1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 2003
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ________ to __________
Commission File Number 33-94318-C
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AMERITYRE CORPORATION
--------------------------
(Exact name of registrant as specified in charter)
Nevada 87-0535207
------------------------------ -------------------------
State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization
1501 Industrial Road, Boulder City, Nevada 89005
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (702) 294-2689
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Securities registered pursuant to section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None N/A
------------------ -----------------------------------------
Securities registered pursuant to section 12(g) of the Act:
Common Stock
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(Title of class)
Check whether the Issuer (1) filed all reports required to be filed by
section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. (1) Yes [X]
No [ ] (2) Yes [X] No [ ]
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [X]
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State issuer's revenues for its most recent fiscal year: $1,040,246
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State the aggregate market value of the voting stock held by nonaffiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days:
Based on the average of the high and low bid prices of our common stock at
September 22, 2003, of $4.15 per share, the market value of shares held by
nonaffiliates (14,463,379 shares) would be approximately $60,023,023.
As of September 26, 2003, we had 17,384,868 shares of common stock issued
and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and
the part of the form 10-KSB (e.g., part I, part II, etc.) into which the
document is incorporated: (1) Any annual report to security holders; (2) Any
proxy or other information statement; and (3) Any prospectus filed pursuant to
rule 424(b) or (c) under the Securities Act of 1933: NONE
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
-------
We were incorporated as a Nevada corporation on January 30, 1995 under the
name American Tire Corporation, to take advantage of certain proprietary and
nonproprietary technology available for the manufacturing of Flatfree[TM]
tires from polyurethane. We changed our name to Amerityre Corporation in
December 1999. Since our inception, we have developed additional proprietary
technology relating to Flatfree[TM] tires so that we have completed the
fundamental technical development of the processes to manufacture non-highway
use Flatfree[TM] tires for bicycles, wheelchairs, lawn and garden products,
commercial and riding lawnmowers, as well as golf cars (the "Products"). In
addition, to manufacturing the Flatfree [TM] Products referred to above, since
August 2001, we have also 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.
"Flatfree " Technology
----------------------
The Products produced from our Flatfree[TM] tire technology differ from
pneumatic tires in several ways: pneumatic tires are made from rubber; some
pneumatic tires require an inner tube; and all pneumatic tires require initial
air inflation and thereafter air pressure monitoring and re-inflation as may
be required. Even though our Products provide equivalent "pneumatic ride-
quality", they are considered "non-pneumatic" because they do not require
inflation. Our Products are multi-density in nature and consist of specially
formulated polyurethanes creating a closed cell foam construction which
effectively reproduces the ride quality of a pneumatic tire. The closed cell
foam construction, which forms one of the key components of our technology,
contains millions of closed cells containing compressed air. Therefore, our
Products are best identified as "Flatfree" in that they have no inner tube,
do not require inflation and will not go flat even if they are punctured.
Moreover, the closed cell infrastructure allows the tire to maintain its
stability. Flatfree[TM] tires are mounted on the wheel rim in much the same
way a pneumatic tire is mounted (with the assistance of a tire lever or tire
mounting press). Apart from cleaning, our Products are virtually maintenance
free, they eliminate the need to make tedious puncture repairs, offer superior
wear and a superior ride to rubber based tires. Fundamentally, our Products
are safer than rubber based pneumatic tires as they can never be under or over
inflated. Our Products have been designed for use by "on/off" road and
"highway" bicycles, lawn and garden equipment such as wheelbarrows and
handtrucks, as well as wheel chairs, riding and commercial mowing equipment
and golf cars.
Product Marketing Plan
----------------------
Historically, we have essentially been a technology company in the development
stage, manufacturing a limited number of Products for the purpose of
validating our Flatfree[TM] tire technology. In an effort to balance our
limited manufacturing capability with the need to gain critical end-user
learning curve, we engaged a few independent regional sales representatives to
directly place our Products with dealers such as local tire, hardware and
bicycle stores.
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During the past year we have developed, demonstrated and tested various
Products for Original Equipment Manufacturers (OEM) with "low-duty" needs
(i.e. commercial and riding lawn mowers, wheelbarrows, handtrucks,
wheelchairs, golf carts, etc.)
In the fall of 2002, we hired an independent consultant to assist us in
evaluating (1) the cost of goods and equipment utilization and requirements of
our manufacturing operations, and (2) our sales and marketing plan on a
product sector basis. In January 2003, we began to incorporate revisions to
our methods, processes and costs in order to achieve necessary manufacturing
efficiencies (i.e., line automation, reduced material costs, reduced product
weights, etc.). It is our expectation that it will take approximately 12
months to fully implement these efficiencies. Beginning in April 2003, we also
began to incorporate revisions to our sales and marketing plan to emphasis a
sector by sector market driven approach to achieve distribution and sell
through support to maintain distribution. As a result, our sales focus has
shifted from regional sales representatives calling on individual customer
accounts to salesmen working directly with original equipment manufacturers
and distributors. In addition, we are implementing an in-house telemarketing
program to maintain contact with existing dealer accounts. We believe that
this program will be fully implemented by October 2003.
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 tires and tubes made
from rubber. Our technology differs from existing polyurethane foam tire
technology in many 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 technology and processes make our Products the
only polyurethane based Flatfree[TM] 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 have become an essential commodity. The 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.
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Manufacturing, Supplies, and Quality Control
--------------------------------------------
Substantially all of our Products 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 isocyanide and polyol) is
combined with a catalyst. This combination causes a chemical reaction that
results in the cross linking of the chemicals, which thereafter become solid.
The mold then moves to the next station where the 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.
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 are 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.
Technology Development Agreement
--------------------------------
In August 2001, we signed an agreement with The Goodyear Tire and Rubber
Company to jointly develop polyurethane automobile tires. In January 2003,
Goodyear announced substantial lay-offs at its Akron Technology Center that,
among other things, directly effected the Goodyear personnel associated with
our development project. As a result, in March 2003, we entered into mutual
release with Goodyear, thereby permitting us to continue with the development
of polyurethane automotive tires without Goodyear's exclusive participation.
Our objective is to finish the development of the polyurethane automotive
tire. Presently, we have completed our engineering and tooling design. We have
contracted with a third party to machine our tooling and we are waiting for
the delivery of the tooling for the automobile tire mold. We expect the
tooling to be delivered by the end of October 2003, so we can complete several
polyurethane prototypes which will then be submitted to an independent
laboratory to conduct testing for compliance with applicable Department of
Transportation requirements.
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Patents
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Our technology is proprietary and we either own the technology directly or
have licensed it through third parties. Set forth in the schedule below are
the patents that have either been issued or for which a patent application is
pending with respect to our technology.
Description of Patent 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 and the Like 5,906,836 5/25/1999
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 Allowed 9/11/2003
Description of Patent Pending Application Status
----------------------------- ------------------
Method for Manufacturing a Tire with Belts, Plies
and Beads Utilizing a Precure Elastomer and Cold
Rolling Pending
Air No-Air Elastomeric Tire Pending
Trademarks
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We have used various trademarks in association with the marketing our
Products, including our logo design in conjunction with the name,
American[TM], and the names Flatfree[TM], Amerityre[TM], Amerithane [TM]
Elastothane[TM] and Urathon[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 will be able to operate in compliance
with such regulations, including laws related to the handling and use of
environmentally hazardous materials.
Employees
---------
As of June 30, 2003, we had 26 full-time employees, including 14
administrative and 12 hourly employees. We also 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.
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ITEM 2. DESCRIPTION OF PROPERTY
Offices
-------
In October 2002, we leased executive and manufacturing facilities located at
1501 Industrial Road, Boulder City, Nevada (the "Leased Property"). The
Leased 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 Leased Property. The base rent for the
Leased Property 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 Leased Property
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.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
No matters were submitted to a vote of shareholders of the Company during the
fourth quarter of the fiscal year ended June 30, 2003.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The table below sets forth, for the respective periods indicated, the prices
for the Company's common stock in the over-the-counter market as reported by
the NASD's OTC Bulletin Board. The closing prices represent inter-dealer
quotations, without adjustments for retail mark-ups, mark-downs or commissions
and may not necessarily represent actual transactions.
