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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JULY 31, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-29248
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SMARTIRE SYSTEMS INC.
(Name of small business issuer in its charter)
BRITISH COLUMBIA N/A
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
#150 - 13151 VANIER PLACE
RICHMOND, BRITISH COLUMBIA, CANADA V6V 2J1
(Address of principal executive offices) (Zip Code)
604-276-9884
(Issuer's telephone number)
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
COMMON STOCK
(TITLE OF EACH CLASS)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. [ X ] Yes [ ]
No
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year: $2,677,935
(Canadian dollars)
At September 30, 1999, the aggregate market value of the voting and
non-voting common equity held by non-affiliates computed by reference to the
average bid and asked price of such common equity, was US$21,960,000.
The number of shares outstanding of the Company's common stock at
September 30, 1999 was 11,542,447.
Transitional Small Business Disclosure Format (check one): [ ] Yes [X] No
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INDEX
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Page
Number
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PART I
Item 1. Description of Business ......................................................2
Item 2. Description of Property......................................................14
Item 3. Legal Proceedings............................................................14
Item 4. Submission of Matters to a Vote of Security Holders..........................14
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.....................14
Item 6. Management's Discussion and Analysis or Plan of Operation....................15
Item 7. Financial Statements.........................................................22
Item 8. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure.....................................................22
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act............................23
Item 10. Executive Compensation.......................................................26
Item 11. Security Ownership of Certain Beneficial Owners
and Management...............................................................30
Item 12. Certain Relationships and Related Transactions...............................31
Item 13. Exhibits and Reports on Form 8-K.............................................32
</TABLE>
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THIS ANNUAL REPORT ON FORM 10-KSB, INCLUDING EXHIBITS THERETO, CONTAINS
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED. THESE FORWARD-LOOKING STATEMENTS ARE TYPICALLY IDENTIFIED BY THE
WORDS "ANTICIPATES", "BELIEVES", "EXPECTS", "INTENDS", "FORECASTS", "PLANS",
"FUTURE", "STRATEGY", OR WORDS OF SIMILAR MEANING. VARIOUS FACTORS THAT COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN THE
FORWARD-LOOKING STATEMENTS ARE DESCRIBED IN "RISK FACTORS" IN THIS FORM 10-KSB.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
SmarTire Systems Inc. (together with its subsidiaries, the "Company" or
"SmarTire") is engaged in developing and marketing technically advanced Tire
Monitoring Systems (TMS) designed for improved vehicle safety, performance,
reliability and fuel efficiency. During the fiscal year ended July 31, 1999, the
Company earned revenues primarily from the sale of TMS for passenger cars and
motorsport applications.
The Company was incorporated under the laws of the Province of British Columbia
as TTC/Truck Tech Corp. on September 8, 1987. The Company (operating as
TTC/Truck Tech Corp.) completed its initial public offering on the Vancouver
Stock Exchange on September 11, 1989. On April 13, 1995, the Company changed its
name to UniComm Signal Inc. On December 24, 1997, the Company changed its name
to SmarTire Systems Inc. and effected a reverse stock split of 1 for 8. All
references in this Annual Report on Form 10-KSB take this split into effect when
referring to the number of shares of the Company's Common Stock or per share
data. On December 16, 1998, trading of the Company's common stock commenced on
the Nasdaq Small Cap Market. On March 12, 1999, the Company delisted its shares
from trading on the Vancouver Stock Exchange. The Company's corporate offices
are located at #150 - 13151 Vanier Place, Richmond, British Columbia, Canada,
V6V 2J1. The Company's telephone number is (604) 276-9884.
The Company's consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, SmarTire USA Inc., SmarTire (Europe)
Limited and SmarTire Technologies Inc.
The Company's consolidated financial statements are stated in Canadian Dollars
(CDN$) and are prepared in accordance with Canadian Generally Accepted
Accounting Principles (GAAP), the application of which, in the case of the
Company, conforms in all material respects for the periods presented with United
States GAAP except as indicated in the notes to the consolidated financial
statements.
In this Report, unless otherwise specified, all dollar amounts are expressed in
Canadian Dollars. All references herein to the "$" and "CDN$" refer to Canadian
Dollars, and all references to "US$" refer to United States Dollars.
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BUSINESS OF THE COMPANY
OVERVIEW
The Company is focused on developing and marketing technically advanced tire
monitoring products in response to an increasing demand from the transportation
industry for improved vehicle safety, performance, reliability and fuel
efficiency. After developing its proprietary TMS technology for application in
the industrial and commercial vehicle markets plus a specialized tire monitoring
product for motorsports, the Company turned to developing its technology for use
by the automotive industry to address the escalating demand for passenger car
TMS. In support of the tire industry's introduction of the innovative run-flat
or extended mobility tire, the Company developed the SmarTire(TM) system and
established North American and European sales, marketing, and distribution
networks. The Company plans to complete the development and launch of its next
generation of TMS products, including a new commercial TMS product.
The Company is promoting the SmarTire(TM) system to both run-flat and
conventional tire aftermarkets worldwide. Additional target markets included in
the Company's plans are commercial, industrial and recreational vehicles as well
as expanded product lines for the motorsport industry. The Company's alliance
partner, TRW Inc., is marketing TMS to the original equipment vehicle
manufacturers of passenger vehicles.
TRW SMARTIRE ALLIANCE
During the last half of 1997, SmarTire began seeking a strategic alliance with a
leading "tier-one" supplier to the original equipment automotive industry (OEM).
Tier-one suppliers are the first tier in a chain of suppliers to automobile
manufacturers. In order for a new feature to be added to a vehicle, generally it
must be introduced through a tier-one supplier.
On April 20, 1998 the Company completed a series of four agreements with TRW
Inc., a leading tier-one supplier to the automotive industry. TRW Inc. is a
global company focused on providing products and services with a high
technological or engineering content to the automotive, space and defense
markets. TRW Inc. has recently completed the purchase of Lucas Varity Plc,
another major tier-one supplier based in the United Kingdom. The four agreements
completed with TRW Inc. are summarized as follows:
(a) Equity Agreement
TRW acquired 900,000 units of SmarTire at a price of US$ 4.00 per
unit. Each unit consisted of one 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 of common stock during the first year and US$ 4.60
per share during the second year. As of July 31, 1999, the
warrants have not been exercised. The warrants expire April 20,
2000.
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(b) Cooperative Engineering Agreement
The Company and TRW agreed to cooperate in the development of new
tire pressure sensing technology. The Cooperative Engineering
Agreement also provides for cross licensing of certain
intellectual property owned by the parties and, to the extent that
the parties conduct in-house development work regarding tire
pressure sensing technology, they will share the results of that
development work.
(c) License Agreement
SmarTire has granted TRW a perpetual worldwide license to use
SmarTire technology to serve OEM's in passenger cars and light,
medium and heavy duty trucks, and for service parts for such
products and component markets. Under the terms of the License
Agreement, the Company will earn a royalty from TRW based on the
net sales price of TMS systems and components sold by TRW to a
specified customer for use on vehicles for model years 2000
through 2003 inclusive, and covered by a claim of a SmarTire
patent. The License Agreement expires on the expiration date of
the last to expire of the Company's patents.
(d) Manufacturing Agreement
SmarTire and TRW entered into a manufacturing agreement which
establishes TRW as the primary supplier to SmarTire. TRW will be
the supplier providing it remains competitive.
PRODUCT DEVELOPMENT
The Company's products include TMS for passenger cars, motorsports, commercial
vehicles and off-road industrial equipment. Key benefits of TMS include:
(a) Safety
When tire pressures are maintained at the proper levels, vehicle
braking, handling and stability are optimized. Incorrect tire pressures
can compromise a vehicle's stability, its handling and braking, and, in
extreme cases, may contribute to causing an accident.
(b) Fuel Economy
Tire performance directly affects fuel economy of a vehicle. By
conducting regular tire checks, fuel economy may be improved.
(c) Reduced Downtime
Full-time tire monitoring of tire operating parameters (e.g. pressure
and temperature) has been shown to reduce unexpected and time-consuming
roadside repairs.
The passenger car TMS incorporates patented technology to monitor the pressure
and temperature in each tire in a passenger car and send a signal to the driver
if the pressure falls below a predetermined level. The current system consists
of four small wheel modules, one fastened to each wheel inside the tire, and a
radio receiver. There are no external wires or connections, minimizing system
maintenance.
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Tire pressure information for each wheel is digitally displayed on the vehicle's
driver information center. When the vehicle is moving at ten miles per hour or
more and a tire is under-inflated, a "low pressure warning" lamp lights up. When
tire pressure falls below a second predetermined level, a second "low pressure
warning" lamp appears on the dashboard and an audible alarm is sounded. The
warnings disappear when tire pressure rises to a programmed pounds per square
inch ("psi"). Tire pressure information is transmitted approximately every 30
seconds while the vehicle is in motion. In the aftermarket version of the
passenger car TMS, tire pressure information is displayed on a visor/dashboard
mounted display module.
The receiver is constantly listening for the transmissions from each wheel. Each
time the receiver is powered up, it performs a diagnostic cycle routine to
ensure all four sensors are operating properly. If signals are not received from
one or more sensors, the system is set to run through the diagnostic cycle
again. If it still does not receive a signal, the low pressure warning lamps are
turned on to alert the driver.
The system is also available for use on vehicles with six wheels such as
recreational vehicles.
The passenger car TMS is currently being offered as an option on Lincoln
Continentals. Sales under the Lincoln Continental production program were
expected to discontinue at the end of the 1999 model year but have been
continued into the 2000 model year. The Company has no contract in place with
Ford. Ford issues purchase orders for the manufacture of TMS for the Lincoln
Continental. The purchase orders do not commit Ford to any minimum purchase
requirement and there is no assurance that Ford will continue to offer the TMS
on the Lincoln Continental.
The Company's TMS has been approved for sale with run-flat or extended mobility
tires by Goodyear, Michelin and Bridgestone/Firestone. Run-flat tires allow
drivers to drive up to 50 miles on a tire that has lost all of its air pressure.
These tires perform so well without any air pressure that an approved TMS is
required with the purchase of each set. Otherwise the operator may unknowingly
drive on the tire until it fails or is no longer repairable. TMS for both
run-flat and conventional tires are distributed primarily through independent
tire dealers and distributors and automobile service centers.
In order to be a leader in the emerging market for TMS, the Company is actively
developing the next generation of SmarTire(TM) systems. SmarTire is undertaking
a dual product strategy incorporating a custom computer chip. The computer chip
will increase the features and functions of the transmitter while reducing the
size and cost of each transmitter. One product involves installation of the
sensor transmitter module inside the tire on the wheel. This new internal system
will use smaller and easier to install transmitter modules and will offer
mounting options for easy installation. This new system will offer the features
being demanded by tire manufacturers, automakers and consumers. The new system
is designed for universal application for both the OEM and aftermarket. Market
launch of this product is expected in early 2000.
The second product represents an external wheel approach by attaching a
miniature sensor/transmitter module to the end of the valve stem. This new
aftermarket
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product is expected to be less expensive, easier to install and designed to be
universally adaptable for all passenger cars and light trucks in North America
and Europe. The Company is continuing to work with Advantage Enterprises Inc.
under the terms of a product licensing agreement. The product is not ready for
production and development and testing of this product is ongoing.
The Company is also developing a commercial vehicle TMS which incorporates
patented technology to monitor tire pressures and temperatures on a wide variety
of on-highway applications, including commercial vehicles and transit buses.
This system builds on the technology developed for the passenger car TMS. The
commercial vehicle TMS consists of individual sensors mounted inside each tire
wheel assembly and a cab mounted receiver/display unit. The individual sensors
measure both the operating pressure and temperature of each tire and then
transmit this information via radio signal. Whenever the pressure in any tire
deviates from its pre-programmed level, the SmarTire(TM) monitor alerts the
driver so that the condition can be corrected before the tire is damaged. The
system has been developed for use by trucking fleets that frequently change
trailers, as each sensor has its own unique identifying signal. When the driver
switches trailers, the new trailer's number, etc., can be entered manually or
electronically into the display unit. Each display unit can handle up to 40 tire
positions and can be used with several trailers.
In 1996, SmarTire acquired a tire monitoring system designed specifically for
use in motorsports that was developed in conjunction with Penske Racing. The
current motorsports TMS can only be fitted on wheels which have been specially
machined by the manufacturer. The wheel fixtures are similar to enlarged valve
stems with the antenna located inside the air space of the tire. The three ounce
transmitter is about three inches long and sends data only when wheel motion is
detected in order to preserve the life of its lithium batteries. In addition to
providing warnings of a tire losing pressure, the motorsport TMS is used to
correctly set cold tire pressures in order to avoid over-inflated tires. The
motorsport TMS is distributed by Pi Research, United Kingdom.
MARKETING
SmarTire USA and SmarTire (Europe) have been established to carry out the
marketing of the Company's products. The initial objective of SmarTire USA and
SmarTire Europe has been to establish a distribution network for the automotive
aftermarket. A co-objective of establishing this network has been to train and
certify dealers and retailers to install the SmarTire(TM) system. The launch of
the next generation of passenger car TMS will build upon this distribution
network. In addition, part of the Company's passenger car TMS strategy is to
market through car accessory programs ("CAPS"). CAPS are programs whereby
accessories for new cars are sold and installed via the car manufacturers'
franchised dealer networks. As part of CAPS, the Company will offer its TMS as
accessories for new cars. The Company's TMS offered through CAPS may be
manufacturer branded products which are designed by the Company in connection
with the car manufacturers as a custom installation for specific car models.
The Company is also preparing to enter the commercial vehicle market. The
commercial vehicle market includes vehicles from local delivery truck fleets to
large tractor trailers.
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COMPETITION
The tire monitoring industry is still in the early stages of development. The
Company's primary competition is Schrader-Bridgeport International Inc.
("Schrader"). Schrader is the only other producer of wireless TMS for the
passenger car market. Schrader's TMS has been approved by certain tire
manufacturers for run-flat tires in the aftermarket in North America and is also
currently being sold in the OEM market on Chevrolet Corvettes. The Company is
not aware of Schrader receiving approvals for its aftermarket product in Europe
and it is not known if any European approvals are being sought by Schrader.
Other potentially competitive TMS are under development by other companies
primarily for the OEM market. These systems include a tire deflation warning
system that uses ABS braking systems to detect low tire pressure and systems
requiring hard-wiring of electronics into the vehicle. One potential future
development that could affect the market for both passenger car and commercial
vehicle tire monitoring is the development of a "smart chip." This is a computer
chip that could transmit data and would be manufactured into tires.
The Company is not aware of any directly competitive TMS products in the
commercial vehicle market although those companies developing TMS for the
passenger car market could potentially also develop systems for commercial
vehicle applications.
RAW MATERIALS AND PRINCIPAL SUPPLIERS
The Company contracts the manufacture of its products to third parties. These
manufacturers normally provide turnkey operations whereby the manufacturer is
responsible for purchasing the component parts for the Company's TMS. The
Company also purchases component parts on its own account for engineering and
prototype development purposes. Certain of the components and raw materials used
in the Company's products are difficult to obtain and/or require purchase
commitments far in advance of the manufacturing date.
GOVERNMENT REGULATIONS
The Company's products are subject to regulation by the government agencies
responsible for radio frequencies in each county that the Company's TMS products
will be sold. For example, in the United States approval must be received from
the Federal Communications Commission. In addition to radio approvals, some
countries require additional governmental approvals, or other approvals may be
necessary for market acceptance of the product. For example, TUV approval in
Germany (a highly regarded independent testing company) is considered necessary
to market the Company's TMS. In the United Kingdom, the Vehicle Installation
Development Group is a governmental body that approves all electronic equipment
to be installed in emergency and police vehicles.
The Company believes it has all of the necessary governmental approvals for its
current TMS products. As each new TMS product is introduced to the market, the
Company will apply for approvals for the new products.
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DEPENDENCE ON CERTAIN CUSTOMERS
Due to the early stage development of the market for TMS in general and for the
Company's TMS products, the Company is still dependent on major customers.
During the year ended July 31,1999 the Company earned 76% of its revenue from
four major customers. Sales to one of these customers accounted for 58% of sales
of aftermarket passenger car TMS during fiscal year 1999. Another customer
accounted for 100% of sales of the OEM passenger car TMS during fiscal year
1999. Two customers accounted for 100% of sales of the motorsports TMS during
fiscal year 1999.
PATENTS, TRADEMARKS, LICENSES, FRANCHISES, CONCESSIONS, ROYALTY AGREEMENTS,
LABOR CONTRACTS, INCLUDING DURATION.
Proprietary Protection
The Company holds several patents for its current technologies, which are listed
below:
United States Patent 5,231,872 addresses the technology in the tire monitoring
product. It was issued on August 3, 1993 and expires August 3, 2010.
United States Patent 5,285,189 addresses the technology in the abnormal tire
condition warning system. It was issued on February 8, 1994 and expires February
8, 2011. This patent was purchased by the Company from Epic Technologies, Inc.
in December 1996.
United States Patent 5,335,540 addresses the technology in the tire monitoring
product. It was issued on August 9, 1994 and expires August 9, 2011.
United States Patent 5,559,484 addresses the technology in the abnormal tire
condition warning system. It was issued on September 24, 1996 and expires
September 24, 2013. This patent was purchased by the Company from Epic
Technologies, Inc. in December 1996.
United States Patent 4,653,445 addresses the technology in an Engine Protection
System ("EPS") product. It was issued on March 31, 1987 and expires March 31,
2004.
Licenses
The Company has entered into four agreements with TRW as described above in
"Business of the Company."
The Company entered into a license agreement on September 30, 1999, with
Transense Technologies PLC based in Oxfordshire, United Kingdom. Transense
researches, develops and exploits the use of its patented surface acoustic wave
("SAW") technology in the automotive industry. The license agreement grants
SmarTire a non-exclusive, worldwide right to develop and market Transense's SAW
technology for use in tire monitoring systems.
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Under the agreement, SmarTire will purchase 250,000 units of Transense, each
comprised of one share and one two-year share purchase warrant, for a total
purchase price of L150,000 (Pounds Sterling). The purchase price will be paid
two-thirds in cash and one-third by issuance of 25,000 of SmarTire shares.
Transense will earn a royalty on any products SmarTire produces and sells using
Transense technology. The agreement is conditional upon approval by Transense's
shareholders.
RESEARCH AND DEVELOPMENT
The following is an estimate of the amount spent during each of the last two
fiscal years on research and development activities;
1998 - $1,477,129
1999 - $8,739,092
Included in 1999 expense is a charge of $7,280,299 to reduce the recorded value
of inventory, production equipment and deferred development costs associated
with the current generation of tire pressure monitoring systems to their net
realizable values. See "Management's Discussion and Analysis or Plan of
Operation" and the consolidated financial statements contained elsewhere in this
Form 10-KSB.
COSTS AND EFFECTS OF COMPLIANCE WITH ENVIRONMENTAL LAWS
The Company has no material expenses and anticipates no material impact on its
business from compliance with environmental laws.
NUMBER OF TOTAL EMPLOYEES AND NUMBER OF FULL-TIME EMPLOYEES
At July 31, 1999, the Company had 39 full-time employees. There is no collective
bargaining agreement in place. All employees of the Company are full-time
employees.
RISK FACTORS
The following factors, among others, could cause actual results to differ
materially from those contained in forward-looking statements in this Form
10-KSB.
History of Operating Losses; Fluctuating Operating Results
Since inception through July 31, 1999, the Company has incurred aggregate losses
of approximately $38,500,000. The Company's net loss for the fiscal year ended
July 31, 1999 was $17,186,248. There is no assurance that the Company will
operate profitably or will generate positive cash flow in the future. In
addition, the Company's operating results may be subject to significant
fluctuations due to many factors not within the Company's control, such as the
unpredictability of when a customer will order products, the size of a
customer's order, the demand for the Company's products, the level of
competition and general economic conditions. Management
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believes that the Company will have sufficient cash to fund its current and
planned operations through at least fiscal year 2000. Thereafter, the Company
expects that it will require additional funding. There can be no assurance that
such financing will be available on terms acceptable to the Company or at all.
