Filed Pursuant to Rule 424(b)(3)
Registration No. 333-132305
AMERITYRE CORPORATION
Up to 1,575,000 Shares of Common Stock
This prospectus relates to the resale by the selling stockholders of up to
1,575,000 shares of our common stock, including up to (i) 860,000 shares of
common stock issued pursuant to our February 2006 private placement, (ii)
500,000 shares of our common stock issued upon the exercise of stock options in
2005, (iii) 107,500 shares of common stock issuable upon the exercise of our
Class A warrants, and (iv) 107,500 shares of common stock issuable upon the
exercise of our Class B warrants. 1,075,000 shares being registered in this
prospectus relate to our February 2006 private placement of an aggregate of
107,500 units at a purchase price of $36.00 per unit. Each unit consists of 8
shares of our common stock, a Class A warrant to purchase one share of common
stock exercisable for 3 years from the date of issuance at an exercise price of
$5.00 per share, and a Class B warrant for the purchase of one share of common
stock, exercisable for 5 years from the date of issuance, at an exercise price
of $5.50.
The selling stockholders may sell common stock from time to time in the
principal market on which the stock is traded at the prevailing market price or
in negotiated transactions. We will pay the expenses of registering these
shares. We will not receive any portion of the proceeds from the sale of these
shares. See "Plan of Distribution" on page 18. However, we will receive the
exercise price of the Class A and Class B warrants in the aggregate amount of
$537,500 and $591,250, respectively, if such warrants are exercised and if such
warrants are exercised for cash.
Our common stock is quoted on the Nasdaq Capital Market under the symbol "AMTY".
The last reported sales price per share of our common stock as reported by the
Nasdaq Capital Market on April 25, 2006, was $8.42.
Investing in these securities involves significant risks. See "Risk Factors"
beginning on page 9.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is May 1, 2006.
3
TABLE OF CONTENTS
Page
Prospectus Summary 6
Supplementary Financial Information 8
Risk Factors 9
Use of Proceeds 13
Selling Shareholders 13
Plan of Distribution 17
Indemnification For Securities Act Liabilities 17
Description of Securities 18
Legal Matters 18
Experts 18
Change in Accountants 18
Description of Business 19
Description of Properties 21
Legal Proceedings 21
Market for Common Equity and Related Stockholder Matters 21
Selected Consolidated Historical Financial Data 23
Management's Discussion and Analysis 24
Quantitative and Qualitative Disclosures About Market Risk 31
Management 31
Executive Compensation 31
Security Ownership of Certain Beneficial Owners and Management 38
Certain Relationships and Related Transactions 39
Where You Can Find More Information 40
Index to Consolidated Financial Statements 41
4
IMPORTANT NOTICE TO READERS
You should rely only on the information contained in this prospectus. We have
not authorized any other person to provide you with different or additional
information. If anyone provides you with different or additional information,
you should not rely on it. The selling stockholders are offering to sell, and
seeking offers to buy, shares of our common stock only in jurisdictions where
such offers and sales are permitted. The information in this prospectus is
accurate only as of the date on the front cover, regardless of the time of
delivery of this prospectus or of any sale of shares of our common stock. Our
business, financial condition, results of operations and prospects may have
changed since this date and may change again.
For investors outside the United States: We have not done anything that would
permit this offering or possession or distribution of this prospectus in any
jurisdiction where action for that purpose is required, other than in the United
States. You are required to inform yourselves about and to observe any
restrictions relating to this offering and the distribution of this prospectus.
5
PART I.
PROSPECTUS SUMMARY
The following summary highlights selected information contained in this
prospectus. This summary does not contain all the information you should
consider before investing in the securities. Before making an investment
decision, you should read the entire prospectus carefully, including the "risk
factors" section, the financial statements and the notes to the financial
statements.
AMERITYRE CORPORATION
We were incorporated as a Nevada corporation on January 30, 1995 under the name
American Tire Corporation and changed our name to Amerityre Corporation in
December 1999. We own certain proprietary and nonproprietary technology to
manufacture tires from polyurethane foam and polyurethane elastomer. We
currently produce Flatfree polyurethane foam tires for bicycles, wheelchairs,
lawn and garden products, and outdoor power equipment products. Recently, we
have been engaged in the development of polyurethane elastomer tires for highway
and agricultural use based on our proprietary technology and various methods and
processes relating to the manufacturing of those tires from liquid elastomers.
We have produced a limited number of prototype polyurethane car tires and
conducted independent laboratory testing to demonstrate that these tires comply
with existing United States safety standards for new-pneumatic tires [FMVSS 109]
and the proposed revisions to those standards, FMVSS 139, which takes effect in
July 2007.
Pursuant to this prospectus, we are registering 1,575,000 shares of our common
stock, including up to (i) 860,000 shares of common stock, (ii) 107,500 shares
of common stock issuable upon the exercise of our Class A warrants, (iii)
107,500 shares of common stock issuable upon the exercise of our Class B
warrants, and (iv) 500,000 shares of our common stock issued upon the exercise
of stock options in 2005, each for resale by our selling stockholders identified
on page 14 of this prospectus. These shares may be offered by the selling
stockholders through public or private transactions, at prevailing market prices
or at privately negotiated prices. See "Plan of Distribution" on page 18. Our
common stock is quoted on the Over-the-Counter Bulletin Board under the symbol
"AMTY."
We are incorporated in the state of Nevada and our corporate offices are located
at 1501 Industrial Road, Boulder City, NV 89005, and our telephone number is
(702) 294-2689. General information, financial news releases and filings with
the Securities and Exchange Commission, including annual reports on Form 10-KSB,
quarterly reports on Form 10-Q and Form 10-QSB, current reports on Form 8-K, and
all amendments to these reports are available free of charge on our website at
www.amerityre.com. We are not including the information contained on our web
site as part of, or incorporating it by reference into, this prospectus.
The Offering
Common stock outstanding before the offering............... 20,977,460 shares as of March 8, 2006
Common stock offered by selling stockholders............... Up to 1,575,000 shares, assuming full
exercise of outstanding common stock
purchase warrants by the selling
stockholders. This number represents
approximately 7.51% of our current
outstanding stock and includes up to
215,000 shares of common stock issuable
pursuant to Class A and Class B
warrants.
Common stock to be outstanding after the offering............ Up to 21,192,460 shares
Use of proceeds.............................................. We will not receive any proceeds from
the sale of the common stock hereunder.
We will, however, receive the sale price
of any common stock we sell for cash to
the selling stockholders upon exercise
of Class A and Class B warrants in the
aggregate amount of $537,500 and
$591,250, respectively, if such warrants
are exercised and if such warrants are
exercised for cash. See "Use of
Proceeds" for a complete description.
Nasdaq Capital Market Symbol................................. AMTY
The above information regarding common stock to be outstanding after the
offering is based on 20,977,460 shares of common stock outstanding as of March
8, 2006 and assumes the subsequent exercise of warrants by our selling
stockholders, although there can be no assurances that any warrants will be
exercised.
FEBRUARY 2006 PRIVATE PLACEMENT
Effective February 1, 2006 (the "Closing Date"), we completed a private
placement for $3,870,000 in offering proceeds. We sold 107,500 units of our
securities at a purchase price of $36.00 per unit. Each unit consists of 8
shares of our common stock, $0.001 par value, a Class A warrant for the purchase
of one share of common stock at an exercise price of $5.00 exercisable for a 3
year period, and a Class B Warrant for the purchase of one share of common stock
6
at an exercise price of $5.50 exercisable for a 5 year period. The Class A
Warrants and Class B Warrants may also be exercised through a cashless exercise
based on the difference between the market price on the date of exercise and the
exercise price. The exercise prices of the Class A Warrants and Class B Warrants
are subject to adjustment in certain events, including, without limitation, upon
our consolidation, merger or sale of all or substantially all of our assets, a
reclassification of our common stock, or any stock splits or combinations with
respect to the common stock.
Purchasers of the units have been granted registration rights in connection with
the private placement. We have agreed to use our best efforts to file a
registration statement with the SEC within 45 days after the Closing Date and
cause the registration statement to be declared effective by the SEC within 120
days after the Closing Date (if there are no comments from the SEC) or 180 days
(if comments are received from the SEC) (the "Effective Date") in order to
register the shares of common stock underlying the units sold in the offering
(the "Registrable Securities") for resale and distribution by the investors. We
are registering 1,075,000 shares of common stock which represents the total
number of shares of common stock plus the shares of common stock issuable upon
exercise of the Class A and Class B Warrants. The Registrable Securities shall
be reserved and set aside exclusively for the benefit of each investor.
The Class A and Class B Warrants are subject to redemption by us. We have the
right to redeem either the Class A or Class B Warrants beginning 90 days from
the Effective Date of the registration statement, if at any time following the
Effective Date, the average closing bid price for the common stock in the
over-the-counter market is at least $5.50 per share (with respect to the Class A
Warrants) or $6.05 per share (with respect to the Class B Warrants), for the 20
consecutive trading day period ending not more than 15 days prior to notice of
redemption of the Class A and Class B Warrants. Our right to redeem the Class A
and Class B Warrants requires us to give the holders written notice of
redemption of not less than 30 days, and is subject to the right of the holders
of the Class A and Class B Warrants to exercise the same in accordance with the
terms hereof during the redemption period. The redemption price for each Class A
and Class B Warrant is $0.10 per share.
We claim an exemption from the registration requirements of the Securities Act
of 1933, as amended (the "Act"), for the private placement of these securities
pursuant to Section 4(2) of the Act and/or Regulation D promulgated thereunder
since, among other things, the transaction did not involve a public offering,
the investors were accredited investors and/or qualified institutional buyers,
the investors had access to information about us and their investment, the
investors took the securities for investment and not resale, and we took
appropriate measures to restrict the transfer of the securities.
CONSULTANT STOCK OPTIONS
Furthermore, in this prospectus we are registering an aggregate of 500,000
shares of common stock issued upon the exercise of options included in a
marketing and advertising advisory consulting agreement with Focus Sales &
Marketing, LLC, dated August 1, 2000, that included piggyback registration
rights. The options vested on January 31, 2001 and were exercisable until July
31, 2005 at an exercise price of $3.00 per share. The options and the related
registration rights were transferable. All of the options were transferred by
Focus Sales & Marketing in private transactions to the various individuals
listed in the selling shareholders table as receiving shares through the
exercise of options. All of the options were exercised by the transferees in
2005.
7
SUPPLEMENTARY FINANCIAL INFORMATION
Summarized unaudited quarterly financial data for Fiscal
2005 and 2004 are as follows (in thousands, except per share data):
--------------------------------------------------------------------------------------------------------------------------------
Year ended June 30, 2005 First Quarter Second Quarter Third Quarter Fourth Quarter
--------------------------------------------------------------------------------------------------------------------------------
Total Sales $ 340 $ 304 $ 487 $ 551
----------------------------------------------------------------------------
Net loss $(7,156) $ (858) $ (989) $(1,070)
============================================================================
Basic loss per share $ (0.38) $ (0.05) $ (0.05) $ (0.05)
============================================================================
--------------------------------------------------------------------------------------------------------------------------------
Year ended June 30, 2004 First Quarter Second Quarter Third Quarter Fourth Quarter
--------------------------------------------------------------------------------------------------------------------------------
Total Sales $ 349 $ 235 $ 449 $ 387
----------------------------------------------------------------------------
Net loss $ (780) $(1,037) $(1,097) $(1,809)
============================================================================
Basic loss per share $ (0.04) $ (0.06) $ (0.06) $ (0.10)
============================================================================
8
RISK FACTORS
An investment in our common stock involves a high degree of risk. You should
consider carefully the following information about these risks, together with
the other information contained or incorporated by reference in this prospectus,
before you decide to invest. If any of the following risks actually occur, our
business, financial condition or results of operations would likely suffer. In
this case, the market price of our common stock could decline, and you could
lose all or part of your investment.
RISKS RELATED TO OUR BUSINESS
HISTORICALLY, WE HAVE LOST MONEY FROM OPERATIONS AND OUR FINANCIALS DO NOT
INCLUDE PROVISIONS FOR ANY CONTINGENCY, UNEXPECTED EXPENSES OR INCREASES IN
COSTS THAT MAY ARISE.
Since inception we have been able to cover our operating losses from accounts
receivables and the sale of our securities.
Our business operations and plans could be adversely affected in the event we
need additional financing and are unable to obtain such funding when needed.
It is possible that our available short-term assets and anticipated revenues may
not be sufficient to meet our operating expenses, business expansion plans, and
capital expenditures for the next twelve months. Insufficient funds may prevent
us from implementing our business strategy or may require us to delay, scale
back or eliminate certain opportunities for the commercialization of our
technology and products. If we cannot generate adequate sales of our products,
or increase our revenues through licensing of our technology or other means,
then we may be forced to cease operations.
In order to succeed as a company, we must continue to develop commercially
viable products and sell adequate quantities of products at a high enough price
to generate a profit. We may not accomplish these objectives. Even if we are
successful in increasing our revenue base, a number of factors may affect future
sales of our product. These factors include: (i) whether competitors produce
alternative or superior products; and (ii) whether the cost of implementing our
products is competitive in the marketplace.
In addition, we are proposing to attempt to increase revenues through licensing
our technology and manufacturing rights, and offering contract design and
engineering services. If these proposals are not viable in the marketplace, we
may not generate any revenues from these efforts.
BECAUSE WE HAVE LIMITED EXPERIENCE, WE MAY BE UNABLE TO SUCCESSFULLY MANAGE
PLANNED GROWTH AS WE COMPLETE THE TRANSITION FROM A TECHNOLOGY DEVELOPMENT
COMPANY TO A LICENSING MANUFACTURING AND MARKETING COMPANY.
We have limited experience in the commercial manufacturing and marketing arena,
limited product sales and marketing experience, and limited staff and support
systems, especially compared to competitors in the tire industry. Although we
have hired consultants to assist us in this transition period, there can be no
assurance that we will properly ascertain or assess any and all risks inherent
in the industry.
In addition, our success depends, in part, on our ability to license market and
distribute our products effectively. We have limited experience in the sale and
marketing of our lawn and garden products and little to no experience in the
marketing and sale of our proposed highway use products. We have limited
manufacturing, marketing and distribution capabilities and we will need to
retain consultants that have contacts in and understand the tire industry
marketplace. We may not be successful in entering into new licensing and or
marketing arrangements, whether engaging independent distributors or recruiting,
training and retaining a larger internal marketing staff and sales force. If we
do not meet the challenges posed by our planned licensing, manufacturing,
distribution and sales growth, the company may fail.
BECAUSE OF OUR RELIANCE ON TRADE SECRETS, WE MAY BE AT RISK FOR POTENTIAL CLAIMS
OR LITIGATION RELATED TO OUR TECHNOLOGY.
In certain cases, where the disclosure of information required to obtain a
patent would divulge proprietary data, we may choose not to patent parts of the
proprietary technology and processes which we have developed or may develop in
the future and rely on trade secrets to protect the proprietary technology and
processes. The protection of proprietary technology through claims of trade
secret status has been the subject of increasing claims and litigation by
various companies both in order to protect proprietary rights as well as for
competitive reasons even where proprietary claims are unsubstantiated. The
prosecution of proprietary claims or the defense of such claims is costly and
uncertain given the uncertainty and rapid development of the principles of law
pertaining to this area. We may also be subject to claims by other parties with
regard to the use of technology information and data that may be deemed
proprietary to others.
OUR BUSINESS DEPENDS ON THE PROTECTION OF OUR INTELLECTUAL PROPERTY AND MAY
SUFFER IF WE ARE UNABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY.
We have been granted several U.S. patents and have several U.S. patent
applications pending relating to certain aspects of our manufacturing technology
and use of polyurethane to make tires. We believe that our ability to either
9
manufacture products and/or license our technology is substantially dependent on
the validity and enforcement of these patents and patents pending. We cannot
provide assurance that our patents will not be invalidated, circumvented or
challenged, that the rights granted under the patents will give us competitive
advantages or that our patent applications will be granted.
PROPOSED NEW PRODUCTS FOR HIGHWAY USE MUST MEET SAFETY STANDARDS PRIOR TO
MARKETING WHICH COULD DELAY ANTICIPATED REVENUES AND INCREASE EXPENSES.
Our proposed new products for highway use must meet applicable federal safety
standards through various testing processes. Our prototype polyurethane car
tires and proposed temporary spare tire are both subject to such standards. The
testing procedures involve submission of products to approved independent
testing facilities, a process that may entail both significant time and
significant expense. Therefore, the timing of new product placement in the
market may be hard to determine, additional research, development and testing
expenses may be incurred, and we may not receive revenues from such products as
planned. Such delays and potential additional expenses could have a negative
impact on cash flows and business planning.
BECAUSE OUR PROPOSED HIGHWAY USE PRODUCTS ARE DERIVED FROM NEW TECHNOLOGY,
PRODUCT LIABILITY INSURANCE COSTS WILL LIKELY INCREASE AND WE MAY BE EXPOSED TO
PRODUCT LIABILITY RISKS THAT COULD ADVERSELY AFFECT PROFITABILITY.
Despite prior testing and approval of new highway use products, such products
may subject us to unforeseen liabilities because the technology is new and there
is no extensive history of use. Introduction of such new products will most
likely increase product liability premiums and defense of potential claims could
increase insurance cost even further which could substantially increase our
expenses.
SIGNIFICANT INCREASES IN THE PRICE OF STEEL AND OTHER RAW MATERIALS USED IN OUR
PRODUCTS COULD INCREASE OUR PRODUCTION COSTS AND DECREASE OUR PROFIT MARGINS OR
MAKE OUR PRODUCTS LESS COMPETITIVE IN THE MARKETPLACE DUE TO PRICE INCREASES.
Over the last year, we have experienced an increase in the cost of wheel
components for our tire/wheel assemblies due to the increasing cost of steel. We
have not passed the additional cost of the steel wheel components on to our
customers, however, if the cost of steel wheel components continues to rise
during the next twelve months, we may elect to amend our product pricing to
reflect the increase in component costs. Also, during the last six months we've
seen a 14% increase in our chemical pricing and there is no guarantee pricing
will remain at current levels. Although we continually seek reductions in raw
material and component costs from our suppliers, and even seek alternative
suppliers in some cases, large price increases may have to be passed on to our
customers and could adversely affect our sales.
RISKS RELATED TO OUR CURRENT FINANCING ARRANGEMENT
THERE ARE A LARGE NUMBER OF SHARES AND SHARES UNDERLYING WARRANTS THAT MAY BE
AVAILABLE FOR FUTURE SALE UNDER THIS PROSPECTUS AND THE SALE OF THESE SHARES MAY
DEPRESS THE MARKET PRICE OF OUR COMMON STOCK.
As of the date of this prospectus, we had approximately 20,977,460 shares of
common stock issued and outstanding. We are registering 1,360,000 shares of
common stock previously issued to the selling stockholders and we have
outstanding warrants to purchase 215,000 shares of our common stock, which are
being registered in this prospectus. All of the shares, including all of the
shares issuable upon exercise of our warrants, are being registered hereunder.
Upon registration such shares may be sold without restriction. The sale of these
shares may adversely affect the market price of our common stock.
THE ISSUANCE OF SHARES AND EXERCISE OF WARRANTS MAY RESULT IN DILUTION TO THE
INTERESTS OF OTHER STOCKHOLDERS.
The issuance of shares and exercise of warrants may result in dilution to the
interests of other stockholders since the selling stockholders may ultimately
receive and sell the full amount issuable under the warrants.
THE ISSUANCE OF SHARES AND EXERCISE OF WARRANTS COULD ENCOURAGE SHORT SALES BY
THIRD PARTIES, WHICH COULD CONTRIBUTE TO THE FUTURE DECLINE OF OUR STOCK PRICE
AND MATERIALLY DILUTE EXISTING STOCKHOLDERS' EQUITY AND VOTING RIGHTS.
The issuance of shares and exercise of warrants have the potential to cause
downward pressure on the price of our common stock. This is particularly the
case if the shares being placed into the market exceed the market's ability to
absorb the increased number of shares of stock. Such an event could place
further downward pressure on the price of our common stock, which presents an
opportunity to short sellers and others to contribute to the future decline of
our stock price. If there are significant short sales of our stock, the price
decline that would result from this activity will cause the share price to
decline more so, which, in turn, may cause long holders of the stock to sell
their shares thereby contributing to sales of stock in the market. If there is
an imbalance on the sell side of the market for the stock, our stock price will
decline.
10
RISKS RELATED TO OUR COMMON STOCK
FUTURE SALES OF OUR COMMON STOCK MAY CAUSE OUR STOCK PRICE TO DECLINE.
Some of our outstanding restricted shares are eligible for resale by the holders
under Rule 144 and the sale or even the perception that a sale of such shares
may occur could cause our stock price to decline. We are unable to estimate the
amount, timing, or nature of future sales of outstanding restricted shares. If
we issue additional shares of common stock in a private financing under an
exemption from registration, then those shares will constitute restricted shares
as defined in Rule 144 under the Securities Act. The restricted shares may only
be sold if they are registered under the Securities Act, or sold under Rule 144,
or another exemption from registration under the Securities Act.
In addition, we may issue stock in a registered offering or in a transaction
that would require registration of the underlying shares. In either case, once a
registration was effective, there could be an increased number of shares
available for sale in the public market which could reduce the market price.
Anticipated fund-raising activities include possible equity placements that will
dilute current shareholders.
WE ARE AUTHORIZED TO ISSUE UP TO 40,000,000 SHARES OF COMMON STOCK. OUR BOARD OF
DIRECTORS HAS THE AUTHORITY TO ISSUE THE AUTHORIZED BUT UNISSUED SHARES OF OUR
COMMON STOCK WITHOUT ACTION BY THE SHAREHOLDERS.
We have authorized 5,000,000 shares of preferred stock. Although no preferred
shares have been issued to date, the board of directors has the authority to
determine rights and privileges respecting voting rights, preferences as to
dividends and liquidation, and conversion rights with respect to any preferred
shares issued, all of which designations may be superior to those attached to
the common stock. The board of directors has the authority to issue up to the
entire amount of the authorized but unissued shares of preferred stock without
action by the shareholders.
Any such issuances, whether of common stock or some designated class of
preferred shares, will reduce the percentage ownership and may dilute the book
value of the shares held by existing shareholders.
OUR STOCK PRICE CAN BE EXTREMELY VOLATILE.
Our common stock is traded on the Nasdaq Capital Market. There can be no
assurance that an active public market will continue for the common stock, or
that the market price for the common stock will not decline below its current
price. Such price may be influenced by many factors, including, but not limited
to, investor perception of us and our industry and general economic and market
conditions. The trading price of the common stock could be subject to wide
fluctuations in response to announcements of our business developments or our
competitors, quarterly variations in operating results, and other events or
factors. In addition, stock markets have experienced extreme price volatility in
recent years. This volatility has had a substantial effect on the market prices
of companies, at times for reasons unrelated to their operating performance.
Such broad market fluctuations may adversely affect the price of our common
stock.
WE DO NOT EXPECT TO PAY DIVIDENDS.
We have not paid dividends since inception on our common stock, and we do not
contemplate paying dividends in the foreseeable future on our common stock in
order to use all of our earnings, if any, to finance expansion of our business
plans.
11
CAUTION ABOUT FORWARD-LOOKING STATEMENTS
Some of the statements in this prospectus constitute forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 (the "Securities
Act") and Section 21E of the Securities Exchange Act of 1934. These statements
relate to future events or our future financial performance and involve known
and unknown risks, uncertainties and other factors that may cause our business
or our industry's actual results, levels of activity, performance or
achievements to be materially different from those expressed or implied by any
forward-looking statements. Such statements include, in particular, statements
about our plans, strategies, prospects, changes and trends in our business and
the markets in which we operate as described in this prospectus and any
amendment or supplement to this prospectus. In some cases, you can identify
forward-looking statements by terminology such as "may," "could," "would,"
"should," "expect," "plan," "anticipate," "intend," "believe," "estimate,"
"forecast," "predict," "propose," "potential" or "continue" or the negative of
those terms or other comparable terminology. These statements are only
predictions.
Important factors that could cause actual results to differ materially from our
forward-looking statements are set forth in the section of this prospectus
entitled "Risk Factors" and in the section entitled "Risk Factors" in any
amendment or supplement to this prospectus. These factors are not intended to
represent a complete list of the general or specific factors that may affect us.
It should be recognized that other factors, including general economic factors
and business strategies, may be significant, now or in the future, and the
factors set forth in this prospectus may affect us to a greater extent than
indicated. All forward-looking statements attributable to us or persons acting
on our behalf are expressly qualified in their entirety by the cautionary
statements set forth in this prospectus. Except as required by law, we undertake
no obligation to update any forward-looking statement, whether as a result of
new information, future events or otherwise.
We caution the reader that the risk factors contained in or incorporated into
this prospectus may not be exhaustive. We operate in a continually changing
business environment, and new risk factors emerge from time to time. Management
cannot predict these new risk factors, nor can it assess the impact, if any, of
these new risk factors on our business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
projected in any forward-looking statements. Accordingly, forward-looking
statements should not be relied upon as a prediction of actual results.
12
USE OF PROCEEDS
We will not receive any portion of the proceeds from the sale of these shares.
However, we will receive the exercise price of the Class A and Class B warrants,
if exercised, in the aggregate amount of $537,500 and $591,250, respectively, if
such warrants are exercised and if such warrants are exercised for cash. We
intend to utilize such proceeds for working capital purposes.
SELLING SHAREHOLDERS
We are filing this registration statement to register the resale of an aggregate
of 1,575,000 shares of our common stock, including up to (i) 860,000 shares of
common stock issued pursuant to our February 2006 private placement, (ii)
500,000 shares of our common stock issued upon the exercise of stock options in
2005 which were issued as compensation for consulting services performed on our
behalf (iii) 107,500 shares of common stock issuable upon the exercise of our
Class A warrants, and (iv) 107,500 shares of common stock issuable upon the
exercise of our Class B warrants.