Fiscal Year Ended June 30, 2003 High Close Low Close
------------------------------- ---------- ---------
Fourth Quarter $4.85 $1.95
Third Quarter $2.25 $1.95
Second Quarter $2.55 $1.85
First Quarter $3.02 $2.10
Fiscal Year Ended June 30, 2002
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Fourth Quarter $3.70 $2.65
Third Quarter $3.90 $2.04
Second Quarter $3.15 $1.75
First Quarter $5.55 $2.50
Fiscal Year Ended June 30, 2001
-------------------------------
Fourth Quarter $5.05 $2.65
Third Quarter $5.875 $2.6875
Second Quarter $4.0625 $1.8125
First Quarter $1.125 $1.0625
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At September 22, 2003, the Company's Common Stock was quoted on the OTC
Bulletin Board at a Closing price of $4.30 per share.
Since our inception, we have not paid any dividends on our Common Stock, and
we do not anticipate that we will pay dividends in the foreseeable future. At
September 22, 2003, we had approximately 704 shareholders of record based on
information provided by our transfer agent, Interwest Transfer Company, 1981
E. Murray-Holladay Road, Holladay, Utah 84117.
In April 2003, we entered into an agreement with a shareholder to assist us
with introductions to parties which might be interested in providing us with
funding in the form of debt and/or equity financing. This agreement is non-
exclusive and we reserved the right to seek funding from other sources. The
shareholder was paid a one-time fee of 50,000 shares of our restricted common
stock valued at $100,000 or $2.00 per share, whether or not a transaction with
a party introduced by the shareholder, directly or indirectly, is consummated.
During the three month period ended June 30, 2003, we sold an aggregate of
157,660 shares at $2.00 per share for $315,320 cash; and 2,170,000 shares at
$1.50 per share for $3,255,000 cash.
All of our shares 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.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Cautionary Statement Regarding Forward-looking Statements
---------------------------------------------------------
This report may contain "forward-looking" statements. Examples of forward-
looking statements include, but are not limited to: (a) projections of our
revenues, capital expenditures, growth, prospects, dividends, capital
structure and other financial matters; (b) statements of our plans and
objectives; (c) statements of our future economic performance; (d) statements
of assumptions underlying other statements and statements about us and our
business relating to the future; and (e) any statements using the words
"anticipate," "expect," "may," "project," "intend" or similar expressions.
Year ended June 30, 2003 compared to year ended June 30, 2002
-------------------------------------------------------------
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 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
product sector. As a result, our net sales for the year ended June 30, 2003
were $1,040,246, or more than double net sales of $506,250 for the year ended
June 30, 2002.
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Our cost of sales for the year ended June 30, 2003 was $976,132, or 93.8% of
sales as compared to $525,154, or 103.7% of sales for the year ended June 30,
2002, resulting in a gross margin of $64,114 (6.2%) as compared to a gross
deficit of $18,904 (-3.7%)for the respective periods. The change from a
slight gross deficit to a slight gross margin for the fiscal year ended June
30, 2003, is a direct result of incorporating 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, 2004, 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.
The Company knows 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 continuation of the stagnant
U.S. economy that has occurred over the past several months and the reduced
consumer spending resulting therefrom.
Corporate Expense. For fiscal year 2003, total operating expenses were
$3,173,149, consisting of consulting expenses of $339,934, payroll and payroll
taxes of $1,083,910, depreciation and amortization of $298,625, bad debt
expense of $51, loss on impairment of assets of $67,982 and selling, general
and administrative expenses of $1,382,647, resulting in a loss from operations
of $3,109,035. For fiscal year 2002, total operating expenses were $3,758,585,
consisting mainly of consulting expenses of $1,505,435, payroll and payroll
taxes of $818,658, depreciation and amortization of $222,742, bad debt expense
of $36,834 and selling, general and administrative expenses of $1,174,916,
resulting in a loss from operations of $3,777,489.
For fiscal year 2003 we were able to reduce our operating expenses $585,436
from fiscal year 2002. The decrease in our operating expenses can in part be
attributed to a reduction in outside consulting expenses and related expense
associated with options granted to those consultants. Our selling, general and
administrative expenses for the fiscal year ended June 30, 2003 do not include
$118,621 in net deferred consulting expenses. This amount is recorded as a
reduction in shareholders' equity because it is associated with the granting
of options to non-employees for services not yet performed. The variable fair
value of these options is calculated using the Black-Scholes option pricing
model.
We have restated our financial statements for the year ended June 30, 2002 to
include an additional $1,220,000 in consulting expenses as the result of our
failure to recognize the vesting of 500,000 stock options that had previously
been issued to Focus Sales and Marketing, L.L.C.
During fiscal year 2003 payroll and payroll taxes increased $265,252, in large
part due to our hiring additional executive and engineering personnel to
handle administrative and product and equipment design responsibilities.
Interest Expense. We had no interest expense during fiscal year 2003 and our
interest expense was $203 for fiscal year 2002.
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Other Income (Expense). For fiscal year 2003, we had other income of $17,063,
consisting almost entirely of interest income associated with stock
subscription receivables and temporary investments of cash not immediately
needed in ordinary daily business. For fiscal year 2002, we had other income
of $31,078, consisting of $14,907 gain on the sale of our former manufacturing
facility in Ravenna, Ohio; interest income of $13,463 and $2,911 of
miscellaneous income. These other income items were offset by an interest
expense of $203.
We experienced a net loss of $3,091,972 for the year ended June 30, 2003,
compared with a net loss of $3,746,411 for the year ended June 30, 2002. The
basic loss per share for fiscal year 2003 was $0.21 as compared to $0.27 for
fiscal year 2002, based on the weighted average number of shares outstanding
of 14,796,744 and 13,662,411 for the respective periods.
Liquidity and Capital Resources
-------------------------------
During the fiscal year ended June 30, 2003, we financed our operations through
collecting accounts receivable and issuing common stock for: cash; prepayment
of certain salaries through June 30, 2003; and payment of professional
services.
At June 30, 2003, we had current assets of $3,136,736 and current liabilities
of $95,384, for a working capital surplus of $3,041,352, a significant
increase in the working capital surplus of $1,225,129 we had at June 30, 2002.
We had cash and cash equivalents of $2,490,604 and net accounts receivable of
$128,481 at June 30, 2003 compared to cash and cash equivalents of $774,345
and net accounts receivable of $102,996 at June 30, 2002. Our increase in cash
and equivalents and net accounts receivables at June 30, 2003, is attributable
to our significant increase in sales, our collection of accounts receivable
associated with those sales, and the receipt of subscriptions from the sales
of our equity securities prior to our fiscal year end.
Net cash used by our operating activities for the fiscal year 2003 was
$2,110,769, compared to $1,719,861 for the fiscal year 2002. Our operations
for fiscal year 2003 were funded primarily by accounts receivables, the sale
of common stock and the issuance of common stock for services and salary. Our
operations for fiscal 2002 were funded primarily the same way.
At June 30, 2003, we had net property and equipment of $1,302,787, after
deduction of accumulated depreciation of $1,273,876. At June 30, 2002, we had
net property and equipment of $615,556, after deduction of $976,840 in
accumulated depreciation. The increase in net property and equipment for
fiscal year 2003 was a direct result of the purchase of software, additional
production equipment and improvements to our leased executive/manufacturing
facility. At June 30, 2003, our property and equipment consisted mainly of
leasehold improvements, $127,976; equipment, $2,256,667; furniture and
fixtures, $56,488; vehicles, $31,541; and software, $103,991.
Because we had an accumulated deficit of $21,669,572 at June 30, 2003, our
audit report contains a going concern modification as to our ability to
continue as a going concern. We have taken certain steps to maintain our
operating and financial requirements in an effort to enable us to operate as a
going concern and until such time as revenues from the sale of our Products
are adequate to cover our expenses, including:
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(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 weights, etc.).
(3) incorporating revisions to our sales and marketing plan to emphasis a
sector by sector market driven approach to achieve distribution and sell thru
support to maintain distribution. Therefore, we are shifting from regional
sales representatives calling on individual customer accounts to salesmen
working directly with original equipment manufacturers and distributors.
(4) implementing an in-house telemarketing program to maintain contact
with existing dealer accounts.
(5) seeking reduced material and component costs from suppliers;
(6) if necessary, obtaining additional funding through the private
placement of the Company's common stock; and
(7) issuing common stock in lieu of cash for legal and other professional
services.
We anticipate that during the upcoming fiscal year we will need approximately
$2,500,000 to implement our plan and to meet our working capital requirements.
Impact of Inflation
-------------------
We do not anticipate that inflation will have a material impact on our current
operations.
Principal Customers
-------------------
During the most recent fiscal year ended June 30, 2002, Sunrise Medical
accounted for approximately 17% of our total sales. No other customers
accounted for more than 10% of our total sales.
