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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED JULY 31, 1998
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-29248
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SMARTIRE SYSTEMS INC.
(Name of small business issuer in its charter)
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BRITISH COLUMBIA N/A
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
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#150 - 13151 VANIER PLACE
RICHMOND, BRITISH COLUMBIA, CANADA V6V 2J1
(Address of principal executive offices) (Zip Code)
604-276-9884
ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE
SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT:
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COMMON SHARES VANCOUVER STOCK EXCHANGE
(TITLE OF EACH CLASS) (NAME OF EACH EXCHANGE ON WHICH REGISTERED)
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Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. [ X ] Yes [ ]
No
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year: $ 2,057,251
(Canadian dollars)
At September 30, 1998, the aggregate market value of the voting and
non-voting common equity held by non-affiliates computed by reference to the
average bid and asked price of such common equity, was US$62,913,000.
The number of shares outstanding of the Company's common stock at
September 30, 1998 was 9,524,196.
Selected portions of the SmarTire Systems Inc. Proxy Statement and
Information Circular for the 1998 Annual General Meeting of Shareholders are
incorporated by reference in Part III of this Form 10-KSB.
Transitional Small Business Disclosure Format
(check one): [ ] Yes [ X ] No
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INDEX
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Page
Number
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PART I
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Item 1. Description of Business ..................................................2
Item 2. Description of Property..................................................12
Item 3. Legal Proceedings........................................................13
Item 4. Submission of Matters to a Vote of Security Holders......................13
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.................13
Item 6. Management's Discussion and Analysis or Plan of Operation................15
Item 7. Financial Statements.....................................................20
Item 8. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure............................................20
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act...................20
Item 10. Executive Compensation...................................................20
Item 11. Security Ownership of Certain Beneficial Owners
and Management....................................................20
Item 12. Certain Relationships and Related Transactions...........................20
Item 13. Exhibits and Reports on Form 8-K.........................................21
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THIS ANNUAL REPORT ON FORM 10-KSB, INCLUDING EXHIBITS THERETO, CONTAINS
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED. THESE FORWARD-LOOKING STATEMENT ARE TYPICALLY IDENTIFIED BY THE
WORDS "ANTICIPATES", "BELIEVES", "EXPECTS", "INTENDS", "FORECASTS", "PLANS",
"FUTURE", "STRATEGY", OR WORDS OF SIMILAR MEANING. VARIOUS IMPORTANT FACTORS
THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN THE
FORWARD-LOOKING STATEMENTS ARE DESCRIBED AS "RISK FACTORS" IN THIS FORM 10-KSB
HERETO, AND IN OTHER DOCUMENTS THE COMPANY HAS FILED AND FILES, FROM TIME TO
TIME, WITH THE SECURITIES AND EXCHANGE COMMISSION.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
SmarTire Systems Inc. (hereinafter together with its subsidiaries is referred to
as the "Company" or "SmarTire") is engaged in developing and marketing
technically advanced Tire Monitoring Systems (TMS) designed for improved vehicle
safety, performance, reliability and fuel efficiency. During the fiscal year
ended July 31, 1998, the Company earned revenues from the sale of TMS for
passenger cars, racing applications, and industrial applications.
The Company was incorporated under the laws of the Province of British Columbia
as TTC/Truck Tech Corp. on September 8, 1987. The Company (operating as
TTC/Truck Tech Corp.) completed its initial public offering on the Vancouver
Stock Exchange on September 11, 1989. On April 13, 1995, the Company changed its
name to UniComm Signal Inc. On December 24, 1997, the Company changed its name
to SmarTire Systems Inc. and effected a reverse stock split of 1 to 8. All
references in this statement take this split into effect when referring to the
number of shares of the Company's Common Stock or per share data. The Company's
corporate offices are located at #150 - 13151 Vanier Place, Richmond, British
Columbia, Canada, V6V 2J1. The telephone number is (604) 276-9884; and the
facsimile number is (604) 276-2350.
The Company's consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, SmarTire USA Inc., SmarTire (Europe)
Limited, and SmarTire Technologies Inc.
The Company's consolidated financial statements are stated in Canadian Dollars
(CDN$) and are prepared in accordance with Canadian Generally Accepted
Accounting Principles (GAAP), the application of which, in the case of the
Company, conforms in all material respects for the periods presented with United
States GAAP except as indicated in the notes to the financial statements. All
per share amounts reflect an 8 to 1 reverse split effected on December 24, 1997.
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Herein all references to the "$" and "CDN$" refer to Canadian Dollars; and all
references to "US$" refer to United States Dollars.
In this Report, unless otherwise specified, all dollar amounts are expressed in
Canadian Dollars. The Government of Canada permits a floating exchange rate to
determine the value of the Canadian Dollar against the U.S. Dollar.
Set forth below is the rate of exchange for the Canadian Dollar at the end of
the five most recent fiscal years ended July 31st, average rates for the
periods, and the range of high and low rates for the periods. For purposes of
this table, the rate of exchange means the noon buying rate in New York City for
the cable transfers in foreign currencies as certified for customs purposes by
the Federal Reserve Bank of New York. The table sets forth the number of
Canadian Dollars required under that formula to by one U.S. dollar. The average
rate means the average of the exchange rates on the last day of each month
during the period.
U.S. Dollar/Canadian Dollar
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Average Close High Low
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Fiscal Year Ended 7/31/98 1.43 1.51 1.51 1.37
Fiscal Year Ended 7/31/97 1.37 1.38 1.40 1.33
Fiscal Year Ended 7/31/96 1.35 1.37 1.38 1.33
Fiscal Year Ended 7/31/95 1.38 1.37 1.42 1.34
Fiscal Year Ended 7/31/94 1.35 1.38 1.40 1.29
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BUSINESS OF THE COMPANY
The Company is engaged in developing and marketing technically advanced Tire
Monitoring Systems (TMS) designed for improved vehicle safety, performance,
reliability and fuel efficiency. During the fiscal year ended July 31, 1998, the
Company earned revenues from the sale of TMS for passenger cars, racing
applications, and industrial applications.
The passenger car TMS are sold to two distinct and separate markets: the
Replacement Tire Market (Aftermarket) and the Original Equipment Manufacturer
(OEM) Market.
The Company is currently concentrating its efforts on the Aftermarket sector of
the passenger car market. Aftermarket systems may be added to existing vehicles
as an accessory and are distributed primarily through independent tire dealers
and distributors, and automotive service centers. The Company believes that
consumer acceptance of the Company's products has been accelerated by the
introduction of "run-flat" tires into the automotive marketplace. Run-flat tires
allow drivers to drive up to 50 miles on a tire that has lost all its air
pressure. These tires perform so well without any air pressure that an approved
tire pressure warning monitor system 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.
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Michelin introduced its ZP (zero-pressure) run-flat tire into the replacement
tire market on June 1, 1997. On July 31, 1997, Goodyear announced of plans to
convert a major part of its replacement tire production to Extended Mobility
Tire ("EMT") run-flat tires beginning in April 1998. Bridgestone/Firestone
announced in May, 1998 that its new Firehawk SH30 RFT Run-Flat Tire would be
installed with SmarTire tire monitoring systems. The Firehawk Run-Flat Tires are
expected to be available in stores by the end of 1998. The Company's tire
monitoring system is currently the only tire monitoring system that has been
approved for sale with run-flat tires by Goodyear, Michelin, and
Bridgestone/Firestone.
The Company announced on October 1, 1998 that it is developing two new tire
monitoring systems for the passenger car Aftermarket. One of the systems, to be
marketed as "SmarTire Pressure Alert(TM)" is designed to be mounted externally
to the valve stem and would offer lower cost and simplified installation. This
product is to be produced by Advantage Enterprises Inc. and licensed to the
Company. The Company expects to begin selling the product during the first
quarter of 1999.
The second system is being co-developed through SmarTire's strategic alliance
with TRW Inc. ("TRW"). This improved product will integrate the radio frequency
technology used in TRW's remote keyless entry systems. This new internal system
will use smaller and easier to install sensor/transmitter modules and will offer
mounting options for easy installation. Testing and certification of this tire
monitoring system is scheduled to commence during the first quarter of 1999.
Subject to the results of the testing and certification program, production is
scheduled to begin before the end of fiscal 1999.
The Company sells OEM passenger car systems to Ford Motor Company ("Ford"),
where they are part of an optional accessory package with run-flat tires and
other safety features on the Lincoln Continental. The Company expects to
continue selling the Lincoln Continental systems to Ford until the end of 1999
model year. Pursuant to the April 20, 1998 licensing agreement between the
Company and TRW, which is described below, the Company will not sell tire
monitoring systems and components directly to original equipment manufacturers
other than the Lincoln Continental production program. The Company will earn a
royalty from TRW based on the net sales price of tire monitoring systems and
components sold by TRW to a specified customer for use on vehicles for model
years 2000 through 2003, inclusive, and covered by a claim of a Company patent.
On April 20, 1998 the Company entered into three agreements with TRW: a License
Agreement (the " TRW License Agreement "), a Technical Cooperation Agreement
(the "TRW Technical Cooperation Agreement") and a Supply Agreement (the "TRW
Supply Agreement"). Pursuant to the terms of the TRW License Agreement, the
Company has granted to TRW a perpetual worldwide exclusive license to make, have
made, use and sell tire pressure sensing products and components thereof for the
market for original equipment products and components for passenger car and
light, medium and heavy duty trucks, and for service parts for such products and
components (the "OEM market").
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Pursuant to the TRW Technical Cooperation Agreement, the Company and TRW agreed
to cooperate in the development of new tire pressure sensing technology. The
Agreement also provides for cross-licensing of certain intellectual property
owned by the parties. Pursuant to the TRW Supply Agreement, the Company agreed
to purchase from TRW all of its requirements for tire pressure monitoring
transmitters and receivers, provided that TRW's prices are competitive. The TRW
License Agreement expires on the expiration date of the last to expire of the
Company's patents. The term of the TRW Technical Cooperation Agreement is for
five years, subject to automatic extension year by year unless one party gives
notice to the other party at least three months prior to the end of the term.