FEBRUARY 2006 PRIVATE PLACEMENT
Effective February 1, 2006 (the "Closing Date"), we completed a private
placement for $3,870,000 in offering proceeds. We sold 107,500 units of our
securities at a purchase price of $36.00 per unit. Each unit consists of 8
shares of our common stock, $0.001 par value, a Class A warrant for the purchase
of one share of common stock at an exercise price of $5.00 exercisable for a 3
year period, and a Class B Warrant for the purchase of one share of common stock
at an exercise price of $5.50 exercisable for a 5 year period. The Class A
Warrants and Class B Warrants may also be exercised through a cashless exercise
based on the difference between the market price on the date of exercise and the
exercise price. The exercise prices of the Class A Warrants and Class B Warrants
are subject to adjustment in certain events, including, without limitation, upon
our consolidation, merger or sale of all or substantially all of our assets, a
reclassification of our common stock, or any stock splits or combinations with
respect to the common stock.
Purchasers of the units have been granted registration rights in connection with
the private placement. We have agreed to use our best efforts to file a
registration statement with the SEC within 45 days after the Closing Date and
cause the registration statement to be declared effective by the SEC within 120
days after the Closing Date (if there are no comments from the SEC) or 180 days
(if comments are received from the SEC) (the "Effective Date") in order to
register the shares of common stock underlying the units sold in the offering
(the "Registrable Securities") for resale and distribution by the investors. We
are registering 1,075,000 shares of common stock which represents the total
number of shares of common stock plus the shares of common stock issuable upon
exercise of the Class A and Class B Warrants. The Registrable Securities shall
be reserved and set aside exclusively for the benefit of each investor.
The Class A and Class B Warrants are subject to redemption by us. We have the
right to redeem either the Class A or Class B Warrants beginning 90 days from
the Effective Date of the registration statement, if at any time following the
Effective Date, the average closing bid price for the common stock in the
over-the-counter market is at least $5.50 per share (with respect to the Class A
Warrants) or $6.05 per share (with respect to the Class B Warrants), for the 20
consecutive trading day period ending not more than 15 days prior to notice of
redemption of the Class A and Class B Warrants. Our right to redeem the Class A
and Class B Warrants requires us to give the holders written notice of
redemption of not less than 30 days, and is subject to the right of the holders
of the Class A and Class B Warrants to exercise the same in accordance with the
terms hereof during the redemption period. The redemption price for each Class A
and Class B Warrant is $0.10 per share.
We claim an exemption from the registration requirements of the Securities Act
of 1933, as amended (the "Act"), for the private placement of these securities
pursuant to Section 4(2) of the Act and/or Regulation D promulgated thereunder
since, among other things, the transaction did not involve a public offering,
the investors were accredited investors and/or qualified institutional buyers,
the investors had access to information about us and their investment, the
investors took the securities for investment and not resale, and we took
appropriate measures to restrict the transfer of the securities.
CONSULTANT STOCK OPTIONS
Furthermore, in this prospectus we are registering an aggregate of 500,000
shares of common stock issued upon the exercise of options included in a
marketing and advertising advisory consulting agreement with Focus Sales &
Marketing, LLC, dated August 1, 2000, that included piggyback registration
rights. The options vested on January 31, 2001 and were exercisable until July
31, 2005 at an exercise price of $3.00 per share. The options and the related
registration rights were transferable. All of the options were transferred by
Focus Sales & Marketing in private transactions to the various individuals
listed in the selling shareholders table as receiving shares through the
exercise of options. All of the options were exercised by the transferees in
2005.
Ownership Table
The following table sets forth the common stock ownership of the selling
stockholder as of March 8, 2006, including the number of shares of common stock
issuable to the selling shareholder upon the exercise of warrants held by the
selling shareholder. Other than as set forth in the following table, the selling
shareholder has not held any position or office or had any other material
relationship with us or any of our predecessors or affiliates within the past
three years. The selling shareholder may sell all, some or none of their shares
in this offering. See "Plan of Distribution."
13
The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934, and the
information is not necessarily indicative of beneficial ownership for any other
purpose. Under such rule, beneficial ownership includes any shares as to which
the selling shareholder has sole or shared voting power or investment power and
also any shares, which the selling shareholder has the right to acquire within
60 days. The information as to the number of shares of our common stock owned by
the selling security holder is based upon our books and records and the
information provided by our transfer agent.
We may amend or supplement this Prospectus, from time to time, to update the
disclosures set forth in the following table. Because the selling shareholder
identified in the table may sell some or all of the shares owned by them which
are included in this Prospectus, and because there are currently no agreements,
arrangements or understandings with respect to the sale of any of the shares, no
estimate can be given as to the number of shares available for resale hereby
that will be held by the selling shareholder upon termination of this offering.
Therefore, we have assumed for the purposes of the following table that the
selling shareholder will sell all of the shares owned beneficially by them,
which are covered by this Prospectus.
Name of selling security Shares of Common Number of Shares Percentage of Beneficial Percentage of
holder Stock Included in Beneficially Common Stock Ownership After Common Stock
Prospectus (1) Owned Before Owned Before the the Owned After
Offering Offering Offering (2) Offering (2)
WAJ Enterprises LLC (3) 397,640 697,790 3.33% 300,150 1.43%
Norman H. Tregenza IV Trust, 7,000 7,000 * 0 0
dated 9/26/86, Richard R.
Keller, Trustee (4)
Richard R. Keller (5) 7,000 14,500 * 7,500 *
Howard Kaneff (6) 13,900 13,900 * 0 0
George Paidas (7) 5,000 10,000 * 5,000 *
Neale F. Hooley (8) 10,000 50,000 * 40,000 *
Wesley G. Sprunk (9) 33,890 157,442 * 123,552 *
Marsha Crouzet (10) 21,000 33,500 * 12,500 *
Giant Trading, Inc. (11) 27,780 33,280 * 5,500 *
Denis D. Taggart (12) 13,890 59,890 * 46,000 *
The Catalyst Master Fund (13) 62,550 62,550 * 0 0
Fleet Maritime, Inc. (14) 117,150 117,150 * 0 0
Chamberlin Investments Ltd. 61,410 61,410 * 0 0
(15)
DCM Limited (16) 8,750 8,750 * 0 0
Farvane Limited (17) 5,690 5,690 * 0 0
HSBC Guyerzeller Trust 44,450 44,450 * 0 0
Company, as Trustee of The
Green Forest Trust c/o HSBC
Guyerzeller Bank AG (18)
Joseph J. Grano, Jr. (19) 131,900 1,481,900 7.06% 1,350,000 6.44%
Concetta B. Kristan (20) 7,000 7,000 * 0 0
Cumulus Investors, LLC (21) 138,890 138,890 * 0 0
John Reinke (22) 13,900 18,400 * 4,500 *
Steven G. Earl (23) 11,000 11,000 * 0 0
David P. and Peggy Martin (24) 10,000 116,000 * 106,00 *
Vanguard Fiduciary Trust 30,000 50,000 * 20,000 *
Company, as Custodian FBO IRA
FBO Thomas P. Hollo(25)
Whitney Small Cap Opportunity 138,890 138,890 * 0 0
Fund, L.P. (26)
Sheryl J. Phillips (27) 10,070 10,070 * 0 0
Gilbert D. Moyle (28) 12,500 90,000 * 77,500 *
Larry Clark (29) 30,000 55,000 * 25,000 *
George H. Tissen and Ellen M. 60,000 60,000 * 0 0
Tissen, JTWROS (29)
Geoffrey E. Schwan (29) 20,000 20,000 * 0 0
Thomas P. Hollo and Mary 25,000 191,000 * 166,000 *
Elizabeth Hollo TIC (29)
Paul R. Green (29) 86,250 245,750 1.17% 159,500 *
Gilbert D. Moyle III (30) 12,500 58,875 * 46,375 *
* Less than 1%
(1) Includes all of the shares issuable upon the exercise of the warrants.
14
(2) Assumes all securities registered will be sold.
(3) Represents (i) 111,112 shares of common stock issued pursuant to our
February 2006 private placement, (ii) 258,750 shares of common stock issued upon
the exercise of stock options in 2005 (iii) 13,889 shares of common stock
issuable upon exercise of a Class A common stock purchase warrant, and (iv)
13,889 shares of common stock issuable upon exercise of a Class B common stock
purchase warrant. In accordance with rule 13d-3 under the securities exchange
act of 1934, Wesley Johnson, the principal of the selling stockholder, may be
deemed a control person, with voting and investment control, of the shares owned
by such entity. The selling stockholder has notified us that they are not
broker-dealers and/or affiliates of broker-dealers.
(4) Represents (i) 5,600 shares of common stock, (ii) 700 shares of common stock
issuable upon exercise of a Class A common stock purchase warrant, and (iii) 700
shares of common stock issuable upon exercise of a Class B common stock purchase
warrant. In accordance with rule 13d-3 under the securities exchange act of
1934, Richard R. Keller, the Trustee of the selling stockholder, may be deemed a
control person, with voting and investment control, of the shares owned by such
entity. The selling stockholder has notified us that they are not broker-dealers
and/or affiliates of broker-dealers.
(5) Represents (i) 5,600 shares of common stock, (ii) 700 shares of common stock
issuable upon exercise of a Class A common stock purchase warrant, and (iii) 700
shares of common stock issuable upon exercise of a Class B common stock purchase
warrant.
(6) Represents (i) 11,120 shares of common stock, (ii) 1,390 shares of common
stock issuable upon exercise of a Class A common stock purchase warrant, and
(iii) 1,390 shares of common stock issuable upon exercise of a Class B common
stock purchase warrant.
(7) Represents (i) 4,000 shares of common stock, (ii) 500 shares of common stock
issuable upon exercise of a Class A common stock purchase warrant, and (iii) 500
shares of common stock issuable upon exercise of a Class B common stock purchase
warrant.
(8) Represents (i) 8,000 shares of common stock, (ii) 1,000 shares of common
stock issuable upon exercise of a Class A common stock purchase warrant, and
(iii) 1,000 shares of common stock issuable upon exercise of a Class B common
stock purchase warrant.
(9) Represents (i) 11,112 shares of common stock issued pursuant to our February
2006 private placement, (ii) 20,000 shares of common stock issued upon the
exercise of stock options in 2005 (iii) 1,389 shares of common stock issuable
upon exercise of a Class A common stock purchase warrant, and (iv) 1,389 shares
of common stock issuable upon exercise of a Class B common stock purchase
warrant.
(10) Represents (i) 16,800 shares of common stock, (ii) 2,100 shares of common
stock issuable upon exercise of a Class A common stock purchase warrant, and
(iii) 2,100 shares of common stock issuable upon exercise of a Class B common
stock purchase warrant.
(11) Represents (i) 22,224 shares of common stock, (ii) 2,778 shares of common
stock issuable upon exercise of a Class A common stock purchase warrant, and
(iii) 2,778 shares of common stock issuable upon exercise of a Class B common
stock purchase warrant. In accordance with rule 13d-3 under the securities
exchange act of 1934, Don Friedland, the principal of the selling stockholder,
may be deemed a control person, with voting and investment control, of the
shares owned by such entity. The selling stockholder has notified us that they
are not broker-dealers and/or affiliates of broker-dealers.
(12) Represents (i) 11,112 shares of common stock, (ii) 1,389 shares of common
stock issuable upon exercise of a Class A common stock purchase warrant, and
(iii) 1,389 shares of common stock issuable upon exercise of a Class B common
stock purchase warrant.
(13) Represents (i) 50,040 shares of common stock, (ii) 6,255 shares of common
stock issuable upon exercise of a Class A common stock purchase warrant, and
(iii) 6,255 shares of common stock issuable upon exercise of a Class B common
stock purchase warrant. In accordance with rule 13d-3 under the securities
exchange act of 1934, Catalyst Investment Management Company, LLC, is a
registered investment advisor and is responsible for making the investment
decisions of the selling stockholder, and therefore, may be deemed a control
person, with voting and investment control, of the shares owned by such entity.
The selling stockholder has notified us that they are not broker-dealers and/or
affiliates of broker-dealers.
(14) Represents (i) 93,720 shares of common stock, (ii) 11,715 shares of common
stock issuable upon exercise of a Class A common stock purchase warrant, and
(iii) 11,715 shares of common stock issuable upon exercise of a Class B common
stock purchase warrant. In accordance with rule 13d-3 under the securities
exchange act of 1934, Catalyst Investment Management Company, LLC, is a
registered investment advisor and is responsible for making the investment
decisions of the selling stockholder, and therefore, may be deemed a control
person, with voting and investment control, of the shares owned by such entity.
The selling stockholder has notified us that they are not broker-dealers and/or
affiliates of broker-dealers.
(15) Represents (i) 49,128 shares of common stock, (ii) 6,141 shares of common
stock issuable upon exercise of a Class A common stock purchase warrant, and
(iii) 6,141 shares of common stock issuable upon exercise of a Class B common
stock purchase warrant. In accordance with rule 13d-3 under the securities
exchange act of 1934, Catalyst Investment Management Company, LLC, is a
registered investment advisor and is responsible for making the investment
decisions of the selling stockholder, and therefore, may be deemed a control
person, with voting and investment control, of the shares owned by such entity.
The selling stockholder has notified us that they are not broker-dealers and/or
affiliates of broker-dealers.
(16) Represents (i) 7,000 shares of common stock, (ii) 875 shares of common
stock issuable upon exercise of a Class A common stock purchase warrant, and
(iii) 875 shares of common stock issuable upon exercise of a Class B common
stock purchase warrant. In accordance with rule 13d-3 under the securities
exchange act of 1934, Catalyst Investment Management Company, LLC, is a
registered investment advisor and is responsible for making the investment
decisions of the selling stockholder, and therefore, may be deemed a control
person, with voting and investment control, of the shares owned by such entity.
The selling stockholder has notified us that they are not broker-dealers and/or
affiliates of broker-dealers.
15
(17) Represents (i) 4,552 shares of common stock, (ii) 569 shares of common
stock issuable upon exercise of a Class A common stock purchase warrant, and
(iii) 569 shares of common stock issuable upon exercise of a Class B common
stock purchase warrant. In accordance with rule 13d-3 under the securities
exchange act of 1934, Catalyst Investment Management Company, LLC, is a
registered investment advisor and is responsible for making the investment
decisions of the selling stockholder, and therefore, may be deemed a control
person, with voting and investment control, of the shares owned by such entity.
The selling stockholder has notified us that they are not broker-dealers and/or
affiliates of broker-dealers.
(18) Represents (i) 35,560 shares of common stock, (ii) 4,445 shares of common
stock issuable upon exercise of a Class A common stock purchase warrant, and
(iii) 4,445 shares of common stock issuable upon exercise of a Class B common
stock purchase warrant. In accordance with rule 13d-3 under the securities
exchange act of 1934, Catalyst Investment Management Company, LLC, is a
registered investment advisor and is responsible for making the investment
decisions of the selling stockholder, and therefore, may be deemed a control
person, with voting and investment control, of the shares owned by such entity.
The selling stockholder has notified us that they are not broker-dealers and/or
affiliates of broker-dealers.
(19) Represents (i) 105,520 shares of common stock, (ii) 13,190 shares of common
stock issuable upon exercise of a Class A common stock purchase warrant, and
(iii) 13,190 shares of common stock issuable upon exercise of a Class B common
stock purchase warrant.
(20) Represents (i) 5,600 shares of common stock, (ii) 700 shares of common
stock issuable upon exercise of a Class A common stock purchase warrant, and
(iii) 700 shares of common stock issuable upon exercise of a Class B common
stock purchase warrant.
(21) Represents (i) 111,112 shares of common stock, (ii) 13,889 shares of common
stock issuable upon exercise of a Class A common stock purchase warrant, and
(iii) 13,889 shares of common stock issuable upon exercise of a Class B common
stock purchase warrant. In accordance with rule 13d-3 under the securities
exchange act of 1934, Nader C. Kazeminy, the controlling principal of the
selling stockholder, may be deemed a control person, with voting and investment
control, of the shares owned by such entity. The selling stockholder has
notified us that they are not broker-dealers and/or affiliates of
broker-dealers.
(22) Represents (i) 11,120 shares of common stock, (ii) 1,390 shares of common
stock issuable upon exercise of a Class A common stock purchase warrant, and
(iii) 1,390 shares of common stock issuable upon exercise of a Class B common
stock purchase warrant.
(23) Represents (i) 8,800 shares of common stock, (ii) 1,100 shares of common
stock issuable upon exercise of a Class A common stock purchase warrant, and
(iii) 1,100 shares of common stock issuable upon exercise of a Class B common
stock purchase warrant.
(24) Represents (i) 8,000 shares of common stock, (ii) 1,000 shares of common
stock issuable upon exercise of a Class A common stock purchase warrant, and
(iii) 1,000 shares of common stock issuable upon exercise of a Class B common
stock purchase warrant.
(25) Represents (i) 24,000 shares of common stock, (ii) 3,000 shares of common
stock issuable upon exercise of a Class A common stock purchase warrant, and
(iii) 3,000 shares of common stock issuable upon exercise of a Class B common
stock purchase warrant. In accordance with rule 13d-3 under the securities
exchange act of 1934, Thomas P. Hollo, the beneficiary of the selling
stockholder, may be deemed a control person, with voting and investment control,
of the shares owned by such entity. The selling stockholder has notified us that
they are not broker-dealers and/or affiliates of broker-dealers.
(26) Represents (i) 111,112 shares of common stock, (ii) 13,889 shares of common
stock issuable upon exercise of a Class A common stock purchase warrant, and
(iii) 13,889 shares of common stock issuable upon exercise of a Class B common
stock purchase warrant. In accordance with rule 13d-3 under the securities
exchange act of 1934, Whitney Small Cap GP, LLC, the general partner of the
selling stockholder, may be deemed a control person, with voting and investment
control, of the shares owned by such entity. The selling stockholder has
notified us that they are not broker-dealers and/or affiliates of
broker-dealers.
(27) Represents (i) 8,056 shares of common stock, (ii) 1,007 shares of common
stock issuable upon exercise of a Class A common stock purchase warrant, and
(iii) 1,007 shares of common stock issuable upon exercise of a Class B common
stock purchase warrant.
(28) Represents (i) 10,000 shares of common stock, (ii) 1,250 shares of common
stock issuable upon exercise of a Class A common stock purchase warrant, and
(iii) 2,500 shares of common stock issuable upon exercise of a Class B common
stock purchase warrant.
(29) Represents shares of common stock issued upon the exercise of stock options
in 2005.
(30) Represents (i) 10,000 shares of common stock, (ii) 1,250 shares of common
stock issuable upon exercise of a Class A common stock purchase warrant, and
(iii) 1,250 shares of common stock issuable upon exercise of a Class B common
stock purchase warrant.
PLAN OF DISTRIBUTION
Each Selling Shareholder (the " Selling Shareholders ") of the common stock ("
Common Stock ") of Amerityre Corporation, a Nevada corporation (the " Company ")
and any of their pledgees, assignees and successors-in-interest may, from time
to time, sell any or all of their shares of Common Stock on the Trading Market
or any other stock exchange, market or trading facility on which the shares are
traded or in private transactions. These sales may be at fixed or negotiated
prices. A Selling Shareholder may use any one or more of the following methods
when selling shares:
o ordinary brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the shares as
agent but may position and resell a portion of the block as principal to
facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the broker-dealer for
its account;
o an exchange distribution in accordance with the rules of the applicable
exchange;
o privately negotiated transactions;
16
o settlement of short sales entered into after the date of this prospectus;
o broker-dealers may agree with the Selling Shareholders to sell a specified
number of such shares at a stipulated price per share;
o a combination of any such methods of sale;
o through the writing or settlement of options or other hedging transactions,
whether through an options exchange or otherwise; or
o any other method permitted pursuant to applicable law.
The Selling Stockholders may also sell shares under Rule 144 under the
Securities Act of 1933, as amended (the " Securities Act "), if available,
rather than under this prospectus.
Broker-dealers engaged by the Selling Shareholders may arrange for other
brokers-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the Selling Shareholders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. Each Selling Shareholder does not expect these commissions and
discounts relating to its sales of shares to exceed what is customary in the
types of transactions involved.
In connection with the sale of our common stock or interests therein, the
Selling Shareholders may enter into hedging transactions with broker-dealers or
other financial institutions, which may in turn engage in short sales of the
common stock in the course of hedging the positions they assume. The Selling
Shareholders may also sell shares of our common stock short and deliver these
securities to close out their short positions, or loan or pledge the common
stock to broker-dealers that in turn may sell these securities. The Selling
Shareholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such transaction).
The Selling Shareholders and any broker-dealers or agents that are involved in
selling the shares may be deemed to be "underwriters" within the meaning of the
Securities Act in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. Each Selling Shareholder has informed the
Company that it does not have any agreement or understanding, directly or
indirectly, with any person to distribute the Common Stock.
The Company is required to pay certain fees and expenses incurred by the Company
incident to the registration of the shares. The Company has agreed to indemnify
certain Selling Shareholders against certain losses, claims, damages and
liabilities, including liabilities under the Securities Act.
Because Selling Shareholders may be deemed to be "underwriters" within the
meaning of the Securities Act, they will be subject to the prospectus delivery
requirements of the Securities Act. In addition, any securities covered by this
prospectus which qualify for sale pursuant to Rule 144 under the Securities Act
may be sold under Rule 144 rather than under this prospectus. Each Selling
Stockholder has advised us that they have not entered into any agreements,
understandings or arrangements with any underwriter or broker-dealer regarding
the sale of the resale shares. There is no underwriter or coordinating broker
acting in connection with the proposed sale of the resale shares by the Selling
Shareholders.
We agreed to keep this prospectus effective until the earlier of (i) the date on
which the shares may be resold by the Selling Shareholders without registration
and without regard to any volume limitations by reason of Rule 144(e) under the
Securities Act or any other rule of similar effect or (ii) all of the shares
have been sold pursuant to the prospectus or Rule 144 under the Securities Act
or any other rule of similar effect. The resale shares will be sold only through
registered or licensed brokers or dealers if required under applicable state
securities laws. In addition, in certain states, the resale shares may not be
sold unless they have been registered or qualified for sale in the applicable
state or an exemption from the registration or qualification requirement is
available and is complied with.
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the resale shares may not simultaneously engage
in market making activities with respect to our common stock for a period of two
business days prior to the commencement of the distribution. In addition, the
Selling Shareholders will be subject to applicable provisions of the Exchange
Act and the rules and regulations thereunder, including Regulation M, which may
limit the timing of purchases and sales of shares of our common stock by the
Selling Shareholders or any other person. We will make copies of this prospectus
available to the Selling Shareholders and have informed them of the need to
deliver a copy of this prospectus to each purchaser at or prior to the time of
the sale.
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our Articles of Incorporation provide to the fullest extent permitted by Nevada
law, our directors or officers shall not be personally liable to us or our
shareholders for damages for breach of such director's or officer's fiduciary
duty. The effect of this provision of our Articles of Incorporation, as amended,
is to eliminate our right and our shareholders (through shareholders' derivative
17
suits on behalf of our company) to recover damages against a director or officer
for breach of the fiduciary duty of care as a director or officer (including
breaches resulting from negligent or grossly negligent behavior), except under
certain situations defined by statute. We believe that the indemnification
provisions in our Articles of Incorporation, as amended, are necessary to
attract and retain qualified persons as directors and officers.
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 Securities 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 Securities Act and will be governed by the final
adjudication of such issue.
DESCRIPTION OF SECURITIES TO BE REGISTERED
Common Stock. As of March 8, 2006, we had 40,000,000 shares of common stock
authorized and there were 20,977,460 shares of common stock issued and
outstanding, held of record by approximately 550 registered stockholders. Our
common stock is traded on the Over-the-Counter Bulletin Board under the symbol
"AMTY." Each holder of common stock is entitled to one vote per share held of
record on all matters submitted to a vote of the stockholders. All shares of
common stock are entitled to participate in any distributions or dividends that
may be declared by the board of directors, subject to any preferential dividend
rights of outstanding shares of preferred stock. Subject to prior rights of
creditors, all shares of common stock are entitled, in the event of our
liquidation, dissolution or winding up, to participate ratably in the
distribution of all our remaining assets, after distribution in full of
preferential amounts, if any, to be distributed to holders of preferred stock.
There are no sinking fund provisions applicable to the common stock. Our common
stock has no preemptive or conversion rights or other subscription rights. All
of the shares of common stock offered under this prospectus will, when issued,
be fully paid and non-assessable.
LEGAL MATTERS
Sichenzia Ross Friedman Ference LLP, New York, New York will issue an opinion
with respect to the validity of the shares of common stock being offered hereby.
EXPERTS
The consolidated financial statements of Amerityre Corporation as of June 30,
2005, 2004 and 2003 included in this Prospectus have been so included in
reliance on the report of HJ & Associates, LLC independent registered public
accounting firm, given on the authority of said firm as experts in auditing and
accounting.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
We have had no disagreements with our certified public accountants with respect
to accounting practices or procedures or financial disclosure.
18
DESCRIPTION OF BUSINESS
General
-------
We were incorporated as a Nevada corporation on January 30, 1995 under the name
American Tire Corporation and changed our name to Amerityre Corporation in
December 1999. We own certain proprietary and nonproprietary technology to
manufacture tires from polyurethane foam and polyurethane elastomer.
Polyurethane Foam Tire Technology
---------------------------------
We currently produce Flatfree polyurethane foam tires for bicycles,
wheelchairs, lawn and garden products, and outdoor power equipment products (the
"Products").
Polyurethane Elastomer Passenger Car Tire Technology
----------------------------------------------------
We are engaged in the development of polyurethane elastomer tires for highway
and agricultural use based on our proprietary technology and various methods and
processes relating to the manufacturing of those tires from liquid elastomers.
The polyurethane elastomer material is identified by us as Elastothane(TM).
Elastothane (TM) and the technology to produce tires using Elastothane(TM) are
significant to us because we believe that combined they result in a tire that
can be produced quickly and less expensively than traditional rubber pneumatic
tires, while meeting or exceeding the performance of those tires.
