SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] Annual report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the fiscal year ended June 30, 2002
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from ________ to ________
Commission File Number 33-17598-NY
The Tirex Corporation
(Name of Small Business Issuer in Its Charter)
Delaware 22-3282985
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3828 St. Patrick
Montreal, Quebec H4E 1A4
(Address of Principal Executive Offices) (Zip Code)
(514) 933-2518
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- ---------------------
NONE NONE
Securities registered under Section 12(g) of the Exchange Act:
NONE
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the Company was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and if no disclosure will be
contained, to the best of the Company'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]
$28,515
-------
(Issuer's revenues for its most recent fiscal year)
$157,330 (as of October 11, 2002)
--------
(Aggregate market value of the voting stock held by
non-affiliates of the Issuer)
224,757,559 (as of October 11, 2002)
-----------
(Number of shares outstanding of each of the Issuer's
classes of common stock)
Transitional Small Business Disclosure Format (check one)
Yes [ ] No [X]
DOCUMENTS INCORPORATED BY REFERENCE
into Part I
Annual Report of the Company on Form 10-KSB for
the year ended June 30, 2001
Quarterly Reports of the Company on Form 10-QSB
for the quarters ended September 30, 2001, December 31, 2001,
and March 31, 2002
Current Reports on Forms 8-K of the Company
Dated February 9, 2001 and March 9, 2001
ITEM 1. DESCRIPTION OF BUSINESS
The Company
The Tirex Corporation (hereinafter referred to as "we", "us" or the
"Company") is engaged in the business of developing for sale, license or lease
an environmentally safe patented "turn key" cryogenic tire recycling system,
known as the "TCS System" The TCS System was designed and developed by us and
separates tires into clean and saleable rubber crumb, steel wire, and fiber. The
Company was incorporated in Delaware on August 19, 1987 under the name "Concord
Enterprises, Inc." The Company's name was changed to "Stopwatch Inc." on June
20, 1989 and to "Tirex America Inc." on March 10, 1993. On July 11, 1997, the
Company's name was changed to "The Tirex Corporation". Since 1993, our core
business has been to develop and to initiate marketing efforts by sale or
license of an environmentally friendly cryogenic tire recycling system, which we
intend to sell to recycling companies and governmental agencies to enable them
to recycle tires. We have devoted the bulk of our efforts to completing the
design and development of our first production model and raising the financing
required to do so. The Company has generated only very limited revenues from
operations and is still in the development stage.
The TCS-System
Our TCS-System comprises a complete, turn-key, environmentally safe,
cryogenic tire recycling system designed to: (i) disintegrate scrap tires, using
less energy than is required by existing ambient methods (which shred and/or
chop tires at "ambient" or normal room temperatures) or other currently
available cryogenic methods (which reduce the temperature of the materials
through the use of liquid nitrogen), and (ii) produce commercially exploitable,
high quality, clean rubber crumb and unshredded steel and fiber. Disregarding
configuration variations related to tire feedstock preparation and possible
auxiliary grinding after processing through the System to obtain higher
proportions of fine mesh rubber, these variations not forming part of our
technology in any event, the TCS System is offered in two basic versions, these
being the TCS-1 and the TCS-2. These two versions have an annual throughput ___
capacity of approximately one million tires and two million tires respectively,
these numbers based on average automobile tires.
The freezing chamber of the TCS-1 Production Model located in Montreal
is a large tank through which the tire parts are circulated at temperatures of
approximately 170 degrees below zero, Fahrenheit. The second version of the TCS
has been designed to run approximately 20 degrees colder to ensure that no
pieces of rubber can warm up to the "glass point" before being entirely
processed by our patented fracturing mill. Frozen tire parts are passed through
another chamber that separates the component parts of all tires, including
rubber, wire and twine. This chamber contains crushing mechanisms and other
proprietary parts and processes that transform the rubber into very small
particles (mesh). The mesh is then physically separated from the metal and twine
and is finally subjected to other steps to achieve the desired mesh size.
The functions and mechanisms of the TCS-System have been designed for
the exclusive purpose of disintegrating automobile tires, although relatively
minor modifications could be introduced to accept other kinds of tires as well.
