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, 1997
or
[ ] Transition report pursuant to Section 13 of 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 be 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; $2,938,565.
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of July 14 1997 based on the average price on that date was
$1,939,610. At July 14, 1997, the number of shares outstanding of the issuer's
common stock was 879,571.
DOCUMENTS INCORPORATED BY REFERENCE
None
Transitional Small Business Disclosure Format Yes[ ] No [X]
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
EcoTyre Technologies, Inc. (the "Company") is a manufacturer in the United
States that recycles used tires by utilizing European remolding technology to
manufacture and distribute a comprehensive line of replacement automobile tires.
This differs from the traditional retreading process in which new tread is
simply placed over the tread portion of a used casing. The Company applies new
sidewall and tread rubber to a completely buffed casing and permanently bonds
the rubber to the casing from sidewall to sidewall in high temperature
vulcanizing presses. The result is a superior quality tire which is virtually
"indistinguishable" from a new tire in appearance and performance, but sells for
substantially less than leading brands. The remolded tires manufactured by the
Company are created by manufacturing a previously used high-quality passenger or
light truck casing of a name brand manufacturer.
The Company commenced limited manufacturing operations in December, 1995.
During the fiscal year ending March 31, 1997, the Company's operations reflect
the full transition from a distribution company to a manufacturing distributor
of remanufactured tires. The operating revenues and customer base increased
substantially throughout this first year of manufacturing operations. The
following table sets forth the growth experienced for the fiscal year ended
March 31, 1997:
<TABLE>
<CAPTION>
Customer Base Sales Dollars
<S> <C> <C>
First Quarter 70 $ 218,802
Second Quarter 75 582,535
Third Quarter 91 797,013
Fourth Quarter 110 1,340,215
</TABLE>
The aforementioned growth was accomplished utilizing the Company's initial
tire size mix which covers 26 of the approximately 140 tire sizes and variations
of the Company's target market group.
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, 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 1996 in the United States for over
$7 billion. 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 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 are
approximately 140 different sizes or variations of tires in its target marketing
group which includes passenger automobiles and light trucks. The Company
currently manufactures 26 sizes with its initial equipment mix. The Company has
invested in and is awaiting delivery of additional equipment which is intended
to expand its production to over 100 sizes and variations of sizes. The added
equipment should enable the Company to produce sizes for over 90% of its market
group.
<PAGE>
Manufacturing Operations
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 its manufacturing operations. In its distribution operations, the
Company resold its products primarily to retail tire replacement centers and
tire distributors.
The Company commenced limited manufacturing operations in December 1995 at
its 65,000 square foot leased facility in Holtsville, New York. See
"Properties". To commence manufacturing, the Company had purchased 20 mold
presses, molds, one extruder, one buffing machine and related ancillary
equipment. Additional equipment was purchased in 1996 to increase the Company's
production capacity and limit down time due to machinery failures and
maintenance. The Company ordered new molds from Italy in November 1996 to be
utilized in its current presses which should allow the Company to increase its
production of popular high performance and light truck tires with higher profit
margins, decreasing its production of smaller tire sizes which are sold at lower
margins. Some molds have already arrived at the Company's facility and new light
truck tire sizes are in production. The remaining molds should arrive in the
second calendar quarter of 1997. Also, in March 1997, the Company finalized a
business acquisition of certain of the assets of Butler Retreading, Inc., (the
"Butler Acquisition") a private 18 year old high performance retreading Company
based in Marietta, Georgia. Butler' s equipment is expected to substantially
increase the Company's present press capacity and position the Company to
increase sales, with intended higher gross profit margins from the new mix of
tires it will produce. The business acquisition, which includes Butler's client
base, machinery, equipment and inventory, was financed principally by the
proceeds of a $1,000,000 loan from PhoenixCor. Inc., a wholly owned subsidiary
of Sumitoma Bank.
Sales and Marketing
The Company sells its products utilizing a direct sales staff and independent
distributors. The Company maintains a direct sales staff at its headquarters in
Holtsville, New York that call on smaller accounts within the Company's
geographical vicinity. The Company also distributes to five wholesale
distributors located in Florida, Indiana, Pennsylvania, Missouri and Ohio.
Additionally, the Company exports to Canada, Mexico, Argentina, Brazil, Jamaica,
Costa Rica and Guatemala through export companies located in the United States.
The Company intends to continue marketing its products through appearances at
domestic tire and automobile trade shows as well as major international tire
trade shows. Additionally, the Company is in the process of developing a print
and internet marketing campaign with its goal being to increase its customer
base from 110 outlets to 300 outlets covering the entire continental United
States and the majority of Central and South American countries by March 31,
1998.
To this end, the Company further intends to increase its sales to the U.S.
Government market. The Company announced on April 29, 1997 that following a
comprehensive inspection of its facilities, the U.S. Department of
Transportation for District 11, with jurisdiction over the entire New York City
metropolitan area, approved the Company's load ratings on all tires manufactured
by the Company, which allows the Company to produce and sell tires for public
passenger vehicles, including mini-buses, school buses, limousines, taxi cabs
and ambulances.
In addition, on June 3, 1997, the Company announced that it had successfully
completed a test program with a New York maintenance facility of the United
States Postal Service ("USPS"). The test provided for the USPS to deliver used
tire casings from local postal vehicles to the Company for recycling by way of
the Company's remolding technology. The Company, in turn, resells the tires back
to the USPS at retail prices. The Company recently completed a similar test in
the State of Florida and received clearance to begin marketing to post offices
in that state through an established distribution network.
<PAGE>
Raw Materials
The primary raw materials 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 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
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 significant
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 primary competition is from lower-priced,
lesser-known associated brands of major manufacturing and private label
manufacturer 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. 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 tire
markets, will not enter the United States market in direct competition with the
Company in the United States.
The Company believes that its primary competitive advantage with respect to
new replacement tires is the cost. While the price differential between the
Company's products and those of lower end and certain foreign-manufactured
replacement tires was less for its last fiscal year than in prior periods, the
Company expects that its price advantage is sufficient to continue 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 and light truck tires), which the Company
believes is superior to warranties typically offered by manufacturers and
sellers of such products and exhibits the Company's confidence in the quality of
its product.
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.
<PAGE>
While the Company believes that its manufacturing operations are not
environmentally sensitive and will continue to comply with all applicable
environmental laws and regulations, no assurance can be given that compliance
with the 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 $15,000,000 of product liability, general and personal and advertising
injury insurance per occurrence and in the aggregate, subject to a $5,000
deductible.
