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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED JULY 31, 2000
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO ____________
COMMISSION FILE NUMBER 0-29248
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SMARTIRE SYSTEMS INC.
(Name of small business issuer in its charter)
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BRITISH COLUMBIA N/A
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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#150 - 13151 VANIER PLACE
RICHMOND, BRITISH COLUMBIA, CANADA V6V 2J1
(Address of principal executive offices) (Zip Code)
604-276-9884
(Issuer's telephone number)
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: $ 1,100,821
(Canadian dollars)
At September 30, 2000, 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$45,918,000.
The number of shares outstanding of the Company's common stock at
September 30, 2000 was 14,506,297.
Transitional Small Business Disclosure Format (check one):
[ ] Yes [X] No
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INDEX Number
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PART I
Item 1. Description of Business .....................................................2
Item 2. Description of Property.....................................................18
Item 3. Legal Proceedings...........................................................18
Item 4. Submission of Matters to a Vote of Security Holders.........................18
PART II
Item 5. Market for Common Equity and Related Stockholder Matters....................18
Item 6. Management's Discussion and Analysis or Plan of Operation...................19
Item 7. Financial Statements........................................................24
Item 8. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure....................................................24
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act........................... 24
Item 10. Executive Compensation......................................................27
Item 11. Security Ownership of Certain Beneficial Owners
and Management........................................................32
Item 12. Certain Relationships and Related Transactions..............................33
Item 13. Exhibits and Reports on Form 8-K............................................34
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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 COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN THE FORWARD-LOOKING
STATEMENTS, INCLUDING THOSE DESCRIBED IN "RISK FACTORS" IN THIS FORM 10-KSB. THE
COMPANY ASSUMES NO OBLIGATIONS TO UPDATE THESE FORWARD-LOOKING STATEMENTS TO
REFLECT ACTUAL RESULTS, CHANGES IN ASSUMPTIONS, OR CHANGES IN OTHER FACTORS,
EXCEPT AS REGULATED BY LAW.
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 designed for improved vehicle safety, performance,
reliability and fuel efficiency. During the fiscal year ended July 31, 2000, the
Company earned revenues primarily from the sale of tire monitoring systems 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
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Company, conforms in all material respects for the periods presented with United
States GAAP except as indicated in note 14 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.
BUSINESS OF THE COMPANY
OVERVIEW
The Company, in conjunction with its strategic partners, is focused on
developing and marketing technically advanced tire monitoring systems in
response to an increasing demand from the transportation industry for improved
vehicle safety, performance, reliability and fuel efficiency. After developing
its proprietary tire monitoring technology for application in the industrial and
commercial vehicle markets plus a specialized tire monitoring system for
motorsports, the Company turned to developing its technology for use by the
automotive industry to address the escalating demand for passenger car tire
monitoring systems. In support of the tire industry's introduction of the
innovative run-flat or extended mobility tire, the Company developed the
SmarTire(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 tire monitoring systems,
including new passenger and commercial tire monitoring systems. The Company is
also working on the development of new technologies for tire monitoring systems.
The Company is promoting the SmarTire(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. The
Company's alliance partner, TRW Inc., is marketing tire monitoring systems to
the original equipment vehicle manufacturers.
STRATEGIC RELATIONSHIPS
The Company's strategy includes the establishment of alliances to assist in the
development of its products and technologies. Key strategic alliances include:
(a) TRW Inc.
Four agreements with this tier one supplier of automotive products
(b) Sensonor ASA
A supply agreement for an Application Specific Integrated Sensor
("ASIS") used in tire monitoring applications
(c) Alligator Ventilfabrik GmbH
A development agreement for valve stem designs and tire monitoring
electronic packaging
(d) Transense Technologies plc
A license agreement to develop and market Surface Acoustic Wave
("SAW") technology for use in future tire monitoring systems.
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TRW SMARTIRE ALLIANCE
During the last half of 1997, the Company 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. 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 a warrant
to purchase an additional share of common stock at an exercisable
price of $4.60. These warrants expired unexercised on April 20, 2000.
(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
The Company has granted TRW a 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
tire monitoring systems and components sold by TRW to a specified
customer for use on vehicles for model years 2000 through 2003
inclusive, and covered by a claim of a 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 tire monitoring systems for passenger cars,
motorsports, commercial vehicles and off-road industrial equipment. Key benefits
of tire monitoring systems include:
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(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.
(d) Protection
Low tire pressure can result in damage to wheels and tires. Tire
monitoring can help protect expensive wheels and tires.
The passenger car tire monitoring system incorporates patented technology to
monitor the pressure and temperature in each tire on the car and sends 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 receiver located near the driver. There are no external wires or
connections, minimizing system maintenance. Tire information is transmitted via
radio frequency from the wheel to the receiver.
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.
In the event of pressure loss, the driver is alerted by the receiver. If further
pressure loss is detected, another visible warning is provided along with an
audible warning. The system also monitors tire temperature. Depending on the
receiver configuration purchased by the driver, temperature warnings and
detailed tire pressure and temperature information can be monitored.
An earlier version of the passenger car tire monitoring system 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
2000 model year but have been continued into the 2001 model year. The Company
has no contract in place with Ford. Ford issues purchase orders for the
manufacture of tire monitoring systems 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 tire monitoring system on the
Lincoln Continental.
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The Company's first generation tire monitoring system 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 tire monitoring system is required with the
purchase of each set. Otherwise the operator may unknowingly drive on the tire
until it fails or is no longer repairable. Tire monitoring systems for both
run-flat and conventional tires are distributed primarily through independent
tire dealers and distributors and automobile service centers.
The Company is nearing completion of its second generation of SmarTire(TM)
systems. The second generation product incorporates a custom ASIS. The ASIS will
increase the features and functions of the transmitter while reducing the size
and cost of each transmitter. The Company is developing two types of
transmitters for installation inside the tire on the wheel. One type of
transmitter is mounted using a strap on the wheel's drop-center well, while the
other type of transmitter is mounted on a special valve on the tire. The
receiver / display has a modular design that incorporates a basic display to
provide early warning. A full function display to monitor all tire data for up
to 20 wheel positions is also available. The display can also be customized in
conjunction with vehicle manufacturers and importers for the Company's Car
Accessory Programs ("CAPS"). The second generation products have entered the
final phase of design and validation testing. The products will be available for
release into production upon completion of the testing process.
The Company is also developing a commercial vehicle tire monitoring system which
incorporates patented technology to monitor tire pressures and temperatures in a
wide variety of on-highway applications, including commercial vehicles and
transit buses. This system builds on the technology developed for the passenger
car tire monitoring system. The commercial vehicle tire monitoring system
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 is being 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 tire monitoring system 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
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motorsport tire monitoring system is used to correctly set cold tire pressures
in order to avoid over-inflated tires. The motorsport tire monitoring system 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 tire monitoring systems will build upon
this distribution network. In addition, part of the Company's passenger car tire
monitoring systems strategy is to market through 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 tire
monitoring systems as accessories for new cars. The Company's tire monitoring
systems 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.
COMPETITION
As a whole, the tire monitoring industry is still in the early stages. A few
competitive tire monitoring systems are under development but only one has been
introduced to the automotive aftermarket.
WIRELESS TIRE PRESSURE MONITORING SYSTEMS
Wireless systems provide universal suitability over the full range of vehicle
applications; motorcycle, passenger vehicle, light truck, medium truck, off the
road ("OTR") and aircraft. Installation of the tire sensing components normally
does not require wheel modification and the monitoring system can be easily and
quickly installed onto both new and existing vehicles. This universality
provides suitability to a significant potential market, which can be expected to
yield the necessary volume of sales for minimizing manufacturing costs. The
development of low cost high capacity batteries together with efficient power
management components and techniques can provide well-designed wireless sensor
modules with battery life expectancy in the order of ten years.
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Advantages of wireless tire monitoring systems include:
~ Universality - can be marketed at both OEM and aftermarket levels
~ Ease of Installation - install sensor modules and power up display
module
~ Low Installation Cost - less than 1/2 hour of extra time required
for tire changing
~ Accuracy - measurement of actual pressure and temperature values
~ Protection - sensor modules can be located within the tire/wheel
assembly.
SmarTire's competitors with respect to wireless tire monitoring systems include
the following:
Schrader Bridgeport - Schrader is currently the only significant competitor to
SmarTire. Schrader, a 150-year-old company, claims to be the world's largest
producer of tire valves and tire-pressure measurement equipment. The tire
monitoring system developed by Schrader has been used on Corvettes since late
1996. The Schrader tire monitoring system is also used on the Plymouth Prowler.
The product is being aggressively marketed at the OEM level.
Unlike the SmarTire(TM) monitoring system, Schrader's system conveys only
pressure values and has non-adjustable alert settings. Schrader's one-piece
sensors attach to a wheel's valve stem hole either with a nut or snap-in rubber
valve.
Schrader has introduced its Smart Valve(TM) system to the aftermarket. Goodyear
and Michelin have indicated a preference for this new Schrader tire monitoring
system for their run-flat tires as opposed to SmarTire's first generation tire
monitoring system. This is a result of a perceived installation advantage the
Schrader product enjoys. The transmitters are part of the valve stem (inside the
tire / wheel assembly) and the receiver is incorporated into the keyless entry
system. The OEM dash display provides pressure values and location.