On May 5, 1998, the Company completed a product licensing agreement with
Advantage Enterprises Inc. ("Advantage") granting the Company the exclusive
worldwide rights to market a new Low Pressure Warning Device ("LPWD") to be
manufactured by or on behalf of Advantage. The Company plans to market the LPWD,
if and when it becomes available, as the "SmarTire Pressure Alert(TM) ". The
Company also purchased the rights to all existing tire monitoring products owned
by Advantage. The product licensing agreement replaces and supercedes an earlier
agreement in principle, announced December 23, 1997, for the two companies to
merge. US $200,000 was paid at closing for the existing tire monitoring
products. The Company agreed to pay an additional US $500,000 for the exclusive
worldwide rights to market the new LPWD for six years from the date the new LPWD
is ready for production. If the new LPWD is ready for production, as defined in
the agreement, by July 1, 1998, the US $500,000 payment will be reduced by US
$2,500 per day for each day that the product is not ready for production after
July 1, 1998. As of October 15, 1998, the LPWD was not ready for production. The
Company must purchase the following number of units, subject to proration for
each day the LPWD is not ready for production after July 1, 1998, to retain its
exclusivity under the agreement:
<TABLE>
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Year Units
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1998 50,000
1999 100,000
2000 120,000
2001 144,000
2002 172,000
2003 207,000
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Racing TMS
The Racing TMS system was co-developed by Epic Technologies Inc. ("Epic") and
the Penske racing team in 1993. The company acquired the rights to the product
from Epic in December 1996 and signed a distribution agreement with PI Research
Limited ("PI") granting PI non-exclusive rights to market the racing systems. PI
sells the TMS as an optional accessory for its motorsports data acquisition
systems.
Industrial TMS
The industrial equipment TMS, which is the first product the Company
commercialized, provides full time monitoring of tire pressures and temperatures
on large mining and construction equipment. The product is distributed, on a
non-exclusive basis, by Komatsu America International company and Rimtec Pty.
Ltd.
Commercial Vehicle TMS
The Company plans to produce a commercial vehicle TMS in the future that will be
suitable for a wide variety of on-highway applications, including commercial
vehicles (tractor-trailers), and transit buses. It is intended that the
commercial TMS will incorporate the technology the Company is currently
developing with TRW for the passenger car market. The Company does not have an
estimated date for commercialization of this product.
RISK FACTORS
History of Operating Losses; Fluctuating Operating Results and Going-Concern
Issue
Since inception through July 31, 1998, the Company has incurred aggregate losses
of approximately $21,300,000. The Company's net loss for the fiscal year ended
July 31, 1998 was $6,692,765. In addition, the Company's quarterly operating
results may be subject to significant fluctuations due to many factors not
within the Company's control, such as the unpredictability of when a customer
will order products, the size of a customer's order, the demand for the
Company's products, the level of competition and general economic conditions.
There is no assurance that the Company will operate profitably or will generate
positive cash flow in the future. The Company's financial statements for the
year ended July 31, 1998 were presented on a going concern basis. Management
believes that the Company has sufficient cash to fund its current and planned
operations through at least fiscal 1999. Thereafter, the Company expects that it
will require additional funding. There can be no assurance that such financing
will be available on terms acceptable to the Company or at all.
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Competitive Business Conditions and the Company's Competitive Position in the
Industry
The markets in which the Company competes are rapidly changing. Other companies
offer products similar to those offered by the Company, and target the same
customers as the Company. Many of these companies have substantially greater
financial, marketing and technical resources. The Company also anticipates that
the competition within these markets will increase as demand for the products
escalates. It is possible that new competitors or alliances among competitors
may emerge and rapidly acquire significant market share.
Schrader-Bridgeport International Inc., is the only significant producer of
wireless tire monitoring systems known to the Company. The tire monitoring
system developed by Schrader is currently being sold on Chevrolet Corvettes.
Delco Electronics has a tire deflation warning system which uses ABS brake
technology. The system is based on measuring rotations of the wheel. The Company
believes that ABS-based systems are less suitable for use with run-flat tires
than wireless systems since the shape of the run-flat tire, hence the number of
rotations, does not change when tire pressure changes. ABS-based systems may not
be suitable to the aftermarket due to the cost and difficulty of installation.
Delco's system is available on various vehicles built by General Motors and
Toyota.
Other companies are offering or have announced plans to offer tire monitoring
systems. It is possible that these companies may emerge and rapidly acquire
market share.
Dependence on Product Line and Services
Historically, the Company has derived a significant percentage of its net
revenue from sales of its Industrial Equipment Tire Monitoring Systems to the
mining industry. The Company has recently introduced products for the passenger
car and motorsports markets. There can be no assurance that the Company will
achieve or sustain significant sales growth in either its historical markets for
industrial equipment or for its new products for the passenger car and
motorsports markets. The Company earned 61% of its revenue during the fiscal
year ended July 31, 1998 from sales of the aftermarket passenger car TMS (1997 -
30%), 26% from sales of the OEM passenger car TMS (1997 - 23%), 9% from sales of
the racing TMS (1997 - 28%), and 4% from sales of the industrial equipment TMS
(1997 - 19%). To the extent demand for the Company's products does not develop,
due to competition, product performance, customer assessment of the Company's
resources and expertise, expertise, technological change or other factors, the
Company's operations will be materially adversely affected.
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Reliance on Major Customers
During the year ended July 31, 1998, the Company earned 90% of its revenue from
six of its major customers. Similarly, in fiscal 1997 the Company earned 90% of
its revenue from four of its major customers. Accordingly, the loss of one of
these major customers would materially adversely affect the Company. The loss of
any significant customer, or further significant reductions by them in buying
the products offered by the Company, or the inability to collect accounts
receivable from them, absent diversification of the Company's revenues over
other customers and products, would materially and adversely affect the
Company's revenue and results of operations. Sales to three of the above noted
customers accounted for 88% of the sales of Aftermarket passenger car systems
during fiscal 1998. One customer accounted for 100% of sales of the OEM
passenger car system during fiscal 1998. Another customer accounted for 100% of
sales of the racing systems during fiscal 1998, and one customer accounted for
60% of sales of the Industrial TMS during fiscal 1998. See "Management's
Discussion and Analysis or Plan of Operation".
Sources and Availability of Components and Raw Materials
The Company's current products, and the products that the Company plans to
provide in the future, embody new technologies. Certain of the components and
raw materials used in the product are difficult to obtain and/or require
purchase commitments to be made by the Company 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 the Company's results of operations. Similarly,
commitments to purchase components and raw materials in excess of customer
demand for the Company's products could adversely affect the Company's results
of operations.
Reliance on Contract Manufacturers
The Company contracts the manufacture of its products to third parties. In
certain cases, the Company does 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 the Company's third party manufacturers is unable or does
not produce the Company's products, the Company's results of operations will be
adversely affected.
Need for Additional Capital
To date, the Company has been dependent primarily on the issuance of securities
to fund its capital requirements. The Company is dependent on the proceeds of
securities offerings to fund its ongoing operations as well as to implement its
proposed expansion plans. The Company intends to raise additional funding in
fiscal 1999 through the issuance of securities. The Company anticipates that the
proceeds to the Company from the additional funding, together with projected
revenues, will be sufficient to fund the Company's operations through at least
fiscal 1999. In the event that the Company's plans change,
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there are any delays in implementing the proposed expansion, its projections
prove to be inaccurate or the proceeds of any additional funding prove to be
insufficient, the Company may be required to seek additional financing to fund
the costs of daily operations and of continuing to expand its operations. Any
additional equity financing may involve substantial dilution to the Company's
then-existing stockholders. 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. See "Management's Discussion and
Analysis or Plan of Operation," and Financial Statements.
Dependence on Key Personnel
The Company's success depends to a significant extent on the continued service
of certain key management personnel. The loss or interruption of services from
one or more of these personnel, for whatever reason, could have a material
adverse effect on the Company. In the event of the loss of services of such
personnel, no assurances can be given that the Company will be able to obtain
the services of adequate replacement personnel. The Company's success also
depends in part on its ability to attract and retain qualified professional,
technical, managerial and marketing personnel. Competition for such personnel in
the markets in which the Company competes is intense, and there can be no
assurance the Company will be successful in attracting and retaining the
personnel it requires to conduct its operations successfully.
Ability to Manage Growth of the Company
The plans of the Company are based upon the growth of the business, and the
success of the Company will depend on its ability to implement and manage this
expansion. In addition, the Company may expand and grow through acquisitions.
Accordingly, the Company could experience a period of significant growth, which
could place a significant strain on the Company's management and other
resources. The Company's ability to manage and sustain growth effectively will
depend, in part, on the ability of its management to manage growth through the
implementation of appropriate management, operational and financial systems and
controls, and successfully to train, motivate and manage its employees. If the
Company's management is unable to manage its growth effectively, the Company's
results of operations could be materially adversely affected.
Limited Personnel
Currently, the Company relies on its existing staff as its principal means of
selling its products, and on a small development staff to develop new products
and applications for existing products. The Company's growth and expansion may
be inhibited unless it establishes a larger direct sales force in order to
enhance its access to potential customers and a larger development staff to
develop new products and applications for existing products. At the present
time, the Company plans to increase its sales force, development staff and its
administrative staff, although no assurances can be given that qualified
personnel can be hired. The inability of the Company to hire and keep qualified
personnel could materially adversely affect the Company's future plans.
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Competition
The markets in which the Company competes are rapidly changing. As indicated
(See "Description of Business"), other companies offer products similar to those
offered by the Company, and target the same customers as the Company. Many of
these companies have substantially greater financial, marketing and technical
resources. The Company also anticipates that the competition within these
markets will increase as demand for the products escalates. It is possible that
new competitors or alliances among competitors may emerge and rapidly acquire
significant market share.
