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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
Form 10-KSB
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended March 31, 1996
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____ to _____
Commission file number 0-27240
ECOTYRE TECHNOLOGIES, INC.
(Name of Small Business Issuer in its Charter)
Delaware 11-3234026
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
895 Waverly Avenue, Holtsville, New York 11742
(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number, including area code: (516) 289-4545
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 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.
Yes [ x ] No [ ]
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B 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]
Issuer's revenue for its most recent fiscal year: $314,024.
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of June 28, 1996 based on the average price on that date was
$12,466,406. At June 28, 1996, the number of shares outstanding of the issuer's
common stock was 3,115,000.
DOCUMENTS INCORPORATED BY REFERENCE
None
Transitional Small Business Disclosure Format Yes [ ] No [ x ]
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<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
EcoTyre Technologies Inc., (the "Company") has marketed since 1993 remolded
automobile tires manufactured by third parties for sale in the United States
replacement automobile passenger tire market. The Company believes based on
published industry reports that in 1994, over $7 billion of replacement
automobile passenger tires were sold in the United States. During 1995, the
Company curtailed distribution operations, concentrating its efforts on
commencing manufacturing operations for its own line of remolded tires, which
limited manufacturing operations commenced in December 1995. The remolded tires
manufactured by the Company are created by remanufacturing a previously used
high-quality passenger automobile tire casing of a name brand manufacturer.
Through a process comparable to manufacturing a new tire, new rubber is attached
to the casing from sidewall to sidewall.
88% of the Company's revenues for the fiscal year ended March 31, 1996 and
all of its revenues for fiscal 1995 were derived from the distribution of
remolded passenger automobile tires manufactured by third parties, thus allowing
the Company to evaluate the market acceptance of these products in the United
States. While remolded passenger automobile tires have for many years been used
in the United Kingdom and other parts of Europe, their use in the United States
has been primarily for commercial purposes such as in the airline industry.
Based upon its experience in distributing remolded passenger automobile tires in
the United States, and in order to exercise greater control over costs and
product quality, the Company acquired equipment to manufacture its own remolded
tires and leased a 65,000 sq. ft. manufacturing facility. The Company also hired
executive, management and engineering personnel with significant experience in
the automobile passenger automobile tire industry, including the manufacture of
remolded passenger automobile tires.
The Company was incorporated under the laws of the State of Delaware on May
20, 1994 as a successor to a predecessor New York corporation formed in April
1993 from which it acquired the assets used in connection with its business in
June 1994. The Company's executive offices, manufacturing facility and warehouse
are located at 895 Waverly Avenue, Holtsville, New York 11742, and its telephone
number is (516) 289-4545.
The Replacement Passenger Tire Industry
According to published industry reports, approximately 175 million
replacement automobile passenger tires were sold during 1994 in the United
States for over $7 billion. This market has been increasing in size each year as
the number of older cars in use in the United States has increased. According to
published reports, more than one in two automobiles in use in the United States
is six years old or older. On average, automobiles currently in use in the
United States are approximately 8 years old and require replacement tires
approximately every 35,000 to 40,000 miles or three to four years. The
replacement tire market includes new tires, retreads (including remolded tires)
and used tires. Replacement tire products are sold primarily through independent
dealers and distributors, which, based on published industry reports, together
accounted for approximately 64% of all replacement tires sold in the United
<PAGE>
States in recent years. Replacement tires are sold in a wide variety of sizes
and types to match the varying sizes and styles of automobiles and other
vehicles on which they are used. The Company believes, based on published
industry data, that there currently are approximately 80 different sizes of
passenger automobile tires in use in the United States, of which the 10 most
popular sizes account for approximately 48% of the market.
According to published reports, in 1994 retreaded tires (including remolded
tires) accounted for approximately 29 million of the replacement tires in the
U.S., of which approximately 6 million units were for passenger automobiles.
Traditional retreaded tires are made from used tire casings to which new rubber
is applied only to the outside tread of the tire. With the exception of this new
tread, traditional retreaded tires undergo no other structural or cosmetic
change. The Company believes that its remolded tires differ in significant
respects from traditional retreaded tires. See "Manufacturing Operations". The
Company believes that remolded tires, while popular in European automobile tire
markets, have not been utilized to a significant degree in the U.S. automobile
tire market.
Manufacturing Operations
The Company commenced limited manufacturing operations in December 1995 at
its 65,000 square foot leased facility in Holtsville, New York. See
"Properties". The Company has purchased 28 mold presses, molds, two extruders,
three sidewall building machines, four buffing machines and related ancillary
equipment. The additional equipment purchased is intended to increase production
and limit down time due to equipment cleaning and repairs. Except for a recently
purchased buffing machine, the Company has no warranty or service contracts with
respect to such equipment, and bears the sole risk if equipment fails to operate
effectively. No assurance can be given that this equipment will function
properly during manufacturing operations.
The Company's remolded tires are manufactured with previously used high
quality tire casings of name brand manufacturers. Using automated buffers, the
Company removes or "buffs" and smoothes the old rubber from the entire casing
down to the shell casing. Using a spray booth cement transfer station, the
Company applies adhesive and then applies new tread rubber onto the casing and
sidewall veneer to the casing. Vulcanizing presses then permanently bond the new
rubber to the casing through a bonding process that covers the entire casing
from sidewall to sidewall (or "bead to bead") in a unitary melded piece of
rubber. This vulcanizing process utilizes a high-temperature mold press and
tread molds to create the new tread design and a steam-heated curing process
comparable to that used in new tire production. Finally, the remolded tire is
inspected, including pressure inflation testing. The Company has also used the
services of an independent testing facility to test the building process for
proper building of the tires with favorable results. The Company believes its
remolded tires are comparable in quality and appearance to new replacement
tires. Its remolded tires contrast with traditional retreaded tires, which do
not have the appearance of a new tire, since on traditional retreads new tread
is placed over only the tread portion of a used casing and is affixed to the old
sidewalls.
Marketing and Distribution
The Company is initially producing at its manufacturing facility an
assortment of popular sizes (in three tread patterns) of replacement tires,
primarily for older small and mid-size vehicles. Eight mold presses that the
Company recently purchased will be used to manufacture larger passenger tires
used on recreational, sports utility, high performance and light commercial
vehicles. Manufacturing of these type tires is scheduled to commence in or about
September 1996. The Company believes that budget minded consumers will find
<PAGE>
cosmetically appealing, low-priced remolded replacement automobile tires to be
an attractive alternative to more expensive, new replacement tires. The Company
enhances its marketing efforts at the retail level by offering a
four-year/50,000 mile tread wear limited warranty on its steel belted radial
passenger car tires (excluding high performance tires, snow tires and light
truck tires), thus demonstrating to its customers and consumers the high level
of confidence which the Company has in the quality level of its products. At the
wholesale level, the Company intends to enhance marketing efforts through dealer
incentive plans such as price incentives, cooperative advertising and
point-of-sale material.
The Company has entered into an agreement dated April 1, 1994, as amended,
with one customer for a three-year term, renewable by either party for
successive one-year terms upon 90 days notice. Pursuant to this agreement, in
the event the customer purchases four cargo containers of tires per month from
the Company during the first 12 months of operations at the Company's new
manufacturing facility, the Company will be required to pay to this customer a
10% commission on all tires purchased by them from the Company for that part of
such period during which the Company is in full production. Under this
agreement, the Company has granted to this customer the exclusive right to
distribute the Company's products in Florida, Alabama, Louisiana, North
Carolina, South Carolina and Georgia, which exclusivity can be terminated by the
Company if, with respect to Florida, this customer does not sell an average of
four containers per month, and with respect to the other states, an average of
two containers per month. The customer also has the non-exclusive right to sell
the Company's tires in Central America and the Caribbean area, subject to the
Company's prior written permission. Pursuant to this agreement, the customer has
agreed not to sell in the exclusive territories any other remolded tire products
aside from those sold by the Company. In June 1996, this customer was also
granted the exclusive right to distribute in South America with certain
conditions.
The Company has entered into an agreement dated January 1, 1995 with a
second customer for a four-year term, renewable by either party for successive
one-year terms upon 90 days notice. Pursuant to this agreement, the Company has
granted to this customer the exclusive right to distribute its tires in
California, Texas, Missouri, Kansas, New Mexico, Oklahoma and Nevada; provided,
that if this customer fails to commence distribution of and has no immediate
intention to distribute the Company's tires in any of these territories by June
30, 1996, then the Company shall be free to offer distributorships to third
parties in such territories. Pursuant to this agreement, this customer has also
agreed not to sell in the exclusive territories any other remolded tires other
than those sold by the Company. This agreement may be terminated by either party
without cause upon 90 days notice.
During fiscal 1995 and 1996, minimum order quantities for sales of third
party manufactured tires distributed by the Company were not met by either of
these customers, due in large part to the Company's inability to obtain
sufficient quantities of remolded tires from its suppliers for resale to these
customers. There can be no assurance that these customers will purchase any
remolded tires from the Company, since their minimum purchase requirements only
affect the exclusivity of their distributorships.
According to published reports, approximately 65% of all replacement tires
are sold through independent dealers and distributors. Accordingly, the Company
intends to target this market in the sale of its manufactured tires. Its
regional sales managers will be an integral part of the Company's marketing
plans. The Company believes, based on industry reports, that there are more than
40,000 retail outlets in the United States which serve an average of 4,500
vehicles annually. Approximately 1,500 of these outlets are in New York,
<PAGE>
approximately 4,000 are in California and approximately 2,400 are in Florida.
The Company also intends to target other significant retail sellers, such as
mass merchandisers, which, based on industry reports, account for approximately
9% of all retail tire sales and auto supply stores, which account for
approximately 6% of such sales.
The Company is also engaged in a marketing program, including attendance at
trade shows, advertising in trade publications and point of purchase displays.
This program is designed to educate the retail sellers of its tires as to the
nature of the Company's products, including their high quality and the economic
advantages to tire dealers of selling the Company's products. Customer service
is considered by the Company as a primary factor in its operations. Accordingly,
the Company intends to use its best efforts to make timely delivery of its
products and provide high-quality service and support to its customers.
With respect to large wholesale customers, the Company intends to deliver
its products in large shipping containers delivered by sea where practicable.
For inland areas, the Company intends to deliver its products by truck or rail.
For customers within the New York metropolitan area, the Company intends to
maintain several small trucks which can service a network of retail tire
replacement centers from the Company's facility.
Raw Materials
The primary raw materials to be used by the Company in its manufacturing
operations are used tire casings and rubber. The Company believes that rubber is
readily available from numerous sources, though its price may fluctuate based on
supply and demand in local and worldwide markets. The Company also believes that
suitable used tire casings of reusable quality are readily available from a wide
variety of sources, including retail replacement tire centers, used tire dealers
and distributors and other sources. Given the nature of the market for tire
casings, the Company believes that it will be necessary to obtain casings from
many sources to meet its anticipated needs. While the Company does not
anticipate any difficulties in obtaining raw materials, in the event that
sufficient quantities of suitable used tire casings or other raw materials are
not available, or if the price thereof substantially increases, the Company's
business operations could be materially adversely affected.
