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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 1998
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ________ to __________
Commission File Number 33-94318-C
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AMERICAN TIRE CORPORATION
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(Exact name of registrant as specified in charter)
Nevada 87-0535207
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State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization
705-B Yucca Street, Boulder City, Nevada 89005
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (702) 293-1930
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Securities registered pursuant to section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None N/A
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Securities registered pursuant to section 12(g) of the Act:
None
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(Title of 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. (1) Yes [ ]
No [X] (2) Yes [X] 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. [X]
State issuer's revenues for its most recent fiscal year: $373,247
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State the aggregate market value of the voting stock held by nonaffiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days:
Based on the average bid and asked prices of the common stock at August
7, 1998, of $2.00 share, the market value of shares held by nonaffiliates
would be $4,548,500.
As of June 30, 1998, the Registrant had 4,619,250 shares of common stock
issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and
the part of the form 10-KSB (e.g., part I, part II, etc.) into which the
document is incorporated: (1) Any annual report to security holders; (2) Any
proxy or other information statement; and (3) Any prospectus filed pursuant to
rule 424(b) or (c) under the Securities Act of 1933: NONE
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PART I.
ITEM 1. DESCRIPTION OF BUSINESS
Business in General
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American Tire Corporation, a Nevada corporation (the "Company"), was
organized on January 30, 1995, to take advantage of existing proprietary and
non-proprietary technology available for the manufacturing of flat-free
specialty tires. The Company is considered a "development stage" company.
The Company has licensed a "flat free" (non-pneumatic) tire technology
and a "Dynamic Steerable Spring" (DSS) technology from Richard A. Steinke (an
officer, director and principal shareholder of the Company)and Dennis S.
Chrobak (a former officer, director and principal shareholder of the Company),
for the purpose of utilizing the technologies to manufacture "flat free" tires
and tire-wheel assemblies. The Company presently has completed the
fundamental development of the process to manufacture flat free bicycle and
lawn and garden tires.
The Company believes that the flat free tire technology allows it to
produce bicycle and lawn and garden tires that offer the same safety and ride
as the traditional pneumatic tire, at competitive prices, without the
associated problems resulting from a flat tire.
With respect to the DSS technology, additional development is necessary
before tire-wheel assemblies can be produced utilizing the technology. The
Company has entered into an agreement with a third party to further develop
passenger car tire-wheel assemblies utilizing the DSS technology.
Hayes Development and License Agreement
- ---------------------------------------
In September 1995, the Company and Hayes Wheels International ("Hayes")
entered into a Development and License Agreement (the "Hayes Development and
License Agreement") wherein the Company and Hayes agreed to jointly develop
for production a prototype tire-wheel assembly utilizing the DSS Technology
licensed by the Company from Dennis S. Chrobak and Richard A. Steinke. The
Hayes Development and License Agreement provides for Hayes to provide the
steel portion of the tire-wheel assembly, as well as any equipment and tooling
to produce the steel portion and the Company to provide the remaining portion,
including sidewalls, cap, cap stabilizer and bonding materials, together with
associated equipment and molds therefor for submission to the United States
Department of Transportation ("DOT") for DOT's approval under FMVSS 129. FMVSS
129 is the applicable U.S. safety standard for non-pneumatic tires used on
passenger vehicles and describes the energy cycle a non-pneumatic tire/wheel
must absorb to be provided for commercial sale in the United States. The
tire-wheel assembly contemplated under the Hayes Development and License
Agreement differs from conventional two-piece tire-wheel assemblies in that
the DSS Technology incorporates a one-piece steel spring and hoop within a
urethane overlaid cap, cap stabilizer, and sidewall (i.e. unified
construction). In its existing design, the Company does not anticipate that
the tire-wheel assembly to be developed under the Hayes Development and
License Agreement can be utilized for any purpose other than a passenger
vehicle tire. U.S. Patent, Reg. No. 5743316, was issued by the U.S. Office of
Patents and Trademarks on April 28, 1998, relating to the DSS Technology.
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Initial test results conducted by an independent lab on 10 prototype
tire-wheel assemblies have provided varying results based on velocity, time,
and the design of the steel wheel, sidewall, tread, and stabilizing cap. To
date, none of the prototypes tested have complied with FMVSS 129. Because of
the lack of sufficient working capital during fiscal year 1998, no additional
testing was conducted. The Company does not expect to commit additional funds
to the development of the DSS Technology until substantial additional working
capital can be obtained.
"Flat-Free" (Non-Pneumatic)Tire Technology
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The Company's flat-free tire technology differs from pneumatic tires in
that pneumatic tires are made from rubber and require an inner tube which is
inflated with air. The Company's bicycle and lawn and garden tire products
could be considered "non-pneumatic" in that they do not require inflation,
however, they are multi-density in nature and consist of a series of layers of
specially formulated elastomers and a closed foam construction to simulate the
compliance of a pneumatic tire. The closed foam contains millions of closed
cells containing air. Therefore, the Company's tires are best identified as
"flat-free" in that they have no inner tube and do not require inflation, but
rely on the infrastructure of the tire to maintain the tires stability. The
flat-free tire is mounted on the wheel rim in much the same way a pneumatic
tire is mounted, with the assistance of a tire lever. The flat-free tires are
approximately the same weight as pneumatic tires and tubes and ride
characteristics are comparable. Apart from cleaning, the Company's bicycle
tires are maintenance free and eliminate tedious puncture repair or the need
for a bicycle pump. The flat-free tires are designed for use by "On/Off"
road and "Highway" bicycles. The Company does not produce any products other
than its flat-free bicycle and lawn and garden tires.
At present, the Company's primary marketing strategy has been to
introduce the flat-free tires through sales to OEMs and existing tire
distributors. Although the Company is investigating other markets, the Company
has targeted two main segments of the tire market:
(1) Original Equipment Manufacturers. By selling to OEMs, the Company
believes it will be able to develop product identification and consumer demand
by emphasizing "Made in the USA" and the "flat-free" and "maintenance-free"
characteristics of the tires while relying on the efforts of OEMs in marketing
their products with the Company's tires.
(2) Tire Distributors. By selling to tire distributors, the Company
believes it will be able to take advantage of existing distribution channels
for moving its tires into the aftermarket, while emphasizing the uniqueness of
the flat-free and maintenance free characteristics of the tires versus
traditional pneumatic tires.
In February 1997, the Company acquired all of the capital stock of UTI
Chemicals (Europe) Ltd, a United Kingdom corporation ("UTI-UK"), from Coronel
Investments Limited, a Jersey corporation ("Coronel"). UTI-UK's name was
subsequently changed to Urathon Limited. Urathon Limited is the Company's
wholly owned subsidiary and distributes urethane bicycle, wheelchair and other
specialty tires in the United Kingdom and Europe under the trade name "Urathon
TM" through independent representatives and distributors.
<PAGE> 5
Competition
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Currently, the Company knows of three tire manufacturers that utilize a
liquid phase technology manufacturing process to produce non-pneumatic tires
from a low density polyurethane foam (Green Tire, Norwich, UK; Woo Tire,
Waihai, China; and Krypton-India, Calcutta, India) and, to the best of the
Company's knowledge, only a limited numbers of their tires have been marketed
in the United States.
In addition to manufacturers of low density polyurethane foam tires, the
Company will be competing directly with firms that manufacture and market
pneumatic bicycle tires and tubes made from rubber. The Company's flat free
bicycle and lawn and garden tire technology differs from existing nonpneumatic
tire technology in (1) the formulation of the polyurethane; (2) the manner in
which the polyurethane is distributed throughout the mold; and (3) the use of
a simple mechanical locking system that allows the tire to stay secure on the
wheel.
The Company estimates that over 98% of all domestic bicycle tire sales
are pneumatic tires. The bicycle tire industry is highly competitive and
there are several of the Company's competitors that have financial resources
which substantially exceed those of the Company. In addition, many
competitors are large companies (i.e. Michelin [France], Kenda [Japan], and
Chengshin Rubber [China]) that have established name recognition of their
products, have established distribution networks for their products, and
developed consumer loyalty to such products. Principal factors in marketing
the Company's tires will be that it is domestically produced with "flat-free"
and "maintenance free" characteristics and may give the Company a competitive
advantage against pneumatic tires produced by foreign manufacturers that are
subject to puncture and loss of air.
Manufacturing, Supplies, and Quality Control
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The Company manufactures the flat-free tires utilizing single and/or
multiple head, centrifugal molding machines. These machines centrifugally
mold elastomer products, such as the bicycle tires, by pouring a predetermined
amount of polyurethane into a mold, which is then spread out in the mold
through centrifugal force. The molding process occurs when the liquid
polyurethane formula (made up of isocyanide and polyol) is combined with a
catalyst. This combination causes a chemical reaction that results in the
cross linking of the chemicals, which thereafter become solid. The mold then
moves to the next station where the tire is removed and the process is
repeated.
The Company has manufacturing equipment that, based on manufacturer's
specifications, should permit the Company to produce approximately 1,500,000
tires annually. At present, the Company has not accumulated a sufficient
number of molds in the various tire sizes necessary to determine with any
degree of consistency the maximum production efficiency of its production
equipment. However, the Company estimates that it could produce about 8 to 10
million tires per year without expansion from its Ravenna facility. At that
level of production, the Company would require approximately 150 employees as
well as additional equipment. The Company trains its employees in the use of
its specialized manufacturing equipment utilized in the manufacturing process.
The Company utilizes multiple suppliers to purchase polyurethane and believes
that it will be able to obtain significant quantities of polyurethane and
other chemicals without significant problems or delays.
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All products produced by the Company are inspected following the
manufacturing process and prior to shipment to ensure quality. Products
considered by the Company's quality control personnel to be defective could be
ground into pellets, which can be melted and reused in the Company's
manufacturing process to make new products and reduce waste of raw materials.