The components of a typical tire, which the TCS System is designed to cleanly
separate, basically consist of the following elements:
o Two types of rubber. The sidewalls of automobile tires are
constructed of material containing a higher percentage of
natural, as opposed to synthetic, rubber which is used in the
treads. One of the several possible configurations of the
front-end tire preparation section of the TCS-System has been
designed to allow the entrepreneur to take advantage of these
differences to produce separate rubber powders from sidewalls and
treads, should the market for his output show such separation to
be advantageous;
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o Steel beads, which consist of steel wires tightly wound together
to a diameter of approximately 3/8 of an inch. These beads are
imbedded around the rims of the tire treads;
o Steel belting, which incorporates a thin layer of steel wires
laid out in a "herring bone" pattern and which underlies the
entire surface of the tread area; and
o Fiber threads which are incorporated into the rubber used
throughout the tire.
The TCS System has been designed to operate continuously (with minimum
amounts of scheduled downtime for maintenance) and to require less energy than
is used, to the best of the Company's knowledge, by other presently existing
tire recycling equipment.
Step-by-Step Operations
The step-by step operations of the TCS-System encompass the following:
Tire Feedstock Preparation
The TCS System is not designed to accept whole tires; whole tires must undergo
preliminary preparation to produce pieces of tire having a dimension which
permits their introduction into the patented fracturing mill. Feedstock
preparation can be accomplished in a number of ways including chipping,
shredding and removal of sidewalls followed by diecutting. None of these
techniques form part of the TCS System technology and the technique ultimately
chosen by the tire recycling entrepreneur will revolve around issues of capital
and operating costs as well as possible issues of transportation costs
respecting whole tires.
Freezing the Tire Pieces
The prepared tire pieces are deposited on a conveyor belt which brings a
continuous stream of tire pieces to a freezing chamber. Supercooled air,
produced on-site by an Air Plant, is continuously blown into the freezing
chamber, and this cold air freezes the tire pieces moving through the chamber to
the point where these pieces can be made to shatter like glass when subjected to
forces such as pressure and bending. After approximately thirty minutes in the
Freezing Chamber the frozen pieces exit the Freezing Chamber and enter our
patented disintegrators ("Fracturing Mills").
Size Reduction and Materials Separation in the Fracturing Mill
The frozen tire pieces pass through our patented disintegrators ("Fracturing
Mills") where the pieces are reduced to three separate output materials, these
being rubber crumb of varying degrees of fineness, intact pieces of steel and
intact pieces of fiber. This operation does not involve any chopping, shredding,
or hammer-milling. Therefore, the steel wires are neither cut nor broken. The
fiber threads retain their basic shapes and characteristics. No steel powder or
fiber fluff is produced.
Elimination of the Steel from the Fracturing Mill Output
Upon completion of processing in the Fracturing Mill, the output is conveyed to
a magnetic separation system where the intact steel wires are magnetically
removed from the remaining output of the Fracturing Mill, this being the rubber
crumb and the fiber. The steel can then be baled for either disposal or sale.
Fiber Removal
The fiber and rubber crumb is then passed through screens to separate the crumb
from the fiber threads. The fiber threads are then conveyed out of the machine.
The fiber can then be baled or put into a container for either disposal or sale.
Rubber Crumb Finishing
Rubber crumb finishing operations are dictated by the output requirements of the
entrepreneur and his or her customers. A basic TCS System will produce rubber
crumb which is virtually all 10 mesh or finer with virtually all of the output
falling between 10 mesh and 30 mesh with the output profile skewed toward the 10
to 15 mesh side of the spectrum. Market considerations might incite the
recycling entrepreneur to request greater proportions of finer mesh rubber crumb
3
than a basic TCS System is designed to produce, such as 100% 30 mesh. This
requires auxiliary grinding, which takes place after the steel and fiber have
been removed, and affects the configuration of the post Fracturing Mill
operations. Auxiliary processing equipment does not form part of the TCS System
technology. It is possible that some very small pieces of steel and fiber can be
trapped in the larger pieces of rubber coming out of the Fracturing Mill. These
small amounts of steel and fiber are released during auxiliary processing and
can be separated during the auxiliary processing operation, magnetically for the
steel and by an air separation system for the residual fiber. The rubber crumb
is then passed through a series of screens to sort the rubber crumb by mesh
size, which is thence packaged for customer requirements.