Competition
The automobile replacement tire industry is highly competitive. There are
inherent difficulties for any company seeking to commence operations and market
a new product, particularly in a very competitive mature market such as that for
replacement automobile tires. The Company anticipates that its primary
competition will be from lower-priced, lesser-known associated brands of major
manufacturers and private label manufacturers of new tires, both imported and
domestic, such as Coronet (Armstrong Tire Company), Summit (General Tire Inc.),
Hankock, Hercules (Cooper Tire & Rubber Co.), Ohtsu and others from
manufacturers and sellers of retreaded tires such as Achievor and Les Schwab.
Many of these competitors have been in existence for many years, maintain
extensive manufacturing budgets, and have established market shares, wide name
recognition, existing franchise, dealer or other distribution networks and
greater financial, personnel and administrative resources than the Company and
have the capability of value pricing their products to deter or eliminate
competition. Assuming the Company does gain a significant market share, there
also is no assurance that other United States or foreign tire manufacturers,
including those with experience in the foreign remolded tire markets, will not
enter the United States market in direct competition with the Company in the
United States.
<PAGE>
In addition, there are several retreading processes already in use by
potential competitors in addition to the process that the Company utilizes.
These alternative processes include the Bandag retreading system precure
process, the Goodyear authorized mold cure, precure and unicircle processes, the
Hawkinsons System of tire retreading mold cure process, the Hercules retreading
equipment system precure process and the Long Mile licensed dealer program mold
cure and precure processes. The Company believes that the primary areas of
competition are price, warranty, service and quality and that it competes
favorably in these regards.
The Company believes that its primary competitive advantage with respect to
new replacement tires is cost. While the price differential between the
Company's products and those of lower end and certain foreign-manufactured
replacement tires is expected to be smaller, the Company expects that its price
advantage will still be sufficient to attract consumers to its products.
Further, the Company believes that it will enjoy a competitive advantage with
respect to lower-priced imported new replacement tires, retreaded tires and used
tires as a result of its four-year/50,000 mile tread wear limited warranty on
its steel belted radial passenger car tires (excluding high performance tires,
snow tires and light truck tires), which the Company believes is superior to
warranties typically offered by manufacturers and sellers of such products.
Government Regulation
The United States Department of Transportation, as well as the National
Highway Traffic Safety Administration ("NHTSA"), under authority granted to it
by the National Traffic and Motor Vehicle Safety Act of 1966, as amended, has
established various standards and regulations relating to motor vehicle safety,
some of which apply to tires sold in the United States for highway use.
Particularly, certain regulations establish minimum requirements for the
remanufacturing of passenger and light truck tires, including casings
suitability, performance and labeling standards. The NHTSA has the authority to
order the recall of automotive products, including tires, having defects deemed
to present a significant safety risk. NHTSA has issued "Tire Registration"
regulations, which require the registration of tires for the purpose of
identification in the event of a product recall and the molding of ten-digit
manufacturing identification codes containing certain qualities of the tires
into the sidewall of each tire. The Company believes that its manufacturing
operations comply with all applicable governmental laws and regulations. In
addition, tires are required to meet certain speed and performance standards
established by tire manufacturer trade associations for its members. The Company
is currently a member of the American Retread Association and is regularly
informed of any changes and standards in the area of tire manufacturing.
While the Company believes that its manufacturing operations are not
environmentally sensitive and will comply with all applicable environmental laws
and regulations, no assurance can be given that compliance with environmental
laws, regulations or other restrictions, including any new laws or regulations,
will not impose additional costs on the Company which could adversely affect its
financial performance and results of operations.
Product Liability
The Company's business exposes it to potential liability which is inherent in
the production and distribution of automotive equipment. The Company currently
maintains $5,000,000 of product liability, general and personal and advertising
injury insurance per occurrence and in the aggregate, subject to a $5,000
deductible.
<PAGE>
Employees
As of March 31, 1996, the Company's staff consisted of 25 full-time
employees, including its executive officers, four salespersons, four
administrative personnel and 13 manufacturing personnel. The Company's employees
are compensated on a salaried or hourly basis, except that certain officers and
sales representatives receive commissions on sales they effectuate. Each of the
Company's employees is a member of the Financial Consultants Guild of America,
and is not represented by any other labor organization. The Company is not aware
of any activity seeking such organization. The Company considers its
relationships with its employees to be satisfactory. When the Company is
operating at full capacity, the Company intends to have approximately 50 full
time employees including its executive officers, salespersons, administrative
employees and manufacturing personnel.
Intellectual Property
The Company intends to utilize its newly registered trademarks on the
products it manufactures at its new manufacturing facility, which trademarks
include "TRAXX-PLUS", and the Company may elect to use additional and/or
replacement trademarks on its products. The Company currently owns no patents
and the technology used to develop the Company's products generally is not
proprietary. There can be no assurance that the Company's competitors will not
independently utilize existing technologies to develop products that are
substantially equivalent or superior to the Company's. The Company believes that
its products do not infringe on the intellectual property rights of any third
party.
ITEM 2. DESCRIPTION OF PROPERTY
The Company has entered into a 10-year, 9-month lease with one five year
renewal option for approximately 65,000 square feet of manufacturing, warehouse
and office space in Holtsville, New York during fiscal 1995, which provides for
minimum annual rental obligations of approximately $282,750, plus utilities,
maintenance and taxes, subject to a 5% annual increase. Commencing October 1,
1995, so long as the Company is in substantial compliance with its obligations
under this lease, the Company will have an option to purchase these premises for
$2,500,000 through July 31, 2005. If this option has not been exercised by
October 1, 1997, the purchase price will increase by 5% on that date and on each
anniversary thereof up to and including October 1, 2004. The Company is
utilizing this facility for its manufacturing operations, as well as for
warehousing its inventory and as its corporate offices.
ITEM 3. LEGAL PROCEEDINGS
The Company is unaware of any pending or threatened material legal
proceedings involving it or its property.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fiscal
year ended March 31, 1996.
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock and Common Stock Purchase Warrants were listed
and commenced trading on the NASDAQ Small Cap market under the symbol ETTI on
February 7, 1996. Prior to February 7, 1996, there was no separate public market
for the Company's stock or warrants, except for trades as a Unit (consisting of
one share of Common Stock and one Warrant) which commenced trading on December
13, 1995 and terminated trading on February 6, 1996. The following table sets
forth, for the quarters indicated, the quarterly high and low closing bid
prices for the Common Stock and Common Stock Purchase Warrants, as reported by
NASDAQ:
<TABLE>
<CAPTION>
Common Stock Warrants
High Bid Low Bid High Bid Low Bid
<S> <C> <C> <C> <C>
Fiscal 1996
First Quarter . . . . . . . . . . * * * *
Second Quarter. . . . . . . . . . * * * *
Third Quarter . . . . . . . . . . * * * *
Fourth Quarter. . . . . . . . . . $6-3/4 $4-3/4 $3 $2
Fiscal 1997
First Quarter(through
June 26,1996). . . . . . . . . $6 $4-3/4 $3 $2
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<FN>
* Not Applicable.
</FN>
</TABLE>
The bid prices set forth above reflect inter-dealer prices, without retail
mark-up, mark-down, or commission, and may not represent actual transactions. As
of June 26, 1996, there were approximately 55 stockholders of record of the
Common Stock.
The Company has not paid any dividends on its Common Stock and does not
presently intend to do so. Future dividend policy will be determined by its
Board of Directors on the basis of the Company's earnings, capital requirements,
financial condition and other factors deemed relevant.
The transfer agent and registrar of the Company's Common Stock is American
Stock Transfer and Trust Co., 40 Wall Street, New York, New York 10005.
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The Company has operated as a wholesale distributor of remolded automobile
tires since its inception in April 1993. In accordance with its business plan,
the Company has substantially curtailed distribution operations, concentrating
its efforts on commencing manufacturing operations. In its distribution
operations, the Company resold its products primarily to retail tire replacement
centers and tire distributors.
At March 31, 1996, the Company has recently commenced limited production
for its domestic manufacturing and distribution of its own
remanufactured/remolded tires. During fiscal 1996, sales to one customer
accounted for 12% of the Company's net sales. Two customers accounted for 27%
and 18%, respectively, of the Company's net sales for the fiscal year ended
March 31, 1995. The Company has distribution agreements with each of these
customers which provide these customers with exclusive territorial rights to
sell the Company's products in their respective territories based on certain
minimum purchase requirements and pursuant to which these customers have agreed
not to sell any other remolded tires. While the Company is expanding its
customer based as a manufacturer or remolded tires, it anticipates that a
substantial portion of the sale of its manufactured tires in the near term will
be to these two customers.
The Company acquired 20 previously owned mold presses, molds, an extruder,
a building machine, a buffing machine and ancillary equipment for an aggregate
price of approximately $530,000. This equipment has been utilized in connection
with the recent commencement of limited manufacturing operations by the Company.
The Company believes based on its proposed manufacturing process, including the
utilization of previously used tire casings, that it will be capable of
producing tires comparable in quality to newly manufactured tires at
significantly lower cost. The Company believes that by manufacturing its own
products it should be able to reduce its per tire costs, expand its product line
and improve the quality of its products.
In addition, the Company has purchased an eight station used Europress to
manufacture larger tires used on recreational, sport utility, high performance
cars and light commercial vehicles. Additional ancillary equipment such as an
extruder, buffers and a Hawkinson electronic scanner have also been purchased.
These recent machinery purchases are in the process of coming on line to
increase the Company's production capacity and to limit down time due to
equipment cleaning and repairs.
Results of Operations
Fiscal Year Ended March 31, 1996 Compared to Fiscal Year Ended March 31, 1995
Net Sales. The Company's net sales of $314,024 for the fiscal year ended
March 31, 1996 ("Fiscal 1996") represent a decrease of $967,199 compared to net
sales for the fiscal year ended March 31, 1995 ("Fiscal 1995"). The decrease was
due to curtailment of its distribution of tires manufactured by third parties
and limited manufacturing of its own tires.
Cost of Sales. The Company's cost of sales for Fiscal 1996 was $925,914 as
compared to $1,058,382, representing a decrease of $132,468. This decrease was
due primarily to the decrease of purchases and corresponding freight and duty
paid as a result of the curtailment of the Company's distribution of third party
manufactured tires. Certain fixed overhead, primarily rent, increased by
<PAGE>
$169,081 due to the Company's relocation to a manufacturing facility from a
sales office and distribution warehouse. Certain of the Company's direct
overhead expenses also increased, such as salaries ($154,013) insurance
($74,992) and depreciation ($34,227) due to the initial commencement of the
manufacturing facility.