Patents
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Dynamic Steerable Spring
The Company is a party to an exclusive technology license agreement (the
"DSS License Agreement") with Dennis S. Chrobak and Richard A. Steinke, to
develop DSS Technology. Mr. Chrobak and Mr. Steinke are the inventors of the
DSS Technology [Reg. No. 5743316] for which a U.S. patent has been issued.
The term of the DSS License Agreement is for the life of the underlying U.S.
patent. However, if the Company fails to market, promote, or otherwise
exploit the DSS Technology so that Mr. Chobak has not received any royalty
payment by August 19, 1999, the DSS License Agreement will automatically
terminate. Under the DSS Technology License Agreement, the Company has the
right to sublicense others (i.e., third parties), to likewise market, promote
or exploit the DSS Technology. The Company is required to pay a royalty to
Mr. Chrobak of $0.50 for each unit of production manufactured and sold
directly by the Company. At such time as Mr. Steinke is no longer an
affiliate of the Company, Mr. Steinke would be entitled to a royalty on the
same terms as Mr. Chrobak. See "Further Research and Development" below and
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
"Flat-free" (Non-Pneumatic) Tires
The Company is a party to an exclusive technology license agreement (the
"Non-Pneumatic Tire License Agreement") with Mr. Chrobak and Mr. Steinke, to
develop certain technology relating to a low density foam tire for which an
application for U.S. Letters Patent has been filed and a patent is pending.
The term of the Non-pneumatic Tire License Agreement will be for the life of
the underlying U.S. patent when issued. The Company is required to pay a
royalty to Mr. Chrobak of $0.125 for each bicycle tire manufactured and sold
by the Company utilizing the technology. At such time as Mr. Steinke is no
longer an affiliate of the Company, Mr. Steinke would be entitled to a royalty
on the same terms as Mr. Chrobak. The Company has not yet received notice from
the U.S. Patent Office passing on the patentability of the claims of the case
with respect to the Non-Pneumatic Tire Technology. The Company is unable to
predict when any office action will be taken or a patent issued.
Although a patent has a statutory presumption of validity in the United
States, the issuance of a patent is not conclusive as to its validity, nor as
to the enforcement scope of the claims contained therein. The Company intends
to, but has not as of the date of this report, applied for patent protection
in other countries. The Company intends to vigorously police its patents and
there can be no assurance that its patents will not be infringed upon or
modified by others. The Company has not retained intellectual property counsel
to render an opinion regarding the DSS Technology and the Non-Pneumatic Tire
Technology as to whether the Company is infringing on the intellectual
property rights of others. However, Mr. Chrobak and Mr. Steinke utilized
intellectual property counsel in preparing and filing the DSS Technology and
Non-Pneumatic Tire Technology patent applications and in that regard, the
Company believes the technologies are not the intellectual property rights of
others or are already in the public domain.
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With respect to the DSS Technology, the Company believes the technology
is unique in that the Company knows of no other manufacturer of airless
passenger vehicle tires or tire-wheel assemblies. With respect to the Non-
Pneumatic Tire Technology, the Company believes that its technology
substantially differs from the existing technology currently being utilized to
produce non-pneumatic tires. The Company believes that although its patents
are important, such factors as product innovation, technical expertise and
experience, and the confidentiality of proprietary data and trade secrets are
equally as important. The Company will attempt to preserve and protect its
proprietary technology principally through trade secret protection and has
obtained confidentiality/nondisclosure agreements with all of its employees.
Further Research and Development
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Because of the Company's limited financial resources, the Company has not
made any significant expenditures for new research and development during the
recently completed fiscal year. The Company does not anticipate expending any
substantial sums for new research and development programs during the fiscal
year ended June 30, 1999 until the working capital is available to justify
such expenditures.
Trademark
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The Company owns the U.S. registered trademark "Urathon" which has been
utilized by its wholly owned subsidiary Urathon Limited on urethane tire
products distributed in the United Kingdom and Europe.
Regulation and Environmental Compliance
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The Company knows of no particular federal or state regulations
applicable to its manufacturing processes. The tire-wheel assemblies designed
to be manufactured for use on passenger vehicles and light trucks are required
to meet certain Department of Transportation, Federal Motor Vehicle Safety
Standards ("FMVSS"), including FMVSS 129, which applies to non-pneumatic tires
for passenger cars. This standard specifies tire dimensions and laboratory
test requirements for lateral strength, endurance, and high speed performance,
defines the tire load rating, and specifies labeling requirements for non-
pneumatic spare tires.
The Company is subject to various local, state, and federal laws and
regulations including, without limitation, regulations promulgated by federal
and state environmental and health agencies, the federal Occupational Safety
and Health Administration, and laws pertaining to hiring, treatment, safety,
and discharge of employees. The Company's manufacturing operations must also
meet federal, state, and local regulatory standards in the areas of labor,
safety, and health. The Company believes that it will be able to operate in
compliance with such regulations, including laws related to the handling and
use of environmentally hazardous materials.
Employees
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As of June 30, 1998, the Company had 14 full-time employees, including
six administrative and 8 hourly employees. None of the Company's employees are
represented by a labor union. The Company believes that it will be able to
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hire a sufficient quantity of qualified laborers in the local area to meet the
Company's employment needs. The Company's manufacturing process does not
require special training, other than orientation to the Company's production
techniques and specific equipment.
ITEM 2. DESCRIPTION OF PROPERTIES
Offices
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The Company's 26,000 sq. ft. manufacturing/distribution/office facility
is located on 4.15 acres of real property at 446 West Lake Street, Ravenna,
Ohio, and consists of 1,000 sq. ft. of administrative offices and 25,000 sq.
ft. of manufacturing space. The facility is constructed of masonry and steel
and is equipped with a one-half ton chain hoist, overhead sprinkler system,
and two loading docks. The Ravenna facility will be utilized for tire
production and management of the Company believes that the Ravenna facility
will be sufficient to handle projected production needs for the next five
years.
Beginning in June 1997, the Company maintains an executive office suite
consisting of approximately 1,100 square feet located at 1643 Nevada Highway,
Boulder City, Nevada. The facility is subleased from American Environmental
Corporation, a company controlled by Richard A. Steinke, an affiliate of the
Company, who in turn leases the facility from Micro Instrument Corp, an
unrelated entity. The Company pays American Environmental Corporation a fee
of $425 per month to occupy the office suite. It is the opinion of management
that the Company maintains adequate insurance coverage for loss or damage to
its facility under its existing insurance policy.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
No matters were submitted to a vote of shareholders of the Company during
the fourth quarter of the fiscal year ended June 30, 1998.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Lack of Prior Public Market and Possible Volatility of Stock Price
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The Company completed its initial public offering in October 1996. Prior
to that time there was no "established trading market" for shares of the
Company's common stock. The table on the following page sets forth, for the
respective periods indicated, the prices for the Company's common stock in the
over-the-counter market as reported by the NASD's OTC Bulletin Board. The
bid prices represent inter-dealer quotations, without adjustments for retail
mark-ups, mark-downs or commissions and may not necessarily represent actual
transactions.
High Bid Low Bid
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Fiscal Year Ended June 30, 1996
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First, Second, Third and Fourth Quarters N/A N/A
Fiscal Year Ended June 30, 1997
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First Quarter N/A N/A
Second Quarter $9.375 $6.00
Third Quarter $9.125 $6.00
Fourth Quarter $6.125 $2.25
Fiscal Year Ended June 30, 1998
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First Quarter $7.785 $2.875
Second Quarter $5.625 $2.5625
Third Quarter $4.50 $2.375
Fourth Quarter $4.00 $1.625
At August 31, 1998, the Company's Common Stock was quoted on the OTC
Bulletin Board at a bid and asked price of $1.00 and $1.50, respectively.
Since its inception, the Company has not paid any dividends on its Common
Stock, and the Company does not anticipate that it will pay dividends in the
foreseeable future. At August 31, 1998, the Company had approximately 322
shareholders of record based on information provided by the Company's transfer
agent.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Cautionary Statement Regarding Forward-looking Statements
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This report may contain "forward-looking" statements. The Company is
including this cautionary statement for the express purpose of availing itself
of the protections of the safe harbor provided by the Private Securities
Litigation Reform Act of 1995 with respect to all such forward-looking
statements. Examples of forward-looking statements include, but are not
limited to: (a) projections of revenues, capital expenditures, growth,
prospects, dividends, capital structure and other financial matters; (b)
statements of plans and objectives of the Company or its management or Board
of Directors; (c) statements of future economic performance; (d) statements of
assumptions underlying other statements and statements about the Company and
its business relating to the future; and (e) any statements using the words
"anticipate," "expect," "may," "project," "intend" or similar expressions.
<PAGE> 10
Year 2000 Disclosure
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The Company is working to resolve the potential impact of the year 2000
on the ability of the Company's computerized information systems to accurately
process information that may be date-sensitive. Any of the Company's programs
that recognize a date using "00" as the year 1900 rather than the year 2000
could result in errors or system failures. The Company utilizes a minimum
number of computer programs in its operations. The Company has not completed
its assessment, but currently believes that costs of addressing this issue
will not have a material adverse impact on the Company's financial position.
However, if the Company and third parties upon which it relies are unable to
address this issue in a timely manner, it could result in a material financial
risk to the Company. In order to assure that this does not occur, the Company
plans to devote all resources required to resolve any significant year 2000
issues in a timely manner.
Results of Operations
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General
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The Company's revenues are generated primarily by its business operations
in the United States. However in February 1997, the Company acquired all of
the capital stock of its current subsidiary Urathon Limited. For fiscal years
ended June 30, 1998 and 1997, the functional currency for the Company's
foreign subsidiary (Urathon Limited) has been determined to be the British
Pound Sterling. Assets and liabilities have been translated at fiscal year
end exchange rates and operating statement items are translated at average
exchange rates prevailing during the period. For the fiscal years ended June
30, 1998 and 1997, the Company had a gain of $188 and $2,984, respectively, as
a result of foreign currency translation adjustments.