Rapid Technological Change
The markets in which the Company competes are characterized by rapid
technological change, frequent new product and service introductions, evolving
industry standards and changes in customer demands. The introduction of products
embodying new technologies and the emergence of new industry standards can, in a
relatively short period of time, render existing products obsolete and
unmarketable. The Company believes that its success will depend upon its ability
continuously to develop new products and to enhance its current products and
introduce them promptly into the market.
Dependence on Proprietary Technology; Risks of Third Party Infringement Claims
There can be no assurance that the Company's measures to protect its current
proprietary rights will be adequate to prevent misappropriation of such rights
or that the Company's competitors will not independently develop or patent
technologies that are substantially equivalent or superior to the Company's
technologies. Additionally, although the Company believes that its products and
technologies do not infringe upon the proprietary rights of any third parties,
there can be no assurance that third parties will not assert infringement claims
against the Company. The Company has not had to defend its patents in court,
therefore there is a risk that they will not be defendable. Similarly,
infringement claims could be asserted against products and technologies which
the Company licenses, or has the rights to use, from third parties. Any such
claims, if proved, could materially and adversely affect the Company's business
and results of operations. In addition, although any such claims may ultimately
prove to be without merit, the necessary management attention and cost required
to defend such claims could adversely affect the Company's business and results
of operations.
Adequacy of Insurance and Lack of Errors and Omissions Insurance
The Company could be subject to claims in connection with the products that it
sells. There can be no assurance that the Company would have sufficient
resources to satisfy any liability resulting from any such claim, or that it
would be able to have its customers indemnify or insure it against any such
liability. The Company currently carries US$25 Million of product liability
insurance and US
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$10 Million of Directors and Officers insurance. There can be no assurance that
such coverage would be adequate in term and scope to protect the Company against
material adverse effects in the event of a successful claim. The Company
currently does not carry errors and omissions insurance. The Company may obtain
errors and omissions insurance provided it can be obtained at reasonable prices;
however, there can be no assurance that such coverage or other insurance, if
obtained, would be adequate in term and scope to protect the Company against
material adverse effects in the event of a successful claim.
Uncertainty Due to the Year 2000 Issue
The Year 2000 issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information using
year 2000 dates is processed. In addition, similar problems may arise in some
systems which use certain dates in 1999 to represent something other than a
date. The effects of the Year 2000 issue may be experienced before, on, or after
January 1, 2000, and, if not addressed, the impact on operations and financial
reporting may range from minor errors to significant systems failure which could
affect an entity's ability to conduct normal business operations. It is not
possible to be certain that all aspects of the Year 2000 issue affecting the
entity, including those related to the efforts of customers, suppliers, or other
third parties, will be fully resolved.
Dilutive Effect of Options and Warrants
As at September 30, 1998, there were options and warrants outstanding to
purchase an aggregate of 4,088,439 shares of Common Stock at an average price of
CDN $4.40 per share. To the extent that these and subsequent dilutive securities
are exercised and/or converted, dilution of the percentage ownership of the
Company's shareholders will occur, and any sales in the public market of the
Common Stock underlying the options, warrants and convertible debentures might
adversely affect prevailing market prices for the Company's securities.
PATENTS, TRADEMARKS, LICENSES, FRANCHISES, CONCESSIONS, ROYALTY AGREEMENTS LABOR
CONTRACTS, INCLUDING DURATION.
Proprietary Protection
The Company holds several patents for its current technologies, which are listed
below:
United States Patent 5,231,872 addresses the technology in the tire monitoring
product. It was issued on August 3, 1993 and expires August 3, 2010.
United States Patent 5,285,189 addresses the technology in the abnormal tire
condition warning system. It was issued on February 8, 1994 and expires February
8, 2011. This patent was purchased by the Company from Epic Technologies, Inc.
in December 1996.
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United States Patent 5,335,540 addresses the technology in the tire monitoring
product. It was issued on August 9, 1994 and expires August 9, 2011.
United States Patent 5,559,484 addresses the technology in the abnormal tire
condition warning system. It was issued on September 24, 1996 and expires
September 24, 2013. This patent was purchased by the Company from Epic
Technologies, Inc. in December 1996.
United States Patent 4,653,445 addresses the technology in an Engine Protection
System ("EPS") product. It was issued on March 31, 1987 and expires March 31,
2004.
Licenses
The Company has entered into three agreements with TRW and one agreement with
Advantage as described above in "Business of the Company".
RESEARCH AND DEVELOPMENT
The following is an estimate of the amount spent during each of the last two
fiscal years on research and development activities;
1997 - $978,566
1998 - $1,174,778
COSTS AND EFFECTS OF COMPLIANCE WITH ENVIRONMENTAL LAWS
The Company has no material expenses and anticipates no material impact on its
business from compliance with environmental laws.
NUMBER OF TOTAL EMPLOYEES AND NUMBER OF FULL TIME EMPLOYEES
At July 31, 1998, the Company operated with the services of its seven directors,
seven Executive Officers (of whom four are directors), and twelve additional
full-time employees/consultants. There is no collective bargaining agreement in
place.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases a 9,768 square foot facility at #150-13151 Vanier Place,
Richmond, British Columbia, V6V 2J1 for a five year term ending January 14, 2002
at a rental of $13,350 per month. This plant consists of an office and
administration area, an engineering department and a prototype production
facility. The Company's subsidiaries lease additional office space in the United
States and in the United Kingdom.
<PAGE> 14
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ITEM 3. LEGAL PROCEEDINGS
The Company knows of no material, active or pending legal proceedings against
it; nor is the Company involved as a plaintiff in any material proceeding or
pending litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There was no matter submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, through the solicitation
of proxies or otherwise.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Shares trade on the Vancouver Stock Exchange in Vancouver,
British Columbia, Canada, having the trading symbol "SES" and CUSIP
#831913-10-8. The Company's Common Shares trade in the United States on the OTC
Bulletin Board with the symbol "SMTR". The Company has applied for listing its
Common Stock on the Nasdaq Small Cap Market.
The following table lists the volume of trading and high, low and closing sales
prices in Canadian dollars on the Vancouver Stock Exchange for the Company's
Common Shares since August 1, 1996. The closing price on September 30, 1998 was
$10.00.
Vancouver Stock Exchange Stock Trading Activity
<TABLE>
<CAPTION>
Quarter
Ended Volume High Low Closing
- ------- ------ ---- --- -------
<S> <C> <C> <C> <C>
10/31/96 230,720 $5.12 $3.52 $3.92
01/31/97 303,737 $4.72 $2.88 $3.04
04/30/97 204,246 $4.32 $2.40 $3.92
07/31/97 211,314 $4.08 $2.40 $2.72
10/31/97 512,763 $5.04 $2.40 $4.32
1/31/98 484,784 $5.00 $2.35 $4.75
4/30/98 924,749 $9.60 $4.20 $9.50
7/31/98 763,623 $20.00 $9.20 $10.30
</TABLE>
Price Fluctuations, Share Price Volatility
In recent years, securities markets in Canada have experienced a high level of
price and volume volatility, and the market price of many industrial companies,
<PAGE> 15
- 14 -
particularly those considered speculative companies, have experienced wide
fluctuations in price which have not necessarily been related to operating
performance, underlying asset values, or prospects of such companies. The
Company's share price on the Vancouver Stock Exchange fluctuated from a low of
$2.40 to a high of $5.12 during 1997; and during fiscal 1998 a low of $2.35 and
a high of $20.00. There can be no assurance that continuing fluctuations in the
Company's share price and volume will not occur.
The table set forth below lists the volume of trading and high, low and closing
sales prices in U.S. dollars on the OTC Bulletin Board for the Company's Common
Shares since August 1996. The closing price on September 30, 1998 was US$6.69.
The quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.
OTC Bulletin Board
Stock Trading Activity
<TABLE>
<CAPTION>
Quarter Ended Volume High Low Closing
- ------------- ------ ---- --- -------
<S> <C> <C> <C> <C>
10/31/96 92,868 US$6.00 US$2.40 US$2.64
1/31/97 104,502 US$3.76 US$2.00 US$2.32
4/30/97 88,007 US$3.20 US$1.60 US$2.56
7/31/97 93,635 US$3.36 US$1.44 US$2.24
10/31/97 513,862 US$4.40 US$1.50 US$4.36
1/31/98 810,055 US$4.25 US$1.63 US$3.28
4/30/98 5,455,963 US$8.44 US$2.88 US$6.56
7/31/98 3,019,100 US$11.69 US$6.50 US$6.88
</TABLE>
The Company's Common Shares are issued in registered form. Pacific Corporate
Trust Company (located in Vancouver, British Columbia, Canada) is the registrar
and transfer agent for the Common Shares.
On September 30, 1998, the shareholders' list for the Company's Common Shares
showed 419 registered shareholders and 9,524,164 shares outstanding. On the
above date, there were also options and warrants outstanding to purchase an
aggregate of 4,088,439 additional shares of common stock at an average price of
$4.40 per share.
The Company has researched indirect holdings registered to the various
depository institutions and stock brokerage firms, and estimates that there were
approximately 4,700 shareholders at the above date.
The Company has not declared any dividends since incorporation and does not
anticipate that it will do so in the foreseeable future. The intention of the
Company is to retain future earnings for use in its operations and the expansion
of its business.
<PAGE> 16
- 15 -
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion of the financial condition, changes in financial
condition and results of operations of the Company for the years ended July 31,
1998 and 1997 should be read in conjunction with the consolidated financial
statements of the Company and related notes included therein.
The Company's consolidated financial statements are in Canadian dollars (CDN$)
and are prepared in accordance with Canadian Generally Accepted Accounting
Principles (GAAP) the application of which, in the case of the Company, conforms
in all material respects for the period presented with the United States GAAP
except as disclosed in the notes to the consolidated financial statements of the
Company included herein.
The Company's consolidated financial statements are prepared on a going-concern
basis which assumes the Company will realize its assets and discharge its
liabilities in the normal course of business. The Company's ability to continue
as a going concern is dependent upon its obtaining financing from its lenders,
shareholders and other investors as required, and the successful development and
marketing of the Company's products to generate future profitable 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 commercial
reasonable terms.
