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, 2005
-------------
[ ] 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
--------------------------
(Name of small business issuer in its 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 there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
2
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act) Yes [ ] No [X]
State issuer's revenues for its most recent fiscal year: $1,681,091
----------
State the aggregate market value of the voting stock and non-voting common
equity held by non-affiliates computed by reference to the price at which the
stock was sold, or the average bid and asked prices of such common equity, 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 12, 2005, of $6.78 per share, the market value of shares held by
nonaffiliates (16,389,627 shares) would be approximately $111,121,671.
As of September 12, 2005, we had 20,005,516 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
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
The Company's market capitalization has exceeded the levels established by the
SEC for SB or small business issuers for each of past two years. Therefore,
this annual report will be the last report filed by the Company under the
provisions of Regulation S-B. The Company's next report, the quarterly report
for the period ending September 30, 2005, will be filed on Form 10Q under the
provisions of Regulation S-K. The Company will also be an "accelerated filer"
under the new regulations promulgated pursuant to the Sarbanes-Oxley Act of
2002.
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 and changed our name to Amerityre Corporation
in December 1999. We own certain proprietary and nonproprietary technology to
manufacture tires from polyurethane foam and polyurethane elastomer.
Polyurethane Foam Tire Technology
---------------------------------
We currently produce "Flatfree[TM]" polyurethane foam tires for bicycles,
wheelchairs, lawn and garden products, and outdoor power equipment products
(the "Products"). In August 2005, we entered into a Memorandum of
Understanding ("MOU") with Ace Products, LLC ("ACE"), outlining the general
scope and proposed terms of a transaction with ACE that is currently still
under negotiation. Details of scope, terms and conditions are all subject to
the execution of final agreements by and between the parties and the closing
of the contemplated transaction, anticipated to take place not later than
September 16, 2005, unless an extension is mutually agreed to by the parties.
The definitive agreements are expected to include provisions for: (i) the use
of certain manufacturing equipment; (ii) the use of manufacturing methods and
processes, tire designs and molds and models; (iii) the use of chemicals and
chemical concentrates; and (iv) the use of our trademarks on products that
utilize our technology. (See FINANCIAL STATEMENTS, Note 6 - Subsequent
Events.)
Polyurethane Elastomer Passenger Car Tire Technology
----------------------------------------------------
Since August 2001, we have been engaged in the development of polyurethane
elastomer tires for highway and agricultural use based on our proprietary
technology and various methods and processes relating to the manufacturing of
those tires from liquid elastomers. The polyurethane elastomer material is
identified by us as Elastothane[TM]. Elastothane [TM] and the technology to
produce tires using Elastothane[TM] are significant to us because we believe
that combined they result in a tire that can be produced quickly and less
expensively than traditional rubber pneumatic tires, while meeting or
exceeding the performance of those tires.
We have produced a limited number of prototype polyurethane car tires and
conducted independent laboratory testing to demonstrate that these tires
comply with existing federal safety standards for new-pneumatic tires [FMVSS
109] and the proposed revisions to those standards, FMVSS 139, which takes
effect in July 2007. Compliance with FMVSS 109 and subsequent FMVSS 139, is
necessary to commercially market pneumatic car tires within the United States.
FMVSS 139, retains many of the test components of FMVSS 109, with the
following major changes:
(1) Endurance and Low Inflation Pressure Test. Test remains 34 hours, but
extends the final load step from 22 hours to 24 hours. Load percentages have
been reduced from 90/100/110% to 85/90/100%. In addition, at the end of the 34
hours of endurance testing, the tire will be run under-inflated (20psi) at 120
km/h (75 mph) for 90 minutes;
4
(2) Speed test. Test remains a total of 90 minutes with a 2 hour warm-up;
however, speeds for each 30 minute segment have been increased from 75/80/85
mph to 140/150/160 km/h [87/93/99 mph], respectively; and
(3) Aging effects performance test. Implementation of the aging effects
performance test has been deferred until the NHTSA has completed additional
research and issues a new proposal.
In addition to inventing passenger car tires made from polyurethane elastomer,
we have invented the manufacturing equipment necessary to produce the
polyurethane car tires in limited quantities. We have filed several
applications for method and process patents with respect to various aspects of
this technology. We have completed fabrication of prototype manufacturing
equipment to mold the polyurethane elastomer tires and we are fabricating
certain additional pieces of manufacturing equipment that are necessary to
assemble the reinforcement materials (i.e., beads, belts and plies) utilized
in connection with manufacturing the tire. This work is continuing and we
expect to make improvements to the method, process and equipment as needed.
Non-pneumatic Temporary/Spare Tire Technology
---------------------------------------------
During the reporting period we filed an application for patent with the US
Patent and Trademark Office relating to the method and apparatus for
manufacturing a temporary/spare tire out of polyurethane elastomer. Our
initial project, a 'zero' pressure non-pneumatic temporary/spare tire, was
developed for prospective use as a temporary/spare tire for passenger
vehicles. These tires do not contain air and do not require inflation. In
April 2005, we announced that prototype non-pneumatic temporary/spare tire had
passed FMVSS 129 testing. FMVSS 129, is the applicable safety standard for
new, non-pneumatic tires that must be met before the tires can be offered
commercially. We believe that this is a major breakthrough in tire technology
because, to the best of our knowledge, no other company has developed a non-
pneumatic tire that has successfully met FMVSS 129 standard.
We have initiated discussions with automobile manufacturers about making these
tires available to their customers as an original equipment temporary/spare
tire. In addition, we are continue testing prototype designs of the non-
pneumatic temporary/spare tire for other vehicles/applications.(See Part II,
Item 6, Management's Discussion and Analysis or Plan of Operation: Risk
Factors.)
Licensing of Manufacturing Technology
-------------------------------------
In addition to the transaction contemplated under the MOU with ACE described
above, we have been negotiating with others interested with respect to a
license transaction relating to our polyurethane tire technology.
To assist us in attracting potential licensees we engaged International
Research and Development Corporation ("IRD"), La Jolla, California, to
introduce our polyurethane tire manufacturing technology in developing
countries around the world. We have presented our manufacturing technology to
many interested parties from several regions throughout the world where
manufacturing opportunities for our tire technology exist. We have introduced
our technology to delegations from Sri Lanka, India, Mexico, Peru, Saudi
Arabia and Dubai. In addition, independent delegations from Brazil and Bahrain
are currently evaluating the prospects of licensing the technology. However,
as of the date of this report, we do not have any definitive licensing
agreements with any of these parties.
5
Competition
-----------
Currently, we know of a few companies that utilize a manufacturing process
similar to ours to produce tires from polyurethane foam (i.e., Green Tire, UK;
Alshin Tire, USA; KIK Technology International, Inc., USA; Woo Tire, China;
and Krypton-India, India). In addition to manufacturers of polyurethane foam
tires, as a potential OEM supplier, we compete directly with firms that
manufacture and market conventional low-duty pneumatic and semi-pneumatic
tires made from rubber. Our technology differs from existing polyurethane
foam tire technology in at least two ways, including: (1) the formulation of
the polyurethane; and (2) the manner in which the polyurethane is distributed
throughout the mold.
The underlying basis of our foam tire technology and processes make our
Products the only polyurethane based Flatfree[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 that our Products compete against are essentially a commodity. The not-
for-highway use tire industry has historically been highly competitive and
several of our competitors have financial resources which substantially exceed
ours. In addition, many competitors are large companies (i.e., Kenda, Japan;
Chengshin Rubber, China; and Carlisle Tire, USA) that have established brand
name recognition, have established distribution networks for their products,
and have developed consumer loyalty to such products.
We know of no other companies that have technology capable of formulating and
producing polyurethane elastomer compounds suitable for passenger car tire
use, in particular, pneumatic and/or non-pneumatic passenger car tires that
comply with U.S. Federal Motor Vehicle Safety Standards for those tires.
Manufacturing, Supplies, and Quality Control
--------------------------------------------
Substantially all of our Products produced with polyurethane foam are
manufactured utilizing single and/or multiple head, centrifugal molding
machines. These machines produce Products by pouring a proprietary based
polyurethane formula into a mold, which then spreads out in the mold through
centrifugal force. The molding process occurs when the liquid polyurethane
formula (made up of 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.
Although we have one customer that accounted for approximately 12% of total
sales during the fiscal year ended June 30, 2005, we don't believe that our
business operations are dependent on that customer.
All of our Products are inspected following the manufacturing process and
prior to shipment to ensure quality. Any Product considered by our quality
control personnel to be defective is disposed of through traditional refuse
collection services or can be ground into pellets, which can be melted and
reused to make other products and reduce waste of raw materials.
6
Patents
-------
Our technology is proprietary. Set forth in the schedule below are patents
that have been issued or for which a patent application is pending with
respect to our technology.
Description of Patents U.S. Patent No. Issued Date
---------------------- --------------- -----------
Method for Making Polyurethane Tires
with an Outer Skin 4,855,096 8/08/1989
Apparatus for Making Foam Products 4,943,223 7/24/1990
Apparatus and Method for Manufacturing
an Item From Polyurethane Foam and the Like 5,906,836 5/25/1999
Improved Method for Making Tires and the Like 6,165,397 12/26/2000
Non-Pnuematic Tire and Rim Combination 6,431,235 8/13/2002
Run Flat Tire with Elastomeric Inner Support 6,679,306 1/20/2004
Description of Patents Pending Action Status
------------------------------ ------ ------
Tire with Arch Shaped Shoulders Allowed To be issued
Method for Manufacturing a Tire with Belts, Plies and
Beads Utilizing a Precured Elastomer and Cold Rolling Filed Pending
Method and Apparatus for Forming a Core of Plies,
Belts and Beads and for Positioning the Core in a
Mold for Forming an Elastomeric Tire and the Formed
Elastomeric Tire Filed Pending
Air No-Air Elastomeric Tire Filed Pending
Method for Manufacturing an Air No-Air Tire with
Belts and Beads Filed Pending
Improved Method and Apparatus for Forming a Core of
Plies, Belts and Beads and for Positioning the Core
in a Mold for Forming an Elastomeric Tire Filed Pending
Improved Method and Apparatus for Suspending a Core of
Plies, Belts and Beads and for Positioning the Core in
a Mold for Forming and Elastomeric Tire Filed Pending
Method and Apparatus for Forming an
Elastomeric Tire Filed Pending
Method and Apparatus for Forming a Wheel
from a Urethane Material
Run Flat Tire Insert System Filed Pending
Trademarks
----------
We have used various trademarks in association with marketing our Products,
including the names Arcus [R], Flatfree[TM], Amerityre[R], Elastothane[TM],
Tire Technology for the 21st Century[TM]
7
Regulation and Environmental Compliance
---------------------------------------
We know of no particular federal or state regulations applicable to our
manufacturing processes. We are subject to various local, state, and federal
laws and regulations including, without limitation, regulations promulgated by
federal and state environmental and health agencies, the federal Occupational
Safety and Health Administration, and laws pertaining to hiring, treatment,
safety, and discharge of employees. Our manufacturing operations must also
meet federal, state, and local regulatory standards in the areas of labor,
safety, and health. We believe that we operate in compliance with such
regulations, including laws relating to the handling and use of materials that
may be deemed to be hazardous materials.