Significant Competition in the Industry
The markets in which the Company competes are rapidly changing due to
technological developments and increasing focus on automotive safety. Other
companies offer products similar to those offered by the Company, and target the
same customers as the Company. Many of these companies have substantially
greater financial, marketing and technical resources. The Company also
anticipates that the competition within these markets will increase as demand
for the products escalates. It is possible that new competitors or alliances
among existing competitors may emerge and such competitors may rapidly acquire
significant market share.
Uncertainty of Consumer Awareness of TMS
TMS are a new product and consumer awareness is in its early stages. There can
be no assurance that consumer awareness and demand for TMS will increase, or
develop sufficiently so that the Company will achieve or sustain significant
sales growth in either its historical markets or for its new products. To the
extent demand for the Company's products does not develop, the Company's
operations will be materially adversely affected.
Dependence on Major Customers
During the year ended July 31, 1999, the Company earned 76% of its revenue from
four of its major customers. Accordingly, the loss of one of these major
customers would materially and adversely affect the Company. The loss of any
major customer, or significant reductions by any of them in buying the Company's
products, or the inability to collect accounts receivable from them, would
materially and adversely affect the Company's business and results of
operations. Sales to one of the above noted customers accounted for 58% of the
sales of aftermarket passenger car TMS during fiscal year 1999. One customer
accounted for 100% of sales of the OEM passenger car TMS during fiscal year
1999. Two customers accounted for 100% of sales of the motorsports TMS during
fiscal year 1999.
Difficulty in Obtaining Components and Raw Materials
The Company's current products, and the products that the Company may provide in
the future, embody new technologies. Certain of the components and raw materials
used in the Company's products are difficult to obtain and/or require purchase
commitments to be made by the Company far in advance of the manufacturing date.
The inability to obtain sufficient quantities of components or raw materials, or
the inability to forecast purchase requirements accurately, could adversely
affect the Company's results business of operations. Similarly, commitments to
purchase components and raw materials in excess of customer demand for the
Company's products could adversely affect the Company's results of operations.
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Reliance on Contract Manufacturers
The Company contracts the manufacture of its products to third parties. In
certain cases, the Company does not have an alternative source of manufacturing,
and a suitable replacement would be time-consuming and expensive to obtain. If,
for any reason, one of the Company's third party manufacturers is unable or does
not produce the Company's products, the Company's business, financial condition
and results of operations will be adversely affected.
Inability to Raise Additional Capital
The Company has been funding its capital requirements primarily through the
offer and sale of securities. These funds are used for ongoing operations as
well as to implement the Company's proposed expansion plans. The Company intends
to raise additional funding in fiscal year 2000 through the issuance and sale of
securities. The Company anticipates that the proceeds to the Company from such
sales, together with projected revenues, will be sufficient to fund the
Company's operations through at least fiscal year 2000. In the event that the
Company's plans change, there are any delays in introducing new TMS products or
the proceeds of any additional funding prove to be insufficient, the Company
will be required to seek additional financing. Any additional equity financing
may involve substantial dilution to the Company's stockholders. There can be no
assurance that additional financing will be available to the Company when needed
or, if available, that it can be obtained on commercially reasonable terms.
Dependence on Key Personnel
The Company's success depends to a significant extent on the continued service
of certain key management personnel. The loss or interruption of services from
one or more of these personnel, for whatever reason, could have a material
adverse effect on the Company. In the event of the loss of services of such
personnel, no assurances can be given that the Company will be able to obtain
the services of adequate replacement personnel.
Potential Inability to Manage Growth of the Company
If the Company is unable to manage its growth effectively, such inability would
have a material adverse effect on the Company's product development, its
business, financial condition and results of operations. The Company's ability
to manage and sustain growth effectively will depend, in part, on the ability of
its management to manage growth through the implementation of appropriate
management, operational and financial systems and controls, and successfully to
train, motivate and manage its employees. If the Company's management is unable
to manage its growth effectively, the Company's results of operations could be
materially adversely affected.
Reliance on Limited Number of Personnel
The Company relies on its existing staff for marketing and selling the Company's
products, and on a small development staff to develop new products and
applications for existing products. The Company's growth and expansion may be
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inhibited unless it establishes a larger development staff to develop new
products and applications for existing products. The Company plans to increase
its development staff, although no assurances can be given that qualified
personnel can be hired. The inability of the Company to hire and keep qualified
personnel could materially adversely affect the Company's future plans. The
Company's success also depends in part on its ability to attract and retain
qualified professional, technical, managerial and marketing personnel.
Competition for such personnel in the markets in which the Company competes is
intense, and there can be no assurance the Company will be successful in
attracting and retaining the personnel it requires to conduct its operations
successfully.
Potential Inability to Keep up With Rapid Technological Change
The markets in which the Company competes are characterized by rapid
technological change, frequent new product and service introductions, evolving
industry standards and changes in customer demands. The introduction of products
embodying new technologies and the emergence of new industry standards can, in a
relatively short period of time, render existing products obsolete and
unmarketable. The Company believes that its success will depend upon its ability
to continuously develop new products and to enhance its current products and
introduce them promptly into the market. If the Company is not able to develop
and introduce new products, its business, financial condition and results of
operations could be adversely affected.
Dependence on Proprietary Technology; Risks of Third Party Infringement Claims
There can be no assurance that the Company's measures to protect its current
proprietary rights will be adequate to prevent misappropriation of such rights
or that the Company's competitors will not independently develop or patent
technologies that are substantially equivalent or superior to the Company's
technologies. Additionally, although the Company believes that its products and
technologies do not infringe upon the proprietary rights of any third parties,
there can be no assurance that third parties will not assert infringement claims
against the Company. Similarly, infringement claims could be asserted against
products and technologies which the Company licenses, or has the rights to use,
from third parties. Any such claims, if proved, could materially and adversely
affect the Company's business and results of operations. In addition, although
any such claims may ultimately prove to be without merit, the necessary
management attention and cost required to defend such claims could adversely
affect the Company's business and results of operations.
Adequacy of Insurance and Lack of Errors and Omissions Insurance
The Company could be subject to claims in connection with the products that it
sells. There can be no assurance that the Company would have sufficient
resources to satisfy any liability resulting from any such claim, or that it
would be able to have its customers indemnify or insure it against any such
liability. There can be no assurance that the Company's insurance coverage would
be adequate in term and scope to protect the Company against material financial
effects in the event of a successful claim. The Company currently does not carry
errors and omissions
12
<PAGE> 14
insurance. The Company may obtain errors and omissions insurance provided it can
be obtained at reasonable prices; however, there can be no assurance that such
coverage, if obtained, would be adequate in term and scope to protect the
Company.
Uncertainty Due to the Year 2000 Issue
The Year 2000 issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information using
year 2000 dates is processed. In addition, similar problems may arise in some
systems which use certain dates in 1999 to represent something other than a
date. The effects of the Year 2000 issue may be experienced before, on, or after
January 1, 2000, and, if not addressed, the impact on operations and financial
reporting may range from minor errors to significant systems failure which could
affect the Company's ability to conduct normal business operations.
In 1999 the Company initiated a Year 2000 program to review operating and
business systems to identify any potential problems and to ensure that all key
systems will not be materially affected by the Year 2000 issue. The Company's
program has several phases and is structured to prioritize critical systems and
minimize business risk. Based on progress to date and plans for the balance of
1999, the Company expects that its business operating systems should be Year
2000 ready in advance of December 31, 1999.
The Company also depends on the Year 2000 readiness of third parties with whom
it conducts business, such as suppliers of goods and services, customers and
governments. As part of its Year 2000 program, the Company is assessing the Year
2000 readiness of key third parties to mitigate the potential risks of the Year
2000 issue.
Because of the uncertainties surrounding the Year 2000 issue, including third
party readiness, notwithstanding the program and steps taken by the Company,
there can be no assurance that Year 2000 issues will not have a material adverse
impact on the Company.
Dilutive Effect of Options and Warrants
As at July 31, 1999, there were options and warrants outstanding to purchase an
aggregate of 2,633,690 shares of the Company's common stock at an average price
of CDN $5.32 per share. To the extent that these and subsequent dilutive
securities are exercised and/or converted, dilution of the percentage ownership
of the Company's stockholders will occur, and any sales in the public market of
the common stock underlying the options, warrants and convertible debentures
might adversely affect prevailing market prices for the Company's common stock.
13
<PAGE> 15
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases a 9,768 square foot facility at #150-13151 Vanier Place,
Richmond, British Columbia, V6V 2J1 for a five year term ending January 14,
2002. This facility consists of an office and administration area, an
engineering department and a prototype production facility.
SmarTire (Europe) Limited leases a 2,166 square foot facility at 6 Berkshire
Business Centre, Berkshire Drive, Thatcham, Berkshire, United Kingdom RG19 4EW
for a three year term ending April 6, 2001. This facility consists of an office
and administration area and a warehousing and fulfillment area.
SmarTire USA Inc. leases a 3,831 square foot facility at 6 Otis Park Drive,
Bourne, Massachusetts USA 02532 for a two year term ending July 31, 2001. This
facility consists of an office and administration area and an application
engineering area.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There was no matter submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, through the solicitation
of proxies or otherwise.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the Nasdaq Small Cap Market under the
symbol "SMTR".
The table below lists the and high and low sales prices on the OTC Bulletin
Board for the Company's common stock until December 15, 1998 when the Company's
common stock began trading on the Nasdaq Small Cap Market. The quotations were
compiled from Stockwatch and reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.
<TABLE>
<CAPTION>
Quarter Ended High Low
- ------------- ---- ---
<S> <C> <C>
10/31/97 US$4.40 US$1.50
1/31/98 4.25 1.63
4/30/98 8.44 2.88
7/31/98 11.69 6.50
10/31/98 7.88 4.63
12/15/98 6.13 3.81
</TABLE>
14
<PAGE> 16
The table below lists the high and low bid prices on the Nasdaq Small Cap Market
for the Company's common stock since December 16, 1998 as compiled from NASDAQ -
AMEX on-line.
<TABLE>
<CAPTION>
Quarter Ended High Low
- ------------- ---- ---
<S> <C> <C>
01/31/99 US$5.94 US$3.31
04/30/99 4.50 2.00
07/31/99 3.09 1.63
</TABLE>
The Company's common stock is issued in registered form. Pacific Corporate Trust
Company (located in Vancouver, British Columbia, Canada) is the registrar and
transfer agent for the Common Shares.
As of September 30, 1999 there were approximately 408 holders of record of the
Company's common stock.
The Company has never declared or paid dividends on its common stock and does
not anticipate that it will do so in the foreseeable future. The Company intends
to retain future earnings, if any, for use in its operations and the expansion
of its business.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion of the financial condition, changes in financial
condition and results of operations of the Company for the years ended July
31, 1999 and 1998 should be read in conjunction with the consolidated financial
statements of the Company and related notes included therein.
The Company's consolidated financial statements are in Canadian dollars (CDN$)
and are prepared in accordance with Canadian Generally Accepted Accounting
Principles (GAAP), the application of which, in the case of the Company,
conforms in all material respects for the period presented with the United
States GAAP except as disclosed in the notes to the consolidated financial
statements of the Company included herein.
RESULTS OF OPERATIONS
Fiscal Year Ended July 31, 1999 vs. Fiscal Year Ended July 31, 1998
Gross revenue for the fiscal year ended July 31, 1999 was $2,677,935 as compared
to $2,057,251 for the fiscal year ended July 31, 1998. The increase in revenue
for the fiscal year 1999 over the fiscal year 1998 was a result of the
following:
Sales of aftermarket passenger car systems increased to $1,823,897 for the
fiscal year ended July 31, 1999 from $1,250,896 in the previous fiscal year. The
increase in revenue was attributable to sales in Europe during the current
fiscal year. Despite the increased sales, revenue was less than expected. Sales
into the run-flat and extended mobility tire market have not met the
expectations shared with the Company by the tire manufacturers.
In the Company's direct marketing campaigns,
15
<PAGE> 17
consumers have been slower to adopt tire monitoring than had been anticipated
primarily due to the fact that tire monitoring is still in its infancy. The
Company expects increased revenues from aftermarket systems in the next fiscal
year as a result of the launch of its second generation products and increased
public awareness of tire pressure monitoring.
Sales of OEM passenger car systems decreased to $440,101 for the fiscal year
ended July 31, 1999 compared to $531,361 in the previous fiscal year. Sales
under the Lincoln Continental production program were expected to be
discontinued at the end of the 1999 model year but are now expected to be
discontinued at the end of the 2000 model year which is expected to occur in the
first half of calendar 2000. Revenue is dependent on sales by Ford and is
difficult to predict.
Sales of motorsports TMS increased to $388,312 in the fiscal year ended July 31,
1999 from $177,477 in the previous fiscal year. Motorsports TMS are sold through
a distributor and revenues are difficult to predict.
Sales of the industrial TMS decreased to $25,626 in the fiscal year ended July
31, 1999 from $73,068 in the previous fiscal year. The decrease in sales was a
result of a shift in focus of the Company, beginning in 1996, from the
industrial market to the passenger car market. Sales during fiscal 1999 were
primarily sales of replacement and maintenance units to existing customers.
Sales to this sector are expected to decrease as the Company continues to focus
its efforts on passenger car and commercial markets.
Gross margin on product sales decreased from 20.5% in the fiscal year ended July
31, 1998 to 18.4% in fiscal year 1999 as the proportion of sales attributable to
the passenger car systems increased. The Company's passenger car product lines,
which represented the majority of its sales in fiscal 1999, earn a lower profit
margin than the Company had earned from industrial sales in prior years. The
Company expects to see slight increases in gross margin in fiscal 2000 on the
launch of new products due to reduced product costs.
Expenses increased during fiscal 1999 to $17,680,135 as compared to $7,113,754
in the previous fiscal year due to increases in expenses for all areas of the
business. Included in research and product development expense is a charge of
$7,280,299. This charge is discussed in more detail below.
Marketing expenses increased to $4,279,228 in fiscal 1999 from $1,614,321 for
the previous fiscal year as a result of increased expenditures in all areas. The
creation of the Company's European subsidiary late in the 1998 fiscal year
contributed to the significant increase in marketing expenses in the fiscal
current year. Marketing wages increased as a result of additional employees in
both North America and Europe. The Company expensed product development costs of
$263,564 incurred to complete sales contracts to certain major customers during
fiscal 1999 compared to $494,123 in fiscal 1998. Marketing travel costs
increased due to increased North American activities and European activities to
set up marketing and distribution programs. Expenditures on trade shows
increased for fiscal 1999 due to increasing participation and presence at North
American trade shows and first-time participation at Automechanika by SmarTire
Europe. Advertising and promotion expenses increased primarily due to costs for
the SmarTire(TM) Direct program in
16
<PAGE> 18
North America including advertising development, support materials for the
certified dealer installation network and placement costs for advertising.
Marketing costs are not expected to increase significantly in fiscal 2000.
General and administrative expenses increased to $4,171,275 in fiscal 1999
compared to $2,674,568 in the previous fiscal year. The increase was due to
higher costs to support the Company's expanded activities in both North America
and Europe, including the Company's filings with securities regulatory
authorities and listing of the Company's common stock on the Nasdaq Small Cap
Market. Administration wages increased due to increases in the number of
administrative staff and higher wage levels in fiscal 1999. Professional fees
increased due to the Company's securities filings, Nasdaq listing and
transaction costs. Investor relations costs increased to reflect expanded
activities associated with the Company's Nasdaq listing. General and
administrative expenses are not expected to increase significantly in fiscal
2000.
Research and development expenses were $8,739,092 (including charges described
below) in fiscal 1999 compared to $1,477,129 for the previous fiscal year. The
decrease in expenditures on prototype development including supplies and
materials, was offset by higher engineering wages, reflecting increased staff
and higher wage levels for product development activities. Engineering
expenditures are expected to increase significantly in fiscal 2000 due to the
development and launch of the Company's new passenger car and commercial tire
monitoring products as well as ongoing product development programs.
The Company has assessed the future business prospects for its tire pressure
monitoring products. Management feels that the longer-term outlook for these
products is favorable as evidenced by the Company's commitment to develop and
market second generation products, including systems for the commercial trucking
market. Based on the Company's assessment, the forecasted sales levels of the
current generation of TMS, through to the introduction of the Company's next
generation of tire pressure monitoring products, would not support the carrying
value of certain assets, including inventories ($6.7 million), production
equipment ($0.2 million) and deferred development costs ($0.4 million)
associated with the current generation of tire pressure monitoring systems. As a
result the Company recorded a charge of $7,280,299 in the third quarter
primarily to reduce the recorded value of these assets to their net realizable
values.
The Company earned interest income of $275,776 in fiscal 1999 as compared to
$131,872 in the previous fiscal year. This increase was due to higher average
cash balances being maintained during the current fiscal year.
Interest expense was nil for the fiscal year ended July 31, 1999 compared to
$1,029,632 for the fiscal year 1998. 1998 interest expense was a result of
interest on debt added during fiscal 1997 and 1998, a premium paid on the
redemption of convertible debentures, and increased use of trade credit. All
long-term debt added during 1997 and 1998 was converted to share capital or
redeemed by June 1998.
17
<PAGE> 19
Fiscal Year Ended July 31, 1998 vs Fiscal Year Ended July 31, 1997
Gross revenue for the fiscal year ended July 31, 1998 was $2,057,251 as compared
to $921,546 for fiscal year 1997. The increase in revenue for the fiscal year
1998 over the fiscal year 1997 was a result of the following:
Sales of aftermarket passenger car systems increased to $1,250,896 for the
fiscal year ended July 31, 1998 from $272,452 in the previous year. The Company
began selling its aftermarket passenger car system in May 1997, and therefore
recorded only three months sales of this system during fiscal 1997.
Sales of OEM passenger car systems increased to $531,361 for the fiscal year
ended July 31, 1998 compared to $213,412 in the previous fiscal year. The
Company recorded only eight months of OEM sales during the 1997 fiscal year as
it purchased the rights to service the Lincoln Continental production program
from Epic Technologies, Inc. on December 6, 1996. Prior to the purchase of the
contractual rights, the Company had no previous sales to the OEM market.
Sales of the motorsports TMS decreased from $258,579 in the fiscal year ended
July 31, 1997 to $177,477 in the fiscal year ended July 31, 1998. Sales were
higher in fiscal 1997 as a number of racing teams adopted the product, which was
then relatively new. Sales during fiscal 1998 slowed as the number of new racing
teams using the system has not increased significantly.
Sales of the industrial TMS decreased to $73,068 in the fiscal year ended July
31, 1998 from $177,103 in the previous fiscal year.
Gross margin decreased from 28.5% in fiscal 1997 to 20.5% in fiscal 1998 as the
proportion of sales attributable to the industrial TMS has decreased. Industrial
TMS have traditionally earned the Company a relatively high profit margin. The
Company's passenger car product lines, which represented the majority of its
sales in 1998, earn a lower profit margin.
Expenses increased during the fiscal year 1998 to $7,113,754 as compared to
$4,385,976 in the fiscal year 1997 due to increases in marketing, general and
administrative expenses, research and development, and depreciation and
amortization.
Marketing expenses increased to $1,614,321 for the fiscal year ended July 31,
1998 from $451,307 for fiscal 1997 as a result of increased expenditures on
advertising and promotion, business development, travel, trade shows, and wages
relating to the passenger car aftermarket product, which the Company began
selling in June 1997. Marketing wages increased as a result of additional
employees hired in the fourth quarter of fiscal 1997. The Company also expensed
product development costs of $494,123 incurred to complete sales contracts to
certain major customers during fiscal 1998, compared to $Nil in fiscal 1997.
Marketing travel increased due to increased sales and marketing activity
relating to the passenger car aftermarket product, which was introduced in the
fourth quarter of fiscal 1997.
General and administrative expenses increased to $2,674,568 in fiscal 1998
compared to $1,997,022 in fiscal 1997, as a result of the following:
Administrative
18
<PAGE> 20
wages increased due to the addition of a paid advisory board in the third
quarter of 1997, increases in the number of administrative staff during 1998 and
increases in administrative wage levels during 1998. Rent increased as a result
of a move of the Company's corporate offices to larger premises in January 1997.
