<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[x] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act 0f
1934 for the quarterly period ended April 30, 1998.
[ ] Transition report under section 13 or 15(d) of the Exchange Act For the
transition period from to
------- --------
Commission file number 0-29248
SmarTire Systems Inc. (Formerly UniComm Signal Inc.)
(Exact Name of Small Business Issuer as Specified in Its Charter)
British Columbia, Canada Not Applicable
(State or Other Jurisdiction of (I.R.S. Employer
Incorporated or Organization) Identification No.)
150-13151 Vanier Place, Richmond, British Columbia, V6V 2J1
(Address of Principal Executive Offices)
(604) 276-9884
(Issuer's Telephone Number, Including Area Code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such report(s), and has been
subject to such filing requirements for the past 90 days.
Yes X No
----- -----
As of April 30, 1998, the Company had 8,989,296 shares of common stock issued
and outstanding.
Transitional Small Business Disclosure Format (check one):
Yes No X
----- -----
<PAGE>
SMARTIRE SYSTEMS INC.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (UNAUDITED) -
APRIL 30, 1998 AND JULY 31, 1997.
CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT (UNAUDITED) - THREE
MONTHS AND NINE MONTHS ENDED APRIL 30, 1998 AND 1997.
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
(UNAUDITED) - NINE MONTHS ENDED APRIL 30, 1998 AND 1997.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - THREE
MONTHS AND NINE MONTHS ENDED APRIL 30, 1998 AND 1997.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<PAGE>
SMARTIRE SYSTEMS INC.
(FORMERLY UNICOMM SIGNAL INC.)
Consolidated Financial Statements (Unaudited)
Three Months and Nine Months ended April 30, 1998 and 1997
<TABLE>
<CAPTION>
INDEX
Page
----
<S> <C>
FINANCIAL STATEMENTS
Consolidated Balance Sheets 1
Consolidated Statements of Loss and Deficit 2
Consolidated Statements of Changes in Financial Position 3
Notes to Consolidated Financial Statements 4
</TABLE>
<PAGE>
SMARTIRE SYSTEMS INC.
Consolidated Balance Sheets
(Expressed in Canadian Dollars)
(Unaudited)
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------
April 30, July 31,
1998 1997
- - -------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Current assets
Cash $ 5,231,432 $ 69,761
Subscription Receivable (Note 3) 5,148,000 -
Receivables 211,649 109,241
Inventory 949,059 699,619
Prepaids 52,375 46,582
Supplier prepayments 727,000 -
- - -------------------------------------------------------------------------------
12,319,515 925,203
Capital assets 601,120 556,332
Other assets 658,031 1,168,042
- - -------------------------------------------------------------------------------
$ 13,578,666 $ 2,649,577
- - -------------------------------------------------------------------------------
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY OF ASSETS OVER LIABILITIES)
<S> <C> <C>
Current liabilities
Payables and accruals $ 763,611 $ 2,027,903
Current portion of long-term debt (note 3) 268,506 207,861
- - -------------------------------------------------------------------------------
1,032,117 2,235,764
Long term debt (note 3) - 2,473,362
Shareholders' equity (deficiency of assets
over liabilities)
Share capital (note 4) 32,553,451 11,707,260
Equity component of convertible
debt (note 5) 42,160 840,402
Deficit (20,049,062) (14,607,211)
- - -------------------------------------------------------------------------------
12,546,549 (2,059,549)
- - -------------------------------------------------------------------------------
$ 13,578,666 $ 2,649,577
- - -------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
SMARTIRE SYSTEMS INC.
Consolidated Statements of Loss and Deficit
(Expressed in Canadian Dollars)
<TABLE>
<CAPTION>
(Unaudited)
- - ----------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
April 30, April 30, April 30, April 30,
1998 1997 1998 1997
- - ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $ 359,729 $ 240,849 $ 1,364,079 $ 471,853
Cost of goods sold 274,979 169,171 1,048,327 334,716
- - ----------------------------------------------------------------------------------------------------
84,750 71,678 315,752 137,137
Expenses
Depreciation and amortization 165,146 157,810 489,006 338,371
General and administrative 885,751 359,313 1,701,743 1,230,119
Interest and finance charges 66,842 68,978 1,243,870 108,937
Marketing 701,698 44,491 1,372,030 135,781
Research and development 313,814 336,149 950,954 649,254
- - ----------------------------------------------------------------------------------------------------
2,133,251 966,741 5,757,603 2,462,462
Net loss (2,048,501) (895,063) (5,441,851) (2,325,325)
Deficit, beginning of period (18,000,561) (11,914,100) (14,607,211) (10,483,838)
- - ----------------------------------------------------------------------------------------------------
Deficit, end of period $(20,049,062) $(12,809,163) $(20,049,062) $(12,809,163)
Loss per share $ (0.32) $ (0.25) $ (0.86) $ (0.64)
- - ----------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
SMARTIRE SYSTEMS INC.
Consolidated Statements of Changes in Financial Position
(Expressed in Canadian Dollars)
<TABLE>
<CAPTION>
(Unaudited)
- - --------------------------------------------------------------------------------
Nine Months Ended
April 30, April 30,
1998 1997
- - --------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN)
<S> <C> <C>
Operations
Net loss $ (5,441,851) $ (2,325,325)
Depreciation and amortization 489,006 338,371
Changes in non-cash working capital (2,348,933) 49,629
---------------------------------------------------------------------------
(7,301,778) (1,937,325)
Financing
Repayment of long-term debt (977,861) -
Convertible debentures 2,162,652 2,856,000
Share capital issued 20,846,191 661,069
Conversion of debentures to share capital (4,237,994) (18,000)
Subscription receivable (Note 3) (5,148,000) -
---------------------------------------------------------------------------
12,644,988 3,499,069
Investing
Capital assets (167,539) (176,665)
Other assets (14,000) -
Acquisition of tire monitoring assets - (1,215,000)
---------------------------------------------------------------------------
(181,539) (1,391,665)
- - --------------------------------------------------------------------------------
Increase in cash 5,161,671 170,079
Cash, beginning of period 69,761 102,755
- - --------------------------------------------------------------------------------
Cash, end of period $ 5,231,432 $ 272,834
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements
(Expressed in Canadian Dollars)
Three Months and Nine Months ended April 30, 1998 and 1997 (Unaudited)
- - --------------------------------------------------------------------------------
1. FUTURE OPERATIONS
SmarTire Systems Inc. is a Canadian company. The Company and its
subsidiaries develop and market products incorporating wireless data
transmission and processing technologies, primarily for the commercial
vehicle and automotive markets. The Company's primary product is a
wireless tire monitoring system which it currently markets for use on
commercial and passenger vehicles, off-road heavy equipment and other
pneumatic tire applications.
These 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 application of the going-concern
concept is dependent upon the Company's ability to successfully develop and
market products to generate future profitable operations, and its ability
to obtain adequate sources of financing from its lenders, shareholders and
other investors as required. Operations from current and prior periods did
not generate positive cash flow from operations. There is no assurance
that the Company will be successful in generating profitable operations or
that adequate sources of financing will be available when needed.
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) Limited and
Delta Transportation Products Ltd.
The unaudited interim 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 8. The unaudited interim financial statements
should be read in conjunction with the audited annual financial statements.
In the opinion of management, the unaudited interim financial statements
contain all adjustments necessary for a fair presentation of the financial
position and results of operations for the interim periods.
(b) CASH
Cash includes cash on account, demand deposits and short-term investments
with maturities of less than three months.
(c) 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.
(d) CAPITAL ASSETS
Capital assets are recorded at cost. Depreciation 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.
4
<PAGE>
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements, Continued
(Expressed in Canadian Dollars)
Three Months and Nine Months ended April 30, 1998 and 1997 (Unaudited)
- - --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(e) 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.
(f) REVENUE RECOGNITION
Revenue from sales is recognized when goods are shipped to customers.
(g) LOSS PER SHARE
Basic loss per share computations are based on the weighted average number
of shares outstanding during the period. The stock options and warrants
outstanding (note 5(f)) are antidilutive. Accordingly, fully diluted loss
per share does not differ from basic loss per share for the periods
presented herein.
(h) 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.
(i) ADVERTISING EXPENSES
Advertising expenses are expensed as incurred.
3. SUBSCRIPTION RECEIVABLE
On April 20, 1998, TRW Inc. of Cleveland, Ohio subscribed for an equity
private placement of 900,000 units at a price of US $4.00 per unit for
gross proceeds of US $3.6 million, subject only to regulatory approval.
Each unit consisted of one common share and one two-year non-transferable
common share purchase warrant. Each warrant entitles TRW to purchase one
additional common share at a price of US$4.00 in the first year or US$4.60
per share in the second year. Regulatory approval was received on April
30, 1998 and the subscription funds were placed in trust on May 8, 1998,
pending delivery of the share and warrant certificates. The funds were
released to the Company from trust on May 15, 1998.