We have produced a limited number of prototype polyurethane car tires and
conducted independent laboratory testing to demonstrate that these tires comply
with existing federal safety standards for new-pneumatic tires, FMVSS 109, and
the proposed revisions to those standards, FMVSS 139, which takes effect in July
2007. Compliance with FMVSS 109 and subsequently, FMVSS 139, is necessary to
commercially market pneumatic car tires within the United States. FMVSS 139
retains many of the test components of FMVSS 109, with the following major
changes:
(1) Endurance and Low Inflation Pressure Test. Test remains 34 hours, but
extends the final load step from 22 hours to 24 hours. Load percentages have
been reduced from 90/100/110% to 85/90/100%. In addition, at the end of the 34
hours of endurance testing, the tire will be run under-inflated (20psi) at 120
km/h (75 mph) for 90 minutes;
(2) Speed test. Test remains a total of 90 minutes with a 2 hour warm-up;
however, speeds for each 30 minute segment have been increased from 75/80/85 mph
to 140/150/160 km/h [87/93/99 mph], respectively; and
(3) Aging effects performance test. Implementation of the aging effects
performance test has been deferred until the NHTSA has completed additional
research and issues a new proposal.
In addition to inventing polyurethane elastomer passenger car tires, we have
invented the manufacturing equipment necessary to produce these tires in limited
quantities. We have filed several applications for method and process patents
with respect to various aspects of this technology. We have completed
fabrication of prototype manufacturing equipment to mold the polyurethane
elastomer tires and we are fabricating certain additional pieces of
manufacturing equipment that are necessary to assemble the reinforcement
materials (i.e., beads, belts and plies) utilized in connection with
manufacturing the tire. This work is continuing and we expect to make
improvements to the method, process and equipment as needed so that these tires
can be produced in commercial qualities.
During the quarter we announced that we had entered into a Product Development
Agreement with Genmar Holdings, Inc., Minneapolis, Minnesota, one of the world's
largest manufacturers of recreational boats, to design and develop prototype
polyurethane "run-flat" boat trailer tires based on our passenger car tire
technology. We estimated the time frame for completing the development project
to be approximately six months (May 2006). If the development project is
successfully completed, and evaluation and testing by Genmar is satisfactory,
the parties will move to an agreement that will allow Genmar to commercially
manufacture "run-flat" boat trailer tires.
Non-pneumatic Temporary/Spare Tire Technology
---------------------------------------------
We also are developing a temporary/spare tire out of polyurethane elastomer. Our
initial project, a 'zero' pressure non-pneumatic temporary/spare tire, was
developed for prospective use as a temporary/spare tire for passenger vehicles.
These tires do not contain air and do not require inflation. In April 2005, we
announced that prototype non-pneumatic temporary/spare tire had passed FMVSS 129
testing. FMVSS 129, is the applicable safety standard for new, non-pneumatic
tires that must be met before the tires can be offered commercially. We believe
that this is a major breakthrough in tire technology because, to the best of our
knowledge, no other company has developed a non-pneumatic tire that has
successfully met FMVSS 129 standard. We have initiated discussions with
automobile manufacturers about making these tires available to their customers
as original equipment temporary/spare tires. In addition, we continue testing
prototype designs of the non-pneumatic temporary/spare tire for other
vehicles/applications.
19
Polyurethane Retread Material
-----------------------------
During the quarter we began development of a compound and manufacturing process
for retreading medium commercial truck tires with a polyurethane elastomer tread
compound. We believe our retreading process has broad application for the medium
commercial truck tire market. The tire retreading process being developed by
Amerityre involves applying the polyurethane tread compound to the rubber tire
casing in such a way that the tread "seamlessly locks" to the tire casing
without pressure or re-vulcanization. We have conducted a series of pull tests
at an independent laboratory to test the adhesion of our polyurethane elastomer
tread compound to rubber tire casings. The results of the test have indicated
that our compounds meet acceptable industry requirements. We are continuing with
the development of the process for applying the polyurethane tread materials to
the rubber tire casings.
In addition to laboratory testing, we have been conducting field tests of the
polyurethane elastomer retreads on a number of truck tires that are being
evaluated by a mining company. We are continuing to test these tires to better
assess their performance characteristics in such a high duty application.
Competition
-----------
Currently, we know of a few companies that utilize a manufacturing process
similar to ours to produce tires from polyurethane foam (i.e., Green Tire, UK;
Alshin Tire, USA; KIK Technology International, Inc., USA; Woo Tire, China; and
Krypton-India, India). In addition to manufacturers of polyurethane foam tires,
as a potential OEM supplier, we compete directly with firms that manufacture and
market conventional low-duty pneumatic and semi-pneumatic tires made from
rubber. Our technology differs from existing polyurethane foam tire technology
in at least two ways, including: (1) the formulation of the polyurethane; and
(2) the manner in which the polyurethane is distributed throughout the mold.
The underlying basis of our foam tire technology and processes make our Products
the only polyurethane based Flatfree tires that utilize a foam consisting of
millions of closed cells containing compressed air. Therefore, our Products have
an equivalent "pneumatic ride-quality" without going flat when punctured.
Tires that our Products compete against are essentially a commodity. The not-
for-highway use tire industry has historically been highly competitive and
several of our competitors have financial resources which substantially exceed
ours. In addition, many competitors are large companies (i.e., Kenda, Japan;
Chengshin Rubber, China; and Carlisle Tire, USA) that have established brand
name recognition, have established distribution networks for their products, and
have developed consumer loyalty to such products.
We know of no other companies that have technology capable of formulating and
producing polyurethane elastomer compounds suitable for passenger car tire use,
in particular, pneumatic and/or non-pneumatic passenger car tires that comply
with U.S. Federal Motor Vehicle Safety Standards for those tires.
Manufacturing, Supplies, and Quality Control
--------------------------------------------
Substantially all of our Products produced with polyurethane foam are
manufactured utilizing single and/or multiple head, centrifugal molding
machines. These machines produce Products by pouring a proprietary based
polyurethane formula into a mold, which then spreads out in the mold through
centrifugal force. The molding process occurs when the liquid polyurethane
formula (made up of isocyanate and polyol) is combined with a catalyst. This
combination causes a chemical reaction that results in the cross linking of the
chemicals, which thereafter become solid. The mold then moves to the next
station where the Product is removed and the process is repeated.
Our chemicals are available from multiple suppliers. We believe that we can
obtain sufficient quantities of raw materials without significant problems or
delays.
Although we have one customer that accounted for approximately 12% of total
sales during the fiscal year ended June 30, 2005, we don't believe that our
business operations are dependent on that customer.
All of our Products are inspected following the manufacturing process and prior
to shipment to ensure quality. Any Product considered by our quality control
personnel to be defective is disposed of through traditional refuse collection
services or can be ground into pellets, which can be melted and reused to make
other products and reduce waste of raw materials.
Patents
-------
Our technology is proprietary. Set forth in the schedule below are patents that
have been issued or for which a patent application is pending with respect to
our technology.
Description of Patents U.S. Patent No. Issued Date
---------------------- --------------- -------------
Method for Making Polyurethane Tires
with an Outer Skin 4,855,096 8/08/1989
Apparatus for Making Foam Products 4,943,223 7/24/1990
Apparatus and Method for Manufacturing
an Item From Polyurethane Foam and the Like 5,906,836 5/25/1999
Improved Method for Making Tires and the Like 6,165,397 12/26/2000
Non-Pnuematic Tire and Rim Combination 6,431,235 8/13/2002
Run Flat Tire with Elastomeric Inner Support 6,679,306 1/20/2004
Elastomeric Tire with Arch Shaped Shoulders 6,971,426 12/06/2005
Tire Core Package for Use in Manufacturing a Tire
with Belts, Plies and Beads and Process of Tire
Manufacture 6,974,519 12/13/2005
20
Description of Patents Pending Action Status
------------------------------ ------ ------
Method for Manufacturing a Tire with Belts, Plies and
Beads Utilizing a Precured Elastomer and Cold Rolling Filed Pending
Air No-Air Elastomeric Tire Filed Pending
Method for Manufacturing an Air No-Air Tire with
Belts and Beads Filed Pending
Improved Method and Apparatus for Forming a Core of
Plies, Belts and Beads and for Positioning the Core
in a Mold for Forming an Elastomeric Tire Filed Pending
Improved Method and Apparatus for Suspending a Core of
Plies, Belts and Beads and for Positioning the Core in
a Mold for Forming and Elastomeric Tire Filed Pending
Method and Apparatus for Forming an
Elastomeric Tire Filed Pending
Method and Apparatus for Forming a Wheel
from a Urethane Material
Run Flat Tire Insert System Filed Pending
Trademarks
-----------
We have used various trademarks in association with marketing our Products,
including the names Arcus(R), Flatfree, Amerityre(R) , Elastothane(TM), Tire
Technology for the 21st Century(TM).
Regulation and Environmental Compliance
----------------------------------------
We know of no particular federal or state regulations applicable to our
manufacturing processes. We are subject to various local, state, and federal
laws and regulations including, without limitation, regulations promulgated by
federal and state environmental and health agencies, the federal Occupational
Safety and Health Administration, and laws pertaining to hiring, treatment,
safety, and discharge of employees. Our manufacturing operations must also meet
federal, state, and local regulatory standards in the areas of labor, safety,
and health. We believe that we operate in compliance with such regulations,
including laws relating to the handling and use of materials that may be deemed
to be hazardous materials.
Employees
---------
As of March 8, 2006 we had 26 full-time employees, including 15 salaried and 11
hourly employees. We may hire temporary labor for manufacturing needs as
required. None of our employees are represented by a labor union. We believe
that we will be able to hire a sufficient quantity of qualified laborers in the
local area to meet our employment needs. Our manufacturing process does not
require special training, other than orientation to our production techniques
and specific equipment. None of our employees is represented by a collective
bargaining agreement. We consider our relations with our employees to be good.
DESCRIPTION OF PROPERTY
In October 2002, we leased our executive and manufacturing facilities located at
1501 Industrial Road, Boulder City, Nevada. The property consists of a 49,200
square foot building, which includes approximately 5,500 square feet of office
space, situated on approximately 4.15 acres. The term of the lease is five years
expiring October 14, 2007, subject to our right to purchase the property. The
base rent is $16,000 per month for the first year, with annual increases of $500
per month during the term of the lease. We believe the facility will be
sufficient to handle our office and production needs for the next few years. It
is our opinion that we maintain adequate insurance coverage for loss or damage
to our leased facilities under our existing insurance policy.
LEGAL PROCEEDINGS
We are not presently subject to any material legal proceedings other than as set
forth below:
In November 2005, Continental Automotive Licensing Corp. ("Petitioner") filed a
Petition for Cancellation #92045199 ("Petition") in the United States Patent and
Trademark Office (the "Trademark Office") against Richard A. Steinke, our
Chairman, President and Chief Executive Officer. Petitioner alleges that it is
being, has been, and will be damaged by the continued existence of the
Amerityre(R) trademark and has asked the Trademark Office to cancel the
registration. This registered trademark (Registration No. 2,401,989) was issued
November 7, 2000 by the Trademark Office to Mr. Steinke and assigned by him to
us in June 2001. We believe that the Petition is without merit and we expect to
vigorously defend our use of the trademark.
MARKET FOR OUR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock is currently traded on the Nasdaq Capital Market
under the symbol "AMTY." The following table sets forth for the periods
indicated the high and low sale prices of our common stock. Prices represent
inter-dealer quotations without adjustment for retail markups, markdowns or
commissions and may not represent actual transactions.
21
HIGH LOW
--------------- -------------
YEAR ENDED JUNE 30, 2004
First Quarter $ 5.38 $ 3.45
Second Quarter 6.42 3.90
Third Quarter 12.74 6.69
Fourth Quarter 11.95 8.20
YEAR ENDED JUNE 30, 2005
First Quarter $ 9.75 $ 6.45
Second Quarter 8.06 6.00
Third Quarter 7.85 4.95
Fourth Quarter 7.45 4.80
YEAR ENDED JUNE 30, 2006
First Quarter $ 7.45 $ 5.25
Second Quarter 6.50 4.15
As of March 8, 2006, there were approximately 550 holders of record of our
common stock and 20,977,460 shares of common stock outstanding.
We have never declared or paid cash dividends on our capital stock. We currently
expect to retain our future earnings for use in the operation and expansion of
our business and do not anticipate paying any cash dividends in the foreseeable
future. Any future determination to pay dividends on our common stock will
depend upon our results of operations, financial condition and capital
requirements, applicable restrictions under any credit facilities or other
contractual arrangements and such other factors deemed relevant by our Board of
Directors.
22
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
You should read the following selected consolidated financial data in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and the
related notes appearing elsewhere in this prospectus.
The consolidated statements of operations data for the years ended June 30,
2003, 2004 and 2005, and the consolidated balance sheet data at June 30, 2004
and 2005, are derived from our audited consolidated financial statements
appearing elsewhere in this prospectus. The consolidated statements of
operations data for the years ended June 30, 2001 and June 30, 2002, and the
consolidated balance sheet data at June 30, 2001 and 2002, are derived from our
audited consolidated financial statements that are not included in this
prospectus. The consolidated statements of operations data for the six months
ended December 31, 2004 and 2005 and the consolidated balance sheet data at
December 31, 2005 are derived from our unaudited consolidated financial
statements included in this prospectus. The unaudited consolidated financial
statements include, in the opinion of management, all adjustments that
management considers necessary for the fair presentation of the financial
information set forth in those statements. The historical results are not
necessarily indicative of the results to be expected in any future period.
Because the following is only a financial summary, it does not contain all the
financial information that may be important to you. Therefore, you should
carefully read all the information in this prospectus, including the financial
statements from which this information was derived and their explanatory notes
and Management's Discussion and Analysis, before making an investment decision.
Year Ended June 30, Six Months
---------------------------------------------------------- Ended-December 31,
---------------------
2001 2002 2003 2004 2005 2004 2005
------- -------- -------- -------- ------- -------- --------
(in thousands, except per share data)
(unaudited)
Consolidated Statements of Operations Data:
Net sales $ 116 $ 506 $ 1,040 $ 1,419 $ 1,681 $ 643 $ 738
Cost sales 126 525 976 1,114 1,233 462 613
Gross profit (deficit) (10) (19) 64 305 448 181 125
Consulting 1,315 1,505 340 371 77 0 99
Advisory group expense (2) 0 0 0 0 6,134 6,134 0
Payroll and payroll taxes 755 819 1,084 2,345 1,905 846 1,010
Depreciation and amortization 175 223 299 296 386 195 181
Research and development (1) 0 0 29 572 881 409 388
Selling, general and administrative 2,370 1,211 1,421 1,462 1,188 632 1,016
Total expenses 4,616 3,758 3,173 5,046 10,571 8,216 2,695
Loss from operations (4,626) (3,777) (3,109) (4,741) (10,123) (8,035) (2,569)
Other income 62 31 17 20 50 21 26
Net loss $(4,564) $ (3,746) $ (3,092) $ (4,721) $ (10,073) $(8,014) $ (2,543)
Basic loss per share $ (.38) $ (.27) $ (.21) $ (.26) $ (.53) $ (.43) $ (.13)
Weighted average number of shares outstanding 12,106 13,662 14,797 17,847 18,932 18,697 19,877
(1) Research and development expenses were not broken out of Selling, general
and administrative expenses until 2003.
(2) During the period ended September 30, 2004, we issued options to acquire an
aggregate of 3,000,000 shares of our common stock to certain non-employees in
connection with an advisory agreement. We recognized a total of $6,134,000 in
expense associated with the issuance of these options and deferred $1,000,000 as
stock offering costs until related funding was received. We estimated the fair
value of the stock options at the grant date by using the Black-Scholes option
pricing model.
At June 30, At
--------------------------------------------------------- December-31,
2005
----------------
2001 2002 2003 2004 2005
-------- --------- ---------- ---------- ----------
(in thousands)
Consolidated Balance Sheet Data: (unaudited)
Cash and cash equivalents $ 530 $ 774 $ 2,491 $ 1,591 $ 2,122 $ 2,578
Total current assets $ 965 $ 1,341 $ 3,137 $ 2,415 $ 3,081 $ 3,704
Total assets $ 1,856 $ 2,045 $ 4,584 $ 4,061 $ 4,627 $ 5,265
Total liabilities (3) $ 356 $ 115 $ 95 $ 59 $ 85 $ 1,216
Total stockholders' equity $ 1,500 $ 1,930 $ 4,488 $ 4,002 $ 4,542 $ 4,049
(3) All liabilities are current liabilities; we do not have any long-term
liabilities.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This discussion and analysis contains statements of a forward-looking nature
relating to future events or our future financial performance or financial
condition. Such statements are only predictions and the actual events or results
may differ materially from the results discussed in or implied by the
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in "Risk Factors"
as well as those discussed elsewhere in this Prospectus. The historical results
set forth in this discussion and analysis are not necessarily indicative of
trends with respect to any actual or projected future financial performance.
This discussion and analysis should be read in conjunction with the financial
statements and the related notes thereto included elsewhere in this Prospectus.
We have restated the financial statements for the period ended December 31, 2005
contained in this report to give effect to the adoption of Statement of
Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment,"
("SFAS 123(R)") as of July 1, 2005. See notes 2 and 3 of the financial
statements for the period ended December 31, 2005 for additional information.
Management's discussion and analysis of financial condition and results of
operations below reflects the restatement.
Overview
We were incorporated as a Nevada corporation on January 30, 1995 under the name
American Tire Corporation and changed our name to Amerityre Corporation in
December 1999. We own certain proprietary and nonproprietary technology to
manufacture tires from polyurethane foam and polyurethane elastomer.
Polyurethane Foam Tire Technology
---------------------------------
We currently produce Flatfree polyurethane foam tires for bicycles,
wheelchairs, lawn and garden products, and outdoor power equipment products (the
"Products").
Polyurethane Elastomer Passenger Car Tire Technology
-----------------------------------------------------
We are engaged in the development of polyurethane elastomer tires for highway
and agricultural use based on our proprietary technology and various methods and
processes relating to the manufacturing of those tires from liquid elastomers.
The polyurethane elastomer material is identified by us as Elastothane(TM).
Elastothane (TM) and the technology to produce tires using Elastothane(TM) are
significant to us because we believe that combined they result in a tire that
can be produced quickly and less expensively than traditional rubber pneumatic
tires, while meeting or exceeding the performance of those tires.
We have produced a limited number of prototype polyurethane car tires and
conducted independent laboratory testing to demonstrate that these tires comply
with existing federal safety standards for new-pneumatic tires, FMVSS 109, and
the proposed revisions to those standards, FMVSS 139, which takes effect in July
2007. Compliance with FMVSS 109 and subsequently, FMVSS 139, is necessary to
commercially market pneumatic car tires within the United States. FMVSS 139
retains many of the test components of FMVSS 109, with the following major
changes:
(1) Endurance and Low Inflation Pressure Test. Test remains 34 hours, but
extends the final load step from 22 hours to 24 hours. Load percentages have
been reduced from 90/100/110% to 85/90/100%. In addition, at the end of the 34
hours of endurance testing, the tire will be run under-inflated (20psi) at 120
km/h (75 mph) for 90 minutes;
(2) Speed test. Test remains a total of 90 minutes with a 2 hour warm-up;
however, speeds for each 30 minute segment have been increased from 75/80/85 mph
to 140/150/160 km/h [87/93/99 mph], respectively; and
(3) Aging effects performance test. Implementation of the aging effects
performance test has been deferred until the NHTSA has completed additional
research and issues a new proposal.
In addition to inventing polyurethane elastomer passenger car tires, we have
invented the manufacturing equipment necessary to produce these tires in limited
quantities. We have filed several applications for method and process patents
with respect to various aspects of this technology. We have completed
fabrication of prototype manufacturing equipment to mold the polyurethane
elastomer tires and we are fabricating certain additional pieces of
manufacturing equipment that are necessary to assemble the reinforcement
materials (i.e., beads, belts and plies) utilized in connection with
manufacturing the tire. This work is continuing and we expect to make
improvements to the method, process and equipment as needed so that these tires
can be produced in commercial qualities.
During the quarter ended December 31, 2005, we announced that we had entered
into a Product Development Agreement with Genmar Holdings, Inc., Minneapolis,
Minnesota, one of the world's largest manufacturers of recreational boats, to
design and develop prototype polyurethane "run-flat" boat trailer tires based on
our passenger car tire technology. We estimated the time frame for completing
the development project to be approximately six months (May 2006). If the
development project is successfully completed, and evaluation and testing by
Genmar is satisfactory, the parties will move to an agreement that will allow
Genmar to commercially manufacture "run-flat" boat trailer tires.
24
Non-pneumatic Temporary/Spare Tire Technology
---------------------------------------------
We also are developing a temporary/spare tire out of polyurethane elastomer. Our
initial project, a zero pressure non-pneumatic temporary/spare tire, was
developed for prospective use as a temporary/spare tire for passenger vehicles.
These tires do not contain air and do not require inflation. In April 2005, we
announced that prototype non-pneumatic temporary/spare tire had passed FMVSS 129
testing. FMVSS 129, is the applicable safety standard for new, non-pneumatic
tires that must be met before the tires can be offered commercially. We believe
that this is a major breakthrough in tire technology because, to the best of our
knowledge, no other company has developed a non-pneumatic tire that has
successfully met FMVSS 129 standard. We have initiated discussions with
automobile manufacturers about making these tires available to their customers
as original equipment temporary/spare tires. In addition, we continue testing
prototype designs of the non-pneumatic temporary/spare tire for other
vehicles/applications.
Polyurethane Retread Material
-----------------------------
During the quarter we began development of a compound and manufacturing process
for retreading medium commercial truck tires with a polyurethane elastomer tread
compound. We believe our retreading process has broad application for the medium
commercial truck tire market. The tire retreading process being developed by
Amerityre involves applying the polyurethane tread compound to the rubber tire
casing in such a way that the tread "seamlessly locks" to the tire casing
without pressure or re-vulcanization. We have conducted a series of pull tests
at an independent laboratory to test the adhesion of our polyurethane elastomer
tread compound to rubber tire casings. The results of the test have indicated
that our compounds meet acceptable industry requirements. We are continuing with
the development of the process for applying the polyurethane tread materials to
the rubber tire casings.
In addition to laboratory testing, we have been conducting field tests of the
polyurethane elastomer retreads on a number of truck tires that are being
evaluated by a mining company. We are continuing to test these tires to better
assess their performance characteristics in such a high duty application.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations
are based upon our financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses. On an ongoing basis, we evaluate our estimates, including those
related to uncollectible receivables, inventory valuation, deferred compensation
and contingencies. We base our estimates on historical performance and on
various other assumptions that are believed to be reasonable under the
circumstances. The results of which for the basis for making judgments about the
carrying values of assets and liabilities that are not readily apparent from
other sources.
We believe the following to be our critical accounting policies because they are
important to the portrayal of our financial condition and results of operations
and they require critical management judgments and estimates about matters that
are uncertain. If actual results or events differ materially from those
contemplated by us in making these estimates, our reported financial condition
and results of operations for future periods could be materially affected.
Revenue Recognition
Revenue is recognized when the sales amount is determined, shipment of goods to
the customer has occurred and collection is reasonably assured. Product is
shipped FOB origination.
Patents and Trademarks
Patent and trademark costs have been capitalized at June 30, 2005 totaling
$407,642. The patents which have been granted are being amortized over a period
of 20 years. Patents which are pending or are being developed are not being
amortized. Amortization will begin once the patents have been issued.
Amortization expense for the years ended June 30, 2005 and June 30, 2004 was
$30,847 and $1,309, respectively. The Company evaluates the recoverability of
intangibles and reviews the amortization period on a continual basis utilizing
the guidance of SFAS 142, "Goodwill and Other Intangible Assets." We test our
patents and trademarks for impairment at least annually and whenever events or
changes in circumstances indicated that the carrying value may not be
recoverable. We consider the following indicators, among others, when
determining whether or not our patents are impaired: 1) any changes in the
market relating to the patents that would decrease the life of the asset; 2) any
adverse change in the extent or manner in which the patents are being used; 3)
any significant adverse change in legal factors relating to the use of the
patents; 4) current-period operating or cash flow loss combined with our history
of operating or cash flow losses; 5) future cash flow values based on the
expectation of commercialization through licensing; and 6) current expectations
that, more likely than not, the patents will be sold or otherwise disposed of
significantly before the end of its previously estimated useful life.
Inventory
Inventory is stated at the lower of cost (computed on a first-in, first-out
basis) or market. The inventory consists of chemicals, finished goods produced
in the Company's plant and products purchased for resale.
Equity Securities
Equity securities issued for services rendered have been accounted for at the
fair market value of the securities on the date of authorization.
Stock Options
On July 1, 2005, we adopted Statement of Financial Accounting Standards No. 123
(revised 2004), "Share-Based Payment," ("SFAS 123(R)") which requires the
measurement and recognition of compensation expense for all share-based payments
to employees and directors including employee stock options and stock purchases
related to the Company's employee stock option and award plans based on
estimated fair values. SFAS 123(R) supersedes our previous accounting under
Accounting Principles Board Option No. 25, "Accounting for Stock Issued to
Employees" ("APB25") for periods beginning in fiscal 2006. In March 2005, the
Securities and Exchange Commission issued Staff Accounting Bulletin No. 107
("SAB 107") relating to SFAS 123(R). We have applied the provisions of SAB 107
in its adoption of SFAS 123(R).
We adopted SFAS 123(R) using the modified prospective transition method, which
requires the application of the accounting standard as of July 1, 2005, the
first day of our fiscal year 2006. Our financial statements as of and for the
three month period ended September 30, 2005 reflect the impact of SFAS 123(R).
In accordance with the modified prospective transition method, our financial
statements for the prior year have not been restated to reflect, and do not
include, the impact of SFAS 123(R). Stock-based compensation expense recognized
under SFAS 123(R) for the three and six month periods ended December 31, 2005
was $173,136 and $317,900, respectively, related to employee stock options
issued during the respective periods. There was no stock-based compensation
expense related to employee stock options and employee stock purchases
recognized during the three and six month periods ended December 31, 2004. See
Note 5 to the financial statements for additional information.