RESULTS OF OPERATIONS
Fiscal Year Ended July 31, 1998 vs. Fiscal Year Ended July 31, 1997
Gross revenue for the fiscal year ended July 31, 1998 was $2,057,251 as compared
to $921,546 for the fiscal year 1997. The increase in revenue for the fiscal
year 1998 over the fiscal year 1997 was a result of the following:
Sales of aftermarket passenger car systems increased to $1,250,896 for the
fiscal year ended July 31, 1998 from $272,452 in the previous year. The Company
began selling its aftermarket passenger car system in May 1997, and therefore
recorded only three (3) months sales of this system during fiscal 1997. Sales of
the aftermarket systems in the first, second, third and fourth quarters of
fiscal 1998 were $113,663, $344,728, $180,635 and $611,870 respectively.
Sales of OEM passenger car systems to Ford Motor Company increased to $531,361
for the fiscal year ended July 31, 1998 compared to $213,412 in the previous
fiscal year. The Company recorded only eight months of sales to Ford during the
1997 fiscal year as it purchased the rights to service the Lincoln Continental
production program from Epic Technologies, Inc. on December 6, 1996. Prior to
the purchase of the contractual rights, the Company had no previous sales to the
OEM market. Sales under the Lincoln Continental production program will
discontinue at the end of the 1999 model year which is expected to occur in the
first half of calendar 1999. Pursuant to the April 20, 1998 licensing agreement
between the Company and TRW, the Company will not sell
<PAGE> 17
- 16 -
tire monitoring systems and components directly to original equipment
manufacturers other than the Lincoln Continental production program. The Company
will earn a royalty from TRW based on the net sales price of tire monitoring
systems and components sold by TRW to a specified customer for use on vehicles
for model years 2000 through 2003 inclusive, and covered by a claim of a Company
patent.
Sales of the racing TMS decreased from $258,579 in the fiscal year ended July
31, 1997 to $177,477 in the fiscal year ended July 31, 1998. Sales were higher
in fiscal 1997 as INDY racing teams adopted the product, which was then
relatively new. Sales during fiscal 1998 slowed as the number of new INDY teams
using the system has not increased significantly.
Sales of the industrial TMS decreased to $73,068 in the fiscal year ended July
31, 1998 from $177,103 in the previous fiscal year. Sale prices for industrial
equipment products were relatively unchanged from the previous fiscal year. The
decrease in sales was a result of a shift in focus of the Company, beginning in
1996, from the industrial market to the passenger car market. Sales during 1998
were primarily sales of replacement and maintenance units to existing customers.
Gross margin decreased from 28.5% in fiscal 1997 to 20.5% in fiscal 1998 as the
proportion of sales attributable to the industrial systems has decreased.
Industrial systems have traditionally earned the Company a relatively high, 43%,
profit margin. The Company's passenger car product lines, which represented the
majority of its sales in 1998, earn a lower profit margin.
Expenses increased during the fiscal year 1998 to $6,696,899 as compared to
$3,983,230 in the fiscal year 1997 due to increases in marketing, general and
administrative, research and development, and depreciation and amortization
expenses.
Marketing expenses increased to $1,614,321 for the fiscal year ended July 31,
1998 from $451,307 for fiscal 1997 as a result of increased expenditures on
advertising and promotion, business development, travel, trade shows, and wages
relating to the passenger car aftermarket product, which the Company began
selling in June 1997. Marketing wages increased from $84,492 in fiscal 1997 to
$527,080 in fiscal 1998 as a result of additional employees hired in the fourth
quarter of fiscal 1997, including the President and the Vice President of
SmarTire USA Inc., the Company's U.S. marketing subsidiary. The Company also
expensed product development costs of $494,123 incurred to complete sales
contracts to certain major customers during fiscal 1998, compared to $Nil in
fiscal 1997. Marketing travel increased to $158,276 during fiscal 1998 from
$58,375 in 1997 due to increased sales and marketing activity relating to the
passenger car aftermarket product, which was introduced in the fourth quarter of
fiscal 1997. Expenditures on trade shows increased from $38,538 in fiscal 1997
to $174,944 in fiscal 1998.
General and Administrative expenses increased to $2,674,568 in fiscal 1998
compared to $1,997,022 in fiscal 1997, as a result of the following:
Administrative wages increased from $648,826 in fiscal 1997 to $917,329 in 1998
due to the
<PAGE> 18
- 17 -
addition of a paid advisory board in the third quarter of 1997, increases in the
number of administrative staff during 1998, and increases in administrative wage
levels during 1998. Rent increased from $101,341 in fiscal 1997 to $171,736
during fiscal 1998 as a result of a move to larger premises in January 1997. The
Company also incurred increased expenditures for public relations, securities
filing fees, and telecommunications.
Research and Development expenses increased from $978,566 for fiscal 1997 to
$1,477,129 for fiscal 1998. The increase was attributable to increases in
expenditures on prototype development, including supplies and materials, from
$414,410 in fiscal 1997 to $676,337 in fiscal 1998 as the Company continued to
develop enhancements for future versions of its products. Engineering wages were
$469,598 in fiscal 1997 as compared to $436,914 in fiscal 1998. Engineering
consulting expenses totalled $199,981 in fiscal 1998 compared to $92,787 in
fiscal 1997.
Depreciation and amortization increased as a result of the amortization of
patents and other intellectual property purchased during the last three fiscal
years and depreciation of capital assets.
Interest and finance charges increased to $897,760 for fiscal 1998 from $447,746
for the fiscal year ended 1997 as a result of interest on additional debt added
during fiscal 1997 and 1998, a premium paid on the redemption of convertible
debentures, and increased use of trade credit. All long-term debt added during
1997 and 1998 was converted to share capital or redeemed by June of 1998.
Therefore, unless the Company obtains additional debt financing, interest and
finance charges will be substantially lower in fiscal year 1999. The Company
also earned foreign exchange income of $403,022 in 1998, primarily due to the
appreciation of its US dollar cash balances relative to the Canadian dollar. The
Company reported no significant foreign exchange gain or losses in 1997.
Net loss for the year ended July 31, 1998 was $6,692,765 as compared to
$4,123,373 for the fiscal year 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its activities substantially through the placement of
securities. Financing has been accomplished in the form of private placements of
Common Shares and Common Share purchase warrants; private placements of
convertible debentures; the exercise of incentive stock options; the exercise of
Common Share purchase warrants; and issuance of Common Stock in exchange for
satisfaction of liabilities.
The timing of such placements was dependent on the requirements of the Company
and the economic climate. The Company has incurred net losses in each year since
inception and, as of July 31, 1998, had an accumulated deficit of $21,299,976.
<PAGE> 19
- 18 -
Shareholders' equity was $13,384,277 and the Company's working capital was
$11,977,053 at July 31, 1998.
As at July 31, 1998, the Company had commitments for payments under operating
leases, and service agreements for premises and certain equipment of $792,000,
as disclosed in the notes to the financial statements.
The Purchase Agreement between the Company and Epic Technologies, Inc. regarding
the acquisition of tire monitoring assets requires the Company to pay Epic an
additional US $100,000 on December 6 in any of the three years following the
December 6, 1996 closing date in which the sales meet specific performance
objectives. The Company was not required to make a payment in 1997 and does not
expect to be required to make a payment in 1998.
The product licensing agreement between the Company and Advantage Enterprises,
Inc. requires the Company to advance up to US$500,000 for the right to market a
new low pressure warning device ("LPWD") for six years after the LPWD is ready
for production, as defined in the agreement. The US$500,000 payment will be
reduced by US$2,500 per day for each day that the product is not ready for
production after July 1, 1998. As at October 15, 1998, the LPWD was not ready
for production. The Company must purchase an increasing minimum number of units
each year to retain its exclusivity under the agreement:
Management believes that the Company has sufficient cash to fund its current and
planned operations through at least fiscal 1999. Thereafter, it is possible that
the Company will require additional funding depending on the results from
operations over the next two fiscal quarters.
The Company effected a reverse stock split of 1 to 8 effective December 24,
1997. At that time, all outstanding convertible securities, share purchase
warrants, and share purchase options were proportionately adjusted to reflect
the consolidation.
Fiscal Year Ended July 31, 1998
The Company's cash position at July 31, 1998 was $8,718,258, as compared to
$69,761 at July 31, 1997. This increase was due to the net of the Company's
operating, financing, and investing activities described below.
For the year ended July 31, 1998, the Company had $19,613,125 provided from the
financing activities.
On April 20, 1998, TRW Inc. agreed to purchase from the Company (the "TRW
Private Placement") 900,000 units at a price of US$4.00 per unit for a total
purchase price of US$3,600,000 (CDN$5,165,000), each Unit consisting of a share
of Common Stock and one non-transferable share purchase warrant entitling TRW to
purchase an additional share for a period of two years at a price of US$4.00 per
share during the first year and US$4.60 per share during the second year.
<PAGE> 20
- 19 -
On March 24, 1998, the Company completed a private placement of 2,175,000 Units
for gross proceeds of $8,700,000. Each Unit consisted of one share of Common
Stock and one non-transferable share-purchase two year warrant at an exercise
price of $4.00 per share if exercised during the first year and $4.80 if
exercised during the second year. The Company paid a commission of $855,500.
On January 30, 1998, the Company completed a private placement of US $550,000
(CDN $770,000) 8% convertible redeemable debentures pursuant to Regulation S
promulgated under the Securities Act of 1933, as amended. The Company paid a
commission of US $55,000, with net proceeds of US $495,000 on the issue. The
convertible debenture was redeemed by the Company on March 16, 1998 for
US$783,750 plus accrued interest.
On October 3, 1997, the Company completed a private placement of 18% convertible
redeemable debentures with a face value of US$ 622,222 (CDN $ 902,221). The
debentures were sold at a discount to their face value for gross proceeds to the
Company of US$ 560,000. The Company paid a commission of US $56,000, with net
proceeds of US$504,000 on the issue. The debentures were convertible into Common
Shares at $3.12 per share. By April 30, 1998, the convertible redeemable
debentures had been converted to common shares.