5
<PAGE>
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements, Continued
(Expressed in Canadian Dollars)
Three Months and Nine Months ended April 30, 1998 and 1997 (Unaudited)
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------
4. LONG-TERM DEBT
-------------------------------------------------------------------------------------------------
April 30, July 31,
1998 1997
-------------------------------------------------------------------------------------------------
<S> <C> <C>
Western Economic Diversification Program, unsecured,
repayable in monthly instalments of the greater of
$1,000 or 1% of gross sales of the prior month, plus
supplemental payments of 1% of new equity funds
raised since August 1, 1995. $ - $ 28,743
Western Economic Diversification Program, repayable
in monthly instalments of the greater of $4,000 or 4%
of gross sales of the prior month, plus supplemental
payments of 1% of new equity raised since August 1, 1995. - 164,718
Class B redeemable debenture with a face value of
$Nil (July 31,1997-$14,400) bearing interest at 12% per
annum, secured by a floating charge on certain assets
of the Company, due December 9, 1997. - 14,400
Class C redeemable debenture with a face value
of $136,600 (July 31, 1997 - $136,600) bearing interest at 10%
per annum, secured by a floating charge on certain assets
of the Company, due July 24, 2000, convertible by the
lender at any time prior to repayment, into units, each unit
comprised of 1 common share and 1 common share
purchase warrant, at $12.00 per unit until July 24,
1998. Each warrant entitles the holder to purchase
one common share at a price ranging from $5.20 to $16.00
at dates between July 25, 1997 and July 24, 2000. 136,600 136,600
Class D redeemable debenture with a face value of $160,000
(July 31, 1997 - $1,134,000) bearing interest at 6% per
annum, secured by a floating charge on certain assets of
the Company, due November 1, 1999, convertible by
the lender at any time prior to repayment, into units,
each unit comprised of 1 common share and
1 common share purchase warrant, at $4.40 per unit until
November 1, 1997, $5.20 per unit until November 1, 1998,
and $6.00 per unit until November 1, 1999. Each warrant
entitles the holder to purchase one common share at a price
ranging $5.20 to $12.00 at dates between November 2, 1996
and November 1, 2001. 131,906 912,454
Class F redeemable debenture with a face value of $ Nil
(July 31, 1997 - $1,722,000) bearing interest at 10% per
annum, secured by a floating charge on certain assets of
the Company, due February 28, 2000, convertible by the
lender at any time prior to repayment, into units, each unit
comprised of 1 common share and 1 common share
purchase warrant, at $2.80 per unit until February 28, 1998,
$3.60 per unit until February 28, 1999, and $4.40 per unit until
February 28, 2000. Each warrant entitles the holder to
purchase one common share at a price ranging from
$2.80 to $5.20 at dates between March 1, 1997
and February 28, 2002. - 1,262,153
-------------------------------------------------------------------------------------------------
Carried forward $ 268,506 $ 2,519,068
-------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements, Continued
(Expressed in Canadian Dollars)
Three Months and Nine Months ended April 30, 1998 and 1997 (Unaudited)
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------
4. LONG-TERM DEBT, CONTINUED
-------------------------------------------------------------------------------------------------
April 30, July 31,
1998 1997
-------------------------------------------------------------------------------------------------
<S> <C> <C>
Brought forward $ 268,506 $ 2,519,068
Class G redeemable debenture with a face value of $ Nil
(July 31, 1997 - $178,000) bearing interest at 10% per
annum, secured by a floating charge on certain assets of
the Company, due May 1, 2000, convertible by the lender
at any time prior to repayment, into units, each unit comprised
of 1 common share and 1 common share purchase warrant,
at $2.80 per unit until May 1, 1998, $3.60 per unit until May 1,
1999, and $4.40 per unit until May 1, 2000. Each warrant
entitles the holder to purchase one common share at a price
ranging from $2.80 to $5.20 at dates between May 1, 1997
and May 1, 2002. - 162,155
-------------------------------------------------------------------------------------------------
268,506 2,681,223
Less: current portion 268,506 207,861
-------------------------------------------------------------------------------------------------
$ Nil $ 2,437,362
-------------------------------------------------------------------------------------------------
</TABLE>
During the nine month periods ended April 30, 1998 and 1997, the Company
paid interest on long term debt of $1,243,870 and $108,937 respectively.
5. SHARE CAPITAL
(a) Authorized
(i) Common shares: 200,000,000 (1997 - 200,000,000) without
par value
(ii) Preferred shares: 20,000 (1997 - 20,000) with par value of
$1,000 per share
During fiscal 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.
During fiscal 1996, the Company authorized 20,000 preferred shares
with a par value of $1,000 per share.
7
<PAGE>
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements, Continued
(Expressed in Canadian Dollars)
Three Months and Nine Months ended April 30, 1998 and 1997 (Unaudited)
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------
5. SHARE CAPITAL, CONTINUED
(b) The subscribed and issued share capital of the Company is as follows:
---------------------------------------------------------------------------
Common
Shares Amount
---------------------------------------------------------------------------
<S> <C> <C>
Balance at July 31, 1997 3,600,898 $ 11,707,260
Issued during the period ended April 30, 1998
Cash (net of issuance costs of $855,500) 2,175,000 7,844,500
Exercise of stock options 446,450 1,420,696
Exercise of warrants 605,703 2,382,967
Conversion of convertible debentures 1,261,245 4,033,028
Shares subscribed for in April 1998 and issued
in May 1998 900,000 5,165,000
---------------------------------------------------------------------------
Balance at April 30, 1998 8,989,296 $ 32,553,451
- - --------------------------------------------------------------------------------
</TABLE>
(c) During the nine month period ended April 30, 1998, convertible
debentures with a principal component of $3,347,171 and an equity
component of $890,814 were converted to 1,261,245 common shares net of
related share issuance costs of $204,957.
(d) 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-consolidation basis.
(e) Shares held in escrow
A total of 181,250 (July 31, 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.
(f) Stock options and warrants, and convertible debentures.
As at April 30, 1998 stock options were outstanding for 659,425 (July 31,
1997 - 349,375) common shares of the Company. These options are
exercisable by the holders at prices ranging from $2.61 to $4.58 (July 31,
1997 - $2.88 to $3.20) per share and expire on various dates from 1997 to
2003.
8
<PAGE>
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements, Continued
(Expressed in Canadian Dollars)
Three Months and Nine Months ended April 30, 1998 and 1997 (Unaudited)
- - --------------------------------------------------------------------------------
5. SHARE CAPITAL, CONTINUED
As at April 30, 1998, warrants were outstanding for 3,880,609 (July 31,
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 $6.60 (July 31, 1997 - $4.00 to $8.00) per share which expire on
various dates until 1999.
As at April 30, 1998, convertible debentures (note 4) were outstanding that
may be converted into 84,305 (July 31, 1997 - 1,895,364) common shares of
the Company at prices ranging from $5.20 to $12.00 (July 31, 1997 - $2.80
to $12.00) per share and expire on various dates from 1998 to 2002.
6. 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.
The fair value of long-term debt subject to fixed interest rates is
estimated by discounting the future cash flows, including interest
payments, using rates currently available for debt of similar terms and
maturity, based on the Company's credit standing and other market factors.
The carrying value was determined to approximate their fair value given the
proximity of their issuance to the balance sheet date. The fair value of
long-term debt subject to floating market rates approximates its carrying
value.
(b) CREDIT RISK
The Company does not have a significant exposure to any individual
customer, however, the majority of the Company's activities are
concentrated in the automotive industry and sales are substantially to
United States customers.
(c) CONVERTIBLE DEBT INSTRUMENTS
The Company records the liability component of a financial instrument
(determined to be the net present value of the principal) 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.
(d) SIGNIFICANT ESTIMATES
Management of the Company follows a policy of using significant estimates
related to establishing the recoverability of its assets including
inventory, 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.
9
<PAGE>
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements, Continued
(Expressed in Canadian Dollars)
Three Months and Nine Months Ended April 30, 1998 and 1997 (Unaudited)
- - --------------------------------------------------------------------------------
7. SUBSEQUENT EVENTS
(a) 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. If the new LPWD is ready for production, as
defined in the agreement, by July 1, 1998 the Company will pay an
additional US $500,000 for the rights to market the new LPWD for six
years from the date the new LPWD is ready for production. 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. The
Company must purchase the following number of units, subject to
proration if the LPWD is not ready for production by July 1, 1998, to
retain its exclusivity under the agreement:
<TABLE>
<CAPTION>
Year Units
---- -----
<S> <C>
1998 50,000
1999 100,000
2000 120,000
2001 144,000
2002 172,000
2003 207,000
</TABLE>
(b) On May 11, 1998, the Company provided redemption notice to holders of
its Class C Convertible Debenture, having a face value of $136,600.
Under the terms of the debenture, the holders had 10 days to convert
the debenture into units of common shares and common share purchase
warrants, rather than be redeemed. At May 22, 1998 the Company had
received notice that the balance of $136,600 would be converted into
11,383 common shares and 11,383 common share purchase warrants.
(c) On May 11, 1998, the Company provided redemption notice to holders of
its Class D Convertible Debenture, having a face value of $160,000.
Under the terms of the debenture, the holders had 30 days to convert
the debenture into units of common shares and common share purchase
warrants, rather than be redeemed. At June 9, 1998 the Company had
received notice that the balance of $160,000 would be converted into
30,769 common shares and 30,769 common share purchase warrants.
10
<PAGE>
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements, Continued
(Expressed in Canadian Dollars)
Three Months and Nine Months ended April 30, 1998 and 1997 (Unaudited)
- - --------------------------------------------------------------------------------
8. UNITED STATES ACCOUNTING PRINCIPLES
(a) LOSS AND DEFICIT
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 is as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
Nine Months Ended
April 30, April 30,
($000's) 1998 1997
---------------------------------------------------------------------------------------
<S> <C> <C>
Net loss in accordance with Canadian GAAP $ (5,425) $ (2,325)
Effects of differences in accounting for:
Research and development costs (b) (138) (139)
Interest expense on convertible debt (473) -
---------------------------------------------------------------------------------------
Net loss in accordance with United States GAAP (5,760) (2,186)
Beginning deficit in accordance with United States GAAP (14,914) (10,883)
---------------------------------------------------------------------------------------
Ending deficit in accordance with United States GAAP $(20,674) $(13,069)
---------------------------------------------------------------------------------------
</TABLE>
(b) RESEARCH AND DEVELOPMENT COSTS
United States GAAP require that all development costs be charged to expense
when incurred. Applying United States GAAP, other assets would be reduced
by approximately $110,000 and $222,000 as at April 30, 1998 and July 31,
1997, respectively.
(c) CONVERTIBLE DEBT
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 $28,094 (July 31, 1997 - $279,000), and shareholder's equity
would increase by $444,906 (July 31, 1997 - decrease by $220,000) as at
April 30, 1998 and interest expense would increase by approximately
$473,000 (July 31, 1997 - $59,000).