SFAS 123(R) requires companies to estimate the fair value of share-based payment
awards on the date of grant using an option-pricing model. The value of the
portion of the award that is ultimately expected to vest is recognized as
expense over the requisite service periods in the Company's Statement of
Operations. Prior to the adoption of SFAS 123(R), we accounted for stock-based
awards to employees and directors using the intrinsic value method in accordance
with APB 25 as allowed under Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"). Under the intrinsic
value method, no stock-based compensation expense had been recognized in the
Company's Statement of Operations, because the exercise price of our stock
options granted to employees and directors equaled the fair market value of the
underlying stock at the date of grant.
Stock-based compensation expense recognized during the period is based on the
value of the portion of share-based payment awards that is ultimately expected
to vest during the period. At June 30, 2005, we had no unvested share-based
payment awards for which compensation expense should be recognized during the
three and six month periods ended December 31, 2005. Stock-based compensation
expense recognized in our Statement of Operations for the three and six month
periods ended December 31, 2005 only includes compensation expense for
share-based payment awards granted, but not yet vested after July 1, 2005, and
is based on the grant date fair value estimated in accordance with SFAS 123(R).
Stock-based compensation expense recognized in our Statement of Operation for
the three and six month periods ended December 31, 2005 assumes all awards will
vest, therefore no reduction has been made for estimated forfeitures.
Valuation of Options and Warrants
The valuation of options and warrants granted to unrelated parties for services
are measured as of the earlier of (1) the date at which a commitment for
performance by the counterparty to earn the equity instrument is reached, or (2)
the date the counterparty's performance is complete. Pursuant to the
requirements of EITF 96-18, the options and warrants will continue to be
revalued in situations where they are granted prior to the completion of the
performance.
Results of Operations - Three and Six Months Ended December 31, 2005 and 2004
Net Sales
For the three month period ended December 31, 2005 we had net sales of $302,255,
a slight decrease from net sales of $303,801, for the same period last year.
However, for the six month period ended December 31, 2005, we had net sales of
$738,224, a 15% increase over net sales of $643,573 for the comparable period
last year. The increase in net sales for the six-month period in 2005 over 2004
was due primarily to further expansion of our Products sales among retail chain
customers and distributors.
Cost of Goods Sold
Our cost of sales consists primarily of expense related to the cost of raw
materials, components and production of our Products. It includes salaries,
benefits expenses, maintenance, facilities and other operating costs associated
with the production of our Products. Our cost of sales for the three month
period ended December 31, 2005 was $258,439, or 86% of sales as compared to
$215,891, or 71% of sales for the same period last year, resulting in a gross
profit of $43,816, or 14% as compared to a gross profit of $87,910 or 29% for
the prior year period. Our cost of sales for the six month period ended December
25
31, 2005 was $612,781, or 83% of sales as compared to $462,678, or 72%,
resulting in a gross profit of $125,443, or 17% of sales compared to a gross
profit of $180,895, or 28% for the prior year period. The reduction in our gross
profit as compared to the prior year periods is a result of a revaluation of our
standard costs after taking into account increases in base chemicals and steel
wheel component costs for tire/wheel assemblies. To offset these increases in
material costs, we have increased the sales price of our Products effective
January 1, 2006 in an attempt to recapture the decrease in gross margin we have
experienced.
Corporate Expense. For three and six month periods ended December 31, 2005,
total operating expenses were $1,383,939 and $2,695,175, respectively,
consisting primarily of consulting expense of $99,498 and $99,498, payroll and
payroll taxes of $519,060 and $1,009,407, depreciation and amortization of
$91,873 and $181,129, research and development costs of $151,825 and $388,208,
and selling, general and administrative expenses of $521,472 and $1,016,722,
respectively.
For the three and six month periods ended December 31, 2004, total operating
expenses were $953,124 and $8,216,157, respectively, consisting primarily of
payroll and payroll taxes of $428,908 and $846,470, depreciation and
amortization of $102,607 and $194,953, research and development of $110,798 and
$409,166, selling, general and administrative expenses of $310,620 and $630,795,
respectively, and, in the six month period, an expense of $6,134,000 for
advisory group services associated with the grant of options to acquire an
aggregate of 3,000,000 shares of our common stock to third-party consultants
during the period. The value of the options was calculated using the
Black-Scholes option pricing model.
During the six month period ended December 31, 2004, we recognized an expense of
$6,134,000 for advisory group services associated with the grant of options to
acquire an aggregate of 3,000,000 shares of our common stock to third-party
consultants during the period. The value of the options was calculated using the
Black-Scholes option pricing model. Our selling, general and administrative
expenses since that time have not included deferred stock offering costs, which
at December 31, 2005 aggregated $1,083,278. This amount has been recorded as a
reduction in stockholders' equity due to its association with the proposed
offering of our securities. In February 2006, we closed a private placement of
our securities for gross offering proceeds of $3.87 million. We intend to charge
the deferred amount against the gross proceeds of the offering in our third
quarter ended March 31, 2006.
Excluding the effect of the one-time $6,134,000 expense for advisory group
services associated with the grant of options for the 2004 periods as detailed
above, our corporate expenses for the six month period ended December 31, 2005,
when compared to our corporate expenses for the six month period ended December
31, 2004, increased approximately $295,000 due to the hiring of a chief
operating officer, annual increases in salary and payroll, stock based
compensation expense related to employee stock options under SFAS 123(R), the
settlement of outstanding litigation, increased marketing and media relations
expenses, and the payment of outside consulting fees for specialty services. We
anticipate that our monthly operating expenses for the next six months will
remain consistent with the average monthly expenses of the first six months, at
approximately $400,000 per month.
Interest Expense. We had no interest expense during the three and six month
periods ended December 31, 2005 and 2004, respectively.
Other Income. For the three and six month periods ended December 31, 2005, we
had other income of $7,658 and $26,014, respectively, earned on account
receivables and temporary investments of cash not immediately needed in ordinary
daily business. For the three and six month periods ended December 31, 2004, we
had other income of $7,407 and $21,176, respectively, earned on account
receivables and temporary investments of cash not immediately needed in ordinary
daily business.
We experienced net losses of $1,332,465 and $2,543,718, respectively, for the
three and six month periods ended December 31, 2005, compared to net losses of
$857,807 and $8,014,086 for the same periods in 2004. The basic losses per share
for the current periods were $0.07 and $0.13, respectively, compared to basic
losses per share of $0.05 and $0.43 for prior year periods.
Net loss for the six month period ended December 31, 2005, includes a $100,000
expense associated with the settlement of outstanding litigation and a
stock-based compensation expense under SFAS 123(R) of $317,900 related to
employee stock options granted during the period. There was no stock-based
compensation expense related to employee stock options under SFAS 123(R) during
the six month period ended December 31, 2004 because we did not adopt the
recognition provisions of SFAS 123 with respect to employee stock options
granted during that period.
With the adoption of SFAS 123(R), we will continue to use the Black-Scholes
option-pricing model ("Black-Scholes model"), which was previously used by us in
the pro forma information required under SFAS 123. For additional information
see note 5 of our financial statements. Our determination of fair value of
share-based payment awards on the date of grant using an option pricing model is
affected by our stock price as well as assumptions regarding a number of highly
complex and subjective variables. These variables include, but are not limited
to, our expected stock price volatility over the term of the awards, and actual
and projected employee stock option exercise behavior. Option-pricing models
were developed for use in estimating the value of traded options that have no
vesting or hedging restrictions and are fully transferable. Because our employee
stock options have certain characteristics that are significantly different from
traded options, and because changes in the subjective assumptions can materially
affected the estimated value, in management's opinion, the existing valuation
models may not provide an accurate measure of fair value of the employee stock
options. Although fair value of employee stock options is determined in
accordance with SFAS 123(R) and SAB 107 using an option-pricing model, the value
may not be indicative of the fair value observed in a willing buyer/willing
seller market transaction.
26
Liquidity and Capital Resources
During the three and six month periods ended December 31, 2005, we financed our
operations through collecting accounts receivable and issuing common stock for
cash paid in connection with the exercise of outstanding stock options and
prepayment of certain salaries.
At December 31, 2005, we had current assets of $3,704,381 and current
liabilities of $1,215,751, for a working capital surplus of $2,488,630, a
decrease of $507,890 over the working capital surplus of $2,996,520 we had at
June 30, 2005. We had cash and cash equivalents of $2,577,694 and net accounts
receivable of $75,617 at December 31, 2005 compared to cash and cash equivalents
of $2,122,320 and net accounts receivable of $168,838 at June 30, 2005. Our
increase in cash and equivalents at December 31, 2005, is attributable to the
exercise of $1,410,000 of outstanding options during the period. Our cash and
cash equivalents include $836,820 of cash received as part of an ongoing private
offering of our securities during the period. The subscription amounts were
recorded at December 31, 2005, as a current liability under the line item "stock
subscription deposits." Subsequent to December 31, 2005, we completed the stock
offering. As a result of completing the offering the "stock subscription
deposits" liability will be reduced to $0 for the period ending March 31, 2006.
At December 31, 2005, we had net property and equipment of $1,125,751, after
deduction of accumulated depreciation of $2,027,326. At December 31, 2005, our
property and equipment consisted mainly of leasehold improvements, $120,767;
molds and models, $353,591; equipment, $2,324,730; furniture and fixtures,
$73,652; and software, $280,337.
Net cash used by our operating activities for the six month period ended
December 31, 2005 was $1,686,061, compared to $1,211,739 for the same period in
2004. The increase in cash used by operating activities for the six month period
ended December 31, 2005 can be attributed to a deposit on the purchase of new
production equipment and the prepayment of operating expenses, including health
insurance and property taxes. Our operations for the six month period ended
December 31, 2005 were funded primarily by cash and cash equivalents, accounts
receivables, and the issuance of common stock for services and salaries. Our
operations for the six month period ended December 31, 2004 were funded
primarily the same way.
Net cash used by investing activities for the six month period ended December
31, 2005 was $105,385, including payments for patents and trademarks and
purchase of property and equipment, compared to $93,609 in the prior year period
for similar purposes.
Cash provided by financing activities for the six month period ended December
31, 2005 totaled $2,246,820 comprised of $836,820 in proceeds from a stock
subscription deposits and additional cash proceeds from the issuance of common
stock for the exercise of outstanding options. Cash provided by financing
activities for the prior year period totaled $880,000 in proceeds from the
issuance of common stock.
To supplement our cash needs during the 2006 fiscal year we have (1) obtained
approximately $1,400,000 in funding through the exercise of outstanding options;
(2) issued common stock in lieu of cash as compensation for employment,
development, and other professional services; and (3) raised $3.87 million in
working capital through the private offering of our securities. Although we have
consistently operated at a loss and a negative cash flow, we have always had
little, if any, debt and have consistently had a positive net tangible book
value. In connection with the preparation of our financial statement for the
period ended December 31, 2005, we analyzed our cash needs. Based on this
analysis, we concluded that the $3,870,000 in cash received during January 2006
(from the private placement of common stock), coupled with our approximately
$2,600,000 in cash and cash equivalents and the potential business prospects for
our products and technology, was sufficient to meet our short-term and long-term
cash requirements, thus eliminating the need for the going concern qualification
in our December 31, 2005 financial statements. We do not anticipate needing any
additional working capital through the balance of the 2006 fiscal year to
implement our operating plan.
Off-Balance Sheet Arrangements
------------------------------
We currently have no off balance sheet arrangements.
Impact of Inflation
-------------------
We do not anticipate that inflation will have a material impact on our current
operations.
Seasonality
-----------
Because the significant portion of our current customers reside in the United
States, we anticipate that sales of certain of our lawn and garden Products to
those customers located in Northern portion of the United States could be
reduced as a result of fall and winter climate and weather conditions.
Results of Operations--Years Ended June 30, 2005 and 2004
Net Sales
Since inception we have focused on the development of our technology and for a
number of years we were considered a development stage company. The past two
fiscal years we had limited revenues from the sale of our services and products.
For the fiscal year ended June 30, 2005 we had net sales of $1,681,091, an 18%
increase over net sales of $1,419,124, the previous year. This increase was due
primarily further expansion of our Products sales among retail chain customers
and original equipment manufacturers.
27
Cost of Goods Sold
Our cost of sales for the year ended June 30, 2005 was $1,233,181, or 73% of
sales as compared to $1,114,230, or 78.5% of sales for the year ended June 30,
2004, resulting in a gross margin of $447,910 or 27% as compared to a gross
margin of $304,894 or 21% for the respective periods. The improvement in our
gross margin for the current year as compared to the prior year is a result of
manufacturing efficiencies such as (a) increasing the size of chemical batches,
(b) dedicating production shifts to manufacturing single products (i.e., longer
production runs), and (c) reducing labor costs by implementing line automation.
We believe that our gross margin can continue to improve as our sales efforts
generate additional product orders in such quantities to take further advantage
of the manufacturing efficiencies. We believe we currently have sufficient
manufacturing equipment and employees to merit a substantial increase in
production without incurring a proportionately equivalent increase in labor
costs.
We have experienced an increase in the cost of wheel components for our
tire/wheel assemblies due to the increasing cost of steel. We have not passed
the increases on to our customers and have elected to seek alternative suppliers
for components that are priced more competitively. However, if the cost of steel
wheel components continues to rise, we may elect to amend our product pricing to
reflect the increase in component costs. Also, during the last six months our
chemical pricing increased approximately 14% and we expect to see some
additional upward pressure on chemical pricing during the next fiscal year.
Corporate Expense. For fiscal year 2005, total operating expenses were
$10,571,052, consisting of consulting expenses of $77,000, payroll and payroll
taxes of $1,905,177, depreciation and amortization of $385,726, research and
development costs of $880,748, bad debt expense of $14,087, loss on impairment
of assets of $18,054, selling, general and administrative expenses of
$1,156,260, and an expense of $6,134,000 for advisory group services associated
with the grant of options to acquire an aggregate of 3,000,000 shares of our
common stock to third-party consultants. The value of the options was calculated
using the Black-Scholes option pricing model and was expended during the three
month period ended September 30, 2004, as reported in our quarterly report on
Form 10QSB for that period.
For fiscal year 2004, total operating expenses were $5,045,895, consisting of
consulting expenses of $370,666, payroll and payroll taxes of $2,345,082,
depreciation and amortization of $296,232, research and development cost of
$572,002, bad debt expense of $3,713 and selling, general and administrative
expenses of $1,458,200.
Our corporate expenses increased from $5,045,895 in fiscal year 2004 to
$10,571,052 in fiscal year 2005, for two main reasons: (1) the $6,134,000 for
advisory group services associated with the grant of options and (2) increases
in research and development expenses attributed to the development of our
polyurethane elastomer car tire technology. However, for fiscal year 2005, we
had reductions in consulting expenses of $293,666; payroll and payroll taxes of
$439,905, and selling, general and administrative expenses of $301,940.
For fiscal year 2006 we are estimating that our total operating expenses will be
approximately $5,000,000.
Interest Expense. We had no interest expense during fiscal years 2005 and 2004.
Other Income. For fiscal year 2005, we had other income of $50,134, consisting
of interest income of $35,181 (earned on account receivables and temporary
investments of cash not immediately needed in ordinary daily business) and
miscellaneous income of $14,953. For fiscal year 2004, we had other income of
$19,746, consisting of interest income of $17,234 (earned on account receivables
and temporary investments of cash not immediately needed in ordinary daily
business) and miscellaneous income of $2,512.
We experienced a net loss of $10,073,008 for the year ended June 30, 2005,
compared to a net loss of $4,721,255 for the year ended June 30, 2004. The basic
loss per share for fiscal year 2005 was $0.53 compared to $0.26 for fiscal year
2004, based on the weighted average number of shares outstanding of 18,931,779
and 17,846,910 for the respective periods.
Results of Operations--Years Ended June 30, 2004 and 2003
Net Sales
For a substantial portion of our operating history we focused on the development
of our technology and have been a development stage company. During this time we
had limited revenues from the sale of or Products. In October 2001, we began
selling our Products to bicycle shops, hardware stores and tire stores in the
United States through the use of a few independent regional sales
representatives traveling throughout their respective regions. In April 2003, we
began to implement changes to our sales and marketing plan based on a product
sector approach. This change helped us to increase our sales, so that our net
sales for the year ended June 30, 2004 were $1,419,124, a 36% increase over net
sales for the year ended June 30, 2003 of $1,040,246.
Cost of Goods Sold
Our cost of sales for the year ended June 30, 2004 was $1,114,230, or 78.5% of
sales as compared to $976,132, or 93.8% of sales for the year ended June 30,
2003, resulting in a gross margin of $304,894 or 21.5% as compared to a gross
margin of $64,114 or 6.2% for the respective periods. The increase in our gross
margin for the year ended June 30, 2004, is a direct result of incorporating
28
revisions to our methods, processes and costs in order to achieve increase
manufacturing efficiencies. We are continuing to effect these revisions and we
believe that, for the fiscal year ending June 30, 2005, our direct costs as a
percent of sales will continue to be reduced as our volume of Product sales
exceeds the fixed costs of minimum Product production (i.e., labor and raw
material costs, etc.). We believe we currently have sufficient manufacturing
equipment and employees to merit a substantial increase in production without
incurring a proportionately equivalent increase in labor costs. In addition, we
continue to seek reductions in raw material and component costs from our
principal suppliers.
During the year ended June 30, 2004, we experienced an increase in the cost of
wheel components for our tire/wheel assemblies due to the increasing cost of
steel. We did not pass the increases on to our customers and elected to seek
alternative suppliers for components that were priced more competitively.
However, if the cost of steel wheel components continues to rise during fiscal
year 2005, we may elect to amend our product pricing to reflect the increase in
component costs. During the reporting period, our chemical pricing remained
relatively constant. We know of no other predictable events or uncertainties
that may be reasonably expected to have a material negative impact on the net
sales revenues or income from our operations other than a the continuation of
the sluggish U.S. economy that has occurred over the past several months and the
reduced consumer spending resulting therefrom.
Corporate Expense. For fiscal year 2004, total operating expenses were
$5,045,895, consisting of consulting expenses of $370,666, payroll and payroll
taxes of $2,345,082, depreciation and amortization of $296,232, research and
development cost of $572,002, bad debt expense of $3,713 and selling, general
and administrative expenses of $1,458,200, resulting in a loss from operations
of $4,741,001. For fiscal year 2003, total operating expenses were $3,173,149,
consisting mainly of consulting expenses of $339,934, payroll and payroll taxes
of $1,083,910, depreciation and amortization of $298,625, research and
development costs of $28,607, bad debt expense of $51, loss on impairment of
assets of $67,982 and selling, general and administrative expenses of
$1,354,040, resulting in a loss from operations of $3,109,035.
Our corporate expenses increased from $3,173,149 in fiscal year 2003 to
$5,045,895 in fiscal year 2004, in large part to the following reasons: (1) An
increase in outside product and marketing consulting fees as a result of issuing
common stock for services valued at current market value in lieu of cash
payments; (2) An increase in executive and employee compensation as a result of
issuing common stock for services valued at current market value in lieu of cash
payments; and (3) An increase in research and development expenses, in large
part attributed to the specific endeavor to develop our polyurethane elastomer
car tire technology. In connection with the foregoing, during fiscal year 2004,
we issued equity instruments for services in lieu of cash with an aggregate
value of $2,176,692.
For fiscal year 2005 we are estimating that our selling, general and
administrative expenses will remain relatively constant with the approximately
$5,000,000 expended in fiscal year 2004.
Interest Expense. We had no interest expense during fiscal years 2004 and 2003.
Other Income. For fiscal year 2004, we had other income of $19,746, consisting
of interest income of $17,234 (earned on account receivables and temporary
investments of cash not immediately needed in ordinary daily business) and
miscellaneous income of $2,512. In fiscal year 2003, we had other income of
$17,063, consisting of interest income of $16,397 and $666 of miscellaneous
income.
We experienced a net loss of $4,721,255 for the year ended June 30, 2004,
compared with a net loss of $3,091,972 for the year ended June 30, 2003. The
basic loss per share for fiscal year 2004 was $0.26 as compared to $0.21 for
fiscal year 2003, based on the weighted average number of shares outstanding of
17,846,910 and 14,796,744 for the respective periods.
Liquidity and Capital Resources
During the fiscal year ended June 30, 2005, we financed our operations through
collecting accounts receivable and issuing common stock for: cash (paid in
connection with the exercise of outstanding stock options); prepayment of
certain salaries; and payment of professional services. For the fiscal year
ended June 30, 2004, we financed our operations in the same manner.
At June 30, 2005, we had current assets of $3,081,348 and current liabilities of
$84,828, for a working capital surplus of $2,996,520, an increase of $640,389
over the working capital surplus of $2,356,131 we had at June 30, 2004. We had
cash and cash equivalents of $2,122,320 and net accounts receivable of $168,838
at June 30, 2005 compared to cash and cash equivalents of $1,591,289 and net
accounts receivable of $167,002 at June 30, 2004. Our increase in cash and
equivalents at June 30, 2005, is attributable to the exercise of outstanding
options during the year.
Net cash used by our operating activities for the fiscal year 2005 was
$2,618,898, compared to $2,197,583 for the fiscal year 2004. Our operations for
fiscal year 2005 were funded primarily by cash and cash equivalents, accounts
receivables, and the issuance of common stock for services and salary. Our
operations for fiscal 2004 were funded primarily the same way.
At June 30, 2005, we had net property and equipment of $1,141,315, after
deduction of accumulated depreciation of $1,858,950. At June 30, 2004, we had
net property and equipment of $1,445,993, after deduction of accumulated
depreciation of $1,567,187. At June 30, 2005, our property and equipment
consisted mainly of leasehold improvements, $120,767; mold and models, $343,031;
equipment, $2,280,888; furniture and fixtures, $70,678; and software, $184,901,
compared to leasehold improvements, $163,896; molds and models, $315,282;
equipment, $2,253,217; furniture and fixtures, $70,033; vehicles, $25,851; and
software, $184,901, at June 30, 2004.
29
Our financial statements are prepared using generally accepted accounting
principles applicable to a going concern which contemplates the realization of
assets and liquidation of liabilities in the normal course of business. We have
historically incurred significant losses which have resulted in a total retained
deficit of $36,463,835 at June 30, 2005 which raises substantial doubt about our
ability to continue as a going concern. Our financial statements do not include
any adjustments relating to the recoverability and classification of asset
carrying amounts or the amount and classification of liabilities that might
result from the outcome of this uncertainty.
We have taken certain steps to maintain our operating and financial requirements
in an effort to enable us to continue as a going concern until such time that
revenues are sufficient to cover expenses, including: (1) evaluating (A) our
cost of goods and equipment utilization and requirements of our manufacturing
operations, and (B) our sales and marketing plan on a product sector basis; (2)
continued revisions to our methods, processes and costs in order to achieve
necessary manufacturing efficiencies (i.e., line automation, reduced material
costs, reduced product waste, etc.); and (3) seeking reduced material and
component costs from suppliers.
In addition, to expanding revenue opportunities during the fiscal year we have
commenced a program of (1) licensing manufacturing and distribution rights to
certain of our polyurethane tire products to third-party manufacturers based on
such factors as geographical locations and boundaries; (2) selling manufacturing
equipment to third-party manufacturers to manufacture products utilizing our
manufacturing equipment and processes; (3) selling our proprietary polyurethane
chemical systems to third-party manufacturers that utilize our manufacturing
equipment and processes; and (4) offering contract design and engineering
services to the tire and auto industries.
To supplement our cash needs during the 2006 fiscal year we have (1) obtained
approximately $1,500,000 in funding through the exercise of outstanding options;
and (2) expect to issued common stock in lieu of cash as compensation for
employment, development, and other professional services.
The combination of our accounts receivables and our cash and cash equivalents
are expected to meet the balance of our operational needs during the 2006 fiscal
year. We are currently evaluating funding strategies to help outset any cash
shortfalls that may occur after during the 2006 fiscal year.
We anticipate that during the 2006 fiscal year we will need approximately
$4,000,000 to implement our plan and to meet our working capital requirements.
Our ability to continue as a going concern is dependent upon our ability to
successfully accomplish the plan described above, and eventually attain
profitable operations.
The accompanying financial statements do not include any adjustments that might
be necessary should we be unable to continue as a going concern.
Off-Balance Sheet Arrangements
------------------------------
We currently have no off balance sheet arrangements.
Impact of Inflation
-------------------
We do not anticipate that inflation will have a material impact on our current
operations.
Seasonality
-----------
Because the significant portion of our current customers reside in the United
States, we anticipate that sales of certain of our lawn and garden Products to
those customers located in Northern portion of the United States could be
reduced as a result of fall and winter climate and weather conditions.
30
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to changes in prevailing market interest rates affecting the
return on our investments but do not consider this interest rate market risk
exposure to be material to our financial condition or results of operations. We
invest primarily in United States Treasury instruments with short-term (less
than one year) maturities. The carrying amount of these investments approximates
fair value due to the short-term maturities. Under our current policies, we do
not use derivative financial instruments, derivative commodity instruments or
other financial instruments to manage our exposure to changes in interest rates
or commodity prices.
MANAGEMENT--DIRECTORS AND EXECUTIVE OFFICERS
Directors and Executive Officers
The following sets forth certain information regarding our directors as of March
8, 2006:
Name of Nominee* Age Principal Occupation
---------------- ----- ---------------------
Richard A. Steinke 63 Chief Executive Officer, President and Chairman of
our Board of Directors
Elliott N. Taylor 47 Executive Vice President, General Counsel and
Chief Administrative Officer
James G. Moore, Jr. 57 Vice President of Operations and Engineering
Gary N. Benninger 64 Executive Vice President and Chief Operating
Officer
Anders A. Suarez 40 Chief Financial Officer
David K. Griffiths 68 Secretary and Treasurer
Louis M. Haynie 78 Director
Henry D. Moyle 75 Director
Wesley G. Sprunk 68 Director
Norman H. Tregenza 68 Director
Steve M. Hanni 37 Director
Kenneth C. Johnsen 47 Director
Richard A. Steinke is our founder and currently serves as our President,
Chairman and Chief Executive Officer. From January 1992 to December 1994, he
served as Chairman and C.E.O. of Alanco Environmental Resources, Inc., a
manufacturer of environmental/pollution control equipment, Salt Lake City, Utah.