Employees
---------
As of June 30, 2005 we had 26 full-time employees, including 15 salaried and
11 hourly employees. We may hire temporary labor for manufacturing needs as
required. None of our employees are represented by a labor union. We believe
that we will be able to hire a sufficient quantity of qualified laborers in
the local area to meet our employment needs. Our manufacturing process does
not require special training, other than orientation to our production
techniques and specific equipment.
Additional Information
----------------------
We make available free of charge on our website, http://www.amerityre.com, our
annual report on Form 10-KSB, quarterly reports on Form 10-QSB, current
reports on Form 8-K, and amendments to those reports as soon as reasonably
practicable after we file or furnish such reports to the Securities and
Exchange Commission. The information on our website is not a part of this
Annual Report on Form 10-KSB.
ITEM 2. DESCRIPTION OF PROPERTY
Offices
-------
In October 2002, we leased our 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.
8
ITEM 3. LEGAL PROCEEDINGS
On June 13, 2005, we filed case number A505333 in the Eighth Judicial District
Court for the State of Nevada against Prototype Engineering, Inc., an Ohio
corporation ("Prototype"), and Frederick F. Vannan, Jr. ("Vannan"). Our causes
of action includes allegations of alter ego, misrepresentation/fraud,
extortion, declaratory relief, defamation and attorney's fees. We have alleged
that Prototype and Vannan, are seeking to extort additional remuneration from
the Company and have made misrepresentations regarding the existence of an
alleged oral contract for additional remuneration (500,000 to 1,000,000 shares
of the Company's common stock). We are seeking a judgment declaring the
parties rights relative to a written contract between the parties and a
judgment declaring that Prototype and Vannan have no right or claim to any
additional remuneration. We have disputed the existence of any such oral
contract for additional remuneration. Prototype and Vannan removed the matter
to the U.S. District Court for the District of Nevada, case number CV-S-05-
0823-HDM-LRL and have alleged counter-claims for breach of contract, breach of
contractual covenant of good faith and fair dealing, unjust enrichment, and
intentional misrepresentation. Our responsive pleading was to file a Motion to
Remand or in the alternative to Dismiss all of the counterclaims. This motion
is now pending the court's ruling. We are strongly pursing the litigation and
we believe a favorable outcome is highly likely. A favorable outcome for the
Company would include a declaratory judgment declaring that Prototype and
Vannan are not entitled to any further remuneration and may also include
attorneys fees and cost for the Company. An unfavorable outcome for the
Company could include a judgment against the Company in an unspecified amount
which may be determined at trial. (See FINANCIAL STATEMENTS, Note 2 -
Commitments and Contingencies.)
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, 2005.
9
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, 2005 High Close Low Close
------------------------------- ---------- ---------
Fourth Quarter $7.45 $4.80
Third Quarter $7.85 $4.95
Second Quarter $8.06 $6.00
First Quarter $9.75 $6.45
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
At September 12, 2005, the Company's Common Stock was quoted on the OTC
Bulletin Board at a closing price of $6.80 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
June 30, 2005, we had approximately 3,263 shareholders of record based on
information provided by our transfer agent, Interwest Transfer Company, 1981
E. Murray-Holladay Road, Holladay, Utah 84117.
Recent Issuances of Unregistered Securities
-------------------------------------------
During June and July 2005, we issued 500,000 shares of restricted common stock
for cash of $1,500,000, or $3.00 per share, in connection with the exercise of
outstanding stock options. All of our shares issued in the foregoing
transactions were issued in reliance on the exemption from registration and
prospectus delivery requirements of the Act set forth in Section 3(b) and/or
Section 4(2) of the Securities Act and the regulations promulgated thereunder.
10
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, 2005 compared to year ended June 30, 2004
-------------------------------------------------------------
Since inception we have focused on the development of our technology and for a
number of years we were considered a development stage company. The past two
fiscal years we had limited revenues from the sale of our services and
products. For the fiscal year ended June 30, 2005 we had net sales of
$1,681,091, an 18% increase over net sales of $1,419,124, the previous year.
This increase was due primarily further expansion of our Products sales among
retail chain customers and original equipment manufacturers.
Our cost of sales for the year ended June 30, 2005 was $1,233,181, or 73% of
sales as compared to $1,114,230, or 78.5% of sales for the year ended June 30,
2004, resulting in a gross margin of $447,910 or 27% as compared to a gross
margin of $304,894 or 21% for the respective periods. The improvement in our
gross margin for the current year as compared to the prior year is a result of
manufacturing efficiencies such as (a) increasing the size of chemical
batches, (b) dedicating production shifts to manufacturing single products
(i.e., longer production runs), and (c) reducing labor costs by implementing
line automation. We believe that our gross margin can continue to improve as
our sales efforts generate additional product orders in such quantities to
take further advantage of the manufacturing efficiencies. We believe we
currently have sufficient manufacturing equipment and employees to merit a
substantial increase in production without incurring a proportionately
equivalent increase in labor costs.
We have experienced an increase in the cost of wheel components for our
tire/wheel assemblies due to the increasing cost of steel. We have not passed
the increases on to our customers and have elected to seek alternative
suppliers for components that are priced more competitively. However, if the
cost of steel wheel components continues to rise, we may elect to amend our
product pricing to reflect the increase in component costs. Also, during the
last six months our chemical pricing increased approximately 14% and we expect
to see some additional upward pressure on chemical pricing during the next
fiscal year.
11
Corporate Expense. For fiscal year 2005, total operating expenses were
$10,571,052, consisting of consulting expenses of $77,000, payroll and payroll
taxes of $1,905,177, depreciation and amortization of $385,726, research and
development costs of $880,748, bad debt expense of $14,087, loss on impairment
of assets of $18,054, selling, general and administrative expenses of
$1,156,260, and an expense of $6,134,000 for advisory group services
associated with the grant of options to acquire an aggregate of 3,000,000
shares of our common stock to third-party consultants. The value of the
options was calculated using the Black-Scholes option pricing model and was
expended during the three month period ended September 30, 2004, as reported
in our quarterly report on Form 10QSB for that period.
For fiscal year 2004, total operating expenses were $5,045,895, consisting of
consulting expenses of $370,666, payroll and payroll taxes of $2,345,082,
depreciation and amortization of $296,232, research and development cost of
$572,002, bad debt expense of $3,713 and selling, general and administrative
expenses of $1,458,200.
Our corporate expenses increased from $5,045,895 in fiscal year 2004 to
$10,571,052 in fiscal year 2005, for two main reasons: (1) the $6,134,000 for
advisory group services associated with the grant of options and (2) increases
in research and development expenses attributed to the development of our
polyurethane elastomer car tire technology. However, for fiscal year 2005, we
had reductions in consulting expenses of $293,666; payroll and payroll taxes
of $439,905, and selling, general and administrative expenses of $301,940.
For fiscal year 2006 we are estimating that our total operating expenses will
be approximately $5,000,000.
Interest Expense. We had no interest expense during fiscal years 2005 and
2004.
Other Income. For fiscal year 2005, we had other income of $50,134, consisting
of interest income of $35,181 (earned on account receivables and temporary
investments of cash not immediately needed in ordinary daily business) and
miscellaneous income of $14,953. For fiscal year 2004, we had other income of
$19,746, consisting of interest income of $17,234 (earned on account
receivables and temporary investments of cash not immediately needed in
ordinary daily business) and miscellaneous income of $2,512.
We experienced a net loss of $10,073,008 for the year ended June 30, 2005,
compared to a net loss of $4,721,255 for the year ended June 30, 2004. The
basic loss per share for fiscal year 2005 was $0.53 compared to $0.26 for
fiscal year 2004, based on the weighted average number of shares outstanding
of 18,931,779 and 17,846,910 for the respective periods.
12
Liquidity and Capital Resources
-------------------------------
During the fiscal year ended June 30, 2005, we financed our operations through
collecting accounts receivable and issuing common stock for: cash (paid in
connection with the exercise of outstanding stock options); prepayment of
certain salaries; and payment of professional services. For the fiscal year
ended June 30, 2004, we financed our operations in the same manner.
At June 30, 2005, we had current assets of $3,081,348 and current liabilities
of $84,828, for a working capital surplus of $2,996,520, an increase of
$640,389 over the working capital surplus of $2,356,131 we had at June 30,
2004. We had cash and cash equivalents of $2,122,320 and net accounts
receivable of $168,838 at June 30, 2005 compared to cash and cash equivalents
of $1,591,289 and net accounts receivable of $167,002 at June 30, 2004. Our
increase in cash and equivalents at June 30, 2005, is attributable to the
exercise of outstanding options during the year.
Net cash used by our operating activities for the fiscal year 2005 was
$2,618,898, compared to $2,197,583 for the fiscal year 2004. Our operations
for fiscal year 2005 were funded primarily by cash and cash equivalents,
accounts receivables, and the issuance of common stock for services and
salary. Our operations for fiscal 2004 were funded primarily the same way.
At June 30, 2005, we had net property and equipment of $1,141,315, after
deduction of accumulated depreciation of $1,858,950. At June 30, 2004, we had
net property and equipment of $1,445,993, after deduction of accumulated
depreciation of $1,567,187. At June 30, 2005, our property and equipment
consisted mainly of leasehold improvements, $120,767; mold and models,
$343,031; equipment, $2,280,888; furniture and fixtures, $70,678; and
software, $184,901, compared to leasehold improvements, $163,896; molds and
models, $315,282; equipment, $2,253,217; furniture and fixtures, $70,033;
vehicles, $25,851; and software, $184,901, at June 30, 2004.
Our financial statements are prepared using generally accepted accounting
principles applicable to a going concern which contemplates the realization of
assets and liquidation of liabilities in the normal course of business. We
have historically incurred significant losses which have resulted in a total
retained deficit of $36,463,835 at June 30, 2005 which raises substantial
doubt about our ability to continue as a going concern. Our financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result from the outcome of this uncertainty.