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.
ITEM 7. FINANCIAL STATEMENTS
Our financial statements appear beginning on page 27 of this Form 10-KSB.
ITEM 8. 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.
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ITEM 8A. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
-----------------------------------------------------
Our chief executive officer and our chief financial officer believe our
disclosure controls and procedures (as defined in Sections 13a-14(c) and 15d-
14(c) of the Securities Exchange Act of 1934, as amended) are adequate, based
on our evaluation of such disclosure controls and procedures on June 30, 2003.
(b) Changes in internal controls.
---------------------------------
There have been no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date
of their evaluation.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The following table sets forth the name, age, and position of each executive
officer and director who have served during the fiscal year ended June 30,
2003 and the term of office of each director of the Company.
Name Age Position Director or Officer Since
---- --- -------- -------------------------
Richard A. Steinke 61 Chairman, Director, CEO January 1995 (1)
Elliott N. Taylor 45 Executive Vice President June 2002
James G. Moore, Jr. 55 COO and VP Operations August 1999
David P. Martin 61 VP Sales and Marketing November 1999
David K. Griffiths 66 Secretary/Treasurer February 1995
Louis M. Haynie 76 Director July 1997
Henry D. Moyle 74 Director March 1999
William K. Watkins 79 Director March 1999 (2)
Gene Stipe 75 Director November 2000 (3)
Wesley G. Sprunk 66 Director January 2003 (4)
Norman H. Tregenza 66 Director April 2003 (5)
---------------------
(1) Mr. Steinke became President and CEO in November 1999.
(2) Mr. Watkins was not re-elected at the annual meeting of shareholders in
November 2002.
(3) Mr. Stipe resigned in February 2003.
(4) Mr. Sprunk was appointed by the board.
(5) Mr. Tregenza was appointed by our board to fill the vacancy created by Mr.
Stipe's resignation.
The term of office of each of our directors is one year and until his
successor is elected and qualified at our annual meeting, subject to removal
by the Shareholders. The term of office for each Officer is one year and
until a successor is elected at the annual meeting of our Board of Directors
and is qualified, subject to removal by the Board of Directors. We reimburse
our Directors for their expenses associated with attending Directors'
meetings. See Item 10. EXECUTIVE COMPENSATION, Compensation of Directors.
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Biographical Information
------------------------
Set forth below is certain biographical information for each of the Company's
Officers and Directors and other key personnel at June 30, 2003.
Richard A. Steinke is our founder and currently serves as our President,
Chairman and Chief Executive Officer. He is also currently the Chairman of the
board of directors of Lew Corporation, a composite material designing company
located in Las Vegas, Nevada. 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 joined us as our Executive Vice President 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 and has been our Chief Operating
Officer and Vice President of Operations since August 1999. Prior to his
employment by us, he worked at The Goodyear Tire & Rubber Company
("Goodyear"), 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.
David P. Martin has been our Vice President of Sales and Marketing since
November 1999. From November 1994 to November 1999, he was the General
Manager of Rocky Mountain Water Proofing, Salt Lake City, Utah. Prior to that
time, he spent 14 years with Paine Weber, Thomson McKinnon and Prudential
Securities as a registered representative. During his business career he has
had substantial sales experience including positions with Eastman-Kodak, GAF
Corporation, and Reproduction Systems, Inc.
David K. Griffiths has been Secretary/Treasurer since December 2000 and has
been our principal accounting officer since February 1995. From 1960 to 1995,
he was self-employed as an accountant/consultant for various small businesses.
He offers the Company 39 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.
14
Henry D. Moyle, Jr. 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 since 1989 has been 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, Brighton Properties, Inc., and the 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.
Management Consultant
---------------------
Steven J. Shindler has been assisting us in preparing our operating plan,
including analysis of product development, production, materials and labor
costs, price structuring and product marketing and providing us with marketing
recommendations that incorporate that analyses. Mr. Shindler has been a
management consultant since 1996. From 1989 to 1996, he was the founder and
president of Purisys, Inc., New York, NY, a manufacturer of Home Diagnostics ,
a complete line of indoor air, building material and drinking water pollution
measurement kits. In 1988, Mr. Shindler, was the co-founder and COO of Silver
Palate Kitchens, Inc., New York, NY, a retail specialty food store. From 1979
to 1987, Mr. Shindler was the Senior Vice President of Levine, Huntley,
Schmidt and Beaver, Inc. ("LHS&B"), New York, NY. LHS&B was recognized as one
of America's top 5 creative advertising agencies in the 80's, and managed a
diverse client base including Citizen Watch, General Foods Corp. (new
products), Matchbox Toys, People Express, Northwest Airlines and Subaru
automobiles. LHS&B was sold to Grey Advertising in 1985. Mr. Shindler
received a B.S. in Economics from the University of Pennsylvania, Wharton
School, Philadelphia, PA in 1976.
Involvement in Certain Legal Proceedings
----------------------------------------
On April 28, 2003, a petition for bankruptcy under Chapter 11 of the
Bankruptcy Code was filled in the United States Bankruptcy Court, District of
Nevada, Case No. 03-15079 (the "Petition"), concerning Lew Corporation, a
Nevada corporation, Corporation, in which Richard A. Steinke serves as
Chairman of the Board of Directors. We are not a creditor in this action.
15
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
-------------------------------------------------
Our common stock is registered pursuant to Section 12(g) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in connection
therewith, it is the responsibility of our directors, officers, and beneficial
owners of more than 10% of our common stock to file on a timely basis certain
reports under Section 16 of the Exchange Act as to their beneficial ownership.
To the best of our knowledge, no such persons failed to file on a timely basis
any reports required pursuant to Section 16 of the Exchange Act, as of June
30, 2003.
ITEM 10. EXECUTIVE COMPENSATION
The following tables set forth certain summary information concerning the
compensation paid or accrued during each of our last three completed fiscal
years to our chief executive officer and each of our other executive officers
who received compensation in excess of $100,000 during such period (as
determined at June 30, 2003, the end of our last completed fiscal year):
Summary Compensation Table
Long Term Compensation
----------------------
Annual Compensation Awards Payouts
Other Restricted
Name and Annual Stock Options LTIP All other
Principal Position Year Salary Bonus($) Compensation Awards /SARs Payout Compensation
------------------ ---- ------ -------- ------------ ------ ------- ------ ------------
Richard A. Steinke 2003 $424,000 -0- $ -0- -0- -0- -0- -0-
CEO, Pres. and 2002 $400,000 -0- $30,000 -0- -0- -0- -0-
Chairman 2001 $346,875 -0- -0- -0- -0- -0- -0-
Elliott N. Taylor, 2003 $120,000 -0- -0- -0- -0- -0- -0-
Executive V.P. 2002 5,000 -0- -0- -0- -0- -0- -0-
Employment Agreements and Benefits
----------------------------------
Pursuant to a resolution of our board of directors, Mr. Steinke was issued
150,000 shares of our restricted common stock in lieu of cash compensation for
employment service through December 31, 2000. Those shares were valued at
$346,875. Also, pursuant to a resolution of our board of directors in December
2001, he 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. 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 $424,000. The value
per share was the closing price of our common stock on the various dates of
the board resolutions.
We provided health and medical insurance, similar to that which is made
available to all full time employees, and we reimbursed Mr. Steinke for
reasonable out-of-pocket expenses incurred in connection with our business.
16
As a condition to employment, our management and key personnel are required to
sign a nondisclosure and noncompetition agreement. Under the terms of the
agreement, employees are not able to provide services or information deemed
confidential by us to any other company or person which directly or indirectly
competes with us in the tire industry or an industry which we intended to
enter. There is no time limitation on the nondisclosure aspect of the
agreement. The noncompetition clause is for a period of two years and
prevents a former employee or consultant from acting as an employee,
consultant or in any other capacity for a competitor.
Additionally, all employees are required, as a condition of their employment,
to enter into a nondisclosure agreement related to any information or process
deemed confidential by us.
Options/SAR Grants
------------------
The following tables contain information regarding the Plan Options granted to
the Company's named executive officers during the fiscal year ended June 30,
2003:
OPTION/SAR GRANTS DURING LAST FISCAL YEAR
Individual Grants
-----------------------------------------------------
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise or
Options/SARs Employees Base Price Expiration
Name Granted in Fiscal Year ($/Share) Date
------------------- ------------ -------------- ----------- ----------
(a) (b) (c) (d) (e)
Elliott N. Taylor
[7/01/02 to 6/30/03] 60,000 sh 24.0 2.00 3/31/05
Aggregate Option/SAR Exercises in Last Fiscal Year
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
------------------- ------------- ------------- ------------ ------------
Elliott N. Taylor - - 60,000/0 -
Pension Table
-------------
Not Applicable.