Employees
As of March 31, 1997, the Company's staff consisted of 67 full-time employees,
including its executive officers, six salespersons, four administrative
personnel and 52 manufacturing personnel. The Company's employees are
compensated on a salaried or hourly basis, except that certain 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.
Intellectual Property
The Company utilizes its registered trademarks on the products it manufactures
at its 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 products. 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. 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 through July 31, 2005.
If this option has not been exercised by October 2, 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, 1997.
<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 set
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.
These prices have been retroactively adjusted for a one-for-seven reverse stock
split effective June 2, 1997.
<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 47 1/4 33 1/4 21 14
Fiscal 1997
First Quarter $ 48 1/8 $32 3/8 $ 25 3/8 $ 14
Second Quarter 42 7/8 20 1/8 15 3/4 6 1/8
Third Quarter 28 4 3/8 4 3/8 1 5/16
Fourth Quarter 5 1/32 2 27/32 1 3/4 7/16
Fiscal 1998
First Quarter $ 3 1/8 $ 1 5/8 $ 21/32 $ 1/4
_________
* Not applicable
</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 July 14, 1997, there were approximately 90 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 OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Fiscal Year Ended March 31, 1997 Compared to Fiscal Year Ended March 31, 1996
Net Sales. The Company's net sales of $2,938,565 for the fiscal year ended
March 31, 1997 ("Fiscal 1997") represents an increase of $2,624,541 compared to
net sales for the fiscal year ended March 31, 1996 ("Fiscal 1996"). The increase
is attributable to the Company operating as a manufacturing facility for the
entire 1997 fiscal year. Approximately 46% of the Company's Fiscal 1997 sales
were achieved in the last quarter as the Company has steadily increased its
manufacturing capacity.
Cost of Sales. The Company's cost of sales for Fiscal 1997 was $4,335,447
as compared to $925,914 for the comparable prior period, representing an
increase of $3,409,533. This increase was due primarily to the increase of
purchases of raw material and labor costs as a result of the manufacturing.
Certain of the Company's direct labor and overhead expenses increased, such as
salaries ($867,577), utilities ($134,240), and depreciation ($162,611) due to
the operation of the manufacturing facility for a full year in Fiscal 1997, the
completion of the transition to a manufacturing facility and the related hiring
of direct labor and personnel needed to run the facility at a higher percentage
of capacity.
Gross Profit (Loss). The Company has a gross loss for Fiscal 1997
($1,396,882) as compared to a gross loss of ($611,890) for Fiscal 1996, an
increased loss of ($784,992). This loss was directly caused by the incurrence of
additional costs as a tire manufacturer. The first nine months of Fiscal 1997
was primarily devoted to testing and training of manufacturing personnel with
the last quarter of the fiscal year showing a gross profit as the Company
completed its manufacturing transition. During the manufacturing transition
period, the Company incurred direct labor and overhead expenses without the
corresponding benefit of sales. The Company is currently operating at
approximately 40% of capacity.
Operating and Other Expenses. The Company incurred selling and shipping
expenses of $745,529, general and administrative expenses of $1,242,416 and
interest expense of $79,732 in Fiscal 1997 as compared to $336,956 of selling
and shipping expenses, $916,988 of general and administrative expenses and
$394,395 of interest expense in Fiscal 1996. The increase in selling and
shipping expenses resulted primarily from an increase in salaries to full time
salespersons and an increase in marketing expense. The general and
administrative expense increase is attributable primarily to increases in
occupancy costs, consulting fees paid and salaries of full time office
personnel. The decrease in interest expense is attributable to amortization of
deferred interest of $283,328 in Fiscal 1996 from the discounting of the notes
in the Company's bridge financing. The Company also wrote off the remaining
original issue discount of $389,216 during Fiscal 1996 at the time of the
initial public offering.
Net Loss. The Company sustained a net loss of ($3,411,743) in Fiscal 1997 as
compared to a net loss of ($2,637,313) in Fiscal 1996, an increased loss of
($774,430). The increased loss relates primarily to the $784,992 increase in the
gross loss and the increase in selling, general and administrative expenses of
$734,001 offset by a decline in interest expense and write-off of original issue
discount of $703,879.
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
$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.
<PAGE>
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 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
notes.
Liquidity and Capital Resources
As indicated in the Report of Independent Certified Public Accountants, the
Company's financial statements have been prepared assuming that the Company will
continue as a going concern. As discussed in Note 1(b) of the Notes to Financial
Statements, the Company has sustained losses since inception and requires
additional working capital. These factors raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
The Company used cash in operating activities of $3,864,581 for the year ended
March 31, 1997 and $1,709,359 for the year ended March 31, 1996 which was
primarily related to the loss from operations. Cash used in investing activities
in the amount of $531,359 and $712,049 for the year ended March 31, 1997 and
1996, 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 $1,740,480 and $5,154,974
for the year ended March 31, 1997 and 1996 was derived principally from the
Company's private placement (in October 1996) and from its initial public
offering (in December 1995), and working capital loans, notes and debentures
during Fiscal 1996. 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 originally could 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 could
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 could either convert the Class A Redeemable Convertible
Preferred Stock or receive the redemption price for his Class A Redeemable
Convertible Preferred Stock. Subsequent to March 31, 1997, the redemption
provision of the Preferred Stock was eliminated. These shares can be converted
to Common Stock at a rate of one share of Common Stock for one share of Class A
Convertible Preferred Stock (See Financial Statement Footnote 16).
<PAGE>
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 consummates the purchase price
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. As of March 31, 1997, the Company has no
significant commitments for additional capital expenditures.
At March 31, 1997, the Company had cash and cash equivalents of $127,392
compared to $2,782,952 at March 31, 1996. The Company's working capital at March
31, 1997 was $333,497 compared to $2,391,664 at March 31, 1996. Subsequent to
March 31, 1997, the Company received approximately $400,000 from the issuance of
approximately 400,000 shares of Class B Preferred Stock and approximately
$250,000 from the private placement of common stock (see Note 16 of Notes to
Financial Statements). Although the Company has expanded its production capacity
in order to meet its increasing sales demand, no assurance can be given that the
Company will be successful in generating sufficient cash flows from its
operations to meet its obligations. The Company is also attempting to generate
additional working capital through sales of common stock. If the Company is
unsuccessful in achieving positive cash flows from its operations or generating
additional working capital through sales of stock, the Company's business may be
materially and adversely affected.