Doduco - Doduco has been acquired by a French company, BERU. Doduco was
contracted by a consortium of the five German vehicle manufacturers. It is
understood that the system makes use of transmitters attached to the valve stem
(inside the tire / wheel assembly), receiving antennas at each of the wheel
wells, wiring harness for conveying data to the receiver and a form of in-dash
display. This system has been developed for the OEM market only.
EXTERNAL "WIRELESS" WARNING SYSTEMS
The most common external "wireless" warning systems utilizes transmitters that
attach externally, directly to the valve stem, and a receiver that displays a
low-pressure warning for a specific tire location. The transmitters are supplied
with factory set threshold values.
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Advantages of an external "wireless" warning system include:
~ Ease of transmitter installation;
~ Ease of transmitter servicing (if replacement necessary);
~ Transmitters can be relocated when tire locations are altered
(rotated);
~ Ease of inspection and verification of transmitter operation;
~ Wireless transmission activates low pressure warning (no wiring
harness);
~ Low system cost;
~ Low installation cost;
~ System can be easily transferred to another vehicle;
~ Basic display (warning and location only).
SmarTire's competitors with respect to external "wireless" warning systems are:
Fleet Specialties Co. (Tire Sentry) - Fleet Specialties Co. is presently selling
systems primarily into the recreational vehicle market. Transmitters are
specific to each wheel location and are factory programmed to emit a signal
(which activates an alarm) when tire pressure decreases to the threshold level.
The transmitters attach to the treaded end of a tire valve and must be removed
when checking or correcting tire inflation pressures.
Advantage Enterprises Inc. (Tire Mate) - The Tire Mate product is also an
external tire monitoring system originally designed for the R.V. industry.
Advantage is a U.S. marketing and distribution company which intends to contract
an engineering firm to develop a new system having pressure transmission
capability. An exclusive agreement is in effect with SmarTire to market the
system when it is fully qualified for the markets, although the agreement is
subject to a number of conditions.
All-Tech S.R.L. - This Italian company has an external commercial product and
internal valve stem based and external car tire monitoring system in production.
ABS (TIRE REVOLUTION COMPARISON) LOW PRESSURE WARNING SYSTEM
Some ABS equipped passenger cars have the ability to detect low tire pressure
situations by comparing the variation in accumulated revolutions at each of the
tire locations. Since tire revolutions per mile increase proportionately with
pressure loss the software controlling this detection system must eliminate the
variations due to curves, turns, etc. prior to being able to identify a
substantially under inflated tire. This process normally takes place over
substantial driving distances and can be masked by irregular tire wear and
pressures, driving habits or road surface conditions.
The principal advantages of ABS low pressure warning systems are their low cost
and that there are no sensing components to be mounted to the wheel. These
systems, however, can only be installed at the OEM level and are not practical
for the aftermarket installations. In addition, the tire type, size and tread
wear must be consistent for best performance. Substantial pressure loss is
required before the system responds and the systems are not suitable for
detecting pressure loss in run flat tires since the shape of the tire, hence the
number of rotations, does not change substantially with small pressure changes,
or as a preventative maintenance tool for inflation pressures.
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SmarTire's only two competitors with an ABS low pressure warning system are
Delco and Dunlop. Delco has acquired a tire deflation warning system that is
tied in with ABS brakes. The system is based on measuring the relative number of
rotations of each wheel. When the tire deflates, the wheel with the deflated
tire must rotate at a faster rate than the other wheels. When the wheel spins
more rapidly, the ABS sensors identify the increased number of rotations. The
deflation warning system notes this change and begins an extensive process of
eliminating every other reason for the increased rotation. Once tire deflation
has been determined, the driver is notified by an alarm. Tire pressure must drop
at least 8 psi before the deflation is sensed. Delco's system is available on
some General Motors products.
INDUCTIVELY COUPLED TIRE MONITOR SYSTEM
Pressure sensing components are attached to modified wheels in an area where
they pass (when the vehicle is in motion) in close proximity to scanning devices
located on the vehicle's suspension components. This type of pressure monitoring
system can only be economically installed at the OEM stage since special wheels,
suspension attachment points and wiring harness installation and protection are
required. The inductive link components and wiring harness of this device are
exposed to brake heat, dirt, moisture, vibration and shock; and servicing this
type of system is costly since a mechanic is required.
The primary advantages of inductively coupled tire monitoring systems are:
~ Eliminates requirements for power on rotating components
~ Eliminates reprogramming of sensor location when tire/wheel
assemblies are relocated
~ Can provide actual pressure and temperature values.
The principal disadvantages of the system are that they require special wheel
modification (additional hole); the inductive link units must be accurately
positioned to each other and avoid brake and suspension components; and
calibration is required after each component movement. Accordingly, they are not
readily suitable for aftermarket installation, and the inductive link and wiring
harness are exposed to the elements and potential damage. These systems are not
suitable for use on dual wheel axles or medium truck applications.
Competitors with this type of system are:
SSI Technologies Inc. - SSI is actively promoting concept with North American
OEMs (especially Chrysler) but no approvals or supply contracts have been
obtained to this date.
Continental Automotive Systems - Described conceptual device promotional
brochure but no prototype units have been seen as of this date.
In the European market, no direct competitor has yet arisen with respect to
providing aftermarket tire monitoring system products. While Schrader is
introducing its product in North America, the Company believes that Schrader's
product has not yet received the necessary approvals to be sold in any European
country.
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COMMERCIAL VEHICLE TIRE MONITORING SYSTEMS
The major tire companies are developing or are ready to launch medium truck
tires incorporating electronic chips in the sidewall to provide tire tracking
information possibly including pressure, temperature and identification. Their
disadvantage is their inability to provide real-time, dynamic values to the
driver, which eliminates any early warning capability while operating. Further,
it seems that there are no additional functions that can be programmed into
these static systems, limiting their integration into other fleet management
programs.
Currently, Eaton-Dana Corporation is the only company marketing a directly
competitive product into the commercial vehicle market and they appear to be
primarily directing this effort toward the OEMs. Commercial vehicles require a
sophisticated product with features such as the ability to change trailers and
identify specific tires.
Bridgestone/Firestone is developing a passive transponder tire monitor system.
This device consists of a sensing component built into or attached to the
interior of a tire. To date, there are no systems that have been able to endure
the tire manufacturing process and provide reliable performance. These devices
are being considered for off-vehicle pressure monitoring and have not been
demonstrated to be compatible to delivering pressure-monitoring capability as an
on-board system.
Advantages of passive transponder tire monitoring systems are that they are
built into the tire and therefore present no mounting difficulty, and there is
no power requirement on the tire/wheel assembly. Disadvantages include that they
have not been demonstrated to have on-board monitoring capability and a sensing
component malfunction would require tire replacement. The only competitor with
this type of system under development is Bridgestone/Firestone, which is active
in developing this technology for use in commercial vehicle and mining
application tires.
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. Goodyear and Bridgestone/Firestone have both completed some development
of such a computer chip.
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 tire monitoring
system. 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.
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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 tire
monitoring systems will be sold. For example, in the United States approval must
be received from the Federal Communications Commission for each product. 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 (a highly regarded independent testing company)
approval in Germany is considered necessary to market the Company's tire
monitoring system. 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 tire monitoring systems. As each new tire monitoring product is
introduced to the market, the Company will apply for necessary approvals for the
new products.
DEPENDENCE ON CERTAIN CUSTOMERS
Due to the early stage development of the market for tire monitoring systems in
general and for the Company's tire monitoring products, the Company is still
dependent on major customers. During the year ended July 31, 2000 the Company
earned 41% of its revenue from three major customers. One of these customers
accounted for 100% of sales of the OEM passenger car tire monitoring systems and
two customers accounted for 100% of sales of the motorsports tire monitoring
systems during fiscal year 2000.
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 data logging tire
monitor with condition predictive capabilities and integrity checking. It was
issued
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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 5,945,908 addresses the technology in data logging tire
monitor with condition predictive capabilities and integrity checking. It was
issued on August 31, 1999 and expires on August 31, 2016. 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 a license agreement 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 ("Transense") 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.
Under the agreement, the Company made an investment in Transense through the
issuance of 25,000 common shares of the Company valued at $55,445 plus cash of
$238,380 in exchange for 250,000 common shares and 250,000 share purchase
warrants of Transense. The Company exercised the warrants at the cost of
$1,153,950 and disposed of all of the Transense common shares for net cash
proceeds of $13,649,607. The Company recorded a gain on sale of investment of
$12,201,832 for the year ended July 31, 2000. The Company still retains its
rights under the license agreement with Transense.
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;
1999 - $8,739,092
2000 - $2,086,096
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 first 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
<PAGE> 15
14
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, 2000, the Company had 38 full-time employees and two part-time
employees. There is no collective bargaining agreement in place.
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, 2000, the Company has incurred aggregate losses
of approximately $35,200,000. The Company's loss from operations for the fiscal
year ended July 31, 2000 was $8,889,478. 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 believes that the
Company will have sufficient cash to fund its current and planned operations
through at least mid fiscal year 2002. 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.
<PAGE> 16
15
Uncertainty of Consumer Awareness of Tire Monitoring Systems
Tire monitoring systems are a new product and consumer awareness is in its early
stages. There can be no assurance that consumer awareness and demand for tire
monitoring systems 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, 2000, the Company earned 41% of its revenue from
three 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. One of these customers accounted for 100% of sales of the OEM
passenger car tire monitoring systems and two customers accounted for 100% of
sales of the motorsports tire monitoring systems during fiscal year 2000.
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 business and results of operations. Similarly, commitments
to purchase components and raw materials in excess of customer demand for the
Company's products could adversely affect the Company's results of operations.