Year ended June 30, 1998 compared to year ended June 30, 1997
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Total revenues for the year ended June 30, 1998 was $373,247 compared to
$69,518 for the same period in 1997. The increase in revenues is mainly
attributable to the fact that the Company had not entered into production of
product until June 1997. Costs of sales for the year ended June 30, 1998 were
$266,874, or 71.5% of sales as compared to $47,882, or 68.9% of sales for the
year ended June 30, 1997. The slight increase in the direct cost of sales as
a percent of sales for fiscal year 1998 compared to fiscal year 1997 is not
directly attributable to any particular factors. The Company knows of no
predictable events or uncertainties that may be reasonably expected to have a
material impact on the net sales revenues or income from continuing operations
other than the lack of working capital.
Corporate Expense. For fiscal 1998, total operating expenses were
$2,194,322, consisting of mainly of payroll and payroll taxes of $1,229,892
and selling, general and administrative expenses of $648,496, resulting in a
loss from operations of $(2,087,949). Total expenses for fiscal 1997 were
$1,482,301, mainly consisting of payroll and payroll taxes of $521,773 and
selling, general and administrative expenses of $457,439, resulting in a loss
from operations of $(1,460,665). The increase in the operating expenses
during fiscal year 1998 can be attributed directly to an increase in payroll
and payroll taxes, resulting from the addition of several management and
technical support personnel.
<PAGE> 11
Interest Expense. Interest expense for fiscal 1998 was $349,505 as
compared to $19,090 in fiscal 1997. The increase in interest expense for
fiscal year 1998 is directly attributed to issuance of convertible promissory
notes during the period and the prepayment of interest in connection
therewith.
Other Expense. For fiscal 1998, other expenses were a net $1,830,375, of
which, substantially all was represented by an impairment loss $(1,694,111)
because of the Company's inability to determine the present value of the
future cash flows of its wholly owned subsidiary, Urathon Limited. (See Note
1(l) - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Goodwill
and Technology.)
The Company experienced a net comprehensive loss of $(4,267,641) for the
year ended June 30, 1998 compared with a net loss of $(1,406,688) for the same
period in 1997. The basic loss per share for fiscal 1998 was $(1.20) as
compared to $(0.33) for fiscal 1997, based on the weighted average number of
shares outstanding of 3,555,799 and 4,246,888 for the respective periods.
Liquidity and Capital Resources
- -------------------------------
During the fiscal year ended June 30, 1998, the Company repurchased
1,270,000 shares of its outstanding common stock from a former officer and
director of the Company at a repurchase price of $0.18 per share. The shares
were returned to the authorized but unissued shares of capital stock of the
Company. During the year, the Company issued 152,250 shares in lieu of
interest on convertible promissory notes at approximately $3.24 per share for
a value of $492,781. In connection therewith, 400,000 shares of common stock
were issued to the holders of the convertible promissory notes on conversion
of $400,000 of such notes at a conversion price of $1.00 per share. The
Company issued 305,000 shares of common stock as prepaid salary under related
party compensation agreements at $2.00 per share for a total value of $610,000
in compensation and an additional 264,752 shares for professional and
consulting services valued at $2.00 per share for a aggregate value of
$529,504. The issuances of common stock have been utilized for working
capital, conversion of debt, prepayment of salaries, payment of professional
services, and the expansion capital required for the continued operational
activities of the Company; however, the Company will require additional
capital to continue its business operations.
The Company had current assets of $684,160 and current liabilities of
$1,515,450, for a working capital deficit of $(831,290) at June 30, 1998. The
Company had cash and cash equivalents of $278,822 and accounts receivable of
$89,463 for the same period. Cash used in operations for the fiscal year
ended June 30, 1998 was $1,041,492 and $1,175,403 for the fiscal year ended
June 30, 1997. Cash used in operations for the fiscal year ended June 30,
1998 was funded primarily by cash received from the sale of convertible
promissory notes, and the issuance of common stock for services and interest
payments. At June 30, 1998, the Company had net property and equipment of
$1,082,586, after deduction of $301,686 in accumulated depreciation. The
Company's property and equipment consists mainly of land ($59,000), building
and improvements ($291,010), and equipment ($995,138). Because at June 30,
1998, the Company has an accumulated deficit during the development stage of
$(6,522,221), has a working capital deficit and limited internal financial
resources, the report of the Company's auditor contains a going concern
modification as to the ability of the Company to continue. During fiscal
1998, the Company began to effect measures to reduce cash outflows and
increase working capital thru the issuance of additional shares of common
stock for services and conversion of debt.
<PAGE> 12
The Company is aware of its ongoing cash requirements and has implemented
a cash flow plan, including continued reduction in its general and
administrative expenses. Additionally, the Company has developed an overall
strategy and certain financing options to meet its ongoing needs through June
30, 1999. Due to the need for working capital for both the Company and its
subsidiary Urathon Limited, the Company intends to seek additional debt and/or
equity financing from existing shareholders and other investment capital
resources. The Company has no commitments for any additional debt or equity
financing at this time and no assurance can be given that the Company will be
able to obtain any such commitments. Because of the Company's limited
financial resources, the Company does not anticipate expending any substantial
sums for new research and development during the fiscal year ended June 30,
1999.
Impact of Inflation
- -------------------
The Company does not anticipate that inflation will have a material
impact on its current or proposed operations.
Principal Customers
- -------------------
During the most recent fiscal year ended June 30, 1998, the Company had
no individual customer that accounted for more than 10% of the Company's
revenues.
Seasonality
- -----------
Management of the Company knows of no seasonal aspects relating to the
nature of the Company business operations that had a material effect on the
financial condition or results of operation of the Company.
ITEM 7. FINANCIAL STATEMENTS
The financial statements of the Company are set forth immediately
following the signature page to this form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
The Company has had no disagreements with its certified public
accountants with respect to accounting practices or procedures or financial
disclosure. See ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
<PAGE>
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PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The following table sets forth as of June 30, 1998, the name, age, and
position of each executive officer and director and the term of office of each
director of the Company.
Name Age Position Director or Officer Since
---- --- -------- -------------------------
Richard Steinke 56 Chairman, Director, CEO January 1995
Roger A. Fleming 58 President and Director February 1997
Hugh Sims-Hilditch 62 Vice-President and Director February 1997
Louis M. Haynie 70 Director July 1997
Ping Zhang 32 Vice-President and Director February 1997
David K. Griffiths 61 Treasurer/Controller February 1995
Marcy L. Janis 30 Secretary February 1997
The term of office of each director is one year and until his successor
is elected and qualified at the Company's annual meeting, subject to removal
by the Shareholders. The term of office for each Officer is one year and
until a successor is elected at the annual meeting of the Board of Directors
and is qualified, subject to removal by the Board of Directors. The Company
will reimburse Directors for their expenses associated with attending
Directors' meetings. However, Directors have not, nor is it anticipated they
will, receive any additional compensation for attending Directors' meetings.
Biographical Information
- ------------------------
Set forth below is certain biographical information for each of the
Company's Officers and Directors and other key personnel.
Richard Steinke is a founder of the Company and currently serves as its
Chairman and Chief Executive Officer. From January 1992 to December 1994, Mr
Steinke served as Chairman and C.E.O. of Alanco Environmental Resources, Inc.,
a manufacturer of environmental/pollution control equipment, Salt Lake City,
Utah. From June 1985 to December 1991, he was the Chairman and C.E.O. of UTI
Chemicals, Inc., a developer and manufacturer of urethane chemicals, El Toro,
California. Mr. Steinke received a B.A. in Political Science and Economics
from the University of Arizona, Tucson, Arizona, in 1967.
Roger A. Fleming joined the Company in February 1997 as Vice-President of
Technology. Prior to joining the Company Mr. Fleming was a senior engineer at
Goodyear Tire & Rubber Company, Akron, Ohio, where Mr. Fleming had worked for
over 31 years. Mr. Fleming holds many patents in product and process design
and has managed the development of Goodyear's liquid phase united spare tire.
Mr. Fleming received a degree in Chemical Engineering from North Carolina
State University, Raleigh, North Carolina in 1963.
Hugh-Sims Hilditch joined the Company in February 1997 in connection with
the Company's acquisition of UTI-UK and currently serves as a Vice President
in charge of the Company's European operations. Mr. Sims-Hilditch has in
excess of the past five years served as the Manager of UTI-UK, Hilmarton,
England, a distributor of urethane products in the United Kingdom and Europe.
<PAGE> 14
Louis M. Haynie was appointed to the Company's board of directors in July
1997 and currently is a Director of Research Medical, Inc. [NASDAQ: RMED],
Salt Lake City, Utah, a developer, manufacturer and distributor of a
diversified line of health care products, focusing on specialized
cardiovascular, vascular and blood management surgical devices and specialty
pharmaceuticals. Mr. Haynie's past board services include the University of
Utah Regents Advisory Board, Redwood Land Co., Salt Lake City, Utah, and MIS
Corporation, Franklin, Tennessee. Mr. Haynie has a law degree from the
University of Utah and has been in the private practice of law since 1951.
Ping Zhang became a director of the Company in February 1997 and
currently serves as a Vice-President. Mr. Zhang's responsibilities included
investigating and developing opportunities and business relationships for the
Company and its products in the Far East. Mr. Zhang has for the past four
years been actively involved in promoting U.S.- China business and trade
relationships. Mr. Zhang received a Masters Degree in Manufacturing and
Industrial Technology from Arizona State University, Tempe, Arizona, in 1993,
and a degree in Mechanical Engineering from Shanghai Jiatong University,
Shanghai, China, in 1991.
David K. Griffiths currently serves as the Company's Treasurer and
principal accounting officer and has since 1960 been self-employed as an
accountant/consultant for various small businesses. Mr. Griffiths offers the
Company 36 years experience in accounting and accounting related systems. Mr.
