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, 2004 ------------- [ ] 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 ---------- 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 ------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Issuer's telephone number, including area code (702) 294-2689 --------------- 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 --------------- (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] 2 State issuer's revenues for its most recent fiscal year: $1,419,124 ---------- 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 24, 2004, of $8.93 per share, the market value of shares held by nonaffiliates (15,472,054 shares) would be approximately $138,088,082. As of September 27, 2004, we had 18,722,168 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 3 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 foam. We changed our name to Amerityre Corporation in December 1999. Since our inception, we have developed additional proprietary technology relating to Flatfree[TM] polyurethane foam tires. We have completed the fundamental technical development of the processes to manufacture non- highway use Flatfree[TM] polyurethane foam tires for bicycles, wheelchairs, lawn and garden products, commercial and riding lawnmowers, as well as golf cars (the "Products"). Polyurethane Foam Tire Technology --------------------------------- The Products produced from our Flatfree[TM] polyurethane foam 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 hand trucks, as well as wheel chairs, riding and commercial mowing equipment and golf cars. Polyurethane Elastomer Technology --------------------------------- In addition to manufacturing the Flatfree [TM] polyurethane foam 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. The polyurethane elastomer material is identified by us as Elastothane[TM]. Elastothane [TM] and the technology to produce tires using Elastothane[TM] are significant to us because we believe that combined they will result in a tire that can be produced quickly and less expensively than traditional rubber pneumatic tires, while meeting or exceeding the performance of those tires. 4 During the reporting period we produced a limited number of prototype polyurethane car tires based on our "air, no-air" run flat technology and announced we had submitted prototypes to an independent lab for testing to determine if the tires comply with Federal Motor Vehicle Safety Standard No. 109, applicable to new pneumatic tires. FMVSS No. 109 specifies tire dimensions and laboratory test requirements for bead unseating resistance, strength, endurance, and high speed performance; defines tire load ratings; and specifies labeling requirements for passenger car tires. In April 2004, we received independent laboratory tests results certifying the prototype tires complied with the test requirements of FMVSS 109. We believe that passing the test requirements is the first significant step required to advance the performance of the Elastothane[TM] material and the tire manufacturing technology. Compliance with FMVSS 109 is necessary to commercially market tires within the United States. The National Highway Traffic Safety Administration has established a new standard for light vehicle tires, FMVSS 139, that will take effect June 1, 2007. Voluntary compliance with this standard is permitted before that date. Under this standard, light vehicle tires are required to meet a high speed test, an endurance test, a low inflation pressure performance test, a resistance-to-bead unseating test, and a road hazard impact/strength test. This standard applies to tires for passenger cars, multipurpose passenger vehicles, trucks, buses and trailers with a gross vehicle weight rating of 10,000 lbs. or less, manufactured after 1975. Additional testing will be required to demonstrate that tires produced utilizing our technology can comply with standard. However, we believe that our tire technology will comply with FMVSS 139 prior to its implementation. Licensing of Manufacturing Technology ------------------------------------- In May 2004, we granted an exclusive license to Liberty Circle, S.A. to manufacture and market certain of our Flatfree[TM] polyurethane foam tire products in Latin America. The Agreement also includes provisions for us to produce and install manufacturing equipment and the proprietary polyurethane chemical systems needed for Liberty Circle to produce the polyurethane foam tires. The exclusivity of the license is dependent on Liberty Circle meeting annual minimum purchase requirements for the purchase of chemical systems from us once the installation of the manufacturing equipment is completed and production commences. We anticipate that it will take approximately 9 to 12 months (July to September 2005) to have the manufacturing equipment installed and ready to commence production. In connection with the agreement, we will also provide Liberty Circle with equipment setup, training and manufacturing support. In addition to the above, we have committed to design and develop moped, motor scooters and motorcycle tires to be produced by Liberty Circle for the Latin American marketplace. We recently granted Liberty Circle an extension to October 24, 2004 to meet the funding requirements to purchase the equipment. (See FINANCIAL STATEMENTS, Note 8 - SUBSEQUENT EVENTS.) Licensing of Manufacturing Equipment and Sale Proprietary Chemical Systems --------------------------------------------------------------------------- We propose to offer to interested parties manufacturing and marketing rights to produce various Flatfree[TM] polyurethane foam tire products similar to the agreement with Liberty Circle described above. Such agreements will involve marketing and distribution rights in various geographic areas. In connection with any such licensing we will also be providing the proprietary polyurethane chemical systems needed to produce the products. 5 The sales of proprietary chemical systems will be based on annual minimum purchase requirements once the manufacturing equipment has been completed and production commences. We anticipate that it will take approximately 9 to 12 months from the time a manufacturing and marketing agreement has been reached to have the manufacturing equipment installed and ready to commence production. 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. We now have an extensive line of Flatfree[TM] closed-cell polyurethane foam Products for various industrial segments. We have commenced an aggressive plan for obtaining market share for each independent segment through the development of close relationships with strategic industry partners who are leaders in agricultural, outdoor power equipment, lawn and garden equipment, mobility and other markets that will enable us to utilize the various channels to market that these potential partners currently enjoy. We also are actively engaging original equipment manufacturers who utilize tires in significant volume. Our sales force has commenced penetrating the various markets seeking sizable opportunities. We have established representatives throughout the United States who are working within the retail market. We are also aggressively engaging distribution marketers for tires. We plan to have our segment based marketing strategy for our Products fully implemented during the fiscal year ending June 30, 2005. Competition ----------- Currently, we know of a few companies that utilize a manufacturing process similar to ours to produce tires from polyurethane foam (i.e., Green Tire, UK; Alshin Tire, USA; KIK Technology International, Inc., USA; Woo Tire, China; and Krypton-India, India). In addition to manufacturers of polyurethane foam tires, as a potential OEM supplier, we compete directly with firms that manufacture and market conventional low-duty pneumatic and semi-pneumatic tires made from rubber. Our technology differs from existing polyurethane foam tire technology in at least two ways, including: (1) the formulation of the polyurethane; and (2) the manner in which the polyurethane is distributed throughout the mold. The underlying basis of our 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. 6 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 is disposed of through traditional refuse collection services or can be ground into pellets, which can be melted and reused to make other products and reduce waste of raw materials. Patents ------- Our technology is proprietary. Set forth in the schedule below are the patents that have been issued or for which a patent application is pending with respect to our technology. Description of Patents U.S. Patent No. Issued Date ---------------------- --------------- ----------- Method for Making Polyurethane Tires with an Outer Skin 4,855,096 8/08/1989 Apparatus for Making Foam Products 4,943,223 7/24/1990 Apparatus and Method for Manufacturing an Item From Polyurethane Foam and the Like 5,906,836 5/25/1999 Improved Method for Making Tires and the Like 6,165,397 12/26/2000 Non-Pnuematic Tire and Rim Combination 6,431,235 8/13/2002 Run Flat Tire with Elastomeric Inner Support 6,679,306 1/20/2004 Description of Patents Pending Action Status ------------------------------ ------ ------ Method for Manufacturing a Tire with Belts, Plies and Beads Utilizing a Precured Elastomer and Cold Rolling Filed Pending Method for Manufacturing a Metal Core Wheel with Elastomeric Coating Filed Pending Air No-Air Elastomeric Tire Filed Pending Tire with Arch Shaped Shoulders Filed Pending Method and Apparatus for Suspending a Core of Plies, Belts and Beads and for Positioning the Core in a Mold for Forming and Elastomeric Tire Filed Pending Improved Method and Apparatus for Suspending a Core of Plies, Belts and Beads and for Positioning the Core in a Mold for Forming and Elastomeric Tire Filed Pending Method and Apparatus for Forming a Tire Filed Pending 7 Trademarks ---------- We have used various trademarks in association with the marketing our Products, including the names Arcus [TM] Flatfree[TM], Amerityre[TM], Amerithane[TM] and Elastothane[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, 2004 we had 26 full-time employees, including 14 salaried 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. 