We have taken certain steps to maintain our operating and financial
requirements in an effort to enable us to continue as a going concern until
such time that revenues are sufficient to cover expenses, including: (1)
evaluating (A) our cost of goods and equipment utilization and requirements of
our manufacturing operations, and (B) our sales and marketing plan on a
product sector basis; (2) continued revisions to our methods, processes and
costs in order to achieve necessary manufacturing efficiencies (i.e., line
automation, reduced material costs, reduced product waste, etc.); and (3)
seeking reduced material and component costs from suppliers.
13
In addition, to expanding revenue opportunities during the fiscal year we have
commenced a program of (1) licensing manufacturing and distribution rights to
certain of our polyurethane tire products to third-party manufacturers based
on such factors as geographical locations and boundaries; (2) selling
manufacturing equipment to third-party manufacturers to manufacture products
utilizing our manufacturing equipment and processes; (3) selling our
proprietary polyurethane chemical systems to third-party manufacturers that
utilize our manufacturing equipment and processes; and (4) offering contract
design and engineering services to the tire and auto industries.
To supplement our cash needs during the 2006 fiscal year we have (1) obtained
approximately $1,500,000 in funding through the exercise of outstanding
options; and (2) expect to issued common stock in lieu of cash as compensation
for employment, development, and other professional services.
The combination of our accounts receivables and our cash and cash equivalents
are expected to meet the balance of our operational needs during the 2006
fiscal year. We are currently evaluating funding strategies to help outset any
cash shortfalls that may occur after during the 2006 fiscal year.
We anticipate that during the 2006 fiscal year we will need approximately
$4,000,000 to implement our plan and to meet our working capital requirements.
Our ability to continue as a going concern is dependent upon our ability to
successfully accomplish the plan described above, and eventually attain
profitable operations.
The accompanying financial statements do not include any adjustments that
might be necessary should we be unable to continue as a going concern.
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.
Risk Factors
------------
You should carefully consider the following risks and other information
contained in this Report and in our other SEC filings before you decide to
invest in us or to maintain or increase your investment. The risks and
uncertainties described below are not the only ones facing us. Additional
risks and uncertainties may also adversely impact and impair our business. If
any of the following risks actually occur, our business, results of operations
or financial condition would likely suffer. In such case, the trading price of
our common stock could decline, and you may lose all or part of your
investment.
14
Due to our history of operating losses, our auditors are uncertain that we
will be able to continue as a going concern.
Our Financial Statements have been prepared assuming that we will continue as
a going concern. For the year ended June 30, 2005, we suffered a net loss of
$10,073,008. During the fiscal years ended June 30, 2004 and 2003 we suffered
net losses of $4,721,255 and $3,091,972, respectively. The independent
auditors' report issued in conjunction with the financial statements for the
year ended June 30, 2005 contains an explanatory paragraph indicating that the
foregoing matters raise substantial doubt about our ability to continue as a
going concern. There is no assurance that we can generate net income, increase
revenues or successfully expand our operation in the future, and if we cannot
do so, the company may not be able to survive and any investment in the
company maybe lost.
Our cash and cash equivalent reserves may not be adequate to cover our costs
of operations.
Since inception we have been able to cover our operating losses from accounts
receivables and the sale of our securities. However, our financials do not
include provisions for any contingency, unexpected expenses or increases in
costs that may arise.
Our business operations and plans could be adversely affected if we are unable
to obtain additional funding when needed. We do not know whether additional
financing will be available when needed, or if it is available, whether it
will be available on acceptable terms.
It is possible that our available short-term assets and anticipated revenues
may not be sufficient to meet our operating expenses, business expansion
plans, and capital expenditures for the next twelve months. Insufficient funds
may prevent us from implementing our business strategy or may require us to
delay, scale back or eliminate certain opportunities for the commercialization
of our technology and products. If we cannot generate adequate sales of our
products, or increase our revenues through licensing of our technology or
other means, then we may be forced to cease operations.
In order to succeed as a Company, we must continue to develop commercially
viable products and sell adequate quantities of products at a high enough
price to generate a profit. We may not accomplish these objectives. Even if we
are successful in increasing our revenue base, a number of factors may affect
future sales of our product. These factors include: (i) whether competitors
produce alternative or superior products; and (ii) whether the cost of
implementing our products is competitive in the marketplace.
In addition, we are proposing to attempt to increase revenues through
licensing our technology and manufacturing rights, and offering contract
design and engineering services. If these proposals are not viable in the
marketplace, we may not generate any revenues from these efforts.
15
Because our auditors have expressed a going concern opinion, our ability to
obtain additional financing could be adversely affected.
We have incurred significant losses, which have resulted in an accumulated
deficit of $36,463,835 at June 30, 2005. Because of these continued losses and
our accumulated deficit, we have included a going concern paragraph in Note 5
to our financial statements included in this report on Form 10-KSB and
previous years, addressing substantial doubt about our ability to continue as
a going concern. This going concern paragraph could adversely affect our
ability to obtain favorable financing terms in the future or to obtain any
additional financing if needed.
Because we have limited experience, we may be unable to successfully manage
planned growth as we complete the transition from a technology development
company to a licensing manufacturing and marketing company.
We have limited experience in the commercial manufacturing and marketing
arena, limited product sales and marketing experience, and limited staff and
support systems, especially compared to competitors in the tire industry.
Although we have hired consultants to assist us in this transition period,
there can be no assurance that we will properly ascertain or assess any and
all risks inherent in the industry.
In addition, our success depends, in part, on our ability to license market
and distribute our products effectively. We have limited experience in the
sale and marketing of our lawn and garden products and little to no experience
in the marketing and sale of our proposed highway use products. We have
limited manufacturing, marketing and distribution capabilities and we will
need to retain consultants that have contacts in and understand the tire
industry marketplace. We may not be successful in entering into new licensing
and or marketing arrangements, whether engaging independent distributors or
recruiting, training and retaining a larger internal marketing staff and sales
force. If we do not meet the challenges posed by our planned licensing,
manufacturing, distribution and sales growth, the company may fail.
Because of our reliance on trade secrets, we may be at risk for potential
claims or litigation related to our technology.
In certain cases, where the disclosure of information required to obtain a
patent would divulge proprietary data, we may choose not to patent parts of
the proprietary technology and processes which we have developed or may
develop in the future and rely on trade secrets to protect the proprietary
technology and processes. The protection of proprietary technology through
claims of trade secret status has been the subject of increasing claims and
litigation by various companies both in order to protect proprietary rights as
well as for competitive reasons even where proprietary claims are
unsubstantiated. The prosecution of proprietary claims or the defense of such
claims is costly and uncertain given the uncertainty and rapid development of
the principles of law pertaining to this area. We may also be subject to
claims by other parties with regard to the use of technology information and
data that may be deemed proprietary to others.
16
Our business depends on the protection of our intellectual property and may
suffer if we are unable to adequately protect our intellectual property.
We have been granted several U.S. patents and have several U.S. patent
applications pending relating to certain aspects of our manufacturing
technology and use of polyurethane to make tires. We believe that our ability
to either manufacture products and/or license our technology is substantially
dependent on the validity and enforcement of these patents and patents
pending. We cannot provide assurance that our patents will not be invalidated,
circumvented or challenged, that the rights granted under the patents will
give us competitive advantages or that our patent applications will be
granted.
Proposed new products for highway use must meet safety standards prior to
marketing which could delay anticipated revenues and increase expenses.
Our proposed new products for highway use must meet applicable federal safety
standards through various testing processes. Our prototype polyurethane car
tires and proposed temporary spare tire are both subject to such standards.
The testing procedures involve submission of products to approved independent
testing facilities, a process that may entail both significant time and
significant expense. Therefore, the timing of new product placement in the
market may be hard to determine, additional research, development and testing
expenses may be incurred, and we may not receive revenues from such products
as planned. Such delays and potential additional expenses could have a
negative impact on cash flows and business planning.
Because our proposed highway use products are derived from new technology,
product liability insurance costs will likely increase and we may be exposed
to product liability risks that could adversely affect profitability.
Despite prior testing and approval of new highway use products, such products
may subject us to unforeseen liabilities because the technology is new and
there is no extensive history of use. Introduction of such new products will
most likely increase product liability premiums and defense of potential
claims could increase insurance cost even further which could substantially
increase our expenses.
Significant increases in the price of steel and other raw materials used in
our products could increase our production costs and decrease our profit
margins or make our products less competitive in the marketplace due to price
increases.
Over the last year, we have experienced an increase in the cost of wheel
components for our tire/wheel assemblies due to the increasing cost of steel.
We have not passed the additional cost of the steel wheel components on to our
customers, however, if the cost of steel wheel components continues to rise
during the next twelve months, we may elect to amend our product pricing to
reflect the increase in component costs. Also, during the last six months
we've seen a 14% increase in our chemical pricing and there is no guarantee
pricing will remain at current levels. Although we continually seek
reductions in raw material and component costs from our suppliers, and even
seek alternative suppliers in some cases, large price increases may have to be
passed on to our customers and could adversely affect our sales.
17
Future sales of our common stock may cause our stock price to decline.
Some of our outstanding restricted shares are eligible for resale by the
holders under Rule 144 and the sale or even the perception that a sale of such
shares may occur could cause our stock price to decline. We are unable to
estimate the amount, timing, or nature of future sales of outstanding
restricted shares. If we issue additional shares of common stock in a private
financing under an exemption from registration, then those shares will
constitute restricted shares as defined in Rule 144 under the Securities Act.
The restricted shares may only be sold if they are registered under the
Securities Act, or sold under Rule 144, or another exemption from registration
under the Securities Act.
In addition, we may issue stock in a registered offering or in a transaction
that would require registration of the underlying shares. In either case,
once a registration was effective, there could be an increased number of
shares available for sale in the public market which could reduce the market
price.
Anticipated fund-raising activities include possible equity placements that
will dilute current shareholders.
We are authorized to issue up to 40,000,000 shares of common stock. Our board
of directors has the authority to issue the authorized but unissued shares of
our common stock without action by the shareholders.
In addition, we have authorized 5,000,000 shares of preferred stock. Although
no preferred shares have been issued to date, the board of directors has the
authority to determine rights and privileges respecting voting rights,
preferences as to dividends and liquidation, and conversion rights with
respect to any preferred shares issued, all of which designations may be
superior to those attached to the common stock. The board of directors has the
authority to issue up to the entire amount of the authorized but unissued
shares of preferred stock without action by the shareholders.
Any such issuances, whether of common stock or some designated class of
preferred shares, will reduce the percentage ownership and may dilute the book
value of the shares held by existing shareholders.
Our stock price can be extremely volatile.