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 mid
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>
Fiscal Year Ended March 31,
1996 1997
---- ----
Statement of Operations Data:
<S> <C> <C>
Net sales $ 314,024 $ 2,938,565
Net loss (2,637,313) (3,411,743)
Primary loss per common share (10.24)(2) (5.98)(2)
Weighted average number
of common shares (1) 272,196 602,367
</TABLE>
<TABLE>
<CAPTION>
Balance Sheet Data:
March 31, 1997
--------------
<S> <C>
Working capital $ 333,497
Total assets 4,815,744
Total long term debt, net of current portion (3) 1,016,700
Class A Redeemable Convertible Preferred Stock 1,193,090
Stockholders' equity 746,445
<FN>
(1) Adjusted to give effect to a 1-for-7 reverse stock split effective on
June 2, 1997. 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, 1997 and 1996 preferred stock dividends of $188,185 and
$149,070, respectively, have increased the net loss from operations to arrive at
net loss attributable to common shareholders of ($3,599,928) and ($2,786,383).
(3) Includes long-term portion of term notes, 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.
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, 1997 were as
follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Marc de Logeres (2)(4) 71 Co-Chairman of the Board
Maxwell G. Parsons (3)(5) 67 Co-Chairman of the Board
Vito F. Alongi (1) 42 President, Principal Executive
Financial and Accounting Officer,
Treasurer and Director
Robert E. Munyer, Jr.(2)(5) 54 Vice President - Manufacturing,
Secretary and Director
John W. King (1) 63 Vice President and Director
Theresa Mari, Esq. (3)(4) 33 Director
Arthur Rosenberg, Esq. (3) 58 Director
<FN>
(1) Member of Class I, to serve until the 1997 Annual Meeting of Stockholders.
(2) Member of Class II, to serve until the 1998 Annual Meeting of Stockholders.
(3) Member of Class III, to serve until the 1999 Annual Meeting of Stockholders.
(4) Member of Audit Committee
(5) Member of Compensation Committee
</FN>
</TABLE>
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 retired 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
1996 to the present, Mr. Parsons has been the president of M.G. Enterprises,
Inc., a consulting firm. From 1982 through 1986, Mr. Parsons was president of
K-Mart Enterprises, Inc. and was responsible for managing the automotive and
sporting goods department 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.
<PAGE>
Robert E. Munyer, Jr. has been Vice President of Manufacturing and Secretary
of the Company and its predecessor from 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.
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 is currently a solo practicing attorney. Prior thereto, Ms.
Mari was an attorney with the firm of Jaeger, Mari & Block from 1992 through
December 1995 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 Louis Crispino who is expected to make
significant contributions to its business. Mr. 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.
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 1997.
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 the 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 transaction during
fiscal 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
1997, 1996 and 1995 to the Company's executive officers.
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
------------------- ------------
Securities
Name and Other Annual Underlying All Other
Principal Position Year Salary Bonus Compensation (1) Options Compensations
<S> <C> <C> <C> <C> <C> <C>
Vito Alongi 1997 $ 94,723 - - 32,143 -
President 1996 $100,103 - - - -
(Chief Executive Officer) 1995 $ 69,252 - - 7,143 -
_________
<FN>
(1) The value of all perquisites provided to the Company's officers did
not exceed the lesser of $50,000 or 10% of the officer's salary and bonus.
</FN>
</TABLE>
Option/SAR Grants in Last Fiscal Year
The following table sets forth all stock option grants to the executive
officers named in the Executive Compensation table during the last fiscal year.
<TABLE>
<CAPTION>
Individual Grants
-----------------
(a) (b) (c) (d) (e)
Number of % of Total
Securities Option/SARS
Underlying Granted to
Options/SARS Employees in Exercise or Base Expiration
Name Granted (#) Fiscal Year Price ($/Sh) Date
- ---- ------------- ------------- ----------------- -----------
<S> <C> <C> <C> <C>
Vito F. Alongi
President 28,571 34-3/4% $4.41 Feb. 2007
(Chief Executive Officer) 3,571 4-1/3% $5.25 Feb. 2007
</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.
<PAGE>
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 in defined in Section
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.
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 therefore will receive $3,500 a
month. Additionally, on June 13, 1997, the Company issued to Mr. Parsons 3,571
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 of 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.
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, 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, acquired shares, shares purchased in the open market or
any combination thereof. If any award under the 1995 Incentive Plan terminates,
expires unexercised, or is canceled, 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 27,142 options to purchase shares of Common Stock under the 1995
Incentive Plan, of which 7,143 options have been granted to each of Vito F.
Alongi and Theresa Mari, 3,571 options have been granted to John W. King, and
3,571 options have been granted to Marc de Logeres.
<PAGE>
1997 Long Term Incentive Plan
In February 1997, the Company adopted the EcoTyre Technologies, Inc. 1997 Long
Term Incentive Plan (the "1997 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 1997 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 1997 Incentive Plan, which is administered by the Compensation Committee
of the Board of Directors, authorizes the issuance of a maximum of 1,700,000
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 1997 Incentive Plan terminates, expires
unexercised, or is canceled, 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 92,857
non-qualified stock options to purchase shares of Common Stock under the 1997
Incentive Plan, of which 28,571 options have been granted to Vito F. Alongi and
17,857 options have been granted to Theresa Mari at an exercise price of $4.41
per share and 35,714 options were granted to members of the Board of Directors
at an exercise price of $5.25 per share.
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 maintains
a liability insurance policy for the benefit of its directors.
ITEM 11. SECURITY OWNERSHIP
The following table sets forth the beneficial ownership of shares of voting
stock of the Company, as of June 15,1997 after giving effect to the Company's
one-for-seven reverse stock split, 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 investment and voting power is
held by the persons named as owners.
<PAGE>
<TABLE>
<CAPTION>
Amount and Nature
Name and Address of of Shares Percentage
Beneficial Owner Beneficially Owned Ownership
- --------------------- ------------------- ------------
<S> <C> <C>
Steven A. Cantor 113,143 (3) 13.0%
Vito F. Alongi (1) 27,143 (4) 3.1%
John W. King (1) 17,679 (5) 2.0%
Robert E. Munyer, Jr. (1) 10,000 (6) 1.1%
Theresa Mari (1) 14,207 (7) 1.6%
Maxwell G. Parsons (2) 5,714 (8) *
Arthur Rosenberg 0 (9) *
Marc de Logeres 0 (10) *
All officers and directors as
a group (8 persons) 77,600 8.7%
<FN>
* Less than 1%
(1) The address for each of these persons is 895 Waverly Avenue, Holtsville,
New York 11742.
(2) The address for this person is 5535 N.E. 4th Avenue, Ocala, Florida 34479.
(3) Includes an aggregate of 40,714 shares of Common Stock owned by Annette
Cantor, Mr. Cantor's mother, and Cindy Birmingham, Mr. Cantor's sister, as
to which Mr. Cantor disclaims beneficial ownership.