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, 2004. 8 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, 2004 High Close Low Close ------------------------------- ---------- --------- Fourth Quarter $11.95 $8.20 Third Quarter $12.74 $6.69 Second Quarter $6.42 $3.90 First Quarter $5.38 $3.45 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 ------------------------------- Fourth Quarter $3.70 $2.65 Third Quarter $3.90 $2.04 Second Quarter $3.15 $1.75 First Quarter $5.55 $2.50 At September 24, 2004, the Company's Common Stock was quoted on the OTC Bulletin Board at a closing price of $8.45 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 27, 2004, we had approximately 580 shareholders of record based on information provided by our transfer agent, Interwest Transfer Company, 1981 E. Murray-Holladay Road, Holladay, Utah 84117. 9 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION Cautionary Statement Regarding Forward-looking Statements --------------------------------------------------------- This report may contain "forward-looking" statements within the meaning of Section 17A of the Securities Exchange Act of 1933, as amended, and Section 21E of the Securities Exchange Act, as amended. 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 "believes," "budget," "target," "goal," "anticipate," "expect," "plan," "outlook," "objective," "may," "project," "intend," "estimate," or similar expressions. Year ended June 30, 2004 compared to year ended June 30, 2003 ------------------------------------------------------------- For a substantial portion of our operating history we focused on the development of our technology and have been a development stage company. During this time we had limited revenues from the sale of or Products. In October 2001, we began selling our Products to bicycle shops, hardware stores and tire stores in the United States through the use of a few independent regional sales representatives traveling throughout their respective regions. In April 2003, we began to implement changes to our sales and marketing plan based on a product sector approach. This change helped us to increase our sales, so that our net sales for the year ended June 30, 2004 were $1,419,124, a 36% increase over net sales for the year ended June 30, 2003 of $1,040,246. Our cost of sales for the year ended June 30, 2004 was $1,114,230, or 78.5% of sales as compared to $976,132, or 93.8% of sales for the year ended June 30, 2003, resulting in a gross margin of $304,894 or 21.5% as compared to a gross margin of $64,114 or 6.2% for the respective periods. The increase in our gross margin for the year ended June 30, 2004, is a direct result of incorporating revisions to our methods, processes and costs in order to achieve increase manufacturing efficiencies. We are continuing to effect these revisions and we believe that, for the fiscal year ending June 30, 2005, our direct costs as a percent of sales will continue to be reduced as our volume of Product sales exceeds the fixed costs of minimum Product production (i.e., labor and raw material costs, etc.). We believe we currently have sufficient manufacturing equipment and employees to merit a substantial increase in production without incurring a proportionately equivalent increase in labor costs. In addition, we continue to seek reductions in raw material and component costs from our principal suppliers. During the year ended June 30, 2004, we experienced an increase in the cost of wheel components for our tire/wheel assemblies due to the increasing cost of steel. We did not pass the increases on to our customers and elected to seek alternative suppliers for components that were priced more competitively. However, if the cost of steel wheel components continues to rise during fiscal year 2005, we may elect to amend our product pricing to reflect the increase in component costs. During the reporting period, our chemical pricing remained relatively constant. We know of no other predictable events or uncertainties that may be reasonably expected to have a material negative impact on the net sales revenues or income from our operations other than a the continuation of the sluggish U.S. economy that has occurred over the past several months and the reduced consumer spending resulting therefrom. 10 Corporate Expense. For fiscal year 2004, total operating expenses were $5,045,895, consisting of consulting expenses of $370,666, payroll and payroll taxes of $2,345,082, depreciation and amortization of $296,232, research and development cost of $572,002, bad debt expense of $3,713 and selling, general and administrative expenses of $1,458,200, resulting in a loss from operations of $4,741,001. For fiscal year 2003, total operating expenses were $3,173,149, consisting mainly of consulting expenses of $339,934, payroll and payroll taxes of $1,083,910, depreciation and amortization of $298,625, research and development costs of $28,607, bad debt expense of $51, loss on impairment of assets of $67,982 and selling, general and administrative expenses of $1,354,040, resulting in a loss from operations of $3,109,035. Our corporate expenses increased from $3,173,149 in fiscal year 2003 to $5,045,895 in fiscal year 2004, in large part to the following reasons: (1) An increase in outside product and marketing consulting fees as a result of issuing common stock for services valued at current market value in lieu of cash payments; (2) An increase in executive and employee compensation as a result of issuing common stock for services valued at current market value in lieu of cash payments; and (3) An increase in research and development expenses, in large part attributed to the specific endeavor to develop our polyurethane elastomer car tire technology. In connection with the foregoing, during fiscal year 2004, we issued equity instruments for services in lieu of cash with an aggregate value of $2,176,692. For fiscal year 2005 we are estimating that our selling, general and administrative expenses will remain relatively constant with the approximately $5,000,000 expended in fiscal year 2004. Interest Expense. We had no interest expense during fiscal years 2004 and 2003. Other Income. For fiscal year 2004, we had other income of $19,746, consisting of interest income of $17,234 (earned on account receivables and temporary investments of cash not immediately needed in ordinary daily business) and miscellaneous income of $2,512. In fiscal year 2003, we had other income of $17,063, consisting of interest income of $16,397 and $666 of miscellaneous income. We experienced a net loss of $4,721,255 for the year ended June 30, 2004, compared with a net loss of $3,091,972 for the year ended June 30, 2003. The basic loss per share for fiscal year 2004 was $0.26 as compared to $0.21 for fiscal year 2003, based on the weighted average number of shares outstanding of 17,846,910 and 14,796,744 for the respective periods. Liquidity and Capital Resources ------------------------------- During the fiscal year ended June 30, 2004, we financed our operations through collecting accounts receivable and issuing common stock for: cash (paid in connection with the exercise of outstanding stock options); prepayment of certain salaries; and payment of professional services. 11 At June 30, 2004, we had current assets of $2,414,814 and current liabilities of $58,683, for a working capital surplus of $2,356,131, a decrease in the working capital surplus of $3,041,352 we had at June 30, 2003. We had cash and cash equivalents of $1,591,289 and net accounts receivable of $167,002 at June 30, 2003 compared to cash and cash equivalents of $2,490,604 and net accounts receivable of $128,481 at June 30, 2003. Our decrease in cash and equivalents at June 30, 2004, is attributable to the purchase of assets of $436,517 and the significant increase in overall operating expenses during the reporting period. Net cash used by our operating activities for the fiscal year 2004 was $2,197,583, compared to $2,110,769 for the fiscal year 2003. Our operations for fiscal year 2004 were funded primarily by cash and cash equivalents, accounts receivables, and the issuance of common stock for services and salary. Our operations for fiscal 2003 were funded primarily the same way. At June 30, 2004, we had net property and equipment of $1,445,993, after deduction of accumulated depreciation of $1,567,187. At June 30, 2003, we had net property and equipment of $1,302,787, after deduction of $1,273,876 in accumulated depreciation. The increase in net property and equipment for fiscal year 2004 was a direct result of the purchase of software, additional production equipment and improvements to our leased executive/manufacturing facility. At June 30, 2004, our property and equipment consisted mainly of leasehold