Griffiths received a B.S. in Accounting from Arizona State University, Tempe,
Arizona in 1961.
Marcy L. Janus currently serves as the Company's Secretary. In December
1989, Marcy received a B.A. in Communications from Kent State University,
Kent, Ohio. Ms. Janis brings to the Company seven years experience in
executive office management and computer services.
KEY EMPLOYEES
- -------------
Derek A. Bowers, joined the Company in June 1995 and is employed as the
Company's Senior Development Engineer. From May 1994 to June 1995, Mr. Bowers
was employed by Huffy Bicycle Company, Celina, Ohio, as an engineer. Mr.
Bowers received a M.S. in Mechanical Engineering from Carnegie Mellon
University, Pittsburgh, Pennsylvania, in May 1994 and a B.S. in Mechanical
Engineering from Old Dominion University, Norfolk, Virginia, in May 1993.
James G. Moore, Jr. joined the Company in August 1997 and is employed as
the Company's manager of mold design and processing. Prior to his employment
with the Company, Mr. Moore worked at Goodyear Tire & Rubber Company, Akron,
Ohio, where he had over 25 years of experience as a master tire carver, which
included five years at the Goodyear apprentice school for tire tread pattern
carving and mold carving. Mr. Moore also took multiple engineering courses
while enrolled in the civil engineering school at the University of Akron,
Akron, Ohio.
Sid Asthana joined the Company in October 1997 and is employed as the
Company's senior chemist. Mr. Asthana has received a B.S. in Chemical
Engineering from the Regional Engineering College of India, Rourkela, India,
July 1990, and a M.S. in Polymer Engineering from the University of Toledo,
Toledo, Ohio in December 1993, and will be receiving his Ph.D. in Polymer
Science from the University of Akron's Polymer Institute, Akron, Ohio, in
January 1998.
<PAGE>
<PAGE> 15
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
- -------------------------------------------------
The Company is not subject to the requirements of Section 16(a) of the
Exchange Act.
ITEM 10. EXECUTIVE COMPENSATION
The following tables set forth certain summary information concerning the
compensation paid or accrued for each of the Company's last three completed
fiscal years to the Company's chief executive officer and each of its other
executive officers that received compensation in excess of $100,000 during
such period (as determined at June 30, 1998, the end of the Company's last
completed fiscal year):
<TABLE>
<CAPTION> Summary Compensation Table
Long Term Compensation
----------------------
Annual Compensation Awards Payouts
Other Restricted
Name and Annual Stock Options LTIP All other
Principal Position Year Salary Bonus($) Compensation Awards /SARs Payout Compensation
- ------------------ ---- ------ -------- ------------ ------ ------- ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Richard A. Steinke 1998 $120,000 -0- -0- -0- -0- -0- -0-
Richard A. Steinke 1997 90,000(1) -0- -0- -0- -0- -0- -0-
C.E.O. and Chairman 1996 -0- -0- -0- -0- -0- -0- -0-
Roger A. Fleming 1998 $130,000 $400,000(2) -0- -0- -0- -0- -0-
Pres. and Director
(since 7/1/97)
Dennis S. Chrobak 1998 $ -0- -0- -0- -0- -0- -0- -0-
Pres. and Director 1997 90,000(3) -0- -0- -0- -0- -0- -0-
(prior to 6/30/97) 1996 -0- -0- -0- -0- -0- -0- -0-
</TABLE>
(1) Effective May 1, 1997, Mr. Steinke requested deferral of his monthly
employment compensation under his employment agreement. The amount set forth
for fiscal year 1997 includes $20,000 of accrued compensation during under the
agreement.
(2) Represents 200,000 restricted shares of common stock issued as a signing
bonus under Employment Agreement and valued at $2.00 per share.
(3) Effective October 1, 1996, Mr. Chrobak requested deferral of his monthly
employment compensation under his employment agreement. The amount set forth
includes $90,000 of accrued compensation during under the agreement, which was
paid in full during fiscal year 1998.
<PAGE>
<PAGE> 16
Employment Agreements and Benefits
- ----------------------------------
In August 1995, the Company entered into an Employment Agreement with
Richard A. Steinke, its Chief Executive Officer. Beginning October 1, 1996,
the Employment Agreement called for Mr. Steinke to be employed for a term of
36 months, with monthly compensation of $10,000, subject to increase at the
discretion of the Board of Directors. The Company provides group health,
medical, and life insurance, similar to that which will be made available to
all full time employees and reimburses Mr. Steinke for out-of-pocket expenses
incurred in connection with the Company's business. In the event of
termination of Mr. Steinke's employment, for reasons other than cause, as
defined in the employment agreement, Mr. Steinke's monthly salary would
continue throughout the balance of the term of the employment agreement.
Effective May 1, 1997, Mr. Steinke declined to receive any further
compensation from the Company based on his employment agreement, therefore all
employment compensation due under Mr. Steinke's employment contract since May
1, 1997 has been accrued. At June 30, 1998, $140,000 of the unpaid salary was
converted to a note payable to Mr. Steinke. Interest on the note consisted of
14,000 shares of the Company's common stock valued at $28,000. The amount of
the note is due December 31, 1998, but is convertible into additional shares
of the Company's common stock at $1.00 per share. As of June 30, 1998, 75,000
shares of common stock of the Company were issued to Mr. Steinke in lieu of
salary from July 1, 1998 to October 1, 1999, the remaining term of Mr.
Steinke's employment agreement. The share issuance was recorded at the
average trading price of the common stock of $2.00 on the date of issuance and
resulted in prepaid compensation of $150,000. The amount will be amortized as
the salary expenses are incurred during the term of the employment agreement.
In June 1998, the Company entered into an Employment Agreement with
Roger A. Fleming, its President and Chief Operating Officer. Beginning June
1, 1998, the Employment Agreement called from Mr. Fleming to be employed for a
term of 36 months, with monthly compensation of $10,000, subject to increase
at the discretion of the Board of Directors. In addition, Mr. Fleming was
issued 180,000 shares of the Company's common stock as prepaid employment
compensation through June 30, 2001, the end of the term of this employment
agreement. These shares were recorded at the average trading price of the
common stock of $2.00 on the date of issuance and resulted in prepaid
compensation of $360,000. As additional incentive, the Company issued Mr.
Fleming 200,000 shares of its common stock as a bonus for signing his
employment agreement. The additional compensation was recorded at the average
trading price of the common stock of $2.00 on the date of issuance and
resulted in bonus compensation to Mr. Fleming of $400,000. Further, Mr.
Fleming was issued a stock option to purchase 200,000 shares of the Company's
common stock at an exercise price of $2.00 per share, exercisable for a term
of 5 years. On June 30, 1998, Mr. Fleming issued the Company a promissory
note in the amount of $400,000 as consideration for exercising the option.
The promissory note bears interest at 8.5% annually and is payable in 5 equal
annual installments beginning June 30, 1999, with payment in full not later
than June 30, 2003. The Company provides group health, medical, and life
insurance, similar to that which will be made available to all full time
employees and reimburses Mr. Fleming for out-of-pocket expenses incurred in
connection with the Company's business. In the event of termination of Mr.
Fleming's employment, for reasons other than cause, as defined in the
employment agreement, Mr. Flemings's monthly salary would continue throughout
the balance of the term of the employment agreement.
<PAGE> 17
As a condition to employment, all the Company's managers and key
personnel are required to sign a nondisclosure and noncompetition agreement.
Under the terms of the nondisclosure and noncompetition agreement, employees
will not be able to provide services or information deemed confidential by the
Company to any other company or person which directly or indirectly competes
with the Company in the tire industry or an industry which, at the time of the
employees' employment, the Company intended to enter. There is no time
limitation on the nondisclosure aspect of the agreement. The noncompetition
clause is for a period of two years and prevents a former employee or
consultant of the Company from acting as an employee, consultant or in any
other capacity for a competitor of the Company. Additionally, all employees
will be required, as a condition of their employment, to enter into a
nondisclosure agreement related to any information or process deemed
confidential by the Company.
Compensation of Directors
- -------------------------
None.
Termination of Employment and Change of Control Arrangement
- -----------------------------------------------------------
Unless otherwise disclosed below, there are no compensatory plans or
arrangements, including payments to be received from the Company, with respect
to any person named in Cash Compensation set out above which would in any
way result in payments to any such person because of his resignation,
retirement, or other termination of such person's employment with the Company
or its subsidiaries, or any change in control of the Company, or a change in
the person's responsibilities following a change in control of the Company.
On August 19, 1997, the Company entered into an agreement with a
principal shareholder and former officer and director, Dennis S. Chrobak
("Chrobak"), to resolve all disputes between them relating to Chrobak's
employment and ownership interest in the Company. In connection therewith the
Registrant agreed to pay Chrobak:
1. $80,000, the amount of Chrobak's accrued salary under his employment
agreement, which amount represents the aggregate amount of Chrobak's monthly
employment compensation for the period from October 1996 through May 1997;
2. $30,000, towards the recission and cancellation of an October 1996
transaction between the Company and Chrobak, wherein the Company had issued to
Chrobak 15,000 shares of its common stock in exchange for cancellation of a
promissory note from the Company to Mr. Chrobak in the principal amount of
$30,000; and
3. $200,000, towards the purchase and cancellation of 1,255,000 shares
of the Company's common stock beneficially owned by Chrobak (the "Chrobak
Shares"). The Chrobak Shares had been issued to Chrobak in February 1995 in
connection with the organization of the Company. The Company has agreed pay
Chrobak $10,000 per month for 20 consecutive months beginning September 1,
1997.
At June 30, 1998, the Company owed Chrobak $80,000 under the terms of the
agreement.
<PAGE>
<PAGE> 18
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of June 30, 1998, the name and the
number of shares of the Company's Common Stock, par value $0.001 per share,
held of record or beneficially by each person who held of record, or was known
by the Company to own beneficially, more than 5% of the 4,619,250 issued and
outstanding shares of the Company's Common Stock, and the name and
shareholdings of each director and of all officers and directors as a group.