From June 1985 to December 1991, he was the Chairman and C.E.O. of UTI
Chemicals, Inc., a developer and manufacturer of urethane chemicals, El Toro,
California. He received a B.A. in Political Science and Economics from the
University of Arizona, Tucson, Arizona, in 1967.
Elliott N. Taylor became Executive Vice President and General Counsel in June
2002. Prior to joining us, he was the principal attorney for Taylor and
Associates, Inc., a law firm in Salt Lake City, Utah, specializing in corporate
and securities law since May 1993. From August 1991 to March 1993, he was the
general counsel and chief financial officer for Carbon Fiber Products, Inc.,
Ogden, Utah, a manufacturer of composite products for the golf industry. From
November 1987 to July 1991, he was an associate attorney at Kruse, Landa &
Maycock, a law firm in Salt Lake City, Utah. He received a J.D. from the
University of Tulsa, Tulsa, Oklahoma in 1986 and a B.S. in Political Science
from Utah State University, Logan, Utah in 1982.
James G. Moore, Jr. joined us in August 1997. Prior to his employment by us, he
worked at The Goodyear Tire & Rubber Company, in Akron, Ohio, where he had over
25 years of experience as a master tire carver, which included five years at the
Goodyear apprentice school for tire tread pattern carving and mold carving.
Dr. Gary N. Benninger became our Chief Operating Officer in October 2005. Dr.
Benninger served as Director of Technology Development from 1999 to 2005 by
Magna International, Inc., a $20+billion diversified auto parts supplier. In
this capacity, Dr. Benninger was responsible for identifying key new
technologies as well as managing the design, engineering and manufacturing
launch of target products. During 1998 and 1999, Dr. Benninger was the Chief
Operating Officer of the North American Operations of Becker Group, a $1.5
billion privately held automotive interior systems supplier. Prior to joining
Becker, he was the Executive Vice President of Engineering and R&D at Magna and
also served as Division General Manager and Vice President of Product
Development. He has also worked for Ford Motor Company as an engineering manager
and the National Aeronautics and Space Administration (NASA) as a research
scientist. Dr. Benninger received his B.S. (1964), M.S. (1965), and Ph.D. (1970)
degrees all in physics at the West Virginia University, Morgantown, West
Virginia.
Anders Suarez was appointed our chief financial officer in July 2004. Prior to
his appointment he worked as our Financial Systems Administrator since October
2003. Prior to joining us, from 1999 to 2003, Mr. Suarez worked as a project
manager/senior consultant for ePartners, Inc., Phoenix, Arizona, a leading
provider of Microsoft-based business solutions for middle market companies. He
received his B.S. in Finance from the University of Arizona, Tucson, Arizona in
1995, and his M.B.A. from Thunderbird-The American Graduate School of
International Management, Glendale, Arizona in 1996.
31
David K. Griffiths has been our Secretary/Treasurer since December 2000 and was
our principal accounting officer from February 1995 to June 2004. From 1960 to
1995, he was self-employed as an accountant/consultant for various small
businesses. He offers the Company 45 years experience in accounting and
accounting related systems. He received a B.S. in Accounting from Arizona State
University, Tempe, Arizona in 1959.
Louis M. Haynie has been a member of our Board of Directors since July 1997. Mr.
Haynie's past board services include, Research Medical, Inc., Salt Lake City,
Utah, the University of Utah Regents Advisory Board, Redwood Land Co., Salt Lake
City, Utah, and MIS Corporation, Franklin, Tennessee. Mr. Haynie has a law
degree from the University of Utah and has been in the private practice of law
since 1951.
Henry D. Moyle has been a member of our Board of Directors since March 1999.
Since 1992, he has been President and C.E.O. of Silver Lake Company, and
formerly President and C.E.O. of Brighton Properties, Inc. From 1970 to 1983, he
was President and C.E.O. of Research Industries Corporation. He received a B.A.
from Stanford in 1957, and a J.D. degree from the University of Utah in 1959. He
is the owner of Sunset Canyon Ranch, raising cattle and racehorses, and serves
on the Board of Directors of Silver Lake Company and Sunset Medical Corporation.
Wesley G. Sprunk, joined our board in January 2003. Mr. Sprunk owns and operates
Saf-Tee Siping & Grooving, a tire siping equipment manufacturing company and
Tire Service Equipment Mfg. Co., Inc., a manufacturer and marketer of automotive
wheel service equipment and recycling equipment, both located in Phoenix,
Arizona.
Norman H. Tregenza, joined our board in April 2003 and has over 40 years
experience in corporate finance, including 12 years as an investment officer in
the securities division of TIAA-CREF, New York City. Mr. Tregenza co- founded
Tempo Enterprises, Inc. in 1976 to act as a common carrier for Turner
Communication's Superstation's signal to the RCA satellite. Tempo obtained a
listing on the American Stock Exchange in 1986. Before being sold to
Telecommunications, Inc. (TCI) in 1988, Tempo owned several cable TV companies,
radio stations and its own satellite TV network while supplying the
Superstation's signal to approximately 50 million homes. TCI was acquired by
AT&T in 2000. Mr. Tregenza received a B.A. from St. Lawrence University, Canton,
NY, in 1959, and a MBA from NYU in 1963.
Steve M. Hanni is currently a partner in the accounting firm of Stayner, Bates &
Jensen, PC in Salt Lake City, Utah. He was formerly an audit partner with HJ &
Associates, LLC from 1997 to 2001. Since November 2002, he also serves on a
part-time basis as Chief Financial Officer for Emergency Filtration Products,
Inc., Las Vegas, a public company that produces masks and filters for medical
devices that are designed to reduce the possibility of transmission of
contagious diseases, and distributes a blood clotting device for surgery, trauma
and burn wound management. Emergency Filtration Products, Inc. is traded on the
NASDAQ OTCBB under the symbol "EMFP". Mr. Hanni received his BA from Weber State
University in 1993 and an MA in Accounting from Weber State University in 1994.
He has worked extensively with small public companies in numerous industries.
Kenneth C. Johnsen, currently serves as a member of the Board of Directors of
Joy Global, Inc., Milwaukee, Wisconsin (NASDAQ: JOYG), a worldwide leader in
manufacturing, servicing and distributing equipment for surface and underground
mining. From April 2001 to June 2005, Mr. Johnsen was a Director, President and
Chief Executive Officer of Geneva Steel, Vineyard, Utah. Mr. Johnsen also served
in various other capacities at Geneva Steel, including Executive Vice President,
Secretary and General Counsel for the period between October 1991 and April
2001. Prior to joining Geneva, Mr. Johnsen was an attorney with Parr, Waddoups,
Brown, Gee & Loveless in Salt Lake City, Utah from 1986 to 1991. Mr. Johnsen
earned a B.A. in Finance from Utah State University (1982), and a J.D. from Yale
Law School in 1985.
Audit Committee
Our Audit Committee includes directors Wesley Sprunk, Norman Tregenza and Steve
Hanni (appointed September 2005 to the Board of Directors and designated as
chairman of the Audit Committee). Our Board of Directors has determined that
Steve Hanni is an "audit committee financial expert" as defined under new SEC
regulations, who is independent of management. The tasks and responsibilities of
the Audit Committee include (i) the review and discussion of the audited
financial statements with management, (ii) discussing with the independent
auditors the matters required to be discussed by the Statement of Auditing
Standards No. 61, as may be modified or supplemented, and (iii) receiving from
auditors disclosure regarding the auditors' Independence Standards Board
Standard No. 1, as may be modified or supplemented. Members of the audit
committee met 4 times during the fiscal year ended June 30, 2005.
Executive Committee
Our Executive Committee consists of Richard A. Steinke, Louis M. Haynie, Kenneth
Johnsen and Henry D. Moyle, Jr. The Executive Committee's purpose is to: (1)
review and make recommendations regarding our short-term and long-term operating
plan; and (2) review management's plans regarding product development, product
pricing structure, product market segments and product marketing strategy and
make recommendations regarding changes and/or modifications thereto.
The Executive Committee meets on an ad hoc basis from time to time as determined
by Mr. Steinke, who serves as chairman of the Executive Committee, until such
time as the Executive Committee is disbanded or until their successors are duly
elected and shall qualify. Members of the executive committee met four times
during the fiscal year ended June 30, 2005.
32
Compensation Committee
Our Compensation Committee includes Louis M. Haynie, Steve Hanni and Wesley G.
Sprunk. The Compensation Committee meets as necessary but at least once annually
to review executive compensation and make recommendations regarding compensation
to the full board. The Compensation Committee met twice during the fiscal year
ended June 30, 2005.
Nominating Committee
Our Nominating Committee includes Henry D. Moyle , Kenneth Johnsen and Norman H.
Tregenza. The Nominating Committee meets as necessary but at least once annually
to consider and recommend potential nominees for directorships to the full
board. The Nominating Committee charter is posted on our website at
www.amerityre.com. Pursuant to the charter, the Nominating Committee will
consider candidates for directorships proposed by any shareholder although there
is no formal procedure for making such proposals.
Meetings of our Board of Directors
Our Board of Directors held ten meetings during the 2005 fiscal year (including
those meetings conducted by telephone conferencing).
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors, executive officers and
10% stockholders (collectively, "Reporting Persons") to file with the SEC
initial reports of ownership and changes in ownership of our Common Stock.
Reporting Persons are required by SEC regulations to furnish us with copies of
all Section 16(a) reports they file. To our knowledge, based solely on our
review of the copies of such reports received or written representations from
certain Reporting Persons that no other reports were required, we believe that
during our fiscal year ended June 30, 2005, all Reporting Persons timely filed
all such reports.
Code of Ethics
We have adopted a Code of Business Conduct that applies to all our directors,
officers and employees. A copy of the code of ethics will be provided free of
charge upon written request to our Secretary at the address shown on the
coverage page of this report and is accessible, free of charge at our Internet
website, http://www.amerityre.com. If we grant waivers from or make amendments
to this code of ethics that are required to be disclosed pursuant to the
Securities Exchange Act of 1934 or applicable listing requirements, we will make
those disclosures on our website within four business days following the date of
such waiver or amendment. Our website and the information contained in or
connected to our website are not part of this report.
Compensation to Executive Officers
The following table shows the compensation received for the fiscal years ended
June 30, 2005, 2004, 2003 and 2002 by (1) the individual who served as our Chief
Executive Officer and (2) the four other most highly compensated individuals who
served as one of our executive officers during the fiscal years ended June 30,
2005, 2004, 2003 and 2002 (the "Named Executive Officers").
Summary Compensation Table
Long Term Compensation
----------------------
Annual Compensation Awards Payouts
Other Restricted
Name and Annual Stock Options LTIP All other
Principal Position Year Salary Bonus($) Compensation Awards /SARs Payout Compensation
------------------ ---- --------- --------- ------------ --------- -------- ------- ------------
Richard A. Steinke 2005 $598,000 -0- $ -0- $-0- $-0- $-0- $ 48,750
CEO, Pres. and 2004 $474,500 -0- $ 492,000 $-0- $-0- $-0- $ -0-
Chairman 2003 $424,000 -0- $ -0- $-0- $-0- $-0- $ -0-
2002 $400,000 -0- $ 30,000 -0- -0- -0- -0-
Elliott N. Taylor, 2005 $180,000 -0- $ -0- $-0- $-0- $-0- $ -0-
Executive V.P. 2004 120,000 -0- $ 81,999 $-0- $-0- $-0- $ -0-
2003 120,000 -0- -0- $-0- $-0- $-0- $ -0-
2002 5,000 -0- -0- -0- -0- -0- -0-
In July 2004, our board authorized the issuance of 65,000 shares of restricted
common stock to Richard Steinke as employment compensation from July 1, 2004
through June 30, 2005. The value of the shares was $598,000, based on $9.20 per
share, the closing price of the common stock on the date of the board
resolution.
In July 2004, we issued 5,000 shares of our restricted common stock as a one-
time payment to the Richard Steinke, in exchange for an assignment and transfer
of certain patents to the Company. The shares were valued at $9.75 per share
based on the closing price of our common stock as quoted on the OTC Bulletin
Board July 1, 2004. The expense associated with the acquisition of the
technology will be amortized over the remaining life of the applicable patents.
Due to Mr. Steinke's relationship to the Company, the transaction cannot be
considered to have been negotiated at arm's length.
Pursuant to a resolution of our board of directors in December 2001, Richard A.
Steinke was issued 100,000 shares of restricted common stock in lieu of cash
compensation for services through December 31, 2001 and an additional 100,000
shares of restricted common stock as prepaid compensation through June 30, 2002.
The aggregate value of the 200,000 shares was $400,000 based on the closing
price of our common stock on the date of the board resolution. In November 2002,
the board authorized the issuance of 200,000 shares of restricted common stock
to Mr. Steinke as employment compensation from July 1, 2002 through June 30,
2003. The aggregate value of the 200,000 shares was $424,000, based on the
closing price of our common stock on the date of the board resolution.
33
In October 2003, our board authorized the issuance of 125,000 shares of
restricted common stock to Mr. Steinke as employment compensation from July 1,
2003 through June 30, 2004. The value of the shares was $472,500, based on the
closing price of the common stock on the date of the board resolution. In May
2004, the board approved the issuance of 60,000 shares of common stock to Mr.
Steinke as additional compensation for service provided during the fiscal year.
The value of the shares was $492,000, based on the closing price of our common
stock on the date of the board resolution.
During the year ended June 30, 2004, Elliott N. Taylor received a base salary of
$120,000. In addition, the board approved the issuance of 10,000 shares of
common stock to Mr. Taylor as additional compensation for services provided
during the fiscal year. The value of the shares was $81,999, based on the
closing price of our common stock on the date of the board resolution.
Employment Benefits
We provided health and medical insurance to our executive officers similar to
that which is made available to all full time employees, and we reimbursed our
executive officers for reasonable out-of-pocket expenses incurred in connection
with our business.
As a condition to employment, our management and key personnel are required to
sign a non-disclosure and non-competition agreement. Under the terms of the
agreement, employees are not able to provide services or information deemed
confidential by us to any other company or person which directly or indirectly
competes with us in the tire industry or an industry which we intended to enter.
There is no time limitation on the non-disclosure aspect of the agreement. The
non-competition clause is for a period of two years and prevents a former
employee or consultant from acting as an employee, consultant or in any other
capacity for a competitor. Additionally, all employees are required, as a
condition of their employment, to enter into a non-disclosure agreement related
to any information or process deemed confidential by us.
Option/SAR Grants in Fiscal Year Ended June 30, 2005
The following table summarizes stock option grants during fiscal year 2005 to
our Chief Executive Officer and our other Named Executive Officers.
OPTION/SAR GRANTS DURING LAST FISCAL YEAR
Individual Grants
-----------------------------------------------------
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise or
Options/SARs Employees Base Price Expiration
Name Granted in Fiscal Year ($/Share) Date
------------------- ------------ -------------- ----------- ----------
(a) (b) (c) (d) (e)
Elliott N. Taylor 25,000 24 $6.40 12/15/09
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The following table sets forth certain information with respect to stock options
exercised by our Chief Executive Officer and our other Named Executive Officers
during the fiscal year ended June 30, 2005.
34
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
Shares at FY-End(#) at FY-End($)
Acquired Value Exercisable/ Exercisable/
Name on Exercise(#) Realized($) Unexercisable Unexerciable
------------------- ------------- ------------- ------------ ------------
N/A N/A N/A N/A N/A
Pension Table
-------------
Not Applicable.
Other Compensation
------------------
None.
Compensation of Directors
In December 2004, we issued options to acquire an aggregate of 80,000 shares of
our common stock to non-employee directors for annual service on our Board of
Directors pursuant to our 2004 Non-Employee Directors' Stock Incentive Plan.
These options vested on June 15, 2005, are exercisable at $6.40 per share and
expire on December 15, 2007.
In addition to the above compensation, as compensation for serving on the audit
committee, in September 2005, the Board of Directors approved annual
compensation for the chairman of the Audit Committee of $25,000, payable
quarterly in cash or stock.
Employment Contracts and Change in Control Arrangements
Effective October 2005, we have written employment agreements with Richard
Steinke, Elliott Taylor, Gary Benninger, Anders Suarez, James Moore, and David
Griffiths, as follows:
Schedule of Employment Agreement and Key Terms for Executive Officers
----------------------- ------- -------- -------------- --------------- ------------ -------------------------------
Additional Adjusted
Base ($) Value ($) Value Annual
Name Executive Annual Cash Stock Salary Stock Award and/or
Officer/Title Term Salary Compensation Compensation FY 2006 Option Grants
----------------------- ------- -------- -------------- --------------- ------------ -------------------------------
Richard A. Steinke, 7/05 $500K $300,000 *$200,000 $500,000 * 30,303 shares valued at
Pres and CEO thru $6.60/sh and 300,000 options
6/08 at $6.60/sh; 5 year term;
options vest 1/3 annually
Gary N. Benninger 10/05 $250K $250,000 *$53,600 $303,600
Chief Operating thru * 10,000 shares valued at
Officer 10/06 $5.36/sh vesting 1/15/06; and
150,000 options at $5.36/sh;
5 yr term; options vest 1/3
annually
Elliott N. Taylor, 7/05 $250K $250,000 - $250,000
ExecVP/Gen'l Counsel thru 150,000 options at $6.60/sh;
7/08 5 yr term; options vest 1/3
annually
Anders A. Suarez, 7/05 $125K $125,000 - $125,000
Chief Financial thru
Officer 7/08 75,000 options at $6.60/sh; 5
yr term; vest 1/3 annually
James G. Moore, Jr., 7/05 $125K $125,000 - $125,000
VP - Engineering & thru 75,000 options at $6.60/sh; 5
Manufacturing 6/08 yr term; vest 1/3 annually
David K. Griffiths 7/05 $72K $72,000 - $72,000
Secretary/Treasurer thru 25,000 options at $6.60/sh; 5
6/06 year term; 100% vesting at 6/30/06
----------------------- ------- -------- -------------- --------------- ------------ -------------------------------
In the event of either termination for cause or due to a change of control, the
above employees are entitled to salary, earned bonus compensation and benefits
for the lesser of the balance of the respective employment agreement or twelve
(12) months.
Other than the above, there are no change of control arrangements with any
person.
Benefit Plans
2002 Plan and 2005 Plan Summary
-------------------------------
Both the 2002 Plan and the 2005 Plan (the "Award Plans") are intended to reward
employees and other individuals who contribute to our success and to provide
them with a stake in the enterprise as shareholders. Consistent with this
belief, the award of stock options has been and will continue to be an important
element of our compensation program.
We intend to use the Award Plans to (a) attract competent directors, executive
personnel, and other employees, (b) aid in the retention of the services of
existing directors, executive personnel, and employees, and (c) provide
incentives to all of such personnel to devote the utmost effort and skill to our
advancement by permitting them to participate in ownership and thereby
permitting them to share in increases in the value which they help produce.
35
The Award Plans are administered by our Compensation Committee (the
"Committee") appointed from time to time by our board of directors. Awards
granted under the Award Plan may be incentive stock options ("ISOs") as defined
in the Internal Revenue Code of 1986, as amended (the "Code"), appreciation
rights, options which do not qualify as ISOs, or stock bonus awards which are
awarded to our employees, including officers and directors, who, in the opinion
of the board or the Committee, have contributed, or are expected to contribute,
materially to our success. In addition, at the discretion of our Board of
Directors or the Committee, options or bonus stock may be granted to individuals
who are not employees but contribute to our success.
The exercise price of options granted under the Award Plans (as determined by
our Board of Directors), may be based on the fair market value of the underlying
common stock at the time of grant and, in the case of ISOs may not be less than
100% of the fair market value of such capital stock on the date the option is
granted (110% of the fair market value in the case of 10% stockholders).
Options granted under the Award Plans shall expire no later than ten years after
the date of grant (five years in the case of ISOs granted to 10% stockholders).
The option price may be paid by cash or, at the discretion of our Board of
Directors or Committee, by delivery of a promissory note or shares of our Common
Stock already owned by the optionee (valued at their fair market value at the
date of exercise), or a combination thereof.
All of our employees, officers, and directors are eligible to participate under
the Award Plans. A maximum of 2,000,000 shares are available for grant under
each Award Plan. The identification of individuals entitled to receive awards,
the terms of the awards, and the number of shares subject to individual awards,
are determined by our Board of Directors or the Committee, in their sole
discretion provided, however, that in no event may the aggregate fair market
value of shares for which an ISO is first exercisable in any calendar year by
any eligible employee exceed $100,000.
The aggregate number of shares with respect to which options or stock awards may
be granted under the Award Plans, the number of shares covered by each
outstanding option, and the purchase price per share shall be adjusted for any
increase or decrease in the number of issued shares resulting from a
recapitalization, reorganization, merger, consolidation, exchange of shares,
stock dividend, stock split, reverse stock split, or other subdivision or
consolidation of shares.
Our Board of Directors or the Committee may from time to time alter, amend,
suspend, or discontinue the Award Plans with respect to any shares as to which
options or stock awards have not been granted. However, no such alteration or
amendment (unless approved by our stockholders) shall (a) increase (except
adjustment for an event of dilution) the maximum number of shares for which
options or stock awards may be granted under the Award Plans either in the
aggregate or to any eligible employee: (b) reduce (except adjustment for an
event of dilution) the minimum option prices which may be established under the
Award Plans; (c) extend the period or periods during which options may be
granted or exercised; (d) materially modify the requirements as to eligibility
for participation in the Award Plans; (e) change the provisions relating to
events of dilution; or (f) materially increase the benefits accruing to the
eligible participants under the Award Plans.
If a participant to whom an option is granted exercises such option by payment
of the exercise price in whole or in part with previously owned shares, the
optionee will not realize income with respect to the number of shares received
on exercise which equals the number of shares delivered by the optionee. The
optionee's basis for the delivered shares will carry over to the option shares
received. With regard to the number of non-qualified option shares received
which exceeds the number of shares delivered, the optionee will realize ordinary
income at the time of exercise; and the optionee's tax basis in these additional
option shares will equal the amount of ordinary income realized plus the amount
of any cash paid.
Recipients of ISOs will not be required to recognize income at the time of the
grant of the options or at the time of exercise of the options as long as the
stock received on exercise is held for at least two years from the date of the
grant of the ISOs or one year from the date of exercise (although the difference
between the fair market value of the stock and the exercise price paid at the
time of exercise must be taken into account for alternative minimum tax
purposes). If the stock received upon exercise of an ISO is disposed of prior to
the expiration of either of such time periods, the optionee will be required to
recognize as ordinary income the amount by which the fair market value of the
stock received at the time of exercise exceeds the exercise price of the ISOs.
Under the Award Plans, stock appreciation rights ("SARs") can be granted at the
time an option is granted with respect to all or a portion of the shares subject
to the related option. SARs can only be exercised to the extent the related
option is exercisable and cannot be exercised for the six-month period following
the date of grant, except in the event of death or disability of the optionee.
The exercise of any portion of either the related option or the tandem SARs will
cause a corresponding reduction in the number of shares remaining subject to the
option or the tandem SARs thus maintaining a balance between outstanding options
and SARs. SARs permit the holder to receive an amount (in cash, shares, or a
combination of cash and shares, as determined by our Board of Directors at the
time of grant) equal to the number of SARs exercised multiplied by the excess of
the fair market value of the shares on the exercise date over the exercise price
of the related options.
Under the terms of the Award Plans, our board of directors or the Committee may
also grant stock awards which may, at the discretion of our Board of Directors
or Committee, be subject to forfeiture under certain conditions. Recipients of
stock awards will realize ordinary income at the time of the lapse of any
36
forfeiture provisions equal to the fair market value of the shares less any
amount paid in connection with the issuance (our Board of Directors or the
Committee can require the payment of par value at the time of the grant). We
will realize a corresponding compensation deduction. The holder will have a
basis in the shares acquired equal to any amount paid on exercise plus the
amount of any ordinary income recognized by the holder. On sale of the shares,
the holder will have a capital gain or loss equal to the sale proceeds minus his
or her basis in the shares.
2004 Non-Employee Directors' Stock Incentive Plan
The 2004 Plan was established to attract, motivate and retain qualified
non-employee Directors. The 2004 Plan will provide a means for non-employee
Directors to increase their equity ownership consistent with our guidelines for
stock ownership by non-employee Directors. The 2004 Plan has not been submitted
to our shareholders for approval.
The date of grant to eligible directors is December 15th of each year during the
life of the 2004 Plan and for any supplemental grant, on a date determined by
the Board of Directors. An eligible director is any person who on the date of
grant is a member of the Board of Directors.
A total of 1,200,000 shares of common stock may be awarded under the 2004 Plan.
If any shares subject to any award granted thereunder are forfeited or such
award otherwise terminates without the issuance of such shares or of other
consideration in lieu of such shares, the shares subject to such award, to the
extent of such termination or forfeiture, shall again be available for grant
under the 2004 Plan during the term of the Plan.
The 2004 Plan has a duration of five (5) years commencing on December 15, 2004.
Awards of Stock Options and of Restricted Stock under this Plan shall be made at
the discretion of the Board of Directors, subject to a maximum individual award
of up to 10,000 Stock Options or up to 10,000 shares of Restricted Stock, or
some combination aggregating no more than 10,000 total in any one year.
Determination of such awards, if any, shall be made annually by the entire board
of directors, with the exercise price of Stock Options or the value of the
Restricted Stock to be determined as of December 1st. The term of Stock Options
shall be three years from the date of grant. Under no circumstances shall any
option vest in less than six months from the date of grant.
In the event of a reorganization, recapitalization, stock split, stock dividend,
combination of shares, merger, consolidation or any other change in our
corporate structure affecting common stock, or a sale by us of all or a
substantial part of its assets, or any distribution to stockholders other than a
cash dividend, our Board of Directors will make appropriate adjustment in the
number and kind of shares authorized by the Plan, and any adjustments to
outstanding awards as it deems appropriate. However, no fractional shares of
common stock will be issued pursuant to any such adjustment, and the fair market
value of any fractional shares resulting from adjustments will be paid in cash
to the awardee.