11
<PAGE>
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements, Continued
(Expressed in Canadian Dollars)
Three Months and Nine Months ended April 30, 1998 and 1997 (Unaudited)
- - --------------------------------------------------------------------------------
8. 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>
---------------------------------------------------------------------------
Nine Months Ended
April 30, April 30,
1998 1997
---------------------------------------------------------------------------
<S> <C> <C>
Weighted average number of shares 6,113,847 3,427,000
Loss per share $ (0.94) $ (0.64)
---------------------------------------------------------------------------
</TABLE>
Loss per share is computed based on the weighted average number of common
shares outstanding during the period plus common share equivalents.
Contingently returnable shares held in escrow have been excluded from the
calculation of weighted average number of shares under United States
generally accepted accounting principles. 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>
---------------------------------------------------------------------------
Nine Months Ended
April 30, April 30,
1998 1997
---------------------------------------------------------------------------
<S> <C> <C>
Decrease (increase) in assets
Receivables $ (102,408) $ 173,474
Supplier prepayments (727,000) -
Inventory (249,440) (114,688)
Prepaids (5,793) (110,577)
Increase in liabilities
Payables and accruals (1,264,292) 101,420
---------------------------------------------------------------------------
$ (2,348,933) $ 49,629
---------------------------------------------------------------------------
</TABLE>
12
<PAGE>
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements, Continued
(Expressed in Canadian Dollars)
Three Months and Nine Months ended April 30, 1998 and 1997 (Unaudited)
- - --------------------------------------------------------------------------------
8. UNITED STATES ACCOUNTING PRINCIPLES, CONTINUED
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 $4,237,994 in the nine month period ended April 30, 1998 (1997 -
$18,000) because these amounts would be considered non-cash transactions.
(f) INCOME TAXES
Under United States GAAP, deferred income taxes reflect the net 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 FAS 109 or Canadian GAAP. The Company's deferred
tax asset under FAS 109 is as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
DEFERRED TAX ASSET April 30, July 31,
1998 1997
--------------------------------------------------------------------------------
<S> <C> <C>
Net operating loss carryforwards $ 5,909,000 $ 3,393,326
Scientific research and development expenses 1,121,000 1,544,000
--------------------------------------------------------------------------------
7,030,000 4,937,326
Less valuation allowance (7,030,000) (4,937,326)
--------------------------------------------------------------------------------
Net deferred tax liabilities $ - $ -
--------------------------------------------------------------------------------
</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) RECENT ACCOUNTING STANDARDS
Effective August 1997, the Company adopted FAS 128, Earning per Share for
United States GAAP reporting purposes, on a retroactive basis. FAS 128 has
no significant effect on the Company's consolidated financial statements.
In June 1997, the 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.
13
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
The unaudited consolidated financial statements of SmarTire Systems Inc. and its
subsidiaries (the "Company" or "SmarTire") as of April 30, 1998 and for the
three and nine month periods ended April 30, 1998 and 1997 are attached hereto.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
FORWARD LOOKING STATEMENTS
Statements contained in this Report that are not based on historical facts are
forward-looking statements subject to uncertainties and risks including, but not
limited to, product demand and acceptance, economic conditions, the impact of
competition and pricing, results of financing efforts, and other risks.
OVERVIEW
The following discussion of the financial condition, changes in financial
condition and results of operations of the Company for the three and nine months
ended April 30, 1998 and 1997 should be read in conjunction with the
consolidated annual financial statements of the Company and related notes
included therein.
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 the successful development and marketing of
the Company's products to generate future profitable operations, and its
obtaining financing from its lenders, shareholders and other investors as
required. There can be no assurance that the Company will be successful in
generating profitable operations or that adequate sources of financing will be
available to the Company when needed, or, if available, that it can be obtained
on commercial reasonable terms.
The Company's consolidated financial statements are stated in Canadian Dollars
(CDN$) and are prepared in accordance with Canadian Generally Accepted
Accounting Principles (GAAP), the application of which, in the case of the
Company, conforms in all material respects for the periods presented with United
States GAAP except as indicated in the notes to the financial statements. All
per share amounts reflect an 8 to 1 reverse split effected on December 24, 1997.
Herein all references to the "$" and "CDN$" refer to Canadian Dollars; and all
references to "US$" refer to United States Dollars.
-1-
<PAGE>
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 most recent fiscal year ended July 31, 1998 and the nine months ended April
30, 1998 and 1997, 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
<TABLE>
<CAPTION>
Average Close High Low
------- ----- ---- ---
<S> <C> <C> <C> <C>
Nine Months Ended 4/30/98 1.42 1.43 1.46 1.37
Nine Months Ended 4/30/97 1.37 1.39 1.39 1.37
Fiscal Year Ended 7/31/97 1.37 1.38 1.40 1.33
</TABLE>
Since its inception, the Company has reported net losses arising from general
expenses and research/development expenditures. The Company has sustained
itself during the last several years through the sale of securities, including
common shares and convertible debentures, and the exercise of share purchase
warrants and share purchase options.
SmarTire is engaged in the development and marketing of a line of Tire
Monitoring Systems (TMS) incorporating proprietary patented technology designed
to improve the tire life, fuel efficiency, vehicle productivity and safety.
During the nine months ended April 30, 1998, the Company earned revenues from
the sale of TMS for passenger cars, racing applications, and industrial
applications.
The passenger car Tire Monitoring Systems are sold to two distinct and separate
markets: the Replacement Tire Market (Aftermarket) and the Original Equipment
Manufacturer (OEM) Market.
The Company sells OEM passenger car systems to Ford Motor Company, where they
are packaged as an optional accessory with run-flat tires and other safety
features on the Lincoln Continental.
-2-
<PAGE>
As of April 20, 1998, the Company has entered into three agreements with TRW
Inc. ("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"). TRW is
required to pay to the Company a royalty based upon the net sales price of each
licensed product sold to a specified customer and covered by a claim of a
Company patent. Pursuant to the TRW Technical Cooperation Agreement, the
Company and TRW agreed to cooperate in the development of new tire pressure
sensing technology, and, to the extent that the parties conduct individual
development work, they will share the results of such development work. The TRW
Technical Cooperation Agreement provides for regular meetings between the
parties to discuss developments at each party and to work together on specific
projects identified and outlined in a project statement. Further, subject to
certain limitations, the parties will share patents and applications therefore,
utility models and applications therefore, copyrights, trade secrets, and other
forms of intellectual property relating to tire pressure sensing systems or
components thereof which either party develops during the term. The Agreement
also provides for cross-licensing of 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.
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 had established approximately 1500
point of sale locations in the US as at April 30, 1998. The Company believes
that consumer acceptance of the Company's products has been accelerated by
Michelin's introduction of its ZP (zero-pressure) tire into the replacement tire
market on June 1, 1997 and Goodyear's July 31, 1997 announcement of plans to
convert a major part of its replacement tire production to run-flat tires
beginning in April 1998. Run-flat tires allow drivers to drive up to 50 miles
on a tire that has lost all its air pressure. Both the Goodyear run-flat tires,
called Extended Mobility Tires ("EMT"), and the Michelin ZP 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.
-3-
<PAGE>
Bridgestone/Firestone announced on May 7, 1998 that its new Firehawk SH30 RFT
Run-Flat Tire would be available in stores beginning in August 1998, and that
the tires would be installed with SmarTire tire monitoring systems.
The Company's advanced tire monitoring system is currently the only tire
monitoring system that has been approved for sale with run-flat tires by
Goodyear, Michelin, or Bridgestone/Firestone.
RESULTS OF OPERATIONS
THREE MONTHS ENDED APRIL 30, 1998 AND 1997
Gross revenue for the three months ended April 30, 1998 was $359,729 compared to
$240,849 for the three months ended April 30, 1997.
Sales of Aftermarket passenger car systems were $267,833 for the quarter ended
April 30, 1998 compared to no sales for the three months ended April 30, 1997,
as the Company began selling this product line in May 1997. Sales of the OEM
passenger car system decreased to $54,976 for the quarter ended April 30, 1998
compared to $81,513 for the comparable period of the previous year. Sales of
the Racing TMS product also decreased to $8,464 for the three months ended April
30, 1998 from $94,834 in the three months ended April 30, 1997. Sales of the
Racing TMS are cyclical, as the majority of the Company's customer's for this
product are participating in INDY racing and typically buy product in the
Company's second or third quarter in preparation for the INDY racing season,
which begins in the spring each year. In Fiscal 1998, the majority of Racing
TMS sales were recorded in the second quarter compared to Fiscal 1997 where the
majority of Racing TMS sales were sold over the second and third quarters.
Sales of Industrial TMS systems decreased to $28,456 during the three months
ended April 30, 1998 from $82,502 in the comparable period of the previous year.
Expenses increased to $2,133,251 for the three months ended April 30, 1998 from
$966,741 for the comparable period of the previous fiscal year, due to increases
in depreciation and amortization, general and administration, interest and
finance charges, marketing expenses, and research and development expenses.
Marketing expenses increased from $44,491 for the three month period ended April
30, 1997 to $701,698 for the comparable period of 1998 as a result of increased
expenditures on point of sale materials, technical manuals, trade shows, and
advertising and promotion relating to the Aftermarket passenger car product,
which the Company began selling in May 1997. Marketing compensation increased
as a result of additional employees hired or assigned to marketing functions.
Marketing travel increased as a result of increased activity relating to the
market of the Aftermarket passenger car product
-4-
<PAGE>
line. The creation of the Company's European marketing subsidiary, SmarTire
(Europe) Limited, in the Third Quarter contributed to the increase in the above
marketing expenses.