Security Ownership of Certain Beneficial Owners
Title
of Name and Address Amount and Nature of Percentage
Class Beneficial Owner Beneficial Ownership(1) of Class
- ----- ---------------- -------------------- ----------
Common Roger A. Fleming D 640,000 13.86
446 W. Lake Avenue
Ravenna, OH 44266
Common Richard A. Steinke D 75,000 1.62
705-B Yucca Street I (2) 455,000 9.85
Boulder City, NV 89005 I (3) 800,000 17.31
Common Hugh Sims-Hilditch I (4) 277,000 6.0
Thane House, Hilmarton
Wiltshire, England SN11 8SB
SECURITY OWNERSHIP OF MANAGEMENT OF THE COMPANY
Title
of Name and Position of Amount and Nature of Percentage
Class Officer and/or Director Beneficial Ownership(1) of Class
- ----- ----------------------- -------------------- ----------
Common Roger A. Fleming, President D 640,000 13.86
and Director
Common Richard A. Steinke, C.E.O. D 75,000 1.62
and Director I (2) 455,000 9.85
(3) 800,000 17.31
Common Ping Zhang, V.P. and Director D 2,000 .04
Common Hugh Sims-Hilditch, V.P. and I (4) 277,000 6.32
Director
Common Louis M. Haynie, Director D 69,000 1.65
I (5) 2,000 .04
Common David K. Griffiths, Treasurer D 25,717 .55
Common Marcy L. Janus, Secretary D 18,208 .39
All Officers and Directors
as a Group (7 person) D 829,925 17.96
I 1,534,000 33.20
--------- ----
Total Beneficial Ownership 2,363,925 51.17
========= ====
[Footnotes continue on next page]
<PAGE> 19
(1) Indirect and Direct ownership are referenced by an "I" or "D",
respectively. All shares owned directly are owned beneficially and of record
and such shareholder has sole voting, investment, and dispositive power,
unless otherwise noted.
(2) Represent shares owned beneficially and of record by Gemini Funding
Services Profit Sharing Account, of which Richard A. Steinke is the principal
beneficiary.
(3) Represent shares owned beneficially and of record by S102 Irrevocable
Trust, for which Richard A. Steinke is the trustee.
(4) Represent shares owned beneficially and of record by Coronel Investments
Limited, a Jersey corporation, of which Hugh Sims-Hilditch is the principal
owner.
(5) Represent shares owned beneficially and of record by Gae Haynie, spouse of
Louis M. Haynie, and of which Mr. Haynie may be deemed to have beneficial
ownership.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
DSS License Agreement
- ---------------------
On August 19, 1997, the Company entered into a revised agreement amending
the terms of the June 5, 1995, DSS License Agreement with American Mobility
Systems, Inc. ("AMS"), an entity Messrs. Chrobak and Steinke. The DSS License
Agreement was amended to provide that the license be directly between the
Company and Mr. Chrobak and Mr. Steinke. The DSS License Agreement grants the
Company an exclusive license to use, sell, license, or otherwise exploit the
DSS Technology worldwide in exchange for a royalty. The revision of the DSS
License Agreement provides for the royalty to be reduced from $1.00 to $0.50
for each unit of production produced and sold by the Company. All royalties
payable under the DSS License Agreement will be paid to Mr. Chrobak. Mr.
Steinke will not receive a royalty under the agreement so long as he is
affiliated with the Company. However, due to the relationship of Mr. Steinke
and Mr. Chrobak with the Company at the time the DSS License Agreement was
made, the DSS License Agreement and the revisions thereto cannot be considered
to have been negotiated at arm's length.
Flat-Free (Non-pneumatic)Tire License Agreement
- -----------------------------------------------
On August 19, 1997, the Company entered into a revised agreement amending
the terms of the October 27, 1995, Non-pneumatic Tire License Agreement with
AMS. The Non-pneumatic Tire Agreement was amended to provide that the license
be directly between the Company and Mr. Chrobak and Mr. Steinke. The
agreement grants the Company an exclusive license to use, sell, license, or
otherwise exploit the technology worldwide in exchange for a royalty. The
revision of the Non-pneumatic License Agreement provides for the royalty to be
reduced from $0.25 to $0.125 for each bicycle tire produced and sold by the
Company utilizing the technology. All royalties payable under the agreement
will be paid to Mr. Chrobak. Mr. Steinke will not receive a royalty under the
agreement so long as he is affiliated with the Company. Due to the
relationship of Mr. Steinke and Mr. Chrobak with the Company at the time the
agreement was made, the Non-pneumatic License Agreement cannot be considered
to have been negotiated at arm's length.
<PAGE> 20
Stock Subscriptions Receivables
- -------------------------------
In April 1995, the Company entered into subscription agreements with
David Griffiths (a current officer and employee), Gary Dalton and Philip
Chrobak (former officers and employees of the Company), to acquire an
aggregate of 170,000 shares of the Company's common stock at a purchase price
of $1.00 per share, in exchange for promissory notes bearing interest at 8%
per annum, payable in 36 months. The promissory notes was subsequently
amended to become due six months from the close of the Company's initial
public offering. The balance of any amounts due under the promissory notes was
received by the Company during the fiscal year ended June 30, 1998, and no
further amounts are due.
During the fiscal year ended June 30, 1998, Roger A. Fleming, the
Company's president utilized a promissory note in the principal amount of
$400,000 to exercise an option to purchase 200,000 shares of the Company's
common stock at an exercise price of $2.00 per share. The promissory note
bears interest at 8.5% annually and is payable in 5 equal annual installments
beginning June 30, 1999, with payment in full not later than June 30, 2003.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a)(1)FINANCIAL STATEMENTS. The following financial statements are included
in this report:
Title of Document Page
- ----------------- ----
Independent Auditors' Report of Jones, Jensen & Company 22
Report of the Auditors to the Shareholders of Urathon Limited 23
Consolidated Balance Sheet as of June 30, 1998 24
Consolidated Statements of Operations for the years ended June 30, 1998
and 1997 and from inception on January 30, 1995 through June 30, 1998 26
Consolidated Statements of Stockholders' Equity 27
Consolidated Statements of Cash Flows for the years ended June 30, 1998
and 1997 and from inception on January 30, 1995 through June 30, 1998 30
Notes to Consolidated Financial Statements 32
(a)(2)FINANCIAL STATEMENT SCHEDULES. The following financial statement
schedules are included as part of this report: None.
(a)(3)EXHIBITS. The following exhibits are included as part of this report:
SEC
Exhibit Reference
Number Number Title of Document Location
- ------- --------- ----------------- ------------
27 27 Financial Data Schedule This Filing
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed with the Commission during the
quarter ended June 30, 1998.
<PAGE>
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated:
AMERICAN TIRE CORPORATION
Date: May 27, 1999 By /S/Richard A. Steinke, Chairman of
the Board
Date: May 27, 1999 By /S/ John Hoffman, C.E.O. [Principal
Executive Officer]
Date: May 27, 1999 By /S/David K. Griffiths, Treasurer
[Principal Accounting Officer]
<PAGE>
<PAGE> 22
INDEPENDENT AUDITORS' REPORT
Board of Directors
American Tire Corporation and Subsidiary
(A Development Stage Company)
Boulder City, Nevada
We have audited the accompanying consolidated balance sheet of American Tire
Corporation and Subsidiary (a development stage company) as of June 30, 1998
and the related consolidated statements of operations, stockholders' equity
and cash flows for the years ended June 30, 1998 and 1997 and from inception
on January 30, 1995 through June 30, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit. We did not audit the financial statements of
Urathon Limited (formerly UTI Chemicals (Europe) Limited), a wholly-owned
subsidiary, which statements reflect total assets of $219,792 as of June 30,
1998 and total revenues of $334,594 for the year then ended. Those statements
were audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for Urathon Limited, is
based solely on the report of the other auditors.
We have conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated 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. We believe
that our audit and the report of other auditors provide a reasonable basis for
our opinion.
In our opinion, based on our audit and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of American Tire
Corporation and Subsidiary (a development stage company) as of June 30, 1998,
and the consolidated results of their operations and their cash flows for the
years then ended June 30, 1998 and 1997 and from inception on January 30, 1995
through June 30, 1998, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 8 to the
consolidated financial statements, the Company has incurred significant losses
which have resulted in an accumulated deficit, raising substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters are also described in Note 8. The consolidated financial
statements do not include any adjustments that might result from the outcome
of this uncertainty.
/S/ Jones, Jensen & Company
Salt Lake City, Utah
May 17, 1999
<PAGE>
<PAGE> 23
URATHON LIMITED
REPORT OF THE AUDITORS TO THE SHAREHOLDERS OF
URATHON LIMITED
We have audited the financial statements on pages four to thirteen which have
been prepared under the historical cost convention and the accounting policies
set out on page nine.
Respective responsibilities of directors and auditors
- -----------------------------------------------------
As described on page two the company's directors are responsible for the
preparation of financial statements. It is our responsibility to form an
independent opinion, based on our audit, on those statements and to report our
opinion to you.
Basis of opinion
- ----------------
We conducted our audit in accordance with Auditing Standards issued by the
Auditing Practices Board. An audit includes examination, on a test basis, of
evidence relevant to the amounts and disclosures in the financial statements.
It also includes an assessment of the significant estimates and judgements
made by the directors in the preparation of the financial statements, and of
whether the accounting policies are appropriate to the company's
circumstances, consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial statements.
Fundamental uncertainty
- -----------------------
Going concern
In forming our opinion we have considered the adequacy of the disclosures made
in the Accounting policies note on page 9 of the financial statements,
concerning the possible outcomes of a strategic review of the business, and
the subordination of balances owed to two significant creditors. It is not
possible to quantify the potential effect of the review.