The Company also incurred increased expenditures for public relations,
securities filing fees and telecommunications.
Research and development expenses increased from $978,566 for fiscal 1997 to
$1,477,129 for fiscal 1998. The increase was attributed to increases in
expenditures of prototype development, including supplies and materials, as the
Company continued to develop enhancements for future versions of its products
Depreciation and amortization increased as a result of the amortization of
patents and other intellectual property purchased during the last three fiscal
years and depreciation of capital assets.
Interest and finance charges increased to $1,029,632 for fiscal 1998 from
$447,746 for fiscal 1997 as a result of interest on debt added during fiscal
1997 and 1998, a premium paid on the redemption of convertible debentures and
increased use of trade credit. All long-term debt added during 1997 and 1998 was
converted to share capital or redeemed by June of 1998. The Company also earned
foreign exchange income of $403,022 in fiscal 1998, primarily due to the
appreciation of its US dollar cash balances relative to the Canadian dollar. The
Company reported no significant foreign exchange gain or losses in fiscal 1997.
The decrease in sales was a result of a shift in focus of the Company, beginning
in 1996, from the industrial market to the passenger car market. Sales during
fiscal 1998 were primarily sales of replacement and maintenance units to
existing customers.
LIQUIDITY AND CAPITAL RESOURCES
Fiscal Year Ended July 31, 1999 vs. Fiscal Year Ended July 31, 1998
The Company has financed its activities primarily through the issuance and sale
of its securities. The Company has incurred net losses in each year since
inception and, as of July 31, 1999, had an accumulated deficit of $38,486,224.
Shareholders' equity was $2,574,931 and the Company's working capital was
$2,051,450 at July 31, 1999.
As at July 31, 1999, the Company had commitments for payments under operating
leases, and service agreements for premises and certain equipment of $578,000,
as disclosed in the notes to the Company's consolidated financial statements
contained elsewhere in this Form 10-KSB.
Subsequent to year-end, the Company announced plans to raise US$6 million
through a private placement. With this financing management believes that the
Company has sufficient cash to fund its current and planned operations through
fiscal 2000. Thereafter, it is possible that the Company will require additional
funding depending on the results from operations over the next two fiscal
quarters.
19
<PAGE> 21
The Company effected a reverse stock split of 1 for 8 effective December 24,
1997. At that time, all outstanding convertible securities, share purchase
warrants and share purchase options were proportionately adjusted to reflect the
consolidation.
The Company's cash and short-term investments at July 31, 1999 were $2,484,955,
as compared to $8,718,258 at July 31, 1998. This decrease was due to the net of
the Company's operating, financing and investing activities described below.
For the fiscal year ended July 31, 1999, the Company raised $6,065,125 from
financing activities. Of this amount, the Company received proceeds of $56,380
upon the exercise of employee and director options to purchase 18,500 shares of
common stock. The Company received net proceeds of $6,008,744 and issued shares
of 1,688,416 common stock upon the exercise of stock purchase warrants.
The Company used $2,375,489 for investing activities during fiscal 1999
including $305,726 for the purchase of capital assets, $7,750 for the purchase
of patent rights, and $2,062,013 for the purchase of short-term investments.
The Company used $11,984,912 for operating activities during fiscal 1999. The
net loss of $17,186,248 was reduced by non-cash charges of $607,559 for
depreciation and amortization, $311,777 for remuneration in shares and the
$7,280,299 provision for special charges. There was also a $2,998,299 increase
in non-cash working capital.
Fiscal Year Ended July 31, 1998 vs. Fiscal Year Ended July 31, 1997
The Company has incurred net losses in each year since inception and, as of July
31, 1998, had an accumulated deficit of $21,299,976. Shareholders' equity was
$13,384,277 and the Company's working capital was $11,977,053 at July 31, 1998.
As at July 31, 1998, the Company had commitments for payments under operating
leases, and service agreements for premises and certain equipment of $792,000,
as disclosed in the notes to the financial statements.
The Company's cash position at July 31, 1998 was $8,718,258, as compared to
$69,761 at July 31, 1997. This increase was due to the net of the Company's
operating, financing and investing activities described below.
For the year ended July 31, 1998, the Company had $19,613,125 provided from the
financing activities.
On April 20, 1998, TRW Inc. agreed to purchase from the Company (the "TRW
Private Placement") 900,000 units at a price of US$4.00 per unit for a total
purchase price of US$3,600,000 (CDN$5,165,000). Each Unit consisted 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.
On March 24, 1998, the Company completed a private placement of 2,175,000 Units
for gross proceeds of $8,700,000. Each Unit consisted of one share of common
stock and one non-transferable share purchase warrant exercisable for two years
at
20
<PAGE> 22
an exercise price of $4.00 per share if exercised during the first fiscal year
and $4.80 if exercised during the second year. The Company paid a commission of
$855,500.
On January 30, 1998, the Company completed a private placement of US$550,000
(CDN$770,000) 8% convertible redeemable debentures pursuant to Regulation S
promulgated under the Securities Act of 1933, as amended. The Company paid a
commission of US$55,000, with net proceeds of US$495,000 on the issue. The
convertible debentures were redeemed by the Company on March 16, 1998 for
US$783,750 plus accrued interest.
On October 3, 1997, the Company completed a private placement of 18% convertible
redeemable debentures with a face value of US$622,222 (CDN$902,221). The
debentures were sold at a discount to their face value for gross proceeds of
US$504,000 on the issue. The debentures were convertible into common stock at
CDN$3.12 per share. By April 30, 1998, all convertible redeemable debentures had
been converted to common stock.
On September 4, 1997, the Company completed the private placement of $380,000
Series "G" convertible debentures. The debentures carried an interest rate of
ten percent (10%) per annum paid semi-annually for a term of three years. The
Company paid a commission of $600, with net proceeds of $379,400 on the issue.
The debentures were convertible into units consisting of one common stock and
one two-year non-transferable share purchase warrant. The warrants may be
exercised at $2.80 per share until May 1, 1999, and $3.60 until May 1, 2000. By
April 30, 1998, all convertible debentures had been converted to Common Shares.
The Company received net proceeds of $1,886,536 upon the exercise of employee
and director options to purchase 550,700 shares of common stock.
The Company received net proceeds of $3,746,571 and issued 876,785 shares of
common stock upon the exercise of share purchase warrants.
The Company also repaid $977,860 of long-term debt during the year.
The Company used $693,605 for investing activities during fiscal 1998 including
$399,605 for the purchase of capital assets, $14,000 for the purchase of patent
rights and $280,000 for marketing rights to a tire monitoring product.
$10,271,023 was used in operating activities of the Company during fiscal 1997
which was comprised of the $6,692,765 net loss and $4,431,256 increased in
non-cash working capital, reduced by non-cash charges for depreciation and
amortization of $852,998.
Uncertainty due to the Year 2000 Issue
The Year 2000 issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information using
year 2000 dates is processed. In addition, similar problems may arise in some
systems which use certain dates in 1999 to represent something other than a
date. The effects of the Year 2000 issue may be experienced before, on, or after
January 1,
21
<PAGE> 23
2000, and, if not addressed, the impact on operations and financial reporting
may range from minor errors to significant systems failure which could affect
the Company's ability to conduct normal business operations.
In 1999 the Company initiated a Year 2000 program to review operating and
business systems to identify any potential problems and to ensure that all key
systems will not be materially affected by the Year 2000 issue. The Company's
program has several phases and is structured to prioritize critical systems and
minimize business risk. Based on progress to date and plans for the balance of
1999, the Company expects that its business operating systems should be Year
2000 ready in advance of December 31, 1999.
The Company also depends on the Year 2000 readiness of third parties with whom
it conducts business, such as suppliers of goods and services, customers and
governments. As part of its Year 2000 program, the Company is assessing the Year
2000 readiness of key third parties to mitigate the potential risks of the Year
2000 issue.
Because of the uncertainties surrounding the Year 2000 issue, including third
party readiness, notwithstanding the program and steps taken by the Company,
there can be no assurance that Year 2000 issues will not have a material adverse
impact on the Company.
The costs of the Year 2000 program have not been and are not expected to be
material. These costs are expensed as incurred.
ITEM 7. FINANCIAL STATEMENTS
The consolidated financial statements of the Company are included beginning
immediately following the signature page to this report. See Item 13 for a list
of the financial statements and financial statement schedules included.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
22
<PAGE> 24
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
The following table sets forth the names, ages and positions held with respect
to each Director and Executive Officer of the Company.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Name Age Position
- --------------------------------------------------------------------------------
<S> <C> <C>
IAN BATEMAN 54 Managing Director,
SmarTire (Europe) Limited
- --------------------------------------------------------------------------------
LAWRENCE BECERRA 47 Director
- --------------------------------------------------------------------------------
JOHN BOLEGOH 55 Vice President, Operations and
Director
- --------------------------------------------------------------------------------
KEVIN CARLSON 38 Chief Financial Officer, Corporate
Secretary and Director
- --------------------------------------------------------------------------------
MARK DESMARAIS 45 President, Chief Operating Officer
and Director
- --------------------------------------------------------------------------------
SHAWN LAMMERS 32 Vice President, Engineering
- --------------------------------------------------------------------------------
BERNARD PINSKY 45 Director
- --------------------------------------------------------------------------------
ROBERT RUDMAN 52 Chairman and Chief Executive Officer
- --------------------------------------------------------------------------------
GARY SCHLACHTER 47 Executive Vice President, Sales and
Marketing SmarTire USA Inc.
- --------------------------------------------------------------------------------
DANA STONEROOK 42 Director
- --------------------------------------------------------------------------------
</TABLE>
BUSINESS EXPERIENCE AND PRINCIPAL OCCUPATION OF DIRECTORS, EXECUTIVE OFFICERS
AND SIGNIFICANT EMPLOYEES
The present and principal occupations of the Company's directors and executive
officers during the last five years are set forth below:
IAN BATEMAN:
Mr. Bateman is the Managing Director for SmarTire (Europe) Limited. He
is a U.K. resident and has extensive sales, marketing and senior
managerial experience in a variety of facets of European automotive
industries. From 1966 to 1973 he was a manager with Mid Bucks
Automotive Limited. During 1973 to 1979 Mr. Bateman was a manager with
Renault U.K. Limited, and was instrumental in the formation of a direct
sales company in the U.K. with a sales budget of pound sterling 100
million per year. Between 1979 and 1991 he operated his own marketing
company which expanded to supply every European car
manufacturer/importer, with the exception of just three, with an
overall turnover of pound sterling 10 million per year. From 1991 and
prior to joining SmarTire (Europe) Limited, Mr. Bateman carried out
independent consulting services, most importantly with Otter Controls
Limited, which was implementing a marketing program for a
tire-monitoring system.
LAWRENCE BECERRA:
Mr. Becerra has an extensive background in international finance. Since
1996, he has been the principal and founder of West Sussex Trading,
Inc. which is involved in corporate finance activities. Between 1992
and 1996 Mr. Becerra was the Senior Proprietary Trader promoted from
the position of Manager of European Money Market Trading for Goldman
Sachs International in London, England. Between 1987 and 1992 Mr.
Becerra was the Managing Director for Czarnikow Financial Futures.
23
<PAGE> 25
Between 1984 and 1987, he held the position of Senior Trader with
TransMarket Group, Inc. Between 1976 and 1984, Mr. Becerra worked for
Continental Bank in London and ended his tenure as the Executive
Director representing all trading activities for the company. He
attended Middlebury College in Middlebury, Vermont between 1970 and
1974 and Hackley School in Tarrytown, New York between 1968 and 1970.
JOHN BOLEGOH:
Mr. Bolegoh has an extensive background in tire product engineering,
including twenty years with Michelin Technical Services Canada Limited
in positions of increasing responsibility. Mr. Bolegoh joined the
Company in 1991. His responsibilities include defining necessary
product capabilities and designs for entering various markets;
establishing contacts to promote awareness of the Company's
technologies; locating and exploring business possibilities with
potential distributors; and providing customer relations, problem
solving, training and sales assistance. Mr. Bolegoh specialized in
mechanical technology at the Hamilton Institute of Technology in
Hamilton, Ontario.
KEVIN CARLSON
Mr. Carlson joined the Company in November 1998. Mr. Carlson is
responsible for Finance, Treasury, Accounting, Taxation, Legal,
Management Information Systems and Administration. Prior to joining the
Company, Mr. Carlson was Chief Financial Officer of a publicly traded
biotechnology company. Previously, he was Chief Financial Officer for
three other publicly traded companies. Mr. Carlson spent eight years
with KPMG in Calgary, Alberta. In addition to his Chartered Accountancy
designation, Mr. Carlson holds a Bachelor of Commerce degree from the
University of Calgary.
MARK DESMARAIS:
Mr. Desmarais joined the Company as President and Chief Executive
Officer of SmarTire USA, Inc. in March 1999. In June 1999 Mr. Desmarais
was appointed to the additional role of President and Chief Operating
Officer of the Company. Prior to joining the Company, Mr. Desmarais
served as Director, Product Planning, North America, for TRW Automotive
Electronics Group since September 1995. Mr. Desmarais joined TRW in
1991 at the company's Marshall, Illinois, electronics plant, where he
served as manufacturing manager, manufacturing engineering manager and
then advanced manufacturing engineering manager over a four-year
period. Mr. Desmarais' more than 21 years of business experience span a
variety of industries, including tire technology, consumer products,
defense, industrial control systems and automotive electronics. Mr.
Desmarais holds a master's degree in management from the Kellogg
Graduate School of Management at Northwestern University, Evanston,
Illinois, and a master's degree in materials engineering and a
bachelor's degree in mechanical engineering from Worcester Polytechnic
Institute, Worcester, Massachusetts. He is a member of the Society of
Automotive Engineers.
24
<PAGE> 26
SHAWN LAMMERS:
Mr. Lammers is a professional engineer, with a Bachelor of Applied
Science degree from the University of British Columbia, specializing in
computer engineering. He has developed software for MS-DOS, Windows,
UNIX Workstations and Amiga platforms. Mr. Lammers has been with the
Company since its inception and is responsible for the development of
the patented remote sensing technology utilized in SmarTire's products.
He has been the chief engineer in respect to the design, development
and production of the Company's passenger car TMS, the commercial
vehicle TMS and the industrial equipment TMS.
BERNARD PINSKY:
Mr. Pinsky is a partner practicing corporate/securities law at Clark,
Wilson, one of Vancouver's most established and respected law firms.
Mr. Pinsky was called to the bar in 1980 and has advised a variety of
public and private companies on legal matters related to acquisitions,
mergers, takeovers, initial public offerings, secondary financings,
public company disclosure requirements and stock exchange practice. Mr.
Pinsky has been corporate and securities counsel for the Company since
1993.
ROBERT RUDMAN:
Mr. Rudman is a Chartered Accountant with 15 years of experience
assisting public companies, especially on the Vancouver Stock Exchange.
Mr. Rudman joined the Company in March 1993 as the Chief Financial
Officer after serving as an independent financial consultant for
several months. He became the President and Chief Executive Officer of
SmarTire Systems on January 19, 1996. Prior to joining the Company, Mr.
Rudman was manager of a California-based sales contract financing firm.
Previously, he was a partner in a consulting firm providing
professional assistance to publicly traded companies. Mr. Rudman became
a Chartered Accountant in 1974 and worked with Laventhol & Horwath and
Price Waterhouse & Co. in Winnipeg, Manitoba. In addition to his
Chartered Accountancy designation, Mr. Rudman holds a Bachelor of Arts
degree and graduate business diploma from Lakehead University in
Thunder Bay, Ontario.
GARY SCHLACHTER:
Mr. Schlachter joined the Company on April 21, 1997 as the Executive
Vice President, Sales and Marketing for SmarTire USA. Mr. Schlachter is
responsible for developing and directing the sales and marketing
program of the Company's passenger car and commercial vehicle TMS
product lines for North America. He has over fifteen years management
and marketing experience in the tire industry. Prior to joining
SmarTire, Mr. Schlachter was Business Development Manager, responsible
for retail development programs, for Continental General Tire.
Previously, he served in several management posts at Michelin North
America including Business Development Manager, Eastern United States,
Manager Special Accounts Training Program, and Manager, Product
Training and Dealer Program. Mr. Schlachter is a graduate of Central
Michigan University.
25
<PAGE> 27
DANA STONEROOK
Mr. Stonerook has been Vice President, Customer Development, TRW
Automotive Electronics since January 1999. The group, a unit of TRW
Inc., is a leading producer of electronic safety, security and
convenience systems for the global automotive electronics market. Mr.
Stonerook has an extensive background in international customer
relations, electrical engineering and program management. Mr. Stonerook
was working for Eagle Monitor Systems, Inc. as manager of design
development when TRW Inc. acquired the company in 1981. He has held a
number of posts of increasing responsibility within TRW since that
time. Mr. Stonerook was named Vice President, Sales, North and South
America, for TRW Automotive Electronics Group in September 1995. He was
appointed Vice President, Sales and Marketing, Automotive Electronics,
North America, for the group in April 1996 and held the position until
his present assignment. Mr. Stonerook holds a Bachelor of Science
degree in electrical engineering from DeVry Institute of Technology,
Chicago.
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY OF EXECUTIVE COMPENSATION
Particulars of compensation awarded to, earned by or paid to:
(a) the Company's chief executive officer (the "CEO");
(b) each of the Company's four most highly compensated executive
officers who were serving as executive officers at the end of
the most recently completed financial year and whose total
salary and bonus exceeds $100,000 per year; or
(c) any additional individuals for whom disclosure would have been
provided under (b) but for the fact that the individual was
not serving as an executive officer of the Company at the end
of the most recently completed financial year;
(the "Named Executive Officers") are set out in the summary compensation table
below. Except as indicated, all dollar amounts set forth below with respect to
the applicable year ended July 31, are expressed in Canadian dollars.
During 1999, nine (9) individuals served as executive officers of the Company at
various times: Robert Rudman, Mark Desmarais, Kevin Carlson, Kenneth Morgan,
John Bolegoh, Shawn Lammers, Joseph Merback, Gary Schlachter and Ian Bateman.
26
<PAGE> 28
<TABLE>
<CAPTION>
===================================================================================================================================
SUMMARY COMPENSATION TABLE
===================================================================================================================================
ANNUAL COMPENSATION LONG TERM COMPENSATION (1)
- -----------------------------------------------------------------------------------------------------------------------------------
AWARDS PAYOUTS
- -----------------------------------------------------------------------------------------------------------------------------------
OTHER RESTRICTED
ANNUAL SECURITIES SHARES OR ALL
COMPEN- UNDERLYING RESTRICTED OTHER
NAME AND PRINCIPAL SATION OPTIONS/SARS SHARE LTIP COMPEN-
POSITION YEAR SALARY BONUS (1) GRANTED UNITS PAYOUTS SATION
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert Rudman 1999 $247,301 $90,000 Nil Nil Nil Nil Nil
Chairman and Chief 1998 $161,058 Nil $41,000(2) 220,000 Nil Nil Nil
Executive Officer 1997 $101,785 Nil Nil 62,500 Nil Nil Nil
- -----------------------------------------------------------------------------------------------------------------------------------
Gary Schlachter 1999 $142,695 Nil Nil Nil Nil Nil Nil
Executive 1998 $118,250 $28,600 Nil Nil Nil Nil Nil
Vice-President Sales 1997 $29,077 Nil Nil 25,000 Nil Nil Nil
and Marketing,
SmarTire USA Inc.
- -----------------------------------------------------------------------------------------------------------------------------------
Joseph Merback 1999 $165,301 Nil Nil Nil Nil Nil $283,434(3)
Former 1998 $129,869 $35,750 $42,900(2) 118,750 Nil Nil Nil
President and CEO of 1997 Nil Nil $76,000(2) 37,500 Nil Nil Nil
SmarTire USA Inc.
- -----------------------------------------------------------------------------------------------------------------------------------
Mark Desmarais (4) 1999 $81,244 $66,093 Nil 75,000 Nil Nil $66,667
President and Chief
Operating Officer,
President and CEO
of SmarTire USA Inc.