On September 4, 1997, the Company completed the private placement of $380,000
Series "G" convertible debentures. The debentures carry an interest rate of ten
percent (10%) per annum paid semi-annually for a term of three years. The
Company paid a commission of $600, with net proceeds of $379,400 on the issue.
The debentures were convertible into units consisting of one Common Share and
one two year non-transferable share purchase warrant at a price of $2.80 in the
first year. The warrants may be exercised at $2.80 per share until May 1, 1999,
and $3.60 until May 1, 2000. By April 30, 1998, the convertible debentures had
been converted to common shares.
The Company received net proceeds of $1,886,536 upon the exercise of employee
and Director options to purchase 550,700 shares of common stock.
The Company received net proceeds of $3,746,571 and issued 876,785 common shares
upon the exercise of share purchase warrants.
During the year, convertible debentures with a principal component of $3,665,686
and an equity component of $932,974 were converted to 1,303,399 common shares
net of related share issue costs of $214,274.
The Company also repaid $977,361 of long-term debt during the year.
The Company used $693,605 for investing activities during fiscal 1998 including
$399,605 for the purchase of capital assets, $14,000 for the purchase of patent
rights, and $280,000 for marketing rights to a tire monitoring product.
$10,271,023 was used in operating activities of the Company during fiscal 1997
which was comprised of the $6,692,765 net loss and $4,431,256 increase in
non-
<PAGE> 21
- 20 -
cash working capital, reduced by non-cash charges for depreciation and
amortization of $852,998.
ITEM 7. FINANCIAL STATEMENTS
The financial statements of the Company are included beginning immediately
following the signature page to this report. See Item 13 for a list of the
financial statements and financial statement schedules included.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The information required by Item 9 has been omitted and is incorporated by
reference from the Company's definitive proxy statement and information circular
relating to its 1998 annual general meeting of shareholders which will be filed
with the Securities and Exchange Commission within 120 days after July 31, 1998
(the "Proxy Statement and Information Circular").
ITEM 10. EXECUTIVE COMPENSATION
The information required by Item 10 is incorporated by reference from the
Company's definitive Proxy Statement and Information Circular.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 11 is incorporated by reference to the
Company's definitive Proxy Statement and Information Circular.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 12 is incorporated by reference to the
Company's definitive Proxy Statement and Information Circular.
<PAGE> 22
- 21 -
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Audited Consolidated Financial Statements and Financial Statement
Schedules;
Auditor's Report, dated October 7, 1998;
Consolidated Balance Sheet at July 31, 1998 and July 31, 1997;
Consolidated Statements of Loss and Deficit for the Years Ended
July 31, 1998 and July 31, 1997;
Consolidated Statement of Changes in Financial Position for the
Years Ended July 31, 1998 and July 31, 1997;
Notes to Consolidated Financial Statements.
2. Exhibits:
3.1 Certificate of Incorporation of TTC/Truck Tech Corp. dated
September 8, 1982
3.2 Memorandum and Articles of TTC/Truck Tech Corp.
3.3 Memorandum of TTC/Truck Tech Corp. dated September 2, 1987
3.4 Altered Memorandum of TTC/Truck Tech Corp. dated October 25,
1991
3.5 Certificate of Change of Name from TTC/Truck Tech Corp. to
UniComm Signal Inc. dated April 13, 1994
3.6 Certificate of Change of Name from UniComm Signal Inc. to
SmarTire Systems Inc. dated December 24, 1997
3.7 Special Resolution and Altered memorandum of UniComm Signal
Inc. dated October 28, 1994
3.8 Special Resolution and Altered memorandum of UniComm Signal
Inc. dated November 17, 1995
3.9 Special Resolution and Altered memorandum of UniComm Signal
Inc. dated January 17, 1997
3.10 Special Resolution and Altered memorandum of SmarTire
Systems Inc. dated January 16, 1998
<PAGE> 23
- 22 -
10.1 Management Agreement between SmarTire Systems Inc. and
Robert Rudman (the President of the Company) dated as of
February 1, 1998
10.2 Management Agreement between SmarTire Systems Inc. and
Joseph Merback dated as of February 1, 1998
10.3 Supply Agreement dated April 20, 1998 between the Company
and TRW Inc.
10.4 Technical Cooperation Agreement dated as of April 20, 1998
between the Company and TRW Inc.
10.5 License Agreement dated as April 20, 1998 between the
Company and TRW Inc.
10.6 Product Licensing Agreement dated May 5, 1998 between the
Company and Advantage Enterprises Inc.
10.7 Distribution Agreement dated March 28, 1995 between the
Company and The Haulpak Division of Komatsu Dresser Company.
10.8 Letter Agreement dated December 4, 1996 between the Company
and Pi Research Limited.
11.1 Computation of Earnings per Share.
27. Financial Data Schedule
(b) There were no reports required to be filed on Form 8-K during fiscal 1998.
<PAGE> 24
- 23 -
DESCRIPTION OF EXHIBITS
The following exhibits are filed as part of this Form 10-KSB
3.1 Certificate 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 UniComm Signal
Inc. dated November 17, 1995(1)
3.10 Special Resolution and Altered memorandum of SmarTire
Systems Inc. dated January 16, 1998(1)
10.1 Management Agreement between SmarTire Systems Inc. and
Robert Rudman (the President of the Company) dated as of
February 1, 1998 (1)
10.2 Management Agreement between SmarTire Systems Inc. and
Joseph Merback dated as of February 1, 1998 (1)
10.3 Supply Agreement dated April 20, 1998 between the Company
and TRW Inc.(1)(2)
10.4 Technical Cooperation Agreement dated as of April 20, 1998
between the Company and TRW Inc. (1)(2)
10.5 License Agreement dated as April 20, 1998 between the
Company and TRW Inc. (1)(2)
<PAGE> 25
- 24 -
10.6 Product Licensing Agreement dated May 5, 1998 between the
Company and Advantage Enterprises Inc. (2)(3)
10.7 Distribution Agreement dated March 28, 1995 between the
Company and The Haulpak Division of Komatsu Dresser Company.
(1)
10.8 Letter Agreement dated December 4, 1996 between the Company
and Pi Research Limited. (1)
11.1 Computation of Earnings per Share.
27. Financial Data Schedule
------------------------
(1) Incorporated by reference to Form 10-SB 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 the Company's Form 10-QSB for
the quarter ended April 30, 1998.
<PAGE> 26
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED.
SMARTIRE SYSTEMS INC.
By: /s/ ROBERT V. RUDMAN
----------------------------------
Robert V. Rudman, CA
President and Chief
Executive Officer
By: /s/ KENNETH W. MORGAN
----------------------------------
Kenneth W. Morgan, CA, CPA
Chief Financial Officer
(Principal Financial Officer)
Date: October 28, 1998
----------------------------------
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES INDICATED ON OCTOBER 28, 1998:
<TABLE>
<CAPTION>
SIGNATURES TITLES
- ---------- ------
<S> <C>
/s/ ROBERT V. RUDMAN Chairman of the Board of
- ------------------------------- Directors, President
Robert V. Rudman
/s/ JOSEPH H. MERBACK Director, President SmarTire
- ------------------------------- USA Inc.
Joseph H. Merback
/s/ JOHN I. BOLEGOH Director, Vice President,
- ------------------------------- Operations
John I. Bolegoh
/s/ KENNETH W. MORGAN Director, Chief Financial Officer
- -------------------------------
Kenneth W. Morgan
</TABLE>
<PAGE> 27
SMARTIRE SYSTEMS INC.
Consolidated Financial Statements
Years ended July 31, 1998 and 1997
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
AUDITORS' REPORT F-1
FINANCIAL STATEMENTS
Consolidated Balance Sheets F-2
Consolidated Statements of Loss and Deficit F-3
Consolidated Statements of Changes in Financial Position F-4
Notes to Consolidated Financial Statements F-5
</TABLE>
<PAGE> 28
AUDITORS' REPORT TO THE SHAREHOLDERS
We have audited the consolidated balance sheets of SmarTire Systems Inc. as at
July 31, 1998 and 1997 and the consolidated statements of loss and deficit and
changes in financial position for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at July 31, 1998 and
1997 and the results of its operations and the changes in its financial position
for the years then ended in accordance with generally accepted accounting
principles. As required by the Company Act of the Province of British Columbia,
we report that, in our opinion, these principles have been applied on a
consistent basis.
KPMG LLP
Chartered Accountants
Richmond, Canada
October 7, 1998
F-1
<PAGE> 29
SMARTIRE SYSTEMS INC.
Consolidated Balance Sheets
(Expressed in Canadian Dollars)
July 31, 1998 and 1997
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets
Cash $ 8,718,258 $ 69,761
Receivables 802,193 109,241
Inventory (note 3) 1,684,686 699,619
Prepaids 106,957 46,582
Supplier prepayments (note 4) 1,466,791 -
- -------------------------------------------------------------------------------------------------------------------
12,778,885 925,203
Capital assets (note 5) 614,612 556,332
Other assets (note 6) 792,612 1,168,042
- -------------------------------------------------------------------------------------------------------------------
$ 14,186,109 $ 2,649,577
- -------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity (Deficiency of Assets over Liabilities)
Current liabilities
Payables and accruals $ 801,832 $ 2,027,903
Current portion of long-term debt (note 7) - 207,861
- -------------------------------------------------------------------------------------------------------------------
801,832 2,235,764
Long-term debt (note 7) - 2,473,362
Shareholders' equity (deficiency of assets
over liabilities)
Share capital (note 8) 30,669,253 11,707,260
Equity component of convertible debt and warrants (note 9) 4,015,000 840,402
Deficit (21,299,976) (14,607,211)
- -------------------------------------------------------------------------------------------------------------------
13,384,277 (2,059,549)
Commitments and contingencies (note 12)
Subsequent events (notes 12(c) and 14)
- -------------------------------------------------------------------------------------------------------------------
$ 14,186,109 $ 2,649,577
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
On behalf of the Board
/s/ Robert V. Rudman, Director /s/ Kenneth W. Morgan, Director
- --------------------- ---------------------
F-2
<PAGE> 30
SMARTIRE SYSTEMS INC.