All options and restricted stock granted to an awardee shall automatically
terminate and be null and void as of the date an eligible director's service on
the Board of Directors terminates if the directorship is terminated as a result
of any act of (a) fraud or intentional misrepresentation, or (b) embezzlement,
misappropriation, or conversion of assets or opportunities of our company.
Equity Compensation Plan Information
The following table sets forth information as of the end of June 30, 2005 with
respect to compensation plans under which our equity securities are authorized
for issuance.
Number of Securities to Weighted-Average
be Issued upon Exercise Price of Number of Securities
Exercise of Outstanding Outstanding Remaining Available
Options, Restricted Options, Restricted for Future Issuance
Stock Units and Stock Units and Under Equity
Performance Units Performance Units Compensation Plans
Plan Category (1) A (4) B C
------------------ ---------------------- ------------------- ----------------------
Equity compensation 395,000 $ 5.04 209,191
plans approved by
security holders
37
Equity compensation
plans not approved
by security
holders (1) (2) (3) 3,550,000 $ 6.59 1,020,000
----------------------- -------------------- ---------------------
Total 3,945,000 $ 6.31 1,229,191
----------------------- -------------------- ---------------------
(1) Includes options to acquire up to 470,000 shares at an exercise price of
$3.00 per share that expire July 31, 2005, owned beneficially and of record by
Focus Sales and Marketing, L.L.C. and issued as compensation in association with
product marketing services.
(2) Includes 3,000,000 Options to certain non-employees at an exercise price of
$7.00 per share. The closing price for our common stock on the date the Option
grants were authorized was $6.95 per share. The Options vest immediately, but
are exercisable only as follows: (a) one-third of the total Options are
exercisable on the earlier of September 13, 2006 or the first day after the
closing price of our common stock has equaled or exceeded a price equal to 150%
of the exercise price for 20 consecutive trading days; (b) one- third of the
total Options are exercisable on the earlier of September 13, 2006 or the first
day after the closing price has equaled or exceeded a price equal to 175% of the
closing price for 20 consecutive trading days; and (c) one-third of the total
Options are exercisable on the earlier of September 13, 2006 or the first day
after the closing price has equaled or exceeded a price equal to 200% of the
closing price for 20 consecutive trading days.
(3) Includes options to acquire an aggregate of 80,000 shares of our common
stock to non-employee directors for annual service on our Board of Directors
pursuant to our 2004 Non-Employee Directors' Stock Incentive Plan. These options
vested on June 15, 2005, are exercisable at $6.40 per share and expire on
December 15, 2007.
(4) This table does not give effect to the 2005 Stock Option and Award Plan for
the issuance of up to 2,000,000 options and/or shares that was approved by our
board of directors in July 2005 and by the shareholders in December 2005. A
total of 625,000 shares have been issued under the 2005 Plan.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information known to us with respect to
the beneficial ownership of our common stock as of March 8, 2006 by: (1) each
person known by us to be a beneficial owner of five percent or more of our
common stock, (2) each of our directors, (3) each of our executive officers
named in the Summary Compensation Table set forth herein and (4) all current
directors and executive officers as a group.
Number of Percent of Total
Name and Address Shares(1) Shares Outstanding (1)
------------------ ------------- -----------------------
Richard A. Steinke (2) 1,425,000 6.49%
Elliott N. Taylor (4) 360,860 1.72%
Gary N. Benninger 10,000 *
Anders A. Suarez (5) 69,400 *
James G. Moore, Jr. (6) 45,535 *
David K. Griffiths 73,594 *
Louis M. Haynie (7) 449,252 2.14%
Henry D. Moyle (8) 727,252 3.47%
Wesley G. Sprunk (9) 157,442 *
Norman H. Tregenza (10) 341,552 1.63%
Steve Hanni 3,704 *
Kenneth C. Johnsen 6,852 *
All current directors and executive
officers as a group (12 persons) 4,007,345 22.51%
Centurion Holdings, LLC
375 Park Avenue, Suite 2008
New York, NY 10152 (3) 1,300,000 6.49%
Joseph J. Grano, Jr. 1,481,900 7.06%
* Less than one percent.
38
Beneficial ownership is determined in accordance with the rules of the SEC. In
determining the number of shares beneficially owned by a person, options or
warrants to purchase common stock held by that person that are currently
exercisable, or become exercisable within 60 days following March 8, 2006, are
deemed outstanding; however, such shares are not deemed outstanding for purposes
of computing the percentage ownership of any other person. We believe that all
of the persons named in this table have sole voting and investment power with
respect to all shares of common stock shown as beneficially owned by them,
subject to community property laws where applicable and except as indicated in
the other footnotes to this table.
As of March 8, 2006, 20,977,460 shares of common stock were issued and
outstanding.
(1) All shares owned directly are owned beneficially and of record and such
shareholder has sole voting, investment, and dispositive power, unless otherwise
noted.
(2) Includes 455,000 shares owned beneficially and of record by Gemini Funding
Services Profit Sharing Account, of which Richard A. Steinke is the principal
beneficiary and 800,000 shares owned beneficially and of record by S102
Irrevocable Trust, for which Richard A. Steinke is the trustee.
(3) Represents options to acquire 1,300,000 shares at an exercise price of $7.00
per share that expire September 12, 2009.
(4) Includes options to acquire up to 200,000 shares at an exercise price of
$4.00 per share that expire June 10, 2007, and 25,000 shares at an exercise
price of $6.40 per share that expire December 15, 2009. Also includes 25,000
shares per power of attorney; 20,692 shares as custodian for Mr. Taylor's minor
children; and 80,918 shares as trustee for family trusts.
(5) Includes options to acquire up to 30,000 shares at an exercise price of
$3.80 per share that expire September 30, 2006, and 25,000 shares at an exercise
price of $6.40 per share that expire December 15, 2009.
(6) Includes options to acquire up to 25,000 shares at an exercise price of
$6.40 per share that expire December 15, 2009.
(7) Includes options to acquire up to 20,000 shares at an exercise price of
$6.40 per share that expire December 15, 2007. Also includes 2,000 shares owned
beneficially and of record by Gae B. Haynie, spouse of Louis M. Haynie, of which
Mr. Haynie may be deemed to have beneficial ownership.
(8) Includes options to acquire up to 20,000 shares at an exercise price of
$6.40 per share that expire December 15, 2007. Also includes 55,000 shares owned
beneficially and of record by Vickie L. Moyle, spouse of Henry D. Moyle, and
11,000 shares owned beneficially and of record by a minor child, all of which
Mr. Moyle may be deemed to have beneficial ownership.
(9) Includes options to acquire up to 20,000 shares at an exercise price of
$6.40 per share that expire December 15, 2007, warrants to acquire 1,389 shares
at an exercise price of $5 per share that expire January 31, 2009, and warrants
to acquire 1,389 shares at an exercise price of $5.50 per share that expire
January 31, 2011.
(10) Includes options to acquire up to 20,000 shares at an exercise price of
$6.40 per share that expire December 15, 2007, warrants to acquire 700 shares at
an exercise price of $5 per share that expire January 31, 2009, and warrants to
acquire 700 shares at an exercise price of $5.50 per share that expire January
31, 2011. Also includes 13,000 shares held in an IRA, of which Mr. Tregenza is a
beneficiary; 40,000 shares held of record by Norman H. Tregenza IV Trust, dated
9/26/86, Richard R. Keller trustee; 56,650 per power of attorney for Norman A.
Tregenza, the son of Mr. Tregenza; 20,000 shares held in an IRA, of which Alyce
B. Tregenza, the spouse of Mr. Tregenza is the beneficiary; 5,000 shares per
power of attorney for Alyce B. Tregenza; 45,650 shares per power of attorney for
Suzanne C. Moore, the daughter of Mr. Tregenza.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On October 29, 1999, we entered into an exclusive license agreement with our
President, Richard A. Steinke, and two unrelated parties to license certain
intellectual property rights known as "Apparatus for Making Foam Products" and
"Method for Making Polyurethane Tires with an Outer Skin" embodied in United
States Patent No.'s 4,943,223 and 4,855,096, respectively. The agreement gave us
an exclusive license to use, sell, license, or otherwise exploit the technology
worldwide in exchange for a royalty of $0.25 of the net selling price for all
units produced utilizing the technology. The agreement required us to meet
certain minimum production/royalty requirements. However, in October 2002, this
agreement was amended to eliminate the provision requiring us to maintain
minimum sales or royalties and restricting the royalty provision to those units
produced and sold having a final production weight in excess of two (2) pounds.
Effective July 1, 2004, the Agreement was amended to eliminate the royalty
altogether in exchange for 15,000 shares of the Company's restricted common
stock as a one-time payment to the licensees for their assignment and transfer
of the technology to the Company. The closing price of the Corporation's common
stock as quoted on the OTC Bulletin Board on July 1, 2004 was $9.75 per share,
for a value of $146,250. The expense associated with the acquisition of the
technology will be amortized over the remaining life of the applicable patents.
Due to our President's relationship with us, the agreement and the related
amendments cannot be considered to have been negotiated at arm's length.
39
In June 2002, we entered into an agreement with Taylor and Associates, Inc., our
SEC counsel ("Taylor and Associates"), whereby, in consideration for our
employment of Elliott Taylor as our Executive Vice President, we agreed to
compensate Taylor and Associates for the potential financial detriment it might
incur as the result of Mr. Taylor's employment by us. Mr. Taylor had been the
principal attorney for Taylor and Associates since 1993. We have agreed to pay
Taylor and Associates $2,750 per month for a period of 24 months, commencing on
June 30, 2002 and continuing through May 31, 2004. At June 30, 2004, all amounts
due under this arrangement were paid in full.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other
documents with the Securities and Exchange Commission under the Securities
Exchange Act of 1934. You may read and copy any of those reports, proxy
statements or other documents at the public reference facilities maintained by
the Commission at 100 F Street NE, Washington, DC 20549. Please call the
Commission at 1-800-SEC-0330 for further information on its public reference
facilities. These filings are also available to the public from commercial
document retrieval services and at the Commission's Web site at www.sec.gov.
This prospectus constitutes a part of a registration statement on Form S-1 filed
by us with the Commission under the Securities Act. This prospectus does not
contain all the information that is contained in the registration statement,
some of which we are allowed to omit under the rules and regulations of the
Commission. We refer to the registration statement and to the exhibits filed
with the registration statement for further information with respect to
Amerityre Corporation. Copies of the registration statement and the exhibits to
the registration statement are on file at the offices of the Commission and may
be obtained upon payment of the prescribed fee or may be examined without charge
at the public reference facilities of the Commission described above. Statements
contained in this prospectus concerning the provisions of documents are
summaries of the material provisions of those documents, and each of those
statements is qualified in its entirety by reference to the copy of the
applicable document filed with the Commission. Since this prospectus may not
contain all of the information that you may find important, you should review
the full text of these documents.
40
INDEX TO FINANCIAL STATEMENTS
OF AMERITYRE CORPORATION
Page
Unaudited Financial Statements of Amerityre Corporation F-1
For The Three and Six Months Ended December 31, 2005 and 2004
Notes to the Unaudited Financial Statements of Amerityre F-6
Corporation For The Three and Six Months Ended December 31, 2005
and 2004
Audited Financial Statements of Amerityre Corporation F-14
For the Years Ended June 30, 2005, 2004 and 2003
Notes to the Audited Financial Statements of Amerityre F-23
Corporation For the Years Ended June 30, 2005, 2004 and 2003
41
AMERITYRE CORPORATION
Balance Sheets
December 31, 2005 June 30, 2005
------------------ ------------------
Restated
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,577,694 $ 2,122,320
Accounts receivable - net 75,617 168,838
Inventory 567,387 646,798
Prepaid expenses and other current assets 106,151 62,489
Special projects in progress - 752
Deferred stock offering expenses 83,278 80,151
Deposit on equipment 294,254 -
------------------ ------------------
Total Current Assets 3,704,381 3,081,348
------------------ ------------------
PROPERTY AND EQUIPMENT
Leasehold improvements 120,767 120,767
Molds and models 353,591 343,031
Equipment 2,324,730 2,280,888
Furniture and fixtures 73,652 70,678
Software 280,337 184,901
Less - Accumulated depreciation (2,027,326) (1,858,950)
------------------ ------------------
Total Property and Equipment 1,125,751 1,141,315
------------------ ------------------
OTHER ASSETS
Patents and trademarks - net 398,830 368,011
Deposits 36,000 36,000
------------------ ------------------
Total Other Assets 434,830 404,011
------------------ ------------------
TOTAL ASSETS $ 5,264,962 $ 4,626,674
================== ==================
The accompanying notes are an integral part of these unaudited financial
statements.
F-1
AMERITYRE CORPORATION
Balance Sheets (Continued)
December 31, 2005 June 30, 2005
Restated
(Unaudited)
------------------ ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 246,372 $ 49,904
Accrued expenses 32,559 27,424
Stock subscription deposits 836,820 -
Deferred revenue - special projects 100,000 7,500
------------------ ------------------
Total Current Liabilities 1,215,751 84,828
------------------ ------------------
TOTAL LIABILITIES 1,215,751 84,828
------------------ ------------------
STOCKHOLDERS' EQUITY
Preferred stock: 5,000,000 shares authorized
of $0.001 par value, -0- shares issued and
Outstanding - -
Common Stock: 40,000,000 shares authorized of
$0.001 par value, 20,065,480 and 19,505,216
shares issued and outstanding, respectively 20,065 19,505
Additional paid-in capital 44,200,866 41,986,176
Expenses prepaid with common stock (100,000) -
Deferred stock offering cost (1,000,000) (1,000,000)
Deferred consulting and directors compensation (64,167) -
Retained deficit (39,007,553) (36,463,835)
------------------ ------------------
Total Stockholders' Equity 4,049,211 4,541,846
------------------ ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,264,962 $ 4,626,674
-================= ==================
The accompanying notes are an integral part of these unaudited financial
statements.
F-2
AMERITYRE CORPORATION
Statements of Operations
(Unaudited)
For the Three Months Ended For the Six Months Ended
December 31, December 31,
------------------------------ -----------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
Restated Restated
NET SALES $ 302,255 $ 303,801 $ 738,224 $ 643,573
COST OF SALES 258,439 215,891 612,781 462,678
----------- ----------- ----------- -----------
GROSS PROFIT 43,816 87,910 125,443 180,895
----------- ----------- ----------- -----------
EXPENSES
Consulting 99,498 - 99,498 -
Advisory group expense - - - 6,134,000
Payroll and payroll taxes 519,060 428,908 1,009,407 846,470
Depreciation and amortization 91,873 102,607 181,129 194,953
Research & development 151,825 110,798 388,208 409,166
Bad debt expense 211 191 211 773
Selling, general & administrative 521,472 310,620 1,016,722 630,795
----------- ----------- ----------- -----------
Total Expenses 1,383,939 953,124 2,695,175 8,216,157
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (1,340,123) (865,214) (2,569,732) (8,035,262)
----------- ----------- ----------- -----------
OTHER INCOME
Interest income 7,649 5,702 24,953 13,628
Other income 9 1,705 1,061 7,548
----------- ----------- ----------- -----------
Total Other Income 7,658 7,407 26,014 21,176
----------- ----------- ----------- -----------
NET LOSS $(1,332,465) $ (857,807) $(2,543,718) $(8,014,086)
=========== =========== =========== ===========
BASIC LOSS PER SHARE $ (0.07) $ (0.05) $ (0.13) $ (0.43)
=========== =========== =========== ===========
WEIGHTED AVG NUMBER OF SHARES 20,038,287 18,731,168 19,877,047 18,696,978
=========== =========== =========== ===========
The accompanying notes are an integral part of these unaudited financial
statements.
F-3
AMERITYRE CORPORATION
Statements of Cash Flows
(Unaudited)
Six Months Ended
December 31, Six Months Ended
2005 December 31,
Restated 2004
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (2,543,718) $ (8,014,086)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation & amortization expense 181,129 194,953
Stock-based compensation expense related to employee options 317,900 -
Common stock issued for services rendered 126,350 -
Amortization of expense prepaid with common stock 105,834 472,053
Options issued for advisory group services - 6,134,000
Changes in operating assets and liabilities:
Decrease in accounts receivable 93,221 89,184
Increase in prepaid expenses (43,662) (35,895)
Increase in other assets (296,629) (600)
Decrease (increase) in inventory 79,411 (87,087)
Increase in accounts payable and accrued expenses 294,103 35,739
---------------- ----------------
Net Cash Used by Operating Activities (1,686,061) (1,211,739)
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for patents and trademarks (43,572) (60,897)
Purchase of property and equipment (61,813) (32,712)
---------------- ----------------
Net Cash Used by Investing Activities (105,385) (93,609)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from stock subscription 836,820 -
Proceeds from issuance of common stock 1,410,000 880,000
---------------- ---------------
Net Cash Provided by Financing Activities 2,246,820 880,000
---------------- ---------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 455,374 (425,348)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,122,320 1,591,289
---------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,577,694 $ 1,165,941
================ ================
The accompanying notes are an integral part of these unaudited financial
statements.
F-4
AMERITYRE CORPORATION
Statements of Cash Flows (Continued)
(Unaudited)
Six Months Ended
December 31, Six Months Ended
2005 December 31,
Restated 2004
---------------- ----------------
SUPPLEMENTAL SCHEDULE OF CASH FLOW ACTIVITIES
Cash paid for interest $ - $ -
Cash paid for income taxes $ - $ -
NON-CASH OPERATING ACTIVITIES
Common stock issued for services rendered $ 126,350 $ -
Common stock issued for prepaid services $ 270,000 $ 598,000
Stock-based compensation expense related to
employee options $ 317,900 $ -
NON-CASH INVESTING/ FINANCING ACTIVITIES
Common stock issued for property & equipment $ 91,000 $ -
Options issued for advisory group service receivable $ - $ 6,134,000
The accompanying notes are an integral part of these unaudited financial
statements.
F-5
AMERITYRE CORPORATION
Notes to the Unaudited Financial Statements December 31, 2005 (Restated) and
June 30, 2005
NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited condensed financial statements have been prepared by
us pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted in
accordance with such rules and regulations. The information furnished in the
interim condensed financial statements includes normal recurring adjustments and
reflects all adjustments, which, in the opinion of management, are necessary for
a fair presentation of such financial statements. Although we believe the
disclosures and information presented are adequate to make the information not
misleading, it is suggested that these interim condensed financial statements be
read in conjunction with our most recent audited financial statements and notes
thereto included in our June 30, 2005 Annual Report on Form 10-KSB. Operating
results for the six months ended December 31, 2005 are not necessarily
indicative of the results that may be expected for the current fiscal year
ending June 30, 2006.
NOTE 2 - RESTATEMENT
Although the Company disclosed in its Form 10-KSB for the year ended June 30,
2005, that it was adopting Statement of Financial Accounting Standard No. 123
(revised 2004) "Share-Based Payment," ("SFAS 123(R)") for the first quarter of
2006, the Company incorrectly determined that SFAS was not applicable to its
financial statement presentation until January 1, 2006, instead of July 1, 2005
(the first day of the Company's fiscal year 2006). The Company has restated its
financial statements to correctly reflect the adoption of SFAS 123(R) as of July
1, 2005. SFAS 123(R) requires the measurement and recognition of compensation
expense for all stock based awards made to employees and directors based on
estimated fair value.
During the three and six month periods ended December 31, 2005, we issued
options to acquire an aggregate of 625,000 shares and 150,000 shares of our
common stock , respectively, to certain employees in connection with their
employment (the "Employment Options"). The Employment Options vest annually over
a period of one to three years based on the employees continued employment by
the Company. The exercise prices for the Employment Options are $6.60 and $5.36
per share, respectively. The options issued to the employees were issued at or
above the market price of our common stock on the date of grant. However, the
compensation cost for the issuance of the options has been determined based on
fair market value at the grant dates consistent with the method of SFAS 123(R).
The effect of the restatement includes an increase of $173,136 and $317,900 in
selling, general and administrative costs for the three and six month periods
ending December 31, 2005, respectively , thereby increasing net loss for the
respectively periods to $1,332,465 and $2,543,718, or a loss of $0.07 and $0.13
per share, as indicated below:
As Reported at Restatement As
STOCKHOLDERS' EQUITY December 31, 2005 Adjustment Restated
---------------------------------------------------------
Preferred stock: 5,000,000 shares authorized of $0.001 par - -
value, -0- shares issued and outstanding
Common stock: 40,000,000 shares authorized of $0.001 par
value, 20,065,480 shares issued and outstanding 20,065 20,065
Additional paid-in capital 43,882,966 317,900 44,200,866
Expenses prepaid with common stock (100,000) (100,000)
Deferred stock offering costs (1,000,000) (1,000,000)
Deferred consulting and directors' compensation (64,167) (64,167)
Retained deficit (38,689,653) (317,900) (39,007,553)
---------------------------------------------------------
Total Stockholders' Equity 4,049,211
---------------------------------------------------------
4,049,211
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$ 5,264,962 $ 5,264,962
=========================================================
F-6
NOTE 2 - RESTATEMENT, Continued
As
As Reported
Reported for the For the six
three month month period
period ended Restatement As ended December Restatement As
December 31, 2005 Adjustment Restated 31, 2005 Adjustment Restated
----------------------------------------------------------------------------------------------------
Net Sales $ 302,255 $ - $ 302,255 $ 738,224 $ - $ 738,224
Cost of Sales 258,439 - 258,439 612,781 - 612,781
------------------- --------------------------------- ----------------
Gross Profit 43,816 - 43,816 125,443 - 125,443
------------------- --------------------------------- ----------------
Expenses
Consulting 99,498 - 99,498 99,498 - 99,498
Advisory Group Expense - - - - - -
Payroll & Payroll Taxes 519,060 - 519,060 1,009,407 - 1,009,407
Depreciation & 91,873 - 91,873 181,129 - 181,129
Amortization
Research & Development 151,825 - 151,825 388,208 - 388,208
Bad Debt Expense 211 - 211 211 - 211
Selling General & 348,336 173,136 521,472 698,822 317,900 1,016,722
Administrative
------------------- --------------------------------- ----------------
Total Expenses 1,210,803 173,136 1,383,939 2,377,275 317,900 2,695,175
------------------- --------------------------------- ----------------
Loss From Operations (1,166,987) (173,136) (1,340,123) (2,251,832) (317,900) (2,569,732)
Other Income
Interest Income 7,649 - 7,649 24,953 - 24,953
Other Income 9 - 9 1,061 - 1,061
------------------- --------------------------------- ----------------
Total Other Income 7,658 - 7,658 26,014 - 26,014
------------------- --------------------------------- ----------------
Net Loss $ (1,159,329) $ (173,136) $ (1,332,465) $ (2,225,818) $ (317,900) $ (2,543,718)
=================== ================================= ================
Basic and Fully Diluted
Loss Per Share $ (0.06) $ (0.01) $ (0.07) $ (0.11) $ (0.02) $ (0.13)
=================== ================================= ================
Weighted Average Number
Shares Outstanding
20,038,287 - 20,038,287 19,877,047 - 19,877,047
=================== ================================= ================
F-7
AMERITYRE CORPORATION
Notes to the Unaudited Financial Statements December 31, 2005 (Restated) and
June 30, 2005
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Stock Based-Compensation Expense
On July 1, 2005, the Company adopted Statement of Financial Accounting Standards
No. 123 (revised 2004), "Share-Based Payment," ("SFAS 123(R)") which requires
the measurement and recognition of compensation expense for all share-based
payments to employees and directors including employee stock options and stock
purchases related to the Company's employee stock option and award plans based
on estimated fair values. SFAS 123(R) supersedes the Company's previous
accounting under Accounting Principles Board Option No. 25, "Accounting for
Stock Issued to Employees" ("APB25") for periods beginning in fiscal 2006. In
March 2005, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 107 ("SAB 107") relating to SFAS 123(R). The Company has applied
the provisions of SAB 107 in its adoption of SFAS 123(R).
The Company adopted SFAS 123(R) using the modified prospective transition
method, which requires the application of the accounting standard as of July 1,
2005, the first day of the Company's fiscal year 2006. The Company's financial
statements as of and for the three month and six month periods ended December
31, 2005 reflect the impact of SFAS 123(R). In accordance with the modified
prospective transition method, the Company's financial statements for the prior
year have not been restated to reflect, and do not include, the impact of SFAS
123(R). Stock-based compensation expense recognized under SFAS 123(R) for the
three and six month periods ended December 31, was $173,136 and $317,900,
respectively, and related to employee stock options issued during the respective
periods. There was no stock-based compensation expense related to employee stock
options and employee stock purchases recognized during the three and six month
periods ended December 31, 2004. See Note 5 for additional information.
SFAS 123(R) requires companies to estimate the fair value of share-based payment
awards on the date of grant using an option-pricing model. The value of the
portion of the award that is ultimately expected to vest is recognized as
expense over the requisite service periods in the Company's Statement of
Operations. Prior to the adoption of SFAS 123(R), the Company accounted for
stock-based awards to employees and directors using the intrinsic value method
in accordance with APB 25 as allowed under Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). Under
the intrinsic value method, no stock-based compensation expense had been
recognized in the Company's Statement of Operations, because the exercise price
of the Company's stock options granted to employees and directors equaled the
fair market value of the underlying stock at the date of grant.
Stock-based compensation expense recognized during the period is based on the
value of the portion of share-based payment awards that is ultimately expected
to vest during the period. At June 30, 2005, the Company had no unvested
share-based payment awards for which compensation expense should be recognized
during the three and six month periods ended December 31, 2005. Stock-based
compensation expense recognized in the Company's Statement of Operations for the
three and six month periods ended December 31, 2005 only includes compensation
expense for share-based payment awards granted, but not yet vested after July 1,
2005, and is based on the grant date fair value estimated in accordance with
SFAS 123(R). Stock-based compensation expense recognized in the Company's
Statement of Operation for the three and six month periods ended December 31,
2005 assumes all awards will vest, therefore no reduction has been made for
estimated forfeitures.