(4) Includes options to purchase 7,143 shares of Common Stock at an
exercise price of $8.75 per share granted pursuant to the Company's 1995
Long Term Incentive Plan, which are exercisable within 60 days of the
Record Date. Does not include options to purchase 3,571 shares of
Common Stock at an exercise price of $5.25 per share which have been
granted pursuant to the Company's 1997 Long Term Incentive Plan and
options to purchase 28,571 shares of Common Stock at an exercise price
of $4.41 per share granted pursuant to the Company's 1997 Long Term
Incentive Plan which are not exercisable within 60 days of the Record Date
and five year warrants to purchase 71,429 shares of Common Stock at
$7.00 per share which are not exercisable within 60 days of the Record
Date.
(5) Includes options to purchase 3,571 shares of Common Stock at an
exercise price of $8.75 per share granted pursuant to the Company's 1995
Long Term Incentive Plan, which are exercisable within 60 days of the
Record Date. Does not include options to purchase 3,571 shares of Common
Stock at an exercise price of $5.25 per share under the Company's 1997
Long Term Incentive Plan which are not exercisable within 60 days of the
Record Date and five year warrants to purchase 14,286 shares of Common
Stock at an exercise price of $7.00 per share which are not exercisable
within 60 days of the Record Date.
(6) Does not include an option to purchase 3,571 shares of Common Stock at
an exercise price of $5.25 per share granted pursuant to the Company's
1997 Long Term Incentive Plan which are not exercisable within 60 days
of the Record Date and five year warrants to purchase 3,571 shares of
Common Stock at $7.00 per share which are not exercisable within 60 days
of the Record Date.
(7) Includes options to purchase 7,143 shares of Common Stock at an exercise
price of $8.75 per share granted pursuant to the Company's 1995 Long
Term Incentive Plan, which are exercisable within 60 days of the
Record Date. Includes 214 shares of Common Stock owned by Ms. Mari's
husband. Does not include options to purchase 3,571 shares of Common
Stock at an exercise price of $5.25 per share and options to purchase
17,857 shares of Common Stock at an exercise price of $4.41 per share
granted pursuant to the Company's 1997 Long Term Incentive Plan which
are not exercisable within 60 days after the Record Date and five year
warrants to purchase 21,429 shares of Common Stock at $7.00 per
share which are not exercisable within 60 days of the Record Date.
<PAGE>
(8) Does not include options to purchase 3,571 shares of Common Stock at
an exercise price of $5.25 per share granted pursuant to the Company's
1997 Long Term Incentive Plan which are not exercisable within 60 days
of the Record Date.
(9) Does not include options to purchase 10,714 shares of Common Stock at
an exercise price of $5.25 per share granted pursuant to the Company's
1997 Long Term Incentive Plan which are not exercisable within 60 days
of the Record Date.
(10) Does not include options to purchase 7,143 shares of Common Stock at an
exercise price of $5.25 per share granted pursuant to the Company's
1997 Long Term Incentive Plan which are not exercisable within 60 days
of the Record Date.
</FN>
</TABLE>
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 7,143 post-split 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 provided for interest at the annual rate of 14%
payable quarterly, was paid in December 1995.
In March 1997, the Company issued to Steven Cantor 81,000 post-split shares
of Common Stock. The consideration for this issuance was the prepayment of the
remaining consulting fees due under Mr. Cantor's four year Consulting Agreement
which commenced in July 1996. In conjunction with this transaction, the Company
canceled 18,571 post-split options exercisable at $8.75 previously issued to Mr.
Cantor under the 1995 Long Term Incentive Plan as well as 2,857 post-split
shares of Common Stock which he owned.
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-2 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 of 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.*
<PAGE>
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.*
10.16 Acquisition Agreement dated March 21, 1997 with Butler Retreading, Inc.*
10.17 PhoenixCor., Inc. Loan Agreement dated February 24, 1997.*
10.18 Loan and Security Agreement dated May 24, 1995 between the Registrant
and Greyrock Capital Corporation*
10.19 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).
(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 Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or for 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 offer
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 of 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 14th day of July, 1997.
ECOTYRE TECHNOLOGIES, INC.
By: /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 July 14, 1997 by the following persons in the
capacities indicated:
Signature Title
--------- ------
/s/ Marc deLogeres
Marc de Logeres Co-Chairman of the Board
/s/ Maxwell G. Parsons
Maxwell G. Parsons Co-Chairman of the Board
/s/ Vito F. Alongi
Vito F. Alongi President, Treasurer and Director (Principal
Executive, Financial and Accounting
Officer)
/s/ Robert E. Munyer, Jr.
Robert E. Munyer, Jr. Vice President, Secretary and Director
/s/ John W. King
John W. King Vice President and Director
/s Theresa Mari
Theresa Mari Director
/s/ Arthur Rosenberg
Arthur Rosenberg Director
<PAGE>
ECOTYRE TECHNOLOGIES, INC.
FINANCIAL STATEMENTS
FORM 10-KSB ITEM 7
YEARS ENDED MARCH 31, 1997 AND 1996
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 F-6
Statements of cash flows F-7
Notes to financial statements F-8 - F-26
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, 1997 and 1996, and the related statements of operations,
stockholders' equity 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, 1997 and 1996, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1(b) to the
financial statements, the Company's losses since inception combined with the
need to obtain additional working capital raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1(b). These financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Mitchel Field, New York
July 10, 1997
F-3
<PAGE>
ECOTYRE TECHNOLOGIES, INC.