Research and Development Activities
The Company's technical expertise and that of its consultants have been
an important factor in its development and are expected to serve as a basis for
future growth. Since its inception, the Company has devoted substantial
resources to the design and development of the TCS-1 Plant as well as to raising
the financing necessary for such activities. During the fiscal years ended June
30, 2001 and 2002 respectively, the Company expended approximately $807,272 and
$751,251 on research and development activities applied to the design,
development, and construction of the first TCS-1 production model and to the
design of the TCS-2 model, as well as to product development involving rubber
crumb. Long-term testing started in the third and fourth quarters of fiscal 1999
and continued through to the end of Calendar 2001. This testing first revealed
design problems involving the conveying system within the freezing tower. which
were corrected during the third quarter of fiscal 2000 Further testing revealed
additional problems in materials separation which were corrected during Fiscal
2002. The Company also became aware that the output profile of rubber crumb in
terms of mesh size from a basic TCS-1 System was not consistent with the high
proportions of fine mesh rubber crumb being requested by our identified
potential customers. Auxiliary processing equipment was identified and, with the
exception of two pieces of equipment, was acquired and installed in late
Calendar 2001. Financial considerations dictated that certain of the pieces of
equipment so acquired were used equipment and we encountered problems with some
of this used equipment. Regardless, Management believes the TCS-1 System
developed and installed in Montreal is ready for replication and
commercialization. We continue to refine and enhance our tire disintegration
technology to comply with emerging regulatory or industry standards or the
requirements of any potential customer.
During the fourth quarter of Fiscal 2002, the lease respecting certain
components of the Air Plant expired. These assets continue to be located at our
factory and Management is currently in negotiations with the lessor for the
acquisition of this equipment. The equipment in question was custom built for us
to Canadian standards and is not suitable for use, as is and without costly
rework, in the USA. Management is of the opinion that, given its status of being
used equipment and being unsuitable for use in the USA without costly rework,
that the market for these pieces of equipment would have minimal marketability
in the USA. In view of the preceding, Management believes that an attractive
price can be negotiated for this equipment. The conclusion of a purchase
agreement with respect to this equipment will depend on the availability of
financial resources to complete any negotiated transaction. The Company
currently does not have the working capital to effect such a purchase, and
cannot predict when, if ever, such financial resou7rces will be available.
During the fiscal year ended June 30, 2002 all research and development
activities respecting the TCS-1Production Model and the design of the TCS-2 were
carried out by the Company's engineering and technical staff, consisting of
Louis V. Muro, Vice President in Charge of Engineering, and two other Company
employed engineers, who devoted 100% of their time to this project. Such
activities were conducted in conjunction with outside consultants and the
Company's outside subcontractors.
Our current rate of recovery of saleable rubber per tire is
approximately 94% of the total amount of rubber (15 lbs.) in a 19 lb. (average
weight) used auto tire. To the best of our knowledge, the recycling industry
currently recovers only 70-80% of the rubber. We continue to test the TCS-1
Production Model components to identify opportunities to increase its operating
efficiency.. During Fiscal 2002, we developed a design for a second generation
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system (the "TCS-2") which is to provide approximately double the scrap tire
processing capacity of a TCS-1 System. Plant. No Production Model of this second
freezing tower has been constructed to date.
Manufacturing
Our activities to date have focused primarily on the design and
development of the TCS-1 Production Model, and, more recently, on the conversion
of this Production Model unit to a to a full-scale recycling center capable of
responding to expressed customer demands. In connection with these activities,
we have been dependent and will continue to depend on arrangements with
subcontractors for the manufacture and assembly of the principal components
incorporated into a TCS System Plant. Components of the TCS-System, which are
not manufactured by subcontractors specifically for the TCS-System, will be
purchased, either directly by us or indirectly through subcontractors from
third-party manufacturers. Management believes that numerous alternative sources
of supply for all such components are readily available.
With respect to the commercial manufacture of TCS-Systems, we have
identified various engineering and manufacturing subcontractors and component
suppliers, which Management believes will give us sufficient production capacity
to meet our needs. Management believes we will be able contract with
subcontractors which will have the requisite manufacturing capabilities and the
willingness to dedicate sufficient amounts of their manufacturing capacity to us
to allow us to meet all of our needs. No assurance can be given that this will,
in fact, be the case, and failure on the part of our subcontractors would
adversely affect our ability to manufacture and deliver TCS Systems on a timely
and competitive basis. There can be no assurance, that, should it be necessary
to do so, we would be able to find capable replacements for any subcontractors
on a timely basis and on acceptable terms, if at all. Our inability to do so
would have a material adverse effect on our business.