Consolidated Statements of Loss and Deficit
(Expressed in Canadian Dollars)
Years ended July 31, 1998 and 1997
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenue $ 2,057,251 $ 921,546
Cost of goods sold 1,636,262 658,943
- -------------------------------------------------------------------------------------------------------------------
420,989 262,603
Expenses
Marketing 1,614,321 451,307
General and administrative 2,674,568 1,997,022
Research and development 1,477,129 978,566
Depreciation and amortization 852,998 511,335
- -------------------------------------------------------------------------------------------------------------------
6,619,016 3,938,230
- -------------------------------------------------------------------------------------------------------------------
Loss from operations (6,198,027) (3,675,627)
Other expense (income)
Foreign exchange (403,022) -
Interest and finance charges 897,760 447,746
- -------------------------------------------------------------------------------------------------------------------
494,738 447,746
- -------------------------------------------------------------------------------------------------------------------
Net loss (6,692,765) (4,123,373)
Deficit, beginning of year (14,607,211) (10,483,838)
- -------------------------------------------------------------------------------------------------------------------
Deficit, end of year $ (21,299,976) $ (14,607,211)
- -------------------------------------------------------------------------------------------------------------------
Loss per share $ (1.12) $ (1.17)
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 31
SMARTIRE SYSTEMS INC.
Consolidated Statements of Changes in Financial Position
(Expressed in Canadian Dollars)
Years ended July 31, 1998 and 1997
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH PROVIDED BY (USED IN)
Operations
Net loss $ (6,692,765) $ (4,123,373)
Depreciation and amortization 852,998 511,335
Changes in non-cash working capital (4,431,256) 1,484,463
- -------------------------------------------------------------------------------------------------------------------
(10,271,023) (2,127,575)
Financing
Repayment of long-term debt (977,860) -
Convertible debentures 2,162,652 3,177,164
Share capital and warrants issued 22,976,993 637,294
Conversion of debentures to share capital (4,548,660) (18,000)
- -------------------------------------------------------------------------------------------------------------------
19,613,125 3,796,458
Investing
Capital assets (399,605) (329,121)
Other assets (294,000) (157,756)
Acquisition of tire monitoring assets - (1,215,000)
- -------------------------------------------------------------------------------------------------------------------
(693,605) (1,701,877)
- -------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash 8,648,497 (32,994)
Cash, beginning of year 69,761 102,755
- -------------------------------------------------------------------------------------------------------------------
Cash, end of year $ 8,718,258 $ 69,761
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 32
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements
(Expressed in Canadian Dollars)
Years ended July 31, 1998 and 1997
- --------------------------------------------------------------------------------
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,
off-road heavy equipment and other pneumatic tire applications.
2. SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of presentation
These financial statements include the accounts of the Company and its
wholly-owned subsidiaries, SmarTire USA Inc., SmarTire (Europe) Ltd., and
SmarTire Technologies Inc.
The audited consolidated financial statements have been prepared in
Canadian dollars in accordance with generally accepted accounting
principles in Canada and generally conform with those established in the
United States, except as explained in note 13.
(b) Inventory
Inventory is valued at the lower of cost and net realizable value. Cost is
determined using the weighted average cost method and includes invoice
cost, duties and freight, plus direct labor applied to the product and the
applicable share of manufacturing overhead.
(c) 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 term of the lease plus one renewal option period.
(d) Deferred and patent costs
Research costs are expensed as incurred. Development costs and patent
costs, which are included in other assets, that are expected to provide
future benefits with reasonable certainty are deferred and amortized over
the useful life of the products to a maximum of three years. Other
development costs that do not meet these criteria are expensed as incurred.
(e) Revenue recognition
Revenue from sales is recognized when goods are shipped to customers.
(f) Loss per share
Basic loss per share computations are based on the weighted average number
of shares outstanding during the year. The stock options and warrants
outstanding (note 8(g)) are antidilutive, accordingly, fully diluted loss
per share does not differ from basic loss per share for the years presented
herein.
F-5
<PAGE> 33
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements, Continued
(Expressed in Canadian Dollars)
Years ended July 31, 1998 and 1997
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(g) Foreign exchange
Monetary items denominated in foreign currency are translated to Canadian
dollars at exchange rates in effect at the balance sheet date and
non-monetary items are translated at rates of exchange in effect when the
assets were acquired or obligations incurred. Revenues and expenses are
translated at rates in effect at the time of the transactions. Foreign
exchange gains and losses are included in income.
(h) Advertising expenses
Advertising costs are expensed as incurred.
(i) Significant estimates
Management of the Company follows a policy of using significant estimates
related to establishing the recoverability of its assets including
inventory, supplier prepayments, capital assets and other assets and the
likelihood of contingent payables. These criteria are evaluated
periodically by management and are amended as the related operations
progress. Management applies the results of operations to the criteria to
determine whether there is a permanent impairment in value of the assets or
the existence of a liability.
3. INVENTORY
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Raw materials and parts $ 794,508 $ 269,367
Work in progress 219,946 192,115
Finished goods 670,232 238,137
- -------------------------------------------------------------------------------------------------------------------
$ 1,684,686 $ 699,619
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
4. SUPPLIER PREPAYMENTS
Supplier prepayments represents advances made to a supplier to cover
estimated future raw material and assembly costs of tire monitoring systems
to meet anticipated future Company sales levels.
5. CAPITAL ASSETS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1998
Accumulated Net book
Cost Depreciation value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computer and software $ 276,484 $ 156,300 $ 120,184
Office and shop equipment 813,720 419,110 394,610
Leasehold improvements 115,098 15,280 99,818
- -------------------------------------------------------------------------------------------------------------------
$ 1,205,302 $ 590,690 $ 614,612
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
F-6
<PAGE> 34
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements, Continued
(Expressed in Canadian Dollars)
Years ended July 31, 1998 and 1997
- --------------------------------------------------------------------------------
5. CAPITAL ASSETS, CONTINUED
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1997
Accumulated Net book
Cost Depreciation value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computer and software $ 211,480 $ 118,721 $ 92,759
Office and shop equipment 493,955 125,631 368,324
Leasehold improvements 100,262 5,013 95,249
- -------------------------------------------------------------------------------------------------------------------
$ 805,697 $ 249,365 $ 556,332
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
6. OTHER ASSETS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1998
Accumulated Net Book
Cost Depreciation Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Patents $ 401,499 $ 236,375 $ 165,124
Deferred development costs 406,626 334,680 71,946
Contractual rights 1 - 1
Customer lists 675,000 376,125 298,875
Marketing license 280,000 23,334 256,666
- -------------------------------------------------------------------------------------------------------------------
$ 1,763,126 $ 970,514 $ 792,612
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1997
Accumulated Net Book
Cost Depreciation Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Patents $ 387,499 $ 125,000 $ 262,499
Deferred development costs 406,626 183,840 222,786
Contractual rights 1 - 1
Customer lists 675,000 150,000 525,000
Deferred finance costs 157,756 - 157,756
- -------------------------------------------------------------------------------------------------------------------
$ 1,626,882 $ 458,840 $ 1,168,042
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) On May 1, 1998, the Company purchased the worldwide marketing,
distribution and sale license for an existing tire monitoring device from
Advantage Enterprises, Inc. for cash consideration of US $200,000 (Cdn
$280,000). These marketing costs are being amortized over a two year
period, representing the estimated period of benefit.
F-7
<PAGE> 35
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements, Continued
(Expressed in Canadian Dollars)
Years ended July 31, 1998 and 1997
- --------------------------------------------------------------------------------
6. OTHER ASSETS, CONTINUED
(b) In 1997, the Company recorded deferred finance costs for expenditures
associated with the issuance of convertible debentures. The costs were
amortized over the term of the debentures and upon conversion into common
shares in fiscal year 1998, the unamortized balance of deferred finance
costs was applied on a pro-rata basis to the value ascribed to the related
share capital.
(c) On December 6, 1996, the Company acquired intellectual property,
manufacturing and testing equipment, and contractual rights relating to
tire monitoring systems from EPIC Technologies, Inc. for cash consideration
of US $900,000 (Cdn $1,215,000).
Net assets acquired were as follows:
<TABLE>
<S> <C>
Capital assets $ 202,500
Patents and intellectual property 337,499
Contractual rights 1
Customer list 675,000
- -------------------------------------------------------------------------------------------------------------------
$ 1,215,000
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
7. LONG-TERM DEBT
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Western Economic Diversification Program $ - $ 28,743
Western Economic Diversification Program - 164,718
Class B redeemable debenture with a face value of
$Nil (1997 - $14,403) bearing interest at 12% per
annum - 14,400
Class C redeemable and convertible debenture bearing
interest at 10% per annum, converted into 11,385 units,
each unit consisting of one common share and one
share purchase warrant, during fiscal 1998 (note 8(e)) - 136,600
Class D redeemable and convertible debenture bearing
interest at 6% per annum, converted into 252,130 units,
each unit consisting of one common share and one share
purchase warrant, during fiscal 1998 (note 8(e)) - 912,454
Class F redeemable and convertible debenture
bearing interest at 10% per annum, converted into 614,948
units, each unit consisting of one common share and one
share purchase warrant, during fiscal 1998 (note 8(e)) - 1,262,153
Class G redeemable and convertible debenture bearing interest
at 10% per annum, converted into 135,713 units, each unit
consisting of one common share and one share purchase
warrant, during fiscal 1998 (notes 7(a) and 8(e)) - 162,155
- -------------------------------------------------------------------------------------------------------------------
- 2,681,223
Less: current portion - 207,861
- -------------------------------------------------------------------------------------------------------------------
$ - $ 2,473,362
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
F-8
<PAGE> 36
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements, Continued
(Expressed in Canadian Dollars)
Years ended July 31, 1998 and 1997
- --------------------------------------------------------------------------------
7. LONG-TERM DEBT, CONTINUED
(a) On September 4, 1997, the Company completed the private placement of
$380,000 Series G convertible debentures. Gross proceeds of $178,000 was
received during fiscal year 1997 and was recorded as long-term debt and
equity component of convertible debt and warrants.