Gross Profit (Loss). The Company had a gross loss for Fiscal 1996 of
($611,890) as compared to a gross profit of $222,841 for Fiscal 1995, a decrease
of $834,731. This decrease was directly caused by the curtailment of the
distribution of third party manufactured tires.
Operating and Other Expenses. The Company incurred selling and shipping
expenses of $336,956, general and administrative expenses of $916,988, interest
expense of $364,892 and the write-off of original issue discount of $389,216 in
Fiscal 1996 as compared to $219,998 of selling and shipping expenses, $657,649
of general and administrative expenses and $177,927 of interest expense in
Fiscal 1995. The increase in selling and shipping expenses resulted primarily
from an increase in salaries to full time salespersons. The general and
administrative expense increase was attributable primarily to increases in
facility expenses including rent and electricity and consulting fees paid, which
arose from the relocation from a distribution sales office and warehouse to a
manufacturing facility. In addition, bridge financing expenses of $54,171 were
incurred during Fiscal 1996. The increase in interest expense is attributable to
amortization of deferred interest of $283,328 from the discounting of the notes
in the Company's bridge financing. The remaining original issue discount of
$389,216 was written off during Fiscal 1996 at the time of the initial public
offering.
Net Loss. The Company sustained a net loss of ($2,637,313) in Fiscal 1996
as compared to a net loss of ($833,925) in the Fiscal 1995, an increase of
($1,803,388). The increase was primarily attributable to the diverting of its
resources from the distribution business to the planned commencement of
manufacturing and the resultant decrease in sales volume. The net loss was also
attributable to fixed expenses such as rent incurred upon relocating to the new
manufacturing facility and the amortization and write off of deferred interest
in the discounting of the notes.
Fiscal Year Ended March 31, 1995 Compared to Fiscal Year Ended March 31, 1994.
Net Sales. The Company's net sales of $1,281,223 in Fiscal 1995 exceeded
its net sales for the fiscal year ended March 31, 1994 ("Fiscal 1994") by
$721,122 or 128.7%. This increase was due primarily to a general expansion of
the Company's distribution operations, including commencement of sales to one
customer which totaled $224,006.
Cost of Sales. The Company's cost of sales in Fiscal 1995 was $1,058,382 as
compared to $462,981 in Fiscal 1994, representing an increase of $595,401 or
128.6%. This increase was due primarily to costs associated with the Company's
increased sales volumes such as freight and duty (increase of $68,044 or 144%)
and tire purchases (increase of $424,832 or 81.3%).
Gross Profit. The Company's gross profit for Fiscal 1995 was $222,841, as
compared to $97,120 in Fiscal 1994, an increase of $125,721 or 129.5%. This
increase was due primarily to the Company's increased sales levels. The gross
profit margins, as a percentage of sales, remained relatively constant for both
periods, respectively.
<PAGE>
Operating and Other Expenses. The Company had selling and shipping expenses
of $219,998, general and administrative expenses of $657,649, and interest
expense of $177,927 in Fiscal 1995 as compared to $112,030 of selling and
shipping expenses, $169,882 of general and administrative expenses, and $38,520
of interest expense in Fiscal 1994. The increase in selling and shipping
expenses resulted from increased commissions on sales of $35,550 or 134.4%,
travel and entertainment of $23,868 or 130.4%, allocated rent of $26,800 or
100%. The general and administrative expense increases were attributable
primarily to increases in salaries of $145,328 or 176.8%, professional fees of
$80,457 or 353.7%, finders fees of $38,297 or 100% and operating expenses due in
part to the expansion of the Company such as rent of $77,510 and insurance of
$53,652. The increase in interest expense is attributable to the increase of
$87,140 related to the increase in long-term debt and the amortization of
deferred interest of $54,585 from discounting of the notes.
Net Loss. The Company had a net loss of ($833,925) in Fiscal 1995 as
compared to a net loss of ($223,889) in Fiscal 1994, an increase of $610,036 or
272.5%. This increase was attributable primarily to the higher operating
expenses relating to the Company's expanding distribution operations and costs
incurred in connection with the Company's planned commencement of manufacturing
operations.
Liquidity and Capital Resources
The Company believes that it has or will have sufficient funds available
from its operations, together with the net proceeds of the initial public
offering, to support its manufacturing operations for at least the next twelve
months. The Company will be using approximately $200,000 of its available funds
to purchase the balance of equipment necessary to become fully operational.
The Company used cash in operating activities in the amount of $1,709,359
for the year ended March 31, 1996, and $646,808 for the year ended March 31,
1995 which was primarily related to the loss from operations. Cash used in
investing activities in the amount of $712,049 and $199,521 for the year ended
March 31, 1996 and 1995, was principally for the purchase of related machinery
and equipment to commence operations of its manufacturing facility. Financing
used to fund operating and investing activities in the amount of $5,154,974 and
$844,957 for the year ended March 31, 1996 and 1995 was derived principally from
its initial public offering (in December 1995), working capital loans, notes and
debentures. In addition, during fiscal 1996, financing was obtained from Bridge
Loans and long-term notes in the amount of $1,075,000 which were repaid at the
initial public offering.
In June 1995, the holders of $1,092,929 principal amount of loans, notes
and debentures, together with subsequent purchasers of similar notes and
debentures, exchanged them, together with accrued and unpaid interest thereon,
for an aggregate of 1,202,775 shares of Class A Redeemable Convertible Preferred
Stock of the Company. The Company can redeem the Class A Redeemable Convertible
Preferred Stock at a redemption price of $1.00 per share on 60 days notice at
any time; provided, that prior to January 1997, the Company may redeem the Class
A Redeemable Convertible Preferred Stock only if the Common Stock has closed
above $7.50 per share for 20 consecutive trading days, whereupon the holder can
either convert the Class A Redeemable Convertible Preferred Stock or receive the
redemption price for his Class A Redeemable Convertible Preferred Stock.
Pursuant to the terms thereof, the holders of these shares can require the
Company to redeem these shares on or after December 18, 1997 at a redemption
price of $1.00 per share and, in any event, these shares are redeemable on or
after December 18, 1997 at the same redemption price. Accordingly, the Company
could be required to pay up to $1,202,775 in cash upon such redemption.
<PAGE>
In May 1995, the Company purchased 20 mold presses, molds, an extruder, a
building machine, a buffing machine and related ancillary equipment for use in
its then proposed new manufacturing facility for an aggregate purchase price of
approximately $530,000 from a financial institution which had foreclosed on such
equipment. After paying a portion of this purchase price, the Company has agreed
with this financial institution to pay the remaining $300,000 balance in equal
monthly installments of approximately $10,000 over a three-year period at an
interest rate of 13.25% per annum. This financial institution has a first
priority security interest in such equipment collateralizing such loan. The
Company has not incurred any material additional indebtedness or capitalized
lease obligations in connection with the commencement of its manufacturing
operations except for $225,000 of unsecured notes, and $200,000 from an
established bank line of credit.
The Company has entered into a 10-year, 9-month lease with one five year
renewal option for approximately 65,000 square feet of manufacturing, warehouse
and office space in Holtsville, New York during fiscal 1995, which provides for
minimum annual rental obligations of approximately $282,750, plus utilities,
maintenance and taxes, subject to 5% annual increases. As long as the Company is
in substantial compliance with its obligations under this lease, the Company has
an option to purchase these premises for $2,500,000. If this option has not been
exercised by October 1, 1997, the purchase price will increase by 5% on that
date and on each anniversary thereof up to and including October 1, 2004. If the
Company elects to purchase these premises, it will be required to tender a
deposit equal to 10% of the purchase price and consummate the purchase within
sixty (60) days thereafter, whereupon the balance of the purchase price will be
due. This option may be exercised at any time up to July 31, 2005. The Company
is utilizing this facility for its manufacturing operations, as well as for
warehousing its inventory and as its corporate offices. The Company's capital
requirements may change depending upon numerous factors and the Company may
require additional financing from time to time, particularly in order to
effectuate its planned expansion.
The Company does not anticipate requiring additional financing to operate
its existing facility, but may need financing to redeem its Class A Redeemable
Convertible Preferred Stock and to expand to additional facilities, if required.
Seasonality
While there is a year-round demand for automobile tires, automobile tire
sales in the Northeastern United States are generally strongest during the
second and third calendar quarters of the year. Seasonality may have an impact
on the Company's operations including cash flow, insofar as the Company is
required to control inventory levels to reflect projected quarterly sales.
However, since the Company anticipates that approximately 50% of its sales will
be in the Western United States and other regions where all purpose automobile
tires are used year round, it does not believe that seasonality will have a
material adverse impact on its operations.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The following selected financial data has been derived from the audited
financial statements of EcoTyre Technologies, Inc. and should be read in
conjunction with, the financial statements and related notes appearing elsewhere
in this Form 10-KSB.
<TABLE>
<CAPTION>
Statement of Operations Data:
Fiscal Year Ended March 31,
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Net sales $ 560,101 $1,281,223 $ 314,024
Net loss from operations (223,889) (833,925) (2,637,313)
Primary loss per common share (.16) (.60) (1.46)(2)
Weighted average number of common
shares outstanding (1) 1,390,000 1,390,000 1,905,369
Balance Sheet Data:
March 31, 1996
--------------
<S> <C>
Working capital $2,391,664
Total assets 4,704,860
Total long term debt, net of
current portion (3) 221,782
Class A Redeemable Convertible Preferred Stock 1,125,182
Stockholders' equity 2,128,019
- --------
<FN>
(1) Adjusted to give effect to (a) a .23453-for-1 reverse stock split
effected in May 1994, and (b) the issuance of 50,000 Bridge Shares in June 1995
in connection with the Company's offering of five Bridge Units and the issuance
of 165,000 Bridge Shares in August 1995 in connection with the sale of an
additional 16.5 Bridge Units (the "Bridge Units"), at a purchase price of
$50,000 per Bridge Unit consisting of one Bridge Note and 10,000 Bridge Shares.
Does not give effect to (a) the exercise of outstanding options and warrants,
(b) the conversion of Class A Redeemable Convertible Preferred Stock or (c) the
exercise of the Class B Warrants issuable upon the conversion of the Class A
Redeemable Convertible Preferred Stock.
(2) For purposes of calculating primary loss per common share for the year
ended March 31, 1996, preferred stock dividends of $149,070 have increased
the net loss from operations to arrive at net loss attributable to common
shareholders of ($2,786,383).
(3) Includes long-term portion of term notes,equipment loan, machinery loan
and capital lease obligations.
</FN>
</TABLE>
The financial statements listed in Item 7 are included in this Report
beginning on Page F-1.