- -----------------------------------------------------------------------------------------------------------------------------------
Ian Bateman (5) 1999 $135,351 $37,032 Nil 10,000 Nil Nil Nil
Managing Director
SmarTire (Europe)
Limited
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The value of perquisites and other personal benefits, securities and
property for the Named Executive Officers that do not exceed the lesser
of $50,000 or 10% of the total of the annual salary and bonus is not
reported herein.
(2) Amounts relate to advisory fees paid to Mr. Rudman and Mr. Merback.
(3) Pursuant to a separation agreement, Mr. Merback received 100,000 shares
of the Company's common stock valued at $283,343.
(4) Mr. Desmarais commenced employment with the Company on March 29, 1999.
Mr. Desmarais received a signing bonus of US$25,000 (CDN$37,750) and
10,000 shares of the Company's common stock valued at $28,343. The
Company also reimbursed Mr. Desmarais US$44,151 (CDN$66,667) for
relocation costs.
(5) Mr. Bateman commenced employment with the Company on February 2, 1998.
27
<PAGE> 29
The following table sets out the details of all stock options granted to the
Named Executive Officers during the most recently completed fiscal year:
OPTION/SAR GRANTS IN THE LAST FISCAL YEAR
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/
UNDERLYING SARS GRANTED
OPTIONS/ TO EMPLOYEES
SARS IN FISCAL EXERCISE PRICE EXPIRATION
NAME GRANTED (#) YEAR ($ / SHARE) DATE
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Robert Rudman - - - -
- ------------------------------------------------------------------------------------
Gary Schlachter - - - -
- ------------------------------------------------------------------------------------
Joseph Merback - - - -
- ------------------------------------------------------------------------------------
Mark Desmarais(1) 75,000 25.2% US$4.00 March 29,
2004
- ------------------------------------------------------------------------------------
Ian Bateman 10,000 3.4% $6.60 January 8,
2004
- ------------------------------------------------------------------------------------
</TABLE>
(1) Mr. Desmarais' options vest over time with 15,000 options currently
exercisable.
The following table sets out the details of all stock options exercised during
the most recently completed fiscal year by the Named Executive Officers.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END
OPTION/SAR VALUES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS/SARS AT IN-THE-MONEY OPTIONS/SARS AT
FY-END (#) FY-END($)(1)
SHARES AGGREGATE
ACQUIRED ON VALUE EXERCISABLE /
NAME EXERCISE (#) REALIZED UNEXERCISEABLE EXERCISEABLE / UNEXERCISEABLE
- --------------------------------------------------------------------------------------------------------------------------
EXERCISEABLE UNEXERCISEABLE EXERCISEABLE UNEXERCISEABLE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Robert Rudman 17,500 $149,450 157,500 Nil $6,400 Nil
Gary Schlachter Nil Nil 17,500 Nil Nil Nil
Joseph Merback Nil Nil Nil Nil Nil Nil
Mark Desmarais Nil Nil 15,000 60,000 Nil Nil
Ian Bateman Nil Nil 30,000 Nil Nil Nil
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The closing price of the Company's common stock on July 30, 1998 was US
$1.94 per share (CDN$2.93)
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS
Effective February 1, 1998, the Board of Directors of the Company approved a new
management agreement with Robert Rudman, regarding his position with the
Company. The management agreement calls for payment of a base salary of
US$150,000 per annum and a bonus payable in shares of the Company's common stock
based on achieving certain gross revenue levels. The term of the agreement is
for five years.
28
<PAGE> 30
The agreement with Mr. Rudman requires the Company to pay a termination
allowance in the event of the termination by the Company of Mr. Rudman's
employment except for just cause. The termination allowance is twice the annual
salary and bonuses. A change of control of the Company is deemed to be a
termination for the purposes of the agreements.
Effective April 15, 1997, the Board of Directors of the Company approved a
management agreement with Gary Schlachter, regarding his position as Executive
Vice President Sales and Marketing of SmarTire USA Inc., the Company's marketing
subsidiary. The management agreement calls for payment of a base salary of
US$90,000 and a bonus based on achieving certain gross revenue levels. The term
of the agreement is for two years. The agreement with Mr. Schlachter requires
the Company to pay a termination allowance in the event of the termination by
the Company of such individual's employment except for just cause. The
termination allowance is six months salary and bonuses.
Effective February 16, 1998, the Board of Directors of the Company approved a
management agreement with Ian Bateman, regarding his position as Managing
Director of SmarTire (Europe) Limited, the Company's European subsidiary. The
management agreement calls for payment of a base salary of pounds sterling
48,000 per year and a bonus based on achieving certain business plan objectives.
The term of the agreement is for two years. The agreement with Mr. Bateman
requires the Company to pay a termination allowance in the event of the
termination by the Company of such individual's employment except for just
cause. The termination allowance is six months salary and bonuses.
Effective June 1, 1999, the Board of Directors of the Company approved a
management agreement with Mark Desmarais, regarding his position as President
and Chief Operating Officer of the Company. The management agreement calls for
payment of a base salary of US$160,000 and a bonus based on achieving certain
business plan objectives. There is no fixed term of the agreement and Mr.
Desmarais must provide ninety days notice of his intention to terminate the
agreement. The agreement with Mr. Desmarais requires the Company to pay a
termination allowance in the event of the termination by the Company of such
individual's employment except for just cause. The termination allowance is six
months base salary.
Other than as discussed above, the Company has no plans or arrangements in
respect of remuneration received or that may be received by Named Executive
Officers of the Company in fiscal 1999 to compensate such officers in the event
of termination of employment (as a result of resignation, retirement, change of
control) or a change of responsibilities following a change of control, where
the value of such compensation exceeds US$100,000 per Named Executive Officer.
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
The Company has no formal plan for compensating its directors for their services
in their capacity as directors although such directors have received from time
to time and are expected to receive in the future incentive stock options to
purchase common stock as awarded by the Board of Directors or the Compensation
Committee. Directors are entitled to reimbursement for reasonable travel and
other out-of-pocket expenses incurred in connection with attendance at meetings
of the Board of Directors. The Board of Directors may award special remuneration
to any director undertaking any special services on behalf of the Company other
than services ordinarily required of a director.
29
<PAGE> 31
Other than as discussed in this Form 10-KSB, no director received and/or accrued
any compensation for his services as a director, including committee
participation and/or special assignments. A director who is a professional
consultant, such as a lawyer, charges the Company for time expended to attend to
directors' matters at an agreed hourly rate. Mr. Pinsky is a lawyer with Clark,
Wilson which receives fees for legal services provided to the Company. Mr.
Becerra is a principal of West Sussex Trading, Inc., which has received
commissions pursuant to financings arranged by the Company.
There are no arrangements or plans in which the Company provides pension,
retirement or similar benefits for directors or executive officers.
Other than the management agreements and advisory agreements discussed herein,
the Company presently has no material bonus or profit sharing plans pursuant to
which cash or non-cash compensation is or may be paid to the Company's directors
or executive officers, except that stock options have been and may be granted at
the discretion of the Board or a committee thereof.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
The authorized capital of the Company consists of: 199,818,749 shares of common
stock without par value; and 20,000 shares of preferred stock with a par value
of $1,000 per share. The Company effected a 1 for 8 reverse split of its common
stock effective December 24, 1997. As of September 30, 1999, there were
11,542,447 issued and outstanding shares of common stock and no issued or
outstanding shares of preferred stock.
To the knowledge of the Company, the following beneficially own, directly or
indirectly, shares carrying more than five percent (5%) of the voting rights
attached to all shares of the Company:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
NAME AND ADDRESS OF AMOUNT AND NATURE OF
TITLE OF CLASS BENEFICIAL OWNER BENEFICIAL OWNERSHIP (2) PERCENT OF CLASS
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock TRW Inc. 1,800,000 (1) 15.6% (1)
1900 Richmond Rd.
Cleveland, OH
44124
- ---------------------------------------------------------------------------------------------------
</TABLE>
(1) 900,000 of these shares represent currently exercisable share purchase
warrants.
The following table shows: (i) the number of shares of common stock beneficially
owned by each of the directors and the Named Executive Officers and all
directors and executive officers as a group as of September 30, 1999 (excluding
shares which such persons have the right to acquire within 60 days of September
30, 1999 but do not actually own), (ii) the number of shares of common stock
which each of such persons has the right to acquire within 60 days of September
30, 1999 but does not actually own, (iii) the total number of shares of common
stock which each of such persons owns as of September 30, 1999 and has the right
to acquire within 60 days of September 30, 1999, and the percent of class.
30
<PAGE> 32
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Total Number of
Shares Beneficially
Name Owned Percent of Class
- --------------------------------------------------------------------------------
Directors:
<S> <C> <C>
Lawrence Becerra (1) 102,000 0.88%
- --------------------------------------------------------------------------------
John Bolegoh (2) 134,056 1.16%
- --------------------------------------------------------------------------------
Kevin Carlson (3) 13,070 0.11%
- --------------------------------------------------------------------------------
Mark Desmarais (4) 25,000 0.22%
- --------------------------------------------------------------------------------
Bernard Pinsky (5) 25,000 0.22%
- --------------------------------------------------------------------------------
Robert Rudman (6) 203,524 1.76%
- --------------------------------------------------------------------------------
Dana Stonerook nil nil
- --------------------------------------------------------------------------------
Named Executive Officers
who are not Directors or
Nominees
- --------------------------------------------------------------------------------
Ian Bateman (7) 30,000 0.26%
- --------------------------------------------------------------------------------
Shawn Lammers (8) 21,519 0.19%
- --------------------------------------------------------------------------------
Gary Schlachter (9) 22,766 0.20%
- --------------------------------------------------------------------------------
Total Directors /
Executive Officers 576,935 5.00%
(10 persons)
- --------------------------------------------------------------------------------
</TABLE>
(1) Mr. Becerra has incentive stock options for the right to purchase up to
an aggregate of 25,000 shares of common stock and a warrant for the
right to purchase up to an aggregate of 37,500 shares of common stock.
The options and warrants are immediately exercisable.
(2) Includes 60,362 Common Shares owned by Mr. Bolegoh's wife and children.
Mrs. Bolegoh has sole voting and dispositive power with respect to her
shares, and Mr. Bolegoh disclaims beneficial ownership of such shares.
Mr. Bolegoh has incentive stock options for the right to purchase up to
an aggregate of 12,500 shares of common stock. All options are
immediately exercisable.
(3) Mr. Carlson has incentive stock options for the right to purchase an
aggregate of 50,000 shares of common stock. The options vest over time
and currently 12,500 options are immediately exercisable
(4) Mr. Desmarais has incentive stock options for the right to purchase an
aggregate of 75,000 shares of common stock. The options vest over time
and currently 15,000 options are immediately exercisable.
(5) Mr. Pinsky has incentive stock options for the right to purchase an
aggregate of 25,000 shares of common stock. The options are immediately
exercisable.
(6) Mr. Rudman has incentive stock options for the right to purchase
157,500 shares of common stock. The options are immediately
exercisable.
(7) Mr. Bateman has incentive stock options for the right to purchase
30,000 shares of common stock. These options are immediately
exercisable.
(8) Mr. Lammers has incentive stock options for the right to purchase
20,000 shares of common stock. The options are immediately exercisable.
(9) Includes 266 Common Shares owned by Mr. Schlachter's wife. Mrs.
Schlachter has sole voting and dispositive power with respect to her
shares, and Mr. Schlachter disclaims beneficial ownership of such. Mr.
Schlachter has incentive stock options for the right to purchase 17,500
shares of common stock. These options are immediately exercisable.
(10) Based on beneficial shares owned, directly or indirectly, or over which
control or direction is exercised at September 30, 1999. The issued and
outstanding Common Shares of the Company at September 30, 1999 were
11,542,447.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
INDEBTEDNESS TO COMPANY OF DIRECTORS, EXECUTIVE OFFICERS AND SENIOR OFFICERS
As at the end of the most recently completed fiscal year, there were two amounts
owing to the Company by Directors. Mr. William Cronin (Director of SmarTire USA
Inc.) was indebted to the Company in the amount of $25,619. This amount was
repaid subsequent to year-end. Mr. John Bolegoh is indebted to the Company in
the amount of
31
<PAGE> 33
$87,454. The debt is secured by 16,818 shares of common stock of the Company.
The debt is non-interest bearing and has no fixed terms of repayment.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Consolidated Financial Statements. See "Index" on Page F-1
Auditor's Report, dated September 22, 1999;
Consolidated Balance Sheets at July 31, 1999 and July 31, 1998;
Consolidated Statements of Loss and Deficit for the Years Ended
July 31, 1999 and July 31, 1998;
Consolidated Statements of Cash Flows for the Years Ended July 31,
1999 and July 31, 1998;
Notes to Consolidated Financial Statements.
2. Financial Statements schedules (All schedules have been omitted
because they are not applicable, not required, were filed
subsequent to the filing of the Form 10-KSB or because the
information required to be set forth therein included in the
Consolidated Financial Statements or in notes thereto)
3. Exhibits. See "Exhibit Index"
(b) Reports on form 8-K. None
32
<PAGE> 34
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED.
SMARTIRE SYSTEMS INC.
Date: October 29, 1999
By: /s/ ROBERT V. RUDMAN
----------------------------------
Robert V. Rudman, CA
Chairman and Chief
Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES INDICATED ON OCTOBER 29, 1999:
<TABLE>
<CAPTION>
NAME TITLES
- ---- ------
<S> <C>
/s/ ROBERT V. RUDMAN Chairman and Chief Executive Officer
- ----------------------------------- (Principal Executive Officer)
Robert V. Rudman
/s/ Mark Desmarais Director, President and Chief
- ----------------------------------- Operating Officer
Mark Desmarais
/s/ JOHN I. BOLEGOH Director, and Vice President,
- ----------------------------------- Operations
John I. Bolegoh
/s/ KEVIN A. CARLSON Director, Chief Financial Officer
- ----------------------------------- and Corporate Secretary
Kevin A. Carlson (Principal Financial Officer and
Principal Accounting Officer)
</TABLE>
33
<PAGE> 35
SMARTIRE SYSTEMS INC.
Consolidated Financial Statements
Years ended July 31, 1999 and 1998
INDEX
AUDITORS' REPORT
FINANCIAL STATEMENTS
Consolidated Balance Sheets
Consolidated Statements of Loss and Deficit
Consolidated Statements of Cash Flow
Notes to Consolidated Financial Statements
<PAGE> 36
STATEMENT OF MANAGEMENT RESPONSIBILITY
The management of SmarTire Systems Inc. is responsible for the preparation of
the accompanying consolidated financial statements and the preparation and
presentation of all information in the Annual Report. The consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in Canada and are considered by management to present fairly the
financial position and operating results of the Company.
The Company maintains various systems of internal control to provide reasonable
assurance that transactions are appropriately authorized and recorded, that
assets are safeguarded, and that financial records are properly maintained to
provide accurate and reliable financial statements.
The Company's audit committee is composed of two non-management directors and
the Chief Executive Officer of the Company and is appointed by the Board of
Directors annually. The committee meets periodically with the Company's
management and independent auditors to review financial reporting matters and
internal controls and to review the consolidated financial statements and the
independent auditors' report. The audit committee reported its findings to the
Board of Directors who have approved the consolidated financial statements.
The Company's independent auditors, KPMG LLP, have examined the consolidated
financial statements and their report follows.
Robert V. Rudman Kevin A. Carlson
Chief Executive Officer Chief Financial Officer
<PAGE> 37
AUDITORS' REPORT TO THE SHAREHOLDERS
We have audited the consolidated balance sheets of SmarTire Systems Inc. as at
July 31, 1999 and 1998 and the consolidated statements of loss and deficit and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at July 31, 1999 and
1998 and the results of its operations and its cash flows for the years then
ended in accordance with generally accepted accounting principles. As required
by the Company Act of the Province of British Columbia, we report that, in our
opinion, these principles have been applied, after giving retroactive effect to
the change in presentation of its statements of cash flows as described in Note
3 to the consolidated financial statements, on a consistent basis.
Significant measurement differences between Canadian and United States
accounting principles as they effect these consolidated financial statements are
explained and quantified in Note 15.
KPMG LLP
Chartered Accountants
Richmond, Canada
September 22, 1999
<PAGE> 38
SMARTIRE SYSTEMS INC.
Consolidated Balance Sheets
(Expressed in Canadian Dollars)
July 31, 1999 and 1998
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
1999 1998
- -----------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 422,982 $ 8,718,258
Short-term investments 2,062,013 -
Receivables 1,104,456 802,193
Inventory (note 4) 225,514 1,684,686
Prepaid expenses 128,988 106,957
Supplier prepayments (note 5) - 1,466,791
- -----------------------------------------------------------------------------------------
3,943,953 12,778,885
Capital assets (note 6) 523,481 614,612
Other assets (note 7) - 792,612
- -----------------------------------------------------------------------------------------
$ 4,467,434 $ 14,186,109
=========================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities $ 1,892,503 $ 801,832
Shareholders' equity
Share capital (note 9) 38,640,478 30,669,253
Equity component of warrants (note 9) 2,420,677 4,015,000
Deficit (38,486,224) (21,299,976)
- -----------------------------------------------------------------------------------------
2,574,931 13,384,277
Operations (note 1)
Commitments and contingencies (note 13)
Uncertainty due to the Year 2000 Issue (note 17)
Proposed transaction (note 18)
- -----------------------------------------------------------------------------------------
$ 4,467,434 $ 14,186,109
=========================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
On behalf of the Board
/s/ ROBERT RUDMAN Director /s/ BERNARD PINSKY Director
- ----------------- ------------------
<PAGE> 39
SMARTIRE SYSTEMS INC.
Consolidated Statements of Loss and Deficit
(Expressed in Canadian Dollars)
Years ended July 31, 1999 and 1998
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C>
Revenue $ 2,677,935 $ 2,057,251
Cost of goods sold 2,184,048 1,636,262
- -------------------------------------------------------------------------------
493,887 420,989
Expenses and other
Marketing 4,279,228 1,614,321
General and administrative 4,171,275 2,674,568
Research and development (note 8) 8,739,092 1,477,129
Interest expense - 1,029,632
Depreciation and amortization 607,559 852,998
Foreign exchange loss (gain) 158,757 (403,022)
Interest income (275,776) (131,872)
- -------------------------------------------------------------------------------
17,680,135 7,113,754
- -------------------------------------------------------------------------------
Net loss 17,186,248 6,692,765
Deficit, beginning of year 21,299,976 14,607,211
- -------------------------------------------------------------------------------
Deficit, end of year $ 38,486,224 $ 21,299,976
===============================================================================
Loss per share $ 1.69 $ 1.12
===============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 40
SMARTIRE SYSTEMS INC.
Consolidated Statements of Cash Flows
(Expressed in Canadian Dollars)
Years ended July 31, 1999 and 1998
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
1999 1998
- -----------------------------------------------------------------------------------------------------
(Restated-
note 3)
<S> <C> <C>
CASH PROVIDED BY (USED IN)
Operating activities
Net loss $(17,186,248) $ (6,692,765)
Items not affecting cash
Depreciation and amortization 607,559 852,998
Remuneration in shares (note 11) 311,777 -
Provision for special charges 7,280,299 -
Changes in non-cash working capital
Receivables (377,263) (692,952)
Inventory (5,156,467) (985,067)
Prepaid expenses (22,031) (60,375)
Supplier prepayments 1,466,791 (1,466,791)
Accounts payable and accrued liabilities 1,090,671 (1,226,071)
- -----------------------------------------------------------------------------------------------------
Net cash used in operating activities (11,984,912) (10,271,023)
- -----------------------------------------------------------------------------------------------------
Investing activities
Purchase of capital assets (305,726) (399,605)
Purchase of other assets (7,750) (294,000)
Purchase of short-term investments (2,062,013) -
- -----------------------------------------------------------------------------------------------------
Net cash used in investing activities (2,375,489) (693,605)
- -----------------------------------------------------------------------------------------------------
Financing activities
Issuance of common shares 6,065,125 18,428,333
Issuance of convertible debentures - 2,162,652
Repayment of long-term debt - (977,860)
- -----------------------------------------------------------------------------------------------------
Net cash provided by financing activities 6,065,125 19,613,125
- -----------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (8,295,276) 8,648,497
Cash and cash equivalents, beginning of year 8,718,258 69,761
- -----------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 422,982 $ 8,718,258
- -----------------------------------------------------------------------------------------------------
Supplementary information
Interest paid $ 11,101 $ 735,045
Income taxes paid - -
Non-cash investing activities
Write-down of other assets 383,542 -
Write-down of capital assets 206,118 -
Non-cash financing activities
Conversion of warrants into common shares 1,594,323 -
Conversion of convertible debentures into common shares - 4,548,660
Remuneration in shares 311,777 -
=====================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 41
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements
(Expressed in Canadian Dollars)
Years ended July 31, 1999 and 1998
- --------------------------------------------------------------------------------
1. OPERATIONS
The Company and its subsidiaries develop and market products incorporating
wireless data transmission and processing technologies, primarily for the
automotive markets. The Company's primary product is a wireless tire
monitoring system which it currently markets for use on passenger vehicles
and other pneumatic tire applications. All sales of its product are made in
this industry segment.