General and Administrative expenses increased to $885,751 for the three months
ended April 30, 1998 as compared to $359,313 for the three month period ended
April 30, 1997. The increase was attributed to increases in rent, repairs and
maintenance, office supplies and equipment, public relations, compensation and
legal expenses. Compensation increased from $102,110 in the three months ending
April 30, 1997 to approximately $375,000 for the three months ended April 30,
1998 due to increases in the number of administrative staff, increases in
administrative wage levels and bonuses paid in the third quarter of 1998.
Professional fees increased to $143,535 for the three months ended April 30,
1998 compared to $72,383 for the three months ended April 30, 1997 as a result
of costs associated with two significant private placements of equity during the
quarter, the cancelled merger and subsequent licensing agreement with Advantage
Enterprises, Inc. (see Part II, Item 5) and the strategic agreements signed with
TRW.
Interest and finance charges were consistent at $66,842 for the three months
ended April 30, 1998 compared to $68,978 for the three months ended April 30,
1997. Interest and finance charges have been substantially reduced during the
third quarter of the 1998 fiscal year as a result of the elimination of $3.8
million of long term debt that was converted to share capital or redeemed during
the quarter. As at June 10, 1998, the Company had no long term debt.
Research and Development expenses decreased slightly to $313,814 for the three
months ended April 30, 1998 from $336,149 for the three months ended April 30,
1997.
Net loss for the three months ended April 30, 1998 was $2,048,501 as compared to
$895,063 for the three months ended April 30, 1997.
NINE MONTHS ENDED APRIL 30, 1998 AND 1997
Gross revenue for the nine months ended April 30, 1998 was $1,364,079 as
compared to $471,853 for the nine month period ended April 30, 1997. The
increase in revenue was the result of the following changes:
Sales of Aftermarket passenger car systems increased to $659,468 for the nine
months ended April 30, 1998 from no sales in the comparable period of the
previous year. The Company began selling its Aftermarket passenger car system
in May 1997.
-5-
<PAGE>
Sales of the Aftermarket passenger car product over the last two quarters
remained relatively unchanged as a result of shortages in several components of
that product. The Company received customer orders in excess of production
volume and therefore had the potential to increase sales of the product.
However, many of the components for that product have significant order lead
times, and the Company did not receive purchase orders from its customers in
time to obtain the components and meet its customer demand.
At April 30, 1998, the Company had backorders of $520,344 of the Aftermarket
passenger car systems that could have been produced and shipped prior to April
30, 1998 had sufficient components been available. These backorders are
expected to be cleared by June 30, 1998.
The Company anticipates increases in revenues from its Aftermarket passenger car
system as sales of run-flat tires by its customers, which include Goodyear,
Michelin and Bridgestone/Firestone, increase. These three manufacturers require
a tire monitoring system to be installed with their run-flat tires. Goodyear
only began selling its Extended Mobility Tire (EMT)in selected sizes in April
1998 and Bridgestone/Firestone announced in May 1998 that its SH30 RFT run-flat
tire would be available in stores by August 1998.
Sales of OEM passenger car systems to Ford Motor Company increased to $438,219
for the nine months ended April 30, 1998 compared to $116,328 in the nine months
ended April 30, 1997. The Company reported only 5 months of sales to Ford
during the 1997 nine month period 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 of the Racing TMS decreased from $220,665 in the nine month period ended
April 30, 1997 to $171,474 for the nine months period ended April 30, 1998.
Sales were higher in the earlier period as INDY racing teams adopted the
product, which was then relatively new. Sales in the 1998 period have slowed as
the number of new INDY teams using the system has not increased significantly.
Sales of the Industrial TMS decreased to $81,606 in the nine months ended April
30, 1998 from $134,860. The decrease was a result of a shift in focus of the
Company, beginning in 1996, from the industrial market to the passenger car
market. The market for industrial systems was determined by management to be
inadequate to justify the related marketing and product development costs.
Sales during the nine months ended April 30, 1998 were primarily sales of
replacement and maintenance units to existing customers.
Expenses increased to $5,757,603 for the nine months ended April 30, 1998, from
$2,462,462 for the comparable period of the previous fiscal year, due to
-6-
<PAGE>
increases in depreciation and amortization, general and administration, interest
and finance charges, marketing expenses, and research and development expenses.
Marketing expenses increased from $135,781 for the nine month period ended April
30, 1997 to $1,372,030 for the comparable period of 1998 as a result of
increased expenditures on point of sale materials, technical manuals, trade
shows, and advertising and promotion relating to the Aftermarket passenger car
product, which the Company began selling in May 1997. Marketing compensation
also increased as a result of additional employees hired or assigned to
marketing functions. Marketing travel increased as a result of increased
activity relating to the market of the Aftermarket passenger car product line.
The creation of the Company's European marketing subsidiary, SmarTire (Europe)
Limited, in the Third Quarter contributed to the above increase in marketing
expenses.
General and Administrative expenses increased to $1,701,743 for the nine months
ended April 30, 1998 as compared to $1,230,119 in the comparable period ended
April 30, 1997. The increase was attributed to increases in rent, repairs and
maintenance, office supplies and equipment, public relations, and compensation.
Compensation increased from $367,000 in the nine months ending April 30, 1997 to
approximately $696,000 for the nine months ended April 30, 1998 due to the
addition of a paid executive advisory board in the third quarter of 1997,
increases in the number of administrative staff, and increases in administrative
wage levels during the first nine months of 1998.
Interest and finance charges increased from $108,937 for the nine months ended
April 30, 1997 to $1,243,870 for the nine months ended April 30, 1998 as a
result of interest on additional debt added during fiscal 1997 and the first
half of fiscal 1998 and as a result of the increased use of trade credit.
Interest and finance charges are expected to be substantially lower in the last
quarter of the fiscal year as a result of the elimination of $3.8 million of
long term debt that was converted to share capital or redeemed in the Third
Quarter. As at June 10, 1998 the Company had no long term debt outstanding.
Research and Development expenses increased from $649,254 for the nine months
ended April 30, 1997 to $950,954 for the nine months ended April 30, 1998. The
increase was attributable to increased expenditures on prototype development
from approximately $250,000 in the 1997 period to approximately $387,000 in the
1998 period as the Company continued to develop further product enhancements for
future versions of its products. Engineering compensation decreased from
approximately $361,000 in the 1997 period to approximately $320,000 in the 1998
period as a result of a reduction in staff during the second quarter of 1998.
Engineering consulting expenses of
-7-
<PAGE>
$111,657 were also incurred in the 1998 period, with no similar expenses in the
1997 period.
Depreciation and amortization expense increased as a result of the amortization
of patents and other intellectual property that were purchased from Epic
Technologies Inc. in December of 1996.
Net loss for the nine months ended April 30, 1998 was $5,441,851 as compared to
$2,325,325 for the nine months ended April 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its activities through revenue from operations and 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 April 30, 1998, had an accumulated deficit of
$20,049,062. As a result of a private placement completed in the quarter ended
April 30, 1998 as discussed below (see "Part II, Item 2"), management believes
that the Company has sufficient cash to fund its current and planned operations
through at least December 31, 1998. 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's cash position at April 30, 1998 was $5,231,432, as compared to
$66,761 at July 31, 1997. This increase was due to the net of the Company's
operating, financing, and investing activities described herein.
The Company used $7,301,778 for operating activities during the nine months
ended April 30, 1998 as compared with $1,937,325 for the nine months ended April
30, 1997. This difference was attributed to an increase in the loss for the
period; an increase in depreciation and amortization; and a $2,348,933 increase
in non-cash operating working capital, including a $1,264,292 decrease in
payables and accruals, a $102,408 increase in receivables, a $727,000 increase
in supplier prepayments, a $249,440 increase in inventory and a $5,793 increase
in prepaids.
For the nine months ended April 30, 1998, the Company had $12,644,988 provided
from financing activities. Sources of financing included the issuance of
-8-
<PAGE>
$2,162,652 of convertible debentures and the issuance of share capital of
$20,846,191 (net of issuance costs of $855,500).
Financing activities included the use of $977,861 for repayment of convertible
debentures and term debt during the nine months ended April 30, 1998 and a
$5,148,000 increase in subscription receivable. $4,237,994 of convertible
debenture debt was converted to share capital in the same period. $268,506 of
long term debt, namely balances of Class "C" and Class "D" convertible
debentures, remained at April 30, 1998, all of which were classified as current
liabilities in the interim financial statements based on redemption notices sent
by the Company to holders of the debt on May 11, 1998. As at June 9, 1998, all
of the holders of the Class C and D debentures had elected to convert into
42,153 common shares and 42,153 common share purchase warrants.
Investing Activities consisted of $181,539 used in investing activities during
the nine months ended April 30, 1998 for the purchase of capital assets and
other assets.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
MODIFICATIONS TO THE RIGHTS OF HOLDERS OF SECURITIES
Series "C" Warrants
On March 9, 1998, the Company received approval from the Vancouver Stock
Exchange to reduce the exercise price of 138,744 Series "C" warrants and 6,800
warrants issuable upon conversion of Class "C" convertible debentures (the
"Unconverted Warrants"). The original warrant exercise price of $6.40 for the
Class "C" warrants and $12.00 for the Unconverted Warrants was reduced to $4.40
and $5.20 respectively. As a condition of the repricing, the warrants must be
exercised within 30 days if the market price of common shares exceeds the
exercise price for 10 trading days. Otherwise, the warrants will expire. The
holders of an additional 4,583 of the warrants issuable upon conversion of the
debenture did not elect to participate on the price reduction. Therefore, the
warrant exercise price for those warrants will remain at $12.00 in the first
year and $18.00 in the second year, and will not be subject to the forced
exercise.
SALES OF EQUITY SECURITIES
Equity securities of the registrant sold by the registrant during the three
months ended April 30, 1998 that were not registered under the Securities Act of
1933, were as follows:
-9-
<PAGE>
On April 20, 1998, TRW subscribed for 900,000 units at a price of US$4.00 per
unit for a total purchase price of US$3,600,000 (the "TRW Private Placement"),
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. No commissions were paid. The units in the TRW
Private Placement were issued pursuant to Section 4(2) of the Securities Act of
1933 as amended (the "Act"). The closing was subject to the Company receiving
the approval of the Vancouver Stock Exchange (VSE) of the subscription. VSE
approval was received on April 30, 1998 and the subscription funds were placed
in trust on May 8, 1998, pending delivery of the share and warrant certificates.