Our common stock is traded on the OTC Bulletin Board. There can be no
assurance that an active public market will continue for the common stock, or
that the market price for the common stock will not decline below its current
price. Such price may be influenced by many factors, including, but not
limited to, investor perception of us and our industry and general economic
and market conditions. The trading price of the common stock could be subject
to wide fluctuations in response to announcements of our business developments
or our competitors, quarterly variations in operating results, and other
events or factors. In addition, stock markets have experienced extreme price
volatility in recent years. This volatility has had a substantial effect on
the market prices of companies, at times for reasons unrelated to their
operating performance. Such broad market fluctuations may adversely affect the
price of our common stock.
18
We do not expect to pay dividends.
We have not paid dividends since inception on our common stock, and we do not
contemplate paying dividends in the foreseeable future on our common stock in
order to use all of our earnings, if any, to finance expansion of our business
plans.
ITEM 7. FINANCIAL STATEMENTS
Our financial statements appear beginning on page 33 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
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, 2005.
There have been no changes in our internal controls or changes in other
factors that could affect these controls subsequent to the date of their
evaluation.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The following table sets forth the name, age, and position of each executive
officer and director who have served during the fiscal year ended June 30,
2005 and the term of office of each director of the Company.
Name Age Position Director or Officer Since
---- --- -------- -------------------------
Richard A. Steinke 63 Chairman/President/CEO January 1995 (1)
Elliott N. Taylor 47 Exec. VP/Gen'l Counsel June 2002
James G. Moore, Jr. 57 VP Operations August 1999
Anders A. Suarez 39 CFO July 2004
David K. Griffiths 68 Secretary/Treasurer February 1995
Louis M. Haynie 78 Director July 1997
Henry D. Moyle 75 Director March 1999
Wesley G. Sprunk 68 Director January 2003
Norman H. Tregenza 68 Director April 2003
---------------------
(1) Mr. Steinke became President and CEO in November 1999.
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.
19
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 became Executive Vice President and General Counsel in June
2002. Prior to joining us, he was the principal attorney for Taylor and
Associates, Inc., a law firm in Salt Lake City, Utah, specializing in
corporate and securities law since May 1993. From August 1991 to March 1993,
he was the general counsel and chief financial officer for Carbon Fiber
Products, Inc., Ogden, Utah, a manufacturer of composite products for the golf
industry. From November 1987 to July 1991, he was an associate attorney at
Kruse, Landa & Maycock, a law firm in Salt Lake City, Utah. He received a
J.D. from the University of Tulsa, Tulsa, Oklahoma in 1986 and a B.S. in
Political Science from Utah State University, Logan, Utah in 1982.
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.
20
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.
Audit Committee and Appointment of New Member to the Board of Directors
-----------------------------------------------------------------------
Our Audit Committee consists of 4 members who are considered independent under
SEC regulations. Our Board of Directors has adopted an Audit Committee Charter
and our Audit Committee assists the Board of Directors overseeing the
performance of our independent auditors and the quality and integrity of our
internal accounting, auditing and financial reporting practices. The Audit
Committee is responsible for retaining (subject to stockholder ratification)
and, as necessary, terminating, the independent auditors, annually reviews the
qualifications, performance and independence of the independent auditors and
the audit plan, fees and audit results, and pre-approves audit and non-audit
services to be performed by the auditors and related fees.
Effective September 12, 2005, our board of directors appointed Steve M. Hanni
to the board of directors and appointed him to serve as the chairman of the
Company's audit committee. Our board has determined that Mr. Hanni, who is
independent of management, is an "audit committee financial expert" as defined
under SEC regulations.
Steve M. Hanni, is a certified public accountant and is a partner at Stayner
Bates & Jensen P.C., Salt Lake City, Utah. Mr. Hanni has been involved in
public accountancy since 1994. Mr. Hanni received a B.A. from Weber State
University, Ogden, Utah in 1993, and a MA in Accounting from Weber State
University in 1994.
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, 2005.
21
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 http://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 $100,000 during such period (as
determined at June 30, 2005, the end of our last completed fiscal year):
Summary Compensation Table
Long Term Compensation
----------------------
Annual Compensation Awards Payouts
Other Restricted
Name and Annual Stock Options LTIP All other
Principal Position Year Salary Bonus($) Compensation Awards /SARs Payout Compensation
------------------ ---- ------ -------- ------------ ------ ------- ------ ------------
Richard A. Steinke 2005 $598,000 -0- $ -0- $-0- $-0- $-0- $48,750
CEO, Pres. and 2004 $474,500 -0- $492,000 $-0- $-0- $-0- $-0-
Chairman 2003 $424,000 -0- $ -0- $-0- $-0- $-0- $-0-
Elliott N. Taylor, 2005 $180,000 -0- $ -0- $-0- $-0- $-0- $-0-
Executive V.P. 2004 120,000 -0- $81,999 $-0- $-0- $-0- $-0-
2003 120,000 -0- -0- $-0- $-0- $-0- $-0-
Notes of Summary Compensation Table
--------------------------------------------
In July 2004, our board authorized the issuance of 65,000 shares of restricted
common stock to Richard Steinke as employment compensation from July 1, 2004
through June 30, 2005. The value of the shares was $598,000, based on $9.20
per share, the closing price of the common stock on the date of the board
resolution.
In July 2004, we issued 5,000 shares of our restricted common stock as a one-
time payment to the Richard Steinke, in exchange for an assignment and
transfer of certain patents to the Company. The shares were valued at $9.75
per share based on the closing price of our common stock as quoted on the OTC
Bulletin Board July 1, 2004. The expense associated with the acquisition of
the technology will be amortized over the remaining life of the applicable
patents. Due to Mr. Steinke's relationship to the Company, the transaction
cannot be considered to have been negotiated at arm's length.
Employment Benefits
-------------------
We provided health and medical insurance to our executive officers similar to
that which is made available to all full time employees, and we reimbursed our
executive officers for reasonable out-of-pocket expenses incurred in
connection with our business.
22
As a condition to employment, our management and key personnel are required to
sign a non-disclosure and non-competition agreement. Under the terms of the
agreement, employees are not able to provide services or information deemed
confidential by us to any other company or person which directly or indirectly
competes with us in the tire industry or an industry which we intended to
enter. There is no time limitation on the non-disclosure aspect of the
agreement. The non-competition clause is for a period of two years and
prevents a former employee or consultant from acting as an employee,
consultant or in any other capacity for a competitor. Additionally, all
employees are required, as a condition of their employment, to enter into a
non-disclosure agreement related to any information or process deemed
confidential by us.
Options/SAR Grants
------------------
The following tables contain information regarding the Plan Options granted to
the Company's named executive officers during the fiscal year ended June 30,
2005:
OPTION/SAR GRANTS DURING LAST FISCAL YEAR
Individual Grants
-----------------------------------------------------
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise or
Options/SARs Employees Base Price Expiration
Name Granted in Fiscal Year ($/Share) Date
------------------- ------------ -------------- ----------- ----------
(a) (b) (c) (d) (e)
Elliott N. Taylor 25,000 24 $6.40 12/15/09
Aggregate Option/SAR Exercises in Last Fiscal Year
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
Shares at FY-End(#) at FY-End($)
Acquired Value Exercisable/ Exercisable/
Name on Exercise(#) Realized($) Unexercisable Unexerciable
------------------- ------------- ------------- ------------ ------------
N/A N/A N/A N/A N/A
Pension Table
-------------
Not Applicable.
Other Compensation
------------------
None.
23
Compensation of Directors
-------------------------
In December 2004, we issued options to acquire an aggregate of 80,000 shares
of our common stock to non-employee directors for annual service on our board
of directors pursuant to our 2004 Non-Employee Directors' Stock Incentive
Plan. These option vested on June 15, 2005, are exercisable at $6.40 per share
and expire on December 15, 2007. (See Item 11. Security Ownership of Certain
Beneficial Owners and Management: Summary of Various Compensation Plans.)
Termination of Employment and Change of Control Arrangement
-----------------------------------------------------------
As of June 30, 2005, 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 named executive officer in Summary Compensation Table
above that 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.
24
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables set forth as of September 12, 2005 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 20,005,516 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) 1,425,000 7.12
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 5.00
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) 1,425,000 7.12
Common Elliott N. Taylor, Exec. VP (5) 360,860 1.78
Common Anders A. Suarez, CFO (6) 69,400 0.35
Common James Moore, Vice President (7) 45,535 0.23
Common David K. Griffiths, Sec./Treas. 86,194 0.42
Common Louis M. Haynie, Director (8) 654,500 3.27
Common Henry D. Moyle, Jr. Director (9) 885,000 4.42
Common Wesley G. Sprunk, Director (10) 141,700 0.71
Common Norman H. Tregenza, Director (11) 332,700 1.66
Total Beneficial Ownership of
All Officers and Directors as
a Group (9 persons) 4,000,889 19.62
[Footnotes for the above table are on the next page]
25
(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, and 25,000 shares at an exercise
price of $6.40 per share that expire December 15, 2009. Also includes 25,000
shares per power of attorney; 20,692 shares as custodian for Mr. Taylor's
minor children; and 80,918 shares as trustee for family trusts.
(6) Includes options to acquire up to 30,000 shares at an exercise price of
$3.80 per share that expire September 30, 2006, and 25,000 shares at an
exercise price of $6.40 per share that expire December 15, 2009.
(7) Includes options to acquire up to 25,000 shares at an exercise price of
$6.40 per share that expire December 15, 2009.
(8) Includes options to acquire up to 20,000 shares at an exercise price of
$6.40 per share that expire December 15, 2007. Also includes 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.
(9) Includes options to acquire up to 20,000 shares at an exercise price of
$6.40 per share that expire December 15, 2007. Also includes 55,000 shares
owned beneficially and of record by Vickie L. Moyle, spouse of Henry D. Moyle,
and 11,000 shares owned beneficially and of record by a minor child, all of
which Mr. Moyle may be deemed to have beneficial ownership.
(10) Includes options to acquire up to 20,000 shares at an exercise price of
$6.40 per share that expire December 15, 2007.
(11) Includes options to acquire up to 20,000 shares at an exercise price of
$6.40 per share that expire December 15, 2007. Also includes 13,000 shares
held in an IRA, of which Mr. Tregenza is a beneficiary; 40,000 shares held of
record by Norman H. Tregenza IV Trust, dated 9/26/86, Richard R. Keller
trustee; 56,650 per power of attorney for Norman A. Tregenza, the son of Mr.
Tregenza; 20,000 shares held in an IRA, of which Alyce B. Tregenza, the spouse
of Mr. Tregenza is the beneficiary; 5,000 shares per power of attorney for
Alyce B. Tregenza; 45,650 shares per power of attorney for Suzanne C. Moore,
the daughter of Mr. Tregenza.