Reliance on Contract Manufacturers
The Company contracts the manufacture of its products to third parties. In
certain cases, the Company does not have an alternative source of manufacturing,
and a suitable replacement would be time-consuming and expensive to obtain. If,
for any reason, one of the Company's third party manufacturers is unable or does
not produce the Company's products, the Company's 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
<PAGE> 17
16
as to implement the Company's proposed expansion plans. While certain levels of
financing will be required, in the event that the Company's plans change, there
are any delays in introducing new tire monitoring products or the Company's
financial position is adversely affected for any other reason, 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 the ability of
its management to successfully 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
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
<PAGE> 18
17
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 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.
Enforceability of Civil Liabilities Against the Company
Substantially all of the Company's assets are located outside the United States
and the Company does not currently maintain a permanent place of business within
the United States. In addition, a majority of the Company's directors and
officers are nationals and/or residents of countries other than the United
States, and all or a substantial portion of such persons' assets are located
outside the United States. As a result, it may be difficult for investors to
enforce within the United States any judgments obtained against the Company or
the Company's
<PAGE> 19
18
officers or directors, including judgments predicated upon the civil liability
provisions of the securities laws of the United States or any state thereof.
Dilutive Effect of Options and Warrants
As at July 31, 2000, there were options and warrants outstanding to purchase an
aggregate of 1,467,342 shares of the Company's common stock at an average price
of CDN $3.91 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.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases a 15,364 square foot facility at #150-13151 Vanier Place,
Richmond, British Columbia, V6V 2J1 for a five year term ending August 31, 2005.
This facility consists of an office and administration area, an engineering
department, a prototype production facility and a warehouse.
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.
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".
For periods prior to December 15, 1998, when the Company's common stock began
trading on the Nasdaq Small Cap Market, the table below lists the high and low
sales prices on the OTC Bulletin Board for the Company's common stock. The OTC
Bulletin Board quotations were compiled from Stockwatch and reflect inter-dealer
prices, without retail mark-up, mark-down or commission and
<PAGE> 20
19
may not represent actual transactions. For all periods since December 16, 1998
the table lists the high and low bid prices on the Nasdaq Small Cap Market for
the Company's common stock as compiled from NASDAQ - AMEX on-line.
<TABLE>
<CAPTION>
Period High Low
------ ---- ---
<S> <C> <C>
08/1/98 - 10/31/98 US$7.88 US$4.63
11/1/98 - 01/31/99 5.94 3.31
02/1/99 - 04/30/99 4.50 2.00
05/1/99 - 07/31/99 3.09 1.63
08/1/99 - 10/31/99 2.34 1.53
11/1/99 - 01/31/00 1.94 1.06
02/1/00 - 04/30/00 3.25 1.13
05/1/00 - 07/31/00 1.97 1.16
</TABLE>
The Company's common stock is issued in registered form. Pacific Corporate Trust
Company (located in Vancouver, British Columbia, Canada) is the registrar and
transfer agent for the Common Shares.
As of September 30, 2000 there were approximately 391 holders of record of the
Company's common stock.
The Company has never declared or paid dividends on its common stock and does
not anticipate that it will do so in the foreseeable future. The Company intends
to retain future earnings, if any, for use in its operations and the expansion
of its business.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion of the financial condition, changes in financial
condition and results of operations of the Company for the years ended July 31,
2000 and 1999 should be read in conjunction with the consolidated financial
statements of the Company and related notes included therein.
The Company's consolidated financial statements are in Canadian dollars (CDN$)
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 note 14 to the consolidated financial
statements of the Company included herein.
RESULTS OF OPERATIONS
Fiscal Year Ended July 31, 2000 vs. Fiscal Year Ended July 31, 1999
Gross revenue for the fiscal year ended July 31, 2000 was $1,100,821 compared to
$2,677,935 for the fiscal year ended July 31, 1999. Sales of aftermarket
<PAGE> 21
20
passenger car systems were $646,232 for the fiscal year ended July 31, 2000
compared to $1,823,897 in the previous fiscal year. Sales of the OEM passenger
car system decreased to $156,198 for the fiscal year ended July 31, 2000
compared to $440,101 in the previous fiscal year. Sales of motorsport tire
monitoring systems decreased to $298,391 for the year ended July 31, 2000 from
$388,312 in the previous fiscal year.
Sales of aftermarket passenger car systems decreased in fiscal 2000 due to lower
selling prices and lower sales volumes resulting from the liquidation of the
Company's first generation products. The Company experienced delays in the
development of its second generation products and there were no sales of this
product in the current year. These second generation products have entered the
final phase of design and testing. 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 on the Lincoln Continental were
expected to be discontinued at the end of the 2000 model year. Revenue is
dependent on sales by Ford and is difficult to predict. Motorsport tire
monitoring systems are sold through a distributor and are difficult to predict.
Gross margin increased from 18.4% for the fiscal year ended July 31, 1999 to
54.6% for the fiscal year ended July 31, 2000. The Company's profit margin on
passenger car systems increased in 2000 due to the reduction in the carrying
value of inventory in the 1999 fiscal year. The Company expects significant
decreases in gross margin in fiscal 2001 as the impact of the 1999 writedown has
been realized in fiscal 2000.
Expenses and other decreased to $9,490,160 for the fiscal year ended July 31,
2000 from $17,680,135 for the previous fiscal year. Included in expenses for
fiscal 2000 is $430,000 of costs associated with the closure of the Company's
office in Bourne, Massachusetts effective March 31, 2000. Of this amount,
approximately $360,000 relates to payments on termination of a management
agreement. These costs have been allocated on a departmental basis within the
financial statements.
Included in expenses for fiscal 1999 is a special charge to engineering,
research and development expense to reduce the recorded value of certain assets
to their estimated net realizable values. During 1999, the Company assessed the
future business prospects and sales for its existing tire monitoring products,
the forecasted sales levels and introduction of the Company's next generation of
tire pressure monitoring products. The Company's assessment 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 the pressure monitoring systems, resulting in a
charge of $7,280,299.
Marketing expenses decreased from $4,279,228 for the fiscal year ended July 31,
1999 to $3,029,695 for the fiscal year ended July 31, 2000. This reduction was
due to reduced advertising, promotion and market development costs. The 1999
expenses include advertising development, support materials and
<PAGE> 22
21
advertising placement costs for the SmarTire(TM) direct campaign in North
America. No such program was undertaken in fiscal 2000. Marketing costs are
expected to increase in fiscal 2001 due to the launch of the Company's new
products and attendance at Automechanika, which occurs every two years.
General and administrative expenses were $4,448,639 for the fiscal year ended
July 31, 2000 as compared to $4,171,275 for the fiscal year ended July 31, 1999.
Higher investor relations costs and professional fees more than offset a
reduction in filing fees and travel costs. These increased costs were the result
of a comprehensive investor relations and public relations program to
significantly increase corporate awareness throughout the automotive industry
and investor community in North America and Europe. General and administrative
expenses are not expected to increase significantly in fiscal 2001.
Engineering, research and development expenses were $2,086,096 for the fiscal
year ended July 31, 2000 compared to $1,458,793 (before special charges of
$7,280,299) for the fiscal year ended July 31, 1999. The increase was due to
increased expenditures for prototype development and testing for the Company's
next generation of tire pressure monitoring systems and increases in the number
of engineering staff and higher wage levels. Engineering, research and
development expenses are expected to increase in fiscal 2001.
Depreciation and amortization expenses decreased to $261,595 for the fiscal year
ended July 31, 2000 from $607,559 for the fiscal year ended July 31, 1999. The
reduction reflects the write-down of certain assets in the 1999 fiscal year.
The Company earned interest income of $312,405 for the fiscal year ended July
31, 2000 as compared to $275,776 for the fiscal year ended July 31, 1999. This
increase was due to higher average cash balances during the current fiscal year.
The Company recorded a gain on sale of investment of $12,201,832 for the year
ended July 31, 2000. During the current fiscal year, the Company made an
investment in Transense Technologies plc ("Transense") through the issuance of
25,000 common shares of the Company valued at $55,445 plus cash of $238,380 in
exchange for 250,000 common shares and 250,000 share purchase warrants of
Transense. The Company exercised the warrants at a cost of $1,153,950 and
disposed of all of the Transense common shares for net cash proceeds of
$13,649,607. The Company still retains its rights under the September 30, 1999
license agreement with Transense.
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
<PAGE> 23
22
year. Despite the increased sales, revenue was less than expected. Sales into
the run-flat and extended mobility tire market did not meet the expectations
shared with the Company by the tire manufacturers. In the Company's direct
marketing campaigns, consumers were slower to adopt tire monitoring than had
been anticipated primarily due to the fact that tire monitoring is still in its
infancy.
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 were extended through the
2000 model year. Revenue is dependent on sales by Ford and is difficult to
predict.
Sales of motorsports tire monitoring systems increased to $388,312 in the fiscal
year ended July 31, 1999 from $177,477 in the previous fiscal year. Motorsports
tire monitoring systems are sold through a distributor and revenues are
difficult to predict.
Sales of the industrial tire monitoring systems 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.
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.
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 North America including advertising
<PAGE> 24
23
development, support materials for the certified dealer installation network and
placement costs for advertising.
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.
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.