<TABLE>
<CAPTION>
BALANCE SHEETS
March 31,
1997 1996
---- ----
ASSETS
Current:
<S> <C> <C>
Cash and cash equivalents (Note 1) $ 127,392 $ 2,782,952
Account receivable, less allowance for possible
losses of $17,000 and $11,000 (Notes 1 and 11) 958,798 65,174
Inventories (Notes 1, 3 and 10) 431,561 340,449
Prepaid expenses (Notes 9 and 12) 241,087 57,870
Other current assets 120,999 102,936
------- -------
Total current assets 1,879,837 3,349,381
Property and equipment, less accumulated depreciation 2,295,089 1,258,008
(Notes 1, 4, 8 and 10)
Security deposits 244,815 60,193
Other assets (Notes 1, 2, 9 and 12) 396,003 37,278
------- ------
$ 4,815,744 $ 4,704,860
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current:
Notes payable - bank (Note 5) $ - $ 200,000
Current maturities of long-term debt (Note 6) 115,000 150,000
Accounts payable 1,003,386 221,211
Accrued expenses (Note 7) 149,687 279,735
Preferred stock dividends payable 120,277 -
Current maturities of capitalized leases (Notes 1 and 8) 7,979 8,433
Current maturities of machinery loan (Notes 1, 4 and 10) 150,011 98,338
------- ------
Total current liabilities 1,546,340 957,717
Long-term debt, less current maturities (Notes 1 and 6) 150,000 75,000
Capitalized leases, less current maturities (Notes 1 and 8) 16,711 24,562
Machinery loan, less current maturities (Notes 1, 4 and 10) 849,989 122,220
Deferred rent credits (Note 12) 313,169 272,160
------- -------
Total liabilities 2,876,209 1,451,659
--------- ---------
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, 6 and 16) 1,193,090 1,125,182
--------- ---------
Commitments (Note 12)
Stockholders' equity (Notes 1, 6, 9, 13 and 16):
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 - 908,143
and 445,000 908 445
Paid-in capital 7,852,407 5,822,701
Deficit (7,106,870) (3,695,127)
---------- ----------
Total stockholders' equity 746,445 2,128,019
------- ---------
$ 4,815,744 $ 4,704,860
=========== ===========
See accompanying notes to financial statements
</TABLE>
F-4
<PAGE>
ECOTYRE TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
March 31,
1997 1996
---- ----
<S> <C> <C>
Net sales (Notes 1 and 11) $ 2,938,565 $ 314,024
Cost of sales 4,335,447 925,914
--------- -------
Gross loss (1,396,882) (611,890)
---------- --------
Operating and other expenses:
Selling and shipping 745,529 336,956
General and administrative 1,242,416 916,988
Interest (including amortization
of original issue discount of
$0 and $283,328 and net of
interest income of $57,652 and
$29,503) (Note 6) 22,080 364,892
Write-off of original issue discount
(Note 6) - 389,216
-------- -------
Total operating and other expenses 2,010,025 2,008,052
--------- ---------
Loss before taxes (3,406,907) (2,619,942)
Provision for taxes (Notes 1 and 14) 4,836 17,371
----- ------
Net loss $(3,411,743) $(2,637,313)
=========== ===========
Preferred stock dividends (Note 6) $ 188,185 $ 149,070
=========== ===========
Net loss attributable to common
stockholders $(3,599,928) $(2,786,383)
=========== ===========
Net loss per share (Note 1) $ (5.98) $ (10.24)
= =========== ===========
Weighted average number of shares of
common stock outstanding 602,367 272,196
======= =======
See accompanying notes to financial statements.
</TABLE>
F-5
<PAGE>
ECOTYRE TECHNOLOGIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<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, 1995 167,857 $ 168 $ 250,804 $(1,057,814) $ (806,842)
Issuance of promissory
notes and shares (Note 6) 7,143 7 149,993 - 150,000
Issuance of promissory
notes and shares (Note 6) 23,571 24 494,976 - 495,000
Adjustment to reflect
deferred placement costs of
promissory notes (Note 6) - - (192,060) - (192,060)
Issuance of common stock in
connection with initial
public offering 246,429 246 5,268,058 - 5,268,304
Preferred stock dividends
(Note 6) - - (149,070) - (149,070)
Net loss - - - (2,637,313) (2,637,313)
--------- ------ ----------- ---------- ----------
Balance, March 31, 1996 445,000 445 5,822,701 (3,695,127) 2,128,019
Issuance of common stock for
professional and consulting
fees (Note 9) 134,572 135 470,865 - 471,000
Issuance of common stock in
connection with business
acquisition (Note 2) 42,857 42 188,958 - 189,000
Issuance of common stock
in connection with
private placement
(Note 13) 285,714 286 1,558,068 - 1,558,354
Preferred stock dividends
(Note 6) - - (188,185) - (188,185)
Net loss - - - (3,411,743) (3,411,743)
--------- ------- ----------- ----------- ----------
Balance, March 31, 1997 908,143 $ 908 $7,852,407 $(7,106,870) $ 746,445
======= ====== ========== ========== ==========
See accompanying notes to financial statements.
</TABLE>
F-6
<PAGE>
ECOTYRE TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
(NOTES 1 and 15)
<TABLE>
<CAPTION>
Year ended March 31,
1997 1996
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net loss $(3,411,743) $(2,637,313)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 220,353 46,852
Deferred rent 41,009 189,450
Amortization and write-off of original issue
discount - 672,544
Provision for possible losses on account
receivable 6,000 11,000
Non-cash professional and consulting fees 131,281 -
Changes in other assets and liabilities, net
of effects of acquisition of Butler
Retreading, Inc.:
Accounts receivable (899,624) 156,727
Inventories 59,388 (214,458)
Other assets (226,408) (147,530)
Accounts payable 782,175 82,382
Accrued expenses (130,048) 130,987
-------- -------
Net cash used in operating activities (3,427,617) (1,709,359)
---------- ----------
Cash flows from investing activities:
Capital expenditures - net (607,434) (712,049)
Payment for assets acquired from Butler
Retreading, Inc. (Note 2) (750,000) -
-------- --------
Net cash used in investing activities (1,357,434) (712,049)
Cash flows from financing activities:
Proceeds from working capital loans - 100,000
Repayment of working capital loans - (225,000)
Proceeds from bank note payable 196,333 200,000
Repayment of bank note payable (396,333) -
Proceeds from long term notes and warrants - 225,000
Net proceeds from bridge financing - 807,940
Repayment of bridge financing - (1,075,000)
Proceeds from machinery loan 1,000,000 -
Repayment of machinery loan (220,558) (79,442)
Repayment of capitalized lease obligations (8,305) (6,688)
Issuance of common stock 1,558,354 5,268,304
Dividends paid on preferred stock - (60,140)
--------- -------
Net cash provided by financing activities 2,129,491 5,154,974
--------- ---------
Net increase (decrease) in cash and cash equivalents (2,655,560) 2,733,566
Cash and cash equivalents, beginning of year 2,782,952 49,386
--------- ------
Cash and cash equivalents, end of year $ 127,392 $ 2,782,952
========== ===========
See accompanying notes to financial statements.
</TABLE>
F-7
<PAGE>
ECOTYRE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1. Summary of Accounting Policies
(a) Business
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. Domestic manufacturing of remanufactured/remolded tires
commenced during Fiscal 1997. The Company's customers are primarily
independent tire distributors and retail tire replacement centers.
(b) Basis of presentation
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company's losses since
inception combined with the need to generate additional working capital
raise substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments that might
arise from the outcome of this uncertainty.
During 1997, the Company commenced manufacturing the tires it distributes.