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES
None
<PAGE>
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, COMPLIANCE WITH SECTION 16(a)
OF THE EXCHANGE ACT
The Company's directors and executive officers as of June 30, 1996 were
as follows:
Name Age Position
---- --- --------
Marc de Logeres (2) 69 Co-Chairman of the Board
Maxwell G. Parsons (3) 66 Co-Chairman of the Board
Vito F. Alongi (1) 41 President, Principal Executive,
Financial and Accounting Officer,
Treasurer and Director
Robert E. Munyer, Jr. (2) 53 Vice President - Manufacturing and
Distribution, Secretary and Director
John W. King (1) 62 Vice President and Director
Patrick A. Tracey 57 Vice President-Sales and Marketing
Theresa Mari, Esq (3). 32 Director
Arthur Rosenberg, Esq. (3) 58 Director
- ---------
(1) Member of Class I, to serve until the 1996 Annual Meeting of Stockholders.
(2) Member of Class II, to serve until the 1997 Annual Meeting of Stockholders.
(3) Member of Class III, to serve until the 1998 Annual Meeting of Stockholders.
Marc de Logeres has been Co-Chairman of the Board of Directors of the
Company since November 1995 and a consultant to the Company since June 1995.
From 1970 through 1995, Mr. de Logeres was Chairman of the Board of Michelin
Tyres plc, the United Kingdom subsidiary of the Michelin Group, and from 1962 to
1992 was chief executive officer, president and later chairman of Michelin Tire
Company in the United States and Michelin Tire Company Ltd., in Canada. Mr. de
Logeres is a director of Cobra Industries, Inc., a director of France Growth
Fund, a $100,000,000 closed-end mutual fund and is also a director of Nova
Scotia Power, Inc., a $650,000,000 per year electricity supplier.
Maxwell G. Parsons was Chairman of the Board of the Company from February
1995 until November 1995 and has been Co-Chairman of the Board since that time.
From 1986 to the present, Mr. Parsons has been the president of M.G.
Enterprises, Inc., a consulting firm. From 1982 through 1986, Mr. Parsons was
<PAGE>
president of K-Mart Enterprises, Inc. and was responsible for managing the
automotive and sporting goods departments of K-Mart stores nationwide, with
approximately $1 billion of automotive sales annually, including over $100
million of automobile tires. From 1975 through 1980, Mr. Parsons was the
consulting managing director of K-Mart Australia, Inc. and a director of G.J.
Coles, a part owner of K-Mart Australia, Inc.
Vito F. Alongi has been President, Principal Executive, Financial and
Accounting Officer, Treasurer and a director of the Company since its inception.
Since September 1991, he has been engaged on a substantially full time basis in
the Company's business. From 1989 until August 1993, Mr. Alongi was a principal
of Nestegg Associates, Inc., a financial planning firm and from 1989 through
1993 was a broker/dealer agent for Nathan & Lewis Securities, Inc.
Robert E. Munyer, Jr. has been Secretary and Vice President-Manufacturing
and Distribution of the Company and its predecessor since April 1993. From 1986
until 1992, Mr. Munyer was employed by Raytheon Corporation in its
Electromagnetic Systems Division holding the positions of Plant Manager and
Director of Material Procurement. From 1975 to 1986, he was employed in various
management positions by Fairchild Republic Company.
John W. King has been Vice President-Sales for the Company since November
1994, acted as a consultant to the Company's business since September 1991 and
has been a director of the Company since May 1995. From 1990 through 1991, Mr.
King was the managing director of B.T.S. Monarch Tires, plc., a leading United
Kingdom-based manufacturer and distributor of remolded automobile tire products
which was placed in receivership in 1991. From 1978 through 1995, Mr. King has
been President of W. B. McVicker Company, a specialty chemical company. For more
than 18 years prior thereto, he was employed by Goodyear International, holding
several senior management positions including Director of Marketing for Europe.
Patrick A. Tracey has been Vice President-Sales and Marketing for the
Company and its predecessor since August 1993. From 1974 to 1991, Mr. Tracey was
President of Patrick A. Tracey, Inc., a real estate investment firm. From 1965
until 1974, Mr. Tracey was employed by Goodyear International, holding several
senior management positions including manager of worldwide product marketing.
Theresa Mari, Esq. has been a director of the Company since May 1994. Ms.
Mari is an attorney admitted to practice in the States of New York and
Connecticut and has been a practicing attorney with the firm of Jaeger, Mari &
Block since 1992 and as a solo practitioner from 1989 through 1992.
Arthur Rosenberg, Esq. has been a director of the Company since March 1996.
Mr. Rosenberg has been the Vice President of Acquisitions for The Associated
Companies, a real estate developer, in Bethesda, Maryland since June 1987. Mr.
Rosenberg is an attorney admitted to practice in the State of New York and has
practiced law for over 30 years.
In addition to the foregoing executive officers and directors, the Company
has also retained the services of several employees and independent contractors
who are expected to make significant contributions to its business, including
the following persons:
Louis Crispino has been Sales Manager of the Company or its predecessor
since April 1993. From 1983 to 1992, Mr. Crispino was employed by Raytheon
Corporation in its Electromagnetic Systems Division, holding the positions of
Financial Manager of Quality Assurance and Financial Control Manager. From 1987
to 1991, Mr. Crispino also owned and operated two retail automobile tire outlets
on Long Island.
<PAGE>
Ian Sayers serves as the Company's plant manager and chief engineer. From
1988 through 1991, Mr. Sayers was engineering manager for B.T.S. Monarch Tyres
plc, a remolded tire manufacturer located in the United Kingdom, which was
placed in receivorship in 1991. From 1986 through 1988, Mr. Sayers was a machine
tool technician with Cloos International (U.K.) Ltd., a manufacturer of welding,
robotics and orbital manipulators. From 1973 through 1982, Mr. Sayers was a
mechanical fitter for Goodyear Tire & Rubber Co.
Walter Carlile is the Company's production manager. From 1989 through 1993,
Mr. Carlile was sales manager for British Vita and Ondura Rubber, manufacturers
of tire rubber compounds. From 1987 through 1988, Mr. Carlile was quality
manager was B.T.S Monarch Tires plc, which was placed in receivership in 1991.
From 1982 through 1987, Mr. Carlile was factory or production manager for
Michelin Tyres U.K. and Watts Tyre & Rubber Ltd.
Directors, with the exception of Mr. Rosenberg, receive no cash
compensation for their services to the Company as directors, but are reimbursed
for expenses actually incurred in connection with attending meetings of the
Board of Directors. Each director attended or participated in at least 75% of
the meetings of the Board of Directors in fiscal 1995.
Compliance with Section 16(a) of the Securities Exchange Act
Section 16(a) of the Exchange Act requires the Company's executive
officers, directors and persons who own more than ten percent of a registered
class of the Company's equity securities ("Reporting Persons") to file reports
of ownership and changes in ownership on Forms 3, 4, and 5 with the Securities
and Exchange Commission (the "SEC") and the National Association of Securities
Dealers (the "NASD"). These Reporting Persons are required by SEC regulation to
furnish the Company with copies of all Forms 3, 4 and 5 they file with the SEC
and NASD. Based solely on the Company's review of the copies of the forms it has
received, the Company believes that all Reporting Persons complied on a timely
basis with all filing requirements applicable to them with respect to
transactions during fiscal year 1995, except that Maxwell G. Parsons filed one
report on Form 4 relating to a purchase of the Company's securities several
weeks late.
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the cash and other compensation paid in
fiscal 1996, 1995 and 1994 to the Company's executive officers.
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Securities
Name and Other Annual Underlying All Other
Principal Position Year Salary Bonus Compensation(1) Options(6) Compensation
------------------- ---- ------ ----- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Vito Alongi 1996 $100,103 - - - -
President 1995 69,252 - - 50,000 -
(Chief Executive Officer) 1994 11,496 - - - -
Robert E. Munyer, Jr. 1996 $80,807 - - - -
Vice President 1995 36,058 - $12,702 (4) - $11,750 (3)
1994 - - 22,738 (5) - -
John W. King 1996 $70,920 - - - -
Vice President 1995 - - 40,342 (2) 25,000 -
1994 - - 22,665 (2) - -
<FN>
(1) The value of all perquisites provided to the Company's officers did not exceed the
lesser of $50,000 or 10% of the officer's salary and bonus.
(2) Represents consulting fees.
(3) Represents finders fee relating to working capital loans provided to the Company by third
parties.
(4) Represents commissions on sales of products.
(5) Represents commissions on sales of products of $11,684 and consulting fees of $11,054.
(6) Represents options granted under the Company's 1995 Long Term Incentive Plan which are
exercisable at $5.00 per share commencing June 11, 1997.
</FN>
</TABLE>
<PAGE>
Option/SAR Grants in Last Fiscal Year
The following table sets forth all stock option grants to the executive
officers named in the Executive Compensation table during the last fiscal year.
<TABLE>
<CAPTION>
Individual Grants
------------------------------------------------------------
(a) (b) (c) (d) (e)
Number of % of Total
Securities Options/SARS
Underlying Granted to
Options/SARS Employees in Exercise or Base Expiration
Name Granted (#) Fiscal Year Price ($/Sh) Date
- ---- ------------ ------------- ----------------- ----------
<S> <C> <C> <C> <C>
Vito F. Alongi 50,000 66-2/3% $5.00 June, 2005 (1)
President
(Chief Executive Officer)
Robert E. Munyer, Jr. - - - -
Vice President
John W. King 25,000 33-1/3% $5.00 June, 2005 (1)
Vice President
- -------
<FN>
(1) Represents ten year non-qualified options granted in June 1995, exercisable
June 11, 1997.
</FN>
</TABLE>
Employment Agreements
The Company has entered into employment agreements with each of Vito Alongi
and John W. King pursuant to which Mr. Alongi has agreed to serve as the
President of the Company, and Mr. King has agreed to serve as a Vice President
of the Company, at minimum annual base salaries of $95,000 and $85,000,
respectively. These employment agreements are for an initial term of three years
commencing in December 1995. The agreements with Mr. Alongi and Mr. King also
provide that they will each be paid 3% of the Company's pre-tax earnings (up to
a maximum payment of $125,000 with respect to the Company's fiscal year ending
March 31, 1996 and up to $150,000 per year thereafter) during the term thereof
upon the Company achieving certain financial results. The employment agreements
provide that if the employee is terminated after the initial term other than for
"cause" (as defined), or dies or becomes permanently disabled, the Company will
pay to the employee certain severance.
Each of the above-described agreements contains restrictions on the
employee engaging in competition with the Company for the term thereof and for
one year thereafter and provisions protecting the Company's proprietary rights
and information. Each agreement also provides for the payment of three times the
employee's previous year's total compensation, less $1.00, upon the termination
of his employment in the event of a change in control of the Company which
adversely affects his working conditions. For those purposes, a change in
control is defined to mean (a) a person (as such term is defined in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) other than a
current director or officer of the Company becoming the beneficial owner,
directly or indirectly, of 30% of the voting power of the Company's outstanding
securities or (b) the members of the Board of Directors at the beginning of
any two-year period ceasing to constitute at least a majority of the Board of
Directors unless the election of any new director during such period has
been approved in advance by two-thirds of the directors in office at the
beginning of such two-year period.