Based on the Company's assessment of the future business prospects for its tire
pressure monitoring products, the forecasted sales levels of the first
generation of tire monitoring systems, through to the introduction of the
Company's next generation of tire pressure monitoring systems, did 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 first generation of tire pressure monitoring
systems. As a result the Company recorded a special charge of $7,280,299 in the
third quarter of 1999 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 fiscal 1999.
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its activities primarily through the issuance and sale
of securities. The Company has incurred net losses in each year since inception
and, as of July 31, 2000, had an accumulated deficit of $35,173,870.
Shareholders' equity was $15,227,218 and the Company's working capital was
$14,308,049 at July 31, 2000.
<PAGE> 25
24
The Company's cash and short-term investments at July 31, 2000 were $14,512,558
as compared to $2,484,995 at July 31, 1999. This increase was due to the net of
the Company's operating, financing and investing activities described below.
The Company used $8,823,908 for operating activities during the fiscal year
ended July 31, 2000. The Company raised $9,251,477 from financing activities,
primarily through the issuance of 3,415,250 shares of common stock through
various private placements and from the exercise of stock options. The Company
used $657,283 for the purchase of capital assets and redeemed $2,062,013 of
short-term investments. The Company generated a net amount of $12,257,277 from
the purchase and sale of the investment in Transense Technologies plc.
As at July 31, 2000, the Company had commitments for payments under operating
leases, and service agreements for premises and certain equipment and consulting
of $1,729,000, as disclosed in note 12 to the Company's consolidated financial
statements contained elsewhere in this Form 10-KSB.
The Company has not experienced any difficulties as a result of the Year 2000
issue.
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.
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 55 Managing Director,
SmarTire (Europe) Limited
LAWRENCE BECERRA 48 Director
JOHN BOLEGOH 56 Technical Support Manager and
Director
KEVIN CARLSON 39 Chief Financial Officer,
General Manager, Corporate
Secretary and Director
SHAWN LAMMERS 33 Vice President, Engineering
BERNARD PINSKY 46 Director
ROBERT RUDMAN 53 President, Chairman and Chief
Executive Officer and Director
DANA STONEROOK 43 Director
</TABLE>
<PAGE> 26
25
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. 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.
<PAGE> 27
26
KEVIN CARLSON:
Mr. Carlson joined the Company as the Chief Financial Officer in
November 1998. Mr. Carlson is responsible for all of the Company's
financial and related functions including Finance, Treasury, Accounting,
Taxation, Legal, Management Information Systems and Administration.
Effective April 1, 2000 Mr. Carlson assumed the additional
responsibilities of General Manager and is responsible for all operating
activities of the Company's Richmond office. Prior to joining the
Company, Mr. Carlson was Chief Financial Officer of ID Biomedical
Corporation, 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.
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 tire monitoring system, the
commercial vehicle tire monitoring system and the industrial equipment
tire monitoring systems.
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 British Columbia Bar in 1980, and was admitted
to practice law in California in 1999. He 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 was appointed Chief Executive Officer of the Company on
January 19, 1996, and served as President from January 19, 1996 to June
4, 1999, when he was appointed Chairman of the Board. Mr. Rudman was
reappointed President of the Company effective April 1, 2000. 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
<PAGE> 28
27
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.
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 2000, six (6) individuals served as executive officers of the Company at
various times: Robert Rudman, Mark Desmarais, Kevin Carlson, Shawn Lammers, Gary
Schlachter and Ian Bateman. All except Mr. Lammers qualify as "Named Executive
Officers" as defined above.
<PAGE> 29
28
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
----------------------------------------------------------------------------------------------------------------
ANNUAL COMPENSATION LONG TERM COMPENSATION (1)
----------------------------------------------------------------------------------------------------------------
AWARDS PAYOUTS
----------------------------------------------------------------------------------------------------------------
NAME AND YEAR SALARY BONUS OTHER SECURITIES RESTRICTED LTIP ALL OTHER
PRINCIPAL POSITION ANNUAL UNDERLYING SHARES OR PAYOUTS COMPENSATION
COMPEN- OPTIONS/ RESTRICTED
SATION SARs SHARE
(1) GRANTED UNITS
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert Rudman 2000 $273,573 Nil Nil 17,500 Nil Nil 65,851(2)
President,
Chairman and 1999 $247,301 $90,000 Nil Nil Nil Nil Nil
Chief Executive
Officer 1998 $161,058 Nil $41,000(3) 220,000 Nil Nil Nil
----------------------------------------------------------------------------------------------------------------
Gary Schlachter 2000 $53,516 Nil Nil Nil Nil Nil 80,908(4)
Executive 1999 $142,695 Nil Nil Nil Nil Nil Nil
Vice-President
Sales and 1998 $118,250 $28,600 Nil Nil Nil Nil Nil
Marketing, SmarTire
USA Inc.
----------------------------------------------------------------------------------------------------------------
Mark Desmarais 2000 $168,080 Nil Nil 50,000 Nil Nil 368,562(5)
President and 1999 $81,244 $66,093(6) Nil 75,000 Nil Nil $66,667(6)
Chief Operating
Officer,
President and CEO
of SmarTire USA
Inc.
----------------------------------------------------------------------------------------------------------------
Ian Bateman(7) 2000 $158,287 Nil Nil 57,500 Nil Nil Nil
Managing Director 1999 $135,351 $37,032 Nil 10,000 Nil Nil Nil
SmarTire (Europe)
Limited
----------------------------------------------------------------------------------------------------------------
Kevin Carlson(8) 2000 $150,461 Nil Nil 60,000 Nil Nil $22,680
Chief Financial
Officer, General
Manager,
Corporate
Secretary and
Director
=================================================================================================================
</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) Amount relates to accumulated vacation pay paid to Mr. Rudman.
(3) Amounts relate to advisory fees paid to Mr. Rudman.
(4) Mr. Schlachter's employment was terminated effective December 24, 1999.
Pursuant to a separation agreement Mr. Schlachter was paid US$50,000
($CDN73,620) and paid accumulated vacation pay of US$4,950 (CDN$7,288).
(5) Mr. Desmarais' employment was terminated effective March 31, 2000. The
Company reimbursed Mr. Desmarais $US48,643 (CDN$71,622) for relocation
costs and paid accumulated vacation pay of $US13,197 (CDN$19,431).
Pursuant to a separation agreement, Mr. Desmarais was paid $US188,474
(CDN$277,509).
(6) 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.
(7) Mr. Bateman commenced employment with the Company on February 2, 1998.
(8) Mr. Carlson commenced employment with the Company on November 16, 1998.
Mr. Carlson was paid a signing bonus consisting of 10,000 shares of the
Company's common stock valued at $22,680.
The following table sets out the details of all stock options granted to the
Named Executive Officers during the most recently completed fiscal year:
<PAGE> 30
29
OPTION/SAR GRANTS IN THE LAST FISCAL YEAR
<TABLE>
<CAPTION>
----------------------------------------------------------------------
% OF
TOTAL
NUMBER OF OPTIONS/
SECURITIES SARs
UNDERLYING GRANTED
OPTIONS/ TO
SARs EMPLOYEES EXERCISE
GRANTED IN FISCAL PRICE EXPIRATION
NAME (#) YEAR ($/SHARE) DATE
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Robert Rudman(1) 17,500 2.6% US$2.98 April 7, 2005
---------------------------------------------------------------------
Gary Schlachter(2) - - - -
----------------------------------------------------------------------
Mark Desmarais(1)(3) 50,000 7.4% US$2.98 Expired during
2000
----------------------------------------------------------------------
Ian Bateman(1) 57,500 8.5% US$2.98 December 1,
2004 to
April 7, 2005
----------------------------------------------------------------------
Kevin Carlson(1) 60,000 8.9% US$2.98 December 1,
2004 to
April 7, 2005
----------------------------------------------------------------------
</TABLE>
(1) Average price of US$2.98 over term of options.
(2) Mr. Schlachter's employment was terminated effective December 24, 1999.
(3) Mr. Desmarais' employment was terminated effective March 31, 1999.
The following table sets out the details of all stock options exercised during
the most recently completed fiscal year by the Named Executive Officers.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR
VALUES
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
VALUE OF UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY
UNDERLYING UNEXERCISED OPTIONS/SARs AT FY-END
SHARES OPTIONS/SARs AT FY-END (#) ($)(1)
ACQUIRED
ON AGGREGATE
EXERCISE VALUE EXERCISABLE/
NAME (#) REALIZED UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
-----------------------------------------------------------------------------------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Robert Rudman Nil Nil 161,000 14,000 Nil Nil
Gary Schlachter(2) Nil Nil Nil Nil Nil Nil
Mark Desmarais(3) Nil Nil Nil Nil Nil Nil
Ian Bateman Nil Nil 41,500 46,000 Nil Nil
Kevin Carlson Nil Nil 32,000 78,000
----------------------------------------------------------------------------------------------------
</TABLE>
(1) The closing price of the Company's common stock on July 31, 2000 was US
$1.44 per share (CDN$2.14).
(2) Mr. Schlachter's employment was terminated effective December 24, 1999.
(3) Mr. Desmarais' employment was terminated effective March 31, 2000.
<PAGE> 31
30
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS
Effective August 1, 1999, 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
Cdn$273,000 per annum subject to increase as from time to time plus incentive
compensation as determined by the Company's incentive compensation plan.
The agreement with Mr. Rudman requires the Company to pay a termination
allowance in the event of the termination of Mr. Rudman's employment by the
Company except for just cause. The termination allowance is equal to the annual
salary.