On October 3, 1997, the Company completed a private placement of 18%
convertible and redeemable debentures with a face value of US $622,222 (Cdn
$902,221) for net proceeds of US $504,000. The debentures were convertible
into common shares at Cdn $3.12 per share. During fiscal 1998, the
convertible redeemable debentures were converted to 289,173 common shares
(note 8(e)).
On January 30, 1998, the Company completed a private placement of US
$550,000 (Cdn $770,000) 8% convertible and redeemable debentures for net
proceeds of US $495,000 on the issue. The convertible debenture was fully
redeemed by the Company in March 1998 at a premium of US $233,750 which is
included in interest expense.
(b) During the years ended July 31, 1998 and 1997, the Company paid
interest on long-term debt of $880,740, and $304,582 respectively.
8. SHARE CAPITAL
(a) Authorized
(i) Common shares: 200,000,000 without par value
(ii) Preferred shares: 20,000 with par value of $1,000 per share
During 1997, the Company increased the authorized capital from
50,000,000 common shares without par value to 200,000,000 common shares
without par value.
F-9
<PAGE> 37
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements, Continued
(Expressed in Canadian Dollars)
Years ended July 31, 1998 and 1997
- --------------------------------------------------------------------------------
8. SHARE CAPITAL, CONTINUED
(b) The subscribed and issued share capital of the Company is as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Common
Shares Amount
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at July 31, 1996 3,404,225 $ 11,069,966
Issued during the year ended July 31, 1997
Cash (net of issuance costs of $32,931) 62,325 216,369
Exercise of stock options 26,250 72,300
Exercise of warrants 102,473 330,625
Conversion of convertible debenture 5,625 18,000
- -------------------------------------------------------------------------------------------------------------------
Balance at July 31, 1997 3,600,898 11,707,260
Issued during the year ended July 31, 1998
Cash (net of issuance costs of $855,500) (note 8(d)) 3,075,000 8,994,500
Exercise of stock options 550,700 1,886,536
Exercise of warrants 876,785 3,746,571
Conversion of convertible debentures (note 7(a) and 8(e)) 1,303,399 4,334,386
- -------------------------------------------------------------------------------------------------------------------
Balance at July 31, 1998 9,406,782 $ 30,669,253
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(c) The Company effected a reverse stock split of 1 to 8 effective December
24, 1997. At that time, all outstanding common shares, convertible
securities, common share purchase warrants, and common share purchase
options were proportionately adjusted to reflect the consolidation. All
references to share capital within the financial statements are on a
post-consolidated basis.
(d) On April 20, 1998, the Company completed a private placement with TRW
Inc. of 900,000 units at a price of US $4.00 per unit for a total purchase
price of US $3,600,000 (Cdn $5,165,000), each unit consisting of a share of
common stock and one non-transferable share purchase warrant to purchase an
additional share for a period of two years at a price of US $4.00 per share
during the first year and US $4.60 per share during the second year.
On March 24, 1998, the Company completed a private placement of 2,175,000
units for gross proceeds of $8,700,000. Each unit consisted of one share of
common stock and one non-transferable share purchase warrant to purchase an
additional share for a period of two years at an exercise price of $4.00
per share during the first year and $4.80 during the second year.
A value has been assigned to the above share purchase warrants issued
totalling $4,015,000 and has been recorded as a separate component of
shareholders' equity.
(e) During the year ended July 31, 1998, convertible debentures with a
principal component of $3,615,686 and an equity component of $932,974 were
converted to 1,303,399 common shares net of related share issuance costs of
$214,274.
F-10
<PAGE> 38
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements, Continued
(Expressed in Canadian Dollars)
Years ended July 31, 1998 and 1997
- --------------------------------------------------------------------------------
8. SHARE CAPITAL, CONTINUED
(f) Shares held in escrow
A total of 181,250 (1997 - 181,250) shares are held in escrow, to be
released only with the consent of the governing regulatory authorities.
These shares carry voting rights but are restricted from trading subject to
an earn-out provision based on a formula acceptable to the governing
regulatory authorities and until consent is obtained.
An additional 250,000 treasury shares have been reserved for future
allotment and issuance, subject to an earn-out provision based on cash flow
as defined in the earn-out agreement.
The shares held in escrow and the allotted treasury shares are scheduled to
expire May 23, 1999.
(g) Stock options and warrants
The Company periodically grants fixed stock options to its employees and
directors.
A summary of fixed stock option transactions and balances during the two
years ended July 31, 1998 is as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
1998 1997
------------------------- ----------------------------
Weighted Weighted
average average
exercise exercise
Shares price Shares price
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 349,375 $ 3.01 196,438 $ 4.17
Options granted 806,500 4.23 486,250 3.37
Options exercised 550,700 3.43 26,250 2.75
Options cancelled 50,000 4.06 297,688 4.37
Options expired - - 9,375 3.36
- ----------------------------------------------------------------------------------------------------------------
Outstanding, end of year 555,175 $ 4.27 349,375 $ 3.01
- ----------------------------------------------------------------------------------------------------------------
Options exercisable at end of year 555,175 $ 4.27 349,375 $ 3.01
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
Stock options outstanding as at July 31, 1998 have a weighted average
remaining life of 4.4 years (1997 - 3.0 years).
As at July 31, 1998, warrants were outstanding for 3,651,678 (1997 -
463,770) common shares of the Company. The warrants entitle the holders to
purchase common shares of the Company at prices ranging from $2.80 to
$12.00 (1997 - $4.00 to $8.00) per share which expire on various dates
until 2000.
F-11
<PAGE> 39
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements, Continued
(Expressed in Canadian Dollars)
Years ended July 31, 1998 and 1997
- --------------------------------------------------------------------------------
9. FINANCIAL INSTRUMENTS AND SIGNIFICANT ESTIMATES
(a) Fair value disclosure
The carrying value of cash, receivables and payables and accruals
approximate fair value due to 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 substantially to United States customers.
Approximately 90% (1997 - 90%) of sales were derived from the Company's six
(1997 - four) largest customers.
(c) Convertible debt instruments and warrants
The Company records the liability component of a compound financial
instrument (determined to be the net present value of the principal and
interest payments) and the equity component separately on the balance
sheet. Interest is recorded at the estimated market interest rate,
determined at issuance date, for instruments of comparable credit status
but without the conversion option.
The Company records the estimated warrant value at the date of issuance as
a separate component of shareholders' equity. As the warrants are
exercised, the value is reclassified to issued share capital.
10. RELATED PARTY TRANSACTIONS
Included in payables and accruals are amounts due to directors and
shareholders of the Company totalling $Nil as at July 31, 1998 (1997 -
$188,500) which are unsecured, non-interest bearing and due on demand.
During the year ended July 31, 1998, the Company issued 749,849 (1997 -
18,750) common shares for cash in the amount of $1,419,416 (1997 - $67,300)
to senior officers, directors and/or their immediate families and companies
controlled by senior officers, directors and/or their immediate families
upon the exercise of stock options and share subscriptions.
On April 20, 1998, TRW Inc. ("TRW") subscribed for an equity interest in
the Company (note 8(d)). Simultaneous to the subscription agreement, the
Company and TRW entered into licensing, technical cooperation and supply
agreements. Under the agreements, TRW was granted a worldwide exclusive
license to market and distribute tire sensing products in the original
equipment manufacturer market. The parties will cooperate in the
development of new tire pressure sensing technology and the Company will
purchase its components from TRW under certain conditions. No sales or
purchases under these agreements occurred in fiscal year 1998.
F-12
<PAGE> 40
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements, Continued
(Expressed in Canadian Dollars)
Years ended July 31, 1998 and 1997
- --------------------------------------------------------------------------------
11. INCOME TAXES
The Company has losses for income tax purposes carried forward at July 31,
1998 of approximately $17,000,000 (1997 - $8,791,000) and scientific
research and development expenditures of $1,400,000 (1997 - $4,000,000)
available to reduce future taxable income. The related tax benefits of
these deductions have not been recognized in the accounts. The estimated
losses for income tax purposes expire as follows:
<TABLE>
<S> <C>
1999 $ 893,000
2000 1,091,000
2001 983,000
2002 1,656,000
2003 2,804,000
2004 3,611,000
2005 5,962,000
- -------------------------------------------------------------------------------------------------------------------
$ 17,000,000
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
12. COMMITMENTS AND CONTINGENCIES
(a) The Company is committed to the following payments under operating
leases, and service agreements for premises and certain equipment.
<TABLE>
<S> <C>
1999 $ 278,000
2000 229,000
2001 204,000
2002 80,000
2003 1,000
- -------------------------------------------------------------------------------------------------------------------
$ 792,000
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(b) The purchase agreement between the Company and Epic Technologies, Inc.
(EPIC) regarding the acquisition of tire monitoring assets (note 6(a))
requires the Company to pay EPIC an additional US $100,000 in any of the
three years following the December 6, 1996 closing date in which sales meet
specific performance objectives. No payment was required in 1997.
(c) On May 5, 1998, the Company completed a product licensing agreement
with Advantage Enterprises Inc. ("Advantage") granting the Company the
exclusive worldwide rights to market a new Low Pressure Warning Device
("LPWD") to be manufactured by Advantage. The Company also purchased the
rights to all existing tire monitoring products owned by Advantage. US
$200,000 was paid upon closing for the existing tire monitoring products.
Subsequent to fiscal year 1998, the Company may be required to pay up to US
$422,500 for rights to market the new LPWD for a period of six years. As of
October 7, 1998, no additional payments have been required under this
agreement. Subject to certain conditions, including the LPWD being ready
for production, the Company is required to purchase certain quantities of
LPWD units in each of the years 1998 to 2003.