improvements, $163,896; molds and models, $315,282; equipment, $2,253,217; furniture and fixtures, $70,033; vehicles, $25,851; and software, $184,901. Because we had an retained deficit of $26,390,827 at June 30, 2004, 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 until such time as revenues from the sale of our Products are adequate to cover our expenses, including: (1) evaluating (A) our cost of goods and equipment utilization and requirements of our manufacturing operations, and (B) our sales and marketing plan on a product sector basis; (2) incorporating revisions to our methods, processes and costs in order to achieve necessary manufacturing efficiencies (i.e., line automation, reduced material costs, reduced product waste, etc.); (3) seeking reduced material and component costs from suppliers; (4) licensing manufacturing and marketing rights to certain of our polyurethane tire products to third-party manufacturers based on geographical locations and boundaries; (5) selling manufacturing equipment to third-parties to manufacturer certain of our polyurethane tire products; (6) selling our proprietary polyurethane chemical systems to third-party manufacturers that utilize our manufacturing equipment; (7) offering contract design and engineering services to the tire and auto industries; (8) obtaining supplemental funding through exercise of outstanding in the money options; (9) issuing common stock in lieu of cash as compensation for employment, development, and other professional services; and (10) sale of shares of common stock for cash in either in private placement or registered offering. We anticipate that during the upcoming fiscal year we will need approximately $4,000,000 to implement our plan and to meet our working capital requirements. 12 Impact of Inflation ------------------- We do not anticipate that inflation will have a material impact on our current operations. Seasonality ----------- Because the significant portion of our current customers reside in the United States, we anticipate that sales of certain of our lawn and garden Products to those customers located in Northern portion of the United States could be reduced as a result of fall and winter climate and weather conditions. ITEM 7. FINANCIAL STATEMENTS Our financial statements appear beginning on page 28 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. 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 effective, based on our evaluation of such disclosure controls and procedures on June 30, 2004. (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. 13 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, 2004 and the term of office of each director of the Company. Name Age Position Director or Officer Since ---- --- -------- ------------------------- Richard A. Steinke 62 Chairman, Director, CEO January 1995 (1) Elliott N. Taylor 46 Executive Vice President June 2002 James G. Moore, Jr. 56 COO and VP Operations August 1999 Anders A. Suarez 38 Chief Financial Officer July 2004 (2) David P. Martin 62 VP Sales and Marketing November 1999 (3) David K. Griffiths 66 Secretary/Treasurer February 1995 Louis M. Haynie 77 Director July 1997 Henry D. Moyle 74 Director March 1999 Wesley G. Sprunk 67 Director January 2003 Norman H. Tregenza 67 Director April 2003 --------------------- (1) Mr. Steinke became President and CEO in November 1999. (2) Mr. Suarez was appointed CFO effective July 1, 2004. (3) Mr. Martin was VP Sales and Marketing through March 31, 2004. 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. Biographical Information ------------------------ Set forth below is certain biographical information for each of the Company's Officers and Directors and other key personnel. Richard A. Steinke is our founder and currently serves as our President, Chairman and Chief Executive Officer. From January 1992 to December 1994, he served as Chairman and C.E.O. of Alanco Environmental Resources, Inc., a manufacturer of environmental/pollution control equipment, Salt Lake City, Utah. From June 1985 to December 1991, he was the Chairman and C.E.O. of UTI Chemicals, Inc., a developer and manufacturer of urethane chemicals, El Toro, California. He received a B.A. in Political Science and Economics from the University of Arizona, Tucson, Arizona, in 1967. Elliott N. Taylor 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. 14 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. Anders Suarez was appointed our chief financial officer in July 2004. Prior to his appointment he worked as our Financial Systems Administrator since October 2003. Prior to joining us, from 1999 to 2003, Mr. Suarez worked as a project manager/senior consultant for ePartners, Inc., Phoenix, Arizona, a leading provider of Microsoft-based business solutions for middle market companies. He received his B.S. in Finance from the University of Arizona, Tucson, Arizona in 1995, and his M.B.A. from Thunderbird-The American Graduate School of International Management, Glendale, Arizona in 1996. David K. Griffiths has been our Secretary/Treasurer since December 2000 and was our principal accounting officer from February 1995 to June 2004. From 1960 to 1995, he was self-employed as an accountant/consultant for various small businesses. He offers the Company 45 years experience in accounting and accounting related systems. He received a B.S. in Accounting from Arizona State University, Tempe, Arizona in 1959. Louis M. Haynie has been a member of our board of directors since July 1997. Mr. Haynie's past board services include, Research Medical, Inc., Salt Lake City, Utah, the University of Utah Regents Advisory Board, Redwood Land Co., Salt Lake City, Utah, and MIS Corporation, Franklin, Tennessee. Mr. Haynie has a law degree from the University of Utah and has been in the private practice of law since 1951. Henry D. Moyle, 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 formerly President and C.E.O. of Brighton Properties, Inc. From 1970 to 1983, he was President and C.E.O. of Research Industries Corporation. He received a B.A. from Stanford in 1957, and a J.D. degree from the University of Utah in 1959. He is the owner of Sunset Canyon Ranch, raising cattle and racehorses, and serves on the board of directors of Silver Lake Company and Sunset Medical Corporation. Wesley G. Sprunk, joined our board in January 2003. Mr. Sprunk owns and operates Saf-Tee Siping & Grooving, a tire siping equipment manufacturing company and Tire Service Equipment Mfg. Co., Inc., a manufacturer and marketer of automotive wheel service equipment and recycling equipment, both located in Phoenix, Arizona. Norman H. Tregenza, joined our board in April 2003 and has over 40 years experience in corporate finance, including 12 years as an investment officer in the securities division of TIAA-CREF, New York City. Mr. Tregenza co- founded Tempo Enterprises, Inc. in 1976 to act as a common carrier for Turner Communication's Superstation's signal to the RCA satellite. Tempo obtained a listing on the American Stock Exchange in 1986. Before being sold to Telecommunications, Inc. (TCI) in 1988, Tempo owned several cable TV companies, radio stations and its own satellite TV network while supplying the Superstation's signal to approximately 50 million homes. TCI was acquired by AT&T in 2000. Mr. Tregenza received a B.A. from St. Lawrence University, Canton, NY, in 1959, and a MBA from NYU in 1963. 15 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 served as Chairman of the Board of Directors. The Petition was withdrawn in January 2004. We are not a creditor in this action. 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, 2004. Audit Committee --------------- 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. Our board of directors has determined that Mr. Haynie is an "audit committee financial expert" as defined under new SEC regulations, who is independent of management. See also "Committees of Our Board of Directors" under ITEM 10 below. Code of Ethics -------------- We have adopted a Code of Ethics that applies to our principal executive officer, principal financial officer and other financial employees. The Code of Ethics is posted on our website www.amerityre.com. 