Effective August 1, 1999, the Board of Directors of the Company approved a new
management agreement with Kevin Carlson, regarding his position with the
Company. The management agreement calls for payment of a base salary of
Cdn$140,000 per annum subject to increase as from time to time plus incentive
compensation as determined by the Company's incentive compensation plan.
Effective April 1, 2000 Mr. Carlson's salary was increased to Cdn $170,000 per
annum due to the assumption of General Manager responsibilities.
The agreement with Mr. Carlson requires the Company to pay a termination
allowance in the event of the termination of Mr. Carlson's employment by the
Company except for just cause. The termination allowance is equal to the annual
salary.
Effective August 1, 1999, the Board of Directors of the Company approved a new
management agreement with Ian Bateman, regarding his position with the Company.
The management agreement calls for payment of a base salary of pounds sterling
67,000 per annum subject to increase as from time to time plus incentive
compensation as determined by the Company's incentive compensation plan.
The agreement with Mr. Bateman requires the Company to pay a termination
allowance in the event of the termination of Mr. Bateman's employment by the
Company except for just cause. The termination allowance is equal to the annual
salary.
Effective August 1, 1999, the Board of Directors of the Company approved a new
management agreement with Shawn Lammers, regarding his position with the
Company. The management agreement calls for payment of a base salary of
Cdn$120,000 per annum subject to increase as from time to time plus incentive
compensation as determined by the Company's incentive compensation plan.
The agreement with Mr. Lammers requires the Company to pay a termination
allowance in the event of the termination of Mr. Lammers' employment by the
Company except for just cause. The termination allowance is equal to the annual
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 2000 to compensate such officers in the event
of termination of employment (as a result of resignation, retirement, change of
control)
<PAGE> 32
31
or a change of responsibilities following a change of control, where the value
of such compensation exceeds $100,000 per Named Executive Officer.
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
In November 1999, the Company adopted a formal incentive compensation plan (the
"EVA Plan") based upon an Economic Value Added ("EVA(TM)") model developed by
Stern, Stewart & Co., a global consulting firm. EVA essentially consists of
after-tax operating profits after accounting for the cost of capital employed to
create such profits. The EVA Plan establishes an incentive pool equal to 10% of
EVA improvement over the prior year plus 10% of positive EVA (if achieved) for
the year for which incentive awards are being considered. The first incentive
pool will be based on the audited consolidated financial statements of the
Company for the financial year ended July 31, 2000. There are no incentive
awards for fiscal 2000 based on the audited consolidated financial statements.
Incentive awards for directors, executive directors and employees will be
determined with reference to the incentive pool at the discretion of the Board
of Directors, in consultation of the Compensation Committee. Incentive awards
equal to not more than one-third of the amount of the incentive pool will be
distributed to eligible participants in each of three years. If EVA
deteriorates, adjustments will be made to the to the incentive pool.
Directors and executive officers have received from time to time incentive stock
options to purchase Common Shares as awarded by the Board of Directors in
consultation with 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. Other than indicated below, no
director received and/or accrued any compensation for his services as a
director, including committee participation and/or special assignments.
There are no arrangements or plans in which the Company provides pension,
retirement or similar benefits for directors or executive officers.
The Company has adopted two formal stock incentive plans (collectively, the
"Stock Incentive Plans") which were approved by the Shareholders at the 1998
Annual General Meeting of the Company. One of the Stock Incentive Plans (the
"1998 US Stock Incentive Plan") provides for Awards to Eligible Employees of
the Company or of any Related Entity who are resident in the United States
and/or subject to taxation in the United States; the other (the "1998 Stock
Incentive Plan") provides for Awards to all other Eligible Employees of the
Company of any Related Entity.
To date, the Company has granted to directors, officers, employees and
consultants incentive stock options to purchase Common Shares subject to and in
accordance with the prevailing policies of the stock exchange on which the
Company's shares were then listed. Options are granted based on the assessment
by the Company's Board of Directors and/or Compensation Committee of the
optionee's past and present contribution to the success of the Company. The
Company's Common Shares are presently listed for trading on the Nasdaq Small
Cap Market. These options are not transferable and are exercisable from the
date granted until the earliest of (i) such number of years (up to ten years)
from the date of the grant, (ii) 30 days after the option holder leaves his
position with the Company, and (iii) such number of days following the death of
the optionee as is specified in each optionee's option agreement.
<PAGE> 33
32
Other than the EVA Plan, the management agreements, the advisory agreements and
the 1998 Stock Incentive Plans 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.
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, 2000, there were
14,506,297 issued and outstanding shares of common stock and no issued or
outstanding shares of preferred stock.
Since the Company is a "foreign private issuer", its insiders are exempt from
the reporting requirements of Sections 16(a) of the United States Securities
Exchange Act of 1934, as amended (the "1934 Act"). Among other things, Section
16(a) of the 1934 Act requires certain "reporting persons" of any issuer with
any class of equity securities registered under Section 12 of the 1934 Act to
file with the United States Securities and Exchange Commission reports of
ownership and changes in ownership of securities of the registered class.
Reporting persons consist of directors, executive officers and beneficial owners
of more than 10% of the securities of the registered class. The Company is aware
that certain persons who would be subject to such reporting requirements, but
for the fact that the Company is a "foreign private issuer", have voluntarily
filed reports under Section 16(a) of the 1934 Act during the year ended July 31,
2000. However, the Company is not in a position to comment on the completeness
of such filings.
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>
------------------------------------------------------------------------------------------
AMOUNT AND NATURE
NAME AND ADDRESS OF OF BENEFICIAL
TITLE OF CLASS BENEFICIAL OWNER OWNERSHIP (2) PERCENT OF CLASS
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock Simon Archdale 2,340,000 16.1%
Chalet Trois Nicholas
Courtavey, Crans
Montana
Valais Switzerland
------------------------------------------------------------------------------ -----------
Common Stock TRW Inc. 900,000 6.2%
1900 Richmond Rd.
Cleveland, OH
44124
------------------------------------------------------------------------------------------
</TABLE>
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, 2000 (excluding
shares which such persons have the right to acquire within 60 days of September
30, 2000 but do
<PAGE> 34
33
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, 2000 but does
not actually own, (iii) the total number of shares of common stock which each of
such persons owns as of September 30, 2000 and has the right to acquire within
60 days of September 30, 2000, and the percent of class.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
Name Total Number of Shares Percent of Class
Beneficially Owned
-----------------------------------------------------------------------------------------
Directors:
-----------------------------------------------------------------------------------------
<S> <C> <C>
Lawrence Becerra (1) 162,303 1.12%
-----------------------------------------------------------------------------------------
John Bolegoh (2) 91,604 0.63%
-----------------------------------------------------------------------------------------
Kevin Carlson (3) 42,570 0.29%
-----------------------------------------------------------------------------------------
Bernard Pinsky (4) 40,000 0.28%
-----------------------------------------------------------------------------------------
Robert Rudman (5) 207,024 1.43%
-----------------------------------------------------------------------------------------
Dana Stonerook Nil Nil
-----------------------------------------------------------------------------------------
Named Executive Officers who are
not Directors or Nominees
-----------------------------------------------------------------------------------------
Ian Bateman (6) 41,500 0.29%
-----------------------------------------------------------------------------------------
Shawn Lammers (7) 35,019 0.24%
-----------------------------------------------------------------------------------------
Total Directors / Executive
Officers 620,020 4.27%
(8 persons)
-----------------------------------------------------------------------------------------
</TABLE>
(1) Mr. Becerra has incentive stock options for the right to purchase up to an
aggregate of 55,000 shares of common stock and warrants for the right to
purchase up to an aggregate of 28,803 shares of common stock. The options
and warrants are immediately exercisable.
(2) Includes 47,080 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 110,000 shares of common stock. The options vest over time
and currently 32,000 options are immediately exercisable.
(4) Mr. Pinsky has incentive stock options for the right to purchase an
aggregate of 40,000 shares of common stock. The options are immediately
exercisable.
(5) Mr. Rudman has incentive stock options for the right to purchase 175,000
shares of common stock. The options vest over time and currently 161,000
options are immediately exercisable.
(6) Mr. Bateman has incentive stock options for the right to purchase 87,500
shares of common stock. The options vest over time and currently 41,500
options are immediately exercisable.
(7) Mr. Lammers has incentive stock options for the right to purchase 87,500
shares of common stock. The options vest over time and currently 33,500
options are immediately exercisable.
(8) Based on beneficial shares owned, directly or indirectly, or over which
control or direction is exercised at September 30, 2000. The issued and
outstanding Common Shares of the Company at September 30, 2000 were
14,506,297.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Becerra is a principal of West Sussex Trading Inc. During the year ended
July 31, 2000 the Company paid $470,191 for consulting services and financing
fees on the private sale of its common stock and issued 86,409 share purchase
warrants at an exercise price of US$2.00, expiring at dates ranging from October
15, 2002 to March 31, 2003, for financing services to West Sussex Trading Inc.
Mr. Pinsky is a partner of Clark, Wilson. During the year ended July 31, 2000
the Company paid $149,485 to Clark, Wilson for legal services.
<PAGE> 35
34
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
Consolidated Financial Statements. See "Index" on Page F-1
Auditor's Report, dated September 13, 2000;
Consolidated Balance Sheets at July 31, 2000 and July 31, 1999;
Consolidated Statements of Income (Loss) and Deficit for the Years
Ended July 31, 2000 and July 31, 1999;
Consolidated Statements of Cash Flows for the Years Ended July 31,
2000 and July 31, 1999;
Notes to Consolidated Financial Statements.