26
Securities Authorized For Issuance Under Equity Compensation Plans
------------------------------------------------------------------
Equity Compensation Plan Information
As of June 30, 2005 (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 395,000 $5.04 209,191
Equity
Compensation
Plans
Not Approved
by Security
Holders (1)(2)(3) 3,550,000 $6.59 1,020,000
--------- ---------
3,945,000 $3.66 1,229,191
========= =========
(1) Includes options to acquire up to 470,000 shares at an exercise price of
$3.00 per share that expire July 31, 2005, owned beneficially and of record by
Focus Sales and Marketing, L.L.C. and issued as compensation in association
with product marketing services
(2) Includes 3,000,000 Options to certain non-employees at an exercise price
of $7.00 per share. The closing price for our common stock on the date the
Option grants were authorized was $6.95 per share. The Options vest
immediately, but are exercisable only as follows: (a) one-third of the total
Options are exercisable on the earlier of September 13, 2006 or the first day
after the closing price of our common stock has equaled or exceeded a price
equal to 150% of the exercise price for 20 consecutive trading days; (b) one-
third of the total Options are exercisable on the earlier of September 13,
2006 or the first day after the closing price has equaled or exceeded a price
equal to 175% of the closing price for 20 consecutive trading days; and (c)
one-third of the total Options are exercisable on the earlier of September 13,
2006 or the first day after the closing price has equaled or exceeded a price
equal to 200% of the closing price for 20 consecutive trading days.
(3) Includes options to acquire an aggregate of 80,000 shares of our common
stock to non-employee directors for annual service on our board of directors
pursuant to our 2004 Non-Employee Directors' Stock Incentive Plan. These
option vested on June 15, 2005, are exercisable at $6.40 per share and expire
on December 15, 2007.
27
Summary of Various Compensation Plans
-------------------------------------
Our 2004 Non-Employee Directors' Stock Incentive Plan (the "2004 Plan") was
established to attract, motivate and retain qualified non-employee Directors.
The 2004 Plan will provide a means for non-employee Directors to increase
their equity ownership consistent with the Company's guidelines for stock
ownership by non-employee Directors. The 2004 Plan has not been submitted to
our shareholders for approval.
The Date of Grant to Eligible Directors is December 15 of each year during the
life of the 2004 Plan and for any supplemental grant, on a date determined by
the Board of Directors. An Eligible Director is any person who on the date of
grant is a member of the Board of Directors.
A total of 1,200,000 shares of Common Stock may be awarded under the 2004
Plan. If any shares subject to any Award granted thereunder are forfeited or
such Award otherwise terminates without the issuance of such shares or of
other consideration in lieu of such shares, the shares subject to such Award,
to the extent of such termination or forfeiture, shall again be available for
grant under the 2004 Plan during the term of the Plan.
The 2004 Plan has a duration of five (5) years commencing on December 15,
2004. Basic Annual Awards can be made annually and Supplemental Grants may be
made at any time in the discretion of the Board of Directors. An annual
aggregate limit of 30,000 shares (including Options, Restricted Stock) is set
for any individual Director. Grants may consist of Options or Restricted Stock
or a combination of Options and Restricted Stock during any given calendar
year. The term of each Option may be up to three (3) years from the Date of
Grant and the Option Price shall be the Fair Market Value of the Common Stock
on the date the Option is granted. Under no circumstances shall any Option
vest in less than six months from the Date of Grant.
Formulas for Basic Annual Awards of Stock Options and of Restricted Stock are
as follows:
(a) Stock Options: A minimum of 20,000 Stock Options, but in no event more
than 30,000 Stock Options to acquire shares of Amerityre based on the Market
Price on the Date of Grant; and
(b) Restricted Stock: Such number of Shares that the Compensation Committee
and/or the Board of Directors determines, after deducting the Stock Options
granted received under (a) above.
In the event of a reorganization, recapitalization, stock split, stock
dividend, combination of shares, merger, consolidation or any other change in
corporate structure of the Company affecting Common Stock, or a sale by the
Company of all or a substantial part of its assets, or any distribution to
stockholders other than a cash dividend, the Board of Directors of the Company
will make appropriate adjustment in the number and kind of shares authorized
by the Plan, and any adjustments to outstanding awards as it deems
appropriate. However, no fractional shares of Common Stock will be issued
pursuant to any such adjustment, and the Fair Market Value of any fractional
shares resulting from adjustments will be paid in cash to the Awardee.
All Options and Restricted Stock granted to an Awardee shall automatically
terminate and be null and void as of the date an Eligible Director's service
on the Board of Directors terminates if the directorship is terminated as a
result of any act of (a) fraud or intentional misrepresentation, or (b)
embezzlement, misappropriation, or conversion of assets or opportunities of
the Company or any Subsidiary.
28
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 (the "2002 Plan"). Effective January
2005, our Board of Directors approved the terms of our 2005 Stock Option and
Award Plan (the "2005 Plan"). The 2005 has not been submitted to our
Shareholders for approval.
2002 Plan and 2005 Plan Summary
-------------------------------
Both the 2002 Plan and the 2005 Plan (the "Award Plans") are intended to
reward employees and other individuals who contribute to our success and to
provide them with a stake in the enterprise as shareholders. Consistent with
this belief, the award of stock options has been and will continue to be an
important element of our compensation program.
We intend to use the Award Plans to (a) attract competent directors, executive
personnel, and other employees, (b) aid in the retention of the services of
existing directors, executive personnel, and employees, and (c) provide
incentives to all of such personnel to devote the utmost effort and skill to
the 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 Plans are administered by our Compensation Committee (the
"Committee") appointed from time to time by our board of directors. Awards
granted under the Award Plan may be incentive stock options ("ISOs") as
defined in the Internal Revenue Code of 1986, as amended (the "Code"),
appreciation rights, options which do not qualify as ISOs, or stock bonus
awards which are awarded to our employees, including officers and directors,
who, in the opinion of the board or the Committee, have contributed, or are
expected to contribute, materially to our success. In addition, at the
discretion of our Board of Directors or the Committee, options or bonus stock
may be granted to individuals who are not employees but contribute to our
success.
The exercise price of options granted under the Award Plans (as determined by
our Board of Directors), may be based on the fair market value of the
underlying Common Stock at the time of grant and, in the case of ISOs may not
be less than 100% of the fair market value of such capital stock on the date
the option is granted (110% of the fair market value in the case of 10%
stockholders).
Options granted under the Award Plans shall expire no later than ten years
after the date of grant (five years in the case of ISOs granted to 10%
stockholders). The option price may be paid by cash or, at the discretion of
our Board of Directors or Committee, by delivery of a promissory note or
shares of our Common Stock already owned by the optionee (valued at their fair
market value at the date of exercise), or a combination thereof.
All of our employees, officers, and directors are eligible to participate
under the Award Plans. A maximum of 2,000,000 shares are available for grant
under each Award Plan. The identification of individuals entitled to receive
awards, the terms of the awards, and the number of shares subject to
individual awards, are determined by our Board of Directors or the Committee,
in their sole discretion provided, however, that in no event may the aggregate
fair market value of shares for which an ISO is first exercisable in any
calendar year by any eligible employee exceed $100,000.
29
The aggregate number of shares with respect to which options or stock awards
may be granted under the Award Plans, the number of shares covered by each
outstanding option, and the purchase price per share shall be adjusted for any
increase or decrease in the number of issued shares resulting from a
recapitalization, reorganization, merger, consolidation, exchange of shares,
stock dividend, stock split, reverse stock split, or other subdivision or
consolidation of shares.
Our Board of Directors or the Committee may from time to time alter, amend,
suspend, or discontinue the Award Plans with respect to any shares as to which
options or stock awards have not been granted. However, no such alteration or
amendment (unless approved by our stockholders) shall (a) increase (except
adjustment for an event of dilution) the maximum number of shares for which
options or stock awards may be granted under the Award Plans either in the
aggregate or to any eligible employee: (b) reduce (except adjustment for an
event of dilution) the minimum option prices which may be established under
the Award Plans; (c) extend the period or periods during which options may be
granted or exercised; (d) materially modify the requirements as to eligibility
for participation in the Award Plans; (e) change the provisions relating to
events of dilution; or (f) materially increase the benefits accruing to the
eligible participants under the Award Plans.
If a participant to whom an option is granted exercises such option by payment
of the exercise price in whole or in part with previously owned shares, the
optionee will not realize income with respect to the number of shares received
on exercise which equals the number of shares delivered by the optionee. The
optionee's basis for the delivered shares will carry over to the option shares
received. With regard to the number of non-qualified option shares received
which exceeds the number of shares delivered, the optionee will realize
ordinary income at the time of exercise; and the optionee's tax basis in these
additional option shares will equal the amount of ordinary income realized
plus the amount of any cash paid.
Recipients of ISOs will not be required to recognize income at the time of the
grant of the options or at the time of exercise of the options as long as the
stock received on exercise is held for at least two years from the date of the
grant of the ISOs or one year from the date of exercise (although the
difference between the fair market value of the stock and the exercise price
paid at the time of exercise must be taken into account for alternative
minimum tax purposes). If the stock received upon exercise of an ISO is
disposed of prior to the expiration of either of such time periods, the
optionee will be required to recognize as ordinary income the amount by which
the fair market value of the stock received at the time of exercise exceeds
the exercise price of the ISOs.
Under the Award Plans, stock appreciation rights ("SARs") can be granted at
the time an option is granted with respect to all or a portion of the shares
subject to the related option. SARs can only be exercised to the extent the
related option is exercisable and cannot be exercised for the six-month period
following the date of grant, except in the event of death or disability of the
optionee. The exercise of any portion of either the related option or the
tandem SARs will cause a corresponding reduction in the number of shares
remaining subject to the option or the tandem SARs thus maintaining a balance
between outstanding options and SARs. SARs permit the holder to receive an
amount (in cash, shares, or a combination of cash and shares, as determined by
our Board of Directors at the time of grant) equal to the number of SARs
exercised multiplied by the excess of the fair market value of the shares on
the exercise date over the exercise price of the related options.
30
Under the terms of the Award Plans, our board of directors or the Committee
may also grant stock awards which may, at the discretion of our Board of
Directors or Committee, be subject to forfeiture under certain conditions.
Recipients of stock awards will realize ordinary income at the time of the
lapse of any 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.
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
remaining life of the applicable patents. Due to our President's relationship
with us, the agreement and the related amendments cannot be considered to have
been negotiated at arm's length.
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..................... 33
Balance Sheet as of June 30, 2005........................................ 34
Statements of Operations for the years ended June 30, 2005 and 2004...... 36
Statements of Stockholders' Equity for the years
ended June 30, 2005 and 2004 ........................................... 37
Statements of Cash Flows for the years ended June 30, 2005 and 2004...... 39
Notes to Financial Statements............................................ 41
31
(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, 2005.