We may license our technology or enter into strategic alliances to
facilitate the bulk of product manufacturing when the need arises. Our
Manufacturing Partner, Simpro S.p.A. of Turin, Italy, has indicated to us
verbally that they actually have or can put into place on short notice the
manufacturing and installation capacity to respond to a large demand for TCS
Systems. Regardless of these assurances, we will not commit to any order without
first securing a manufacturing arrangement. As of June 30, 2002, , we had not
received any orders for the purchase, lease or license of a TCS System. While
Management is hopeful that two systems will be sold imminently, there can be no
assurances that either of the contemplated sales will occur.
Operations
We have one Production Model TCS-1 Plant which is composed of various
proprietary and non-proprietary parts and technology. During Calendar 2001 we
converted the Production Model into a full-scale commercial recycling center,
with only two pieces of equipment required to be added such that we would be
able to produce the quantities of fine mesh rubber crumb demanded by our
identified customers. The lack of financial resources forced Management to
prolong the shutdown, initially put into effect for the 2001 December holiday
season, indefinitely. As of the end of Fiscal 2002, rubber production operations
remained suspended and only very limited revenues were generated.
The lease for certain pieces of equipment related to the Air Plant
expired in mid-April 2002. Our very limited revenues and working capital
condition have precluded the Company's being able to complete negotiations for
the purchase of these pieces of equipment. While the lessor requested return of
the equipment in question, he has been unable, to date, to supply a list of what
he owns nor a destination point for the delivery of these items. Insofar as the
Company does not have title to these assets and nor is there a valid lease in
effect to permit their use by the Company, the Air Plant cannot be used by the
Company until such times as either the Company successfully negotiates the
purchase of the equipment or replaces it with other equipment. Without an Air
Plant, the TCS-1 Production Model cannot function. Management cannot provide any
assurance that adequate financial resources will be found to effect the purchase
of the pieces of equipment or to effect their replacement, and to effect a
repair to a key component part of the Air Plant.
5
At the beginning of 1999, we began the process of putting into place
the production capacity for producing welcome mats using recycled rubber crumb
of the kind which the TCS-1 Plant would produce. Entering this new business
segment was expected to be profitable based on the estimated costing of the
rubber crumb. Technical difficulties in the freezing tower section of the TCS-1
Plant were identified during the fourth quarter of fiscal 1999 which reduced the
availability of TCS-1 Plant rubber crumb and it became apparent in June and July
of 1999 that capital asset requirements and the financial and human resources
being consumed by the mat production operation were impeding progress on the
completion of the TCS-1 Plant which was and remains our primary focus.
Therefore, during the summer of 1999, we discontinued mat production operations
and made available for sale the mat production equipment. To date, it has not
all been sold.
TCS-1 Plant Financing Arrangements
On May 29, 1997, we entered into an Equipment Lease and Purchase
Agreement (the "OTRP L&P Agreement") with Oceans Tire Recycling & Processing
Co., Inc. ("OTRP"), a New Jersey corporation. Pursuant to the OTRP L&P
Agreement, OTRP was to purchase the first production model TCS-1 Plant with an
anticipated delivery date of September 15, 1997. However, while construction of
the first full-scale Production Model of the TCS-1 Plant began in February of
1997, its completion was delayed because of the limited funds available for such
purpose. As a result, OTRP waived the delivery date and agreed to reschedule
delivery. In December 1997, OTRP and the Company agreed that, to the extent
necessary for OTRP to obtain sale and lease-back financing for the front-end
module ("Front-End") and for certain parts of the Air Plant portion of the
Plant, the OTRP Agreement would be deemed to be modified, as required for such
purpose. In connection therewith OTRP arranged with an equipment financing
company for sale and lease-back financing, pursuant to which: (i) the said
financing company purchased the Front-End and certain designated portions of the
TCS-1 Plant's Air Plant directly from us; and (ii) leased such equipment back to
OTRP pursuant to its arrangements with OTRP and/or the OTRP principals. We sold,
pursuant to a lease purchase arrangement, the Front-End for a total purchase
price of $300,000, with irrevocable acceptance and final payment being obtained
in December of 1997. The designated portions of the Air Plant were sold/leased
to a financing company for a total purchase price of $580,000, with irrevocable
acceptance and final payment being obtained in April of 1998.