F-8
AMERITYRE CORPORATION
Notes to the Unaudited Financial Statements December 31, 2005 (Restated) and
June 30, 2005
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Basic and Fully Diluted Loss Per Share
Basis and Fully Diluted net loss per share is computed using the
weighted-average number of common shares outstanding during the period.
For the Six Months Ended
December 31,
--------------------------------------
2005 2004
--------------------------------------
Loss (numerator) $ (2,543,718) $ (8,014,086)
Shares (denominator) 19,877,047 18,696,978
Per share amount $ (0.13) $ (0.43)
The Company's outstanding stock options have been excluded from the basic net
loss per share calculation. The Company excluded 4,190,000 and 4,877,000 common
stock equivalents for the three and six month periods ended December 31, 2005
and 2004, respectively, because they are antidilutive.
NOTE 4 - STOCK OPTIONS
During the period ended December 31, 2005, we issued options to acquire an
aggregate of 625,000 shares of our common stock to certain employees in
connection with their employment (the "Employment Options"). The Employment
Options vest annually over a period of one to three years based on the employees
continued employment by the Company. The exercise price for the Employment
Options is $6.60 per share. The 625,000 options issued to the employees were
issued at or above the market price of our common stock on the date of issue and
are accounted for under APB 25, "Accounting for Stock Issued to Employees". As
such, no compensation expense was recognized. Had compensation cost for the
issuance of the options been determined based on fair market value at the grant
dates consistent with the method of FASB Statement 123, "Accounting for Stock
Based Compensation," there would have been no change to our net loss and loss
per share, as noted with the pro forma amounts indicated below:
For the Three Months Ended For the Six Months Ended
December 31, December 31,
-------------------------------- -------------------------------
2005 2004 2005 2004
------------- -------------- ------------- --------------
Net (loss) as reported $ (1,159,329) $ (857,807) $ (2,225,818) $ (8,014,086)
Pro forma $ (1,159,329) $ (1,384,857) $ (2,225,818) $ (8,544,086)
Basic (loss) per share as reported $ (0.06) $ (0.05) $ (0.11) $ (0.43)
Pro forma $ (0.06) $ (0.07) $ (0.11) $ (0.46)
[The balance of this page intentionally left blank]
F-9
AMERITYRE CORPORATION
Notes to the Unaudited Financial Statements December 31, 2005 (Restated) and
June 30, 2005
NOTE 4 - STOCK OPTIONS, Continued
A summary of the status of the Company's outstanding stock options as of
December 31, 2005 and June 30, 2005 and changes during the periods then ended is
presented below:
December 31, 2005 June 30, 2005
----------------- -------------
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
----------------- ---------------- ----------- ----------------
Outstanding beginning of period 3,945,000 $ 6.31 1,922,000 $ 3.66
Granted 775,000 $ 6.36 3,185,000 $ 6.97
Expired/Cancelled (60,000) $(6.70) (195,252) $ (0.18)
Exercised (470,000) $(3.00) (966,748) $ (4.14)
--------- -----------
Outstanding end of period 4,040,000 $ 6.74 3,945,000 $ 6.31
========= ===========
Exercisable 415,000 $ 5.05 945,000 $ 4.14
========= ===========
Outstanding Exercisable
----------- -----------
Weighted
Range of Number Outstanding at Average Weighted Number Weighted
Exercise Dec 31, Remaining Average Exercisable at Average
Prices 2005 Contractual Life Exercise Price Dec 31, 2005 Exercise Price
-------- --------------------- ---------------- -------------- -------------- --------------
$3.80 30,000 0.75 $3.80 30,000 $3.80
4.00 200,000 1.44 $4.00 200,000 $4.00
5.36 150,000 6.50 $0.24 - -
6.40 185,000 3.09 $6.40 185,000 $6.40
6.60 625,000 6.46 $6.60 - -
7.00 3,000,000 3.70 $7.00 - -
--------- -------
$3.80-$7.00 4,190,000 3.97 $6.69 415,000 $5.05
========= =======
As of December 31, 2005, the unrecognized stock-based compensation related to
stock options was approximately $1,759,728. This cost is expected to be expensed
over a weighted average period of 3 years.
NOTE 5 - STOCK ISSUANCES
During the quarter, we issued 5,000 shares of common stock for outside
consulting services valued at $26,250, based on a price of $5.25 per share and
15,000 shares of common stock for outside consulting services valued at $68,250,
based on a price of $4.55 per share. We also issued 20,000 shares of common
stock for software development services valued and capitalized at $91,000, based
on a price of $4.55 per share. These shares were issued pursuant to our 2002
Stock Option and Award Plan.
During the quarter, we issued 7,000 shares of our restricted common stock to an
investor and media relations firm as payment for services. The value of the
shares was $31,850, based on the closing price of $4.55 per share.
F-10
AMERITYRE CORPORATION
Notes to the Unaudited Financial Statements December 31, 2005(Restated) and June
30, 2005
NOTE 5 - STOCK ISSUANCES (continued)
During the quarter, we issued 1,852 shares of our restricted common stock to the
Chairman of our audit committee as partial compensation for his services as
Chairman. The value of the shares was $10,000, based on the closing price of
$5.40 per share.
During the quarter, we issued an aggregate of 11,112 shares (1,852 shares each)
of our restricted common stock to our six (6) non-employee directors as annual
compensation for their services as members of our board of directors for the
period commencing December 1, 2005 through November 30, 2006. The aggregate
value of the shares was $60,000, based on the closing price of $5.40 per share.
All of our securities issued in the foregoing transactions were issued in
reliance on the exemption from registration and prospectus delivery requirements
of the Act set forth in Section 3(b) and/or Section 4(2) of the Securities Act
and the regulations promulgated thereunder.
NOTE 6 - INVENTORY
Inventory is stated at the lower of cost (computed on a first-in, first-out
basis) or market. The inventory consists of chemicals, finished goods produced
in the Company's plant and products purchased for resale.
December 31, 2005 June 30, 2005
(Unaudited)
----------------- -------------
Raw Materials $ 142,866 $ 122,834
Work in Progress - -
Finished Goods 424,521 523,964
----------------- -------------
Total Inventory $ 567,387 $ 646,798
================= =============
NOTE 7 - SIGNIFICANT EVENTS
1. Employment of Chief Operating Officer
Effective October 16, 2005, the Company hired Gary N. Benninger as our Chief
Operating Officer. Dr. Benninger's employment contract with the Company is for
an initial term of one year beginning October 16, 2005, at an annual salary of
$250,000, renewable by mutual agreement. The contract also includes provisions
for the payment of a bonus share award of 10,000 shares of the Company's common
stock vesting January 15, 2006, and a grant of options for the purchase of
150,000 shares of the Company's common stock, subject to annual vesting
provisions (50,000 options on June 30th 2006-2008). The bonus share award and
the options are being issued under the terms of the Company's 2005 Stock Option
and Award Plan. Both the bonus share award and the vesting of the options are
subject to continuing employment with the Company.
2. Settlement of Legal Proceeding
Effective October 20, 2005, we entered into a settlement and release agreement
with the defendant in case number A505333, 8th Judicial District Court for the
State of Nevada, Amerityre Corporation vs. Prototype Engineering, Inc., an Ohio
corporation ("Prototype") The Company paid $100,000 to Prototype and agreed that
the settlement resolved the lawsuit. The settlement is in no way an admission of
fault, guilt, liability, or wrongdoing on the part of either party, and any
possible fault, guilt, liability, or wrongdoing by either party was expressly
denied. Each of the parties agreed, on its own behalf and on behalf of its
officers, directors, agents and employees not to disparage or demean the
business, the reputation, the good faith, character, ability or products of the
other party. The Company recognized the settlement expense during the three
month period ended September 30, 2005, which is included in the selling, general
and administrative expenses for that period.
F-11
AMERITYRE CORPORATION
Notes to the Unaudited Financial Statements December 31, 2005 (Restated) and
June 30, 2005
NOTE 8 - SUBSEQUENT EVENTS
A. Stock Issuances
On January 3, 2006, we issued 53,100 shares of our common stock to various
employees as compensation pursuant to our 2002 Stock Option and Award Plan,
valued at $239,481, or $4.51 share.
On January 15, 2006, 10,000 shares of our restricted common stock vested to Gary
N. Benninger, our Chief Operating Officer, pursuant to the terms of his
employment agreement with the Company. The value of the shares was $53,600,
based on the closing price of the shares on October 16, 2005, the date of grant.
With respect to the issuance of the shares on vesting, the Company claims an
exemption from the registration requirements of the Securities Act of 1933, as
amended pursuant to Section 4(2) of said Act.
Effective February 1, 2006 (the "Closing Date"), we completed a private
placement for $3,870,000 in offering proceeds. The Company sold 107,500 Units of
the Company's securities at a purchase price of $36.00 per Unit. Each Unit
consists of eight (8) shares of the Company's Common Stock, a Class A Warrant
(the "Class A Warrant") for the purchase of one share of Common Stock at an
exercise price of $5.00 exercisable for a 3 year period and a Class B Warrant
(the "Class B Warrant") for the purchase of one share of Common Stock at an
exercise price of $5.50 exercisable for a 5 year period. The Warrants may also
be exercised through a cashless exercise based on the difference between the
market price on the date of exercise and the exercise price. The exercise prices
of the Class A Warrants and Class B Warrants are subject to adjustment in
certain events, including, without limitation, upon the Company's consolidation,
merger or sale of all or substantially all of its assets, a reclassification of
the Company's Common Stock, or any stock splits or combinations with respect to
the Common Stock.
Purchasers of the Units have been granted registration rights in connection with
the private placement. The Company shall use its best efforts to file a
registration statement with the Commission within 45 days after the Closing Date
and cause the registration statement to be declared effective by the SEC within
120 days after the Closing Date (if there are no comments from the SEC) or 180
days (if comments are received from the SEC) (the "Effective Date") in order to
register the shares of Common Stock underlying the Units sold in the offering
(the "Registrable Securities") for resale and distribution by the investors (the
"Registration Statement"). The Company will register approximately 1,075,000
shares of Common Stock which represents the total number of shares of Common
Stock plus the shares of Common Stock issuable upon exercise of the Class A and
Class B Warrants. The Registrable Securities shall be reserved and set aside
exclusively for the benefit of each investor.
The Class A and Class B Warrants are subject to redemption by the Company. The
Company has the right to redeem either the Class A or Class B Warrants beginning
ninety (90) days from the Effective Date of the Registration Statement, if at
any time following the Effective Date, the average closing bid price for the
Common Stock in the over-the-counter market is at least $5.50 per share (with
respect to the Class A Warrants) or $6.05 per share (with respect to the Class B
Warrants), for the 20 consecutive trading day period ending not more than 15
days prior to notice of redemption of the Class A and Class B Warrants. The
Company's right to redeem the Class A and Class B Warrants requires the Company
to give the holders written notice of redemption of not less than 30 days, and
is subject to the right of the holders of the Class A and Class B Warrants to
exercise the same in accordance with the terms hereof during the redemption
period. The redemption price for each Class A and Class B Warrant is $0.10 per
share.
F-12
AMERITYRE CORPORATION
Notes to the Unaudited Financial Statements December 31, 2005 (Restated) and
June 30, 2005
NOTE 8 - SUBSEQUENT EVENTS (Continued)
With respect to the sale of the Units described above, the Company claims an
exemption from the registration requirements of the Securities Act of 1933, as
amended, pursuant to Section 4(2) of the Securities Act and/or Regulation D
promulgated thereunder since, among other things, (1) the transaction did not
involve a public offering, (2) the investors were accredited investors and/or
qualified institutional buyers, (3) the investors had access to information
about the Company and their investment, (4) the investors took the securities
for investment and not resale, (5) the Company took appropriate measures to
restrict the transfer of the securities, and (6) no commissions were paid in
connection with the placement and/or sale of the securities.
B. Deferred Stock Issuance Costs
During the three six month period ended December 31, 2004, we recognized an
expense of $6,134,000 for advisory group services associated with the grant of
options to acquire an aggregate of 3,000,000 shares of our common stock to
third-party consultants during the period. The value of the options was
calculated using the Black-Scholes option pricing model. Our selling, general
and administrative expenses since that time have not included deferred stock
offering costs, which at December 31, 2005 aggregated $1,083,278. This amount
has been recorded as a reduction in stockholders' equity due to its association
with the proposed offering of our securities. In February 2006, we closed a
private placement of our securities for gross offering proceeds of $3.87
million. The Company intends to charge the deferred amount against the gross
proceeds of the offering in its third quarter ended March 31, 2006.
F-13
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Amerityre Corporation
Boulder City, Nevada
We have audited the accompanying balance sheets of Amerityre Corporation (the
"Company") as of June 30, 2005 and 2004 and the related statements of
operations, stockholders' equity and cash flows for the years ended June 30,
2005, 2004, and 2003. 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 the standards of the Public Company
Accounting Oversight Board (United States). 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 Amerityre Corporation as of
June 30, 2005 and 2004, and the results of its operations and its cash flows for
the years ended June 30, 2005, 2004, and 2003 in conformity with U.S. generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 5 to the financial
statements, the Company has incurred significant losses from operations, which
have resulted in an accumulated deficit, raising substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 5 to the financial statements. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
HJ & Associates, LLC
Salt Lake City, Utah
September 1, 2005 with respect to June 30, 2005 and 2004 and September 24, 2004
with respect to June 30, 2003
F-14
AMERITYRE CORPORATION
Balance Sheets
ASSETS
------
June 30,
---------------------------------------
2005 2004
------------------- ------------------
CURRENT ASSETS
Cash and cash equivalents $ 2,122,320 $ 1,591,289
Accounts receivable - net of zero allowance 168,838 167,002
Inventory (Note 1) 646,798 557,516
Prepaid expenses 62,489 99,007
Special projects in progress 752 -
Deferred stock offering expenses 80,151 -
------------------- ------------------
Total Current Assets 3,081,348 2,414,814
------------------- ------------------
PROPERTY AND EQUIPMENT (Note 1)
Leasehold improvements 120,767 163,896
Molds and models 343,031 315,282
Equipment 2,280,888 2,253,217
Furniture and fixtures 70,678 70,033
Vehicles - 25,851
Software 184,901 184,901
Less: Accumulated depreciation (1,858,950) (1,567,187)
------------------- ------------------
Total Property and Equipment 1,141,315 1,445,993
------------------- ------------------
OTHER ASSETS
Patents and trademarks - net (Note 1) 368,011 156,792
Deposits 36,000 43,180
------------------- ------------------
Total Other Assets 404,011 199,972
------------------- ------------------
TOTAL ASSETS $ 4,626,674 $ 4,060,779
=================== ==================
The accompanying notes are an integral part of these financial
statements.
F-15
AMERITYRE CORPORATION
Balance Sheets (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30,
---------------------------------------
2005 2004
------------------- ------------------
CURRENT LIABILITIES
Accounts payable $ 49,904 $ 42,866
Accrued expenses 27,424 15,817
Deferred revenue - special projects 7,500 -
------------------- ------------------
Total Current Liabilities 84,828 58,683
------------------- ------------------
Total Liabilities 84,828 58,683
------------------- ------------------
COMMITMENTS AND CONTINGENCIES (Note 2)
STOCKHOLDERS' EQUITY
Preferred stock: 5,000,000 shares authorized of
$0.001 par value, -0- shares issued and outstanding - -
Common stock: 40,000,000 shares authorized of
$0.001 par value, 19,505,216 shares issued and
outstanding 19,505 18,429
Additional paid-in capital 41,986,176 30,594,482
Deferred Stock Offering - Cost (1,000,000) (219,988)
Retained Deficit (36,463,835) (26,390,827)
------------------- ------------------
Total Stockholders' Equity 4,541,846 4,002,096
------------------- ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,626,674 $ 4,060,779
=================== ==================
The accompanying notes are an integral part of these financial
statements.
F-16
AMERITYRE CORPORATION
Statements of Operations
For the Years Ended
June 30,
------------------------------------------------------------
2005 2004 2003
-------------------- ------------------ ------------------
NET SALES $ 1,681,091 $ 1,419,124 $ 1,040,246
COST OF SALES 1,233,181 1,114,230 976,132
-------------------- ------------------ ------------------
GROSS PROFIT 447,910 304,894 64,114
-------------------- ------------------ ------------------
EXPENSES
Consulting 77,000 370,666 339,934
Advisory group expense 6,134,000 - -
Payroll and payroll taxes 1,905,177 2,345,082 1,083,910
Depreciation and amortization 385,726 296,232 298,625
Research and development 880,748 572,002 28,607
Bad debt expense 14,087 3,713 51
Loss on sale and impairment of assets 18,054 - 67,982
Selling, general and administrative 1,156,260 1,458,200 1,354,040
-------------------- ------------------ ------------------
Total Expenses 10,571,052 5,045,895 3,173,149
-------------------- ------------------ ------------------
LOSS FROM OPERATIONS (10,123,142) (4,741,001) (3,109,035)
-------------------- ------------------ ------------------
OTHER INCOME
Interest income 35,181 17,234 16,397
Miscellaneous income 14,953 2,512 666
-------------------- ------------------ ------------------
Total Other Income 50,134 19,746 17,063
-------------------- ------------------ ------------------
NET LOSS $ (10,073,008) $ (4,721,255) $ (3,091,972)
==================== ================== ==================
BASIC LOSS PER SHARE $ (0.53) $ (0.26) $ (0.21)
==================== ================== ==================
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 18,931,779 17,846,910 14,796,744
==================== ================== ==================
The accompanying notes are an integral part of these financial
statements.
F-17
AMERITYRE CORPORATION
Statements of Stockholders' Equity
Expenses
Prepaid Deferred
Common Stock Additional Stock with Consulting/
---------------------------- Paid-in Subscription Common Stock Accumulated
Shares Amount Capital Receivable Stock Offering Deficit
------------- ------------- -------------- ------------- ------------- -------------- -------------
Balance, June 30, 2002 14,187,731 $ 14,188 $ 21,310,261 $ (562,721) $ (150,750) $ (103,433) $ (18,577,600)
Common stock issued for
cash at $1.50 per share 2,170,000 2,170 3,252,830 - - - -
Common stock issued for
cash at $2.00 per share 604,675 605 1,208,745 - - - -
Cancellation of common
stock issued for stock
subscription receivable (45,000) (45) (87,705) 87,750 - - -
Common stock issued to
CEO for compensation 200,000 200 423,800 - (212,000) - -
Common stock issued for
exercise of options 20,000 20 39,980 - - - -
Common stock issued for
cash-less exercise of
option 10,462 10 23,562 - - - -
Common stock issued for
services and prepaid
services 182,500 183 360,493 - (336,300) - -
Common stock issued for
stock offering costs 50,000 50 99,950 - - - -
Stock offering costs - - (220,954) - - - -
Common stock issued for
stock subscription deposit 4,500 4 8,996 - - - -
Issuance of options for
services - - 2,906 - - - -
Amortization of expenses
prepaid with common stock - - - - 480,950 - -
Additional interest recorded
on subscription receivable
and subscription receivable
related party - - 15,547 (21,686) - - -
Receipt of cash for subscription
receivable and interest on
subscriptions receivable - - - 448,068 - - -
Receipt of services and debt
relief for subscriptions
receivable - - - 31,957 - - -
Valuation adjustment and
amortization of deferred
consulting - - 55,500 - - (15,188) -
------------- ------------- -------------- ------------- ------------- -------------- -------------
Balance forward 17,384,868 $ 17,385 $ 26,493,911 $ (16,632) $ (218,100) $ (118,621) $ (18,577,600)
------------- ------------- -------------- ------------- ------------- -------------- -------------
The accompanying notes are an integral part of these financial
statements.
F-18
AMERITYRE CORPORATION
Statements of Stockholders' Equity (Continued)
Expenses
Prepaid Deferred
Common Stock Additional Stock with Consulting/
---------------------------- Paid-in Subscription Common Stock Accumulated
Shares Amount Capital Receivable Stock Offering Deficit
------------- ------------- -------------- ------------- ------------- -------------- -------------
Balance forward 17,384,868 $ 17,385 $ 26,493,911 $ (16,632) $ (218,100) $ (118,621) $ (18,577,600)
Net loss for the year
ended June 30, 2003 - - - - - - (3,091,972)
------------- ------------- -------------- ------------- ------------- -------------- -------------
Balance, June 30, 2003 17,384,868 17,385 26,493,911 (16,632) (218,100) (118,621) (21,669,572)
Receipt of Subscriptions
Receivable - - - 16,632 - - -
Common stock issued for
services and prepaid
services at $3.78 per
share 240,000 240 906,960 - (732,375) - -
Common stock issued for
services at $6.10 per
share 40,000 40 243,960 - (244,000) - -
Common stock issued for
cash exercise of options
at $2.00 per share 130,000 130 259,870 - - - -
Common stock issued for
cash exercise of options
at $3.00 per share 500,000 500 1,499,500 - - - -
Common stock issued for
services rendered at
$5.48 per share 2,000 2 10,958 - - - -
Common stock issued for
cash exercise of options
at $4.00 per share 4,000 4 15,996 - - - -
Common stock issued to
employees per stock award
plan at $6.69 per share 3,900 4 26,087 - - - -
Common stock issued for
services at $6.69 per share 20,000 20 133,780 - (133,800) - -
Common stock issued to
employee per stock award
plan at $9.10 per share 500 - 4,550 - - - -
Common stock issued to
employees per stock award
plan at $8.20 per share 103,900 104 851,876 - - - -
Valuation adjustment and
amortization of deferred
consulting - - 147,034 - - 118,621 -
Amortization of expenses prepaid
with common stock - - - - 1,108,287 - -
------------- ------------- -------------- ------------- ------------- -------------- -------------
Balance forward 18,429,168 $ 18,429 $ 30,594,482 $ - $ (219,988) $ - $ (21,669,572)
------------- ------------- -------------- ------------- ------------- -------------- -------------
The accompanying notes are an integral part of these financial
statements.
F-19
AMERITYRE CORPORATION
Statements of Stockholders' Equity (Continued)
Expenses
Prepaid Deferred
Common Stock Additional Stock with Consulting/
---------------------------- Paid-in Subscription Common Stock Accumulated
Shares Amount Capital Receivable Stock Offering Deficit
------------- ------------- -------------- ------------- ------------- -------------- -------------
Balance forward 18,429,168 $ 18,429 $ 30,594,482 $ - $ (219,988) $ - $ (21,669,572)
Net loss for the year
ended June 30, 2004 - - - - - - (4,721,255)
------------- ------------- -------------- ------------- ------------- -------------- -------------
Balance, June 30, 2004 18,429,168 18,429 30,594,482 - (219,988) - (26,390,827)
Common stock issued to
CEO for compensation 65,000 65 597,935 - - - -
Common stock issued for
cash exercise of options
at $2.00 per share 20,000 20 39,980 - - - -
Common stock issued for
cash exercise of options
at $3.00 per share 30,000 30 89,970 - - - -
Common stock issued for
cash exercise of options
at $4.00 per share 796,000 796 3,183,204 - - - -
Common stock issued for
patents 15,000 15 146,235 - - - -
Common stock issued for
cash-less exercise of
option 120,748 121 (121) - - - -
Common stock issued for
services and prepaid
services 29,300 29 200,491 - - - -
Options granted for
services and stock
offering cost - - 7,134,000 - - (1,000,000) -
Amortization of prepaid
expenses - - - - 219,988 - -
Net loss for the year
ended June 30, 2005 - - - - - - (10,073,008)
------------- ------------- -------------- ------------- ------------- -------------- -------------
Balance, June 30, 2005 19,505,216 $ 19,505 $ 41,986,176 $ - $ - $ (1,000,000) $ (36,463,835)
============= ============= ============== ============= ============= ============== =============
The accompanying notes are an integral part of these financial
statements.
F-20
AMERITYRE CORPORATION
Statements of Cash Flows
For the Years Ended
June 30,
-----------------------------------------------------
2005 2004 2003
---------------- ----------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (10,073,008) $ (4,721,255) $ (3,091,972)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 385,726 296,232 298,625
Bad debt expense 14,087 3,713 51
Loss on sale and impairment of assets 18,054 - 67,982
Common stock issued for services 798,520 2,176,692 759,351
Stock subscription receivable paid through
services - - 9,880
Re-valuation of deferred consulting - 265,656 40,312
Options issued for advisory group services 6,134,000 - -
` Amortization of expenses prepaid with
with common stock 219,988 - -
Changes in assets and liabilities:
(Increase) in accounts receivable (15,923) (42,234) (25,537)
(Increase) in inventory (89,282) (92,532) (97,444)
Decrease (increase) in prepaid expenses 36,518 (46,340) (24,825)
(Increase) in other assets (73,723) - (36,000)
Increase (decrease) in accounts payable and
accrued expenses 26,145 (37,515) (11,192)
---------------- ----------------- ----------------
Net Cash Used by Operating Activities (2,618,898) (2,197,583) (2,110,769)
---------------- ----------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for patents and trademarks (97,226) (57,847) (20,560)
Proceeds from sale of fixed assets 8,800 - -
Cash paid for fixed assets (75,645) (436,517) (984,267)
---------------- ----------------- ----------------
Net Cash Used by Investing Activities (164,071) (494,364) (1,004,827)
---------------- ----------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from stock subscription deposit - - 25,000
Receipt of subscriptions receivable - 16,632 448,459
Cash paid for stock offering costs - - (120,954)
Common stock issued for cash 3,314,000 1,776,000 4,479,350
---------------- ----------------- ----------------
Net Cash Provided by Financing Activities $ 3,314,000 $ 1,792,632 $ 4,831,855
---------------- ----------------- ----------------
The accompanying notes are an integral part of these financial
statements.