Other Compensation
------------------
None.
17
Compensation of Directors
-------------------------
In December 2002, we established an Executive Committee to: (1) review our
existing policies and procedures relating to executive compensation and board
compensation, as well as review management's recommendations regarding changes
and/or modifications thereto; (2) review potential nominees for board
membership and make recommendations to the full board regarding the nominees;
(3) review and make recommendations regarding our short-term and long-term
operating plan; and (4) 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. Richard A. Steinke, Louis M. Haynie and Henry Moyle
were appointed to serve on the Executive Committee. 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, but at least once per month
until such time as the Executive Committee is disbanded or until their
successors are duly elected and shall qualify. As compensation for serving on
the Executive Committee, each non-employee director who serves as a member of
the Executive Committee received a cash payment of $22,000 for service through
December 31, 2003.
In April 2002, four non-officer members of our Board of Directors were each
granted options to acquire 200,000 shares of our restricted common stock at an
exercise price of $4.00 per share. The exercise price per share was set at
approximately 110% of the closing price of the stock on the date the options
were granted. In addition, our Board of Directors have been reimbursed for
reasonable expenses incurred on our behalf.
In December 2001, pursuant to a resolution of the Board of Directors, we
compensated the members of our Board of Directors by issuing each of them
15,000 shares of our restricted common stock in lieu of cash compensation for
board service for the calendar year ending December 31, 2002. The common stock
received by each of them was valued at $30,000, for aggregate board
compensation of $150,000. The value per share was determined by averaging the
closing price for our common stock for the four days previous to the board's
approval. $75,000 was expensed during our fiscal year ended June 30, 2003 and
$75,000 was expensed during our fiscal year ended June 30, 2002.
Committees of our Board of Directors
------------------------------------
In September 2002, our Board of Directors appointed a three person audit
committee consisting of two directors, Louis M. Haynie and Henry D. Moyle,
Jr., and one member of our management, Elliott N. Taylor. Members of the audit
committee met three times during the fiscal year ended June 30, 2003. In
December 2002, our board established an executive committee consisting of
Richard A. Steinke, Louis M. Haynie and Henry D. Moyle, Jr. Members of the
executive committee met four times during the fiscal year ended June 30, 2003.
Meetings of our Board of Directors
----------------------------------
Our Board of Directors held eight meetings during the last fiscal year
(including those meetings conducted by telephone conferencing).
18
Compensation Pursuant to Plans
------------------------------
Effective April 1, 2002, our Board of Directors approved the terms of our 2002
Stock Option and Award Plan. The Plan was ratified by our shareholders at the
Annual Meeting on November 1, 2002. Under the Plan, four non-officer members
of our Board of Directors were each granted options to acquire 200,000 shares
of common stock at an exercise price of $4.00 per share. In addition, our
Board of Directors approved the grant of additional options to acquire up to
386,000 shares of common stock to various employees at an exercise price of
$4.00 per shares. The exercise price per share was set at approximately 110%
of the closing price of the stock on the date the options were granted.
During the fiscal year ended June 30, 2003, our board approved the grant of
options to acquire up to 250,000 shares of common stock to various employees
at an exercise price of $2.00 per share. The closing price for our common
stock as quoted on the OTC Bulletin board on the date of grant was $1.99 per
share.
Award Plan Summary
------------------
Our Award Plan is 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 Plan 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 company's advancement by permitting them to participate in ownership and
thereby permitting them to share in increases in the value which they help
produce.
The Award Plan is 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 Plan (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 Plan 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.
19
All of our employees, officers, and directors are eligible to participate
under the Award Plan. A maximum of 2,000,000 shares are available for grant
under the 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 Plan, 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 Plan 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 Plan 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 Plan; (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 Plan; (e) change the provisions relating to
events of dilution; or (f) materially increase the benefits accruing to the
eligible participants under the Award Plan.
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.
20
Under the Award Plan, 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 Plan, 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
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.
Termination of Employment and Change of Control Arrangement
-----------------------------------------------------------
Unless otherwise disclosed below, as of June 30, 2003, the end of our most
recent fiscal year, there are no compensatory plans or arrangements, including
payments to be received from us, with respect to any person named in Cash
Compensation set out above which would in any way result in payments to any
such person because of his resignation, retirement, or other termination of
such person's employment or any change in our control, or a change in the
person's responsibilities following a change in our control.
[This space to end of page intentionally left blank]
21
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables set forth as of September 22, 2003 the name and address
and the number of shares of our Common Stock held of record or beneficially by
each person who held of record, or was known by us to own beneficially, more
than 5% of the 17,384,868 shares of our Common Stock issued and outstanding,
and the name and shareholdings of each director and of all officers and
directors as a group. The information on share numbers and percentage
ownership listed assumes: a) the exercise of options by the beneficial owner
(all included options are currently exercisable); and b) a corresponding
increase in the number of shares issued and outstanding.
Security Ownership of Certain Beneficial Owners
-----------------------------------------------
Title
of Name and Address Amount and Nature of Percentage
Class Beneficial Owner Beneficial Ownership(1) of Class
----- ---------------- -------------------- ----------
Common Richard A. Steinke (2) 1,320,000 7.59
705 Yucca Street
Boulder City, NV 89005
Common Alan F. Rypinksi (3) 1,010,000 5.49
3101 North Pacific Coast Hwy.
Suite 100 A
Newport Beach, CA 92663
Security Ownership of Management of the Company
-----------------------------------------------
Title
of Name and Position of Amount and Nature of Percentage
Class Officer and/or Director Beneficial Ownership(1) of Class
----- ----------------------- -------------------- ----------
Common Richard A. Steinke, CEO/Pres. (2) 1,320,000 7.59
Common Elliott N. Taylor, Exec. VP (5) 330,860 1.87
Common James Moore, Vice President (6) 80,000 0.46
Common David P. Martin, Vice President (7) 183,629 0.91
Common David K. Griffiths, Sec./Treas. (8) 118,600 0.68
Common Louis M. Haynie, Director (9) 600,000 3.41
Common Henry D. Moyle, Jr. Director (4) 778,000 5.37
Common Wesley G. Sprunk, Director 91,700 0.53
Common Norman H. Tregenza (10) 288,700 1.66
Total Beneficial Ownership of
All Officers and Directors as
a Group (9 persons) 3,791,489 20.77
[Footnotes continue on next page]
22
(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) Includes options to acquire up to 500,000 shares at an exercise price of
$3.00 per share that expire July 31, 2004 and options to acquire an additional
500,000 shares at an exercise price of $3.00 per share that expire July 31,
2005, both owned beneficially and of record by Focus Sales and Marketing,
L.L.C. and of which Mr. Rypinski is a controlling principal.
(4) Includes options to acquire up to 200,000 shares at an exercise price of
$4.00 per share that expire April 01, 2005. Also includes 55,000 shares owned
beneficially and of record by Vickie L. Moyle, spouse of Henry B. 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.
(5) Includes options to acquire up to 45,000 shares at an exercise price of
$2.00 per share that expire December 14, 2006; up to 60,000 shares at an
exercise price of $2.00 per share that expire March 31, 2005; and up to
200,000 shares at an exercise price of $4.00 per share that expire June 10,
2007. Also includes 17,000 shares per power of attorney for Lawrence C. Taylor
and 860 shares as custodian for Mr. Taylor's minor children.
(6) Includes options to acquire up to 50,000 shares at an exercise price of
$4.00 per share that expire April 1, 2005 and 20,000 shares at an exercise
price of $2.00 per share that expire March 31, 2005.
(7) Includes options to acquire up to 20,000 shares at an exercise price of
$4.00 per share that expire April 1, 2005 and 20,000 shares at an exercise
price of $2.00 per share that expire March 31, 2005. Also includes 6,000
shares owned beneficially and of record by Peggy Martin, the spouse of David
P. Martin, and of which Mr. Martin may be deemed to have beneficial ownership.
(8) Includes options to acquire up to 25,000 shares at an exercise price of
$4.00 per share that expire April 1, 2005 and 30,000 shares at an exercise
price of $2.00 per share that expire March 31, 2005.
(9) Includes options to acquire up to 200,000 shares at an exercise price of
$4.00 per share that expire April 1, 2005. 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.