In July 2000, we entered onto a new agreement with OTRP/its principals
(the "New Agreement") modifying and clarifying provisions of the prior agreement
between the parties regarding certain rights to the Production Model. Pursuant
to the terms of the New Agreement, we issued 4,553,102 shares of its Common
Stock to OTRP's principal officer and stockholder in exchange for forgiveness of
approximately $938,000 in advances to us or paid on its behalf through June 30,
2000. The New Agreement confirmed OTRP's assignment to us of all its rights to
the Production Model and related technology, including all intellectual property
rights and any and all rights accruing to OTRP upon termination of the financing
lease/purchase arrangements. In addition, OTRP and its principal agreed to make
all lease payments to the financing companies in the event we failed to do so
and to convert all advances into our Common Stock at 50% of the market value on
the date of conversion. During fiscal year ended June 30, 2001 OTRP advanced
$256,857 toward our lease payments, and continued to make lease payments in
Fiscal 2002 at the rate of $29,280 per month, until the expiration of the lease
in mid-April 2002. Insofar as the equipment was not being used after the expiry
of the lease, no further lease payments have been made. As indicated previously,
the lessor has requested the return of the equipment, but has been unable to
supply, to date, a list of what is to be returned nor a destination point for
shipment. As of the date of this Report, the equipment is remaining idle at the
Company's factory. Management is attempting to negotiate the purchase of this
equipment, but no assurance can be given that these negotiations will be
successful. In April of 2002, 2,250,000 were issued in partial payment against
the lease payments made.
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Subsidiaries
In May of 1995, in order to take advantage of financial incentives in
connection with the research and development work on the first production model
of the TCS-1 Plant, we formed a Canadian corporation, 3143619 Canada Inc. On
June 3, 1998, this entity's name was changed to Tirex Canada R&D Inc.
(hereinafter referred to as "Tirex R&D"). To qualify for Canadian Government
grants and tax benefits, the record owners of 51% of the issued and outstanding
capital stock of Tirex R&D are John L. Threshie, Jr. our President and Chairman
of our Board of Directors and Louis V. Muro, our Vice President of Engineering
and a member of our Board of Directors, both of whom are Canadian residents.
John L. Threshie, Jr. also serves as the Chairman of the Board of Directors and
the Chief Executive Officer of Tirex R&D while Louis V. Muro also serves as a
vice president and a director of Tirex R&D. We are the record holder of the
balance of 49% of the issued and outstanding capital stock of Tirex R&D. Messrs.
Threshie and Muro hold their Tirex R&D shares under the terms of a shareholders
agreement, which we can require them to transfer all such shares to us for no
compensation.
On April 22, 1998, we formed a second Canadian corporation, 3477584
Canada Inc., the name of which was changed to Tirex Advanced Products Quebec
Inc. on June 3, 1998 (hereinafter referred to as "TAP"). TAP is a wholly owned
subsidiary of ours and is presently dormant.
On June 1, 1998, we formed a third Canadian corporation, The Tirex
Corporation Canada Inc., referred to herein as "TCCI". TCCI is also a wholly
owned subsidiary of ours. TCCI was established to operate as our manufacturing
arm, but is presently dormant.
We also have another dormant, wholly owned subsidiary, formed under the
laws of the State of Delaware, Tirex Acquisition Corp. ("TAC"), for which we
have no present plans.
Canadian Grants
The governments of Canada and Quebec, have officially acknowledged the
pivotal role played by business investment in research and development in
insuring sustained economic growth and long-term prosperity. In order to
encourage such activities, the Government of Canada, on a national basis, and
the Government of Quebec, on a provincial basis, support private research and
development initiatives through the provision of scientific research tax
incentives to businesses and individuals. As a result of the combined efforts of
both levels of government, Quebec offers the most generous tax incentives for
research and development programs of which we are aware.
In May of 1995, in order to take advantage of such financial incentives
in connection with the research and development work on the first production
model of the TCS-1 Plant, we formed Tirex R&D. (See "Subsidiaries").