The funds were released to the Company on May 15, 1998.
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.
The placement to non-U.S. persons was consummated pursuant to Regulation S and
to U.S. persons pursuant to Section 4(2) of the Act.
On March 30, 1998 the Company granted 500,000 share purchase options to
employees and directors. The options have an exercise price of $4.58 and expire
on March 30, 2003. The options to non-U.S. individuals were granted pursuant to
Regulation S and to US persons pursuant to Section 4(2) of the Act.
ITEM 5. OTHER INFORMATION
Product Licensing Agreement
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. 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. If the new LPWD is ready for
production, as defined in the agreement, by July 1, 1998 the Company will pay an
additional US $500,000 for the rights to market the new LPWD for six years from
the date the new LPWD is ready for production. 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. The Company must purchase the
-10-
<PAGE>
following number of units, subject to proration if the LPWD is not ready for
production by July 1, 1998, to retain its exclusivity under the agreement:
<TABLE>
<CAPTION>
Year Units
---- -----
<S> <C>
1998 50,000
1999 100,000
2000 120,000
2001 144,000
2002 172,000
2003 207,000
</TABLE>
Bridgestone/Firestone
Bridgestone/Firestone announced on May 7, 1998 that its new Firehawk SH30 RFT
Run-Flat Tire would be available in stores beginning in August 1998, and that
the tires would be installed with SmarTire tire monitoring systems. Goodyear
Tire and Michelin have also approved the SmarTire Wireless Pressure Monitor
System for use with their run-flat tires. The SmarTire Wireless Pressure Monitor
System is the only tire monitoring system that has been approved for sale with
run-flat tires by these manufacturers.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
The following exhibits are filed hereunder:
10.1 Product Licensing Agreement dated May 5, 1998 between the Company
and Advantage Enterprises Inc.*
* Portions of the Exhibit have been omitted pursuant to a request for
confidential treatment.
27 Financial Data Schedule (electronic filing only)
(b) Reports of Form 8-K - Three months ended April 30, 1998:
None.
-11-
<PAGE>
SIGNATURES
In accordance with the requirements for the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SMARTIRE SYSTEMS INC.
-----------------------------------
(Registrant)
Date June 16, 1998 /s/ ROBERT V. RUDMAN
----------------------- -----------------------------------
Robert V. Rudman
President and
Chief Executive Officer
Date June 16, 1998 /s/ KENNETH W. MORGAN
----------------------- -----------------------------------
Kenneth W. Morgan
Chief Financial Officer (Principal
Financial Officer)
-12-
<PAGE>
EXHIBIT 10.1
THE ITEMS MARKED BY TWO ASTERISKS * * HAVE BEEN OMITTED FROM THIS FILING AND
HAVE BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION
EXCLUSIVE DISTRIBUTION AGREEMENT
This Exclusive Distribution Agreement ("Agreement") is entered into as
of May 1, 1998 ("Effective Date") between Advantage Enterprises, Inc., a
Missouri corporation ("Advantage"), and SmarTire Systems Inc., a corporation
formed under the laws of the Province of British Columbia ("Distributor").
RECITALS:
A. Advantage is involved in the business of developing, manufacturing,
marketing, distributing and selling tire monitoring systems, know-how and
devices, including the tire monitoring system commonly known as TireMate.
B. Advantage has entered into an agreement dated April 29, 1998 as
amended by any amendment agreements thereto (collectively referred to as the
"ASD Agreement") with Auto Safe Devices, Inc. ("ASD") whereby ASD is currently
developing the next generation of tire monitoring system for Advantage, pursuant
to the specific Statement of Work ("SOW") incorporated within the ASD Agreement.
A copy of the ASD Agreement including the SOW, is attached as Annex A.
Distributor shall have the exclusive rights to market, distribute, sell and
otherwise commercialize such next generation tire monitoring system, in
accordance with the terms of this Agreement.
C. Advantage possesses the right to grant exclusive licenses to market,
distribute, sell and otherwise commercialize the Product (as defined below)
throughout the World.
D. Distributor desires to market, distribute, sell and otherwise
commercialize the Product Worldwide pursuant to rights granted under this
Agreement.
NOW, THEREFORE, it is agreed as follows:
1. DEFINITIONS. As used herein, the following terms shall have the meanings
set forth below:
a. "Existing Product" means all tire pressure monitoring systems, devices
and know-how in which business Advantage is currently involved, including the
tire monitoring system commonly known as TireMate including all data, designs,
drawings, specifications, inventions, processes, techniques, systems and
methods, and all developments, modifications, enhancements and other
improvements thereto and all patent, copyright, trademark, trade secret and
other intellectual property rights in respect thereof that may exist, however,
the definition of Existing Product specifically excludes the Product.
b. "Product" means the tire pressure monitoring system currently being
developed by ASD pursuant to the ASD Agreement, including all data designs,
drawings, specifications, inventions, know-how, processes, techniques, systems
and methods, all developments,
<PAGE>
-2-
modifications, enhancements and other improvements thereto, whether undertaken
by ASD or any other party on behalf of Advantage, and all patent, copyright,
trademark, trade secret and other intellectual property rights in respect
thereof.
c. "Ready for Production" means:
(i) the Product has been satisfactorily tested by Distributor
for commercial use production based upon commercially reasonable
standards, including reasonable assurances by Goodyear Tire &
Rubber Company that the Product has been approved for use with
their "run-flat" tires;
(ii) all tests required by the Federal Communications Commission
("FCC") in order to obtain an FCC licence for the Product shall
have been successfully completed and approval for such licence
has been granted; and
(iii) the Product meets all specifications set out in the SOW.
d. "Term" means the period commencing on the Effective Date and
continuing for six (6) years from the date the Product is Ready for Production,
subject to the terms of this Agreement regarding termination of this Agreement.
e. "Territory" means the World.
2. GRANT OF RIGHTS.
Subject to the terms and conditions set forth herein, Advantage hereby
grants to Distributor, during the Term, the exclusive right to market,
distribute and sell the Existing Product and the Product in the Territory,
either directly or indirectly through its agents, dealers, subdistributors,
licensees and sales representatives.
Provided Distributor has complied with all its material covenants
hereunder, Distributor shall, at its sole option, be entitled to extend the Term
for a further three (3) years by delivering notice of such intention at least
ninety (90) days prior to the end of the Term. The parties shall negotiate in
good faith as to the minimum purchase order requirements and pricing to be in
place during the extension of the Term. If the parties have not agreed to such
minimum purchase order requirement or pricing prior to the expiry of the Term,
the minimum purchase order requirement per year during such extension shall be
that number of Units of Product that is twenty (20%) percent over the minimum
purchase order requirement in the last year of the Term and the price per Unit
shall be the average price per Unit during the last year of the Term.
Provided Distributor has complied with all its material covenants
hereunder and subject to section 6.b., Advantage shall not, directly or
indirectly, market, distribute or sell the Existing Product or the Product or
any other tire pressure monitor product anywhere in the Territory during the
Term, shall not use the trademark TIREMATE or any confusing variant thereof in
association with any such products and shall not authorize or assist any other
party to do so. Distributor shall market, distribute and sell the Existing
Product and the Product under any trademark or trademarks it deems advisable,
other than TIREMATE. Provided that Advantage is
<PAGE>
-3-
materially in compliance with this Agreement, Distributor shall not, during the
Term, market, distribute or sell any externally mounted tire pressure monitoring
device other than the Product or the Existing Product, provided that Distributor
may market, distribute or sell such other external devices if Advantage is
unable to fill purchase orders for the Product submitted by Distributor or if
such other external devices are of comparable quality at a materially lower
price than the Product or if such other external devices are of materially
better quality and/or have additional or improved features that materially add
value to the Product at the same or lower price than the Product. An example of
such an additional feature is a battery powered receiver.
3. FINANCIAL CONSIDERATIONS.
In consideration for the exclusive rights granted herein, and the
obligations of Advantage under the Agreement, Distributor shall remit to
Advantage, and otherwise undertake the following obligations:
a. Concurrently with the execution of this Agreement,
Distributor shall remit to Advantage via wire transfer or certified check
$200,000US, representing the non-refundable consideration for the goodwill,
customer lists and the exclusive, worldwide marketing, distribution and sales
rights for the Existing Product and for all the remaining inventory of the
Existing Product in the possession or control of Advantage and any current
distributors, dealers or sales representatives of Advantage.
b. (i) In the event the Product is "Ready for Production" (as
defined in Section 1 above) on or before July 1, 1998 ("Completion Date"),
Distributor shall remit to Advantage on the Date the Product is Ready for
Production via wire transfer or certified check $500,000US, representing the
non-refundable consideration for the goodwill, customer lists and exclusive
worldwide rights to market, distribute and sell the Product as granted herein.
(ii) The $500,000 payment referenced above shall be
reduced by $2,500 per day for each day beyond the Completion Date that the
Product is not Ready for Production.
If the Product is not Ready for Production by that date that is
120 days after July 1, 1998, Distributor may at its sole option at any time
thereafter, on provision of five (5) days written notice:
A. Terminate this Agreement and all of its further
obligations relating to the Product;
B. Require Advantage to terminate the ASD Agreement for
cause and appoint another manufacturer acceptable to Distributor acting
reasonably and acceptable to Advantage on commercially reasonable terms; or
C. Affirm this Agreement.
(iii) All payments due Advantage under this Section 3
<PAGE>
-4-
shall be payable in United States dollars.