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 $38,758 and $35,326, 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 $-0-, respectively. The services provided
related to the review of registration statements filed during applicable
period.
3) Tax Fees. $1,816 and $1,914.
4) All Other Fees. $3,500 and $2,519.
5) Not applicable.
6) Not Applicable.
32
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 15, 2005 By /S/Richard A. Steinke, Chairman of
the Board, President and CEO
[Principal Executive Officer]
Date: September 15, 2005 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 15, 2005 /S/Louis M. Haynie, Director
Date: September 15, 2005 /S/Henry Moyle, Director
Date: September 15, 2005 /S/Wesley G. Sprunk, Director
Date: September 15, 2005 /S/Norman H. Tregenza, Director
Date: September 15, 2005 /S/Steve M. Hanni, Director
33
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, 2005 and the related statements of operations,
stockholders' equity and cash flows for the years ended June 30, 2005 and
2004. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Amerityre Corporation as of
June 30, 2005, and the results of its operations and its cash flows for the
years ended June 30, 2005 and 2004, in conformity with U.S. generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 5 to the financial
statements, the Company has incurred significant losses from operations, which
have resulted in an accumulated deficit, raising substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 5 to the financial statements. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/S/ HJ & Associates
HJ & Associates, LLC
Salt Lake City, Utah
September 1, 2005
34
AMERITYRE CORPORATION
Balance Sheet
ASSETS
------
June 30,
2005
------------
CURRENT ASSETS
Cash and cash equivalents $ 2,122,320
Accounts receivable - net of zero allowance 168,838
Inventory (Note 1) 646,798
Prepaid expenses 62,489
Special projects in progress 752
Deferred stock offering expenses 80,151
------------
Total Current Assets 3,081,348
------------
PROPERTY AND EQUIPMENT (Note 1)
Leasehold improvements 120,767
Molds and models 343,031
Equipment 2,280,888
Furniture and fixtures 70,678
Software 184,901
Less - accumulated depreciation (1,858,950)
------------
Total Property and Equipment 1,141,315
------------
OTHER ASSETS
Patents and trademarks - net (Note 1) 368,011
Deposits 36,000
------------
Total Other Assets 404,011
------------
TOTAL ASSETS $ 4,626,674
============
The accompanying notes are an integral part of these financial statements.
35
AMERITYRE CORPORATION
Balance Sheet (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
June 30,
2005
------------
CURRENT LIABILITIES
Accounts payable $ 49,904
Accrued expenses 27,424
Deferred revenue - special projects 7,500
------------
Total Current Liabilities 84,828
------------
Total Liabilities 84,828
------------
COMMITMENTS AND CONTINGENCIES (Note 2)
STOCKHOLDERS' EQUITY
Preferred stock: 5,000,000 shares authorized of
$0.001 par value, -0- shares issued and outstanding -
Common stock: 40,000,000 shares authorized of
$0.001 par value, 19,505,216 shares issued and
outstanding 19,505
Additional paid-in capital 41,986,176
Deferred Stock Offering - Cost (1,000,000)
Retained Deficit (36,463,835)
------------
Total Stockholders' Equity 4,541,846
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,626,674
============
The accompanying notes are an integral part of these financial statements.
36
AMERITYRE CORPORATION
Statements of Operations
For the Years Ended
June 30,
---------------------------
2005 2004
------------ ------------
NET SALES $ 1,681,091 $ 1,419,124
COST OF SALES 1,233,181 1,114,230
------------ ------------
GROSS PROFIT 447,910 304,894
------------ ------------
EXPENSES
Consulting 77,000 370,666
Advisory Group Expense 6,134,000 -
Payroll and payroll taxes 1,905,177 2,345,082
Depreciation and amortization 385,726 296,232
Research and development 880,748 572,002
Bad debt expense 14,087 3,713
Loss on sale and impairment of assets 18,054 -
Selling, general and administrative 1,156,260 1,458,200
------------ ------------
Total Expenses 10,571,052 5,045,895
------------ ------------
LOSS FROM OPERATIONS (10,123,142) (4,741,001)
------------ ------------
OTHER INCOME
Interest income 35,181 17,234
Miscellaneous income 14,953 2,512
------------ ------------
Total Other Income 50,134 19,746
------------ ------------
NET LOSS $ (10,073,008) $ (4,721,255)
============ ============
BASIC LOSS PER SHARE $ (0.53) $ (0.26)
============ ============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 18,931,779 17,846,910
============ ============
The accompanying notes are an integral part of these financial statements.
37
AMERITYRE CORPORATION
Statements of Stockholders' Equity
Expenses
Prepaid Deferred
Additional Stock with Consulting/
Common Stock Paid-in Subscription Common Stock Accumulated
Shares Amount Capital Receivable Stock Offering 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.
38
AMERITYRE CORPORATION
Statements of Stockholders' Equity (Continued)
Expenses
Prepaid Deferred
Additional Stock with Consulting/
Common Stock Paid-in Subscription Common Stock Accumulated
Shares Amount Capital Receivable Stock Offering Deficit
----------- -------- ----------- ----------- ----------- ----------- -----------
Balance, June 30, 2004 18,429,168 $ 18,429 $ 30,594,482 $ - $ (219,988) $ - $(26,390,827)
Common stock issued to
CEO for compensation 65,000 65 597,935 - - - -
Common stock issued for
cash exercise of options
at $2.00 per share 20,000 20 39,980 - - - -
Common stock issued for
cash exercise of options
at $3.00 per share 30,000 30 89,970 - - - -
Common stock issued for
cash exercise of options
at $4.00 per share 796,000 796 3,183,204 - - - -
Common stock issued for
patents 15,000 15 146,235 - - - -
Common stock issued for
cash-less exercise of
option 120,748 121 (121) - - - -
Common stock issued for
services and prepaid
services 29,300 29 200,491 - - - -
Options granted for
services and stock
offering cost - - 7,134,000 - - (1,000,000) -
Amortization of prepaid
expenses - - - - 219,988 - -
Net loss for the year
ended June 30, 2005 - - - - - - (10,073,008)
----------- -------- ------------ ----------- ----------- ---------- ------------
Balance, June 30, 2005 19,505,216 $ 19,505 $ 41,986,176 $ - $ - $(1,000,000) $(36,463,835)
=========== ======== ============ =========== =========== ========== ============
The accompanying notes are an integral part of these financial statements.
39
AMERITYRE CORPORATION
Statements of Cash Flows
For the Years Ended
June 30,
---------------------------
2005 2004
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (10,073,008) $ (4,721,255)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 385,726 296,232
Bad debt expense 14,087 3,713
Loss on sale and impairment of assets 18,054 -
Common stock issued for services 798,520 2,176,692
Re-valuation of deferred consulting - 265,656
Options issued for advisory group services 6,134,000 -
Amortization of expenses prepaid with
with common stock 219,988 -
Changes in assets and liabilities:
(Increase) in accounts receivable (15,923) (42,234)
(Increase) in inventory (89,282) (92,532)
Decrease (increase) in prepaid expenses 36,518 (46,340)
(Increase) in other assets (73,723) -
Increase (decrease) in accounts payable and
accrued expenses 26,145 (37,515)
------------ ------------
Net Cash Used by Operating Activities $ (2,618,898) $ (2,197,583)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for patents and trademarks (97,226) (57,847)
Proceeds from sale of fixed assets 8,800 -
Cash paid for fixed assets (75,645) (436,517)
------------ ------------
Net Cash Used by Investing Activities $ (164,071) $ (494,364)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Receipt of subscriptions receivable - 16,632
Common stock issued for cash 3,314,000 1,776,000
------------ ------------
Net Cash Provided by Financing Activities $ 3,314,000 $ 1,792,632
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 531,031 (899,315)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,591,289 2,490,604
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,122,320 $ 1,591,289
============ ============
The accompanying notes are an integral part of these financial statements.
40
AMERITYRE CORPORATION
Statements of Cash Flows (Continued)
For the Years Ended
June 30,
---------------------------
2005 2004
------------ ------------
SUPPLEMENTAL SCHEDULE OF CASH FLOW ACTIVITIES
CASH PAID FOR:
Interest $ - $ -
Income taxes $ - $ -
NON-CASH OPERATING ACTIVITIES
Common stock issued for services rendered $ 798,520 $ 2,176,692
NON-CASH FINANCING ACTIVITIES
Options issued for advisory group service $ 6,134,000 $ -
The accompanying notes are an integral part of these financial statements.
41
AMERITYRE CORPORATION
Notes to the Financial Statements
June 30, 2005 and 2004
NOTE 1 -ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Organization
Amerityre Corporation, (the "Company") was incorporated under the laws of the
State of Nevada on January 30, 1995, under the name American Tire Corporation.
The Company was organized to take advantage of existing proprietary and non-
proprietary technology available for the manufacturing of specialty tires.
The Company engages in the manufacturing, marketing, distribution and sales of
"flatfree" specialty tires and tire-wheel assemblies and currently is
manufacturing these tires at its manufacturing facility located in Boulder
City, Nevada. During the year ended June 30, 2001, the name of the Company
was changed to Amerityre Corporation.
b. Accounting Method
The Company's financial statements are prepared using the accrual method of
accounting. The Company has elected a June 30 year-end.
c. Basic Loss Per Share
The computation of basic loss per share of common stock is based on the
weighted average number of shares outstanding during the period.
For the Years Ended
June 30,
---------------------------
2005 2004
------------ ------------
Loss (numerator) $ (10,073,008) $ (4,721,255)
Shares (denominator) 18,931,779 17,846,910
Per share amount $ (0.53) $ (0.26)
The Company's outstanding stock options have been excluded from the basic net
loss per share calculation. The Company excluded 3,945,000 and 1,922,000
common stock equivalents for the years ended June 30, 2005 and 2004,
respectively because they are antidilutive.
d. Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
42
AMERITYRE CORPORATION
Notes to the Financial Statements
June 30, 2005 and 2004
NOTE 1 -ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
e. Income Taxes
Deferred taxes are provided on a liability method whereby deferred tax assets
are recognized for deductible temporary differences and operating loss and tax
credit carryforwards and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely that not that some portion or all of the
deferred tax assets will not be realized. Deferred tax assets and liabilities
are adjusted for the effects of changes in tax laws and rates on the date of
enactment. Net deferred tax assets consist of the following components as of
June 30, 2005 and 2004:
2005 2004
------------ ------------
Deferred tax assets:
NOL Carryover $ 8,154,000 $ 6,224,303
Deferred tax liabilities:
Valuation allowance (8,154,000) (6,224,303)
------------ ------------
Net deferred tax asset $ - $ -
============ ============
The income tax provision differs from the amount of income tax determined by
applying the U.S. federal and state income tax rates of 39% to pretax income
from continuing operations for the years ended June 30, 2005 and 2004 due to
the follow:
2005 2004
------------ ------------
Book income $ (3,928,473) $ (1,841,328)
Meals & Entertainment 1,854 650
Officer issuance - 9,750
Other 397,218 (2,884)
Depreciation and amortization 53,773 -
Stock for Services/Options Expense - 848,909
Advisory Group Option 2,392,260 -
Valuation Allowance 1,083,368 984,903
------------ ------------
$ - $ -
============ ============
At June 30, 2005, the Company had net operating loss carryforwards of
approximately $20,800,000 that may be offset against future taxable income
from the year 2005 through 2025. No tax benefit has been reported in the June
30, 2005 financial statements since the potential tax benefit is offset by a
valuation allowance of the same amount. Due to the change in ownership
provisions of the Tax Reform Act of 1986, net operating loss carryforwards for
Federal income tax reporting purposes are subject to annual limitations.