(10) 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; 33,650 shares held as custodian for
Norman A. Tregenza; 12,000 shares per power of attorney for Norman A.
Tregenza; 17,000 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; 28,650 shares as custodian for Suzanne C. Tregenza; and
17,000 shares per power of attorney for Suzanne C. Tregenza.
23
Securities Authorized For Issuance Under Equity Compensation Plans
------------------------------------------------------------------
Equity Compensation Plan Information
As of June 30, 2003 (Fiscal Year End)
Number of Securities
Number of Weighted remaining available
Securities to be average exercise for future issuance
issued upon exercise price of under equity compen-
of outstanding outstanding plans (excluding
options, warrants options, warrants securities reflected
Plan and rights and rights in column (a))
Category (a) (b) (c)
------------ --------------------- ------------------ --------------------
Equity
Compensation
Plans
Approved by
Security
Holders 1,416,000 $3.68 383,539
Equity
Compensation
Plans
Not Approved
by Security
Holders (1)(2) 1,050,000 $2.95
--------- -------
2,466,000 $3.37 383,539
========= =======
(1) Includes options to acquire up to 500,000 shares at an exercise price of
$3.00 per share that expire July 31, 2004 and options to acquire an additional
500,000 shares at an exercise price of $3.00 per share that expire July 31,
2005, both 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 options to acquire up to 50,000 shares at an exercise price of
$2.00 per share that expire December 14, 2006, issued as compensation for
legal services.
24
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Technology License Agreement
----------------------------
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 gives
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 requires
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. Due to our President's relationship with the
Company, the agreement cannot be considered to have been negotiated at arm's
length.
Other Agreements
----------------
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.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a)(1)FINANCIAL STATEMENTS. The following financial statements are included
in this report:
Title of Document Page
----------------- ----
Independent Auditors' Report of HJ & Associates, LLC..................... 27
Balance Sheet as of June 30, 2003........................................ 28
Statements of Operations for the years ended June 30, 2003
and 2002 ............................................................... 30
Statements of Stockholders' Equity....................................... 31
Statements of Cash Flows for the years ended June 30, 2003 and 2002...... 34
Notes to Financial Statements............................................ 36
(a)(2)FINANCIAL STATEMENT SCHEDULES. The following financial statement
schedules are included as part of this report:
None.
25
(a)(3)EXHIBITS. The following exhibits are included as part of this report:
Exhibit No. Description
----------- -----------
31.01 Certification of Principal Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.02 Certification of Principal Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.01 Certification of Principal Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted, pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
32.02 Certification of Principal Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted, pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed with the Commission during the quarter
ended June 30, 2003.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information required by Item 9(c) of Schedule 14A
1) Audit Fees - The aggregate fees billed us for each of the last two fiscal
years for professional services rendered by our principal accountant for the
audit of our annual financial statements and review of our quarterly financial
statements is $47,595 and $36,165, respectively.
2) Audit-Related Fees - The aggregate fees billed in each of the last two
fiscal years for assurance and related services by our principal accountant
that are reasonably related to the performance of the audit or review of our
financial statements is $385 and $1,856. The services provided related to the
review of registration statements filed during applicable period.
3) Tax Fees. None.
4) All Other Fees. None.
5) Not applicable.
6) Not Applicable.
26
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
AMERITYRE CORPORATION
Date: September 26, 2003 By /S/Richard A. Steinke, Chairman of
the Board, President and CEO
[Principal Executive Officer]
Date: September 26, 2003 By /S/David K. Griffiths, Secretary
Treasurer [Principal Accounting
Officer]
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Date: September 26, 2003 /S/Louis M. Haynie, Director
Date: September 26, 2003 /S/Henry Moyle, Director
Date: September 26, 2003 /S/Wesley G. Sprunk, Director
Date: September 26, 2003 /S/ Norman H. Tregenza, Director
27
INDEPENDENT AUDITORS' REPORT
Board of Directors
Amerityre Corporation
Boulder City, Nevada
We have audited the accompanying balance sheet of Amerityre Corporation (the
"Company") as of June 30, 2003 and the related statements of operations,
stockholders' equity and cash flows for the years ended June 30, 2003 and
2002. 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 auditing standards generally
accepted in the United States of America. 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, 2003, and the results of its operations and its cash flows for the
years ended June 30, 2003 and 2002, in conformity with accounting principles
generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 8 to the financial
statements, the Company has incurred significant losses, which have resulted
in an accumulated deficit, raising substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters
are also described in Note 8. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
As discussed in Note 9 to the financial statements, the Company has restated
its financial statements for the year ended June 30, 2002. This action was
taken as a result of its failure to recognize the vesting of 500,000 stock
options and instead, treating them as cancelled. Adjustments have been made to
correct this error.
/S/ HJ & Associates
HJ & Associates, LLC
Salt Lake City, Utah
September 23, 2003
28
AMERITYRE CORPORATION
Balance Sheet
ASSETS
------
June 30,
2003
------------
CURRENT ASSETS
Cash and cash equivalents (Note 1) $ 2,490,604
Accounts receivable - net of zero allowance 128,481
Inventory (Note 1) 464,984
Prepaid expenses 52,667
------------
Total Current Assets 3,136,736
------------
PROPERTY AND EQUIPMENT (Note 1)
Leasehold improvements 127,976
Equipment 2,256,667
Furniture and fixtures 56,488
Vehicles 31,541
Software 103,991
Less - accumulated depreciation (1,273,876)
------------
Total Property and Equipment 1,302,787
------------
OTHER ASSETS
Patents and trademarks - net (Note 1) 101,052
Deposits 43,180
------------
Total Other Assets 144,232
------------
TOTAL ASSETS $ 4,583,755
============
The accompanying notes are an integral part of these financial statements.
29
AMERITYRE CORPORATION
Balance Sheet (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
June 30,
2003
------------
CURRENT LIABILITIES
Accounts payable $ 93,880
Accrued expenses 1,504
------------
Total Current Liabilities 95,384
------------
Total Liabilities 95,384
------------
COMMITMENTS AND CONTINGENCIES (Note 4)
STOCKHOLDERS' EQUITY
Preferred stock: 5,000,000 shares authorized of
$0.001 par value, -0- shares issued and outstanding -
Common stock: 25,000,000 shares authorized of
$0.001 par value, 17,384,868 shares issued and
outstanding 17,385
Additional paid-in capital 26,493,911
Stock subscriptions receivable (Note 2) (16,632)
Expenses prepaid with common stock (218,100)
Deferred consulting (118,621)
Retained Deficit (21,669,572)
------------
Total Stockholders' Equity 4,488,371
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,583,755
============
The accompanying notes are an integral part of these financial statements.
30
AMERITYRE CORPORATION
Statement of Operations
For the Years Ended
June 30,
2003 2002
------------ ------------
(Restated)
NET SALES $ 1,040,246 $ 506,250
COST OF SALES 976,132 525,154
------------ ------------
GROSS PROFIT (DEFICIT) 64,114 (18,904)
------------ ------------
EXPENSES
Consulting 339,934 1,505,435
Payroll and payroll taxes 1,083,910 818,658
Depreciation and amortization 298,625 222,742
Bad debt expense 51 36,834
Loss on impairment of assets 67,982 -
Selling, general and administrative 1,382,647 1,174,916
------------ ------------
Total Expenses 3,173,149 3,758,585
------------ ------------
LOSS FROM OPERATIONS (3,109,035) (3,777,489)
------------ ------------
OTHER INCOME (EXPENSE)
Other income 666 2,911
Interest income 16,397 13,463
Interest expense - (203)
Gain on disposition of assets - 14,907
------------ ------------
Total Other Income 17,063 31,078
------------ ------------
NET LOSS $ (3,091,972) $ (3,746,411)
============ ============
BASIC LOSS PER SHARE $ (0.21) $ (0.27)
============ ============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 14,796,744 13,662,411
============ ============
The accompanying notes are an integral part of these financial statements.