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)
Exhibits. See "Exhibit Index"
(b) Reports on form 8-K. None
<PAGE> 36
35
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 27, 2000
By: /s/ ROBERT V. RUDMAN
----------------------------------
Robert V. Rudman, CA
President, 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 27, 2000:
<TABLE>
<CAPTION>
NAME TITLES
---- ------
<S> <C>
/s/ ROBERT V. RUDMAN Director, President, Chairman and
--------------------------------------------- Chief Executive Officer
Robert V. Rudman (Principal Executive Officer)
/s/ JOHN I. BOLEGOH Director, and Technical Services
-------------------------------------------- Manager
John I. Bolegoh
/s/ KEVIN A. CARLSON Director, Chief Financial Officer,
--------------------------------------------- General Manager and Corporate
Kevin A. Carlson Secretary (Principal Financial Officer and
Principal Accounting Officer)
/s/ BERNARD PINSKY Director
---------------------------------------------
Bernard Pinsky
</TABLE>
<PAGE> 37
SMARTIRE SYSTEMS INC.
Consolidated Financial Statements
Years ended July 31, 2000 and 1999
<PAGE> 38
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> 39
AUDITORS' REPORT TO THE SHAREHOLDERS
We have audited the consolidated balance sheets of SmarTire Systems Inc. as at
July 31, 2000 and 1999 and the consolidated statements of income (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 Canadian 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, 2000 and
1999 and the results of its operations and its cash flows for the years then
ended in accordance with Canadian generally accepted accounting principles. As
required by the Company Act (British Columbia), we report that, in our opinion,
these principles have been applied, after giving retroactive effect to the
change in accounting for income taxes as described in note 3 to the consolidated
financial statements, on a consistent basis.
Canadian generally accepted accounting principles differ in certain significant
respects from accounting principles generally accepted in the United States. The
application of United States accounting principles to these financial statements
would have affected net income (loss) and amounts reported in the consolidated
balance sheet to the extent summarized in Note 14.
KPMG LLP
Chartered Accountants
Vancouver, Canada
September 13, 2000
<PAGE> 40
SMARTIRE SYSTEMS INC.
Consolidated Balance Sheets
(Expressed in Canadian Dollars)
July 31, 2000 and 1999
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
2000 1999
---------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 14,512,558 $ 422,982
Short-term investments - 2,062,013
Receivables 114,278 1,104,456
Inventory (note 4) 265,190 225,514
Prepaid expenses 155,178 128,988
---------------------------------------------------------------------------------------
15,047,204 3,943,953
Capital assets (note 5) 919,169 523,481
---------------------------------------------------------------------------------------
$ 15,966,373 $ 4,467,434
=======================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 739,155 $ 1,892,503
Shareholders' equity:
Share capital (note 8) 47,980,411 38,640,478
Contributed surplus (note 8(b)(ii)) 2,420,677 -
Equity component of warrants (note 8(b)(ii)) - 2,420,677
Deficit (35,173,870) (38,486,224)
---------------------------------------------------------------------------------------
15,227,218 2,574,931
Commitments and contingencies (note 12)
---------------------------------------------------------------------------------------
$ 15,966,373 $ 4,467,434
=======================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
On behalf of the Board:
/s/ ROBERT RUDMAN Director /s/ BERNARD PINSKY Director
------------------ ------------------
<PAGE> 41
SMARTIRE SYSTEMS INC.
Consolidated Statements of Income (Loss) and Deficit
(Expressed in Canadian Dollars)
Years ended July 31, 2000 and 1999
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
2000 1999
---------------------------------------------------------------------------------------
<S> <C> <C>
Revenue $ 1,100,821 $ 2,677,935
Cost of goods sold 500,139 2,184,048
---------------------------------------------------------------------------------------
600,682 493,887
Expenses and other:
Marketing 3,029,695 4,279,228
General and administrative 4,448,639 4,171,275
Engineering, research and development (note 6) 2,086,096 8,739,092
Depreciation and amortization 261,595 607,559
Foreign exchange loss (gain) (23,460) 158,757
Interest income (312,405) (275,776)
---------------------------------------------------------------------------------------
9,490,160 17,680,135
---------------------------------------------------------------------------------------
Net loss (8,889,478) (17,186,248)
Other income:
Gain on sale of investment (note 7) 12,201,832 -
---------------------------------------------------------------------------------------
Net income (loss) 3,312,354 (17,186,248)
Deficit, beginning of year (38,486,224) (21,299,976)
---------------------------------------------------------------------------------------
Deficit, end of year $ (35,173,870) $ (38,486,224)
=======================================================================================
Basic and diluted income (loss) per share $ 0.25 $ (1.69)
=======================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 42
SMARTIRE SYSTEMS INC.
Consolidated Statements of Cash Flows
(Expressed in Canadian Dollars)
Years ended July 31, 2000 and 1999
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
2000 1999
-------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash provided by (used in):
Operating activities:
Net income (loss) $ 3,312,354 $(17,186,248)
Items not affecting cash:
Depreciation and amortization 261,595 607,559
Remuneration in shares 33,011 311,777
Special charges in research and product development - 7,280,299
Gain on sale of investment (12,201,832) -
Changes in non-cash working capital:
Receivables 990,178 (377,263)
Inventory (39,676) (5,156,467)
Prepaid expenses (26,190) (22,031)
Supplier prepayments - 1,466,791
Accounts payable and accrued liabilities (1,153,348) 1,090,671
-------------------------------------------------------------------------------------------------------
Net cash used in operating activities (8,823,908) (11,984,912)
-------------------------------------------------------------------------------------------------------
Investing activities:
Purchase of capital assets (657,283) (305,726)
Purchase of investment (note 7) (1,392,330) -
Purchase of other assets - (7,750)
Purchase of short-term investments - (2,062,013)
Redemption of short-term investments 2,062,013 -
Net proceeds on sale of investment (note 7) 13,649,607 -
-------------------------------------------------------------------------------------------------------
Net cash from (used) in investing activities 13,662,007 (2,375,489)
-------------------------------------------------------------------------------------------------------
Financing activities
Issuance of common shares 9,251,477 6,065,125
-------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 14,089,576 (8,295,276)
Cash and cash equivalents, beginning of year 422,982 8,718,258
-------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 14,512,558 $ 422,982
=======================================================================================================
Supplementary information:
Interest paid $ 23,413 $ 11,101
Income taxes paid - -
Non-cash investing and financing activities:
Purchase of investment through issuance of common shares 55,445 -
Write-down of other assets - 383,542
Write-down of capital assets - 206,118
Conversion of the equity component of warrants to common
shares upon exercise or contributed surplus upon expiration 2,420,677 1,594,323
Remuneration in shares 33,011 311,777
=======================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 43
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements
(Expressed in Canadian Dollars)
Years ended July 31, 2000 and 1999
------------------------------------------------------------------------------
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 has incurred recurring operating losses and has a deficit of
$35,173,870 as at July 31, 2000. The Company will ultimately be required to
generate profitable operations in order 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 Canadian generally accepted
accounting principles and conform, in all material respects, with those
established in the United States except as explained in note 14.
(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. 1999
development expenses include the write-down of 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, 2000.
(c) Cash and cash equivalents:
Cash and cash equivalents includes investments in short-term investment
with a term to maturity when acquired 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> 44
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements, page 2
(Expressed in Canadian Dollars)
Years ended July 31, 2000 and 1999
------------------------------------------------------------------------------
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 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 lesser of their useful lives or the term of the
lease.
(g) Impairment of long-lived assets:
The Company monitors the recoverability of long-lived assets, including
capital 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, being the undiscounted expected future cash flows,
in the period when it is determined that the carrying amount of the
asset is not likely to be recovered.
(h) Revenue recognition:
The Company recognizes revenue from sales of products upon the later of
transfer of title or upon shipment of the product to the customer. The
Company records deferred revenue when cash is received in advance of the
revenue recognition criteria being met.
(i) Income (loss) per share:
Basic income (loss) per share computations are based on the weighted
average number of shares outstanding during the year. Fully diluted
earnings (loss) per share calculations assume the exercise of dilutive
outstanding stock options and warrants, effective on the later of their
respective dates of issue and the beginning of the period presented and
that the funds derived therefrom were invested at annual after-tax
interest rate of 5%.
<PAGE> 45
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements, page 3
(Expressed in Canadian Dollars)
Years ended July 31, 2000 and 1999
------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(j) Income taxes:
The Company follows the asset and liability method for accounting for
income taxes. Under this method, future income taxes are recognized for
the future income tax consequences attributable to differences between
the financial statement carrying values and their respective income tax
basis (temporary differences). The resulting changes in the net future
tax asset or liability are included in income. Future tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which temporary differences are expected
to be recovered or settled. The effect on future income tax assets and
liabilities of a change in tax rates is included in income in the period
that includes the substantial enactment date. Future income tax assets
are evaluated and if realization is not considered "more likely than
not", a valuation allowance is provided.
(k) Foreign currency translation:
The Company's functional or primary operating currency is the Canadian
dollar. Monetary items denominated in a 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.
(l) 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 and the net recoverable amount of
long-lived assets. Actual results may differ from those estimates.
(m) Stock-based compensation plans:
The Company has three stock-based compensation plans which are described
in note 8. No compensation expense is recognized when stock options are
issued pursuant to the plans. Consideration paid for shares on exercise
of the stock options is credited to share capital.