4. COVENANTS AND FURTHER OBLIGATIONS OF ADVANTAGE.
In addition to the other obligations as set forth herein, Advantage agrees
to perform the following under this Agreement:
a. Provided Distributor has complied with all its material covenants
hereunder, Advantage shall discontinue all research, development, marketing,
distribution, sales and other commercialization of the Existing Product
throughout the Territory. All Inquiries received by Advantage regarding the
purchase of the Existing Product shall be referred to Distributor. Subject to
satisfaction of the minimum purchase order requirements set forth in Section
6.a. below, Advantage shall refer all inquiries, leads, contacts, customers,
referrals and sales relating to the Product to Distributor. There are no
minimum purchase order requirements with respect to the Existing Product.
b. In the event a bona fide offer is tendered for the acquisition of
Advantage (whether stock or substantially all of its assets or any of
Advantage's rights to the Product) Distributor shall have the first right of
refusal to match such offer. Advantage shall immediately provide Distributor
written notice setting forth the terms of such offer. Following receipt of such
notice, Distributor shall have thirty days to notify Advantage that it will
match the terms offered by the potential bona fide third-party purchaser and a
further fifteen (15) days to close the transaction contemplated in the offer.
Any sale to a third party shall have no effect on this Agreement and such third
party shall acknowledge in writing that it is bound by the terms of this
Agreement as a condition of such sale.
c. The principals of Advantage shall be available to consult with
Distributor in connection with the commercialization of the Product, upon terms
and conditions mutually agreed upon, however Distributor is under no obligation
to utilize or contract for such services.
d. If Advantage, ASD or any person on behalf of Advantage or ASD develops
or designs any new tire pressure monitor products or technology (other than
improvements to the Product or Existing Product, which are automatically
included as part of this Agreement), Distributor shall have the first option to
acquire the exclusive rights to market, distribute and sell such new product or
technology throughout the Territory, on terms to be negotiated by the parties
acting reasonably, before such new product or technology is offered to any other
party. Such negotiations shall be concluded within thirty (30) days of the date
Advantage first notifies Distributor of the new product or technology and
Distributor shall have a further fifteen (15) days to close the transaction
negotiated, if any.
e. At any time during the Term, Distributor may, at its sole option,
carry out a patent infringement search with respect to the Product in any or all
of the United States, Canada, Mexico, Germany, France and the United Kingdom. If
as a result of any such search, Distributor determines that the Product
infringes the valid patent rights of a third party, Distributor shall promptly
notify Advantage of such determination in writing. Upon receipt of such notice
Advantage may promptly review the allegation of infringement with its own patent
attorneys and if such patent attorneys provide an opinion that there is no
infringement as alleged within thirty (30) days of the date Distributor notifies
Advantage of the alleged infringement, Distributor shall continue to distribute
<PAGE>
-5-
the Product in the country in issue provided that Advantage shall: (i) arrange
and pay for patent infringement insurance in favour of Distributor and Advantage
providing for coverage in such amounts and with such reputable insurers as the
parties agree to, acting reasonably; and (ii) fully and promptly indemnify and
save harmless Distributor from all damage, cost, loss, expense and liability
that Distributor may suffer or incur, including all reasonable legal fees and
expenses billed to Distributor, as a result of the continued marketing, sale and
distribution of the Product in the country in issue. If, on reviewing the
Distributor's allegation of infringement Advantage does not dispute such
allegation within the thirty (30) day period set out above, Advantage shall
promptly, at Advantage's sole cost, arrange to either: (iii) redesign the
Product so that it is no longer infringing, without loss of quality or
functionality; or (iv) arrange for a licence or purchase of the patent which is
being infringed. If neither such action is completed within sixty (60) days of
the date Advantage received notice of such infringement, Advantage shall, if
requested by Distributor, refund to Distributor the amount paid by Distributor
pursuant to Section 3(b) above, and in such event this Agreement shall be
terminated upon such payment being received in full by Distributor. Advantage
shall or shall cause ASD to provide to Distributor all drawings, schematics,
specifications, know-how and assistance reasonably required by Distributor to
carry out the patent infringement searches referred to herein, such information
to be used solely for such purpose and not to be disclosed to any other party
without Advantage's prior written consent.
f. Advantage shall itself or shall cause ASD to, at all times during the
Term, take out and maintain in good standing third party liability (including
product liability) insurance providing for a minimum of $5,000,000 coverage per
single occurrence. All insurance of Advantage and/or ASD as required by this
Agreement shall be with insurers acceptable to Distributor, acting reasonably,
shall provide that Distributor is an additional insured, and shall not be
cancellable until Advantage has provided Distributor with thirty (30) days prior
written notice of its intention to cancel. Advantage shall itself or shall
cause ASD to provide a copy of all such insurance policies to Distributor, on
request.
5. COVENANTS AND FURTHER OBLIGATIONS OF DISTRIBUTOR.
In addition to the other obligations as set forth herein, Distributor
agrees to perform the following under this Agreement:
a. Throughout the Term, Distributor may offer to Advantage, feedback
received by Distributor from customers, sub-distributors, dealers and the like
regarding the Product and may offer suggestions for improvements to the Product.
Any improvements to the Product created or discovered by Advantage or any third
party on behalf of Advantage shall be promptly communicated to Distributor in
writing and all such improvements and any new patents and/or products resulting
from such improvements shall be owned by Advantage and shall immediately be
included within the scope of the exclusive rights granted to Distributor under
this Agreement. If Distributor creates or discovers an improvement to the
Product, Distributor shall own all rights to such improvement. The terms of any
proposed joint development of new products and/or technology by the parties
shall be agreed to in writing before proceeding with such joint development.
<PAGE>
-6-
b. Within 90 days from the Effective Date, Distributor shall provide
Advantage with a Business and Marketing Plan setting forth its marketing
strategy in the Territory. Distributor and Advantage shall collectively be
involved in the initial testing of the Product at Distributor's premises.
c. Concurrently with execution of this Agreement, Distributor shall
submit an initial purchase order for 50,000 units covering a six month period
("Initial Purchase Order") from the date the Product is Ready for Production.
The form of Purchase Order is attached as Annex C. The price per unit (receiver
and four sensors) ("Unit") for the Initial Purchase Order shall be $**. Such
$** per Unit price is exclusive of shipping and does not include a battery
powered option for the receiver, but does include sensor batteries and a
standard mount (optional mounting brackets are at additional cost to be agreed
upon). If the price at which Advantage is purchasing the Product from ASD
exceeds $** per Unit, the price per Unit to Distributor shall increase by 50% of
the excess above $**, but in no event shall such increase exceed $**. Advantage
shall provide to Distributor, at the request of Distributor, documentation
verifying the price being charged by ASD, including a breakdown of the component
costs of the Product.
Thereafter, Distributor shall provide, on a monthly basis, a rolling six
month purchase order of which the first 90 days will be confirmed. Distributor
agrees that the Unit price for such subsequent purchase orders shall be reduced
to a maximum of $**. Except for the Initial Purchase Order, Advantage agrees to
negotiate in good faith with Distributor to arrive at a discounted Unit price in
the event of "substantial" orders (e.g., orders in the range of 400,000 Units
from WalMart, etc.) or if a competitor makes a comparable product available at a
materially lower price or a materially better quality product or one with
additional or improved features that materially add value to the Product
available at the same or lower price. Such discounted Unit prices for
"substantial orders" shall be determined following projections as to the cost
and manufacturing savings attributable to such bulk orders of the Product.
All orders shall be delivered on terms FCA ASD's manufacturing plant in
California or Nevada, or FCA such other approved manufacturer's plant in the
continental United States.
The term "FCA" or Free Carrier shall have the meaning set forth in the
publication "Incoterms 1990" published by the International Chamber of Commerce.
If at any time during the Term, Advantage, ASD or any other approved
manufacturer of the Product is unable to deliver the volume of Product required
in any purchase order, Distributor may require Advantage to appoint another
manufacturer for the Product within ninety (90) days, such manufacturer to be
acceptable to both parties acting reasonably and such appointment to be on
commercially reasonable terms.
d. Distributor shall provide reasonable assistance from time to time, to
help Advantage procure various components for the Product at the most attractive
rates possible, and where appropriate shall introduce potential manufacturers to
Advantage, with the understanding that the parties shall discuss in good faith
reductions in the Unit price corresponding to reductions in the manufacturing
cost associated with the Product.
<PAGE>
-7-
e. It is acknowledged that any material modifications to the Product made
at the request of the Distributor may affect the price per Unit. Any such
modifications shall be mutually agreed upon by the parties.
f. Upon the Product being Ready for Production, Distributor shall arrange
for a Letter of Credit (in the form attached as Annex B) supporting one-half of
the first ninety (90) days of the Initial Purchase Order. For all subsequent
orders, Distributor shall arrange for a Letter of Credit (in the form attached
as Annex B), supporting one-half of the rolling 90-day confirmed purchase order.
The balance of each payment for the purchase order shall be paid within thirty
(30) days of each shipment under such purchase order. Advantage, shall, on
behalf of Distributor, inspect each shipment of Product. If any shipment
contains less than the quantity of Product ordered or contains defective
Products, Advantage shall cause ASD to immediately remedy such shortage or
defect or to credit Distributor for the cost of such shortage or defect on the
next invoice. Repeated shortages or defects shall entitle Distributor to demand
that Advantage terminate the ASD Agreement for breach, and arrange for a new
manufacturer for the Product within ninety (90) days, such manufacturer to be
acceptable to Distributor and Advantage acting reasonably and such appointment
to be on commercially reasonable terms.
g. Distributor shall maintain in place during the Term, commercial
general liability insurance providing for $5,000,000 coverage per single
occurrence and naming Advantage as an additional insured but only with respect
to the liability arising from the operations of Distributor, its agents and
employees, and shall otherwise comply with all legal and regulatory obligations
relating to the sale or distribution of the Product within the various countries
and states in the Territory. All insurance of Distributor as required by the
Agreement shall be with insurers acceptable to Advantage, acting reasonably,
shall provide that Advantage is an additional insured, and shall not be
cancellable until Distributor has provided Advantage with thirty (30) days prior
written notice of its intention to cancel. Distributor shall provide a copy of
all such insurance policies to Advantage, on request.
h. Distributor shall provide all packaging materials, instruction manuals
and product decals to be used for the Product to be distributed by Distributor.