31 AMERITYRE CORPORATION
Statements of Stockholders' Equity
Expenses
Additional Stock Prepaid with
Common Stock Paid-in Subscription Common Deferred Accumulated
Shares Amount Capital Receivable Stock Consulting Deficit
----------- -------- ----------- ----------- ----------- ----------- -----------
Balance, June 30, 2001 13,291,635 $ 13,292 $17,841,792 $(1,458,307) $ (65,250) $ - $(14,831,189)
Common stock issued for
cash at $1.00 per share 50,000 50 49,950 - - - -
Common stock issued for
cash at $2.00 per share 758,450 759 1,516,142 - - - -
Common stock issued for
stock subscription receivable 20,000 20 39,980 (40,000) - - -
Common stock issued for
subscription deposit 12,500 12 24,988 - - - -
Common stock issued in
lieu of royalty payment 22,500 22 49,978 - - - -
Common stock issued as
payment of accounts payable 7,646 8 30,007 - - - -
Options granted to non-
employees for deferred
consulting - - 81,000 - - (81,000) -
Common stock issued for
prepaid services 10,000 10 19,990 - (20,000) - -
Common stock issued for
rent and prepaid rent 22,500 22 44,978 - (45,000) - -
Commons stock issued for
prepaid board of directors
fees 75,000 75 149,925 - (150,000) - -
Common stock issued to CEO
for current and prepaid
compensation at $2.00 per
share 200,000 200 399,800 - (200,000) - -
Common stock cancelled
due to court order (300,000) (300) (289,551) - - - -
Stock subscription
receivable cancelled (20,000) (20) (39,980) 40,000 - - -
Common shares issued for
option exercise paid for
through services rendered 37,500 38 74,962 - - - -
Stock subscription receivable
related party written-off
due to court order - - - 502,000 - - -
----------- -------- ----------- ----------- ----------- ----------- -----------
Balance Forward 14,187,731 $ 14,188 $19,993,961 $ (956,307) $ (480,250) $ (81,000)$(14,831,189)
----------- -------- ----------- ----------- ----------- ----------- -----------
The accompanying notes are an integral part of these financial statements.
32 AMERITYRE CORPORATION
Statements of Stockholders' Equity (Continued)
Expenses
Additional Stock Prepaid with
Common Stock Paid-in Subscription Common Deferred Accumulated
Shares Amount Capital Receivable Stock Consulting Deficit
----------- -------- ----------- ----------- ----------- ----------- -----------
Balance Forward 14,187,731 $ 14,188 $19,993,961 $ (956,307) $ (480,250) $ (81,000) $(14,831,189)
Amortization of expenses
prepaid with common stock - - - - 329,500 - -
Additional interest recorded
on subscriptions receivable
and subscriptions
receivable - related party - - 61,300 (67,722) - - -
Receipt of cash and services
for subscriptions receivable
and interest on subscriptions
receivable - - - 51,640 - - -
Receipt of cash on
subscriptions receivable - - - 409,668 - - -
Valuation adjustment and
amortization of deferred
consulting - - 35,000 - - (22,433) -
Expenses incurred through
the vesting of options issued
for consulting services
(restated) - - 1,220,000 - - - -
Net loss for the year
ended June 30, 2002
(restated) - - - - - - (3,746,411)
----------- -------- ----------- ----------- ----------- ----------- -----------
Balance, June 30, 2002
(restated) 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 - - - -
----------- -------- ----------- ----------- ----------- --------- -----------
Balance Forward 17,380,368 $ 17,381 $ 26,631,916 $ (474,971) $ (699,050) $(103,433)$(18,577,600)
----------- -------- ----------- ----------- ----------- --------- -----------
The accompanying notes are an integral part of these financial statements.
33 AMERITYRE CORPORATION
Statements of Stockholders' Equity (Continued)
Expenses
Additional Stock Prepaid with
Common Stock Paid-in Subscription Common Deferred Accumulated
Shares Amount Capital Receivable Stock Consulting Deficit
----------- -------- ----------- ----------- ----------- ----------- -----------
Balance Forward 17,380,368 $ 17,381 $26,631,916 $ (474,971) $ (699,050) $(103,433) $(18,577,600)
Stock offering costs - - (220,954) - - - -
Common stock issued for
stock subscription deposit 4,500 4 8,996 - - - -
Issuances 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) -
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)
=========== ======== =========== =========== =========== =========== ============
The accompanying notes are an integral part of these financial statements.
34
AMERITYRE CORPORATION
Statements of Cash Flows
For the Years Ended
June 30,
2003 2002
------------ ------------
(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,091,972) $ (3,746,411)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 298,625 222,742
Bad debt expense 51 36,834
(Gain) loss on disposition of assets - (14,907)
Loss on impairment of assets 67,982 -
Equity instruments issued for services 759,351 1,874,500
Stock subscription receivable paid through services 9,880 17,863
Re-valuation of deferred consulting 40,312 12,567
Changes in assets and liabilities:
(Increase) in accounts receivable (25,537) (126,154)
(Increase) in inventory (97,444) (6,216)
(Increase) in prepaid expenses (24,825) (36,068)
(Increase) in other assets (36,000) -
Increase (decrease) in accounts payable
and accrued expenses (11,192) 45,389
------------ ------------
Net Cash Used by Operating Activities (2,110,769) (1,719,861)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for patents and trademarks (20,560) (42,205)
Proceeds from sale of fixed assets - 298,680
Cash paid for fixed assets (984,267) (277,890)
------------ ------------
Net Cash Used by Investing Activities $ (1,004,827) $ (21,415)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from stock subscription deposit $ 25,000 $ 9,000
Receipt of subscriptions receivable 448,459 409,668
Cash paid for stock offering costs (120,954) -
Common stock issued for cash 4,479,350 1,566,901
------------ ------------
Net Cash Provided by Financing Activities 4,831,855 1,985,569
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,716,259 244,293
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 774,345 530,052
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,490,604 $ 774,345
============ ============
The accompanying notes are an integral part of these financial statements.
35
AMERITYRE CORPORATION
Statement of Cash Flows (Continued)
For the Years Ended
June 30,
2003 2002
------------ ------------
(Restated)
SUPPLEMENTAL SCHEDULE OF CASH FLOW ACTIVITIES
CASH PAID FOR:
Interest $ - $ -
Income taxes $ - $ -
NON-CASH FINANCING ACTIVITIES
Equity investments issued for services
rendered $ 759,351 $ 1,874,500
Common stock issued in lieu of debt and
interest $ - $ 80,015
Common stock issued for subscriptions
receivable $ 99,500 $ -
Interest on related party subscription
receivable $ 15,547 $ 61,300
The accompanying notes are an integral part of these financial statements.
36
AMERITYRE CORPORATION
Notes to the Financial Statements
June 30, 2003 and 2002
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,
---------------------------
2003 2002
------------ ------------
(Restated)
Loss (numerator) $ (3,091,972) $ (3,746,411)
Shares (denominator) 14,796,744 13,662,411
Per share amount $ (0.21) $ (0.27)
The Company's outstanding stock options have been excluded from the basic net
loss per share calculation as they are anti-dilutive. The Company has excluded
2,446,000 common stock equivalents.
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.
37
AMERITYRE CORPORATION
Notes to the Financial Statements
June 30, 2003 and 2002
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,
2003 and 2002:
2003 2002
------------ ------------
Deferred tax assets:
NOL Carryover $ 5,585,000 $ 5,857,100
Deferred tax liabilities:
Valuation allowance (5,585,000) (5,857,100)
------------ ------------
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, 2003 and 2002 due to
the follow:
2003 2002
------------ ------------
Book income $ (1,205,900) $ (985,300)
Meals & Entertainment 904 990
Stock for Services/Options Expense 363,730 109,600
Valuation Allowance 841,266 874,710
------------ ------------
$ - $ -
============ ============
38
AMERITYRE CORPORATION
Notes to the Financial Statements
June 30, 2003 and 2002
NOTE 1 -ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
e. Income Taxes (Continued)
At June 30, 2003, the Company had net operating loss carryforwards of
approximately $14,000,000 that may be offset against future taxable income
from the year 2003 through 2023. No tax benefit has been reported in the June
30, 2003 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.
Upon review of the prior year tax footnote, certain adjustments were made to
the reported Net Operating Loss. The beginning Net Operating Loss of
$15,017,971 has been reduced by $3,099,671 to account for non-cash equity
transactions improperly included in prior years' Net Operating Loss footnote
disclosures.
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.
Raw Materials $ 84,585
Work in Progress -
Finished Goods 380,399
-----------
Total Inventory $ 464,984
===========
During the years ended June 30, 2003 and 2002, the Company recorded inventory
impairment expense of $39,596 and $0, 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
Equipment 5 to 7 years
Furniture and fixtures 7 years
Automobiles 5 years
Software 3 years
Depreciation expense for the years ended June 30, 2003 and 2002 was $297,037
and $220,678, 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.