However, by the end of Fiscal 1997, such manufacturing approximated 40% at
capacity which, in turn, limited the Company's ability to increase its
sales levels. Accordingly, the Company's profitability and cash flows have
been adversely affected. Management's plans for Fiscal 1998 include
expanding production, in part, through the business acquired in March 1997
(See Note 2) which will enable the Company to increase its sales levels.
Management's plans also include raising additional working capital to fund
the planned expansion of operations through additional sales of stock. As
described in Note 16, the Company raised approximately $400,000 from the
sale of Class B Convertible Preferred Stock and approximately $250,000
from a private placement of stock in April 1997. However, the Company
requires additional working capital and there are no assurances that
the Company will be successful in generating additional working capital
through the sale of stock or generating positive cash flow from
its expanded operations. If the Company is unable to generate
additional working capital, the Company's business could be materially
and adversely affected.
F-8
<PAGE>
ECOTYRE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
(c) 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.
(d) Concentration of credit risk
Financial instruments which potentially subject the Company to
concentration 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 (See Note
11). 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.
(e) 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.
F-9
<PAGE>
ECOTYRE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
(f) 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
(g) Customer list
Amortization of the customer list is computed using the straight-line
method over the estimated useful life of seven years. (See Note 2).
(h) 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,
1997, based upon the borrowing rates currently available to the Company for
loans with similar terms and average maturities.
(i) 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.
(j) 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.
F-10
<PAGE>
ECOTYRE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
(k) 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. All share and per share
information has been restated to give effect to the one-for-seven reverse
stock split effective June 2, 1997 (See Note 16).
(l) 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.
(m) Accounting for stock-based compensation
In Fiscal 1997, the Company adopted the Statement of Financial Accounting
Standard No. 123, "Accounting for Stock-Based Compensation". The Company
has elected not to implement the fair value based accounting method for
employee stock options, but has elected to disclose the pro-forma
net income and earnings per share, if material, as if such method has
been used to account for stock-based compensation cost as described in the
Statement.
(n) Accounting for the impairment of long-lived assets
In Fiscal 1997, the Company adopted the Statement of Financial Accounting
Standard No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of". The effect of
adopting this standard was insignificant.
The Company reviews the carrying values of its long-lived and identifiable
intangible assets for possible impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable, based on a comparison to undiscounted future operating cash
flows.
(o) Prospective accounting changes
On March 3, 1997, the FASB issued Statement of Financial Accounting
Standard No. 128, "Earnings Per Share". This pronouncement provides for the
calculation of Basic and Diluted earnings per share which is different from
the current calculation of Primary and Fully Diluted earnings per share in
accordance with APB 15. The effect of adopting this new standard is not
expected to be material.
F-11
<PAGE>
ECOTYRE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
(p) Reclassifications
Certain reclassifications have been made to conform prior years' financial
statements to the fiscal 1997 presentation.
Note 2. Acquisition
On March 21, 1997, the Company acquired certain assets of Butler
Retreading, Inc. The aggregate purchase price was approximately $939,000
consisting of $750,000 in cash provided by long term financing (Note 10)
and 42,857 newly-issued shares of common stock of the Company valued at
$189,000, or $4.41 per share, the quoted market price of the Company's
shares as of March 21, 1997. The acquisition has been accounted for by the
purchase method of accounting. The purchase price has been allocated to the
assets acquired based on the estimated fair values of each asset as
follows:
<TABLE>
<S> <C>
Inventory $ 150,500
Machinery and equipment 650,000
Customer list (included in other assets) 125,000
Other 13,500
---------
$ 939,000
=========
</TABLE>
An unaudited pro-forma condensed combined statement of operations giving
effect to this acquisition as if it had occurred at the beginning of fiscal
1996 has not been presented because the acquisition was not material to
the Company's assets or historical operations.
F-12
<PAGE>
ECOTYRE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
Note 3. Inventories
Inventories at March 31, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Raw materials $ 252,221 $ 207,280
Work in process 9,765 4,052
Finished goods 169,575 129,117
--------- ---------
$ 431,561 $ 340,449
========= =========
</TABLE>
Note 4. Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
March 31,
1997 1996
---- ----
<S> <C> <C>
Furniture and equipment $ 104,114 $ 88,158
Machinery and equipment 2,328,554 1,158,877
Motor vehicles 30,735 20,096
Leasehold improvements 104,345 43,182
------- ------
$ 2,567,748 1,310,313
Less accumulated depreciation (272,659) (52,305)
-------- -------
$ 2,295,089 $ 1,258,008
=========== ===========
</TABLE>
At March 31, 1997, all of the Company's equipment is collateral for a
financing loan in the original amount of $1,000,000 (see Note 10).
Note 5. Notes Payable - Bank
The Company had a secured line of credit with a bank which expired in
January 1997. The interest rate on borrowings was 1-1/2% over the bank's
prime rate and was secured by a $400,000 certificate of deposit.
F-13
<PAGE>
ECOTYRE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
Note 6. Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
March 31,
1997 1996
---- ----
<S> <C> <C>
Term notes
(a) Unsecured borrowings which bear
interest at 12% per annum and are
payable in June 1997. $ 75,000 $ 75,000
(b) Unsecured borrowing which bears
interest at 14% per annum and is
payable in February 1999. 150,000 150,000
Working capital loans
Unsecured borrowings from a stockholder
which bears interest at 8-1/4% per annum 40,000 -
------ --------
265,000 225,000
Less: current portion of
long-term debt 115,000 150,000
------- -------
$150,000 $ 75,000
======== ========
</TABLE>
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 $1,202,775 at the conversion date (before unamortized original
issue discount of approximately $167,000), 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 is being 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.
F-14
<PAGE>
ECOTYRE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
Such shares pay a cumulative dividend of 10% and were convertible to one
share of voting Common Stock at the rate of five shares of preferred (or
$35.00 per share) commencing in January 1997 and one warrant which was
exercisable for two years after the conversion at $52.50 per common share
for the first year and $70.00 per common share for the second year. The
redemption feature associated with the preferred stock required it to be
classified outside of stockholders' equity.
Subsequent to March 31, 1997, the redemption provision was eliminated and
the Class A redeemable convertible preferred stock was converted to Class
A convertible preferred stock (See Note 16).