The Company is continuing to develop its products and markets, accordingly,
during the year ended July 31, 1999 it incurred a loss of $17,186,248
(1998 - $6,692,765) and used cash from operations of $11,984,912
(1998 - $10,271,023). Operations to-date have been primarily financed by
debt and equity placements and as described in note 18, subsequent to
July 31, 1999, the Company is continuing with its program to finance its
operations from these sources. The consolidated financial statements have
been prepared on the going concern basis which assumes that adequate
sources of financing will be obtained as required. Accordingly, these
consolidated financial statements do not include any adjustments related
to the recoverability of assets and classification of assets and
liabilities that might be necessary should the Company be unable to
continue as a going concern.
2. SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of presentation
These financial statements include the accounts of the Company and its
wholly-owned subsidiaries, SmarTire USA Inc., SmarTire (Europe) Ltd.,
and SmarTire Technologies Inc. All intercompany balances and
transactions have been eliminated.
The audited consolidated financial statements have been prepared in
Canadian dollars in accordance with generally accepted accounting
principles in Canada and generally conform with those established in
the United States, except as explained in note 15.
(b) Research and development costs
Research costs are expensed as incurred. Development costs are charged
to expense as incurred unless the Company believes the development
project meets stringent criteria for deferral and amortization.
Development expenses include the write-down of current product
inventory and related production equipment and deferred development
costs to their net realizable value based upon their forecasted sales
levels. No development costs have been deferred at July 31, 1999.
(c) Cash and cash equivalents
Cash and cash equivalents includes investments in short-term investment
with an initial term of 90 days or less.
(d) Short-term investments
Short-term investments, all of which are categorized as available for
sale are carried at lower of cost and quoted market value.
<PAGE> 42
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements, Continued
(Expressed in Canadian Dollars)
Years ended July 31, 1999 and 1998
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(e) 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.
(f) Capital assets
Capital assets are recorded at cost. Depreciation of computer hardware
and software and office and shop equipment is provided for on the
declining balance basis at 30% per annum. Leasehold improvements are
depreciated over the term of the lease plus one renewal option period.
(g) Deferred costs
Patent costs, marketing licenses and customer lists, which are included
in other assets and that are expected to provide future benefits with
reasonable certainty are deferred and amortized over their useful life
or period of benefit.
(h) Impairment of long-lived assets
The Company monitors the recoverability of long-lived assets, including
capital and intangible assets based on estimates using factors such as
future asset utilization, business climate and future undiscounted cash
flows expected to result from the use of the related assets or be
realized on sale. The Company's policy is to write down assets to their
net recoverable amount in the period when it is determined that the
carrying amount of the asset is not likely to be recovered.
(i) Revenue recognition
Revenue from sales is recognized when goods are shipped to customers.
Provisions are established for estimated product returns and warranty
costs at the time revenue is recognized.
(j) Loss per share
Basic loss per share computations are based on the weighted average
number of shares outstanding during the year. The stock options and
warrants outstanding (note 9(c)) are antidilutive, accordingly, diluted
loss per share does not differ from basic loss per share for the years
presented herein.
(k) Foreign currency translation
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.
<PAGE> 43
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements, Continued
(Expressed in Canadian Dollars)
Years ended July 31, 1999 and 1998
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(l) Advertising expenses
Advertising costs are expensed as incurred.
(m) Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities and the
reported amounts to revenues and expenses during the reporting period.
Significant areas requiring the use of estimates include estimating the
net realizable value of inventory, the net recoverable amount of
long-lived assets and the estimation of certain accounts payable and
accrued liabilities. Actual results may differ from those estimates.
3. CHANGE IN ACCOUNTING POLICY
The Company adopted CICA Handbook Section 1540, Cash Flow Statements, for
the year ended July 31, 1999. The provisions were applied retroactively
with restatement of prior period financial statements. Under Section 1540,
non-cash investing and financing activities are excluded from the statement
of cash flows and are disclosed as summary information to the Statement of
Cash Flows.
4. INVENTORY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Raw materials and parts $ - $ 794,508
Work in progress - 219,946
Finished goods 225,514 670,232
- --------------------------------------------------------------------------------
$ 225,514 $1,684,686
================================================================================
</TABLE>
During the year, the Company wrote-down its inventory by approximately
$6,690,639 to reflect its lower of cost and net realizable value as
discussed in note 8.
5. SUPPLIER PREPAYMENTS
Supplier prepayments represent advances made to a supplier to cover
estimated future raw material and assembly costs of tire monitoring systems
to meet anticipated future Company sales levels.
<PAGE> 44
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements, Continued
(Expressed in Canadian Dollars)
Years ended July 31, 1998 and 1997
- --------------------------------------------------------------------------------
6. CAPITAL ASSETS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
1999 1998
Accumulated Net Book Net Book
Cost Depreciation Value Value
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Computers and software $419,786 $214,531 $205,255 $120,184
Office and shop equipment 380,392 166,175 214,217 394,610
Leasehold improvements 130,089 26,080 104,009 99,818
- -----------------------------------------------------------------------------------------
$930,267 $406,786 $523,481 $614,612
=========================================================================================
</TABLE>
During the year the Company recognized an impairment loss of $206,118
relating to its production equipment as discussed in note 8.
7. OTHER ASSETS
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
1999 1998
Accumulated Net Book Net Book
Cost Depreciation Value Value
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Patents $ 409,249 $ 409,249 $- $ 165,124
Deferred development costs 406,626 406,626 - 71,946
Contractual rights 1 1 - 1
Customer lists 675,000 675,000 - 298,875
Marketing license 280,000 280,000 - 256,666
---------------------------------------------------------------------------------------------
$1,770,876 $1,770,876 $- $ 792,612
=============================================================================================
</TABLE>
On May 1, 1998, the Company purchased the worldwide marketing, distribution
and sale license for an existing tire monitoring device from Advantage
Enterprises, Inc. for cash consideration of US $200,000 (Cdn $280,000).
During the year the Company wrote down $383,542 of other assets to their
estimated net recoverable amount as discussed in note 8.
8. SPECIAL CHARGES - WRITE-DOWN OF INVENTORY AND IMPAIRMENT OF LONG-LIVED
ASSETS
Based on the Company's assessment of the future business prospects and
sales for its current tire pressure monitoring products, the forecasted
sales levels and the introduction of the Company's next generation of tire
pressure monitoring products did not support the carrying value of certain
assets, including inventories (including purchase commitments), production
equipment and deferred development costs associated with the current
generation of tire pressure monitoring systems. As a result, the company
recorded special charges of $7,280,299 (1998 - Nil) during the third
quarter primarily to reduce the recorded value of these assets to their
estimated net realizable values.
<PAGE> 45
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements, Continued
(Expressed in Canadian Dollars)
Years ended July 31, 1999 and 1998
- --------------------------------------------------------------------------------
9. SHARE CAPITAL
(a) Authorized
(i) Common shares 199,818,749 (1998 - 200,000,000) without par value
(ii) Preferred shares 20,000 (1998 - 20,000) with par value of $1,000
per share
(b) The subscribed and issued share capital of the Company is as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
Common
Shares Amount
-------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at July 31, 1997 3,600,898 $11,707,260
Issued during the year ended July 31, 1998
Cash (net of issuance costs of $855,000) (note 9(b)(ii)) 3,075,000 8,994,500
Exercise of stock options 550,700 1,886,536
Exercise of warrants 876,785 3,746,571
Conversion of convertible debenture 1,303,399 4,334,386
-------------------------------------------------------------------------------------------------
Balance at July 31, 1998 9,406,782 30,669,253
Issued during the year ended July 31, 1999
Exercise of stock options 18,500 56,380
Exercise of warrants (net of issuance costs of $539,348) 1,688,416 6,008,744
Remuneration in shares (note 10) 110,000 311,777
Escrow shares cancelled during the year (181,251) -
Conversion from equity component of warrants (note 9(b)(i)) - 1,594,323
-------------------------------------------------------------------------------------------------
Balance at July 31, 1999 11,042,447 $38,640,477
=================================================================================================
</TABLE>
(i) The Company effected a reverse stock split of 1 for 8 effective
December 24, 1997. At that time, all outstanding common shares, convertible
securities, common share purchase warrants, and common share purchase
options were proportionately adjusted to reflect the consolidation. All
references to share capital within the financial statements are on a
post-consolidated basis.
(ii)On April 20, 1998, the Company completed a private placement with TRW
Inc. of 900,000 units at a price of US $4.00 per unit for a total purchase
price of US $3,600,000 (Cdn $5,165,000), each unit consisting of a share of
common stock and one non-transferable share purchase warrant to purchase an
additional share for a period of two years at a price of US $4.00 per share
during the first year and US $4.60 per share during the second year. On
March 24, 1998, the Company completed a private placement of 2,175,000
units for gross proceeds of $8,700,000. Each unit consisted of one share of
common stock and one non-transferable share purchase warrant to purchase an
additional share for a period of two years at an exercise price of $4.00
per share during the first year and $4.80 during the second year.
(iii) During 1999, the Company cancelled 181,251 common shares originally
in escrow, reducing the authorized capital from 200,000,000 common shares
without par value to 199,818,749 common shares without par value. These
shares are considered to be a separate sub-classification of shares by
virtue of their significant conditions and nominal
value paid out at the time of issuance therefore, no dollar value has been
attributed thereto at the time of their cancellation.
<PAGE> 46
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements, Continued
(Expressed in Canadian Dollars)
Years ended July 31, 1999 and 1998
- --------------------------------------------------------------------------------
9. SHARE CAPITAL, CONTINUED
(b) The subscribed and issued share capital of the Company is as follows,
continued:
(iv) A value has been assigned to the above share purchase warrants issued
totalling $4,015,000 and has been recorded as a separate component of
shareholders' equity. During 1999, share purchase warrants were exercised
which reduced the equity component of warrants by $1,594,323 to $2,420,677.
(c) Stock options and warrants
The Company periodically grants fixed stock options to its employees and
directors.
A summary of fixed stock option transactions and balances during the two
years ended July 31, 1999 is as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
1999 1998
---------------------- -----------------------
Weighted Weighted
average average
exercise exercise
Shares price Shares price
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 555,175 $ 4.27 349,375 $ 3.01
Options granted 297,500 6.37 806,500 4.23
Options exercised 18,500 3.05 550,700 3.43
Options cancelled 163,750 4.29 50,000 4.06
----------------------------------------------------------------------------------------
Outstanding, end of year 670,425 $ 5.24 555,175 $ 4.27
========================================================================================
Options exercisable at end of year 482,425 $ 4.81 555,175 $ 4.27
========================================================================================
</TABLE>
Stock options outstanding as at July 31, 1999 have a weighted average
remaining life of 3.98 years (1998 - 4.4 years).
As at July 31, 1999, warrants were outstanding for 1,963,265 (1998 -
3,651,678) common shares of the Company. The warrants entitle the holders
to purchase common shares of the Company at prices ranging from $3.60 to
$16.00 (1998 - $2.80 to $12.00) per share that expire on various dates
until June 11, 2000.
<PAGE> 47
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements, Continued
(Expressed in Canadian Dollars)
Years ended July 31, 1999 and 1998
- --------------------------------------------------------------------------------
10. FINANCIAL INSTRUMENTS
(a) Fair value disclosure
The carrying values of cash and cash equivalents, receivables accounts
payable and accrued liabilities approximate their fair values due to
the short-term maturity of these instruments.
(b) Credit risk
The majority of the Company's activities are concentrated in the
automotive industry and a few major customers (note 14). To reduce
credit risk, management performs ongoing credit evaluations of its
customers' financial condition. The Company maintains reserves for
potential credit losses.
(c) Foreign currency risk
The Company operates internationally which gives rise to the risk that
cash flows may be adversely impacted by exchange rate fluctuations.
(d) Convertible debt instruments and warrants
The Company records the liability component of a compound financial
instrument (determined to be the net present value of the principal and
interest payments) and the equity component separately on the balance
sheet. Interest is recorded at the estimated market interest rate,
determined at issuance date, for instruments of comparable credit
status but without the conversion option. The debt component is
accreted to its face value at maturity over the term of the debt
through a charge to interest expense.
The Company records the estimated warrant value at the date of issuance
as a separate component of shareholders' equity. As the warrants are
exercised, the value is reclassified to issued share capital.
11. RELATED PARTY TRANSACTIONS
Included in receivables are amounts due from directors and shareholders of
the Company totaling $ 113,317 as at July 31, 1999 (1998 - $Nil). 16,818
common shares of the Company secure $87,454 of this balance. The remaining
unsecured balance of $25,619 was repaid subsequent to year-end.
During the year ended July 31, 1999, the Company issued 19,318 (1998 -
749,849) common shares in the amount of $99,454 (1998 - $1,419,416) to
senior officers, directors and/or their immediate families and companies
controlled by senior officers, directors and/or their immediate families
upon the exercise of stock options and share subscriptions and 110,000
(1998 - Nil) common shares valued at $311,000 (1998 - $Nil) as
remuneration.
<PAGE> 48
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements, Continued
(Expressed in Canadian Dollars)
Years ended July 31, 1999 and 1998
- --------------------------------------------------------------------------------
11. RELATED PARTY TRANSACTIONS, CONTINUED
On April 20, 1998, TRW Inc. ("TRW") subscribed for an equity interest in
the Company (note 9(b)(ii)). Simultaneous to the subscription agreement,
the Company and TRW entered into licensing, technical cooperation and
supply agreements. Under the agreements, TRW was granted a worldwide
exclusive license to market and distribute tire sensing products in the
original equipment manufacturer market. The parties cooperate in the
development of new tire pressure sensing technology and the Company was to
purchase its components from TRW under certain conditions. No sales or
purchases under these agreements occurred in fiscal year 1998 or 1999.
12. INCOME TAXES
For Canadian tax purposes, the Company has approximately $24,200,000 of
non-capital losses for income tax purposes available at July 31, 1999 to
reduce taxable income of future years. These losses will expire as follows:
<TABLE>
<S> <C>
2000 $ 1,100,000
2001 1,000,000
2002 1,700,000
2003 2,800,000
2004 3,600,000
2005 4,200,000
2006 9,800,000
---------------------------------------------------------------------------
$24,200,000
===========================================================================
</TABLE>
Additionally, for Canadian tax purposes, the Company has scientific
research and development expenditures of $1,400,000 available to reduce
future taxable income.
For United States tax purposes, the Company has approximately $5,000,000 of
non-capital losses for income tax purposes available at July 31, 1999 to
reduce taxable income of future years. These losses will expire as follows:
<TABLE>
<S> <C>
2012 $ 200,000
2013 1,400,000
2019 3,400,000
---------------------------------------------------------------------------
$ 5,000,000
===========================================================================
</TABLE>
For United Kingdom tax purposes, the Company has approximately $3,400,000
of non-capital losses for income tax purposes available at July 31, 1999 to
reduce taxable income of future years. These losses may be carried forward
indefinitely.
The potential income tax benefits relating to these losses and tax balances
have not been recognized in the accounts at July 31, 1999.
<PAGE> 49
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements, Continued
(Expressed in Canadian Dollars)
Years ended July 31, 1999 and 1998
- --------------------------------------------------------------------------------
13. COMMITMENTS AND CONTINGENCIES
(a) The Company is committed to the following payments under operating
leases, and service agreements for premises and certain equipment:
<TABLE>
---------------------------------------------------------------------------
<S> <C>
2000 $ 261,000
2001 $ 239,000
2002 $ 77,000
2003 $ 1,000
===========================================================================
</TABLE>
(b) Cash and short-term investments are used to secure a letter of credit
and credit card advances in the amount of $ 1,210,255 (1998 - $25,135).
During August 1999 the letter of credit in the amount of $1,130,250 was
cancelled.
14. SEGMENTED INFORMATION
Substantially all revenue is derived from sales to North American and
European customers. Geographic information is as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
Revenue from
external customers
1999 1998
---------------------------------------------------------------------------
<S> <C> <C>
North America $1,488,509 $2,057,251
Europe 1,189,426 -
---------------------------------------------------------------------------
$2,677,935 $2,057,251
===========================================================================
</TABLE>
Major customers, representing 10% or more of total sales, include:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
1999 1998
---------------------------------------------------------------------------
<S> <C> <C>
Customer A $1,050,000 $ 593,000
Customer B 440,000 531,000
Customer C 388,000 177,000
Customer D 148,000 324,000
===========================================================================
</TABLE>
<PAGE> 50
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements, Continued
(Expressed in Canadian Dollars)
Years ended July 31, 1999 and 1998
- --------------------------------------------------------------------------------
15. UNITED STATES ACCOUNTING PRINCIPLES
The Company's financial statements have been prepared in accordance with
Canadian generally accepted accounting principles ("GAAP"). A
reconciliation of financial statement amounts from Canadian generally
accepted accounting principles to United States generally accepted
accounting principles is as follows:
(a) Loss and deficit
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
1999 1998
------------------------------------------------------------------------------------
(thousands of dollars)
<S> <C> <C>
Net loss in accordance with Canadian GAAP $(17,186) $ (6,693)
Effects of differences in accounting for:
Research and development costs (b) 97 151
Interest expense on convertible debt (c) - (557)
------------------------------------------------------------------------------------
Net loss in accordance with United States GAAP (17,089) (7,099)
Beginning deficit in accordance with United States GAAP (22,013) (14,914)
------------------------------------------------------------------------------------
Ending deficit in accordance with United States GAAP $(39,102) $(22,013)
===================================================================================
</TABLE>
(b) Research and development costs
United States generally accepted accounting principles require that all
development costs be charged to expense when incurred. Applying United
States generally accepted accounting principles, other assets would be
reduced by approximately $Nil and $72,000 as at July 31, 1999 and 1998,
respectively.
(c) Convertible debt and issuance of units
Under Canadian GAAP, a value is assigned to the conversion feature of
debt convertible to equity. Under United States GAAP, a value is
assigned to the conversion feature of debt convertible to equity if the
conversion rate is less than the market price of the common stock at
the date of issuance. Applying United States GAAP shareholders' equity
would decrease by $Nil (1998 - $616,000) as at July 31, 1999 and
interest expense would increase by approximately $Nil (1998 -
$557,000).
During fiscal year 1998, the Company completed private placements of
units (note 9 (b)(ii)), each unit consisting of one share of common
stock and one share purchase warrant. Under Canadian GAAP, the warrants
were assigned a value of $4,015,000 on issuance which was included as a
separate component of shareholders' equity. Under United States GAAP,
this value at July 31, 1999 of $2,420,677 (1998 - $4,015,000) would be
included in issued share capital.