ASD shall provide all warranty information, including a copy of the Limited
Warranty attached as Annex D. On termination of this Agreement for any reason,
Advantage shall be responsible to return all unused packaging materials,
instruction manuals and product decals then in its or ASD's or any other
approved manufacturer's possession or control.
i. Distributor shall use reasonable commercial efforts in the marketing
and distribution of the Product and the Existing Product, and shall include
within the Business and Marketing Plan referenced in Section 5.b. above, a
marketing and advertising plan relating to the worldwide distribution of the
Product. All such activity shall be undertaken at Distributor's sole expense.
In this regard, Distributor acknowledges that it shall spend at least $500,000
during the first 12 months of the Term on marketing efforts for the Product and
thereafter shall incur commercially reasonable amounts on marketing efforts.
<PAGE>
-8-
6. MINIMUM PURCHASE ORDER REQUIREMENTS.
a. Distributor agrees to submit Purchase Orders representing the
following minimum sales of the Product for each of the years during the Term.
There is no minimum purchase order requirement for the Existing Product. It is
acknowledged that the minimum purchase order requirement as set forth below is
contingent upon the Product being Ready for Production on or before July 1,
1998. In the event that the Product is not Ready for Production on or before
July 1, 1998, the minimum purchase order requirement for 1998 shall be reduced
proportionately for the remainder of 1998. The minimum purchase order
requirement below is also contingent on ASD delivering a sufficient number of
Units to fulfil the minimum purchase order requirement.
<TABLE>
<CAPTION>
Year Units
---- -----
<S> <C> <C> <C>
i. 1998 - 50,000
ii. 1999 - 100,000
iii. 2000 - 120,000
iv. 2001 - 144,000
v. 2002 - 172,000
vi. 2003 - 207,000
</TABLE>
b. Subject as set out in Section 6.a. above, in the event Distributor
fails to meet the purchase order requirements set forth in Section 6.a. above
based on an annual review for 1998 and based on a semi-annual review, as
annualized for the years 1999 - 2003, Distributor may at its option pay $10 per
Unit for such shortfall to Advantage in order to retain its exclusivity under
this Agreement, such payment to be made within 30 days of the end of the period
being reviewed. If Distributor does not make such payment within the time
required, Advantage shall thereafter, have the right to distribute the Product
in any other manner it deems appropriate, but Distributor shall retain the right
to be a non-exclusive distributor of the Product in the Territory for the
remainder of the Term, but limited to the tire manufacturing and tire
distribution industries.
7. ADVANTAGE'S REPRESENTATIONS, WARRANTIES AND COVENANTS. Advantage
represents and warrants to Distributor as follows:
a. Advantage is a corporation duly organized and in good standing under
the laws of the State of Missouri and has the corporate power to enter into and
perform its obligations under this Agreement. The execution, delivery and
performance by Advantage of this Agreement has been authorized by all necessary
corporate action of Advantage. This Agreement is the valid and binding
obligation of Advantage enforceable in accordance with its terms.
b. Advantage will be the sole owner of the Product on the date the
Product is Ready for Production and throughout the Term . Advantage has the
authority to grant to Distributor the rights to the Product as set forth in this
Agreement, free and clear of any liens, charges, restrictions, pledges, security
interests or similar encumbrances and has not granted any such rights to any
other party;
c. The Product does not and will not throughout the Term infringe the
patent, copyright, trademark, trade secret or other intellectual property rights
of any third party in the
<PAGE>
-9-
United States, Canada, Mexico, Germany, France or the United Kingdom, and
Advantage is not aware of any third party claims of infringement with respect to
the Product;
d. The ASD Agreement is in good standing and neither Advantage or ASD is
in breach of any provision of that agreement;
e. With the sole exception of ASD and Distributor (and Columbia Research
& Development, L.L.C. in furtherance of a previously contemplated commercial
arrangement), Advantage has not disclosed any confidential information,
including trade secrets, relating to the Product to any other party;
f. Advantage covenants and agrees as follows:
(i) During the Term, except as expressly provided in this
Agreement, Advantage and its principals shall not engage,
directly or indirectly, in any business that designs, develops,
manufactures, tests, markets, distributes or sells products that
are competitive with the Existing Product or the Product, namely
external or internal tire pressure monitor systems for the
automotive industry. Advantage's principals shall execute and
deliver a separate agreement confirming this covenant in the form
attached as Annex E concurrently with the execution and delivery
of this Agreement;
(ii) Advantage acknowledges that monetary damages may not be an
adequate remedy to Distributor in the event of a breach by
Advantage or its principals of its covenants herein. Accordingly,
in the event of such breach, in addition to its other rights and
remedies, Distributor may apply to a court of competent
jurisdiction for an order enjoining or restraining such activity
and Advantage hereby agrees that such an order is necessary to
protect the legitimate and reasonable business interests of
Distributor. For the purpose of this Agreement, engaging in a
competitive business includes carrying on such business directly
or advising, investing in, lending funds or consulting to such
business, or acting as a director, officer, manager or employee.
A breach of this covenant by either of Advantage's principals
will be deemed to be a breach by Advantage.
g. Advantage, or its designee, shall promptly upon the Product being
Ready for Production but prior to any public disclosure of the Product, apply
for patent protection for the Product at the United States Patent and Trademark
Office and shall concurrently reserve the right, under appropriate international
treaties, to file corresponding patents in Canada, Mexico and all of the
European Union member countries, all at the sole expense of Advantage, and
Advantage shall be the owner of all such patent applications. The claims
covered by such patent applications shall be determined by mutual agreement and
in consultation with a firm of patent agents agreeable to Distributor, acting
reasonably. Advantage shall be solely responsible for the cost of filing all
such applications and paying all filing, registration and maintenance fees
throughout the full term of all such patents.
<PAGE>
-10-
h. Advantage shall be responsible at its own cost for obtaining, as
quickly as reasonably possible, and for maintaining and paying for all
telecommunications and other regulatory licences necessary to use the Product in
the United States, Canada, Mexico, Germany, France and the United Kingdom.
Distributor shall provide reasonable assistance to Advantage in applying for and
obtaining such licences. For all other countries in the Territory, Distributor
shall first request that Advantage obtain such licences for such countries and
Advantage shall obtain, maintain and pay for all such licences if such countries
represent a commercially viable market for the Product, at the sole discretion
of Advantage.
8. DISTRIBUTOR'S REPRESENTATIONS, WARRANTIES AND COVENANTS. Distributor
represents and warrants to Advantage as follows:
a. Distributor is a corporation duly organized and in good standing under
the laws of the Province of British Columbia and has the corporate power to
enter into and perform its obligations under this Agreement. The execution,
delivery and performance by Distributor of this Agreement has been authorized by
all necessary corporate action of Distributor. This Agreement is the valid and
binding obligation of Distributor enforceable in accordance with its terms.
b. Distributor acknowledges and understands that the ability of Advantage
to provide the Product as otherwise contemplated under this Agreement is
contingent upon the development of the Product pursuant to the ASD Agreement.
Notwithstanding such reliance, if ASD is in breach of the ASD Agreement, and
subject to the provisions of this paragraph, such breach shall not relieve
Advantage of its covenants and obligations hereunder and Advantage shall, if
requested by Distributor, locate and contract with another manufacturer
acceptable to Distributor acting reasonably and acceptable to Advantage, on
commercially reasonable terms. Such action is the only remedy of Distributor
against Advantage for a breach by ASD. Distributor further acknowledges that
Advantage is the owner of the Product (and corresponding patent, trade secret,
copyright and other non-trademark intellectual property rights) and
Distributor's rights shall only be as set forth in this Agreement with regard to
the distribution of the Product in the Territory.
c. Distributor and its marketing agents and representatives shall not
initiate or be involved in any proceedings or commercial activities to
invalidate any patent obtained by Advantage with respect to the Product or to
invalidate Advantage's ownership rights in the Product. Distributor shall be
responsible for applying for trademark protection for whatever trademarks it
sells the Product and the Existing Product in association with and Distributor
shall own all such trademarks and applicable registrations, and all goodwill
arising from the marketing, distribution and sale of the Existing Product and
the Product in association with such trademarks. Upon termination of this
Agreement for any reason, Advantage shall have no rights in any such trademarks
and shall not market, distribute or sell the Product, the Existing Product or
any other product in association with any such trademarks or any confusing
variants thereof, without the prior express written consent of Distributor.
Advantage shall not initiate or be involved in any proceedings or commercial
activities to invalidate Distributor's trademarks used in association with the
Product or the Existing Product or Distributor's ownership rights in such
trademarks.
d. Distributor shall cooperate at Advantage's cost (for Distributor's
out-of-pocket costs) with Advantage in the preparation and filing and
prosecution of applications for registration, or extensions of existing
registrations, or other documentation relative to the patents and intellectual
<PAGE>
-11-
property matters related to the Product (other than trademarks), and shall
execute any other documents Advantage may reasonably require to register and
maintain its registrations of the related patents and intellectual property as
may be required to give effect to this license in any country within the
Territory.
9. ACKNOWLEDGMENT OF ASD AGREEMENT.
Advantage shall not terminate, extend, provide approvals or consents,
modify, amend, revise, or breach the ASD Agreement, or waive a breach by ASD of
the ASD Agreement or grant any licence to ASD that would in any way negatively
affect the rights of Distributor hereunder, without the prior written consent of
Distributor.