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 1,429
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 $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 1,429 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 ($192,060) and 25% was
amortized over the life of the debt ($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 totaled $283,328 for the year ended March 31, 1996. 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-15
<PAGE>
ECOTYRE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
Note 7. Accrued Expenses
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
March 31,
1997 1996
---- ----
<S> <C> <C>
Interest $ - $ 4,750
Printing expenses - 84,237
Professional fees 43,800 95,300
Payroll and related expenses 55,887 30,625
Other 50,000 64,823
------ ------
$149,687 $ 279,735
======== =========
</TABLE>
Note 8. 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
collaterized by the telephone equipment with a net book value of
approximately $10,050 as of March 31, 1997. The copy machine lease is
payable in monthly installments of $380 through March 2000, including
interest. The lease is collaterized by the copy machine with a net book
value of approximately $12,800 as of March 31, 1997.
Note 9. 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, 1997 and 1996. Interest at 7% is payable annually.
F-16
<PAGE>
ECOTYRE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
The Company obtained some of its unsecured borrowings in the amount of
approximately $40,000 for the year ended March 31, 1997 from a stockholder
(see Note 6).
In March 1997, the Company issued 81,000 shares of Common Stock to one of
its stockholders. Consideration for this issuance was the prepayment of
the remaining consulting fees due under the stockholder's four year
consulting agreement which commenced in July 1996.
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, in cash or
stock, amounted to $149,667 and $68,632 for the years ended March 31, 1997
and 1996, respectively.
Note 10. 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 was payable in 36 monthly
installments of $10,144 including interest at 13-1/4 % per annum, beginning
in May 1995.
During March 1997, the Company entered into a business acquisition (Note 2)
which included the purchase of additional manufacturing equipment. In
connection with the acquisition, the Company entered into a new loan
agreement with a new financing company. That company assumed the balance of
the previous loan in the amount of $139,589 and provided new financing in
the amount of $860,411, for a total new loan of $1,000,000. The loan is
payable in 3 monthly installments of $11,205 from April 1997 through June
1997, 3 monthly installments of $19,609 from July 1997 through September
1997 and 42 monthly installments of $28,012 thereafter, including interest
at 11.4% per annum. The new lender has a security interest in all of the
Company's equipment and inventory.
F-17
<PAGE>
ECOTYRE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
Maturities of the machinery loan are as follows:
<TABLE>
<CAPTION>
Year ending March 31,
<S> <C>
1998 $ 150,011
1999 252,156
2000 282,446
2001 315,387
-----------
$ 1,000,000
===========
</TABLE>
Note 11. Customer Concentration
During fiscal 1997, sales to one customer accounted for 17% of net sales.
As of March 31, 1997, three customers accounted for 15%, 14% and 10% of the
accounts receivable.
During fiscal 1996, sales to one customer accounted for 12% of net sales.
As of March 31, 1996, two customers accounted for approximately 22% and 14%
of the accounts receivable.
Note 12. Commitments
(a) Lease
Minimum annual rental commitments under a noncancelable operating lease for
the Company's manufacturing and warehousing facility are as follows:
<TABLE>
<CAPTION>
Year ending March 31,
<S> <C>
1998 $ 304,310
1999 319,525
2000 335,501
2001 352,277
2002 370,000
Thereafter 1,443,592
-----------
$ 3,125,205
===========
</TABLE>
F-18
<PAGE>
ECOTYRE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
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 $332,000
and $338,000 for the years ended March 31, 1997 and 1996, respectively.
(b) Sales and territory agreements
The Company has entered into separate three and four year agreements with
principal customers 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. During fiscal 1997 and 1996, minimum order quantities
were not met by either customer and no commissions were earned.
(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 was paid $120,000 per annum for their
services in connection with the development and operation of the Company's
manufacturing facility. During fiscal 1997 these consultants received their
residency status in the United States and have since become employees of
the Company and the agreement was canceled.
F-19
<PAGE>
ECOTYRE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
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. 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 commission on Company sales to customers obtained by this individual.
In addition, this individual received 3,571 shares of Common Stock in March
1997. The stockholder received 81,000 shares of Common Stock (see Note 9)
as prepaid management consulting services.
(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. 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 13. Stockholders' Equity
(a) Initial public offering
In December 1995, the Company completed an initial public offering of
246,429 units. Each unit consisted of one share of Common Stock and one
redeemable Common Stock purchase warrant. Following the initial public
offering 445,000 shares of Common Stock and warrants to purchase 246,429
shares of Common Stock were outstanding. The warrants are exercisable at
$35.00 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 $.07 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 $45.50 per share for each of twenty consecutive trading days.
F-20
<PAGE>
ECOTYRE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
(b) Underwriters' purchase option
In conjunction with the offering, the underwriters also obtained an option
to purchase 21,429 units at a price of $42.00 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 $52.50). 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.
(c) Private placement
In October 1996, the Company received gross proceeds of $2,000,000
from the private sale of its common stock. 285,714 shares were sold at
$7.00 per share to an aggregate of 10 foreign investors. The sales were
made pursuant to an exemption from the registration requirements of the
Securities Act of 1933, as amended, under Regulation S promulgated
thereunder. The net proceeds of approximately $1,558,000 received from this
sale have been utilized for working capital.
(d) Long-term incentive plans
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 interests 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, 1997, the Company has
outstanding an aggregate of 27,142 options. Each of these options is
exercisable for ten years for a price of $8.75 per share, commencing in
December 1996.
F-21
<PAGE>
ECOTYRE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
In February 1997, the Company adopted a second long-term incentive plan
similar to the 1995 plan. The plan provides for the grant of, among other
things, stock options and restricted stock, up to a maximum of 1,700,000
shares of Common Stock. As of March 31, 1997, the Company has granted
92,852 options. Each of these options is exercisable for ten years for a
price of either $4.41 or $5.25 per share, commencing in August 1997.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123") requires the Company to provide,
beginning with fiscal 1996 grants, pro forma information regarding net
loss and net loss per common share as if compensation costs for the
Company's stock option plans had been determined in accordance with the
fair value based method prescribed in SFAS No. 123. Such pro forma
information has not been presented because management has determined that
the compensation costs associated with options granted in Fiscal 1997 and
1996 are not material to net loss or net loss per common share.