39
AMERITYRE CORPORATION
Notes to the Financial Statements
June 30, 2003 and 2002
NOTE 1 -ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
i. Patents and Trademarks
Patent costs have been capitalized at June 30, 2003 totaling $108,404. The
patents which have been granted are being amortized over a period of 17 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, 2003 and June 30, 2002 was $1,588 and
$2,064, 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, 2003 and 2002
was $36,320, and $122,314, respectively.
k. Newly Adopted Accounting Pronouncements
In October 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 147, "Acquisitions of
Certain Financial Institutions" which is effective for acquisitions on or
after October 1, 2002. This Statement provides interpretive guidance on the
application of the purchase method to acquisitions of financial institutions.
Except for transactions between two or more mutual enterprises, this Statement
removes acquisitions of financial institutions from the scope of both SFAS 72
and Interpretation 9 and requires that those transactions be accounted for in
accordance with SFAS No. 141, "Business Combinations" and No. 142, "Goodwill
and Other Intangible Assets". The adoptions of this principle had no material
effect on the Company's financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock Based
Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123"
which is effective for financial statements issued for fiscal years ending
after December 15, 2002. This Statement amends SFAS 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure
requirements of SFAS 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
compensation and the effect of the method used on reported results. The
effect of the adoption of this new accounting pronouncement on the Company's
financial statements has not been significant.
40
AMERITYRE CORPORATION
Notes to the Financial Statements
June 30, 2003 and 2002
NOTE 1 -ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
k. Newly Adopted Accounting Pronouncements (Continued)
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" which is effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. This statement amends and
clarifies financial accounting for derivative instruments embedded in other
contracts (collectively referred to as derivatives) and hedging activities
under SFAS 133. The Company currently expects that the effect of adoption of
SFAS 149 to the Company's financial statements will not be significant.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" which is
effective after May 31, 2003, and is otherwise effective into or modified
after May 31, 2003, and is otherwise effective at the beginning of the first
interim period beginning after June 15, 2003. This statement requires an
issuer to classify financial instruments that have issued in the form of
shares that is mandatorily redeemable; that embodies an obligation to
repurchase the issuers equity shares, or is indexed to such an obligation, and
that requires or may require the issuer to settle the obligation by
transferring assets; and, that embodies an unconditional obligation, or a
financial investment other than the issuer must or may settle by issuing a
variable number of its equity shares as liabilities (or assets in some
circumstances). The Company currently expects that the effect of SFAS 150 to
the Company's financial statements will not be significant.
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 issuance.
n. 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 regularly exceed that amount.
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 does not have any customers who account for greater than 10% of
the accounts receivable balance at June 30, 2003. However, the Company has one
customer who accounted for 17% of total sales for the year ended June 30,
2003.
41
AMERITYRE CORPORATION
Notes to the Financial Statements
June 30, 2003 and 2002
NOTE 1 -ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
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.
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 -STOCK SUBSCRIPTIONS RECEIVABLE
During the year ended June 30, 2002, the Company issued 20,000 shares of
common stock for a subscription receivable of $40,000. Later in the year, this
note was cancelled due to non-receipt of cash and the shares were returned to
the Company and cancelled. During the year, $409,668 of the outstanding
receivable and accrued interest was collected in cash, $502,000 was reversed
due to return and cancellation of 300,000 shares previously issued to the
Company's former CEO and $51,640 was received through services and debt
relief. Additionally, the Company recorded $67,722 in accrued interest,
bringing the total balance to $562,721 at June 30, 2002.
During the year ended June 30, 2003, $448,068 of the outstanding receivable
and accrued interest was collected in cash, $87,750 was collected through the
return of 45,000 net shares of common stock and $31,957 was received through
services and debt relief. Additionally, the Company recorded $21,686 in
accrued interest, bringing the total balance to $16,632 at June 30, 2003.
42
AMERITYRE CORPORATION
Notes to the Financial Statements
June 30, 2003 and 2002
NOTE 3 -RELATED PARTY TRANSACTIONS
On October 29, 1999, the Company entered into an exclusive license agreement
with the Company's President 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
granted the Company an exclusive license to use, sell, license, or otherwise
exploit the technology worldwide in exchange for a royalty of $0.25 per unit
sold for all wholesale or retail sales of units produced utilizing the
technology. The Agreement also provided for certain minimum
production/royalty requirements following the first year in order to maintain
the exclusive license. The licensors have the option to terminate the
agreement should the Company fail to pay any required royalty when due or fail
to meet the minimum production/royalty requirements.
At October 2001, the Company had failed to produce and sell enough units
utilizing the technology to meet the minimum production/royalty requirements
outlined in the agreement. Therefore, the parties agreed to amend the original
agreement such that the Company issued the licensors 22,500 shares of its
restricted common stock in lieu of all royalty payments accrued through
December 31, 2001. According to the amended agreement, the Company agreed to
pay a royalty of $0.25 per unit sold utilizing the technology subsequent to
December 31, 2001, except for those sold for promotional purposes. The
Agreement was further amended such that in order to maintain the exclusive
license, the Company was required to sell units utilizing the technology in
the following minimum quantities:
Period Number of Units
------------------------------------ ---------------
January 1, 2002 to December 31, 2002 200,000
January 1, 2003 to December 31, 2003 300,000
January 1, 2004 to December 31, 2004 400,000
January 1, 2005 to December 31, 2005
and each calendar year thereafter 500,000
At October 2002, the Company failed to produce and sell enough units utilizing
the technology to meet the minimum production/royalty requirements outlined in
the amended Agreement for the third year. Therefore, the parties agreed to
again amend the Agreement to delete all provisions to maintain minimum sales
or royalties and to exclude any units that have a final production weight of
two (2) lbs. or less.
For the year ended June 30, 2003, the Company paid a total of $13,182 in
royalties relating to this agreement.
43
AMERITYRE CORPORATION
Notes to the Financial Statements
June 30, 2003 and 2002
NOTE 3 -RELATED PARTY TRANSACTIONS (Continued)
During the year ended June 30, 2002, the Company contracted for the design and
building of equipment with a company having common board members with
Amerityre. During the year, the Company made several "good faith" deposits on
this equipment totaling $82,332. In June of 2002, the related party performed
services for the Company valued at $15,201, leaving an outstanding balance of
$67,131. At this time it became clear to both parties that the related party
was not financially viable enough to be able to complete the contracted
performance. Therefore, the Company accepted certain fixed assets from the
related party in lieu of the agreed-upon services. The assets received from
the related party were valued at $32,084, with the remaining amount of $35,047
being written-off to bad debt expense. As of June 30, 2003, the Company has
no outstanding obligation relating to this agreement.
During June 2002, the Company entered into an agreement with Taylor and
Associates, Inc. (Taylor and Associates), whereby, in consideration for the
Company's employ of Elliott Taylor as its Executive Vice-President and to
compensate Taylor and Associates for the potential financial detriment that
might occur to it as the result of his employment by the Company, the Company
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.
Elliott Taylor was the principle attorney for Taylor and Associates prior to
his employment by the Company.
During September 2002, the Company agreed to accept the return of 45,000
shares of common stock in lieu of cash payment on a stock subscription
receivable and accrued interest totaling $87,750 from a related party. The
Company recorded the return of the shares at the market price at the date of
settlement, or $1.95 per share, and cancelled the shares.
During fiscal years 2002 and 2003, the Company had outstanding stock
subscription receivables from related parties which were accruing interest at
8% per annum. The Company recorded $15,547 and $61,300 in accrued interest as
additional paid-in capital for the years ended June 30, 2003 and 2002,
respectively.
During September 2002, the Company issued 200,000 shares of common stock to
its Chief Executive Officer as compensation for the fiscal year ending June
30, 2003. The shares were valued at the market price on the date of issue, or
$2.12 per share.
44
AMERITYRE CORPORATION
Notes to the Financial Statements
June 30, 2003 and 2002
NOTE 4 -COMMITMENTS AND CONTINGENCIES
The Company maintained an executive office suite in Boulder City, Nevada. The
lease was allowed to expire in March 2003.
On February 18, 2000, the Company entered into a five-year lease agreement
related to a manufacturing facility in Las Vegas, Nevada beginning on March 1,
2000. The monthly rental payment is $6,893 for the first twelve months with
annual increases based on the Consumer Price Index. This facility is now
sitting idle and the Company is actively seeking a sublessor.
During October 2002, the Company entered into a five-year lease for a 49,200
square foot executive/manufacturing facility in Boulder City, NV. The
Agreement calls for a security deposit of $18,000 and monthly rent payments of
$16,000 for the first twelve months with annual increases.