F-21
AMERITYRE CORPORATION
Statements of Cash Flows (Continued)
For the Years Ended
June 30,
-----------------------------------------------------
2005 2004 2003
---------------- ----------------- ----------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 531,031 (899,315) 1,716,259
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 1,591,289 2,490,604 774,345
---------------- ----------------- ----------------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 2,122,320 $ 1,591,289 $ 2,490,604
================ ================= ================
SUPPLEMENTAL SCHEDULE OF CASH
FLOW ACTIVITIES
CASH PAID FOR:
Interest $ - $ - $ -
Income taxes $ - $ - $ -
NON_CASH OPERATING ACTIVITIES
Common stock issued for services rendered $ 798,520 $ 2,176,692 $ 759,351
Common stock issued for subscription
receivable $ - $ - $ 99,500
Interest on related party subscription
receivable $ - $ - $ 15,547
NON-CASH FINANCING ACTIVITIES
Options issued for advisory group service $ 6,134,000 $ - $ -
The accompanying notes are an integral part of these financial
statements.
F-22
AMERITYRE CORPORATION
Notes to the Financial Statements
June 30, 2005, 2004, and 2003
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Organization
Amerityre Corporation, (the "Company") was incorporated under the laws of the
State of Nevada on January 30, 1995, under the name American Tire Corporation.
The Company was organized to take advantage of existing proprietary and
non-proprietary technology available for the manufacturing of specialty tires.
The Company engages in the manufacturing, marketing, distribution and sales of
"flatfree" specialty tires and tire-wheel assemblies and currently is
manufacturing these tires at its manufacturing facility located in Boulder City,
Nevada. During the year ended June 30, 2001, the name of the Company was changed
to Amerityre Corporation.
b. Accounting Method
The Company's financial statements are prepared using the accrual method of
accounting. The Company has elected a June 30 year-end.
c. Basic Loss Per Share
The computation of basic loss per share of common stock is based on the weighted
average number of shares outstanding during the period.
For the Years Ended
June 30,
-------------------------------------------
2005 2004 2003
-------------- ------------- ------------
Loss (numerator) $ (10,073,008) $ (4,721,255) $ (3,091,972)
Shares (denominator) 18,931,779 17,846,910 14,796,744
Per share amount $ (0.53) $ (0.26) $ (0.21)
The Company's outstanding stock options have been excluded from the basic net
loss per share calculation. The Company excluded 3,945,000, 1,922,000, and
2,446,000 common stock equivalents for the years ended June 30, 2005, 2004, and
2003 respectively because they are antidilutive.
d. Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-23
AMERITYRE CORPORATION
Notes to the Financial Statements
June 30, 2005, 2004, and 2003
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
e. Income Taxes
Deferred taxes are provided on a liability method whereby deferred tax assets
are recognized for deductible temporary differences and operating loss and tax
credit carryforwards and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely that not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment. Net deferred
tax assets consist of the following components as of June 30, 2005, 2004, and
2003:
2005 2004 2003
-------------- ------------ -----------
Deferred tax assets:
NOL Carryover $ 8,154,000 $ 6,224,303 $ 5,585,000
Deferred tax liabilities:
Valuation allowance (8,154,000) (6,224,303) (5,585,000)
-------------- ------------ -----------
Net deferred tax asset $ - $ - $ -
============== ============ ===========
The income tax provision differs from the amount of income tax determined by
applying the U.S. federal and state income tax rates of 39% to pretax income
from continuing operations for the years ended June 30, 2005, 2004, and 2003 due
to the following:
2005 2004 2003
-------------------- ------------------ -----------------
Book income $ (3,928,473) $ (1,841,328) $ (1,205,900)
Meals & entertainment 1,854 650 904
Officer issuance - 9,750 -
Other 397,218 (2,884) -
Depreciation and amortization 53,773 - -
Stock for services/options
expense - 848,909 363,730
Advisory group option 2,392,260 - -
Valuation allowance 1,083,368 984,903 841,266
-------------------- ------------------ -----------------
$ - $ - $ -
==================== ================== =================
At June 30, 2005, the Company had net operating loss carryforwards of
approximately $20,800,000 that may be offset against future taxable income from
the year 2005 through 2025. No tax benefit has been reported in the June 30,
2005 financial statements since the potential tax benefit is offset by a
valuation allowance of the same amount. Due to the change in ownership
provisions of the Tax Reform Act of 1986, net operating loss carryforwards for
Federal income tax reporting purposes are subject to annual limitations. Should
a change in ownership occur, net operating loss carryforwards may be limited as
to use in future years.
F-24
AMERITYRE CORPORATION
Notes to the Financial Statements
June 30, 2005, 2004, and 2003
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Continued)
f. Inventory
Inventory is stated at the lower of cost (computed on a first-in, first-out
basis) or market. The inventory consists of chemicals, finished goods produced
in the Company's plant and products purchased for resale.
June 30,
-------------------------------------
2005 2004
------------------ -----------------
Raw materials $ 122,834 $ 109,820
Work in progress - -
Finished goods 523,964 447,696
------------------ -----------------
Total Inventory $ 646,798 $ 557,516
================== =================
During the years ended June 30, 2005, 2004, and 2003, the Company recorded
inventory impairment expense of $-0-, $-0-, and $39,596, respectively.
g. Property and Equipment
Property and equipment are stated at cost. Expenditures for small tools,
ordinary maintenance and repairs are charged to operations as incurred. Major
additions and improvements are capitalized. Depreciation is computed using the
straight-line method over estimated useful lives as follows:
Leasehold improvements 5 years, or over lease term
Equipment 5 to 7 years
Furniture and fixtures 7 years
Automobiles 5 years
Software 3 years
Depreciation expense for the years ended June 30, 2005, 2004, and 2003 was
$354,879 and $294,923, and $297,037, respectively.
h. Revenue Recognition
Revenue is recognized when the sales amount is determined, shipment of goods to
the customer has occurred and collection is reasonably assured. Product is
shipped FOB origination.
F-25
AMERITYRE CORPORATION
Notes to the Financial Statements
June 30, 2005, 2004, and 2003
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
i. Patents and Trademarks
Patent and trademark costs have been capitalized at June 30, 2005 totaling
$407,642. The patents which have been granted are being amortized over a period
of 20 years. Patents which are pending or are being developed are not being
amortized. Amortization will begin once the patents have been issued.
Amortization expense for the years ended June 30, 2005, June 30, 2004, and June
30, 2003 was $30,847, $1,309, and $1,588, respectively. The Company evaluates
the recoverability of intangibles and reviews the amortization period on a
continual basis utilizing the guidance of SFAS 142, "Goodwill and Other
Intangible Assets." Several factors are used to evaluate intangibles, including,
but not limited to, management's plans for future operations, recent operating
results and projected, undiscounted cash flows.
j. Advertising
The Company follows the policy of charging the costs of advertising to expense
as incurred. Advertising expense for the years ended June 30, 2005, 2004, and
2003 was $160,860, $45,055, and $36,320, respectively.
k. Newly Adopted Accounting Pronouncements
During the year ended June 30, 2005, the Company adopted the following
accounting pronouncements:
On December 16, 2004 the FASB issued SFAS No. 123(R), Share-Based Payment, which
is an amendment to SFAS No. 123, Accounting for Stock-Based Compensation. This
new standard eliminates the ability to account for share-based compensation
transactions using Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees, and generally requires such
transactions to be accounted for using a fair-value-based method and the
resulting cost recognized in our financial statements. This new standard is
effective for awards that are granted, modified or settled in cash in interim
and annual periods beginning after June 15, 2005. In addition, this new standard
will apply to unvested options granted prior to the effective date. We will
adopt this new standard effective for the first fiscal quarter of 2006, and have
not yet determined what impact this standard will have on our financial position
or results of operations.
F-26
AMERITYRE CORPORATION
Notes to the Financial Statements
June 30, 2005, 2004, and 2003
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
k. Newly Adopted Accounting Pronouncements (continued)
In November 2004, the FASB issued SFAS No. 151, Inventory Costs - an amendment
of ARB No. 43, Chapter 4. This Statement amends the guidance in ARB No. 43,
Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts
of idle facility expense, freight, handling costs, and wasted material
(spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that ". . .
under some circumstances, items such as idle facility expense, excessive
spoilage, double freight, and rehandling costs may be so abnormal as to require
treatment as current period charges. . ." This Statement requires that those
items be recognized as current-period charges regardless of whether they meet
the criterion of "so abnormal." In addition, this Statement requires that
allocation of fixed production overheads to the costs of conversion be based on
the normal capacity of the production facilities. This statement is effective
for inventory costs incurred during fiscal years beginning after June 15, 2005.
Management does not believe the adoption of this Statement will have any
immediate material impact on the Company.
In December 2004, the FASB issued SFAS No. 152, Accounting for Real Estate
Time-sharing Transactions, which amends FASB statement No. 66, Accounting for
Sales of Real Estate, to reference the financial accounting and reporting
guidance for real estate time-sharing transactions that is provided in AICPA
Statement of Position (SOP) 04-2, Accounting for Real Estate Time-Sharing
Transactions. This statement also amends FASB Statement No. 67, Accounting for
Costs and Initial Rental Operations of Real Estate Projects, to state that the
guidance for (a) incidental operations and (b) costs incurred to sell real
estate projects does not apply to real estate time-sharing transactions. The
accounting for those operations and costs is subject to the guidance in SOP
04-2. This Statement is effective for financial statements for fiscal years
beginning after June 15, 2005. Management believes the adoption of this
Statement will have no impact on the financial statements of the Company.
In December 2004, the FASB issued SFAS No.153, Exchange of Nonmonetary Assets.
This Statement addresses the measurement of exchanges of nonmonetary assets. The
guidance in APB Opinion No. 29, Accounting for Nonmonetary Transactions, is
based on the principle that exchanges of nonmonetary assets should be measured
based on the fair value of the assets exchanged. The guidance in that Opinion,
however, included certain exceptions to that principle. This Statement amends
Opinion 29 to eliminate the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. A nonmonetary exchange
has commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. This Statement is effective
for financial statements for fiscal years beginning after June 15, 2005. Earlier
application is permitted for nonmonetary asset exchanges incurred during fiscal
years beginning after the date of this statement is issued. Management believes
the adoption of this Statement will have no impact on the financial statements
of the Company.
F-27
AMERITYRE CORPORATION
Notes to the Financial Statements
June 30, 2005, 2004, and 2003
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
k. Newly Adopted Accounting Pronouncements (continued)
The implementation of the provisions of these pronouncements are not expected to
have a significant effect on the Company's consolidated financial statement
presentation.
l. Equity Securities
Equity securities issued for services rendered have been accounted for at the
fair market value of the securities on the date of authorization.
m. Concentrations of Risk
The Company maintains several accounts with financial institutions. The accounts
are insured by the Federal Deposit Insurance Corporation up to $100,000. The
Company's balances exceed that amount by $1,808,640 at June 30, 2005.
Credit losses, if any, have been provided for in the financial statements and
are based on management's expectations. The Company's accounts receivable are
subject to potential concentrations of credit risk. The Company does not believe
that it is subject to any unusual risks, or significant risks in the normal
course of its business.
The Company has one customer who accounted for 12% of the Company's sales for
the year ended June 30, 2005.
n. Stock Options
As permitted by FASB Statement 148 "Accounting for Stock Based Compensation -
Transition and Disclosure" (SFAS No. 148), the Company elected to measure and
record compensation cost relative to employee stock option costs in accordance
with Accounting Principles Board ("APB") Opinion 25, "Accounting for Stock
Issued to Employees," and related interpretations and make proforma disclosures
of net income and earnings per share as if the fair value method of valuing
stock options had been applied. Under APB opinion 25, compensation cost is
recognized for stock options granted to employees when the option price is less
that the market price of the underlying common stock on the date of grant.
o. Valuation of Options and Warrants
The valuation of options and warrants granted to unrelated parties for services
are measured as of the earlier of (1) the date at which a commitment for
performance by the counterparty to earn the equity instrument is reached, or (2)
the date the counterparty's performance is complete. Pursuant to the
requirements of EITF 96-18, the options and warrants will continue to be
revalued in situations where they are granted prior to the completion of the
performance.
F-26
AMERITYRE CORPORATION
Notes to the Financial Statements
June 30, 2005, 2004, and 2003
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
p. Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
NOTE 2 - COMMITMENTS AND CONTINGENCIES
In October 2002, we entered into a five-year lease for a 49,200 square foot
executive/manufacturing facility in Boulder City, Nevada. The agreement required
a security deposit of $18,000 and monthly rent payments of $16,000 for the first
twelve months with annual increases. At June 30, 2005, the monthly rent was
$17,500. Future minimum lease payments under this non-cancelable operating lease
is as follows:
2006 $ 208,000
2007 214,000
2008 54,000
-----------------
$ 476,000
=================
On June 13, 2005, we filed case number A505333 in the Eighth Judicial District
Court for the State of Nevada against Prototype Engineering, Inc., an Ohio
corporation ("Prototype"), and Frederick F. Vannan, Jr. ("Vannan"). Our causes
of action includes allegations of alter ego, misrepresentation/fraud, extortion,
declaratory relief, defamation and attorney's fees. We have alleged that Vannan
and Prototype, are seeking to extort additional remuneration from the Company
and have made misrepresentations regarding the existence of an alleged oral
contract for additional remuneration (500,000 to 1,000,000 shares of the
Company's common stock). We are seeking a judgment declaring the parties rights
relative to a written contract between the parties and a judgment declaring that
Prototype and Vannan have no right or claim to any additional remuneration. We
have disputed the existence of any such oral contract for additional
remuneration. Prototype and Vannan removed the matter to the U.S. District Court
for the District of Nevada [CV-S-05-0823-HDM-LRL] and have alleged
counter-claims for breach of contract, breach of contractual covenant of good
faith and fair dealing, unjust enrichment, and intentional misrepresentation.
Our responsive pleading was to file a Motion to Remand or in the alternative to
Dismiss all of the counterclaims. This motion is now pending the court's ruling.
We are strongly pursing the litigation and we believe a favorable outcome is
highly likely. A favorable outcome for the Company would include a declaratory
judgment declaring that Prototype and Vannan are not entitled to any further
remuneration and may also include attorneys fees and cost for the Company. An
unfavorable outcome for the Company could include a judgment against the Company
in an unspecified amount which may be determined at trial.
F-27
AMERITYRE CORPORATION
Notes to the Financial Statements
June 30, 2005, 2004, and 2003
NOTE 3 - STOCK TRANSACTIONS
During the year ended June 30, 2005, the Company issued an aggregate of
1,076,048 shares of common stock as follows:
a. 20,000 shares of common stock for cash of $40,000, or $2.00 per share, in
connection with the exercise of outstanding stock options;
b. 15,000 shares of common stock to acquire outright three (3) patents that had
previously been assigned to the Company increase for periodic royalty payments.
The shares were valued at $146,250, or $9.75 per share. Of the above shares,
5,000 shares were issued to our CEO;
c. 65,000 shares of common stock for services valued at $598,000, or $9.20 per
share, to our CEO as compensation for services through June 30, 2005;
d. 10,000 shares of common stock valued at $77,000, or $7.70 per share for
services to an outside consultant;
e. 19,300 shares of our common stock for services valued at $123,520 or $6.40
per share, in connection with an employee stock award. The stock was valued at
$6.40 per share, the closing price on the date of grant;
f. 120,748 shares of common stock to employees in connection with the cashless
exercise of outstanding stock options;
g. 30,000 shares of common stock for cash of $90,000, or $3.00 per share, in
connection with the exercise of outstanding stock options; and
h. 796,000 shares of common stock for cash of $3,184,000, or $4.00 per share, in
connection with the exercise of outstanding stock options.
NOTE 4 - STOCK OPTIONS
During the period ended September 30, 2004, we issued options to acquire an
aggregate of 3,000,000 shares of our common stock to certain non-employees in
connection with an advisory agreement. The options vested immediately and the
exercise price is $7.00 per share. We recognized a total of $6,134,000 in
expense associated with the issuance of these options and deferred $1,000,000 as
stock offering costs until related funding is received. We estimated the fair
value of the stock options at the grant date by using the Black-Scholes option
pricing model based on the following assumptions:
Risk free interest rate 2.49%
Expected Life 2 years
Expected volatility 59.83%
Dividend Yield 0.0%
F-28
AMERITYRE CORPORATION
Notes to the Financial Statements
June 30, 2005, 2004, and 2003
NOTE 4 - STOCK OPTIONS (Continued)
In December 2004, we issued options to acquire an aggregate of 105,000 shares of
our common stock to certain employees under our 2002 Stock Option and Award
Plan. The options are exercisable at $6.40 per share, the closing price on the
date of grant, vested immediately, and expire on December 15, 2009. At June 30,
2005, we had issued 1,920,000 shares of our common stock under our 2002 Stock
Option and Award Plan as a result of option exercises and stock awards. Exercise
prices for the outstanding options range from $3.80 to $6.70 per share and
exercise terms range from one to five years. At June 30, 2005, there were
209,191 shares available to grant additional options or stock awards under the
Plan.
In December 2004, we issued options to acquire an aggregate of 80,000 shares of
our common stock to non-employee directors for annual service on our board of
directors pursuant to our 2004 Non-Employee Directors' Stock Incentive Plan.
These option vested on June 15, 2005, are exercisable at $6.40 per share and
expire on December 15, 2007. There are 1,920,000 shares available for the grant
of additional options or stock awards under this plan.
A summary of the status of the Company's outstanding stock options as of June
30, 2005, 2004, and 2003 and changes during the years then ended is presented
below:
2005 2004 2003
------------------------ ----------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------ --------- ------------ -------- -------------- ----------
Outstanding,
beginning of year 1,922,000 $ 3.66 2,466,000 $ 3.42 2,616,000 $ 3.42
Granted 3,185,000 6.97 90,000 5.73 260,461 2.01
Expired/Cancelled (195,252) (0.18) - - (380,000) 2.92
Exercised (966,748) (4.14) (634,000) 2.80 (30,461) 2.09
------------ --------- ------------ -------- -------------- -------
Outstanding end
of year 3,945,000 $ 6.31 1,922,000 $ 3.66 2,466,000 $ 3.42
============ ========= ============ ======== ============== =======
Exercisable 945,000 $ 4.14 1,922,000 $ 3.66 2,466,000 $ 3.42
============ ======== ============ ======== ============== =======
F-29
AMERITYRE CORPORATION
Notes to the Financial Statements
June 30, 2005, 2004, and 2003
NOTE 4 - STOCK OPTIONS (Continued)
Outstanding Exercisable
-------------------------------------------- ----------------------------
Weighted
Number Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise at June 30, Contractual Exercise at June 30, Exercise
Prices 2005 Life Price 2005 Price
-------------- ------------- ------------- ------------- ------------- -------------
$ 3.00 470,000 0.08 $ 0.36 470,000 $ 1.49
3.80 30,000 1.25 0.03 30,000 0.12
4.00 200,000 1.95 0.20 200,000 0.85
6.40 185,000 3.60 0.30 185,000 1.25
6.70 60,000 0.50 0.10 60,000 0.43
7.00 3,000,000 4.21 5.32 - -
-------------- ------------- ------------- ------------- ------------- -------------
$ 3.00-7.00 3,945,000 3.49 $ 6.31 945,000 $ 4.14
============== ============= ============= ============= ============= =============
Other than the 3,000,000 options issued to non-employees, all other options
issued during the fiscal year were issued to employees and were accounted for
under APB 25, "Accounting for Stock Issued to Employees." All of these options
were issued either at or above the market price of the Company's common stock on
the date of issue and no compensation expense was recognized. Had compensation
cost for the issuance of the options been determined based on the fair value at
the grant dates consistent with the method of FASB Statement 148, "Accounting
for Stock Based Compensation - Transition and Disclosure," the Company's net
loss and loss per share would have been increased to the pro forma amounts
indicated below:
For the Years Ended
June 30,
----------------------------------------------
2005 2004 2003
-------------- --------------- -------------
Net (loss) as reported $ (10,073,008) $ (4,721,255) $ (3,091,972)
Pro forma (10,741,958) (4,941,080) (3,293,264)
Basic (loss) per share
as reported $ (0.53) $ (0.26) $ (0.21)
Pro forma (0.56) (0.28) (0.22)
NOTE 5 - GOING CONCERN
Our financial statements are prepared using generally accepted accounting
principles applicable to a going concern which contemplates the realization of
assets and liquidation of liabilities in the normal course of business. We have
historically incurred significant losses which have resulted in a total retained
deficit of $36,463,835 at June 30, 2005 which raises substantial doubt about our
ability to continue as a going concern. The accompanying financial statements do
not include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result from the outcome of this uncertainty.
F-30
AMERITYRE CORPORATION
Notes to the Financial Statements
June 30, 2005 and 2004
NOTE 5 - GOING CONCERN (Continued)
We have taken certain steps to maintain our operating and financial requirements
in an effort to enable us to continue as a going concern until such time that
revenues are sufficient to cover expenses, including: (1) evaluating (A) our
cost of goods and equipment utilization and requirements of our manufacturing
operations, and (B) our sales and marketing plan on a product sector basis; (2)
incorporating revisions to our methods, processes and costs in order to achieve
necessary manufacturing efficiencies (i.e., line automation, reduced material
costs, reduced product waste, etc.); and (3) seeking reduced material and
component costs from suppliers.
In addition, to expanding revenue opportunities during the fiscal year we have
commenced a program of (1) licensing manufacturing and distribution rights to
certain of our polyurethane tire products to third-party manufacturers based on
such factors as geographical locations and boundaries; (2) selling manufacturing
equipment to third-party manufacturers to manufacture products utilizing our
manufacturing equipment and processes; (3) selling our proprietary polyurethane
chemical systems to third-party manufacturers that utilize our manufacturing
equipment and processes; and (4) offering contract design and engineering
services to the tire and auto industries.
To supplement our cash needs during the 2006 fiscal year we have (1) obtained
approximately $1,500,000 in funding through the exercise of outstanding options;
and (2) expect to issued common stock in lieu of cash as compensation for
employment, development, and other professional services.
The combination of our accounts receivables and our cash and cash equivalents
are expected to meet the balance of our operational needs during the 2006 fiscal
year. We are currently evaluating funding strategies to help offset any cash
shortfalls that may occur after during the 2006 fiscal year.
We anticipate that during the 2006 fiscal year we will need approximately
$4,000,000 to implement our plan and to meet our working capital requirements.
Our ability to continue as a going concern is dependent upon our ability to
successfully accomplish the plan described above, and eventually attain
profitable operations.
The accompanying financial statements do not include any adjustments that might
be necessary should we be unable to continue as a going concern.
NOTE 6 - SUBSEQUENT EVENTS
Subsequent to June 30, 2005, we have issued 470,000 shares of our common stock
for cash of $1,410,000, in connection with the exercise of 470,000 outstanding
stock options at $3.00 per share.
F-31
AMERITYRE CORPORATION
Notes to the Financial Statements
June 30, 2005 and 2004
NOTE 6 - SUBSEQUENT EVENTS (Continued)
Effective July 1, 2005, our Board of Directors authorized the issuance of 30,300
shares of restricted common stock to Richard A. Steinke, the Company's President
and Chief Executive Officer as part of his employment compensation for the
period beginning July 1, 2005 and ending June 30, 2006. The value of the shares
was $200,000, based on the closing price of $6.60 per share.
On July 1, 2005, our Board of Directors authorized the issuance of options to
acquire up to 625,000 shares of our common stock to various employees. The
options vest over the term of their employment up to 3 years from the date of
grant and are exercisable for a 5 year term. The exercise price for the initial
option grants is $6.60 per share, the closing price for our common stock on June
30, 2005. The options were granted under the terms of the 2005 Stock Option and
Award Plan (the "2005 Plan") and 2,000,000 shares of our common stock have been
set aside for stock option grants and stock awards under the 2005 Plan.
In August 2005, we entered into a Memorandum of Understanding ("MOU") with Ace
Products, LLC, a Delaware limited liability company ("ACE"), outlining the
general scope and proposed terms of a transaction with ACE that is currently
still under negotiation. Details of scope, terms and conditions are all subject
to the execution of final agreements by and between the parties (the "Definitive
Agreements") and the closing of the contemplated transaction, anticipated to
take place not later than September 16, 2005 (the "Closing"), unless an
extension is mutually agreed to by the parties.
The Definitive Agreements are expected to include provisions for: (i) the use of
certain manufacturing equipment; (ii) the use of manufacturing methods and
processes, tire designs and molds and models; (iii) the use of chemicals and
chemical concentrates; and (iv) the use of our trademarks on products that
utilize the Company's technology. The Definitive Agreements are expected to
consist of a License Agreement and various ancillary agreements that will be
integral to the License Agreement, including agreements for the purchase of
certain manufacturing equipment and finished goods inventory, the continuing
supply of chemicals and other items.
The MOU is non-binding, however, it reflects the parties' stated intentions to
enter into Definitive Agreements and consummate the transaction. However, in the
event that the Definitive Agreements are not executed and the transaction is not
completed by September 16, 2005, the parties agree that the MOU shall
effectively supersede, replace and cancel all previous agreements between the
parties, including without limitation the Joint Market, Product Development and
Supply Agreement entered into September 13, 2004, by and between ACE Products,
Inc., a Tennessee corporation, and the Company, and the Standstill Agreement
dated May 18, 2005 by an between ACE and the Company, except that all
obligations relating to confidentiality and non-disclosure shall remain in full
force and effect.
F-32
TABLE OF CONTENTS
Page
Prospectus Summary 6
Supplementary Financial Information 8
Risk Factors 9
Use of Proceeds 14
Selling Shareholders 14
Plan of Distribution 18
Indemnification For Securities Act Liabilities 20
Description of Securities 20
Legal Matters 20
Experts 20
Change in Accountants 21
Description of Business 22
Description of Properties 25
Legal Proceedings 25
Market for Common Equity and Related Stockholder Matters 25
Selected Consolidated Historical Financial Data 27
Management's Discussion and Analysis 29
Quantitative and Qualitative Disclosures About Market Risk 39
Management 39
Executive Compensation 42
Security Ownership of Certain Beneficial
Owners and Management 47
Certain Relationships and Related Transactions 49
Where You Can Find More Information 49
Index to Consolidated Financial Statements 50
1,575,000 SHARES
OF OUR
COMMON STOCK
AMERITYRE CORPORATION
PROSPECTUS
May 1, 2006