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 $100,000 during such period (as determined at June 30, 2004, the end of our last completed fiscal year): 16 Summary Compensation Table Long Term Compensation ---------------------- Annual Compensation Awards Payouts Other Restricted Name and Annual Stock Options LTIP All other Principal Position Year Salary Bonus($) Compensation Awards /SARs Payout Compensation ------------------ ---- ------ -------- ------------ ------ ------- ------ ------------ Richard A. Steinke 2004 $472,500 -0- $492,000 CEO, Pres. and 2003 $424,000 -0- $ -0- -0- -0- -0- -0- Chairman 2002 $400,000 -0- $30,000 -0- -0- -0- -0- Elliott N. Taylor, 2004 $120,000 -0- $81,999 -0- -0- -0- -0- Executive V.P. 2003 120,000 -0- -0- -0- -0- -0- -0- 2002 5,000 -0- -0- -0- -0- -0- -0- Compensation to our Named Executive Officers -------------------------------------------- Pursuant to a resolution of our board of directors in December 2001, Richard A. Steinke was issued 100,000 shares of restricted common stock in lieu of cash compensation for services through December 31, 2001 and an additional 100,000 shares of restricted common stock as prepaid compensation through June 30, 2002. The aggregate value of the 200,000 shares was $400,000 based on the closing price of our common stock on the date of the board resolution. In November 2002, the board authorized the issuance of 200,000 shares of restricted common stock to Mr. Steinke as employment compensation from July 1, 2002 through June 30, 2003. The aggregate value of the 200,000 shares was $424,000, based on the closing price of our common stock on the date of the board resolution. In October 2003, our board authorized the issuance of 125,000 shares of restricted common stock to Mr. Steinke as employment compensation from July 1, 2003 through June 30, 2004. The value of the shares was $472,500, based on the closing price of the common stock on the date of the board resolution. In May 2004, the board approved the issuance of 60,000 shares of common stock to Mr. Steinke as additional compensation for service provided during the fiscal year. The value of the shares was $492,000, based on the closing price of our common stock on the date of the board resolution. During the year ended June 30, 2004, Elliott N. Taylor received a base salary of $120,000. In addition, the board approved the issuance of 10,000 shares of common stock to Mr. Taylor as additional compensation for services provided during the fiscal year. The value of the shares was $81,999, based on the closing price of our common stock on the date of the board resolution. Employment Benefits ------------------- We provided health and medical insurance to Messrs. Steinke and Taylor, similar to that which is made available to all full time employees, and we reimbursed Messrs. Steinke and Taylor for reasonable out-of-pocket expenses incurred in connection with our business. 17 As a condition to employment, our management and key personnel are required to sign a nondisclosure and noncompetition agreement. Under the terms of the agreement, employees are not able to provide services or information deemed confidential by us to any other company or person which directly or indirectly competes with us in the tire industry or an industry which we intended to enter. There is no time limitation on the nondisclosure aspect of the agreement. The noncompetition clause is for a period of two years and prevents a former employee or consultant from acting as an employee, consultant or in any other capacity for a competitor. Additionally, all employees are required, as a condition of their employment, to enter into a nondisclosure agreement related to any information or process deemed confidential by us. Options/SAR Grants ------------------ The following tables contain information regarding the Plan Options granted to the Company's named executive officers during the fiscal year ended June 30, 2004: OPTION/SAR GRANTS DURING LAST FISCAL YEAR Individual Grants ----------------------------------------------------- Number of % of Total Securities Options/SARs Underlying Granted to Exercise or Options/SARs Employees Base Price Expiration Name Granted in Fiscal Year ($/Share) Date ------------------- ------------ -------------- ----------- ---------- (a) (b) (c) (d) (e) None N/A N/A N/A N/A 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 105,000 686,450 200,000/0 1,190,000/0 Pension Table ------------- Not Applicable. Other Compensation ------------------ None. 18 Compensation of Directors ------------------------- On November 21, 2003, at the Annual Meeting of Directors, our board of directors approved the issuance of 10,000 shares of restricted common stock to each of our four (4) independent directors as compensation for board services and related travel expenses for the period from December 2003 to November 2004. The aggregate value of the shares was $244,000, based on a closing price per share of $6.10 on the date of the approval. 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. Members of the Executive Committee have received no compensation for their service on the Executive Committee for the period from January 1, 2004 to the date of this report. 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. Our board of directors has determined that Mr. Haynie is an "audit committee financial expert" as defined under new SEC regulations, who is independent of management. The tasks and responsibilities of the Audit Committee include (i) the review and discussion of the audited financial statements with management, (ii) discussing with the independent auditors the matters required to be discussed by the Statement of Auditing Standards No. 61, as may be modified or supplemented, and (iii) receiving from auditors disclosure regarding the auditors' Independence Standards Board Standard No. 1, as may be modified or supplemented. Members of the audit committee met (3) times during the fiscal year ended June 30, 2004. In December 2002, our board established an Executive Committee consisting of Richard A. Steinke, Louis M. Haynie and Henry D. Moyle, Jr. The Executive Committee was formed 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. 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. Members of the executive committee met twelve (12) times during the fiscal year ended June 30, 2004. 19 Meetings of our Board of Directors ---------------------------------- Our Board of Directors held ten (10) meetings during the last fiscal year (including those meetings conducted by telephone conferencing). 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). 20 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. 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 21 minimum tax purposes). If the stock received upon exercise of an ISO is disposed of prior to the expiration of either of such time periods, the optionee will be required to recognize as ordinary income the amount by which the fair market value of the stock received at the time of exercise exceeds the exercise price of the ISOs. Under the Award 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, 2004, 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. 22 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following tables set forth as of September 27, 2004 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 18,722,168 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) 1,485,000 7.93 1501 Industrial Road Boulder City, NV 89005 Common Centurion Holdings, LLC (3) 1,300,000 6.49 375 Park Avenue, Suite 2008 New York, NY 10152 Common Lee Iacocca (4) 1,000,000 5.07 1501 Industrial Road Boulder City, NV 89005 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) 1,485,000 7.93 Common Elliott N. Taylor, Exec. VP (5) 338,860 1.79 Common Anders A. Suarez, CFO (6) 40,900 0.22 Common James Moore, Vice President (7) 58,071 0.31 Common David K. Griffiths, Sec./Treas. (8) 115,383 0.61 Common Louis M. Haynie, Director (9) 560,500 2.98 Common Henry D. Moyle, Jr. Director (10) 775,000 4.12 Common Wesley G. Sprunk, Director 101,700 0.54 Common Norman H. Tregenza, Director (11) 312,700 1.67 Total Beneficial Ownership of All Officers and Directors as a Group (9 persons) 3,788,114 19.67 [Footnotes continue on next page] 23 (1) All shares owned directly are owned beneficially and of record and such shareholder has sole voting, investment, and dispositive power, unless otherwise noted. (2) Includes 455,000 shares owned beneficially and of record by Gemini Funding Services Profit Sharing Account, of which Richard A. Steinke is the principal beneficiary and 800,000 shares owned beneficially and of record by S102 Irrevocable Trust, for which Richard A. Steinke is the trustee. (3) Represents options to acquire 1,300,000 shares at an exercise price of $7.00 per share that expire September 12, 2009. (4) Represents options to acquire 1,000,000 shares at an exercise price of $7.00 per share that expire September 12, 2009. (5) Includes options to acquire up to 200,000 shares at an exercise price of $4.00 per share that expire June 10, 2007. Also includes 25,000 shares per power of attorney; 20,692 shares as custodian for Mr. Taylor's minor children; and 80,918 shares as trustee for family trusts. (6) Includes options to acquire up to 30,000 shares at an exercise price of $3.80 per share that expire September 30, 2006. (7) Includes options to acquire up to 50,000 shares at an exercise price of $4.00 per share that expire April 1, 2005. (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 103,000 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 options to acquire up to 100,000 shares at an exercise price of $4.00 per share that expire April 1, 2005. Also includes 55,000 shares owned beneficially and of record by Vickie L. Moyle, spouse of Henry D. Moyle, and 11,000 shares owned beneficially and of record by a minor child, all of which Mr. Moyle may be deemed to have beneficial ownership. (11) Includes 13,000 shares held in an IRA, of which Mr. Tregenza is a beneficiary; 40,000 shares held of record by Norman H. Tregenza IV Trust, dated 9/26/86, Richard R. Keller trustee; 56,650 per power of attorney for Norman A. Tregenza; 20,000 shares held in an IRA, of which Alyce B. Tregenza, the spouse of Mr. Tregenza is the beneficiary; 5,000 shares per power of attorney for Alyce B. Tregenza; 45,650 shares per power of attorney for Suzanne C. Tregenza. 