<PAGE> 51
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements, Continued
(Expressed in Canadian Dollars)
Years ended July 31, 1999 and 1998
- --------------------------------------------------------------------------------
15. 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>
-----------------------------------------------------------------------
1999 1998
-----------------------------------------------------------------------
<S> <C> <C>
Weighted average number of shares 10,192,024 5,815,970
Basic loss per share $ (1.68) $ (1.22)
=======================================================================
</TABLE>
Effective January 31, 1998, the Company adopted Statement of Financial
Accounting Standards No. 128 ("FAS 128") Earnings per Share for United
States GAAP purposes, on a retroactive basis. Under FAS 128, basic loss
per common share, similar to Canadian GAAP, is based on the weighted
average number of common shares outstanding during the year.
Contingently returnable shares held in escrow (1999 - Nil; 1998 -
181,251) have been excluded from the calculation of weighted average
number of shares under United States GAAP. Under Canadian GAAP,
contingently returnable shares held in escrow are included in the
calculation of weighted average number of shares.
16. COMPARATIVE FIGURES
Certain comparative figures have been reclassified to conform with the
financial statement presentation adopted for the current year.
17. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize
the year 2000 as 1900 or some other date, resulting in errors when
information using year 2000 dates is processed. In addition, similar
problems may arise in some systems which use certain dates in 1999 to
represent something other than a date. The effects of the Year 2000 Issue
may be experienced before, on, or after January 1, 2000, and, if not
addressed, the impact on operations and financial reporting may range from
minor errors to significant systems failure which could affect an entity's
ability to conduct normal business operations. It is not possible to be
certain that all aspects of the Year 2000 Issue affecting the entity,
including those related to the efforts of customers, suppliers, or other
third parties, will be fully resolved.
18. PROPOSED TRANSACTION
On September 28, 1999, the Company announced that it is arranging a private
placement for up to US $6 million through the issuance of up to 3 million
common shares at a minimum price of US $2 per share. A commission will be
payable on cash proceeds received by the Company. Net proceeds from the
private placement will be used to fund the development and market launch of
the Company's new products and for working capital.
<PAGE> 52
Index to Exhibits
<TABLE>
<S> <C>
3.1 Certified of Incorporation of TTC/Truck Tech Corp. dated
September 8, 1987 (1)
3.2 Memorandum and Articles of TTC/Truck Tech Corp. (1)
3.3 Memorandum of TTC/Truck Tech Corp. dated September 2, 1987 (1)
3.4 Altered Memorandum of TTC/Truck Tech Corp. dated October 25, 1991 (1)
3.5 Certificate of Change of Name from TTC/Truck Tech Corp. to
UniComm Signal Inc. dated April 13, 1994 (1)
3.6 Certificate of Change of Name from UniComm Signal Inc. to
SmarTire Systems Inc. dated December 24, 1997 (1)
3.7 Special Resolution and Altered memorandum of UniComm Signal
Inc. dated October 28, 1994 (1)
3.8 Special Resolution and Altered memorandum of UniComm Signal
Inc. dated January 17, 1997 (1)
3.9 Special Resolution and Altered memorandum of SmarTire Systems
Inc. dated November 17, 1995 (1)
3.10 Special Resolution and Altered memorandum of SmarTire Systems
Inc. dated January 16, 1998 (1)
10.1 Management Agreement between SmarTire Systems Inc. and Robert
Rudman (the President of the Company) dated as of February 1,
1998 (1)
10.2 Management Agreement between SmarTire Systems Inc. and Joseph
Merback dated as of February 1, 1998 (1)
10.3 Supply Agreement dated April 20, 1998 between the Company and
TRW Inc. (1) (2)
10.4 Technical Cooperation Agreement dated as of April 20, 1998
between the Company and TRW Inc. (1) (2)
10.5 License Agreement dated as April 20, 1998 between the Company
and TRW Inc. (1) (2)
10.6 Product Licensing Agreement dated May 5, 1998 between the
Company and Advantage Enterprises Inc. (2) (3)
</TABLE>
<PAGE> 53
<TABLE>
<S> <C>
10.7 Distribution Agreement dated March 28, 1995 between the
Company and the Haulpak Division of Komatsu Dresser Company.
(1)
10.8 Letter Agreement dated December 4, 1996 between the Company
and Pi Research Limited. (1)
10.9 ASIS Development 1 Purchase Contract between SensoNor asa, TRW
Inc. and SmarTire Systems Inc. dated as of September 1,
1998.(4)
10.10 Management Agreement between SmarTire USA Inc. and Mark
Desmarais and SmarTire Systems Inc. dated as of June 1, 1999.
10.11 Release and Settlement Agreement between SmarTire Systems Inc
and Joseph Merback dated as of June 4, 1999.
11.1 Computation of Earnings Per Share
</TABLE>
(1) Incorporated by reference to Form 10-KSB filed with the
Securities and Exchange Commission on August 18, 1998.
(2) Portions of the Exhibit have been omitted pursuant to an order
granting confidential treatment under the Securities Exchange
Act of 1934.
(3) Incorporated by reference to the Company's Form 10-QSB for the
quarter ended April 30, 1998.
(4) Portions of Exhibit have been omitted in connection with a
request for confidential treatment under the Securities
Exchange Act of 1934.
<PAGE> 1
EXHIBIT 10.9
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THE ITEMS MARKED BY TWO ASTERISKS ** HAVE BEEN OMITTED FROM THIS FILING AND
HAVE BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
AGREEMENT NO. TA-3727
ASIS DEVELOPMENT/PURCHASE CONTRACT
THIS AGREEMENT ("Agreement") is made this 1st day of September 1998, by and
between SensoNor asa, a Norwegian corporation, ("Supplier") and TRW Inc.
("TRW") an Ohio, USA corporation acting on behalf of its Automotive Electronics
Group, North America, 24175 Research Dr., Farmington Hills, MI 48335-2642
("AEG") and SmarTire Systems Inc., a British Columbian corporation having a
place of business at 13151 Vanier Place, Suite 150, Richmond, British Columbia,
Canada V6V 2J1 ("SmarTire").
OVERVIEW
Supplier is in the business of developing and manufacturing, among other
things, application specific integrated sensors ("ASISs");
Supplier wants to develop an ASIS (AEG part number 152008, Specification Doc#
152008 Tire Pressure Sensor) for AEG and SmarTire and to sell such ASISs to AEG
and SmarTire;
AEG and SmarTire want Supplier to develop an ASIS for AEG and SmarTire; and
If Supplier's ASIS is acceptable, AEG and SmarTire will buy the ASISs from
Supplier upon the terms set forth herein.
Therefore, in consideration of the mutual provisions of this Agreement, the
Parties agree as follows:
1. DEFINITIONS: As used in this Agreement, the following terms will have the
following meanings:
(A) "Product" will mean the ASIS (AEG part number 152008) developed under
this Agreement.
(B) "Specifications" will mean the technical outline of the Product,
including block diagrams, circuit schematics, die size, net list, test
vectors, layout, simulation results, screening requirements, packaging
information, and any other information required to manufacture the
Product, and the performance and test requirements for the Product.
The Specifications are designated by AEG as document number 152008 and
part number
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152008.
(C) "Concept Verification Units" ("CVs") will mean quantities of the
Product which have undergone functional testing and characterization
as agreed by AEG, Smartire, and Supplier, and which will be used to
verify the concept of the Product.
(D) "Design Verification Units" ("DVs") will mean quantities of the
Product made on qualified production equipment and processes which
have undergone testing as agreed to by AEG, SmarTire and Supplier and
which will be used to verify the aftermarket design and
manufacturability of the Product.
(E) "Production Verification Units" ("PVs") will mean quantities of the
Product made on the qualified production equipment and processes and
which have undergone testing as defined in the Specification.
(F) "Schedule" will mean the development schedule set out in Attachment A
and corresponding payment milestones set out in Section 4(a).
(G) "Product Database" will mean the database[s] which contains any
information pertaining to a Product in the possession of Supplier on
any media (including but not limited to documents, magnetic tape,
film, and other media) to create, process, verify, and test the
Product. The Product Database will include the Specifications and all
physical data in a database format necessary to manufacture the
Product, bonding diagrams, pin outs, electrical specifications, and
part marking specifications.
(H) "Tape Out" means the date on which the design of all components of
the Product is complete, has been digitized in an electronic format
and is otherwise ready for the commencement of the preparation of
masks for the particular components of the Product.
2. SPECIFICATIONS
(A) AEG Obligations: AEG has submitted to Supplier a written description
representing the initial version of the Specifications, a copy of
which is attached hereto as Attachment E.
(B) Supplier Obligations: Supplier will use the initial version of the
Specifications supplied by AEG and modify the Specifications as
necessary and submit them to AEG for approval.
(C) Production: The AEG part number and the associated Specifications,
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when approved by AEG, will be referenced on the purchase orders
("POs") issued by AEG and SmarTire for production quantities of the
Product. Supplier acknowledges that AEG and SmarTire will incorporate
the Products into tire monitoring systems for motor vehicles and,
therefore, the Products require the highest level of quality and
conformance to Specifications and other requirements.
3. SUPPLIER/AEG DEVELOPMENT RESPONSIBILITIES
(A) Supplier: Time is of the essence in Supplier's performance of it's
obligations under this Agreement. Supplier will, in accordance with
the Schedule (Attachment A):
(1) Supply design tools for completion of design. Fully describe the
design tools and tool flow. Provide technical support during
development.
(2) Supply application and technical support to evaluate design
during development. Design any cells which are not available or
which cannot be constructed from existing cells and perform
layout.
(3) Generate test programs for functional test. Describe test
methods, tools, and fixtures.
(4) Conduct regular design reviews during the development process
according to the Schedule (the location of these design reviews
will be as agreed between AEG, SmarTire, and Supplier). These
reviews will be held to ensure problems are resolved and review
action item status and schedule conformance.
(5) Submit to AEG and SmarTire a final release package containing (i)
layout, (ii) circuit specifications, (iii) schematic diagram,
(iv) results of simulations, and (v) packaging information.
(6) Produce 450 plastic packaged CVs to be used for concept
verification, 1000 DVs to be used for aftermarket production
validation, and 1500 PVs to be used for OEM production
validation. CVs, DVs, and PVs will be fully functional as per the
Specification, and will be assembled in the package defined in
the Specifications. If the CVs, DVs or PVs do not meet the
Specifications, Supplier will rework the CVs, DVs, or PVs (as the
case may be) at Suppliers expense. If AEG orders more than 450
CVs, 1000 DVs, and/or 1500 PVs, Supplier will deliver such
additional CVs, DVs, and/or PVs within four (4) weeks after
receipt of order, subject to Suppliers limited production
capabilities.
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(7) Perform mask fabrication, wafer fabrication, CV and DV
assembly and testing.
(8) Supply test fixtures, equipment, and personnel for Product
testing.
(9) Complete production hardware/software as specified in the
Specification.
(B) AEG: AEG will, in accordance with the Schedule (Attachment A):
(1) Support the design reviews.
(2) Cooperate with SmarTire to submit to Supplier the initial
version of the Specification, including the test requirements.
(3) Submit to Supplier the TRW Supplier Development Manual (the
"Supplier Development Manual"), which will govern the terms of
the development of the Product.
(C) SmarTire: SmarTire will, in accordance with the Schedule
(Attachment A):
(1) Support the design reviews.
(2) Cooperate with AEG to submit to Supplier the initial version
of the Specification, including the test requirements.
(D) Project Organization: The business and technical contacts of the
three parties are specified in Attachment B.
4. DEVELOPMENT PRICING
Development Price: AEG and SmarTire will pay to Supplier the following
amounts (collectively, the "Development Price") for all development
work performed by Supplier under the Agreement:
AEG **
SmarTire **
The Development Price includes all charges for Product to be
delivered by Supplier under the provisions of Section 3. Supplier
will invoice AEG and SmarTire for milestone payments according to
the following schedule:
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<TABLE>
<CAPTION>
DEVELOPMENT MILESTONES PAYMENT
---------------------- -------
<S> <C> <C>
Signing of the Agreement [**]
After Tape Out of the Product [**]
After completion of DVs that meet the Specification [**]
Delivery of PVs that meet Specifications [**]
</TABLE>
(B) Price of Additional Samples: Supplier will supply the first 450 CVs
to AEG and SmarTire without charge. If AEG and SmarTire require more
than 450 CVs, AEG and SmarTire will pay $[**] U.S. for
each additional CV. AEG and SmarTire will pay Supplier $[**]
for each DV and PV purchased hereunder.
5. PURCHASE ORDERS
(A) Requirements: Competitiveness: If the Product developed hereunder
performs to the satisfaction of AEG and SmarTire, then AEG and
SmarTire will purchase its requirements for the Product from
Supplier, subject to Supplier being and remaining competitive in
terms of price, quality, delivery, service, technology, and terms of
sale. However, this obligation is not, and will not be construed
as, (a) a representation that AEG or SmarTire will have any
particular requirements for the Product, or (b) a proscription
against AEG or SmarTire purchasing from another company next
generation pressure sensors (with or without on-board ASICs or
microcomputers) or pressure sensors for other applications. If
Supplier is competitive in supplying the Product, then TRW and
SmarTire will give Supplier an opportunity to competitively quote on
the next generation of pressure sensors.
(B) Purchase Orders: If AEG has requirements for the Product, AEG will
issue POs and/or shipping releases to Supplier from time to time to
satisfy such requirements. Such purchases will be subject to the TRW
Terms and Conditions of Purchase set forth in the TRW Automotive
North America Supplier Information Package, October 1998, attached as
Exhibit 1 ("the AEG Terms and Conditions"). In case of conflict
between the terms of this Agreement and the AEG Terms and Conditions,
the terms of this Agreement will prevail.
(C) Authorizations: POs and releases issued pursuant to POs will
reference this Agreement and will specify the AEG and/or SmarTire
part number for the Product, the quantity ordered, the delivery due
dates, the purchase price, the transportation requirements, and the
invoice instructions. POs and releases will also include a 'shipping
authorization', a 'fabrication
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authorization', and a 'raw material procurement authorization'. 'Shopping
authorizations' will authorize Supplier to ship specified quantities of
Products for arrival at the location designated by Buyer on specified due
dates. 'Fabrication authorizations' will authorize Supplier to manufacture
specified quantities of Products. 'Raw material procurement
authorizations' will authorize Supplier to procure the necessary raw
materials for specified quantities of Goods. POs and releases will be
Supplier's only authorization to manufacture and ship Products to AEG and
SmarTire in production quantities.
AEG normally will issue releases weekly, with each release including a
four week fabrication authorization, an additional eight week raw material
procurement authorization, and a six month rolling forecast of future
orders.
Forecast quantity estimates set forth on AEG's POs or releases are for
planning purposes only and do not constitute a commitment by AEG to
purchase such quantities.
(D) Acknowledgment: Supplier will acknowledge all POs and releases received
from AEG and SmarTire. Failure of Supplier to acknowledge receipt of the
PO or the releases will constitute acceptance by Supplier.
(E) Testing/Screening: Supplier will test all Products supplied pursuant to
POs and releases as specified in the Specifications. Supplier will deliver
Products which have been qualified to CDF-AEC-Q100 and any additional test
requirements established by the Specifications.
(F) Purchases of Products by SmarTire: SmarTire will purchase Products from
Supplier, and Supplier will sell Products to SmarTire, at prices and upon
other terms and conditions that are the same as the terms and conditions
of purchase and sale set forth in this Agreement with respect to AEG. Such
purchases by AEG and SmarTire will be independent of one another, however,
and neither AEG or SmarTire will be responsible for the performance of the
other hereunder. Further, a breach of this Agreement by one of AEG and
SmarTire will not diminish or otherwise affect the responsibility of
Supplier under this Agreement with respect to the other of AEG and
SmarTire.
(g) Noncompetitiveness: If Supplier is noncompetitive, AEG and/or SmarTire, as
the case may be, ("Purchaser") will provide written notice thereof to
Supplier. Such notice will identify and describe the non-competitiveness
giving rise to the notice.
Within thirty (30) days after receipt of such notice, Suppler will give to
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Purchaser, in writing, its proposed plan to correct the
non-competitiveness. Such plan must allow Supplier to correct the
non-competitiveness within sixty (60) days of approval of the plan by
Purchaser.
Purchaser will promptly approve or reject the proposed plan. If the
proposed plan is approved by Purchaser, then Supplier will diligently
implement the plan and cure the non-competitiveness according to the
plan.
The requirements obligation set forth in Section 5(A) will terminate
as to Purchaser if Supplier fails to provide a corrective plan, or
such plan is not reasonably acceptable to Purchaser, or Supplier fails
to diligently implement such plan, or Supplier is unsuccessful in
implementing the plan within the sixty day cure period.
6. PRODUCTION-PRICING
(A) Purchase Price: The Purchase Price of Products will be determined in
accordance with Attachment C.
(B) Rollback: Supplier will use its best efforts to offer 5% price
reductions to AEG and SmarTire for each calendar year after the last
calendar year for which pricing is specified in Attachment C.
Quarterly meetings will be held to develop recommendations on yield
and process improvements.
(C) Inclusions: The Purchase Price will include all costs for packaging
and packing.
(D) Exclusions: AEG will be responsible for all sales and use taxes
imposed on the sale of Products to AEG. SmarTire will be responsible
for all sales and use taxes imposed on the sale of the Product to
SmarTire.
(E) Delivery Terms: Delivery terms shall be Ex Works (Incoterms 1990).
7. LIFETIME PURCHASE
Supplier will (i) notify AEG and SmarTire at least two (2) years prior to
discontinuing the manufacture of such Product and (ii) make available a
"lifetime" purchase of such Product.
8. PAYMENT TERMS
(A) Non Production Orders: Payment terms are net thirty (30) days from
receipt of a correct invoice.
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(B) Production Orders: Payment terms are net thirty (30) days from receipt
of a correct invoice. Each shipment will be considered a separate
transaction. The details on payment terms and methodology are
contained in the TRW Automotive North America Supplier Information
Package, October 1998, attached as Exhibit 1.
9. PRODUCT DATABASE
(A) Maintenance: Supplier will, at no charge to AEG or SmarTire, maintain
the Product Database for a period of not less than one (1) year
following Supplier's last scheduled shipment of such Product.
(B) Limitations: Supplier will not use, for any purpose other than
producing Products for AEG and SmarTire, any Product Database
information not owned by Supplier unless previously authorized in
Section 10(c) or in writing by AEG.
10. TECHNOLOGY RIGHTS
(A) Ownership, Generally: As between AEG and SmarTire and Supplier, each
party will own all know-how, copyrights, inventions (patentable or
unpatentable) and other intellectual property created or developed by
the party, or which the party introduces to the Product from another
source. The parties agree that, under this general rule, certain
technology is owned by certain parties as set out in Attachment D. As
used in this Section 10(A), the term "own" means that the party
owning certain technology will have the right to seek and enforce
such intellectual property rights for the owned technology
(including, but not limited to, patents) as are available at law
outside of this Agreement. This Section 10(A) does not impose any
obligation on any party with respect to information or technology
falling into one or more of the exceptions set forth in Section 21(C).
(B) Ownership, Masks: Section 10(A) notwithstanding, AEG and SmarTire
will jointly own the masks of any application specific integrated
circuit ("ASIC") to be used in the Product developed hereunder.
Supplier will not use such masks to produce products for any other
customer, and will deliver to AEG at no additional cost to AEG, a
complete set of the most current masks, in such electronic and/or
physical form as AEG may specify, under the conditions specified in
Section 13.
(C) Standard Cell Designs: Supplier will own the designs of standard
cells contained within the Products that do not utilize (1) the
designs (above the cell level) of the Products or masks of the
Products or (2) any AEG or
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--------------
SmarTire Proprietary Information. Supplier may continue to incorporate
these standard cells in integrated circuits for other customers.
(D) Use of AEG/SmarTire Features: As long as AEG is purchasing its
requirements for Products from Supplier hereunder, Supplier will not
incorporate in any products sold to other customers any of the
features outlined in part (B) of Attachment D. Further, Supplier will
at no time incorporate in any products sold to other customers (i) any
AEG or SmarTire Proprietary information, or (ii) any feature patented,
copyrighted, or otherwise protected by law by either AEG or SmarTire.
11. CHANGES
-------
(A) Specifications: AEG and SmarTire reserve the right to change the
Specification from time to time. Supplier will promptly implement such
changes. Supplier will make changes to the Specifications that result
in minor changes to the design without charge, unless the cost to
Supplier of making such change is not minor.