<PAGE>
The Company also has entered into an employment agreement with Patrick
Tracey. This agreement provides that Mr. Tracey will serve as a Vice-President
of the Company, and will receive as compensation therefor an annual base salary
of $40,000 per year, plus commissions equal to approximately 2% of the Company's
net sales to Martino which Mr. Tracey obtains for the Company. This agreement is
for an initial term of two years commencing in December 1995, and provides that
if the employee is terminated after the initial term other than for "cause" (as
defined), or dies or becomes permanently disabled, the Company will pay to the
employee certain severance. This agreement also contains restrictions on the
employee engaging in competition with the Company for the term thereof and for
one year thereafter and provisions protecting the Company's proprietary rights
and information.
Consulting Agreements
The Company has entered into a consulting agreement with Marc de Logeres.
Under this agreement, Mr. de Logeres has agreed to provide business operations
and management consulting services to the Company and to act as the Company's
Co-Chairman of the Board. Mr. de Logeres will receive an aggregate consulting
fee of $84,000 per year. Mr. de Logeres is considered an independent contractor.
The Company may terminate the services of Mr. de Logeres under this consulting
agreement if he cannot adequately perform his duties thereunder because of
mental or physical disability, death or for "Just Cause" (as defined). The
above-described agreement expires in July 1998 and contains restrictions on Mr.
de Logeres from engaging in competition with the Company for the term thereof
and for one year thereafter and provisions protecting the Company's trade
secrets and proprietary rights and information.
The Company has entered into a consulting agreement with Maxwell Parsons.
Under this agreement, the Consultant has agreed to provide business operations
and management consulting services to the Company and to act as the Company's
Co-Chairman of the Board, and as compensation therefor will receive $3,500 a
month. Additionally, on June 13, 1997, the Company will issue to Mr. Parsons
25,000 shares of common stock of the Company at a price of $.001 (par value) per
share. Mr. Parsons is considered an independent contractor and not an employee
of the Company. The Company may terminate the services of Mr. Parsons under this
consulting agreement if he cannot adequately perform his duties thereunder
because of mental or physical disability, death or for "Just Cause" (as
defined). The above-described agreement expires in July 1998 and contains
restrictions on Mr. Parsons from engaging in competition with the Company for
the term thereof and for one year thereafter and provisions protecting the
Company's trade secrets and proprietary rights and information.
The Company has entered into a consulting agreement with Saycar, Ltd., a
partnership organized under the laws of the United Kingdom ("Saycar"). Under
this agreement, the Saycar has agreed to cause its principals, Walter Carlile
and Ian Sayers (the "Principals"), to provide engineering and plant management
advisory and consulting services to the Company. This consulting agreement is
for an initial term of 3 years. Saycar will receive an aggregate consulting fee
of $120,000 per year deliverable in equal installments over the term of the
agreement. Saycar and its Principals are considered independent contractors and
not employees of the Company. The Company may terminate the services of either
Principal under this consulting agreement if such Principal cannot adequately
perform his duties thereunder because of mental or physical disability, death or
for "Just Cause" (as defined). The consulting agreement provides that if one of
the Principals is terminated by the Company, the consulting fee paid to Saycar
will be reduced by one half and if both Principals are terminated by the
Company, no further compensation will be paid to Saycar. The above-described
agreement expires in May 1998 and contains restrictions on Saycar and its
Principals from engaging in competition with the Company for the term thereof
and for one year thereafter and provisions protecting the Company's trade
secrets and proprietary rights and information.
<PAGE>
The Company has entered into a consulting agreement with Steven Cantor.
Under this agreement, the Consultant has agreed to provide business operations
and management consulting services to the Company. Pursuant to this Agreement,
Mr. Cantor has received options to purchase 130,000 shares of Common Stock under
the Company's 1995 Long Term Incentive Plan. In addition, Mr. Cantor will be
receiving $4,166.67 per month together with an unallocated expense allowance of
up to $1,500 per month. Also, on June 13, 1997, the Company shall issue to Mr.
Cantor 20,000 shares of common stock of the Company at a price of $.001 (par
value) per share. Mr. Cantor is considered an independent contractor and not an
employee of the Company. The Company may terminate the services of Mr. Cantor
under this consulting agreement if he cannot adequately perform his duties
thereunder because of mental or physical disability, death or for "Just Cause"
(as defined). The above-described agreement expires in July 1998 and contains
restrictions on Mr. Cantor from engaging in competition with the Company for the
term thereof and for one year thereafter and provisions protecting the Company's
trade secrets and proprietary rights and information.
1995 Long Term Incentive Plan
In June 1995, the Company adopted The EcoTyre Technologies, Inc. 1995 Long
Term Incentive Plan (the "1995 Incentive Plan") in order to motivate qualified
employees of the Company, to assist the Company in attracting employees and to
align the interests of such persons with those of the Company's stockholders.
The 1995 Incentive Plan provides for the grant of "incentive stock options"
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended, "non-qualified stock options," restricted stock, performance grants and
other types of awards to officers, key employees, consultants and independent
contractors of the Company and its affiliates.
The 1995 Incentive Plan, which will be administered by the Long Term
Incentive Plan Administrative Committee of the Board of Directors, authorizes
the issuance of a maximum of 350,000 shares of Common Stock which may be either
newly issued shares, treasury shares, reacquired shares, shares purchased in the
open market or any combination thereof. If any award under the 1995 Incentive
Plan terminates, expires unexercised, or is cancelled, the shares of Common
Stock that would otherwise have been issuable pursuant thereto will be available
for issuance pursuant to the grant of new awards. To date, the Company has
granted an aggregate of 340,000 options to purchase shares of Common Stock under
the 1995 Incentive Plan, of which 130,000 options have been granted to Steven
Cantor, 50,000 options have been granted to each of Vito F. Alongi and Theresa
Mari, 25,000 options have been granted to John W. King, 25,000 options have been
granted to Marc de Logeres, 10,000 options have been granted to Ian Sayers and
10,000 options have been granted to Walter Carlile. Each of these options is
exercisable for ten years for a price of $5.00 per share, commencing June 11,
1997.
Personal Liability and Indemnification of Directors
The Company's Certificate of Incorporation and Bylaws contain provisions
which reduce the potential personal liability of directors for certain monetary
damages and provide for indemnity of directors and other persons. The Company is
unaware of any pending or threatened litigation against the Company or its
directors that would result in any liability for which such director would seek
indemnification or similar protection.
Such indemnification provisions are intended to increase the protection
provided directors and, thus, increase the Company's ability to attract and
retain qualified persons to serve as directors. The Company currently maintain a
liability insurance policy for the benefit of its directors.
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of the Company's
Common Stock as of May 30, 1996 of (i) each person known by the Company to
beneficially own 5% or more of the shares of outstanding Common Stock, (ii) each
of the Company's executive officers and directors, and (iii) all of the
Company's executive officers and directors as a group. Except as otherwise
indicated, all shares are beneficially owned, and investments and voting power
is held by the persons named as owners.
<TABLE>
<CAPTION>
Amount and Nature
Name and Address of of Shares Percentage
Beneficial Owner Beneficially Owned Ownership
- --------------------- ------------------- ----------
<S> <C> <C>
Steven A. Cantor (1) 510,000(3) 16.4%
Vito F. Alongi (1) 140,000(4) 4.5%
Annette Cantor (1) 150,000 4.8%
Cindy Bermingham (1) 135,000 4.3%
John W. King (1) 98,750(5) 3.2%
Robert E. Munyer, Jr. (1) 70,000 2.2%
Theresa Mari (1) 45,000(4) 1.4%
Patrick Tracey 20,000 .6%
Maxwell G. Parsons (2) 15,000 .5%
All officers and directors
as a group (8 persons) 388,750 12.5%
- -----------------
<FN>
(1) The address for each of these persons is 895 Waverly Avenue,
Holtsville, New York 11742.
(2) The address for this person is 3714 Woodlake Drive, Bonita Springs,
Florida 33923.
(3) Includes an aggregate of 285,000 shares of Common Stock owned by
Annette Cantor, Mr. Cantor's mother and Cindy Bermingham, Mr. Cantor's
sister, as to which Mr. Cantor disclaims beneficial ownership. Does not
include options to purchase 130,000 shares of Common Stock at an
exercise price of $5.00 per share which have been granted pursuant to the
Company's 1995 Long Term Incentive Plan, which are not exercisable within
60 days.
(4) Does not include options to purchase 50,000 shares of Common Stock at
an exercise price of $5.00 per share which have been granted pursuant
to the Company's 1995 Long Term Incentive Plan, which are not
exercisable within 60 days.
(5) Does not include options to purchase 25,000 shares of Common Stock at
an exercise price of $5.00 per share which have been granted pursuant
to the Company's 1995 Long Term Incentive Plan, which are not exercisable
within 60 days.
</FN>
</TABLE>
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On October 24, 1994, Mr. Vito Alongi, the Company's President, borrowed
$25,000 from the Company. This loan is represented by an unsecured promissory
note due October 21, 1999 bearing interest at 7% per annum, with interest
payable annually. The note may be prepaid at any time without penalty.
In June 1995, Steven Cantor pledged 50,000 shares of Common Stock to secure
the obligations of the Company to ProTect Business Management Corp. relating to
the letter of credit facility to the Company by The Bank of New York. This
pledge replaced a pledge of the Common Stock by all of the Company's officers
and directors. The letter of credit was to secure purchases by the Company from
a foreign supplier of up to $150,000 and expired in September 1995, at which
time the pledge agreement was terminated and Mr. Cantor's shares were released.
In November 1995 Steven Cantor loaned $100,000 to the Company as part of interim
financing pending completion of the Company's initial public offering. The loan,
which provides for interest at the annual rate of 14% payable quarterly, was
paid in December 1995.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a)(1)(2) Financial Statements and Schedules
See index to financial statements on page F-1 at beginning of attached
financial statements.