24 Securities Authorized For Issuance Under Equity Compensation Plans ------------------------------------------------------------------ Equity Compensation Plan Information As of June 30, 2004 (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 1,422,000 $3.90 148,239 Equity Compensation Plans Not Approved by Security Holders (1) 500,000 $3.00 --------- ------- 1,922,000 $3.66 148,239 ========= ======= (1) Includes options to acquire up to 500,000 shares at an exercise price of $3.00 per share that expire July 31, 2005, owned beneficially and of record by Focus Sales and Marketing, L.L.C. and issued as compensation in association with product marketing services. On September 13, 2004, our Board of Directors authorized the issuance of an aggregate of 3,000,000 Options to certain non-employees at an exercise price of $7.00 per share. The closing price for our common stock on the date the Option grants were authorized was $6.95 per share. The Options vest immediately, but are exercisable only as follows: (a) one-third of the total Options are exercisable on the earlier of September 13, 2006 or the first day after the closing price of our common stock has equaled or exceeded a price equal to 150% of the exercise price for 20 consecutive trading days; (b) one- third of the total Options are exercisable on the earlier of September 13, 2006 or the first day after the closing price has equaled or exceeded a price equal to 175% of the closing price for 20 consecutive trading days; and (c) one-third of the total Options are exercisable on the earlier of September 13, 2006 or the first day after the closing price has equaled or exceeded a price equal to 200% of the closing price for 20 consecutive trading days. (See FINANCIAL STATEMENTS, Note 8 - SUBSEQUENT EVENTS.) 25 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 gave us an exclusive license to use, sell, license, or otherwise exploit the technology worldwide in exchange for a royalty of $0.25 of the net selling price for all units produced utilizing the technology. The agreement required us to meet certain minimum production/royalty requirements. However, in October 2002, this agreement was amended to eliminate the provision requiring us to maintain minimum sales or royalties and restricting the royalty provision to those units produced and sold having a final production weight in excess of two (2) pounds. Effective July 1, 2004, the Agreement was amended to eliminate the royalty altogether in exchange for 15,000 shares of the Company's restricted common stock as a one-time payment to the licensees for their assignment and transfer of the technology to the Company. The closing price of the Corporation's common stock as quoted on the OTC Bulletin Board on July 1, 2004 was $9.75 per share, for a value of $146,250. The expense associated with the acquisition of the technology will be amortized over the remain life of the applicable patents. Due to our President's relationship with us, the agreement and the related amendments cannot be considered to have been negotiated at arm's length. 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. At June 30, 2004, all amounts due under this arrangement were paid in full. 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..................... 28 Balance Sheet as of June 30, 2004........................................ 29 Statements of Operations for the years ended June 30, 2004 and 2003...... 31 Statements of Stockholders' Equity....................................... 32 Statements of Cash Flows for the years ended June 30, 2004 and 2003...... 34 Notes to Financial Statements............................................ 36 26 (a)(2)FINANCIAL STATEMENT SCHEDULES. The following financial statement schedules are included as part of this report: None. (a)(3)EXHIBITS. The following exhibits are included as part of this report: 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, 2004 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 $35,326 and $47,595, 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 $0 and $385, respectively. The services provided related to the review of registration statements filed during applicable period. 3) Tax Fees. $1,914 and $0. 4) All Other Fees. $2,519 and $0. 5) Not applicable. 6) Not Applicable. 27 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 27, 2004 By /S/Richard A. Steinke, Chairman of the Board, President and CEO [Principal Executive Officer] Date: September 27, 2004 By /S/Anders A. Suarez, CFO [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 27, 2004 /S/Louis M. Haynie, Director Date: September 27, 2004 /S/Henry Moyle, Director Date: September 27, 2004 /S/Wesley G. Sprunk, Director Date: September 27, 2004 /S/ Norman H. Tregenza, Director 28 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors Amerityre Corporation Boulder City, Nevada We have audited the accompanying balance sheet of Amerityre Corporation (the "Company") as of June 30, 2004 and the related statements of operations, stockholders' equity and cash flows for the years ended June 30, 2004 and 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Amerityre Corporation as of June 30, 2004, and the results of its operations and its cash flows for the years ended June 30, 2004 and 2003, in conformity with generally accepted accounting principles 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 7 to the financial statements, the Company has incurred significant losses from operations, which have resulted in an accumulated deficit, raising substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 7 to the financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /S/ HJ & Associates HJ & Associates, LLC Salt Lake City, Utah September 24, 2004 29 AMERITYRE CORPORATION Balance Sheet ASSETS ------ June 30, 2004 ------------ CURRENT ASSETS Cash and cash equivalents $ 1,591,289 Accounts receivable - net of zero allowance 167,002 Inventory (Note 1) 557,516 Prepaid expenses 99,007 ------------ Total Current Assets 2,414,814 ------------ PROPERTY AND EQUIPMENT (Note 1) Leasehold improvements 163,896 Molds and Models 315,282 Equipment 2,253,217 Furniture and fixtures 70,033 Vehicles 25,851 Software 184,901 Less - accumulated depreciation (1,567,187) ------------ Total Property and Equipment 1,445,993 ------------ OTHER ASSETS Patents and trademarks - net (Note 1) 156,792 Deposits 43,180 ------------ Total Other Assets 199,972 ------------ TOTAL ASSETS $ 4,060,779 ============ The accompanying notes are an integral part of these financial statements. 30 AMERITYRE CORPORATION Balance Sheet (Continued) LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ June 30, 2004 ------------ CURRENT LIABILITIES Accounts payable $ 42,866 Accrued expenses 15,817 ------------ Total Current Liabilities 58,683 ------------ Total Liabilities 58,683 ------------ 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, 18,429,168 shares issued and outstanding 18,429 Additional paid-in capital 30,594,482 Expenses prepaid with common stock (219,988) Retained Deficit (26,390,827) ------------ Total Stockholders' Equity 4,002,096 ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,060,779 ============ The accompanying notes are an integral part of these financial statements. 31 AMERITYRE CORPORATION Statements of Operations For the Years Ended June 30, --------------------------- 2004 2003 ------------ ------------ NET SALES $ 1,419,124 $ 1,040,246 COST OF SALES 1,114,230 976,132 ------------ ------------ GROSS PROFIT 304,894 64,114 ------------ ------------ EXPENSES Consulting 370,666 339,934 Payroll and payroll taxes 2,345,082 1,083,910 Depreciation and amortization 296,232 298,625 Research and development 572,002 28,607 Bad debt expense 3,713 51 Loss on impairment of assets - 67,982 Selling, general and administrative 1,458,200 1,354,040 ------------ ------------ Total Expenses 5,045,895 3,173,149 ------------ ------------ LOSS FROM OPERATIONS (4,741,001) (3,109,035) ------------ ------------ OTHER INCOME Other income 2,512 666 Interest income 17,234 16,397 ------------ ------------ Total Other Income 19,746 17,063 ------------ ------------ NET LOSS $ (4,721,255) $ (3,091,972) ============ ============ BASIC LOSS PER SHARE $ (0.26) $ (0.21) ============ ============ WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 17,846,910 14,796,744 ============ ============ The accompanying notes are an integral part of these financial statements. 32 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, 2002 14,187,731 $ 14,188 $ 21,310,261 $ (562,721) $ (150,750)$ (103,433)$(18,577,600) Common stock issued for cash at $1.50 per share 2,170,000 2,170 3,252,830 - - - - Common stock issued for cash at $2.00 per share 604,675 605 1,208,745 - - - - Cancellation of common stock issued for stock subscription receivable (45,000) (45) (87,705) 87,750 - - - Common stock issued to CEO for compensation 200,000 200 423,800 - (212,000) - - Common stock issued for exercise of options 20,000 20 39,980 - - - - Common stock issued for cash-less exercise of option 10,462 10 23,562 - - - - Common stock issued for services and prepaid services 182,500 183 360,493 - (336,300) - - Common stock issued for stock offering costs 50,000 50 99,950 - - - - Stock offering costs - - (220,954) - - - - Common stock issued for stock subscription deposit 4,500 4 8,996 - - - - 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. 