10. QUALITY STANDARDS.
The Product shall be of such high standard quality as to be merchantable
and commercially suited for its intended use, as appropriate for a safety
device in the automotive industry. All Product will be manufactured in
accordance with applicable Federal, State and local laws and in accordance with
the specifications in the SOW. Distributor acknowledges that the only warranty
being provided in connection with the Product shall be the limited warranty
received from ASD pursuant to the ASD Agreement, which warranty shall
specifically acknowledge its applicability to the end user. The form of Limited
Warranty is attached as Annex D.
11. INDEMNIFICATION.
a. Advantage (in this Section 11.a. referred to as "Indemnitor") agrees
to indemnify and hold Distributor and its successors, agents, shareholders,
directors, officers and employees of the foregoing (in this capacity referred to
as "Indemnitees") harmless from and against any and all damages, costs, claims,
charges, losses, expenses (including, but not limited to, reasonable attorneys'
fees), liabilities, judgments, settlements, penalties or any other loss of any
kind or nature whatsoever which may be made, asserted, maintained, secured
against or suffered by the Indemnitees and directly caused by:
(i) any breach by Indemnitor of any provision of this
Agreement;
(ii) any bona fide claim by a third party that the Product
infringes the intellectual property rights of such third party;
(iii) any claim by a third party for product liability (namely
death or injury to persons or damage, destruction or loss of
property) relating to the design or manufacture of the Product or
any failure to warn by the manufacturer of the Product; or
(iv) any claims made by end users directly against Distributor
as a result of Product or Existing Product failure, defects,
breakage and the like (other than as a result of acts or
omissions of Distributor) where such claims are not fully
satisfied by ASD or any other approved manufacturer.
<PAGE>
-12-
b. Distributor (in this Section 11.b. referred to as "Indemnitor") agrees
to indemnify and hold Advantage and its successors, agents, shareholders,
directors, officers, and employees of the foregoing (in this capacity referred
to "Indemnitees") harmless from and against any and all damages, costs, claims,
charges, losses, expenses (including, but not limited to, reasonable attorneys'
fees), liabilities, judgments, settlements, penalties or any other loss of any
kind or nature whatsoever which may be made, asserted, maintained, secured
against or suffered by the Indemnitees and directly caused by any breach by
Indemnitor of any provision of this Agreement or as a result of any acts or
omissions to act of Distributor, its agents or employees.
c. In any case of such application of these indemnification provisions,
Indemnitees (as the case may be) agrees to provide the Indemnitor (as the case
may be) a written notice of any claim, demand or action which is or may be
subject to this Section 11.c. ("Claim") promptly after obtaining knowledge
thereof and shall make available to the other party all documents and
information in possession of that party material to the Claim. Promptly upon
receipt of such notice of any Claim, Indemnitor agrees to assume the defense of
the Claim on behalf of itself and Indemnitees. Indemnitees or each of them shall
have the right to participate in the defense of any Claim through counsel of
their choice. If Indemnitor fails to promptly assume the defense of any Claim,
Indemnitees or any of them may do so and Indemnitor shall promptly reimburse
Indemnitees for all reasonable costs and expenses (including, but not limited
to, reasonable attorneys' fees) incurred in connection therewith as such are
incurred. Indemnitees shall not settle or compromise any Claim without the prior
written consent of Indemnitor, unless Indemnitor shall fail or refuse for any
reason to reimburse costs and expenses of defense as incurred by Indemnitees.
Both parties agree to fully cooperate with the other in the defense of all
Claims initially made by third parties.
12. ASSIGNABILITY
Distributor shall have the right to assign its rights under this Agreement
to an affiliate controlled by Distributor without the consent of Advantage,
provided, however, Distributor shall remain primarily liable for performance of
all of its obligations under this Agreement. Advantage shall not assign this
Agreement or subcontract any of its obligation hereunder without the prior
written consent of Distributor.
13. MISCELLANEOUS.
a. ENTIRE AGREEMENT. This Agreement sets forth, and is intended to be an
integration of, all agreements, understandings, representations and warranties
between the parties with respect to the subject matter of this Agreement, and
there are no agreements, understandings representations or warranties, oral or
written, express or implied, between the parties with respect to the subject
matter of this Agreement other than as set forth herein.
b. AMENDMENT; WAIVER. No amendment of this Agreement shall be valid
unless in writing and signed by both parties. No waiver of any provision of
this Agreement shall be valid unless in writing and signed by the party against
whom it is sought to be enforced.
c. GOVERNING LAW. This Agreement shall be governed in accordance with
the laws of the State of California, without reference to its conflict of laws
rules. Any dispute regarding this
<PAGE>
-13-
Agreement shall be resolved by a court of competent jurisdiction in California
and the parties hereby attorn to the jurisdiction of such courts.
d. CONFIDENTIALITY; PUBLIC DISCLOSURES. Subject as set out below, the
terms and conditions of this Agreement shall remain confidential between the
parties, and shall not be discussed with any third party without the prior
consent of the other party. Advantage acknowledges that Distributor is a
publicly traded company and as a result, must publicly disclose information with
respect to this Agreement and the transactions contemplated herein. Advantage
agrees to cooperate with Distributor in this regard to the extent required by
Distributor and any applicable regulatory body and hereby consents to public
disclosure of the terms of this Agreement and the transactions contemplated
herein. Any public announcement regarding the relationship between the parties
or developments involving the Product shall be made only following consultation
between the parties and joint approval of the timing and content of such public
announcement, such approval not to be unreasonably withheld or delayed.
e. NOTICES. Any notice required or desired to be given hereunder shall
be in writing and may be personally delivered or sent by telecopier, addressed
as follows:
(i) To Advantage: Advantage Enterprises, Inc.
1610 Elm Street
Harrisonville, Missouri, 64701
Attn: Phillip Zaroor
Clete McQuinn
Fax: (816) 887-3705
with a copy to:
(ii) Jeffrey S. Fried, Esquire
Fried & Company, P.C.
700 Thirteenth Street
Suite 325
Washington, D.C. 20005
Fax: (202) 331-3905
and:
(iii) To Distributor:
SmarTire Systems Inc.
13151 Vanier Place
Suite 150
Richmond, British Columbia V6V 2J1
Attn: Robert Rudman
Fax: (604) 276-2350
with a copy to:
(iv) Clark, Wilson
Suite 800-885 West Georgia Street
Vancouver, British Columbia V6C 3H1
Attn: Bernard Pinsky
Fax: (604) 687-6314
<PAGE>
-14-
Any notice so sent shall be deemed received, if delivered, upon
delivery and if sent by telecopier, upon successful transmission.
f. TIME OF THE ESSENCE. Time is of the essence of this Agreement.
g. FURTHER ASSURANCES. The parties shall execute and deliver all such
further documents, do or cause to be done all such further acts and things, and
give all such further assurances as may be necessary to give full effect to the
provisions and intent of this Agreement.
h. ENUREMENT. This Agreement shall enure to the benefit of and be
binding upon the parties and their respective successors and permitted assigns.
i. COUNTERPARTS. This Agreement may be executed in several counterparts,
each of which shall be deemed to be an original and all of which shall together
constitute one and the same instrument.
j. ELECTRONIC MEANS. Delivery of an executed copy of this Agreement by
electronic facsimile transmission or other means of electronic communication
capable of producing a printed copy shall be deemed to be execution and delivery
of this Agreement as of the Effective Date.
k. SEVERABILITY. If any covenant or other provision of this Agreement is
invalid, illegal, or incapable of being enforced by reason of any rule of law or
public policy, then such covenant or other provision shall be severed from and
shall not affect any other covenant or other provision of this Agreement, and
this Agreement shall be construed as if such invalid, illegal, or unenforceable
covenant or provision had never been contained in this Agreement. All other
covenants and provisions of this Agreement shall, nevertheless, remain in full
force and effect and no covenant or provision shall be deemed dependent upon any
other covenant or provision unless so expressed herein.
l. NON-WAIVER. No waiver of any of the provisions of this Agreement
shall constitute a waiver of any other provision (whether or not similar), nor
shall any waiver constitute a continuing waiver unless otherwise expressly
agreed in writing.
m. UN CONVENTION NOT APPLICABLE. The provisions of the UN Convention on
Contracts for the International Sale of Goods (1980) shall not be applicable to
this Agreement or any order by Distributor for the Product hereunder.
<PAGE>
-15-
n. RELATIONSHIP OF THE PARTIES. The relationship of the parties is that
of independent contractors. This Agreement does not create a relationship of
partnership, joint venturers, principal and agent or employer and employee.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
Attest: Advantage Enterprises, Inc.
By:
- - ---------------------- ----------------------
Clete McQuinn Phillip Zaroor
SmarTire Systems Inc.:
By:
- - ---------------------- ----------------------
President
Attachments:
Annex A- ASD Agreement
Annex B- Form of Letter of Credit
Annex C- Form of Purchase Order
Annex D- Limited Warranty
Annex E- Non-Disclosure, Non-Competition and Non-Solicitation Agreement
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S
QUARTERLY REPORT ON FORM 10-QSB FOR THE QUARTERLY PERIOD ENDED APRIL 30, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CURRENCY> CANADIAN DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> APR-30-1998
<EXCHANGE-RATE> 1.43
<CASH> 5,231,432
<SECURITIES> 0
<RECEIVABLES> 5,359,649
<ALLOWANCES> 0
<INVENTORY> 949,059
<CURRENT-ASSETS> 12,319,515
<PP&E> 973,235
<DEPRECIATION> 372,115
<TOTAL-ASSETS> 13,578,666
<CURRENT-LIABILITIES> 1,032,117
<BONDS> 0
0
0
<COMMON> 32,553,451
<OTHER-SE> (20,006,902)
<TOTAL-LIABILITY-AND-EQUITY> 13,578,666
<SALES> 1,364,079
<TOTAL-REVENUES> 1,364,079
<CGS> 1,048,327
<TOTAL-COSTS> 1,048,327
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,243,870
<INCOME-PRETAX> (5,441,851)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,441,851)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,441,851)
<EPS-PRIMARY> (0.86)
<EPS-DILUTED> (0.86)
</TABLE>