(a) Exhibits
3.1 Amended and Restated Certificate of Incorporation of the Registrant.*
3.2 Bylaws of the Registrant.*
4.1 Specimen Common Stock Certificate.*
4.2 Form of Warrant Agreement (including Warrant Certificate).*
4.3 Form of Underwriter's Purchase Option.*
4.4 Form of Class A Redeemable Preferred Stock Certificate.*
10.1 Lease Agreement dated February 1995 between the Registrant and Air
Realty Associates.*
10.2 1995 Long Term Incentive Plan.*
10.3 Employment Agreement dated July 11, 1995 between the Registrant and
Vito F. Alongi.*
10.4 Employment Agreement dated July 11, 1995
between the Registrant and John W. King.*
10.5 Employment Agreement dated June 30, 1995 between the Registrant and
Patrick Tracey.*
10.6 Consulting Agreement dated July 11, 1995 between the Registrant
and Marc de Logeres.*
10.7 Consulting Agreement dated June 1, 1995 between the Registrant and
Saycar Tire & Rubber.*
10.8 Consulting Agreement dated July 7, 1995 between the Registrant and
Maxwell G. Parsons.*
10.9 Consulting Agreement dated July 7, 1995 between the Registrant and
Steven A. Cantor.*
10.10 Form of Consulting Agreement between the Registrant and LT Lawrence &
Co., Inc.*
10.11 Form of Bridge Note.*
10.12 Form of Bridge Unit Subscription Agreement.*
10.13 Exchange Offer dated June 23, 1995,including Form of Exchange Agreement.*
10.14 Form of Indemnification Agreement between the Company and its
officers and directors.*
10.15 Agreement dated April 1, 1994 between the Registrant and Martino Tire
Company, as amended.*
<PAGE>
10.16 Agreement dated January 1, 1995 between the Registrant and RPJ Tire
Company.*
10.17 Loan and Security Agreement dated May 24, 1995 between the Registrant
and GreyRock Capital Corporation.*
23 Consent of BDO Seidman, LLP.*
- --------
* Incorporated by reference to Registration Statement on Form SB-2
No. 33-96482.
(b) Reports on Form 8-K.
None
The following undertakings are incorporated into the Company's Registration
Statement on Form S-8 (Registration No. 333-6365).
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement.
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any fact or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if
the registration statement is on Form S-3 or Form S-8, and the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed by the registrant pursuant to Section 13 or
Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by
reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
<PAGE>
(1) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Act of 1933, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized on the 28th day of June, 1996.
ECOTYRE TECHNOLOGIES, INC.
/s/ Vito F. Alongi
--------------------------
Vito F. Alongi
President, Treasurer
(Principal Executive, Financial
and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed on June 28, 1996 by the following persons in the
capacities indicated:
Signature Title
---------- ------
/s/ Marc de Logeres Co-Chairman of the Board
- --------------------------
Marc de Logeres
/s/ Maxwell G. Parsons
- -------------------------- Co-Chairman of the Board
Maxwell G. Parsons
/s/ Vito F. Alongi President, Treasurer and
- -------------------------- Director (Principal Executive,
Vito F. Alongi Financial and Accounting
Officer)
/s/ Robert E. Munyer Director
- --------------------------
Robert E. Munyer
/s/ John W. King Director
- --------------------------
John W. King
/s/ Theresa Mari Director
- --------------------------
Theresa Mari
/s/ Arthur Rosenberg Director
- --------------------------
Arthur Rosenberg
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
EcoTyre Technologies, Inc.
Holtsville, New York
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 filed June 19, 1996 of our report dated May 24, 1996
relating to the financial statements of EcoTyre Technologies, Inc. appearing
in the Company's Annual Report on Form 10-KSB for the year ended March 31, 1996.
/s/ BDO Seidman, LLP
Mitchel Field, New York
June 28, 1996
<PAGE>
ECOTYRE TECHNOLOGIES, INC.
FINANCIAL STATEMENTS
FORM 10-KSB ITEM 7
YEARS ENDED MARCH 31, 1996 AND 1995
F-1
<PAGE>
ECOTYRE TECHNOLOGIES, INC.
INDEX
Page No.
--------
Report of independent certified public accountants F-3
Financial Statements:
Balance sheets F-4
Statements of operations F-5
Statements of stockholders' equity (capital
deficit) F-6
Statements of cash flows F-7
Notes to Financial Statements F-8 - F-19
F-2
<PAGE>
Report of Independent Certified Public Accountants
To the Board of Directors and Stockholders
EcoTyre Technologies, Inc.
We have audited the accompanying balance sheets of EcoTyre Technologies,
Inc. as of March 31, 1996 and 1995, and the related statements of operations,
stockholders' equity (capital deficit) and cash flows for the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of EcoTyre Technologies, Inc.
at March 31, 1996 and 1995, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
BDO Seidman, LLP
Mitchel Field, New York
May 24, 1996
F-3
<PAGE>
ECOTYRE TECHNOLOGIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,
1996 1995
---- ----
<S> <C> <C>
ASSETS
Current:
Cash and cash equivalents (Notes 1 and 4) $ 2,782,952 $49,386
Accounts receivable, less allowance for
possible losses of $11,000 and $10,000
(Note 1) 65,174 232,901
Inventories (Notes 1 and 2) 340,449 125,991
Other current assets 160,806 8,236
----------- -----------
Total current assets 3,349,381 416,514
Property and equipment, less accumulated
depreciation
(Notes 1, 3, 7 and 9) 1,258,008 26,500
Deposits on equipment (Note 9) - 230,000
Other assets (Note 8) 97,471 102,511
----------- -----------
$ 4,704,860 $775,525
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIT)
Current:
Notes payable - bank (Note 4) $ 200,000 $ -
Current maturities of long-term debt (Note 5) 150,000 195,000
Accounts payable 221,211 138,829
Accrued expenses (Note 6) 279,735 258,594
Current maturities of equipment loan (Note 1) 1,697 1,675
Current maturities of capitalized leases
(Notes 1 and 7) 6,736 -
Current maturities of machinery loan
(Notes 1, 3 and 9) 98,338 -
----------- -----------
Total current liabilities 957,717 594,098
Long-term debt (Notes 1, 5 and 8) 75,000 903,862
Equipment loan, less current maturities (Note 1) - 1,697
Capitalized leases, less current maturities
(Notes 1 and 7) 24,562 -
Machinery loan, less current maturities
(Notes 1, 3 and 9) 122,220 -
Deferred rent credits (Note 11) 272,160 82,710
----------- -----------
Total liabilities 1,451,659 1,582,367
----------- -----------
Class A Redeemable Convertible Preferred Stock,
2,000,000 shares authorized; issued and
outstanding - 1,202,775 (redemption amount
of $1,202,775) (Notes 1 and 5) 1,125,182 -
----------- -----------
Commitments (Notes 9 and 11)
Stockholders' equity (capital deficit)
(Notes 1, 5, and 12):
Preferred stock, $.001 par value,
2,000,000 shares authorized; none issued - -
Common stock, $.001 par value,
20,000,000 shares authorized;
issued and outstanding - 3,115,000
and 1,175,000 3,115 1,175
Paid-in capital 5,820,031 249,797
Deficit (3,695,127) (1,057,814)
----------- -----------
Total stockholders' equity (capital deficit) 2,128,019 (806,842)
----------- -----------
$ 4,704,860 $ 775,525
=========== ===========
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
F-4
<PAGE>
ECOTYRE TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended March 31,
1996 1995
---- ----
<S> <C> <C>
Net sales (Notes 1 and 10) $ 314,024 $1,281,223
Cost of sales 925,914 1,058,382
----------- -----------
Gross profit (loss) (611,890) 222,841
----------- -----------
Operating and other expenses:
Selling and shipping 336,956 219,998
General and administrative 916,988 657,649
Interest (including amortization of original
issue discount of $283,328 and $54,585 and
net of interest income of $29,503 and $325)
(Note 5) 364,892 177,927
Write-off of original issue discount (Note 5) 389,216 -
----------- -----------
Total operating and other expenses 2,008,052 1,055,574
----------- -----------
Loss before taxes (2,619,942) (832,733)
Provision for taxes (Notes 1 and 13) 17,371 1,192
----------- -----------
Net loss $(2,637,313) $ (833,925)
=========== ===========
Preferred stock dividends (Note 5) $ 149,070 $ -
=========== ===========
Net loss attributable to common
stockholders $(2,786,383) $ (833,925)
=========== ===========
Net loss per share (Note 1) $ (1.46) $ (.60)
=========== ===========
Weighted average number of shares of common stock
outstanding 1,905,369 1,390,000
=========== ===========
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
F-5
<PAGE>
ECOTYRE TECHNOLOGIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (CAPITAL DEFICIT)
<TABLE>
<CAPTION>
Common Stock
$.001 par value
---------------
Number Paid-in
of shares Amount capital Deficit Total
--------- ------ ------- ------- -----
<S> <C> <C> <C> <C> <C>
Balance, March 31, 1994 1,175,000 $1,175 $ 26,945 $ (223,889) $ (195,769)
Issuance of warrants with debt
(Note 5) - - 222,852 - 222,852
Net loss - - - (833,925) (833,925)
--------- ------ -------- ----------- -----------
Balance, March 31, 1995 1,175,000 1,175 249,797 (1,057,814) (806,842)
Issuance of promissory notes
and shares (Note 5) 50,000 50 149,950 - 150,000
Issuance of promissory notes
and shares (Note 5) 165,000 165 494,835 - 495,000
Adjustment to reflect deferred
placement costs of promissory
notes (Note 5) - - (192,060) - (192,060)
Issuance of common stock in
connection with initial
public offering 1,725,000 1,725 5,266,579 - 5,268,304
Preferred stock dividends
(Note 5) - - (149,070) - (149,070)
Net loss - - - (2,637,313) (2,637,313)
--------- ------ ---------- ----------- -----------
Balance, March 31, 1996 3,115,000 $3,115 $5,820,031 $(3,695,127) $2,128,019
========= ====== ========== =========== ===========
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
F-6
<PAGE>
ECOTYRE TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
(NOTES 1 and 14)
<TABLE>
<CAPTION>
Year ended March 31,
-------------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,637,313) $(833,925)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and amortization 46,852 4,027
Deferred rent 189,450 82,710
Amortization and write-off of original issue
discount 672,544 54,585
Provision for possible losses on accounts
receivable 11,000 10,000
Decrease (increase) in:
Accounts receivable 156,727 (138,776)
Inventories (214,458) (5,364)
Other assets (147,530) (64,057)
Increase (decrease) in:
Accounts payable 82,382 21,820
Accrued expenses 130,987 222,172
----------- ----------
Net cash used in operating activities (1,709,359) (646,808)
----------- ----------
Cash flows from investing activities:
Capital expenditures - net (712,049) (16,578)
Deposits on equipment - (180,000)
Loans to officer - (2,943)
----------- -----------
Net cash used in investing activities (712,049) (199,521)
----------- -----------
Cash flows from financing activities:
Proceeds from working capital loans 100,000 255,000
Repayment of working capital loans (225,000) (25,000)
Repayment of convertible debentures - (4,500)
Proceeds from bank note payable 200,000 -
Proceeds from long term notes and warrants 225,000 620,966
Net proceeds from bridge financing 807,940 -
Repayment of bridge financing (1,075,000) -
Repayment of machinery loan (79,442) -
Repayment of equipment loan (1,675) (1,509)
Repayment of capitalized lease obligations (5,013) -
Issuance of common stock 5,268,304 -
Dividends paid on preferred stock (60,140) -
----------- ----------
Net cash provided by financing activities 5,154,974 844,957
----------- ----------
Net increase (decrease) in cash and cash equivalents 2,733,566 (1,372)
Cash and cash equivalents, beginning of year 49,386 50,758
----------- ----------
Cash and cash equivalents, end of year $ 2,782,952 $ 49,386
=========== ==========
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
F-7
<PAGE>
ECOTYRE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1. Summary of Accounting Policies
(a) Business and recapitalization
EcoTyre Technologies, Inc. (the "Company") was engaged in the importation,
marketing and wholesale distribution of remanufactured/remolded automobile tires
for sale in the United States passenger tire replacement market. During the 1996
fiscal year, the Company began preparing its operations for the domestic
manufacturing and distribution of its remanufactured/remolded automobile tires.