Future minimum lease payments under these two non-cancelable operating leases
are as follows:
2004 $ 309,563
2005 279,614
2006 208,500
2007 214,500
2008 54,000
-------------
$ 1,066,177
=============
NOTE 5 -STOCK TRANSACTIONS
During the year ended June 30, 2002, the Company issued 808,450 shares of its
common stock for $1,566,901 in cash; 12,500 shares of its common stock for
$25,000 in stock subscription deposits; 30,146 shares in lieu of debt and
royalty obligations; 207,500 shares for prepaid services; 100,000 shares for
consulting services rendered; and 37,500 shares for the exercise of stock
options. The Company cancelled 20,000 shares of its common stock during the
year for non-payment of subscriptions receivable and 300,000 shares due to a
court order.
During the year ended June 30, 2003, the Company issued 2,762,175 shares of
its common stock for $4,459,350 in cash; 12,500 shares of its common stock for
$25,000 in stock subscription deposits; 200,000 shares for compensation of its
CEO valued at $424,000; 30,462 shares for the exercise of options for cash at
$40,000 and services valued at $23,572; 182,500 shares to consultants for
services and prepaid services valued at $360,675; 50,000 shares for a finders
fee in conjunction with the sale of common stock for cash, valued at $99,500;
and 4,500 shares for a $9,000 stock subscription deposit. The Company
cancelled 45,000 shares as a result of a net share settlement of a stock
subscription receivable.
45
AMERITYRE CORPORATION
Notes to the Financial Statements
June 30, 2003 and 2002
NOTE 6 -STOCK SUBSCRIPTION DEPOSIT
During the year ended June 30, 2002 the Company issued 12,500 shares of its
common stock for $25,000 in stock subscription deposits which were received
during the year ended June 30, 2001.
During the year ended June 30, 2002, the Company received a total of $9,000
for the purchase of 4,500 shares of common stock, which shares were
subsequently issued during the year ended June 30, 2003.
NOTE 7 -STOCK OPTIONS
During August 2002, the Company's board of directors approved the "Amerityre
2002 Stock option and Award Plan," (Plan) to be effective April 1, 2002.
During November 2002, the Plan was ratified by the Company's shareholders at
the annual meeting. Under the terms of this Plan, the Company registered
2,000,000 shares of its $0.001 par value common stock at a proposed offering
price per share of $2.80. The proposed maximum aggregate offering price
totaled $5,600,000. As of June 30, 2003, 1,436,000 options had been issued
under this Plan, with exercise prices of either $4.00 or $2.00 per share and
exercise terms ranging from two to five years.
During July, September and October 2002, the Company issued 5,000, 2,604 and
2,857 options to purchase common stock to a consultant for services,
respectively. The options had an exercise price of between $2.10 and $2.40 per
share and one to two month terms. The options were exercised through cashless
applications of billings. The Company recognized a total of $2,906 in expense
associated with the issuance of these options.
A summary of the status of the Company's outstanding stock options as of June
30, 2002 and 2001 and changes during the years then ended is presented below:
2003 2002
----------------------- -----------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
---------- ---------- ---------- ----------
Outstanding, beginning of (Restated) (Restated)
year 2,616,000 $ 3.42 3,417,500 $ 5.17
Granted 260,461 2.01 1,236,000 3.92
Expired/Cancelled (380,000) 2.92 (2,000,000) 6.75
Exercised (30,461) 2.09 (37,500) 2.00
---------- ---------- ---------- ----------
Outstanding end of year 2,466,000 $ 3.37 2,616,000 $ 3.42
========== ========== ========== ==========
Exercisable 2,466,000 $ 3.37 2,616,000 $ 3.42
========== ========== ========== ==========
46
AMERITYRE CORPORATION
Notes to the Financial Statements
June 30, 2003 and 2002
NOTE 7 - STOCK OPTIONS (Continued)
Outstanding Exercisable
----------------------------------- -----------------------
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
Range of at June 30, Contractual Exercise at June 30, Exercise
Exercise Prices 2003 Life Price 2003 Price
---------- ---------- ---------- ---------- ---------- ----------
$ 2.00 280,000 2.06 $ 2.00 280,000 $ 2.00
3.00 1,000,000 1.59 3.00 1 000,000 3.00
4.00 1,186,000 2.13 4.00 1,186,000 4.00
---------- ---------- ---------- ---------- ----------
$ 2.00-4.00 2,466,000 1.90 $ 3.37 2,466,000 $ 3.37
========== ========== ========== ========== ==========
The Company estimates the fair value of each stock option at the grant date by
using the Black-Scholes option pricing model based on the following
assumptions:
For the Year Ended
June 30, 2003
------------------
Risk free interest rate 1.65% - 1.72%
Expected life 0.08 3.95 years
Expected volatility 62.49% - 98.82%
Dividend yield 0.00%
Of the 260,461 options issued, 250,000 were issued to employees and were
accounted for under APB 25, "Accounting for Stock Issued to Employees." All of
these shares 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
123, "Accounting for Stock Based Compensation," 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,
2003 2002
----------- -----------
(Restated)
Net (loss) as reported $ (3,091,972) $ (3,746,411)
Pro forma (3,293,264) (6,591,691)
Basic (loss) per share as reported $ (0.21) $ (0.27)
Pro forma (0.22) (0.48)
47
AMERITYRE CORPORATION
Notes to the Financial Statements
June 30, 2003 and 2002
NOTE 8 -GOING CONCERN
The Company's financial statements are prepared using generally accepted
accounting principles applicable to a going concern, which contemplates the
realization of assets and liquidation of liabilities in the normal course of
business. The Company has historically incurred significant losses, which
have resulted in an accumulated deficit of $21,669,572 at June 30, 2003, which
raises substantial doubt about the Company's 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. The Company's management has taken certain steps
to maintain its operating and financial requirements in an effort to enable
the Company 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 weights, etc.);
(3) incorporating revisions to our sales and marketing plan to emphasize a
sector by sector market driven approach to acheive distribution and sell thru
support to maintain distribution. Therefore, shifting from regional sales
representatives calling on individual customer accounts to salesmen working
directly with original equipment manufacturers and distributors;
(4) implementing an in-house telemarketing program to maintain contact with
existing dealer accounts;
(5) seeking reduced material costs from suppliers;
(6) obtaining additional funding through the private placement of the
Company's common stock; and,
(7) issuing common stock in lieu of cash for legal and other professional
services.
Management anticipates that during the upcoming fiscal year the Company will
need approximately $2,500,000 to implement its plan and meet its working
capital requirements.
The ability of the Company to continue as a going concern is dependent upon
its 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 if the
Company is unable to continue as a going concern.
48
AMERITYRE CORPORATION
Notes to the Financial Statements
June 30, 2003 and 2002
NOTE 10 -CORRECTION OF ERRORS
The Company has restated its financial statements for the year ended June 30,
2002. This action was taken as the result of the failure to recognize the
vesting of 500,000 stock options and instead treating them as cancelled as
discussed below:
On August 1, 2000, the Company entered into a Marketing Agreement (Agreement)
and in connection therewith granted options to purchase up to 3,000,000 shares
of the Company's common stock, with 500,000 options vesting upon execution;
500,000 vesting on July 31, 2001; 1,000,000 vesting on July 31, 2002; and
1,000,000 vesting on July 31, 2003 as long as the Agreement had not been
terminated. The Company terminated the Agreement effective July 31, 2001 and
cancelled 2,500,000 options. It was subsequently discovered that the option
Agreement provided any options that would have otherwise vested had the
Agreement not been terminated, should vest pro-rata up to the date of
termination. Therefore, 500,000 options that had been recorded as cancelled,
had in fact vested. The discovery prompted management to restate its 2002
financial statements to recognize an additional $1,220,000 expense associated
with the vesting of these options.
June 30, 2002
-------------------------------------------
As Reported As Adjusted Difference
-------------------------------------------
Additional paid-in capital $ 20,090,261 $ 21,310,261 $ 1,220,000
Accumulated deficit 2,526,411 3,746,411 1,220,000
Consulting expense 285,435 1,505,435 1,220,000
Net loss (2,526,411) (3,746,411) (1,220,000)
Net loss per share (0.19) (0.27) (0.08)
NOTE 10 - SUBSEQUENT EVENT
During July 2003, the Company entered into an agreement to purchase a piece of
manufacturing equipment. The agreement calls for the payment of $188,640,
with 10% due upon order; 20% due in six weeks; 30% due upon shipment; 30% due
upon delivery; and, 10% due upon installation.