<PAGE> 46
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements, page 4
(Expressed in Canadian Dollars)
Years ended July 31, 2000 and 1999
------------------------------------------------------------------------------
3. CHANGE IN ACCOUNTING POLICY:
Beginning July 31, 2000, the Company adopted new recommendations of The
Canadian Institute of Chartered Accountants ("CICA") for the accounting for
income taxes. The new standard requires the use of the asset and liability
method for accounting for income taxes as described in Note 2(j).
Prior to adoption of this new accounting standard, income tax expense was
determined using the deferral method. Under this method, deferred income tax
expense was determined based on "timing differences" (differences between
the accounting and tax treatment of items of expense or income), and were
measured using the tax rates in effect in the year the differences
originated. Certain deferred tax assets, such as the benefit of tax losses
carried forward, were not recognized unless there was virtual certainty that
they would be realized.
The Company has adopted this standard retroactively and has not recognized
any future tax asset or liability in the current or prior periods.
Accordingly, the adoption of the new accounting standards does not result in
a restatement of the prior period financial statements.
4. INVENTORY:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
2000 1999
----------------------------------------------------------------------------------------------
<S> <C> <C>
Raw materials $ 239,852 $ -
Finished goods 25,338 225,514
----------------------------------------------------------------------------------------------
$ 265,190 $ 225,514
==============================================================================================
</TABLE>
During 1999, the Company wrote-down its inventory by $6,690,639 to reflect
its lower of cost and net realizable value as discussed in note 6.
5. CAPITAL ASSETS:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
2000 1999
------------------------------------ ------------------------------------
Accumulated Net Book Accumulated Net Book
Cost Depreciation Value Cost Depreciation Value
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Computers and software $ 509,052 $ 295,010 $ 214,042 $ 419,786 $ 214,531 $ 205,255
Office and shop equipment 941,430 312,205 629,225 380,392 166,175 214,217
Leasehold improvements 129,002 53,100 75,902 130,089 26,080 104,009
---------------------------------------------------------------------------------------------------------
$1,579,484 $ 660,315 $ 919,169 $ 930,267 $ 406,786 $ 523,481
=========================================================================================================
</TABLE>
During 1999 the Company recognized an impairment loss of $206,118 relating
to its production equipment as discussed in note 6.
<PAGE> 47
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements, page 5
(Expressed in Canadian Dollars)
Years ended July 31, 2000 and 1999
------------------------------------------------------------------------------
6. SPECIAL CHARGES - WRITE-DOWN OF INVENTORY AND IMPAIRMENT OF LONG-LIVED
ASSETS:
During the third quarter of 1999, the Company assessed the future business
prospects and sales for its existing tire pressure monitoring products, the
forecasted sales levels and the introduction of the Company's next
generation of tire pressure monitoring products. The Company's assessment
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. The Company recorded special charges of $7,280,299
during the third quarter of 1999 primarily to reduce the recorded value of
these assets to their estimated net realizable values.
7. GAIN ON SALE OF INVESTMENT:
During the current fiscal year the Company made an investment in Transense
Technologies plc ("Transense") through the issuance of 25,000 common shares
of the Company valued at $55,445, based on the market value of the Company's
stock at the date of investment, plus cash of $238,380 in exchange for
250,000 common shares and 250,000 share purchase warrants of Transense. The
Company exercised the Transense warrants at a cost of $1,153,950 and sold
all its Transense common shares for net cash proceeds of $13,649,607. The
Company still retains its rights under the license agreement with Transense.
Under the terms of the agreement, the Company has a worldwide non-exclusive
license to Transense's surface acoustic wave technology for certain tire
pressure monitoring applications.
<PAGE> 48
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements, page 6
(Expressed in Canadian Dollars)
Years ended July 31, 2000 and 1999
------------------------------------------------------------------------------
8. SHARE CAPITAL:
(a) Authorized:
(i) Common shares 199,818,749 without par value
(ii) Preferred shares 20,000 with par value of $1,000 per share
(b) The subscribed and issued share capital of the Company is as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
Common
Shares Amount
---------------------------------------------------------------------------------------------
<S> <C> <C>
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 6,008,745
Remuneration in shares (note 10) 110,000 311,777
Escrow shares cancelled during the year (note 8(b)(i)) (181,251) -
Conversion from equity component of warrants
(note 8(b)(ii)) - 1,594,323
---------------------------------------------------------------------------------------------
Balance at July 31, 1999 11,042,447 38,640,478
Cash (net of issuance costs of $748,029)
(note 8(b)(iii)) 3,415,250 9,246,794
Purchase of investment (note 7) 25,000 55,445
Exercise of stock options 1,600 4,683
Remuneration in shares (note 10(i)) 13,500 33,011
---------------------------------------------------------------------------------------------
Balance at July 31, 2000 14,497,797 $ 47,980,411
=============================================================================================
</TABLE>
(i)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> 49
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements, page 7
(Expressed in Canadian Dollars)
Years ended July 31, 2000 and 1999
-------------------------------------------------------------------------------
8. SHARE CAPITAL (CONTINUED):
(b) The subscribed and issued share capital of the Company is as follows
(continued):
(ii) A value had been assigned to the 1998 share purchase warrants issued
totaling $4,015,000 and had 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. During 2000, 1,963,265 share purchase
warrants expired which reduced the equity component of warrants to
nil and increased contributed surplus to $2,420,677.
(iii) The Company completed various private sales of its common stock
during the year for net proceeds of $9,246,794 from the issuance of
3,415,250 common shares at a price of $US 2.00 per share. Of the
total shares sold, 1,505,000 were issued in October 1999 and
additional 1,910,250 were issued in March 2000.
(c) Stock based compensation plans:
At July 31, 2000, the Company has three stock-based compensation plans
that are described below.
The Company has three fixed stock option plans.
(i) Prior to 1998, the Company had an initial plan whereby the Company
could grant employees options to purchase common stock.
(ii) Under the "1998 US Stock Incentive Plan" the Company may grant
options to its employees for up to 300,000 common shares.
(iii) Under the "1998 Stock Incentive Plan" the Company may grant options
to its employees for up to 600,000 common shares.
A summary of fixed stock option transactions and balances during the two
years ended July 31, 2000 is as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
2000 1999
---------------------------------------------------------------------------------------
Weighted Weighted
average average
exercise exercise
Shares price Shares price
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 670,425 $ 5.24 555,175 $ 4.27
Options granted 674,500 4.14 297,500 6.37
Options exercised (1,600) (2.93) (18,500) (3.05)
Options forfeited (345,700) (4.96) (163,750) (4.29)
---------------------------------------------------------------------------------------
Outstanding, end of year 997,625 $ 4.58 670,425 $ 5.24
=======================================================================================
</TABLE>
<PAGE> 50
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements, page 8
(Expressed in Canadian Dollars)
Years ended July 31, 2000 and 1999
-------------------------------------------------------------------------------
8. SHARE CAPITAL (CONTINUED):
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
Options outstanding Options exercisable
at July 31, 2000 at July 31, 2000
-------------------------------------- ---------------------
Weighted
average Weighted
remaining average Weighted
Range of Number contractual exercise Number average
exercise prices outstanding life price exercisable price
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$2.60 - 4.60 872,625 3.78 $ 4.31 505,825 $ 3.96
$4.61 - 6.60 125,000 3.49 6.46 125,000 6.46
----------------------------------------------------------------------------------------------
$2.60 - 6.60 997,625 3.74 $ 4.58 630,825 $ 4.45
==============================================================================================
</TABLE>
(d) Warrants:
As at July 31, 2000, warrants were outstanding for 469,717 (1999 -
1,963,265) common shares of the Company. The warrants entitle the
holders to purchase common shares of the Company at prices ranging from
US$1.50 to US$2.00 (1999 - $3.60 to $16.00) per share that expire on
various dates until March 31, 2003.
9. FINANCIAL INSTRUMENTS:
(a) Fair value disclosure:
The carrying values of cash and cash equivalents, receivables and
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 13). 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.
<PAGE> 51
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements, page 9
(Expressed in Canadian Dollars)
Years ended July 31, 2000 and 1999
------------------------------------------------------------------------------
9. FINANCIAL INSTRUMENTS (CONTINUED):
(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.
10. RELATED PARTY TRANSACTIONS:
Included in receivables are amounts due from directors and shareholders of
the Company totaling $Nil as at July 31, 2000 (1999 - $113,317).
During the year ended July 31, 2000, the Company:
(a) Paid $470,191 (1999 - $237,663) for consulting services and financing
fees on the private sales of its common stock and issued 86,409 share
purchase warrants at an exercise price of US $2.00, expiring at dates
ranging from October 15, 2002 to March 31, 2003, for financing services
to a company in which a director of the Company has significant
influence. The director also received 30,000 options (1999 - nil) from
the Company during the year.
(b) Paid $149,485 (1999 - $170,413) for legal fees to a legal firm in which
a director of the Company is a partner. The director also received
15,000 options (1999 - 25,000) from the Company during the year.