The Tirex R&D License
Tirex R&D holds an exclusive, ten year license from the Company, which
expires on July 2, 2005. This license, which was modified in June of 2002,
permits Tirex R&D to design, develop, and manufacture the TCS-Systems on a
worldwide basis (the "Primary License"). To the extent necessary to ensure that
Tirex R&D's operations are focussed on pure research and development activities,
Tirex R&D may sublicense the Primary License to TCCI or such other corporate
entity as would be deemed appropriate and beneficial. Unless the context
requires otherwise, the terms of the sublicense will be identical to those of
the Primary License. To the extent necessary to achieve the aforesaid goals, all
other contracts to which Tirex R&D is a party, will be transferred and assigned,
in whole or in part, from Tirex R&D to us, TCCI, or any other existing or future
subsidiary or affiliate of ours.
7
Canadian Government and Government Sponsored Financial Assistance
Our May 1995 transfer of our research and development and manufacturing
activities to Tirex R&D (then referred to as "Tirex Canada") made us eligible
for various Canadian and Quebec government programs which provide loans, grants,
and tax incentives, as well as government guarantees for loans from private
lending institutions, for eligible investment, research and development, and
employee-training activities.
Tax Incentives
Canadian and Quebec tax incentives take the form of deductions and tax
credits with respect to eligible research and development expenditures of Tirex
R&D. Certain tax credits are called "refundable" because, to the extent that the
amount of the tax credit exceeds the taxes payable, they are paid over or
"refunded" to the taxpayer. Thus such credits function effectively as monetary
grants. To qualify for such tax credits, research and development activities
must comprise investigation or systematic technological or scientific research
conducted through pure or applied research, undertaken to advance science and
develop new processes, materials, products or devices or to enhance existing
processes, materials, products, or devices. In the period following June 30,
2002, the Company's claim for tax credits in respect of Fiscal 2002 was audited
by Revenue Canada, which organization recently changed is name to Canada Customs
and Revenue Agency, or CCRA. For purposes of ease of reading, the old name of
Revenue Canada will continue to be used. As a result of this assessment, Revenue
Canada determined that Cdn193,936 (approximately US$124,000) was due to us.
After deducting arrearages on payroll taxes and amounts due to other government
departments, the Company received a net amount of approximately Cdn$132,038
(approximately US$84,500). As a function of reciprocal arrangements between
Revenue Canada and Revenue Quebec, the Revenue Canada audit result becomes the
basis of the calculation of the tax credit granted by Revenue Quebec. The
calculated Quebec credit is Cdn$180,520 (approximately US$115,500) After
deduction of payroll tax arrearages and payroll tax audit adjustments, an amount
die to us in the amount of Cdn$119,365 was established (approximately
US$76,400). The release of this amount has been delayed by Revenue Quebec
pending resolution of taxes owed by the President of the Company.
Canadian Government, and Government Sponsored Loans and Grants
We have in the past also received financial assistance by way of loans
and grants from Canadian and Quebec governmental agencies for the design and
development of the TCS-1 Plant and for export market development. All of the
activities for which these loans were approved have been completed and we have
received the funds approved.
Patent Protection
We were issued a United States patent on our Cryogenic Tire
Disintegration Process and Apparatus on April 7, 1998 (Patent No. 5,735,471).
The duration of the patent is 20 years from the date the original application
was filed. In November 1998, we filed our patent, for review, with the Canadian
Patent Office. We are unable to state at this time how long the Canadian review
process will take and is unable to give any assurances that the Canadian Patent
will be granted. Prior to the issuance of such patent, we relied solely on trade
secrets, proprietary know-how and technological innovation to develop our
technology and the designs and specifications for the TCS-1 Plant. In connection
with a loan made by the Bank of Nova Scotia to the Company, a lien on this
patent was granted to the bank. With the loan having been paid off, the lien was
lifted and at present, the patent is free of liens. We do not presently hold any
patents for our products or systems outside of the United States. A Canadian
patent has been applied for and remains pending. We have lacked the financial
resources to apply for a process patent on an international basis, but the
Company intends to file for additional patent protection, in accordance with our
Agreement with Simpro S.p.A. of Turin, Italy, once sufficient financial
resources will become available.