Transactions involving options granted under the Plans are summarized
below:
<TABLE>
<CAPTION>
March 31,
---------------------------------------------------
1997 1996
---- ----
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ ---------- --------- -----
<S> <C> <C> <C> <C>
Outstanding,
April 1 48,571 $ 8.75 - $ -
Granted 92,852 4.83 48,571 8.75
Canceled 21,429 8.75 - -
- --------------------------------------------------------------------
Outstanding,
March 31 119,994 $ 5.72 48,571 $ 8.75
- --------------------------------------------------------------------
Exercisable,
March 31 27,142 $ 8.75 - $ -
- --------------------------------------------------------------------
</TABLE>
F-22
<PAGE>
ECOTYRE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
The following table summarizes information about stock options outstanding
under the Plans at March 31, 1997:
<TABLE>
<CAPTION>
Options
Options Outstanding Exercisable
------------------- -----------
Weighted-
Average Weighted- Weighted-
Range of Number Remaining Average Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Price at 3/31/97 Life Price at 3/31/97 Price
- -----------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
$ 4.41 - 5.25 92,852 9.9 years $ 4.83 - $ -
8.75 27,142 8.2 8.75 27,142 8.75
- -----------------------------------------------------------------------------
$ 4.41 - 8.75 119,994 9.6 years $ 5.72 27,142 $ 8.75
- -----------------------------------------------------------------------------
</TABLE>
(e) Common stock shares reserved
At March 31, 1997, shares of the Company's authorized and unissued Common
Stock were reserved for issuance as follows:
<TABLE>
<S> <C>
Long-term incentive plans 2,050,000
Outstanding IPO warrants 246,429
Conversion of Class A Redeemable
Convertible Preferred Stock
(including related warrants) 68,730
Warrants issuable to consultants or
key employees 128,571
Underwriters' IPO purchase option units 42,857
Issuable to consultants and independent
contractors 25,000
---------
2,561,587
=========
</TABLE>
F-23
<PAGE>
ECOTYRE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
Note 14. Income Taxes
The provision for income taxes is comprised of state taxes for the years
ended March 31, 1997 and 1996. The Company has net operating loss
carryforwards arising through March 31, 1997 of approximately $5,750,000.
Such losses can be utilized against future profits until 2012, and a
portion of such losses are also subject to Internal Revenue Code Section
382 limitations which limit the annual use of net operating loss
carryforwards when significant ownership changes occur.
The Company's net deferred tax asset consists of the following:
<TABLE>
<CAPTION>
March 31,
1997 1996
---- ----
<S> <C> <C>
Benefit of net operating loss carryforwards $ 2,300,000 $ 960,000
Tax temporary differences relating to:
Intangible assets 160,000 160,000
Deferred rent costs 125,000 110,000
Inventory capitalization, allowance
for possible losses and other 5,000 5,000
----------- -----------
2,590,000 1,235,000
Less: valuation allowance (2,590,000) (1,235,000)
----------- -----------
$ - $ -
=========== ===========
</TABLE>
A 100% valuation allowance for the deferred tax assets was provided because
of uncertainty as to future realization of the deferred tax assets as a
result of the continuing losses and the substantial doubt about
the Company's ability to continue as a going concern.
F-24
<PAGE>
ECOTYRE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
Note 15. Supplemental Cash Flow Information
Income taxes and interest paid were as follows:
<TABLE>
<CAPTION>
March 31,
1997 1996
---- ----
<S> <C> <C>
Income taxes $ 9,841 $ 17,371
Interest expense $ 64,733 $ 124,488
</TABLE>
Non-cash investing and financing activities during the period were as follows:
<TABLE>
<CAPTION>
March 31,
1997 1996
---- ----
<S> <C> <C>
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 6) - 192,060
Common stock issued in connection with
business acquisition 189,000 -
Common stock issued for professional
and consulting fees 471,000 -
Accretion of preferred dividends 67,908 88,930
Accrued dividends 120,277 -
Exchange of loan for vendor deposit 40,000 -
</TABLE>
F-25
<PAGE>
ECOTYRE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
Note 16. Subsequent events
Class A Redeemable Convertible Preferred Stock.
Effective April 17, 1997, the Certificate of Incorporation of the Company
was amended upon approval from its redeemable Convertible Preferred
shareholders to modify their existing stock. The redemption provision has
been eliminated and the conversion rate of Preferred Stock into Common
Stock has been reduced. The Class A Convertible Preferred Stock is now
convertible by multiplying the number of shares to be converted by the sum
of $1.00 plus all accrued and unpaid dividends divided by the lesser of
$21.00 per share (after reverse stock split) or 75% of the closing bid
price for a five day trading period immediately prior to the conversion
date. Commencing July 15, 1997, each holder of Class A Convertible
Preferred Stock shall be entitled to convert up to 25% of their shares per
month.
Private Placement
In April 1997, the Company completed a private placement of its common
stock which provided net proceeds of approximately $250,000.
Series B Preferred Stock.
Effective April 17, 1997, the Certificate of Incorporation of the Company
was amended upon approval from its Board of Directors to authorize 675,000
shares of Class B Convertible Preferred Stock, with a par value of $.001
per share (liquidation preference $1.00 per share; cumulative dividend of
10%).
In April 1997, a principal stockholder of the Company purchased
approximately 400,000 shares of Class B Convertible Preferred Stock for
approximately $400,000. Such preferred stock is convertible into common
stock at a rate based on a specific conversion formula. This transaction,
the elimination of the mandatory redemption feature of the Class A
Convertible Preferred Stock, and the private placement resulted in an
increase to stockholders' equity of approximately $1,800,000.
Reverse Stock Split.
On June 2, 1997, the Company, with the approval of its shareholders,
commenced a one-for-seven reverse stock split to comply with NASDAQ's
requirements as a condition for continued listing and to increase the
long-term marketability and liquidity of the Common Stock. All share
and per share information in the financial statements reflects the effects
of the reverse stock split.
F-26
<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 May 8, 1997 of our report dated July 10, 1997
relating to the financial statements of EcoTyre Technologies, Inc. ("EcoTyre")
(which contains an explanatory paragraph regarding EcoTyre's ability to
continue as a going concern) appearing in the Company's Annual Report on Form
10-KSB for the year ended March 31, 1997.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Mitchel Field, New York
July 14, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements for the fiscal year ended March 31, 1997 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 127,392
<SECURITIES> 0
<RECEIVABLES> 975,798
<ALLOWANCES> 17,000
<INVENTORY> 431,561
<CURRENT-ASSETS> 2,567,748
<PP&E> 272,659
<DEPRECIATION> 220,353
<TOTAL-ASSETS> 4,815,744
<CURRENT-LIABILITIES> 1,546,340
<BONDS> 0
1,193,090
0
<COMMON> 908
<OTHER-SE> 745,537
<TOTAL-LIABILITY-AND-EQUITY> 4,815,744
<SALES> 2,938,565
<TOTAL-REVENUES> 2,938,565
<CGS> 4,335,447
<TOTAL-COSTS> 4,335,447
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 17,000
<INTEREST-EXPENSE> 79,732
<INCOME-PRETAX> (3,406,907)
<INCOME-TAX> 4,836
<INCOME-CONTINUING> (3,411,743)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,411,743)
<EPS-PRIMARY> (5.98)
<EPS-DILUTED> (5.98)
</TABLE>