F-13
<PAGE> 41
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements, Continued
(Expressed in Canadian Dollars)
Years ended July 31, 1998 and 1997
- --------------------------------------------------------------------------------
13. UNITED STATES ACCOUNTING PRINCIPLES
The Company's financial statements have been prepared in accordance with
Canadian generally accepted accounting principles ("GAAP"). A
reconciliation of financial statement amounts from Canadian generally
accepted accounting principles to United States generally accepted
accounting principles is as follows:
(a) Loss and deficit
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------------------------------------------
(thousands of dollars)
<S> <C> <C>
Net loss in accordance with Canadian GAAP $ (6,693) $ (4,123)
Effects of differences in accounting for:
Research and development costs (b) 151 151
Interest expense on convertible debt (c) (557) (59)
- -------------------------------------------------------------------------------------------------------------------
Net loss in accordance with United States GAAP (7,099) (4,031)
Beginning deficit in accordance with United States GAAP (14,914) (10,883)
- -------------------------------------------------------------------------------------------------------------------
Ending deficit in accordance with United States GAAP $ (22,013) $ (14,914)
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(b) Research and development costs
United States generally accepted accounting principles require that all
development costs be charged to expense when incurred. Applying United
States generally accepted accounting principles, other assets would be
reduced by approximately $72,000 and $222,000 as at July 31, 1998 and 1997,
respectively.
(c) Convertible debt and issuance of units
Under Canadian GAAP, a value is assigned to the conversion feature of debt
convertible to equity. Under United States GAAP, a value is assigned to the
conversion feature of debt convertible to equity if the conversion rate is
less than the market price of the common stock at the date of issuance.
Applying United States GAAP, total long-term debt would increase by
approximately $Nil (1997 - $279,000) and shareholders' equity would
increase by $616,000 (1997 - decrease by $220,000) as at July 31, 1998 and
interest expense would increase by approximately $557,000 (1997 - $59,000).
During fiscal year 1998, the Company completed private placements of units
(note 8(d)), each unit consisting of one share of common stock and one
share purchase warrant. Under Canadian GAAP, the warrants were assigned a
value of $4,015,000 on issuance which was included as a separate component
of shareholders' equity. Under United States GAAP, this value would be
included in issued share capital.
F-14
<PAGE> 42
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements, Continued
(Expressed in Canadian Dollars)
Years ended July 31, 1998 and 1997
- --------------------------------------------------------------------------------
13. UNITED STATES ACCOUNTING PRINCIPLES, CONTINUED
(d) Loss per share
The weighted average number of shares and loss per share under United
States GAAP are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Weighted average number of shares 5,815,970 3,344,803
Basic loss per share $ (1.22) $ (1.21)
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Effective January 31, 1998, the Company adopted Statement of Financial
Accounting Standards No. 128 ("FAS 128") Earnings per Share for United
States GAAP purposes, on a retroactive basis. Under FAS 128, basic loss per
common share, similar to Canadian GAAP, is based on the weighted average
number of common shares outstanding during the year. Contingently
returnable shares held in escrow have been excluded from the calculation of
weighted average number of shares under United States GAAP. Under Canadian
GAAP, contingently returnable shares held in escrow are included in the
calculation of weighted average number of shares.
(e) Statement of changes in financial position
United States GAAP requires the effect of non-cash working capital balances
be disclosed in the statement of cash flows and the effect of non-cash
financing and investing transactions excluded from the statement of cash
flows.
The changes in non-cash working capital balances related to operating
activities include:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Decrease (increase) in assets
Supplier prepayments $ (1,466,791) $ -
Receivables (692,952) 127,981
Inventory (985,067) (295,400)
Prepaids (60,375) (28,001)
(Decrease) increase in liabilities
Payables and accruals (1,226,071) 1,679,883
- -------------------------------------------------------------------------------------------------------------------
$ (4,431,256) $ 1,484,463
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Cash provided by share capital issuance and cash applied to the conversion
of debentures to share capital under financing would each decrease in total
by $4,548,660 in the year ended July 31, 1998 (1997 - $18,000) because
these amounts would be considered non-cash transactions.
F-15
<PAGE> 43
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements, Continued
(Expressed in Canadian Dollars)
Years ended July 31, 1998 and 1997
- --------------------------------------------------------------------------------
13. UNITED STATES ACCOUNTING PRINCIPLES, CONTINUED
(f) Income taxes
Under United States GAAP, deferred income taxes reflect the net tax effects
of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and amounts used for income
tax purposes. Temporary differences are tax-effected at current rates
whereas under Canadian GAAP, temporary differences are tax-effected at
historical rates. There have been no deferred tax effects or changes in tax
rates during fiscal years 1998 and 1997. There are no differences in
recorded amounts under United States GAAP or Canadian GAAP. The Company's
net deferred tax asset under United States GAAP is as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets
Net operating loss carryforwards $ 6,877,000 $ 3,393,326
Scientific research and development expenses 549,000 1,544,000
- -------------------------------------------------------------------------------------------------------------------
7,426,000 4,937,326
Less valuation allowance (7,426,000) (4,937,326)
- -------------------------------------------------------------------------------------------------------------------
Net deferred tax assets $ - $ -
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company believes that the realization of its net deferred tax assets is
not more likely than not and therefore has recognized a full valuation
allowance thereon. The Company's future ability to realize its deferred tax
assets is based on several factors, including future profitability.
(g) Stock-based compensation
The Company adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 123 ("FAS 123"), Accounting for Stock-Based
Compensation, for United States GAAP purposes. Under APB 25, no
compensation expense has been recognized in 1998 and 1997. Had compensation
cost been determined based on the fair value at the grant dates consistent
with the measurement provisions of FAS 123, net loss under United States
GAAP would have been $8,172,000 for the year ended July 31, 1998
($4,386,000 - 1997) and basic loss per common share would have been $1.41
(1997 - $1.32). For these purposes, the fair value of each option was
estimated using the Black-Scholes option - pricing model with the following
weighted average assumptions: dividend yield 0% (1997 - 0%), expected
volatility 60% (1997 - 60%), Canadian risk free interest rate 5.25% (1997 -
4.50%), and weighted average option term of 1.5 years (1997 - 1.4 years).
The weighted average fair value of the options granted was $1.33 (1997 -
$0.96) per option.
F-16
<PAGE> 44
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements, Continued
(Expressed in Canadian Dollars)
Years ended July 31, 1998 and 1997
- --------------------------------------------------------------------------------
13. UNITED STATES ACCOUNTING PRINCIPLES, CONTINUED
(h) Functional currency
The functional currency for the Company's foreign operations is the
Canadian dollar.
(i) Recent United States accounting standards
The Canadian Institute of Chartered Accountants ("CICA") issued CICA
Handbook 3465, Income Taxes, which is required to be implemented for fiscal
years beginning after January 1, 2000. This new standard is substantially
consistent with the U.S. Standard, FAS109.
The Financial Accounting Standards Board ("FASB") issued FAS 130, Reporting
Comprehensive Income, and FAS 131, Disclosures About Segments of an
Enterprise and Related Information which are required to be implemented
during the Company's fiscal year ended July 31, 1999. These standards will
effect the presentation but not the measurement of the consolidated
financial statements and the related notes.
14. SUBSEQUENT EVENTS
Subsequent to year-end, 117,414 shares were issued as a result of exercise
of warrants and options.
15. COMPARATIVE FIGURES
Certain comparative figures have been reclassified to conform with the
financial statement presentation adopted for the current year.
16. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize
the year 2000 as 1900 or some other date, resulting in errors when
information using year 2000 dates is processed. In addition, similar
problems may arise in some systems which use certain dates in 1999 to
represent something other than a date. The effects of the Year 2000 Issue
may be experienced before, on, or after January 1, 2000, and, if not
addressed, the impact on operations and financial reporting may range from
minor errors to significant systems failure which could affect an entity's
ability to conduct normal business operations. It is not possible to be
certain that all aspects of the Year 2000 Issue affecting the entity,
including those related to the efforts of customers, suppliers, or other
third parties, will be fully resolved.
F-17
<PAGE> 1
EXHIBIT 11.1
SMARTIRE SYSTEMS INC.
COMPUTATION OF LOSS PER SHARE
The Company's financial statements have been prepared in accordance with
Canadian Generally Accepted Accounting Principles ("GAAP"). A reconciliation of
financial statement amounts from Canadian GAAP to United States GAAP has been
provided in the consolidated financial statements.
<TABLE>
<CAPTION>
Year Ended Year Ended
July 31, 1998 July 31, 1997
------------- -------------
($000's except per share data)
<S> <C> <C>
Net loss in accordance with
United States GAAP (7,099) $ (4,031)
====== ======
Weighted average number
of common shares
- - Basic 5,815,970 3,344,803
Shares issuable upon exercise
of dilutive options, warrants
and convertible debentures 4,206,853 2,708,509
---------- ---------
Weighted average number of
common shares outstanding
- - Diluted 10,022,823 6,053,312
========== =========
Loss per share in accordance
with United States GAAP
- - Basic $ (1.22) $ (1.21)
======= =======
- -Diluted $ (0.71) $ (0.67)
======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S ANNUAL REPORT ON
FORM 10-KSB FOR THE YEAR ENDED JULY 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CURRENCY> CANADIAN DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> JUL-31-1998
<EXCHANGE-RATE> 1.43
<CASH> 8,718,258
<SECURITIES> 0
<RECEIVABLES> 592,061
<ALLOWANCES> 0
<INVENTORY> 1,684,686
<CURRENT-ASSETS> 12,568,753
<PP&E> 1,046,712
<DEPRECIATION> 432,099
<TOTAL-ASSETS> 13,975,977
<CURRENT-LIABILITIES> 591,700
<BONDS> 0
0
0
<COMMON> 34,684,253
<OTHER-SE> (21,299,976)
<TOTAL-LIABILITY-AND-EQUITY> 13,975,977
<SALES> 2,057,251
<TOTAL-REVENUES> 2,057,251
<CGS> 1,636,262
<TOTAL-COSTS> 1,636,262
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 897,760
<INCOME-PRETAX> (6,692,765)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,692,765)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,692,785)
<EPS-PRIMARY> (1.12)
<EPS-DILUTED> (1.12)
</TABLE>