Should a change in ownership occur, net operating loss carryforwards may be
limited as to use in future years.
43
AMERITYRE CORPORATION
Notes to the Financial Statements
June 30, 2005 and 2004
NOTE 1 -ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
f. Inventory
Inventory is stated at the lower of cost (computed on a first-in, first-out
basis) or market. The inventory consists of chemicals, finished goods
produced in the Company's plant and products purchased for resale.
Raw Materials $ 122,834
Work in Progress -
Finished Goods 523,964
-----------
Total Inventory $ 646,798
===========
During the years ended June 30, 2005 and 2004, the Company recorded inventory
impairment expense of $-0- and $-0-, respectively.
g. Property and Equipment
Property and equipment are stated at cost. Expenditures for small tools,
ordinary maintenance and repairs are charged to operations as incurred. Major
additions and improvements are capitalized. Depreciation is computed using the
straight-line method over estimated useful lives as follows:
Leasehold improvements 5 years, or over lease term
Equipment 5 to 7 years
Furniture and fixtures 7 years
Automobiles 5 years
Software 3 years
Depreciation expense for the years ended June 30, 2005 and 2004 was $354,879
and $294,923, respectively.
h. Revenue Recognition
Revenue is recognized when the sales amount is determined, shipment of goods
to the customer has occurred and collection is reasonably assured. Product is
shipped FOB origination.
i. Patents and Trademarks
Patent and trademark costs have been capitalized at June 30, 2005 totaling
$407,642. The patents which have been granted are being amortized over a
period of 20 years. Patents which are pending or are being developed are not
being amortized. Amortization will begin once the patents have been issued.
Amortization expense for the years ended June 30, 2005 and June 30, 2004 was
$30,847 and $1,309, respectively. The Company evaluates the recoverability of
intangibles and reviews the amortization period on a continual basis utilizing
the guidance of SFAS 142, "Goodwill and Other Intangible Assets." 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.
44
AMERITYRE CORPORATION
Notes to the Financial Statements
June 30, 2005 and 2004
NOTE 1 -ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
j. Advertising
The Company follows the policy of charging the costs of advertising to expense
as incurred. Advertising expense for the years ended June 30, 2005 and 2004
was $160,860 and $45,055 respectively.
k. Newly Adopted Accounting Pronouncements
During the year ended June 30, 2005, the Company adopted the following
accounting pronouncements:
On December 16, 2004 the FASB issued SFAS No. 123(R), Share-Based Payment,
which is an amendment to SFAS No. 123, Accounting for Stock-Based
Compensation. This new standard eliminates the ability to account for share-
based compensation transactions using Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees, and generally
requires such transactions to be accounted for using a fair-value-based method
and the resulting cost recognized in our financial statements. This new
standard is effective for awards that are granted, modified or settled in cash
in interim and annual periods beginning after June 15, 2005. In addition, this
new standard will apply to unvested options granted prior to the effective
date. We will adopt this new standard effective for the first fiscal quarter
of 2006, and have not yet determined what impact this standard will have on
our financial position or results of operations.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs - an amendment
of ARB No. 43, Chapter 4. This Statement amends the guidance in ARB No. 43,
Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts
of idle facility expense, freight, handling costs, and wasted material
(spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that ". . .
under some circumstances, items such as idle facility expense, excessive
spoilage, double freight, and rehandling costs may be so abnormal as to
require treatment as current period charges. . ." This Statement requires that
those items be recognized as current-period charges regardless of whether they
meet the criterion of "so abnormal." In addition, this Statement requires that
allocation of fixed production overheads to the costs of conversion be based
on the normal capacity of the production facilities. This statement is
effective for inventory costs incurred during fiscal years beginning after
June 15, 2005. Management does not believe the adoption of this Statement will
have any immediate material impact on the Company.
In December 2004, the FASB issued SFAS No. 152, Accounting for Real Estate
Time-sharing Transactions, which amends FASB statement No. 66, Accounting for
Sales of Real Estate, to reference the financial accounting and reporting
guidance for real estate time-sharing transactions that is provided in AICPA
Statement of Position (SOP) 04-2, Accounting for Real Estate Time-Sharing
Transactions. This statement also amends FASB Statement No. 67, Accounting for
Costs and Initial Rental Operations of Real Estate Projects, to state that the
guidance for (a) incidental operations and (b) costs incurred to sell real
estate projects does not apply to real estate time-sharing transactions. The
accounting for those operations and costs is subject to the guidance in SOP
04-2. This Statement is effective for financial statements for fiscal years
beginning after June 15, 2005. Management believes the adoption of this
Statement will have no impact on the financial statements of the Company.
45
AMERITYRE CORPORATION
Notes to the Financial Statements
June 30, 2005 and 2004
NOTE 1 -ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
k. Newly Adopted Accounting Pronouncements (continued)
In December 2004, the FASB issued SFAS No.153, Exchange of Nonmonetary Assets.
This Statement addresses the measurement of exchanges of nonmonetary assets.
The guidance in APB Opinion No. 29, Accounting for Nonmonetary Transactions,
is based on the principle that exchanges of nonmonetary assets should be
measured based on the fair value of the assets exchanged. The guidance in that
Opinion, however, included certain exceptions to that principle. This
Statement amends Opinion 29 to eliminate the exception for nonmonetary
exchanges of similar productive assets and replaces it with a general
exception for exchanges of nonmonetary assets that do not have commercial
substance. A nonmonetary exchange has commercial substance if the future cash
flows of the entity are expected to change significantly as a result of the
exchange. This Statement is effective for financial statements for fiscal
years beginning after June 15, 2005. Earlier application is permitted for
nonmonetary asset exchanges incurred during fiscal years beginning after the
date of this statement is issued. Management believes the adoption of this
Statement will have no impact on the financial statements of the Company.
The implementation of the provisions of these pronouncements are not expected
to have a significant effect on the Company's consolidated financial statement
presentation.
l. Equity Securities
Equity securities issued for services rendered have been accounted for at the
fair market value of the securities on the date of authorization.
m. Concentrations of Risk
The Company maintains several accounts with financial institutions. The
accounts are insured by the Federal Deposit Insurance Corporation up to
$100,000. The Company's balances exceed that amount by $1,808,640 at June 30,
2005.
Credit losses, if any, have been provided for in the financial statements and
are based on management's expectations. The Company's accounts receivable are
subject to potential concentrations of credit risk. The Company does not
believe that it is subject to any unusual risks, or significant risks in the
normal course of its business.
The Company has one customer who accounted for 12% of the Company's sales for
the year ended June 30, 2005.
46
AMERITYRE CORPORATION
Notes to the Financial Statements
June 30, 2005 and 2004
NOTE 1 -ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
n. Stock Options
As permitted by FASB Statement 148 "Accounting for Stock Based Compensation -
Transition and Disclosure" (SFAS No. 148), the Company elected to measure and
record compensation cost relative to employee stock option costs in accordance
with Accounting Principles Board ("APB") Opinion 25, "Accounting for Stock
Issued to Employees," and related interpretations and make proforma
disclosures of net income and earnings per share as if the fair value method
of valuing stock options had been applied. Under APB opinion 25, compensation
cost is recognized for stock options granted to employees when the option
price is less that the market price of the underlying common stock on the date
of grant.
o. Valuation of Options and Warrants
The valuation of options and warrants granted to unrelated parties for
services are measured as of the earlier of (1) the date at which a commitment
for performance by the counterparty to earn the equity instrument is reached,
or (2) the date the counterparty's performance is complete. Pursuant to the
requirements of EITF 96-18, the options and warrants will continue to be
revalued in situations where they are granted prior to the completion of the
performance.
p. Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
NOTE 2 -COMMITMENTS AND CONTINGENCIES
In October 2002, we entered into a five-year lease for a 49,200 square foot
executive/manufacturing facility in Boulder City, Nevada. The agreement
required a security deposit of $18,000 and monthly rent payments of $16,000
for the first twelve months with annual increases. At June 30, 2005, the
monthly rent was $17,500. Future minimum lease payments under this non-
cancelable operating lease is as follows:
2006 $ 208,000
2007 214,000
2008 54,000
-------------
$ 476,000
=============
47
AMERITYRE CORPORATION
Notes to the Financial Statements
June 30, 2005 and 2004
NOTE 2 -COMMITMENTS AND CONTINGENCIES, Continued
On June 13, 2005, we filed case number A505333 in the Eighth Judicial District
Court for the State of Nevada against Prototype Engineering, Inc., an Ohio
corporation ("Prototype"), and Frederick F. Vannan, Jr. ("Vannan"). Our causes
of action includes allegations of alter ego, misrepresentation/fraud,
extortion, declaratory relief, defamation and attorney's fees. We have alleged
that Vannan and Prototype, are seeking to extort additional remuneration from
the Company and have made misrepresentations regarding the existence of an
alleged oral contract for additional remuneration (500,000 to 1,000,000 shares
of the Company's common stock). We are seeking a judgment declaring the
parties rights relative to a written contract between the parties and a
judgment declaring that Prototype and Vannan have no right or claim to any
additional remuneration. We have disputed the existence of any such oral
contract for additional remuneration. Prototype and Vannan removed the matter
to the U.S. District Court for the District of Nevada [CV-S-05-0823-HDM-LRL]
and have alleged counter-claims for breach of contract, breach of contractual
covenant of good faith and fair dealing, unjust enrichment, and intentional
misrepresentation. Our responsive pleading was to file a Motion to Remand or
in the alternative to Dismiss all of the counterclaims. This motion is now
pending the court's ruling. We are strongly pursing the litigation and we
believe a favorable outcome is highly likely. A favorable outcome for the
Company would include a declaratory judgment declaring that Prototype and
Vannan are not entitled to any further remuneration and may also include
attorneys fees and cost for the Company. An unfavorable outcome for the
Company could include a judgment against the Company in an unspecified amount
which may be determined at trial.