Its customers are primarily independent tire distributors and retail tire
replacement centers.
The Company was organized in Delaware in May 1994 as successor to a
previous New York corporation having the same name (the "Predecessor Company").
In June 1994, the Company acquired the assets and assumed the liabilities of the
Predecessor Company and, in August 1994, the Company acquired the stock of the
Predecessor Company. The sale of the assets and acquisition of the stock had no
impact on the historical financial statements other than as described below.
The equity accounts of the Company reflect (a) a May 1994 recapitalization
which (i) effected a reverse stock split of 1 share of $.001 par value Common
Stock for every 4.2553 shares of $.001 par value Common Stock and (ii) created
two new classes of preferred stock, Class A Redeemable Convertible Preferred
Stock (see also Note 5) and $.001 par value Serial Preferred Stock and (b) a
June and August 1995 sale of twenty-one and one-half bridge units, each unit of
which consists of, in part, 50,000 shares of $.001 par value Common Stock (see
also Note 5). Both preferred classes have 2,000,000 authorized shares. Following
the reverse split and sale of the bridge units, 1,390,000 shares of Common Stock
were outstanding and this amount has been used for the net loss per share
calculation for the 1995 fiscal year.
(b) Use of estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
F-8
<PAGE>
(c) Concentrations of credit risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents
and accounts receivable.
The Company maintains its cash and cash equivalents in bank deposit
accounts and short-term bank certificates of deposit which, at times, may exceed
federally insured limits. The Company has not experienced any losses in such
accounts. The Company believes it is not exposed to any significant credit risk
on cash and cash equivalents.
The Company attempts to minimize credit risk with respect to accounts
receivable by reviewing customers' credit history before extending credit, and
by monitoring customers' credit exposure regularly. The Company establishes an
allowance for possible losses on accounts receivable based upon factors
surrounding the credit risk of specific customers, historical trends and other
information.
(d) Inventories
Inventories, which consist of raw materials, remanufactured tires and
purchased remanufactured tires, are valued at the lower of cost or market. Cost
is determined using the first-in, first-out method.
(e) Property, equipment and depreciation
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the related assets
as follows:
Furniture 5 - 7 years
Machinery and equipment 7 - 10 years
Motor vehicles 5 years
Leasehold improvements Lesser of 10 years or remaining lease term
(f) Fair value of financial instruments
The carrying value of long-term debt, loans and capitalized leases,
including the current portion, approximates fair value as of March 31, 1996,
based upon the borrowing rates currently available to the Company for loans with
similar terms and average maturities.
(g) Revenue recognition
Sales are recognized upon shipment of products. A provision for warranty
costs, net of anticipated recovery from suppliers, is accrued at the time of
sale.
F-9
<PAGE>
(h) Income taxes
The Company follows the liability method of accounting for income taxes, as
prescribed by Statement No. 109 of the Financial Accounting Standards Board (FAS
109).
Under FAS 109, deferred income taxes are recorded to reflect the temporary
differences between the tax bases of assets and liabilities and their reported
amounts in the financial statements.
(i) Net loss per share
Net loss per share is based on the weighted average number of shares of
Common Stock during each period. Common Stock equivalents and other potentially
dilutive securities are anti-dilutive. Net loss has been adjusted for accretion
of and preferred dividends.
(j) Cash flows
For purposes of the statements of cash flows, the Company considers all
highly liquid instruments with a maturity of three months or less to be cash
equivalents.
(k) Prospective accounting changes
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 ("SFAS No. 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of".
SFAS No. 121 is effective for fiscal years beginning after December 15, 1995.
SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The impact of adopting SFAS No. 121 is not expected to
be material.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for
Stock-Based Compensation". SFAS No. 123 encourages companies to recognize
expense for stock options and other stock-based employee compensation plans
based on their fair value at the date of grant. As permitted by SFAS No. 123,
the Company plans to continue to apply its current accounting policy under APB
Opinion No. 25, "Accounting for Stock Issued to Employees", in fiscal 1997 and
future years, and will provide disclosure of the pro forma impact on net income
and earnings per share as if the fair value-based method had been applied.
F-10
<PAGE>
Note 2. Inventories
Inventories at March 31, 1996 and 1995 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Raw materials $207,280 $ -
Work in process 4,052
Finished goods 129,117 125,991
-------- --------
$340,449 $125,991
======== ========
</TABLE>
Note 3. Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
March 31,
----------------------------
1996 1995
---- ----
<S> <C> <C>
Furniture and equipment $ 88,158 $ 13,948
Machinery and equipment 1,158,877 -
Motor vehicles 20,096 6,758
Leasehold improvement 43,182 -
Construction in progress - 11,247
---------- ----------
1,310,313 31,953
Less accumulated depreciation (52,305) (5,453)
---------- ----------
$1,258,008 $ 26,500
========== ==========
</TABLE>
Included in machinery and equipment at March 31, 1996 is manufacturing
equipment with a net book value of approximately $511,000, which is collateral
for a financing loan in the original amount of $300,000 (see Note 9).
Note 4. Notes Payable - Bank
The Company has a secured line of credit with a bank which expires in July
1996. The interest rate on borrowings is 1-1/2% over the bank's prime rate and
is secured by a $400,000 certificate of deposit.
F-11
<PAGE>
Note 5. Long-Term Debt
Long term debt consists of the following:
<TABLE>
<CAPTION>
March 31,
----------------------------
1996 1995
---- ----
<S> <C> <C>
Term notes
(a) Unsecured borrowings which
bear interest at 12% per annum
and are payable in June 1997. $ 75,000 $ -
(b) Unsecured borrowing which bears
interest at 14% per annum and
is payable in February 1997. 150,000 -
(c) Convertible debentures - the
debentures were converted
to preferred stock (see below). - 115,500
Working capital loans
Unsecured borrowings from individuals
which bear interest at 10% per annum. - 230,000
Notes with warrants
Converted to preferred stock
(see below).
Principal sum - 947,429
Less: original issue discount - (194,067)
----------- -----------
- 753,362
----------- -----------
225,000 1,098,862
Less: current portion of
long-term debt 150,000 195,000
----------- -----------
$ 75,000 $ 903,862
=========== ===========
</TABLE>
The interest rates on the various notes with warrants were recalculated by
applying interest rates more commensurate with the discount rates associated
with the value of the detachable warrants. The differences between these rates
and the stated rates of the notes were classified as original issue discount.
These amounts originally totaled $222,852 and were credited to paid-in capital.
F-12
<PAGE>
On June 23, 1995, the Company commenced an exchange offer to the holders of
convertible debentures, notes with warrants and $30,000 of the outstanding
working capital loans whereby the principal and unpaid interest thereon,
totaling approximately $1,185,000 at March 31, 1995, $1,202,775 at the
conversion date (before unamortized original issue discount of approximately
$194,000), was converted into 1,202,775 shares of newly issued $.001 par value
Class A redeemable convertible preferred stock (liquidation and redemption value
of $1 per share). The preferred stock was recorded at its estimated fair value
and the discount from its redemption value will be amortized as additional
dividends on a ratable basis up to the mandatory redemption date. There was no
material gain or loss on the extinguishment of the convertible debentures and
notes with warrants.
Such shares will pay a cumulative dividend of 10% and are convertible to
one share of voting Common Stock at the rate of five shares of preferred (or
$5.00 per share) commencing in January 1997 and one warrant which is exercisable
for two years after the conversion at $7.50 per common share for the first year
and $10.00 per common share for the second year. If the shares are not
converted, the preferred shareholders can cause the Company to redeem such
shares in two years, and in any event, the Company is obligated to redeem the
shares three years from December 1995 at $1 per share.
In June 1995, the Company offered and sold five bridge units consisting of
an aggregate of $250,000 principal amount of Promissory Notes. Each unit
consisted of $50,000 principal amount of a 12% Promissory Note and 10,000 shares
of Common Stock. 25% of the subscription price of each Unit was applied to the
Note component thereof and 75% is applied to the Common Stock component thereof.
Original issue discount, amounting to $150,000, was amortized over the life of
the debt. These notes were paid off at the initial public offering in December
1995.
In August 1995, the Company offered and sold sixteen and one-half bridge
units consisting of an aggregate of $825,000 principal amount of Promissory
Notes. Each unit consisted of $50,000 principal amount of a 12% Promissory Note
and 10,000 shares of Common Stock. 25% of the subscription price of each unit
was applied to the Note component thereof and 75% was applied to the Common
Stock component thereof. Original issue discount, amounting to $495,000, was
amortized over the life of the debt. Costs related directly to the bridge
financing in the amount of $256,079 have been distributed as follows: 75% of the
expenses relating to the sale of these bridge units were charged to additional
paid-in capital (or $192,060) and 25% was amortized over the life of the debt
(or $64,019). These notes were paid off at the initial public offering in
December 1995.
Amortization of original issue discount relating to the notes with warrants
prior to conversion to preferred stock and the bridge notes prior to repayment
totalled $283,328 and $54,585 for the years ended March 31, 1996 and 1995,
respectively. At the December 1995 repayment date of the bridge unit notes, the
Company wrote off the remaining unamortized original issue discount relating to
such notes, totaling $389,216.
F-13
<PAGE>
Note 6. Accrued Expenses
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
March 31,
--------------------
1996 1995
---- ----
<S> <C> <C>
Interest $ 4,750 $108,470
Printing expenses 84,237 -
Professional fees 95,300 82,628
Payroll and related expenses 30,625 46,230
Other 64,823 21,266
--------- ---------
$279,735 $258,594
========= =========
</TABLE>
Note 7. Capital Leases
In fiscal 1996, the Company entered into two capital leases for telephone
equipment and a copy machine. The telephone lease is payable in monthly
installments of $325 through May 2000 including interest. The lease is
collateralized by the telephone equipment with a net book value of approximately
$11,900 as of March 31, 1996. The copy machine lease is payable in monthly
installments of $380 through March 2000 including interest. The lease is
collateralized by the copy machine with a net book value of approximately
$16,500 as of March 31, 1996.
Note 8. Related Party Transactions
The Company's receivable from its president, included in other assets,
consists of an unsecured promissory note due in October 1999 totaling $25,000 at
March 31, 1996 and 1995. Interest at 7% is payable annually.