Opinion
- -------
In our opinion the financial statements give a true and fair view of the state
of the company's affairs as at 30 June 1998 and of its loss for the year then
ended and have been properly prepared in accordance with the Companies Act
1985.
/S/WISE & CO.
CHARTERED ACCOUNTANTS
REGISTERED AUDITORS
50 WEST STREET
FARNHAM
SURREY
GU9 7DX
Dated: 29 April 1999
<PAGE> 24
AMERICAN TIRE CORPORATION AND SUBSIDIARY
(A Development Stage Company)
Consolidated Balance Sheet
ASSETS
------
June 30,
1998
------------
CURRENT ASSETS
Cash and cash equivalents $ 278,822
Accounts receivable 89,463
Accounts receivable - related party (Note 3) 3,971
Inventory (Note 1) 138,852
Prepaid expenses 173,052
------------
Total Current Assets 684,160
------------
PROPERTY AND EQUIPMENT (Note 1)
Land 59,000
Building and improvements 291,010
Equipment and vehicles 995,138
Furniture and fixtures 39,124
Less - accumulated depreciation (301,686)
------------
Total Property and Equipment 1,082,586
------------
OTHER ASSETS
Patents (Note 1) 55,542
Deposits 854
------------
Total Other Assets 56,396
------------
TOTAL ASSETS $ 1,823,142
============
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<PAGE> 25
AMERICAN TIRE CORPORATION AND SUBSIDIARY
(A Development Stage Company)
Consolidated Balance Sheet (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
June 30,
1998
------------
CURRENT LIABILITIES
Accounts payable $ 345,278
Accounts payable - related parties (Note 3) 5,600
Accrued expenses 17,072
Notes payable (Note 7) 1,122,500
Line of credit (Note 6) 25,000
------------
Total Current Liabilities 1,515,450
------------
TOTAL LIABILITIES 1,515,450
------------
COMMITMENTS AND CONTINGENCIES (Note 4)
STOCKHOLDERS' EQUITY
Preferred stock: 5,000,000 shares authorized
of $0.001 par value,-0-shares issued and outstanding -
Common stock: 25,000,000 shares authorized
of $0.001 par value, 4,619,250 shares issued
and outstanding 4,619
Additional paid-in capital 7,798,789
Stock subscription receivable (Note 2) (400,000)
Related party prepaid compensation contracts (Note 3) (576,667)
Other comprehensive income 3,172
Deficit accumulated during the development stage (6,522,221)
------------
Total Stockholders' Equity 307,692
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,823,142
============
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<PAGE> 26
AMERICAN TIRE CORPORATION AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Operations
<TABLE>
<CAPTION>
From
Inception on
January 30,
For the Years Ended 1995 Through
June 30, June 30,
1998 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
NET SALES $ 373,247 $ 69,518 $ 442,765
COST OF SALES 266,874 47,882 314,756
------------ ------------ ------------
GROSS MARGIN 106,373 21,636 128,009
------------ ------------ ------------
EXPENSES
Consulting 148,853 292,414 633,645
Payroll and payroll taxes 1,229,892 521,773 2,004,239
Depreciation and amortization 153,360 189,563 382,222
Bad debt expense 13,721 21,112 34,833
Selling, general and administrative 648,496 457,439 1,421,254
------------ ------------ ------------
Total Expenses 2,194,322 1,482,301 4,476,193
------------ ------------ ------------
LOSS BEFORE OTHER INCOME (EXPENSE) (2,087,949) (1,460,665) (4,348,184)
------------ ------------ ------------
OTHER INCOME (EXPENSES)
Other income - 56,096 56,096
Interest income 6,170 17,649 35,591
Interest expense (349,505) (19,090) (425,517)
Impairment loss (Note 1) (1,694,111) - (1,694,111)
Inventory impairment loss (140,712) - (140,712)
Loss on disposition of assets (1,722) (3,662) (5,384)
------------ ------------ ------------
Total Other Income (Expense) (2,179,880) 50,993 (2,174,037)
------------ ------------ ------------
NET LOSS $ (4,267,829) $ (1,409,672) $ (6,522,221)
============ ============ ============
OTHER COMPREHENSIVE INCOME
Foreign currency adjustments 188 2,984 3,172
------------ ------------ ------------
NET COMPREHENSIVE LOSS $ (4,267,641) $ (1,406,688) $ (6,519,049)
============ ============ ============
BASIC LOSS PER SHARE $ (1.20) $ (0.33)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 3,555,799 4,246,888
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<PAGE> 27
AMERICAN TIRE CORPORATION AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Related Deficit
Party Accumulated
Additional Other Stock Prepaid During the
Common Stock Paid-in Comprehensive Subscription Compensation Development
Shares Amount Capital Income Receivable Contracts Stage
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January 30, 1995
(Inception) - $ - $ - $ - $ - $ - $ -
Common stock issued for
cash during February
1995 at $0.001 per share 2,510,000 2,510 - - - - -
Common stock issued for
services rendered in
February 1995 at $0.10
per share 300,000 300 29,700 - - - -
Common stock issued for
services rendered during
April 1995 at $1.00 per
share 100,000 100 99,900 - - - -
Common stock issued for
notes receivable valued
at $1.00 per share 170,000 170 169,830 - (170,000) - -
Repayment of stock
subscriptions receivable
with cash or services
rendered - - - - 76,100 - -
Common stock issued for
cash at $1.00 per share 720,000 720 719,280 - - - -
Stock offering costs - - (78,271) - - - -
Net loss for the period
ended June 30, 1995 - - - - - - (248,630)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, June 30, 1995 3,800,000 3,800 940,439 - (93,900) - (248,630)
Common stock issued for
cash at $6.00 per share 40,642 41 243,811 - - - -
Stock offering costs - - (1,600) - - - -
Repayment of stock
subscriptions receivable
by providing services - - - - 8,900 - -
Net loss for the year
ended June 30, 1996 - - - - - - (596,090)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, June 30, 1996 3,840,642 $ 3,841 $ 1,182,650 $ - $ (85,000)$ - $ (844,720)
----------- ----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<PAGE> 28
AMERICAN TIRE CORPORATION AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity (Continued)
<TABLE>
<CAPTION>
Related Deficit
Party Accumulated
Additional Other Stock Prepaid During the
Common Stock Paid-in Comprehensive Subscription Compensation Development
Shares Amount Capital Income Receivable Contracts Stage
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1996 3,840,642 $ 3,841 $ 1,182,650 $ - $ (85,000) $ - $ (844,720)
Cancellation of common
stock (34,977) (35) (209,827) - - - -
Common stock issued for
cash at $6.00 per share
pursuant to public
offering 344,083 344 2,064,154 - - - -
Stock offering costs - - (307,509) - - - -
Common stock issued in lieu
of debt at $6.00 per share
during November 1996 27,000 27 161,973 - - - -
Common stock issued for
cash at $6.00 per share
during January 1997 155,000 155 929,845 - - - -
Common stock issued to
acquire Urathon Limited
at $7.75 per share 200,000 200 1,549,800 - - - -
Common stock issued for
services rendered at
$6.125 per share during
February 1997 15,000 15 91,860 - - - -
Common stock issued for
services rendered at
$7.99 per share during
June 1997 15,000 15 119,865 - - - -
Repayment of stock
subscriptions receivable
by providing services - - - - 40,000 - -
Interest accrual on stock
subscription receivable - - - - (5,000) - -
Currency translation
adjustment - - - 2,984 - - -
Net loss for the year
ended June 30, 1997 - - - - - - (1,409,672)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, June 30, 1997 4,561,748 $ 4,562 $ 5,582,811 $ 2,984 $ (50,000)$ - $(2,254,392)
----------- ----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<PAGE> 29
AMERICAN TIRE CORPORATION AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity (Continued)
<TABLE>
<CAPTION>
Related Deficit
Party Accumulated
Additional Other Stock Prepaid During the
Common Stock Paid-in Comprehensive Subscription Compensation Development
Shares Amount Capital Income Receivable Contracts Stage
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1997 4,561,748 $ 4,562 $ 5,582,811 $ 2,984 $ (50,000) $ $(2,254,392)
Exercise of options for
common stock at $2.50
per share 5,500 5 13,745 - - - -
Common stock repurchased
at $0.18 per share(Note 3)(1,270,000) (1,270) (228,730) - - - -
Common stock issued in lieu
of interest on promissory
notes at approximately
$3.24 per share 152,250 152 492,629 - - - -
Common stock issued in lieu
of notes payable at $1.00
per share 400,000 400 399,600 - - - -
Common stock issued as
prepaid salary under related
party compensation contracts
at $2.00 per share 305,000 305 609,695 - - (610,000) -
Common stock issued for
subscription receivable
at $2.00 per share 200,000 200 399,800 - (400,000) - -
Common stock issued for
services at $2.00 per
share 264,752 265 529,239 - - - -
Receipt of stock
subscriptions - - - - 50,000 - -
Currency translation
adjustment - - - 188 - - -
Amortization of prepaid
compensation contracts - - - - - 33,333 -
Net loss for the year
ending June 30, 1998 - - - - - - (4,267,829)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, June 30, 1998 4,619,250 $ 4,619 $ 7,798,789 $ 3,172 $ (400,000)$ (576,667)$(6,522,221)
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<PAGE> 30
AMERICAN TIRE CORPORATION AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
From
Inception on
January 30,
For the Years Ended 1995 Through
June 30, June 30,
1998 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (4,267,829) $ (1,409,672) $ (6,522,221)
Adjustments to Reconcile Net Loss to
Net Cash (Used) by Operating Activities:
Depreciation and amortization 153,360 189,563 382,222
Bad debt expense 13,721 21,112 34,833
Loss on disposition of assets 1,722 3,662 5,384
Impairment loss 1,694,111 - 1,694,111
Inventory impairment loss 140,712 - 140,712
Common stock issued for services 529,504 211,755 870,259
Services provided in lieu of cash payment
on subscriptions receivable - 40,000 75,000
Common stock issued in lieu of interest 492,781 - 492,781
Changes in Assets and Liabilities:
(Increase) decrease in accounts receivable and
accounts receivable- related (30,996) (64,511) (118,274)
(Increase) decrease in inventory 24,140 (172,419) (279,564)
(Increase) decrease in prepaid expenses (48,399) (58,413) (139,719)
(Increase) decrease in other assets (27,160) 192,921 66,533
Increase (decrease) in accounts payable and
accrued expenses 282,841 (129,401) 256,950
------------ ------------ ------------
Net Cash (Used) by Operating Activities (1,041,492) (1,175,403) (3,040,993)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (357,005) (469,392) (1,349,053)
Purchase of subsidiary - (400,000) (400,000)
------------ ------------ ------------
Net Cash (Used) in Investing Activities $ (357,005) $ (869,392) $ (1,749,053)
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<PAGE> 31
AMERICAN TIRE CORPORATION AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Cash Flows (Continued)
<TABLE>
<CAPTION>
From
Inception on
January 30,
For the Years Ended 1995 Through
June 30, June 30,
1998 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of common stock $ (230,000) $ (209,862) $ (439,862)
Receipt of subscriptions receivable 50,000 - 50,000
Payment of stock offering costs - (160,401) (160,401)
Proceeds from notes payable 1,382,500 - 2,235,338
Payments made on notes payable and line of credit (30,380) (82,458) (404,838)
Payments made to related parties (10,000) - (10,000)
Common stock issued for cash 13,750 2,994,498 3,798,631
------------ ------------ ------------
Net Cash Provided by Financing Activities 1,175,870 2,541,777 5,068,868
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH (222,627) 496,982 278,822
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 501,449 4,467 -
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 278,822 $ 501,449 $ 278,822
============ ============ ============
SUPPLEMENTAL SCHEDULE OF CASH FLOW ACTIVITIES
CASH PAID FOR:
Interest $ 8,466 $ 19,090 $ 56,038
Income taxes $ - $ - $ -
NON-CASH FINANCING ACTIVITIES
Common stock issued for services rendered $ 529,504 $ 211,755 $ 870,259
Common stock issued in lieu of debt and interest $ 892,781 $ 162,000 $ 1,054,781
Common stock issued for acquisition of subsidiary $ - $ 1,550,000 $ 1,550,000
Common stock issued as prepaid salary $ 610,000 $ - $ 610,000
</TABLE>
In April 1995, the Company issued 170,000 shares of common stock at $1.00 per
share in exchange for notes receivable. During the period ended June 30,
1995, services were provided valued at $26,100, which were offset against the
notes receivable. During the years ended June 30, 1997 and 1996, an
additional $40,000 and $8,900, respectively, of services were provided, which
were offset against the notes receivable.