(B) Consequences: If any change causes an increase or decrease in
development costs, an increase or decrease in the time required for
the performance of any part of the development, or a change in the die
size necessitating a change in the Development Price or the Purchase
Price, Supplier will promptly notify AEG and SmarTire in writing, but
in any event within ten (10) business days of the date on which AEG
first requests the change. In such event, an equitable adjustment will
be made in the prices or delivery schedule or both, and this Agreement
will be modified by a written agreement (in accordance with Section
20) to reflect such mutually agreed upon equitable adjustment.
12. TERM AND TERMINATION
--------------------
(A) Commencement: This Agreement will begin on the date set forth in the
preamble of this Agreement (the "Effective Date").
(B) Specifications: If Supplier and AEG cannot agree on the
Specifications, either Party may terminate this Agreement as to all
parties with ten (10) days' written notice and with no further
liability or obligations, except the obligations concerning
confidentiality.
(C) Termination for Breach: If either one of AEG or Supplier fails to
perform its respective obligations under this Agreement, the other of
AEG and Supplier will have the right to terminate this Agreement for
cause. To exercise such right, the non-breaching party will give
notice of termination (setting forth specific deficiencies in writing
signed by a duly authorized
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representative. Termination will become effective if the breaching
party fails to correct the deficiencies within a mutually agreed
upon time, not to exceed thirty (30) days from receipt of notice of
termination. If AEG terminates this Agreement for cause, AEG and
SmarTire will have no further payment liability to Supplier, except
for payment obligations relating to conforming Product delivered
and milestones completed prior to the effective date of termination
and non-disclosure obligations then accrued through the date of
termination. The obligations of the parties under Sections 10, 13,
16, 18 and 21 shall survive the termination, cancellation or
expiration of this Agreement.
(D) Termination for Special Conditions: Either of AEG or Supplier has
the right to terminate this Agreement if the other of AEG or
Supplier (i) has a permanent disruption of its business due to
bankruptcy, insolvency, or reorganization, (ii) is adjudged a
bankrupt, or (iii) makes a general assignment for the benefit of
its creditors.
(E) Purchase Order Termination: If either AEG or SmarTire terminates a
Purchase Order or a Release pursuant to the AEG Terms and
Conditions, the terminating party's liability will be limited to
(i) paying Supplier for finished Products ordered by the party
pursuant to Shipping Authorizations and (ii) reimbursing Supplier
for inventory procured or fabricated by Supplier in accordance with
the party's Fabrication and Raw Material Authorizations. Supplier
will promptly deliver any such finished Products or inventory to
AEG or SmarTire, as the case may be.
(F) Document Delivery: Upon the expiration or termination of this
Agreement for any reason whatsoever, Supplier will immediately
deliver to AEG and SmarTire at no additional charge:
(1) All AEG and SmarTire documentation provided by AEG and
SmarTire, respectively, to Supplier.
(2) All test results generated by Supplier.
(3) The Product Database and all net lists and test vectors
generated by Supplier.
13. MANUFACTURING RIGHTS
Supplier recognizes that AEG and/or SmarTire must have a continuous
supply of the Product after production begins. Thus, if Supplier
thereafter becomes unable to continue to supply the Product to AEG and/or
SmarTire as required hereunder and no alternative source of equivalent
pressure sensors exists that is reasonably acceptable to AEG and/or
SmarTire, as the case may be, then Supplier will give to AEG and SmarTire
a license under any intellectual property rights Supplier may hold
necessary to make the Product or have the Product
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made for AEG and SmarTire by a third party. Such license will be
exclusive, worldwide, and will have sufficient scope to permit AEG or such
third party to manufacture, use, and sell the Product. Such license will
also require Supplier to disclose to AEG all technical information
necessary to manufacture the Product (such information will include,
without limitation, the masks for the Product, functional design
information, detailed electrical schematics, net lists, and test vectors)
and will allow AEG to disclose information as necessary to make the
Product or have the Product made by a third party. The license will be
cost-free to AEG and SmarTire.
14. NRE PRICE ASSURANCE
Supplier warrants that software, models, and layout information will be
representative of the Product process. If the test results do not match
the simulation results and the failure requires one or more new masks and
wafer runs, there will be no additional cost to AEG or SmarTire. For
purposes of this Section 14, a test result match means a result that is
equal to or better than the expected result as defined in the Supplier
Development Manual.
15. DEVELOPMENT PRODUCT WARRANTY
Supplier warrants that the Products delivered during the development
process will conform to the Specifications and will meet all applicable
quality requirements of Supplier and AEG and SmarTire.
16. INDEMNIFICATION
Supplier will indemnify and hold harmless AEG and SmarTire, their
respective officers, employees, agents, successors, assigns, customers,
and users of its products from and against any and all losses, expenses,
damages, claims, suits and liabilities (including recall, repair and
replacement expenses and other incidental and consequential damages, court
costs, and attorneys' fees) arising as a result of any claim that the
manufacture, use, sale or resale of Product infringes any patent, utility
model, industrial design, copyright, trade secret, or other intellectual
property right in any country. Supplier will, when requested by AEG or
SmarTire (the "requesting party"), defend any action or claim of such
infringement at its own expense. If the sale and/or use of the Product is
enjoined or, in the requesting party's sole judgment, is likely to be
enjoined, Supplier will, at the requesting party's election and Supplier's
sole expense, either (i) procure for the requesting party the right to
continue using the Product, (ii) replace the Product with an equivalent
noninfringing Product, or (iii) modify the Product so it becomes
noninfringing. The foregoing notwithstanding, Supplier will not be liable
to AEG or SmarTire for, and will not indemnify and hold harmless AEG and
SmarTire against, any patent infringement arising from Product features or
functions required by AEG or SmarTire.
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17. TRADEMARK/TRADENAME
No Party will use any trademark or tradename of any other Party, or except
as may be required by law, refer directly or indirectly to this Agreement
or to the services performed hereunder in connection with any Product,
promotion, or publication, without the prior written consent of the other
Party.
18. APPLICABLE LAW; DISPUTE RESOLUTION
This Agreement will be construed, and the legal relations between the
parties will be determined, in accordance with the laws of the State of
Ohio. Any claim, controversy or dispute arising from the execution of, or
in connection with, this Agreement preferably shall be settled through
negotiations between the parties. As such, the parties shall attempt in
good faith to resolve such claim, controversy or dispute promptly by
negotiation between executives who have authority to settle the controversy
and who are at a higher level of management than the persons with direct
responsibility for administration of this Agreement. If no settlement can
be reached through negotiations within sixty (60) days of the submission of
such a matter by one of the parties to the other party, then such dispute
shall be submitted to the Arbitration Institute of the Stockholm Chamber of
Commerce for arbitration in accordance with its rules of procedure. Any
such arbitration proceeding shall be held in Stockholm, Sweden and
conducted in the English language. The arbitration award shall be final and
binding upon all parties and shall be enforceable in accordance with its
terms. The cost of the arbitration, including a reasonable allowance for
attorneys' fees, shall be borne by the losing Party or as otherwise
specified in the ruling of the arbitration tribunal. The arbitration award
shall be in writing and shall specify the factual and legal bases for the
award. The arbitrator shall only have authority to award compensatory
damages in accordance with the Agreement and shall not have authority to
award punitive damages, other non-compensatory damages, or any other
relief, and the parties hereby waive all rights for this type of relief
with respect to claims resolved by arbitration.
19. ASSIGNMENT
No right or interest in this Agreement may be assigned and no duty under
this Agreement may be delegated by any party without the prior written
consent of the other parties. However, any party may assign its rights and
delegate its duties under this Agreement, without such consent, to any
successor in interest by amalgamation, merger, consolidation, or
acquisition of substantially all the assets of such party relating to this
Agreement.
20. MODIFICATIONS
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No modification of this Agreement will be binding upon any party unless
such modification is in a writing that (a) specifically refers to the
provision of this Agreement to be modified and (b) has been signed by
authorized representatives of all parties.
21. CONFIDENTIALITY AND USE OF INFORMATION
(A) AEG Information.
(1) Definition. "AEG Proprietary Information" means the fact that
this Agreement exits, the AEG and SmarTire technical information
listed on Attachment D, and any other information, including
models and prototypes, which (1) relate to products and
components and subsystems thereof of TRW Inc. or its
subsidiaries, and (2) are disclosed to Supplier by AEG or any
employee, agent or independent contractor of TRW Inc. or its
subsidiaries, or are developed by Supplier under this Agreement.
In particular and without limiting the foregoing, the datasheet
for any Product developed under this Agreement and any
information on such datasheet will be AEG Proprietary
Information.
(2) Use and Obligation of Confidence. Supplier will, during the
fulfillment of this Agreement and for a period of seven (7) years
after its cancellation, termination or expiration: (1) use the
AEG Proprietary Information only in developing and/or
manufacturing Products and their components for sale by or to TRW
Inc. or its subsidiaries; and (2) hold the AEG Proprietary
Information in confidence and disclose such AEG Proprietary
Information only to its own employees who will likewise hold the
AEG Proprietary Information in confidence and use the AEG
Proprietary Information only as provided in this Subsection
21(A)(2), unless otherwise agreed in writing by TRW.
(B) SmarTire Information.
(1) Definition. "SmarTire Proprietary Information" means the fact
that this Agreement exists, the AEG and SmarTire technical
information listed on Attachment D, and any other information,
including models and prototypes, which (1) relate to products and
components and subsystems thereof of SmarTire, or its
subsidiaries, and (2) are disclosed to Supplier by SmarTire or
any employee, agent or independent contractor of SmarTire or its
subsidiaries, or are developed by Supplier under this Agreement.
In particular and without limiting the foregoing, the datasheet
for any Product developed under this Agreement and any
information
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on such datasheet will be SmarTire Proprietary Information.
(2) Use and Obligation of Confidence. Supplier will, during the
fulfillment of this Agreement and for a period of seven (7) years
after its cancellation, termination or expiration: (1) use the
SmarTire Proprietary Information only in developing and/or
manufacturing Products and their components for sale by or to
SmarTire or its subsidiaries; and (2) hold the SmarTire
Proprietary Information in confidence and disclose such SmarTire
Proprietary Information only to its own employees who will
likewise hold the SmarTire Proprietary Information in confidence
and use the SmarTire Proprietary Information only as provided in
this Subsection 21(B)(2), unless otherwise agreed in writing by
SmarTire.
(C) Supplier Information.
(1) Definition. "Supplier Proprietary Information" means the Supplier
technical information listed on Attachment D and other
information which (1) relates to Supplier's manufacturing
processes or business financial data or business plans, and (2)
is disclosed to AEG or SmarTire by Supplier or any employee,
agent or independent contractor retained by Supplier during the
fulfillment of this Agreement. The datasheet for any Product
developed under this Agreement and any information on such
datasheet will be not be Supplier Proprietary Information.
(2) Use and Obligation of Confidence. Each of AEG and SmarTire will,
during the fulfillment of this Agreement and for a period of
seven (7) years after its cancellation, termination or
expiration: (1) use the Supplier Proprietary Information that it
receives only in connection with activities that are permissible
under this Agreement; and (2) hold the Supplier Proprietary
Information that it receives in confidence and disclose such
Supplier Proprietary Information only to its own employees who
will likewise hold such Supplier Proprietary Information in
confidence and use such Supplier Proprietary Information only as
provided in Subsection 21(B)(2), unless otherwise agreed in
writing by Supplier.
(D) Exceptions. Notwithstanding Subsections (A) and (B), this Agreement
will impose no obligation upon any party with respect to any
information which: (i) is now or subsequently becomes publicly known
or available by publication, commercial use or otherwise without
breach of this Agreement; (ii) is known to the party at the time of
receipt, (iii) is subsequently rightfully furnished to the party by a
third person without a
-Page 14-
<PAGE> 15
Execution Copy
restriction on disclosure; (iv) is independently developed by
employees of the party who have not had access to the Proprietary
Information of the other party; or (v) is delivered to the party after
the cancellation. termination or expiration of this Agreement, or (vi)
is required by law to be disclosed.
(E) Override. In the event of any conflict between the provisions of this
Section 21 and the provisions of any secrecy or confidentiality
agreement between Supplier and either AEG or SmarTire, the provisions
of this Section 21 will govern.
22. INDEPENDENT CONTRACTOR
The relationship between the parties will be that of independent
contractors. No party will be or hold itself out as an employee or agent of
the other, and no party will create or assume any obligation, express or
implied, on behalf of the other.
23. ENTIRE AGREEMENT
This Agreement, together with the Attachments and Exhibits, each of which
is incorporated fully and is made a part of this Agreement by this
reference, (i) contains the entire agreement of the parties with respect to
the subject matter hereof and (ii) supersedes all prior agreements or other
arrangements between the parties with respect to the subject matter hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective duly authorized representatives, effective as of
the Effective Date.
TRW INC. SMARTIRE SYSTEMS INC.
Automotive Electronics Group,
North America
By: /s/ MARK DESMARAIS By: /s/ R.J. RUDMAN
----------------------- ------------------------
Mark Desmarais R.J. Rudman
(Typed/Printed Name) (Typed/Printed Name)
Title: Director Planning & Business Dev. Title: President & CEO
SENSONOR ASA
By: /s/ SVERRE HOENTUEDT
----------------------
Sverre Hoentuedt
President & CEO
-Page 15-
<PAGE> 1
EXHIBIT 10.10
MANAGEMENT AGREEMENT
THIS AGREEMENT effective as of the 1st day of June, 1999 (the "Effective Date").
BETWEEN:
SMARTIRE USA INC., a company duly incorporated pursuant to the
laws of Delaware, U.S.A. having an office at 155 Wilbur Dr.
N.E., North Canton, Ohio, USA, 44720
(hereinafter referred to as the "Company")
OF THE FIRST PART
AND:
MARK DESMARAIS, businessman, of 1825 Stonebridge Way Court,
Canton, MI, USA, 48188
(hereinafter referred to as the "Manager")
OF THE SECOND PART
AND:
SMARTIRE SYSTEMS INC., a company duly incorporated pursuant to
the laws of the Province of British Columbia, having an office
at 150 - 13151 Vanier Place, Richmond, British Columbia, V6V
2J1
(hereinafter referred to as "SmarTire")
OF THE THIRD PART
RECITALS
WHEREAS SmarTire has requested the assistance of the Manager in providing
certain management services to the Company and SmarTire, as hereinafter
described;
WHEREAS the Manager has agreed to provide such assistance and services to the
Company and SmarTire in accordance with the terms and conditions herein set
forth;
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
covenants set forth below, the parties hereto agree as follows:
<PAGE> 2
-2-
1 DUTIES AND DEVOTION OF TIME
1.1 Duties. During the term of this Agreement the Manager shall be responsible
for the duties contained in Schedule "A" attached hereto and incorporated herein
by this reference (the "Duties").
1.2 Devotion of Time. The parties hereto acknowledge and agree that the work of
the Manager is and shall be of such a nature that regular hours may not be
sufficient and occasions may arise whereby the Manager shall be required to work
more than eight (8) hours per day and/or five (5) days per week. The Manager
agrees that the consideration set forth herein shall be in full and complete
satisfaction for such work and services, regardless of when and where such work
and services are performed. The Manager further releases SmarTire and the
Company from any claims for overtime pay or other such compensation which may
accrue to the Manager. Notwithstanding the foregoing, SmarTire and the Company
agree that so long as the Manager properly discharges his duties hereunder, the
Manager may devote the remainder of his time and attention to other
non-competing business and personal pursuits.
1.3 Business Opportunities the Property of the Company. The Manager agrees to
communicate immediately to SmarTire all business opportunities, inventions and
improvements in the nature of the business of SmarTire or the Company which,
during the term of this Agreement, the Manager may conceive, make or discover,
become aware of, directly or indirectly, or have presented to him in any manner
which relates in any way to SmarTire or the Company, either as they are now or
as they may develop, and such business opportunities, inventions or improvements
shall become the exclusive property of SmarTire without any obligation on the
part of the Company or SmarTire to make any payments therefor in addition to the
salary and benefits herein described to the Manager.
1.4 No Personal Use. The Manager shall not use any of the work the Manager shall
perform for the Company or SmarTire for any personal purposes without first
obtaining the prior written consent of SmarTire.
2 SALARY, BONUSES AND BENEFITS
2.1 Salary. In consideration of the Manager providing the services referred to
herein, SmarTire agrees to pay the Manager an annual base salary (the "Annual
Base Salary") of one hundred sixty thousand U.S. dollars ($160,000) less
applicable deductions, payable bi-weekly, plus incentive compensation as set out
below, subject to increase as from time to time approved by the Board of
Directors of SmarTire.
2.2 Benefits. SmarTire shall provide, maintain and pay for:
(a) medical, dental and vision insurance for the Manager and his
immediate family as is provided by SmarTire's medical services
plan or an equivalent plan;
<PAGE> 3
-3-
(b) such extended health and other benefits for the Manager and
his immediate family as are provided to senior management
employees of SmarTire, subject to the eligibility of the
Manager; and
(c) a car allowance of US$800 per month.
2.3 Incentive Compensation and Stock Options. Within ninety (90) days of the
Effective Date, the SmarTire Board of Directors will approve and implement an
incentive compensation plan for the senior management of SmarTire and its
subsidiaries, including therein a policy regarding the granting of stock
options. The Manger will participate as a member of the Compensation Committee
of the Board of Directors in recommending that plan to the Board of Directors
and will participate in that plan when approved and implemented by the SmarTire
Board of Directors.
2.4 Payment in Cash or Shares. All payments payable by the Company or SmarTire
to the Manager, including the Annual Base Salary, incentive compensation and
reimbursement of expenses under Section 4.1 hereof, shall be payable in cash or,
at the election of the Manager, and subject to the approval of the regulatory
authorities, such will be paid in whole or in part in common shares in the
capital stock of SmarTire ("Remuneration Shares"), issued at the 10 day average
closing price (for the 10 days prior to the Manager's election) of SmarTire's
common shares on any stock exchange or quotation system upon which SmarTire's
common shares are listed for trading.
2.5 Registration of Performance Bonus Shares. To ensure that any shares issued
to the Manager under paragraph 2.4 of this Agreement are freely tradable,
SmarTire shall register with the SEC any such shares issued. Upon or as soon as
is practical after the issuance of such shares, SmarTire shall file a form S-8
or other appropriate form with the United States Securities and Exchange
Commission (the "SEC") to effect registration.
2.6 Incentive Stock Options. The Manager acknowledges that prior to execution of
this Agreement SmarTire executed an incentive stock option agreement for the
right for the Manager to purchase up to seventy-five thousand (75,000) common
shares in the capital of SmarTire, with options to acquire up to fifteen
thousand (15,000) common shares vesting on execution of the Stock Option
Agreement which grants the options and on each of the first, second, third and
fourth anniversaries of such Agreement, all subject to regulatory approval.
2.7 Signing Bonus. In consideration of the Manager entering into this Agreement,
Smartire agrees to pay the Manager a signing bonus of ten thousand (10,000)
common shares (the "Signing Bonus Shares") in the capital of SmarTire. The
Signing Bonus Shares shall be paid within ten (10) days of the execution of this
Agreement by all parties hereto. The Manager acknowledges that the Signing Bonus
Shares will be subject to a one year hold period; however, Smartire will add
registration of the Signing Bonus Shares to any other share registration that
Smartire may file with the SEC during the year. The Manager further acknowledges
that prior to the execution of this Agreement SmarTire paid to the Manager a
signing cash bonus of twenty five thousand U.S. dollars ($25,000 U.S.).
<PAGE> 4
-4-
3 VACATION
3.1 Entitlement to Vacation. The Company and SmarTire acknowledge that the
Manager shall be entitled to an annual vacation of four (4) weeks. The Manager
shall use his best efforts to ensure that such vacation is arranged with
SmarTire in advance such that his vacation does not unduly affect the operations
of SmarTire or the Company.
3.2 Increase in Vacation. The period set out in Section 3.1 above may be
increased from time to time as mutually agreed to by the Manager and the
SmarTire Board of Directors.