11. INCOME TAXES:
(a) Effective tax rate:
The effective income tax rates differ from the Canadian Statutory rates for
the following reasons:
<TABLE>
<CAPTION>
=======================================================================================
2000 1999
---------------------------------------------------------------------------------------
<S> <C> <C>
Combined Canadian federal and provincial income taxes
at expected rate of 45.6% $ 1,510,434 $(7,822,354)
Foreign losses tax affected at lower rates 465,023 736,016
Permanent and other differences (1,957,866) 28,740
Change in valuation allowance (17,591) 7,057,598
---------------------------------------------------------------------------------------
$ - $ -
=======================================================================================
</TABLE>
<PAGE> 52
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements, page 10
(Expressed in Canadian Dollars)
Years ended July 31, 2000 and 1999
-------------------------------------------------------------------------------
11. INCOME TAXES (CONTINUED):
(b) Future tax assets and liabilities:
<TABLE>
<CAPTION>
=======================================================================================
2000 1999
---------------------------------------------------------------------------------------
<S> <C> <C>
Future tax assets:
Accounting depreciation in excess of cost $ 833,738 $ 733,116
Loss carryforwards 13,517,022 13,784,380
Scientific research and development expenses 648,504 648,504
Share issue costs 618,579 495,454
Others 318,189 292,169
---------------------------------------------------------------------------------------
Total gross future tax assets 15,936,032 15,953,623
Less valuation allowance (15,936,032) (15,953,623)
---------------------------------------------------------------------------------------
Net future tax assets $ - $ -
=======================================================================================
</TABLE>
In assessing the realizability of future tax assets, management considers
whether it is more likely than not that some portion or all of the future
tax assets will be realized. The ultimate realization of the future tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible.
For Canadian tax purposes, the Company has approximately $21,300,000 of
non-capital losses for income tax purposes available at July 31, 2000 to
reduce taxable income of future years. These losses will expire as follows:
<TABLE>
<S> <C>
2001 $ 200,000
2002 400,000
2003 2,800,000
2004 3,600,000
2005 4,200,000
2006 10,100,000
---------------------------------------------------------------------------------------
$21,300,000
=======================================================================================
</TABLE>
Additionally, for Canadian tax purposes, the Company has scientific research
and development expenditures of $1,400,000 available to reduce future
taxable income indefinitely.
<PAGE> 53
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements, page 11
(Expressed in Canadian Dollars)
Years ended July 31, 2000 and 1999
-------------------------------------------------------------------------------
11. INCOME TAXES (CONTINUED):
For United States tax purposes, the Company has approximately $6,200,000 of
non-capital losses for income tax purposes available at July 31, 2000 to
reduce taxable income of future years. These losses will expire as follows:
<TABLE>
<S> <C>
2012 $ 200,000
2013 1,400,000
2019 2,600,000
2020 2,000,000
------------------------------------------------------------------------------------
$6,200,000
====================================================================================
</TABLE>
For United Kingdom tax purposes, the Company has approximately $4,800,000 of
non-capital losses for income tax purposes available at July 31, 2000 to
reduce taxable income of future years. These losses may be carried forward
indefinitely.
12. COMMITMENTS AND CONTINGENCIES:
(a) The Company is committed to the following payments under operating
leases, and service agreements for premises and certain equipment and
consultants:
<TABLE>
<S> <C>
2001 $562,000
2002 $302,000
2003 $291,000
2004 $287,000
2005 $287,000
====================================================================================
</TABLE>
(b) Cash and short-term investments are used to secure a letter of credit
and credit card advances in the amount of $62,000 (1999-$1,210,255).
During August 1999 the letter of credit in the amount of $1,130,250 was
cancelled.
13. SEGMENTED INFORMATION:
The Company operates in the wireless tire monitoring technology industry.
Management of the Company makes decisions about allocating resources based
on the one operating segment.
<PAGE> 54
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements, page 12
(Expressed in Canadian Dollars)
Years ended July 31, 2000 and 1999
-------------------------------------------------------------------------------
13. SEGMENTED INFORMATION (CONTINUED):
Substantially all revenue is derived from sales to North American and
European customers. Geographic information is as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
Revenue from external customers
2000 1999
----------------------------------------------------------------------------------
<S> <C> <C>
North America $ 822,312 $1,488,509
Europe 278,509 1,189,426
----------------------------------------------------------------------------------
$1,100,821 $2,677,935
==================================================================================
</TABLE>
Major customers, representing 10% or more of total sales, include:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
2000 1999
----------------------------------------------------------------------------------
<S> <C> <C>
Customer A $ - $1,050,000
Customer B 156,198 440,000
Customer C 298,391 388,000
==================================================================================
</TABLE>
14. 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>
----------------------------------------------------------------------------------
2000 1999
----------------------------------------------------------------------------------
(thousands of dollars)
<S> <C> <C>
Net income (loss) in accordance with Canadian GAAP $ 3,312 $(17,186)
Effects of differences in accounting for:
Research and development costs - 97
Compensation cost (d) (589) -
----------------------------------------------------------------------------------
Net income (loss) in accordance with United States GAAP 2,723 (17,089)
Beginning deficit in accordance with United States GAAP (39,102) (22,013)
----------------------------------------------------------------------------------
Ending deficit in accordance with United States GAAP $(36,379) $(39,102)
==================================================================================
</TABLE>
<PAGE> 55
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements, page 13
(Expressed in Canadian Dollars)
Years ended July 31, 2000 and 1999
-------------------------------------------------------------------------------
14. UNITED STATES ACCOUNTING PRINCIPLES (CONTINUED):
(b) Shareholders' equity:
During the year, the Company agreed to issue warrants to purchase
119,717 common shares of $US 2.00 per share for consulting and advisory
services in connection with the private placement. The warrants will
expire between October 15, 2001 and March 31, 2003. Under United States
GAAP, the estimated fair value of these warrants should be recorded as a
charge against share capital and a corresponding credit to equity
component of warrant. The fair value of these warrants at the date of
grant was $267,857.
(c) Provision for write-down of inventory:
Under United States GAAP, provision for write-down of inventory should
be included in cost of goods sold. In the statement of operations in
accordance with Canadian GAAP, this amount is included in engineering,
research and development expense. Due to this, the cost of goods sold
for 1999, in accordance with United States GAAP will increase by
$6,690,639 (note 4) and engineering, research and development expense
will decrease by the same amount with no impact on net income.
(d) Compensation expense:
Under United States generally accepted accounting principles warrants
issued to non-employees for other than employment services are recorded
as a compensation cost. Under Financial Accounting Standards No. 123,
the fair value of each warrant issued is estimated on the date of issue
using the Black-Scholes option pricing model with the following weighted
average assumptions:
<TABLE>
<S> <C>
Expected dividend yield 0%
Risk-free interest rate 6%
Expected volatility 202%
Expected life (in years) 2 to 3
</TABLE>
(e) Income (loss) per share:
The weighted average number of shares and income (loss) per share under
United States GAAP are as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
2000 1999
----------------------------------------------------------------------------------------------
<S> <C> <C>
Weighted average number of shares 13,159,385 10,192,024
Basic income (loss) per share $ .21 $ (1.68)
Diluted weighted average number of shares 13,159,385 10,192,024
Diluted income (loss) per share .21 (1.68)
==============================================================================================
</TABLE>
<PAGE> 56
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements, page 14
(Expressed in Canadian Dollars)
Years ended July 31, 2000 and 1999
------------------------------------------------------------------------------
14. UNITED STATES ACCOUNTING PRINCIPLES (CONTINUED):
(e) Income (loss) per share (continued):
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.
15. COMPARATIVE FIGURES:
Certain comparative figures have been reclassified to conform with the
financial statement presentation adopted for the current year.
<PAGE> 57
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 Supply Agreement dated April 20, 1998 between the Company and TRW Inc. (1) (2)
10.2 Technical Cooperation Agreement dated as of April 20, 1998 between the Company
and TRW Inc. (1) (2)
10.3 License Agreement dated as April 20, 1998 between the Company and TRW Inc. (1)
(2)
10.4 Product Licensing Agreement dated May 5, 1998 between the Company and
Advantage Enterprises Inc. (2) (3)
10.5 Distribution Agreement dated March 28, 1995 between the Company and the
Haulpak Division of Komatsu Dresser Company. (1)
10.6 Letter Agreement dated December 4, 1996 between the Company and Pi Research
Limited. (1)
</TABLE>
<PAGE> 58
<TABLE>
<S> <C>
10.7 ASIS Development 1 Purchase Contract between SensoNor asa, TRW Inc. and
SmarTire Systems Inc. dated as of September 1, 1998. (4)
10.8 Release and Settlement Agreement between SmarTire Systems Inc and Joseph
Merback dated as of June 4, 1999. (4)
10.9 Management agreement between the Company and Kevin Carlson dated as of August
1, 1999. (5)
10.10 Management agreement between SmarTire USA Inc. and Mark Desmarais and SmarTire
Systems Inc. dated as of June 1, 1999. (6)
10.11 Management Agreement between the Company and Shawn Lammers dated as of August
1, 1999. (6)
10.12 Management Agreement between the Company and Robert Rudman dated as of August
1, 1999. (6)
10.13 Management Agreement between SmarTire Europe Limited and Ian Bateman dated as
of December 9, 1999. (6)
10.14 ASIS Development / Purchase Agreement dated as of December 13, 1999 between
the Company and Sensonor ASA. (6) (2)
10.15 License Agreement dated September 20, 1999 between the Company and Transense
Technologies plc. (6) (2)
11.1 **Computation of Earnings Per Share
27.1 **Financial Data Schedule
</TABLE>
----------------------
** Filed Herewith
(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) Incorporated by reference to Form 10-KSB filed with the
Securities and Exchange Commission on October 29, 1999
(5) Incorporated by reference to Form S-8 filed with the Securities
and Exchange Commission on December 17, 1999.
(6) Incorporated by reference to Form 10-QSB filed with the
Securities and Exchange Commission on March 16, 2000.