During the year ended June 30, 1998, the Company issued 200,000 shares of
common stock at $2.00 per share in exchange for notes receivable.
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<PAGE> 32
AMERICAN TIRE CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
Notes to the Consolidated Financial Statements
June 30, 1998
NOTE 1- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Organization
The consolidated financial statements include those of American Tire
Corporation (ATC) and its wholly-owned subsidiary, Urathon Limited (UL)
(formerly UTI Chemicals (Europe) Limited). Collectively, they are referred to
herein as "the Company".
ATC was incorporated under the laws of the State of Nevada on January 30,
1995. The Company was organized to take advantage of existing proprietary and
non-proprietary technology available for the manufacturing of specialty tires.
ATC has had limited operations since its organization and is a "development
stage" company. The Company intends to engage in the manufacturing,
marketing, distribution, and sales of airless specialty tires and tire-wheel
assemblies and currently is manufacturing airless tires in limited quantities
at its manufacturing facility located in Ravenna, Ohio.
On February 28, 1997, ATC purchased UL for $1,950,000 by issuing 200,000
shares of its common stock plus $400,000 in cash in exchange for 100% of the
issued and outstanding stock of UL. The common stock was valued at its
trading price of $7.75 per share.
UL was incorporated under the laws of England and Wales on October 8, 1990 for
the purpose of promoting and developing products within the chemical industry.
Since 1990, UL has been a distributor of urethane bicycle, wheelchair and
other specialty tires in the United Kingdom and Europe. UL distributes
urethane tires under the registered trade name "Urathon" in approximately 540
retail outlets in England, Scotland and Wales. UL also sells product in
France, Denmark, Austria, the Netherlands and Germany through independent
distributors.
b. Accounting Method
The Company's consolidated financial statements are prepared using the accrual
method of accounting. The Company has elected a June 30 year end.
c. Cash and Cash Equivalents
Cash equivalents include short-term, highly liquid investments with maturities
of three months or less at the time of acquisition. The Company's cash account
at its bank is insured by the FDIC up to $100,000. The amount in excess of the
insured limits at June 30,1998 was $178,822.
d. Basic Loss Per Share
The computations of basic loss per share of common stock are based on the
weighted average number of shares outstanding during the the period of the
consolidated financial statements. Common stock equivalents, consisting of
stock options, have not been included in the calculation as their effect is
antidilutive for the periods presented.
<PAGE>
<PAGE> 33
AMERICAN TIRE CORPORATION AND SUBSIDIARY
(A Development Stage Company)
Notes to the Consolidated Financial Statements
June 30, 1998
NOTE 1- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)
e. Principles of Consolidation
The June 30, 1998 consolidated financial statements include those of American
Tire Corporation and its wholly-owned subsidiary, Urathon Limited. All
significant intercompany accounts and transactions have been eliminated.
For the Company's foreign subsidiary (UL), the functional currency has been
determined to be the local currency. Accordingly, assets and liabilities are
translated at year-end exchange rates, and operating statement items are
translated at average exchange rates prevailing during the year. The
resultant cumulative translation adjustments to the assets and liabilities are
recorded as a separate component of stockholders' equity. Exchange
adjustments resulting from foreign currency transactions are included in the
determination of net income (loss). Such amounts are immaterial for all years
presented.
In accordance with Statement of Financial Accounting Standards No. 95
"Statement of Cash Flows," cash flows from the Company's foreign subsidiary
are calculated based upon the local currencies. As a result, amounts related
to assets and liabilities reported on the consolidated statements of cash
flows will not necessarily agree with changes in the corresponding balances on
the balance sheets.
f. Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires managements to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
g. Provision for Taxes
As of June 30, 1998, the Company has net operating loss carry forwards of
approximately $6,500,000 which will expire in 2013. No tax benefit has been
reported in the consolidated financial statements because the potential tax
benefits of the net operating loss carryforwards are offset by a valuation
allowance of the same amount.
h. Inventory
Inventory is stated at the lower of cost (computed on a first-in, first-out
basis) or market. The inventory consists of finished goods produced in the
Company's plant and products purchased for resale.
<PAGE>
<PAGE> 34
AMERICAN TIRE CORPORATION AND SUBSIDIARY
(A Development Stage Company)
Notes to the Consolidated Financial Statements
June 30, 1998
NOTE 1- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)
i. Property and Equipment
Property and equipment are stated at cost. Expenditures for small tools,
ordinary maintenance and repairs are charged to operations as incurred. Major
additions and improvements are capitalized. Depreciation is computed using
the straight-line method over estimated useful lives as follows:
Building and improvements 40 years
Equipment and vehicles 5 to 7 years
Furniture and fixtures 7 years
Depreciation expenses for the years ended June 30, 1998 and 1997 was $153,411
and $68,555, respectively.
j. Revenue Recognition
Revenue is recognized upon shipment of goods to the customer.
k. Concentrations of Risk
Foreign Currency Translation
- ----------------------------
Since UL is a foreign company whose financial statements must be translated
into U.S. Dollars to conform with the requirements of the Securities and
Exchange Commission, major changes in the currency exchange rate between Pound
Sterling and U.S. Dollars may have a significant impact on operations of the
Company. Although the Company does not anticipate the currency exchange rate
to be significantly different over the 12 months, no such assurances can be
given.
Accounts Receivable
- -------------------
Credit losses, if any, have been provided for in the consolidated financial
statements and are based on managements' expectations. The Company's accounts
receivable are subject to potential concentrations of credit risk. The
Company does not believe that it is subject to any unusual, or significant
risks in the normal course of its business.
l. Goodwill and Technology
Goodwill and technology was originally recorded which consisted of the excess
of the purchase price over the fair value of net tangible assets of the
purchased subsidiary and was amortized on the straight-line method over a 5
year period.
The Company periodically reviews goodwill and technology for impairment by
comparing undiscounted projected income over the remaining amortization period
to the unamortized balance of goodwill and technology. Amortization expense on
the goodwill and technology for the year ended June 30, 1998 and 1997 was $-0-
and $121,008.
During the year ended June 30, 1998, an impairment loss of $1,694,111 was
recorded since the Company was unable to determine the present value of the
future cash flows of the purchased subsidiary.
<PAGE> 35
AMERICAN TIRE CORPORATION AND SUBSIDIARY
(A Development Stage Company)
Notes to the Consolidated Financial Statements
June 30, 1998
NOTE 1- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)
m. Patents
Patents and related technology have been capitalized at June 30, 1998. The
patents are still pending, thus, no amortization of the costs has been
recorded for the year ended June 30,1998.
n. Change in Accounting Principle
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
130, "Reporting Comprehensive Income" during the year ended June 30, 1998.
SFAS No. 130 established standards for reporting and display of comprehensive
income (loss) and its components (revenues, expenses, gains and losses) in a
full set of general purpose financial statements. This statement requires
that an enterprise classify items of other comprehensive income by their
nature in a financial statement and display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a balance sheet. SFAS No. 130 is effective
for fiscal years beginning after December 15, 1997. The Company has
retroactively applied the provisions of this new standard by showing the other
comprehensive income (loss) for all years presented.
o. Advertising
The Company follows the policy of charging the costs of advertising to expense
as incurred.