4 REIMBURSEMENT OF EXPENSES
4.1 Reimbursement of Expenses. The Manager shall be reimbursed for all
reasonable out-of-pocket expenses incurred by the Manager in or about the
execution of the Duties contained herein, including without limiting the
generality of the foregoing, all reasonable travel and promotional expenses
payable or incurred by the Manager in connection with the Duties under this
Agreement. All payments and reimbursements shall be made within three (3) days
of submission by the Manager of vouchers, bills or receipts for such expenses.
5 CONFIDENTIAL INFORMATION
5.1 Confidential Information. The Manager shall not, either during the term of
this Agreement or under the provisions of section 5.3, without specific consent
in writing, disclose or reveal in any manner whatsoever to any other person,
firm or corporation, nor will he use, directly or indirectly, for any purpose
other than the purposes of the Company and SmarTire, the private affairs of the
Company or SmarTire or any confidential information which he may acquire during
the term of this Agreement with relation to the business and affairs of the
directors and shareholders of the Company or SmarTire, unless the Manager is
ordered to do so by a court of competent jurisdiction or unless required by any
statutory authority.
5.2 Non-Disclosure Provisions. The foregoing provision shall be subject to the
further non-disclosure provisions contained in Schedule "C" attached hereto and
incorporated hereinafter by this reference.
5.3 Provisions Survive Termination. The provisions of this section shall survive
the termination of this Agreement for a period of three years.
6 TERM
6.1 Term. This Agreement shall remain in effect until terminated in accordance
with any of the provisions contained in this Agreement.
<PAGE> 5
-5-
7 TERMINATION
7.1 Termination by Manager. Notwithstanding any other provision contained
herein, the parties hereto agree that the Manager may terminate this Agreement,
with or without cause, by giving ninety (90) days' written notice of such
intention to terminate.
7.2 Resignation or Cessation of Duties. In the event that the Manager ceases to
perform all of the Duties contained herein, other than by reason of the
Manager's death or disability, or if the Manager resigns unilaterally and on his
own initiative from all of his positions this Agreement shall be deemed to be
terminated by the Manager as of the date of such cessation of Duties or such
resignation, and the Company and SmarTire shall have no further obligations
under Section 2 hereof.
7.3 Termination by Company. SmarTire may terminate this agreement at any time
for just cause. The parties further agree that except for termination for just
cause, SmarTire may not terminate this Agreement without payment, at that time,
to the Manager of a termination allowance equivalent to six months in value of
the Annual Base Salary payable by SmarTire to the Manager, regardless of the
date of termination, and in addition, any stock options that have been granted
but that have not yet vested shall immediately vest, and may be exercised for a
period of 30 days only after vesting.
7.4 Death. In the event of the death of the Manager during the term of this
Agreement, this Agreement shall be terminated as of the date of such death, and
the Manager's spouse, if living, or surviving children shall be entitled to the
termination allowance stated in Section 7.3 hereof.
7.5 Disability. In the event that the Manager will during the term of this
Agreement by reason of illness or mental or physical disability or incapacity be
prevented from or incapable of performing the Duties hereunder, then the Manager
shall be entitled to receive the remuneration provided for herein at the rate
specified hereinbefore for the period during which such illness, disability or
incapacity will continue, but not exceeding six (6) successive months. If such
illness, disability or incapacity continues or will continue for a period longer
than six (6) successive months, then this Agreement may, at the option of the
Directors of SmarTire, forthwith be terminated, and the Manager shall be
entitled to the termination allowance stated in Section 7.3 hereof.
7.6 Termination Payments. Any payments made by SmarTire to the Manager upon the
termination of this Agreement shall be made in cash in a lump sum payment, or,
if SmarTire does not have available funds, in equal monthly cash installments
over one year with interest at 8% per annum, or in Remuneration Shares, or in a
combination of cash and Remuneration Shares, subject to regulatory approval. All
payments required to be made by the Company to the Manager pursuant to Section 7
hereof shall be made in full, irrespective of the amount of the term remaining
under this Agreement.
<PAGE> 6
-6-
8 RIGHTS AND OBLIGATIONS UPON TERMINATION
8.1 Rights and Obligations. Upon termination of this Agreement, the Manager
shall deliver up to SmarTire all documents, papers, plans, materials and other
property of or relating to the affairs of the Company and SmarTire, other than
the Manager's personal papers in regard to his role in the Company or SmarTire,
which may then be in the Manager's possession or under his control.
9 CLOSING
9.1 Closing Date. This Agreement shall be effective as of June 1, 1999.
9.2 Conditions of Closing. The parties hereto agree that it shall be a condition
of the execution of this Agreement that prior to or contemporaneously with the
execution of this Agreement:
(a) this Agreement shall be approved by the Board of Directors of
SmarTire.
10 NOTICES AND REQUESTS
10.1 Notices and Requests. All notices and requests in connection with this
Agreement shall be deemed given as of the day they are received either by
messenger, delivery service, or mailed by registered or certified mail with
postage prepaid and return receipt requested and addressed as follows:
(a) if to the Company:
SmarTire USA Inc.
155 Wilbur Dr. N.E.
North Canton, Ohio, USA
44720
with a copy to: SmarTire (address below)
(b) If to the Manager:
Mark Desmarais
1825 Stonebridge Way Court
Canton, MI, USA 48188
<PAGE> 7
-7-
(c) If to SmarTire:
SmarTire Systems Inc.
150 - 13151 Vanier Place
Richmond, British Columbia
V6V 2J1
with a copy to:
CLARK, WILSON
Suite 800-885 West Georgia Street
Vancouver, British Columbia
V6C 3H1
Attention: Bernard Pinsky
or to such other address as the party to receive notice or request so designates
by written notice to the others.
11 INDEPENDENT PARTIES
11.1 Independent Parties. This Agreement is intended solely as a management
services agreement and no partnership, agency, joint venture, distributorship or
other form of agreement is intended.
12 AGREEMENT VOLUNTARY AND EQUITABLE
12.1 Agreement Voluntary. The parties acknowledge and declare that in executing
this Agreement they are each relying wholly on their own judgement and knowledge
and have not been influenced to any extent whatsoever by any representations or
statements made by or on behalf of any other party regarding any matters dealt
with herein or incidental thereto.
12.2 Agreement Equitable. The parties further acknowledge and declare that they
each have carefully considered and understand the provisions contained herein,
including, but without limiting the generality of the foregoing, the Manager's
rights upon termination and the restrictions on the Manager after termination
and agree that the said provisions are mutually fair and equitable, and that
they executed this Agreement voluntarily and of their own free will.
13 CONTRACT NON-ASSIGNABLE; INUREMENT
13.1 Contract Non-Assignable. This Agreement and all other rights, benefits and
privileges contained herein may not be assigned by the Manager.
<PAGE> 8
-8-
13.2 Inurement. The rights, benefits and privileges contained herein, including
without limitation the benefits of Sections 2 and 7 hereof, shall inure to the
benefit of and be binding upon the respective parties hereto, their heirs,
executors, administrators and successors.
14 ENTIRE AGREEMENT
14.1 Entire Agreement. This Agreement represents the entire Agreement between
the parties and supersedes any and all prior agreements and understandings,
whether written or oral, among the parties. The Manager acknowledges that he was
not induced to enter into this Agreement by any representation, warranty,
promise or other statement, except as contained herein.
14.2 Previous Agreements Cancelled. Save and except for the express provisions
of this Agreement and the Manager's continuation as a director of SmarTire and
the Company, any and all previous agreements, written or oral, between the
parties hereto or on their behalf relating to the services of the Manager for
the Company or for SmarTire are hereby terminated and cancelled and each of the
parties hereby releases and further discharges the others of and from all manner
of actions, causes of action, claims and demands whatsoever under or in respect
of any such agreements.
15 WAIVER
15.1 Waiver. No consent or waiver, express or implied, by any party to or of any
breach or default by another party in the performance by the other of its or his
obligations herein shall be deemed or construed to be a consent or waiver to or
of any breach or default of the same or any other obligation of such party.
Failure on the part of any party to complain of any act or failure to act, or to
declare another party in default irrespective of how long such failure
continues, shall not constitute a waiver by such party of its or his rights
herein or of the right to then or subsequently declare a default.
16 SEVERABILITY
16.1 Severability. If any provision contained herein is determined to be void or
unenforceable in whole or in part, it is to that extent deemed omitted. The
remaining provisions shall not be affected in any way.
17 AMENDMENT
17.1 Amendment. This Agreement shall not be amended or otherwise modified except
by a written notice of even date herewith or subsequent hereto signed by both
parties.
<PAGE> 9
-9-
18 HEADINGS
18.1 Headings. The headings of the sections and subsections herein are for
convenience only and shall not control or affect the meaning or construction of
any provisions of this Agreement.
19 GOVERNING LAW
19.1 Governing Law. This Agreement shall be construed under and governed by the
laws of the Province of British Columbia and the laws of Canada applicable
therein.
20 EXECUTION
20.1 Execution in Several Counterparts. This Agreement may be executed by
facsimile and 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.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
4th day of June, 1999.
SMARTIRE USA INC.
Per: /s/ ROBERT RUDMAN
------------------------------
Authorized Signatory
SIGNED by MARK DESMARAIS in the presence of: )
)
/s/ W.A. PAGE )
- -------------------------------------- )
Name W.A. Page )
)
31 EATON PLACE )
LONDON SWIX 8BP )
- -------------------------------------- )
Address ) /s/ MARK DESMARAIS
) --------------------
BUSINESSMAN ) MARK DESMARAIS
- -------------------------------------- )
Occupation )
)
SMARTIRE SYSTEMS INC.
Per: /s/ ROBERT RUDMAN
---------------------------------
Authorized Signatory
This is page 9 of Agreement dated above for reference the 1st day of June ,
1999.
<PAGE> 1
EXHIBIT 10.11
RELEASE AND SETTLEMENT AGREEMENT
THIS AGREEMENT made as of the 4th day of June, 1999.
BETWEEN:
SMARTIRE SYSTEMS INC., a company duly incorporated pursuant to
the laws of the Province of British Columbia, having an office
at 150 - 13151 Vanier Place, Richmond, British Columbia, V6V
2J1
(the "Company")
OF THE FIRST PART
AND:
JOSEPH MERBACK, businessman, of 27725 Winding Way, Malibu,
California, 90265
("Merback")
WHEREAS:
A. Merback is a director and an employee of the Company and Smartire USA Inc.
and has rendered certain management services (the "Services") to the Company and
its subsidiaries pursuant to a Management Agreement, dated February 1, 1998, as
amended (the "Management Agreement"), and has accordingly acquired and is in
possession of certain confidential information (the "Confidential Information")
regarding the Company, its subsidiaries and their respective businesses;
B. Merback has agreed to resign as a director and an employee of the Company and
of Smartire USA Inc. and to release the Company and its subsidiaries from all
claims and issues that he now may have or which may arise against the Company
and/or its subsidiaries in connection with the Services and the positions held
by him with the Company and its subsidiaries, in consideration for the Company
allotting and issuing to Merback 100,000 common shares (the "Shares") in the
capital of the Company;
NOW THEREFORE THIS AGREEMENT WITNESSETH that in consideration of the premises
and of the covenants and agreements set out herein, the parties hereto covenant
and agree as follows:
<PAGE> 2
2
1. ALLOTMENT AND ISSUANCE OF SHARES
1.1 The Company will allot and issue to Merback, or to another nominee as
directed by Merback, the Shares as full and final payment of the Services and
Merback will accept the Shares as full and final payment of the Services. The
Shares will be issued within ten (10) days of the execution of this Agreement
and will be delivered to Merback. Merback will pay any tax liability accruing
to him as a result of the issuance of the Shares.
1.2 The Company hereby agrees to take the necessary steps to register (the
"Registration"), as soon as reasonably practicable after the issuance of the
Shares, the Shares with the Securities and Exchange Commission (the "SEC") on
Form S-8 if Merback directs that the Shares be registered in his name or in the
name of a nominee, if the Shares issued such nominee are eligible for
registration on Form S-8. Otherwise, the Company agrees to add registration of
the Shares to any other share registration that it may file with the SEC during
the year.
1.3 Merback acknowledges that the Shares will be subject to a one year hold
period, commencing from the date of issuance of the Shares, unless the Shares
are registered with the SEC prior to the expiration of such hold period. The
Shares may be subject to additional "affiliate" restrictions under U.S.
securities laws.
2. CONFIDENTIAL INFORMATION
2.1 "Confidential Information" shall mean, for the purposes of this Agreement,
non-public information regarding the Company, its subsidiaries, their respective
businesses and management which, under the circumstances, ought reasonably to be
treated as confidential.
2.2 Within ten (10) days of the execution of this Agreement, Merback shall
return all originals, copies, reproductions and summaries of or relating to the
Confidential Information to the Company.
2.3 Merback hereby agrees, at any time before or after the execution of this
Agreement, that he has not and will not disclose any Confidential Information to
third parties except as provided herein. Merback may disclose Confidential
Information in accordance with judicial or other governmental order, provided
that he shall give reasonable notice to the Company prior to such disclosure and
shall comply with any applicable protective order or equivalent.
2.4 Merback hereby agrees, at any time after the execution of this Agreement,
that he will not utilize, in anyway whatsoever, the Confidential Information.
<PAGE> 3
3
3. RESIGNATION, REMUNERATION AND TERMINATION OF STOCK OPTIONS
3.1 Merback agrees to resign, effective June 4, 1999, from his position as a
director of the Company.
3.2 Upon Registration of the Shares, Merback agrees to immediately resign from
all other positions held by him with the Company and its subsidiaries (the
"Resignations").
3.3 Merback acknowledges and agrees that all remuneration and compensation
payable to him by the Company and its subsidiaries will be suspended immediately
upon issuance of the Shares.
3.4 Merback acknowledges and consents to the immediate cancellation of any and
all incentive stock options (the "Options") he may hold in the capital of any of
the Company or its subsidiaries.
3.5 Merback hereby appoints the President of the Company as his attorney with
power to execute any and all Resignations, upon the Registration, any documents
regarding cancellation of the Options and any other documents necessary to give
effect to this Agreement.
4. RELEASE OF THE COMPANY
4.1 Merback hereby agrees that, upon delivery to him of the Shares by the
Company in accordance with the provisions of this Agreement, all claims in
connection with the Services will be fully satisfied and extinguished and
Merback will remise, release and forever discharge the Company, its subsidiaries
and any of their respective directors, officers and employees from any and all
manner of actions, causes of action, suits, debts, sums of money, due accounts,
dues, bonds, covenants, contracts, claims, demands, damages, costs, expenses and
any and all legal obligations of any and every kind and nature whatsoever, at
law or in equity or under any statute, whether known or unknown, suspected or
unsuspected and which Merback had or may now have or which he hereafter may have
for or by reason of any matter, cause or thing and, in particular, but without
limitation, for or by reason of any matter, cause or thing which has been or may
be sustained in consequence of Merback's relationship with the Company and its
subsidiaries as a director, officer, consultant, agent, employee or shareholder
or pursuant to the Management Agreement.
4.2 Merback acknowledges that in making this Agreement he has been advised and
has had an opportunity to obtain independent legal advice, he has exercised his
own independent judgment and he has not been influenced to any extent whatsoever
by any representations, statements or conduct of any description whatever on the
part of any other parties to this Agreement.
4.3 The Company will continue to provide directors and officers liability
insurance for Merback, for the period for which he was a director of the Company
and Smartire USA Inc., for a minimum of five years.
<PAGE> 4
4
5. GENERAL
5.1 Except as herein otherwise provided, no subsequent alteration, amendment,
change or addition to this Agreement will be binding upon the parties hereto
unless reduced to writing and signed by the parties.
5.2 This Agreement will enure to the benefit of and be binding upon the parties
and their respective heirs, executors, administrators, successors, and assigns.
5.3 The parties will 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.
5.4 This Agreement will be governed by and construed in accordance with the law
of British Columbia.
5.5 Any notice required or permitted to be given under this Agreement will be in
writing and may be given by delivering, sending by electronic facsimile
transmission or other means of electronic communication capable of producing a
printed copy, or sending by prepaid registered mail posted in Canada and the
United States, the notice to the addresses set forth on the first page of this
agreement (or to such other address or facsimile number as any party may specify
by notice in writing to another party). Any notice delivered or sent by
electronic facsimile transmission or other means of electronic communication
capable of producing a printed copy on a business day will be deemed
conclusively to have been effectively given on the day the notice was delivered,
or the transmission was sent successfully, as the case may be. Any notice sent
by prepaid registered mail will be deemed conclusively to have been effectively
given on the third business day after posting; but if at the time of posting or
between the time of posting and the third business day thereafter there is a
strike, lockout, or other labour disturbance affecting postal service, then the
notice will not be effectively given until actually delivered.
5.6 Time is of the essence of this Agreement.
5.7 This Agreement may be executed in several counterparts, each of which will
be deemed to be an original and all of which will together constitute one and
the same instrument.
5.8 The provisions herein contained constitute the entire agreement between the
parties and supersede all previous understandings, communications,
representations and agreements, whether written or verbal, between the parties
with respect to the subject matter of this Agreement.
5.9 In this Agreement, wherever the singular or masculine is used the same will
be deemed to include the plural, feminine or body politic or corporate and also
the successors and assigns of the parties hereto and each of them where the
context of the parties so require.
<PAGE> 5
5
IN WITNESS WHEREOF the parties hereto have executed this Agreement as of the day
and year first above written.
SMARTIRE SYSTEMS INC.
Per: /s/ ROBERT RUDMAN
---------------------------
Authorized Signatory
EXECUTED by JOSEPH MERBACK in the presence of: )
)
- -------------------------------------- )
Signature )
)
WILLIAM A. PAGE )
- -------------------------------------- )
Print Name ) /s/ JOSEPH MERBACK
) --------------------------
31 EATON PLACE ) JOSEPH MERBACK
LONDON SWIX 8BP ENGLAND )
- -------------------------------------- )
Address )
- -------------------------------------- )
)
BUSINESSMAN )
- -------------------------------------- )
Occupation )
<PAGE> 1
EXHIBIT 11.1
SMARTIRE SYSTEMS INC.
COMPUTATION OF LOSS PER SHARE
The Company's financial statements have been prepared in accordance with
Canadian Generally Accepted Accounting Principles ("GAAP"). A reconciliation of
financial statement amounts from Canadian GAAP to United States GAAP has been
provided in the consolidated financial statements.
<TABLE>
<CAPTION>
Year Ended Year Ended
July 31, 1999 July 31, 1998
------------- -------------
($000's except per share data)
<S> <C> <C>
Net loss in accordance with
United States GAAP (17,089) $ (7,099)
============ ============
Weighted average number
of common shares 10,192,024 5,815,970
============ ============
Basic loss per share in accordance
with United States GAAP $ (1.68) $ (1.22)
============ ============
</TABLE>
The stock options and warrants outstanding are anti-dilutive. Accordingly,
diluted loss per share does not differ from basic loss per share for the years
presented herein.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S ANNUAL REPORT ON
FORM 10-KSB FOR THE YEAR ENDED JULY 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CURRENCY> CANADIAN DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> JUL-31-1999
<EXCHANGE-RATE> 1.51
<CASH> 422,982
<SECURITIES> 2,062,013
<RECEIVABLES> 1,104,456
<ALLOWANCES> 0
<INVENTORY> 225,514
<CURRENT-ASSETS> 3,943,953
<PP&E> 930,267
<DEPRECIATION> (406,786)
<TOTAL-ASSETS> 4,467,434
<CURRENT-LIABILITIES> 1,892,503
<BONDS> 0
0
0
<COMMON> 41,061,155
<OTHER-SE> (38,486,224)
<TOTAL-LIABILITY-AND-EQUITY> 4,467,434
<SALES> 2,677,935
<TOTAL-REVENUES> 2,677,935
<CGS> 2,184,048
<TOTAL-COSTS> 17,680,135
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (17,186,248)
<INCOME-TAX> 0
<INCOME-CONTINUING> (17,186,248)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,186,248)
<EPS-BASIC> (1.69)
<EPS-DILUTED> (1.69)
</TABLE>