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, June 30, 2003 17,384,868 $ 17,385 $ 26,493,911 $ (16,632) $ (218,100)$ (118,621)$(21,669,572) Receipt of Subscriptions Receivable - - - 16,632 - - - Common stock issued for services and prepaid services at $3.78 per share 240,000 240 906,960 - (732,375) - - Common stock issued for services at $6.10 per share 40,000 40 243,960 - (244,000) - - Common stock issued for cash exercise of options at $2.00 per share 130,000 130 259,870 - - - - Common stock issued for cash exercise of options at $3.00 per share 500,000 500 1,499,500 - - - - Common stock issued for services rendered at $5.48 per share 2,000 2 10,958 - - - - Common stock issued for cash exercise of options at $4.00 per share 4,000 4 15,996 - - - - Common stock issued to employees per stock award plan at $6.69 per share 3,900 4 26,087 - - - - Common stock issued for services at $6.69 per share 20,000 20 133,780 - (133,800) - - Common stock issued to employee per stock award plan at $9.10 per share 500 - 4,550 - - - - Common stock issued to employees per stock award plan at $8.20 per share 103,900 104 851,876 - - - - Valuation adjustment and amortization of deferred consulting - - 147,034 - - 118,621 - Amortization of expenses prepaid with common stock - - - - 1,108,287 - - Net loss for the year ended June 30, 2004 - - - - - - (4,721,255) ----------- -------- ------------ ------------ ------------ ---------- ------------ Balance, June 30, 2004 18,429,168 $ 18,429 $ 30,594,482 $ - $ (219,988) $ - $(26,390,827) =========== ======== ============ ============ =========== ========== ============ The accompanying notes are an integral part of these financial statements. 34 AMERITYRE CORPORATION Statements of Cash Flows For the Years Ended June 30, --------------------------- 2004 2003 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (4,721,255) $ (3,091,972) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 296,232 298,625 Bad debt expense 3,713 51 Loss on impairment of assets - 67,982 Equity instruments issued for services 2,176,692 759,351 Stock subscription receivable paid through services - 9,880 Re-valuation of deferred consulting 265,656 40,312 Changes in assets and liabilities: (Increase) in accounts receivable (42,234) (25,537) (Increase) in inventory (92,532) (97,444) (Increase) in prepaid expenses (46,340) (24,825) (Increase) in other assets - (36,000) (Decrease) in accounts payable and accrued expenses (37,515) (11,192) ------------ ------------ Net Cash Used by Operating Activities $ (2,197,583) $ (2,110,769) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Cash paid for patents and trademarks (57,847) (20,560) Proceeds from sale of fixed assets - - Cash paid for fixed assets (436,517) (984,267) ------------ ------------ Net Cash Used by Investing Activities $ (494,364) $ (1,004,827) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from stock subscription deposit $ - $ 25,000 Receipt of subscriptions receivable 16,632 448,459 Cash paid for stock offering costs - (120,954) Common stock issued for cash 1,776,000 4,479,350 ------------ ------------ Net Cash Provided by Financing Activities $ 1,792,632 $ 4,831,855 ------------ ------------ NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (899,315) 1,716,259 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,490,604 774,345 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,591,289 $ 2,490,604 ============ ============ The accompanying notes are an integral part of these financial statements. 35 AMERITYRE CORPORATION Statements of Cash Flows (Continued) For the Years Ended June 30, --------------------------- 2004 2003 ------------ ------------ SUPPLEMENTAL SCHEDULE OF CASH FLOW ACTIVITIES CASH PAID FOR: Interest $ - $ - Income taxes $ - $ - NON-CASH FINANCING ACTIVITIES Equity investments issued for services rendered $ 2,176,692 $ 759,351 Common stock issued for subscriptions receivable $ - $ 99,500 Interest on related party subscription receivable $ - $ 15,547 The accompanying notes are an integral part of these financial statements. 36 AMERITYRE CORPORATION Notes to the Financial Statements June 30, 2004 and 2003 NOTE 1 -ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Organization Amerityre Corporation, (the "Company") was incorporated under the laws of the State of Nevada on January 30, 1995, under the name American Tire Corporation. The Company was organized to take advantage of existing proprietary and non- proprietary technology available for the manufacturing of specialty tires. The Company engages in the manufacturing, marketing, distribution and sales of "flatfree" specialty tires and tire-wheel assemblies and currently is manufacturing these tires at its manufacturing facility located in Boulder City, Nevada. During the year ended June 30, 2001, the name of the Company was changed to Amerityre Corporation. b. Accounting Method The Company's financial statements are prepared using the accrual method of accounting. The Company has elected a June 30 year-end. c. Basic Loss Per Share The computation of basic loss per share of common stock is based on the weighted average number of shares outstanding during the period. For the Years Ended June 30, --------------------------- 2004 2003 ------------ ------------ Loss (numerator) $ (4,721,255) $ (3,091,972) Shares (denominator) 17,846,910 14,796,744 Per share amount $ (0.26) $ (0.21) The Company's outstanding stock options have been excluded from the basic net loss per share calculation. The Company excluded 1,922,000 and 2,446,000 common stock equivalents for the years ended June 30, 2004 and 2003, respectively. 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, 2004 and 2003 NOTE 1 -ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) e. Income Taxes Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely that not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Net deferred tax assets consist of the following components as of June 30, 2004 and 2003: 2004 2003 ------------ ------------ Deferred tax assets: NOL Carryover $ 6,224,303 $ 5,585,000 Deferred tax liabilities: Valuation allowance (6,224,303) (5,585,000) ------------ ------------ Net deferred tax asset $ - $ - ============ ============ The income tax provision differs from the amount of income tax determined by applying the U.S. federal and state income tax rates of 39% to pretax income from continuing operations for the years ended June 30, 2004 and 2003 due to the follow: 2004 2003 ------------ ------------ Book income $ (1,841,328) $ (1,205,900) Meals & Entertainment 650 904 Officer issuance 9,750 - Other (2,884) - Stock for Services/Options Expense 848,909 363,730 Valuation Allowance 984,903 841,266 ------------ ------------ $ - $ - ============ ============ 38 AMERITYRE CORPORATION Notes to the Financial Statements June 30, 2004 and 2003 NOTE 1 -ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) e. Income Taxes (Continued) At June 30, 2004, the Company had net operating loss carryforwards of approximately $15,000,000 that may be offset against future taxable income from the year 2004 through 2024. No tax benefit has been reported in the June 30, 2004 financial statements since the potential tax benefit is offset by a valuation allowance of the same amount. Due to the change in ownership provisions of the Tax Reform Act of 1986, net operating loss carryforwards for Federal income tax reporting purposes are subject to annual limitations. Should a change in ownership occur, net operating loss carryforwards may be limited as to use in future years. f. 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 $ 109,820 Work in Progress - Finished Goods 447,696 ----------- Total Inventory $ 557,516 =========== During the years ended June 30, 2004 and 2003, the Company recorded inventory impairment expense of $0 and $39,596, respectively. g. Property and Equipment Property and equipment are stated at cost. Expenditures for small tools, ordinary maintenance and repairs are charged to operations as incurred. Major additions and improvements are capitalized. Depreciation is computed using the straight-line method over estimated useful lives as follows: Leasehold improvements 5 years, or over lease term Equipment 5 to 7 years Furniture and fixtures 7 years Automobiles 5 years Software 3 years Depreciation expense for the years ended June 30, 2004 and 2003 was $294,923 and $297,037, respectively. 39 AMERITYRE CORPORATION Notes to the Financial Statements June 30, 2004 and 2003 NOTE 1 -ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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. i. Patents and Trademarks Patent and trademark costs have been capitalized at June 30, 2004 totaling $166,251. 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, 2004 and June 30, 2003 was $1,309 and $1,588, respectively. The Company evaluates the recoverability of intangibles and reviews the amortization period on a continual basis utilizing the guidance of SFAS 142, "Goodwill and Other Intangible Assets." Several factors are used to evaluate intangibles, including, but not limited to, management's plans for future operations, recent operating results and projected, undiscounted cash flows. j. Advertising The Company follows the policy of charging the costs of advertising to expense as incurred. Advertising expense for the years ended June 30, 2004 and 2003 was $45,055 and $36,320, respectively. k. Newly Adopted Accounting Pronouncements During the year ended June 30, 2004, the Company adopted the following accounting pronouncements: SFAS No. 149 -- 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 adoption of SFAS No. 149 did not have a material effect on the financial statements of the Company. SFAS No. 150 -- In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" which is effective for financial instruments entered 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 establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial 40 AMERITYRE CORPORATION Notes to the Financial Statements June 30, 2004 and 2003 NOTE 1 -ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) k. Newly Adopted Accounting Pronouncements (Continued) instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. The adoption of SFAS No. 150 did not have a material effect on the financial statements of the Company. FASB Interpretation No. 46 -- In January 2003, the FASB issued FASB Interpretation No. 46 "Consolidation of Variable Interest Entities." FIN 46 provides guidance on the identification of entities for which control is achieved through means other than through voting rights, variable interest entities, and how to determine when and which business enterprises should consolidate variable interest entities. This interpretation applies immediately to variable interest entities created after January 31, 2003. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The adoption of FIN 46 did not have a material impact on the Company's financial statements. During the year ended June 30, 2004, the Company adopted the following Emerging Issues Task Force Consensuses: EITF Issue No. 00-21 "Revenue Arrangements with Multiple Deliverables", EITF Issue No. 01 8 "Determining Whether an Arrangement Contains a Lease", EITF Issue No. 02-3 "Issues Related to Accounting for Contracts Involved in Energy Trading and Risk Management Activities", EITF Issue No. 02-9 "Accounting by a Reseller for Certain Consideration Received from a Vendor", EITF Issue No. 02-17, "Recognition of Customer Relationship Intangible Assets Acquired in a Business Combination", EITF Issue No. 02-18 "Accounting for Subsequent Investments in an Investee after Suspension of Equity Method Loss Recognition", EITF Issue No. 03-1, "The Meaning of Other Than Temporary and its Application to Certain Instruments", EITF Issue No. 03-5, "Applicability of AICPA Statement of Position 9702, 'Software Revenue Recognition' to Non-Software Deliverables in an Arrangement Containing More Than Incidental Software", EITF Issue No. 03-7, "Accounting for the Settlement of the Equity Settled Portion of a Convertible Debt Instrument That Permits or Requires the Conversion Spread to be Settled in Stock", EITF Issue No. 03-10, "Application of EITF Issue No. 02-16 by Resellers to Sales Incentives Offered to Consumers by Manufacturers. 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. m. Concentrations of Risk The Company maintains several accounts with financial institutions. The accounts are insured by the Federal Deposit Insurance Corporation up to $100,000. The Company's balances 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. 41 AMERITYRE CORPORATION Notes to the Financial Statements June 30, 2004 and 2003 NOTE 1 -ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) m. Concentrations of Risk (Continued) The Company has one customer who accounts for 11% of the accounts receivable balance at June 30, 2004. 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, 2004, $16,632 of the outstanding receivable and accrued interest was collected in cash so that the balance at June 30, 2004 was $0. 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. 42 AMERITYRE CORPORATION Notes to the Financial Statements June 30, 2004 and 2003 NOTE 3 -RELATED PARTY TRANSACTIONS (Continued) 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 years ended June 30, 2004 and 2003, the Company incurred expenses of $19,089 and $13,182, respectively, for royalties relating to this agreement. Effective July 1, 2004, the Agreement was amended to eliminate the royalty altogether in exchange for an aggregate of 15,000 shares of the Company's restricted common stock as a one-time payment to the licensees for their assignment and transfer of the technology to the Company. The closing price of the Corporation's common stock as quoted on the OTC Bulletin Board on July 1, 2004 was $9.75 per share, for a value of $146,250. The expense associated with the acquisition of the technology will be amortized over the remain life of the applicable patents. 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 principal attorney for Taylor and Associates prior to his employment by the Company. During fiscal year 2003, the Company had outstanding stock subscription receivables from related parties which were accruing interest at 8% per annum. The Company recorded $15,547 in accrued interest as additional paid-in capital for that year. 43 AMERITYRE CORPORATION Notes to the Financial Statements June 30, 2004 and 2003 NOTE 3 - RELATED PARTY TRANSACTIONS (Continued) During October 2003, the Company issued 125,000 shares of common stock to its Chief Executive Officer as compensation for the fiscal year ending June 30, 2004. The shares were valued at the market price on the date of issue, or $3.78 per share. During November 2003, the Company issued 40,000 shares of common stock (10,000 shares each) to four non-employee directors as prepayment for services from December 1, 2004 through November 30, 2004. The shares were valued at the market price on the date of issue, or $6.10 per share. NOTE 4 -COMMITMENTS AND CONTINGENCIES 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 current monthly rental payment is $7,744 with annual increases based on the Consumer Price Index. This facility is now subleased to an unrelated party on a month to month basis at $3,872 per month. The Company intends to vacate the premises at the end of February 2005, the expiration of the original lease term. In October 2002, the Company entered into a five-year lease for a 49,200 square foot executive/manufacturing facility in Boulder City, Nevada. The Agreement required a security deposit of $18,000 and monthly rent payments of $16,000 for the first twelve months with annual increases. At June 30, 2004, the monthly rent was $16,500. Future minimum lease payments under these two non-cancelable operating leases are as follows: 2005 $ 264,452 2006 208,500 2007 214,500 2008 54,000 ------------- $ 741,452 ============= NOTE 5 -STOCK TRANSACTIONS 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. 44 AMERITYRE CORPORATION Notes to the Financial Statements June 30, 2004 and 2003 NOTE 5 -STOCK TRANSACTIONS (Continued) During the year ended June 30, 2004, the Company issued 100,000 shares to a consultant for prepaid services valued at $378,000; 125,000 shares for compensation of its CEO valued at $472,500; 15,000 shares to employees for services valued at $56,700; 40,000 shares for compensation of its non-employee directors valued at $244,000; 634,000 shares for the exercise of options for cash at $1,776,000; 22,000 shares to consultants for services rendered valued at $144,760; and 108,300 shares to employees per our stock award plan valued at $882,621. NOTE 6 -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. In October 2003, we issued options to acquire 30,000 shares of our common stock to an employee. The options are exercisable at $3.80 per share (the closing market price on the date of grant was $3.78 per share) and vested 7,500 shares on the date of grant; 7,500 shares on December 31, 2003; 7,500 shares on March 31, 2004; and 7,500 shares on June 30, 2004. In January 2004, we issued options to acquire an aggregate of 60,000 shares of our common stock to various employees. The options are exercisable at $6.70 per share (the closing market price on the date of grant was $6.69 per share), vested immediately and expire on December 31, 2005. During the year ended June 30, 2004 we issued 634,000 shares of our common stock for cash of $1,776,000, in connection with the exercise of 130,000 outstanding stock options at $2.00 per share, 500,000 outstanding stock options at $3.00 per share and 4,000 outstanding stock options at $4.00 per share. Through June 30, 2004, 1,536,461 options had been granted and 315,300 shares had been awarded under the Plan. Exercise prices for the options range from $2.00 to $6.80 per share and exercise terms range from two to five years. At June 30, 2004, there are 148,239 shares available for the grant of additional options or stock awards under the Plan. 45 AMERITYRE CORPORATION Notes to the Financial Statements June 30, 2004 and 2003 NOTE 6 - STOCK OPTIONS, Continued A summary of the status of the Company's outstanding stock options as of June 30, 2004 and 2003 and changes during the years then ended is presented below: 2004 2003 ----------------------- ----------------------- Weighted Weighted Average Average Exercise Exercise Shares Price Shares Price ---------- ---------- ---------- ---------- Outstanding, beginning of year 2,466,000 $ 3.42 2,616,000 $ 3.42 Granted 90,000 5.73 260,461 2.01 Expired/Cancelled - - (380,000) 2.92 Exercised (634,000) 2.80 (30,461) 2.09 ---------- ---------- ---------- ---------- Outstanding end of year 1,922,000 $ 3.66 2,466,000 $ 3.42 ========== ========== ========== ========== Exercisable 1,922,000 $ 3.66 2,466,000 $ 3.42 ========== ========== ========== ========== 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 2004 Life Price 2004 Price ---------- ---------- ---------- ---------- ---------- ---------- $ 2.00 150,000 0.75 $ 2.00 150,000 $ 2.00 3.00 500,000 1.08 3.00 500,000 3.00 3.80 30,000 2.25 3.80 30,000 3.80 4.00 1,182,000 1.12 4.00 1,182,000 4.00 6.70 60,000 1.50 6.70 60,000 6.70 ---------- ---------- ---------- ---------- ---------- $ 2.00-6.70 1,922,000 1.11 $ 3.66 1,922,000 $ 3.66 ========== ========== ========== ========== ========== 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, 2004 ------------------ Risk free interest rate 1.88% - 2.15% Expected life 2 to 3 years Expected volatility 72.05% - 79.53% Dividend yield 0.00% 46 AMERITYRE CORPORATION Notes to the Financial Statements June 30, 2004 and 2003 NOTE 6 - STOCK OPTIONS, Continued