NOTE 2 - STOCK SUBSCRIPTION RECEIVABLE
In April 1995, the Company entered into subscription agreements for three of
its officers to acquire an aggregate of 170,000 shares of common stock at a
purchase price of $1.00 per share, in exchange for promissory notes bearing
interest at 8% per annum, principal and interest payable in April, 1998. The
officers provided accounting and consulting services valued at $26,100 which
were charged to operations during the period ended June 30, 1995, and offset
against the amount owed under the promissory notes. A separate officer paid
$50,000 toward the note receivable during the year ended June 30, 1995. The
promissory notes were amended to become due no later than six months from the
close of the Company's initial public offering.
During the year ended June 30, 1996, an officer provided $8,900 of accounting
services, which was offset against the amounts owed under the promissory note.
During the year ended June 30, 1997, additional services valued at $40,000
were provided, which were offset against the amount owed under the promissory
note. The remaining $45,000 plus accrued interest of $5,000 was received in
cash by the Company during the year ended June 30, 1998. Also during the year
ended June 30, 1998, an officer of the Company signed an agreement and note to
purchase 200,000 shares of the Company's common stock at a price of $2.00 per
share. At June 30, 1998, $400,000 was owed under a note, which has been
presented as a reduction of stockholders' equity.
<PAGE>
<PAGE> 36
AMERICAN TIRE CORPORATION AND SUBSIDIARY
(A Development Stage Company)
Notes to the Consolidated Financial Statements
June 30, 1998
NOTE 3 - RELATED PARTY TRANSACTIONS
In August 1995, the Company entered into employment agreements with two of its
officers. These two agreements are for 36 months at a monthly compensation of
$10,000 each. At June 30, 1997, $100,000 was owed to the two officers for
unpaid wages. In addition, $50,000 was due to another officer at June 30,
1997 for services rendered to the Company from February 1, 1997 to June 30,
1997. At June 30, 1998, $140,000 of the unpaid wages was converted to a note
payable. Interest on the note payable consists of 14,000 shares of the
Company's common stock valued at $28,000 (effective interest rate of 40%).
The amount is due December 1, 1998.
In October 1995, the Company entered into a Technology License Agreement with
a related party providing for a royalty of $0.25 to be paid for each tire sold
by the Company utilizing the "non-pneumatic tire technology" as defined by the
agreement. This agreement was subsequently amended to reduce the royalty
payment from $0.25 per unit sold to $0.125 per unit sold. The royalty
payments are to be paid quarterly.
As of June 30, 1998, $3,971 was owed to the Company by certain employees and
related entities. $5,600 was also owed to certain related entities as of June
30, 1998. These amounts are unsecured and due on demand.
The Company entered into an Agreement of Settlement and Mutual Release on
August 19, 1997 with two former officers and another employee of the Company.
As part of the settlement agreements, the Company agreed to pay a total of
$360,000 for accrued wages and the purchase and cancellation of 1,270,000
shares of the Company's outstanding common stock. $160,000 was paid on the
date of the agreement and the remaining $200,000 was to be paid in twenty
equal consecutive monthly payments.
As of June 30, 1998, salary and management fees in the amount of $576,667 had
been prepaid to officers and consultants of the Company through the issuance
of stock. The amount will be amortized as the salary and consulting expenses
are incurred for these individuals. The amount is broken out as follows:
1. 75,000 shares were issued to the Company's CEO in lieu of salary from
July 1, 1998 to October 1, 1999. These shares were recorded at the average
trading price of the stock of $2.00 on the date of issuance resulting in a
prepaid amount of $150,000.
2. 50,000 shares were issued as a management fee for services to be
rendered from March 1, 1998 to February 28, 1999. These shares were recorded
at the average trading price of the stock of $2.00 on the date of issuance,
resulting in an initial prepaid expense of $100,000. Amortization through
June 30, 1998 was $33,333, resulting in a prepaid amount of $66,667 as of June
30, 1998.
3. 180,000 shares were issued to the Company's president in lieu of
salary from July 1, 1998 to June 30, 2001. These shares were recorded at the
average trading price of the stock of $2.00 on the date of issuance resulting
in a prepaid amount of $360,000.
The total prepaid amount of $576,667 has been presented as a reduction of
stockholders' equity (related party prepaid compensation contracts) as of June
30, 1998.
<PAGE> 37
AMERICAN TIRE CORPORATION AND SUBSIDIARY
(A Development Stage Company)
Notes to the Consolidated Financial Statements
June 30, 1998
NOTE 4 - COMMITMENTS AND CONTINGENCIES
The Company maintains an executive office suite in Boulder City, Nevada which
is currently provided to the Company at a rent charge of $425 per month.
On June 5, 1995, the Company entered into a Technology License Agreement with
a related party. This agreement provides the Company the exclusive license to
use, sell and license the technology for manufacturing a wheel-tire assembly
known as the "Dynamic Steerable Spring." The agreement originally specified
that a royalty of either $1.00 per unit sold directly by the Company or eight
percent of any royalty the Company should receive from any third party
licensee to be paid quarterly. The agreement was superceded on August 19,
1997. The terms of the Agreement were amended to reduce the royalty payment
from $1.00 per unit sold to $0.50 per unit sold. In addition, a separate
Technology License Agreement relating to the "non-pneumatic tire technology"
was amended to reduce the royalty payment from $0.25 per unit sold to $0.125
per unit sold (see Note 3). All royalty payments are to be paid quarterly.
NOTE 5 - STOCK TRANSACTIONS
Pursuant to a recission offer and agreement, the Company repurchased and
canceled 34,977 shares of its outstanding common stock at $6.00 per share
during the year ended June 30, 1997.
During the year ended June 30, 1997, the Company completed a public offering
of 344,083 shares of common stock at $6.00 per share for total proceeds of
$2,064,498. The Company also completed a private placement during January
1997 of 155,000 shares at $6.00 per share for total proceeds of $930,000.
During the year ended June 30, 1997, the Company issued 27,000 shares of
common stock valued at $162,000 in lieu of outstanding debt. The Company also
issued 15,000 shares of common stock valued at $91,875 for services rendered,
and 15,000 shares valued at $119,880 pursuant to a management agreement (Note
4).
During the year ended June 30, 1998, the Company issued 152,250 shares of
common stock valued at $492,781 in lieu of interest on promissory notes. The
Company issued 400,000 shares of common stock valued at $400,000 in lieu of
outstanding debt. The Company also issued 305,000 shares of common stock
under related party compensation contracts valued at $610,000 and 264,752
shares of common stock for services valued at $529,504.
NOTE 6 - LINE OF CREDIT
The Company has a line of credit with a bank. The loan is secured and accrues
interest at a variable rate of approximately 12% per annum. The balance
outstanding on the line of credit at June 30, 1998 was $25,000.
<PAGE>
<PAGE> 38
AMERICAN TIRE CORPORATION AND SUBSIDIARY
(A Development Stage Company)
Notes to the Consolidated Financial Statements
June 30, 1998
NOTE 7 - NOTES PAYABLE
During the year ended June 30, 1998, the Company entered into various
promissory notes payable for a total of $1,122,500 as of June 30, 1998. As
part of the original note agreements, prepaid interest was to be paid on each
note in the form of shares of the Company's common stock. The shares were
recorded at a total value of $492,781 (effective interest rate of
approximately 65%). Amortization of the interest through June 30, 1998 was
$341,039 resulting in prepaid interest of $151,742 as of June 30, 1998. The
notes have maturity dates ranging from July 2, 1998 to December 23, 1998.
Therefore, the entire amount is considered to be a current liability as of
June 30, 1998. Of the $1,122,500 due at June 30, 1998, $140,000 was due to
the Company's CEO (a related party).
NOTE 8 - GOING CONCERN
The Company's consolidated financial statements are prepared using generally
accepted accounting principles applicable to a going concern which
contemplates the realization of assets and liquidation of liabilities in the
normal course of business. The Company has historically incurred significant
losses which have resulted in an accumulated deficit of $6,522,221 at June 30,
1998 which raises substantial doubt about the Company's ability to continue as
a going concern. The accompanying consolidated financial statements do not
include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result from the outcome of this uncertainty. It is the intent of
management to create additional revenues through the development and sales of
its patented tires and to rely upon additional equity financing if required to
sustain operations until revenues are adequate to cover the costs.
NOTE 9 - STOCK OPTIONS OUTSTANDING
The Company's Board of Directors has authorized a Non-Qualified Stock Option
Plan that allows for the Company to issue options to purchase up to 35,000
shares of the Company's common stock that may be issued to consultants or
others that provide professional services to the Company. The stock options
have been valued at fair market value according to FAS 123, "Accounting for
Stock-Based Compensation." Stock option activity for the year ended June 30,
1998 consisted of the following:
Number
Of Shares
------------
Outstanding at June 30, 1997 20,000
Granted during the year -
Exercised during the year (5,500)
------------
Outstanding at June 30, 1998 14,500
============
<PAGE>
<PAGE> 39
AMERICAN TIRE CORPORATION AND SUBSIDIARY
(A Development Stage Company)
Notes to the Consolidated Financial Statements
June 30, 1998
NOTE 9 - STOCK OPTIONS OUTSTANDING (Continued)
The 20,000 stock options outstanding at June 30, 1998 are summarized as
follows:
Date Number of Exercise Expiration
Issued Options Price Date
------ --------- -------- ----------
May 31, 1997 14,500 $2.00 May 31, 1999
NOTE 10 - SUBSEQUENT EVENTS
Subsequent to June 30, 1998, the Company issued 1,725,250 shares of its common
stock in lieu of notes payable valued at $1,490,750.
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<NAME> AMERICAN TIRE CORPORATION
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 278,822
<SECURITIES> 0
<RECEIVABLES> 93,434
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