The Company obtained some of its unsecured borrowings in the amount of
approximately $488,000 for the year ended March 31, 1995 from various
individuals related to members of the Company's management or to stockholders
(see Note 5). In connection with obtaining the unsecured borrowings, fees
amounting to $30,796 were paid to the stockholders who arranged these
borrowings.
In addition, expenses relating to services rendered, primarily consisting
of consulting fees, commissions on sales and legal expenses that were paid or
accrued to stockholders or parties related to stockholders, amounted to $68,632
and $115,176 for the years ended March 31, 1996 and 1995, respectively.
F-14
<PAGE>
Note 9. Machinery Loan
During fiscal 1996, the Company entered into an agreement to purchase
manufacturing equipment through a financing corporation. Under the agreement,
the Company paid $230,000 of the $530,000 total purchase price and financed the
$300,000 balance. The balance is payable in 36 monthly installments of $10,144
including interest at 13-1/4% per annum, beginning in May 1995. The lender
has a security interest in the equipment.
Maturities of the machinery loan are as follows:
<TABLE>
Year ending March 31,
<S> <C>
1997 $ 98,338
1998 112,187
1999 10,033
--------
$220,558
========
</TABLE>
Note 10. Customer Concentration
At March 31, 1996, the Company was in the process of preparing its
operations for its domestic manufacturing and distribution of its own
remanufactured/remolded automobile tires, thereby curtailing its distribution of
third party remanufactured/remolded tires. During fiscal 1996, sales to one
customer accounted for 12% of net sales. As of March 31, 1996, two customers
accounted for 22% and 14% of the accounts receivable.
During fiscal 1995, sales to two customers accounted for 27% and 18% of net
sales, respectively. As of March 31, 1995 these customers together accounted for
approximately 54% of the accounts receivable (see Note 11(d)).
Note 11. Commitments
(a) Lease
Minimum annual rental commitments under a noncancellable operating lease
for the Company's manufacturing and warehousing facility are as follows:
<TABLE>
Year ending March 31,
<S> <C>
1997 $ 289,819
1998 304,310
1999 319,525
2000 335,501
2001 352,277
Thereafter 1,813,592
-----------
$3,415,024
===========
</TABLE>
F-15
<PAGE>
The initial lease term, which began in January 1995, is for ten years and
nine months and has one five-year renewal option. The lease contains a
$2,500,000 purchase option commencing October 1, 1995 with increases of 5% of
the purchase price on each anniversary beginning October 1, 1997 through
October, 2004. The Company records a liability for deferred rent costs to the
extent that the amortized rent commitment exceeds actual lease payments
(including nine free months of rent at the inception of the lease term).
Rental expense under operating leases amounted to approximately $338,000
and $112,000 for the years ended March 31, 1996 and 1995, respectively.
(b) Sales and territory agreements
During fiscal 1995, the Company entered into separate three and four year
agreements with its two principal customers at that time (see Note 10) to
supply, subject to certain limitations, the Company's remanufactured tires for
distribution within exclusive territories. Included in the conditions for the
territory rights are commissions to be paid to these customers based on a
percentage of gross profit if the Company distributes through national retail
stores located within the respective territories. The territories cover thirteen
states, seven in the west and six in the south. In addition, the contracts
require a percentage of the purchases to be reimbursed if annual minimum order
quantities are met. One of the contracts also includes a provision for
reimbursement of direct advertising expenses. During fiscal 1996 and 1995,
minimum order quantities were not met by either customer, no commissions were
earned and no direct reimbursable advertising expenses were incurred.
(c) Consulting agreements
In July 1995, the Company entered into a three year agreement with a U.K.
Company to provide the services of two consultants beginning August 1, 1995,
whereby the U.K. Company will be paid $120,000 per annum for their services in
connection with the development and operation of the Company's manufacturing
facility.
The Company also entered into three year agreements starting August 1, 1995
with two individuals and one of the stockholders to provide management
consulting services. One individual will be paid $84,000 per annum for his
services and the stockholder has been granted options to purchase 130,000 shares
of Common Stock of the Company at an exercise price of $5.00 per share,
exercisable in June 1997. In addition, the stockholder will receive 20,000
shares of Common Stock in June 1997 and will be paid a fee of $4,167 a month
plus expenses starting in May 1996. The agreement with the second individual
provides for compensation to be paid at a rate of $3,500 a month starting in
April 1996, plus commissions on Company sales to customers obtained by this
individual. In addition, this individual will receive 25,000 shares of Common
Stock in June 1997.
F-16
<PAGE>
(d) Employment agreements
During 1995, the Company entered into three year employment agreements with
its president and one of its vice presidents whereby each officer will be paid a
minimum annual salary of $95,000 and $85,000, respectively, commencing in
December 1995. In addition, a two year employment agreement with one of the
Company's vice presidents was entered into during 1995 whereby the officer will
be paid $40,000 per annum and 2% of the net sales to one of its major customers
at that time (see Note 10), also commencing in December 1995. The agreements
with the president and vice president also contain buyout clauses in the event
of a change of control in the Company which adversely affects working
conditions.
Note 12. Stockholders' Equity
(a) Initial public offering
In December 1995, the Company completed an initial public offering of
1,725,000 units. Each unit consisted of one share of Common Stock and one
redeemable Common Stock purchase warrant. Following the initial public offering
3,115,000 shares of Common Stock and warrants to purchase 1,725,000 shares of
Common Stock were outstanding. The warrants are exercisable at $5.00 per share,
subject to adjustment, and expire on December 12, 1998. The Company has the
right to redeem any or all of the warrants at a price of $.01 per warrant, upon
giving 30 to 60 days' notice, after a period during which the closing price for
the Company's Common Stock has equaled or exceeded $6.50 per share for each of
twenty consecutive trading days.
(b) Underwriters' purchase option
In conjunction with the offering, the underwriters also obtained an option
to purchase 150,000 units at a price of $6.00 per unit. This option will be
exercisable for a period of four years, commencing on the first anniversary of
the effective date of the offering. The units underlying the underwriters
purchase option are identical in all respects to the units issued to the public
(except that the Class A Warrants included in the units issuable upon the
exercise of the purchase option are not redeemable and the exercise price of
such Class A Warrants is $7.50). The purchase option cannot be transferred,
assigned or hypothecated for one year from the date of its issuance, except that
they may be assigned, in whole or in part, to any successor, officer or partner
of the underwriter or to other underwriters or members of the selling group. The
purchase option contains anti-dilution provisions providing for appropriate
adjustment of the exercise price and number of shares of Common Stock and Class
A Warrants which may be purchased upon exercise upon the occurrence of certain
events.
F-17
<PAGE>
(c) Long-term incentive plan
In June 1995, the Company adopted a long-term incentive plan in order to
motivate qualified employees of the Company to assist the Company in attracting
employees and to align the interest of such persons with those of the Company's
stockholders. The plan provides for the grant of, among other things, stock
options and restricted stock, up to a maximum of 350,000 shares of Common Stock.
As of March 31, 1996, the Company has granted an aggregate of 340,000 options.
Each of these options is exercisable for ten years for a price of $5.00 per
share, commencing in June 1997.
(d) Common stock shares reserved
At March 31, 1996, shares of the Company's authorized and unissued Common
Stock were reserved for issuance as follows:
<TABLE>
<S> <C>
Long-term incentive plan 350,000
Outstanding warrants 1,725,000
Conversion of Class A Redeemable
Convertible Preferred Stock
(including related warrants) 481,110
Issuable to consultants 45,000
Underwriters' purchase option units 300,000
---------
2,901,110
=========
</TABLE>
Note 13. Income Taxes
The provision for income taxes is comprised of state taxes for the years
ended March 31, 1996 and 1995. The Company has fully reserved the tax benefits
arising from March 31, 1996 and 1995 net operating loss carryforwards of
approximately $3,000,000 and $560,000, respectively. Such losses, which can be
utilized against future profits until 2011, may be subject to Internal Revenue
Code Section 382 limitations which limit the use of net operating loss
carryforwards when significant ownership changes occur. As a result of the asset
sale described in Note 1(a), approximately $400,000 of the net operating loss
was applied and replaced by intangible assets for tax reporting purposes. The
write-off of such intangibles would result in a future tax benefit, but because
of the uncertainty as to the future realization of such benefits, this deferred
tax asset has also been fully reserved.
F-18
<PAGE>
The Company's net deferred tax asset consists of the following:
<TABLE>
<CAPTION>
March 31,
-----------------
1996 1995
---- ----
<S> <C> <C>
Benefit of net operating loss
carryforwards $1,200,000 $224,000
Tax temporary differences relating to:
Intangible assets 160,000 160,000
Deferred rent costs 110,000 33,000
Inventory capitalization, allowance
for possible losses and other 5,000 10,000
---------- ----------
1,475,000 427,000
Less: valuation allowance (1,475,000) (427,000)
---------- ----------
$ - $ -
========== ==========
</TABLE>
Note 14. Supplemental Cash Flow Information
Income taxes and interest paid were as follows:
<TABLE>
<CAPTION>
March 31,
-----------------
1996 1995
---- ----
<S> <C> <C>
Income taxes $ 17,371 $ 1,192
Interest expense $124,488 $10,506
</TABLE>
Non-cash investing and financing activities during the period were as
follows:
<TABLE>
<CAPTION>
March 31,
-----------------
1996 1995
---- ----
<S> <C> <C>
Exchange of $200,000 working capital
loan and $43,463 accrued interest
for a two year note with warrants
(see Note 5) $ - $243,463
Assets acquired under machinery loan 300,000 -
Assets acquired under capitalized leases 36,311 -
Conversion of long-term debt and
$109,846 accrued interest for
redeemable convertible preferred stock 1,202,775 -
Deferred placement costs of promissory
notes (see Note 5) 192,060 -
Accretion of preferred dividends 88,930 -
F-19
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements for the fiscal year ended March 31, 1996 and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-1-1995
<PERIOD-END> MAR-31-1996
<CASH> 2,782,952
<SECURITIES> 0
<RECEIVABLES> 76,174
<ALLOWANCES> 11,000
<INVENTORY> 340,449
<CURRENT-ASSETS> 3,349,381
<PP&E> 1,310,313
<DEPRECIATION> 52,305
<TOTAL-ASSETS> 4,704,860
<CURRENT-LIABILITIES> 957,717
<BONDS> 0
1,125,182
0
<COMMON> 3,115
<OTHER-SE> 2,124,904
<TOTAL-LIABILITY-AND-EQUITY> 4,704,860
<SALES> 314,024
<TOTAL-REVENUES> 314,024
<CGS> 925,914
<TOTAL-COSTS> 925,914
<OTHER-EXPENSES> 389,216
<LOSS-PROVISION> 11,000
<INTEREST-EXPENSE> 394,395
<INCOME-PRETAX> (2,619,942)
<INCOME-TAX> 17,371
<INCOME-CONTINUING> (2,637,313)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,637,313)
<EPS-PRIMARY> (1.46)
<EPS-DILUTED> (1.46)
</TABLE>