Of the 90,000 options issued during the fiscal year, all 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 148, "Accounting for Stock Based Compensation - Transition and Disclosure," the Company's net loss and loss per share would have been increased to the pro forma amounts indicated below: For the Years Ended June 30, 2004 2003 ----------- ----------- Net (loss) as reported $ (4,721,255) $ (3,091,972) Pro forma (4,941,080) (3,293,264) Basic (loss) per share as reported $ (0.26) $ (0.21) Pro forma (0.28) (0.22) NOTE 7 -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 a retained deficit of $26,390,827 at June 30, 2004, 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 waste, etc.); (3) seeking reduced material and component costs from suppliers; (4) licensing manufacturing and marketing rights to certain of our polyurethane tire products to third-party manufacturers based on geographical locations and boundaries; (5) selling manufacturing equipment to third-parties to manufacturer certain of our polyurethane tire products; (6) selling our proprietary polyurethane chemical systems to third-party manufacturers that utilize our manufacturing equipment; (7) offering contract design and engineering services to the tire and auto industries; (8) obtaining supplemental funding through exercise of outstanding in the money options; (9) issuing common stock in lieu of cash as compensation for employment, development, and other professional services; and (10) sale of shares of common stock for cash in either in private placement or registered offering. 47 AMERITYRE CORPORATION Notes to the Financial Statements June 30, 2004 and 2003 NOTE 7 -GOING CONCERN, Continued We anticipate that during the upcoming fiscal year the Company will need approximately $4,000,000 to implement our plan and to meet our 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. NOTE 8 - SUBSEQUENT EVENTS Effective September 22, 2004, the Company entered into an agreement with Centurion Holdings, LLC ("Centurion") that provides for Amerityre to form an Advisory Group and for Centurion to provide the following services: 1. For a period of two years, commencing on September 22, 2004, Centurion will consult with and assist the Company in connection with: (a) the development of a 5-year operating strategy and a 3-year operating plan for the Company that focuses on increasing the Company's market value based on strategic partnering and technology licensing; (b) structuring the Company's equity with a view toward placing equity securities for minimum offering proceeds of $10,000,000; (c) obtaining a NASDAQ listing for its common stock, and as such other matters as the Company's Board of Directors may determine during the two year term and any extension thereof. 2. Lee Iacocca and Joseph Grano, Jr., will serve as Chairman and Vice- Chairman, respectively, of the Company's Advisory Group for a minimum of two years commencing as of the date hereof, to be extended for one additional year on the mutual consent of the Company and the individuals. 3. The purpose of the Advisory Group is to provide advice to the Company's Board of Directors with respect to the matters identified in paragraph 1 above and such other matters as the Board of Directors shall determine from time to time. The Advisory Group will consist of such other persons as may be designated by the Board of Directors from time to time. The Advisory Group shall have no policy-making power, no voting rights, and no management authority with respect to the Company. The Advisory Group will meet at least once per fiscal quarter and will provide a report to the Board of Directors regarding the activities of the Advisory Group. Advisory Group members will also be available for consultation with the Board of Directors from time to time, as the Board of Directors requests. 4. The Company will pay to Centurion the following compensation: (a) commencing on the last day of the month during which occurs the closing of the sale by the Company of its equity securities or of securities convertible into its equity securities in an amount (aggregating all such sales from and after the date hereof) of $10,000,000, and on the last day of each month thereafter until September 30, 2006, the Company will pay Centurion $41,667 per month; (b) reimburse Centurion for all reasonable out-of-pocket expenses associated with the performance by it of the services described herein, in an amount up to a maximum of $250,000 per year; and (c) issue options to acquire an aggregate of 3,000,000 shares of the Company's common stock. 48 AMERITYRE CORPORATION Notes to the Financial Statements June 30, 2004 and 2003 NOTE 8 - SUBSEQUENT EVENTS, Continued 5. The Name of the Option holders and the number of Option shares issuable on exercise of the Options are set forth below: Name of Option Holder Number of Option Shares --------------------- ----------------------- Centurion Holdings, L.L.C. 1,300,000 Lee Iacocca 1,000,000 Nasser J. Kaseminy 650,000 Robert Guinta 50,000 6. The closing price per share of the Company's common stock on September 13, 2004, the date the Board of Directors authorized the grant of the Options was $6.95. The exercise price for the Options is $7.00 per share (the "Exercise Price"), subject to the terms, conditions and restrictions set forth in the Options. 7. The Options are exercisable as follows: (a) one-third of the total Options are exercisable on the earlier of September 13, 2006 or the first day after the Closing Price of the Company's common stock has equaled or exceeded a price equal to 150% of the Exercise Price for 20 consecutive trading days; (b) one-third of the total Options are exercisable on the earlier of September 13, 2006 or the first day after the Closing Price has equaled or exceeded a price equal to 175% of the Closing Price for 20 consecutive trading days; and (c) one-third of the total Options are exercisable on the earlier of September 13, 2006 or the first day after the Closing Price has equaled or exceeded a price equal to 200% of the Closing Price for 20 consecutive trading days. 8. All Options that are not exercised on or before September 12, 2009, expire and will no longer be exercisable. "Closing Price" means (a) the closing price of the common stock if the common stock is then traded on a national securities exchange, (ii) the last sale price if the common stock is then quoted on the NASDAQ National Market System or (iii) the average of the closing representative bid and asked prices of the common stock as reported on NASDAQ on the date as of which fair market value is being determined. 9. The options may be exercise by delivery to the Company of the option price by check (bank check, certified check or personal check) in the amount of the shares being purchased. 10. At any time or times after September 22, 2005, holders holding at least two thirds of the options may make written request to the Company to register all or a part of the option shares having a reasonably anticipated aggregate offering price, net of underwriting discounts and commissions, that exceeds $5,000,000. Also, if the Company determines to register any of its securities either for its own account or the account of a security holder or holders, other than a registration relating solely to employee benefit plans, or a registration relating solely to a Rule 145 transaction, or a registration on any registration form which does not permit secondary sales, the Company may include the option shares in such registration. 49 AMERITYRE CORPORATION Notes to the Financial Statements June 30, 2004 and 2003 NOTE 8 - SUBSEQUENT EVENTS, Continued Effective September 24, 2004, the Company agreed to extend until October 24, 2004, the Closing Date, for the Manufacturing and Distribution License Agreement and related agreements (collectively, the "Agreement") between the Company and Liberty Circle S.A., a Panamanian corporation ("Liberty Circle"). Under the terms of the Agreement, Liberty Circle was to have made an initial payment of $3,125,000 of the approximately $6.5 million transaction by September 3, 2004. The Company had granted Liberty Circle an extension to September 24, 2004, because of delays Liberty Circle had experienced related to the closing of its acquisition of the real property in Panama, where Liberty Circle intends to construct its manufacturing facility. Liberty has now requested that the closing date be extended to October 24, 2004. Liberty Circle has represented to the Company that it cleared title and closed the acquisition of the real property in Panama, however, it has encountered delays associated with the transfer of funds internationally and complying with the requirements of the Patriot Act. The Company agreed to extend the date for closing in exchange for payment of an additional $500,000 under the terms of the Agreement, bringing the total payments Amerityre is to received under the Agreement to $7.0 million. In July 2004, we issued 213,000 shares of our common stock for cash of $812,000, in connection with the exercise of 193,000 outstanding stock options at $4.00 per share and 20,000 outstanding stock options at $2.00 per share. Effective July 1, 2004, the Board of Directors authorized the issuance of 65,000 shares of restricted common stock to Richard A. Steinke, the Company's President and Chief Executive Office as employment compensation from July 1, 2004 through June 30, 2005. The value of the shares was $598,000, based on the closing price of $9.20 per share on the date of the board resolution.