NOTE 3 -STOCK TRANSACTIONS
During the year ended June 30, 2005, the Company issued an aggregate of
1,076,048 shares of common stock as follows:
a. 20,000 shares of common stock for cash of $40,000, or $2.00 per share, in
connection with the exercise of outstanding stock options;
b. 15,000 shares of common stock to acquire outright three (3) patents that
had previously been assigned to the Company increase for periodic royalty
payments. The shares were valued at $146,250, or $9.75 per share. Of the above
shares, 5,000 shares were issued to our CEO;
c. 65,000 shares of common stock for services valued at $598,000, or $9.20
per share, to our CEO as compensation for services through June 30, 2005;
d. 10,000 shares of common stock valued at $77,000, or $7.70 per share for
services to an outside consultant;
e. 19,300 shares of our common stock for services valued at $123,520 or $6.40
per share, in connection with an employee stock award. The stock was valued at
$6.40 per share, the closing price on the date of grant;
f. 120,748 shares of common stock to employees in connection with the
cashless exercise of outstanding stock options;
48
AMERITYRE CORPORATION
Notes to the Financial Statements
June 30, 2005 and 2004
NOTE 3 -STOCK TRANSACTIONS, Continued
g. 30,000 shares of common stock for cash of $90,000, or $3.00 per share, in
connection with the exercise of outstanding stock options; and
h. 796,000 shares of common stock for cash of $3,184,000, or $4.00 per share,
in connection with the exercise of outstanding stock options.
NOTE 4 -STOCK OPTIONS
During the period ended September 30, 2004, we issued options to acquire an
aggregate of 3,000,000 shares of our common stock to certain non-employees in
connection with an advisory agreement. The options vested immediately and the
exercise price is $7.00 per share. We recognized a total of $6,134,000 in
expense associated with the issuance of these options and deferred $1,000,000
as stock offering costs until related funding is received. We estimated the
fair value of the stock options at the grant date by using the Black-Scholes
option pricing model based on the following assumptions:
Risk free interest rate 2.49%
Expected Life 2 years
Expected volatility 59.83%
Dividend Yield 0.0%
In December 2004, we issued options to acquire an aggregate of 105,000 shares
of our common stock to certain employees under our 2002 Stock Option and Award
Plan. The options are exercisable at $6.40 per share, the closing price on the
date of grant, vested immediately, and expire on December 15, 2009. At June
30, 2005, we had issued 1,920,000 shares of our common stock under our 2002
Stock Option and Award Plan as a result of option exercises and stock awards.
Exercise prices for the outstanding options range from $3.80 to $6.70 per
share and exercise terms range from one to five years. At June 30, 2005, there
were 209,191 shares available to grant additional options or stock awards
under the Plan.
In December 2004, we issued options to acquire an aggregate of 80,000 shares
of our common stock to non-employee directors for annual service on our board
of directors pursuant to our 2004 Non-Employee Directors' Stock Incentive
Plan. These option vested on June 15, 2005, are exercisable at $6.40 per share
and expire on December 15, 2007. There are 1,920,000 shares available for the
grant of additional options or stock awards under this plan.
49
AMERITYRE CORPORATION
Notes to the Financial Statements
June 30, 2005 and 2004
NOTE 4 -STOCK OPTIONS, Continued
A summary of the status of the Company's outstanding stock options as of June
30, 2005 and 2004 and changes during the years then ended is presented below:
2005 2004
----------------------- -----------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
---------- ---------- ---------- ----------
Outstanding, beginning of
year 1,922,000 $ 3.66 2,466,000 $ 3.42
Granted 3,185,000 6.97 90,000 5.73
Expired/Cancelled (195,252) (0.18) - -
Exercised (966,748) (4.14) (634,000) 2.80
---------- ---------- ---------- ----------
Outstanding end of year 3,945,000 $ 6.31 1,922,000 $ 3.66
========== ========== ========== ==========
Exercisable 945,000 $ 4.14 1,922,000 $ 3.66
========== ========== ========== ==========
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 2005 Life Price 2005 Price
---------- ---------- ---------- ---------- ---------- ----------
$ 3.00 470,000 0.08 $ 0.36 470,000 $ 1.49
3.80 30,000 1.25 0.03 30,000 0.12
4.00 200,000 1.95 0.20 200,000 0.85
6.40 185,000 3.60 0.30 185,000 1.25
6.70 60,000 0.50 0.10 60,000 0.43
7.00 3,000,000 4.21 5.32 - -
---------- ---------- ---------- ---------- ----------
$ 3.00-7.00 3,945,000 3.49 $ 6.31 945,000 $ 4.14
========== ========== ========== ========== ==========
50
AMERITYRE CORPORATION
Notes to the Financial Statements
June 30, 2005 and 2004
NOTE 4 - STOCK OPTIONS, Continued
Other than the 3,000,000 options issued to non-employees, all other options
issued during the fiscal year were issued to employees and were accounted for
under APB 25, "Accounting for Stock Issued to Employees." All of these 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,
2005 2004
----------- -----------
Net (loss) as reported $(10,073,008) $ (4,721,255)
Pro forma (10,741,958) (4,941,080)
Basic (loss) per share as reported $ (0.53) $ (0.26)
Pro forma (0.56) (0.28)
NOTE 5 - GOING CONCERN
Our financial statements are prepared using generally accepted accounting
principles applicable to a going concern which contemplates the realization of
assets and liquidation of liabilities in the normal course of business. We
have historically incurred significant losses which have resulted in a total
retained deficit of $36,463,835 at June 30, 2005 which raises substantial
doubt about our ability to continue as a going concern. The accompanying
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result from the outcome of this
uncertainty.
We have taken certain steps to maintain our operating and financial
requirements in an effort to enable us to continue as a going concern until
such time that revenues are sufficient to cover expenses, including: (1)
evaluating (A) our cost of goods and equipment utilization and requirements of
our manufacturing operations, and (B) our sales and marketing plan on a
product sector basis; (2) incorporating revisions to our methods, processes
and costs in order to achieve necessary manufacturing efficiencies (i.e., line
automation, reduced material costs, reduced product waste, etc.); and (3)
seeking reduced material and component costs from suppliers.
51
AMERITYRE CORPORATION
Notes to the Financial Statements
June 30, 2005 and 2004
NOTE 5 - GOING CONCERN, Continued
In addition, to expanding revenue opportunities during the fiscal year we have
commenced a program of (1) licensing manufacturing and distribution rights to
certain of our polyurethane tire products to third-party manufacturers based
on such factors as geographical locations and boundaries; (2) selling
manufacturing equipment to third-party manufacturers to manufacture products
utilizing our manufacturing equipment and processes; (3) selling our
proprietary polyurethane chemical systems to third-party manufacturers that
utilize our manufacturing equipment and processes; and (4) offering contract
design and engineering services to the tire and auto industries.
To supplement our cash needs during the 2006 fiscal year we have (1) obtained
approximately $1,500,000 in funding through the exercise of outstanding
options; and (2) expect to issued common stock in lieu of cash as compensation
for employment, development, and other professional services.
The combination of our accounts receivables and our cash and cash equivalents
are expected to meet the balance of our operational needs during the 2006
fiscal year. We are currently evaluating funding strategies to help outset any
cash shortfalls that may occur after during the 2006 fiscal year.
We anticipate that during the 2006 fiscal year we will need approximately
$4,000,000 to implement our plan and to meet our working capital requirements.
Our ability to continue as a going concern is dependent upon our ability to
successfully accomplish the plan described above, and eventually attain
profitable operations.
The accompanying financial statements do not include any adjustments that
might be necessary should we be unable to continue as a going concern.
52
AMERITYRE CORPORATION
Notes to the Financial Statements
June 30, 2005 and 2004
NOTE 6 - SUBSEQUENT EVENTS
Subsequent to June 30, 2005, we have issued 470,000 shares of our common stock
for cash of $1,410,000, in connection with the exercise of 470,000 outstanding
stock options at $3.00 per share.
Effective July 1, 2005, our Board of Directors authorized the issuance of
30,300 shares of restricted common stock to Richard A. Steinke, the Company's
President and Chief Executive Officer as part of his employment compensation
for the period beginning July 1, 2005 and ending June 30, 2006. The value of
the shares was $200,000, based on the closing price of $6.60 per share.
On July 1, 2005, our Board of Directors authorized the issuance of options to
acquire up to 625,000 shares of our common stock to various employees. The
options vest over the term of their employment up to 3 years from the date of
grant and are exercisable for a 5 year term. The exercise price for the
initial option grants is $6.60 per share, the closing price for our common
stock on June 30, 2005. The options were granted under the terms of the 2005
Stock Option and Award Plan (the "2005 Plan") and 2,000,000 shares of our
common stock have been set aside for stock option grants and stock awards
under the 2005 Plan.
In August 2005, we entered into a Memorandum of Understanding ("MOU") with Ace
Products, LLC, a Delaware limited liability company ("ACE"), outlining the
general scope and proposed terms of a transaction with ACE that is currently
still under negotiation. Details of scope, terms and conditions are all
subject to the execution of final agreements by and between the parties (the
"Definitive Agreements") and the closing of the contemplated transaction,
anticipated to take place not later than September 16, 2005 (the "Closing"),
unless an extension is mutually agreed to by the parties.
The Definitive Agreements are expected to include provisions for: (i) the use
of certain manufacturing equipment; (ii) the use of manufacturing methods and
processes, tire designs and molds and models; (iii) the use of chemicals and
chemical concentrates; and (iv) the use of our trademarks on products that
utilize the Company's technology. The Definitive Agreements are expected to
consist of a License Agreement and various ancillary agreements that will be
integral to the License Agreement, including agreements for the purchase of
certain manufacturing equipment and finished goods inventory, the continuing
supply of chemicals and other items.
The MOU is non-binding, however, it reflects the parties' stated intentions to
enter into Definitive Agreements and consummate the transaction. However, in
the event that the Definitive Agreements are not executed and the transaction
is not completed by September 16, 2005, the parties agree that the MOU shall
effectively supersede, replace and cancel all previous agreements between the
parties, including without limitation the Joint Market, Product Development
and Supply Agreement entered into September 13, 2004, by and between ACE
Products, Inc., a Tennessee corporation, and the Company, and the Standstill
Agreement dated May 18, 2005 by an between ACE and the Company, except that
all obligations relating to confidentiality and non-disclosure shall remain in
full force and effect.