8
We have entered into confidentiality and invention assignment
agreements with certain employees and consultants, which limit access to, and
disclosure or use of, our technology. There can be no assurance, however, that
the steps we have taken to deter misappropriation or third party development of
our technology and/or processes will be adequate, that others will not
independently develop similar technologies and/or processes or that secrecy will
not be breached. In addition, although Management believes that our technology
has been independently developed and does not infringe on the proprietary rights
of others, there can be no assurance that our technology does not and will not
so infringe or that third parties will not assert infringement claims against us
in the future. Management believes that the steps they have taken to date will
provide some degree of protection, however, no assurance can be given that this
will be the case.
Competition
At present, there are various methods available to recycle tires,
either to produce rubber crumb or to extract their energy value. We know of no
devices, apparatus or equipment, utilizing technology which is identical or
comparable to the TCS-System technology, which are presently being sold or used
anywhere in the world, nor are we aware of any competing patents relating to our
disintegration technology. However, the TCS-System technology may reasonably be
expected to have to compete with related or similar processes, machines, or
devices for tire disintegration, cryogenic or otherwise. There are presently
many companies currently recycling tires which have established business
relationships. Moreover, prospective competitors which may enter the field in
the future may be considerably larger than us in total assets and resources.
This could enable them to bring their own technologies to more advanced stages
of development with more speed and efficiency than we will be able to apply to
the TCS-System. Additionally, manufacturers of presently available equipment and
systems are in a position to operate research and development departments
dedicated continually to improving conventional systems and to developing new
and improved systems. There can be no assurance that the TCS-System will
successfully compete with existing systems or with any improved or new systems
which may be developed in the future.
Employees
As of October 2002, we have nine persons employed either directly or
under consulting contracts including its three executive officers. The balance
of our staff is comprised predominantly of technical and other support
personnel. All of the foregoing persons devote their full time to our business
and affairs, as required. At times, we also utilize the services of part-time
consultants to assist us with market research and development and other matters.
We intend to hire additional personnel, as needed.
Potential Markets
We believe that the potential markets for our TCS System will directly
reflect the level of demand for economical, high quality rubber crumb derived
from the recycling of scrap tires. The following discussion of the potential
markets for rubber crumb assumes that the TCS System will be capable of
economically producing high quality recycled rubber crumb and in a variety of
sizes, capable of being used in wide range of products. It should be noted,
however, that because of the limited operating history of our Production Model
TCS-1 Plant, we cannot, give any assurance that our TCS Systems will in fact
perform as expected under continuous, commercial operating conditions. Moreover,
even if the demand for rubber crumb should increase in accordance with our
expectations, there can be no assurance that a demand for TCS Systems will
likewise develop.
9
Rubber is a valuable raw material and we believe that recycling this
valuable resource from scrap tires is an ideal way to recover that value.
Recycled scrap tire rubber is already used in a great variety of products,
promoting longevity by adding it to asphalt pavement, adding bulk and providing
drainage as a soil additive, providing durability as a carpet underpadding,
increasing resiliency in running track surfaces and gymnasium floors, absorbing
shock and lessening the potential for injuries as a ground cover for playgrounds
and other recreational areas, and as a significant component added to plastic
resins for making extruded or injection molded products.
Marketing Activities
To a large extent we have in the past concentrated our efforts on
completing the design, development, and construction of our Production Model
TCS-1 Plant and raising adequate financing to support such efforts. Our
long-term objective, however, is to market TCS Systems worldwide, through
national and international sales representatives, licensees or strategic
partners. Our short- term objective is to operate our Production Model TCS-1
Plant as a Certified Commercial Recycling Center. We have been certified as an
Accredited Tire Recycler by Recyc-Quebec, a quasi-governmental agency of the
Quebec Government, and once we will be able to re-establish operations we will
be entitled to tipping fees paid by Recycle Quebec, of approximately US$0.59 per
tire at prevailing foreign exchange rates. Once we will have re-established
rubber crumb production operations , we believe that the rubber crumb customers
previously identified by us will once again start issuing rubber crumb purchase
orders to us.
We can make no assurances with respect to the success of our marketing
and distribution strategy of either our rubber crumb or our TCS Systems.
Furthermore, we have limited resources to achieve the distribution of our TCS
Systems and to date we have made no sales, leases or licenses. We believe that
we will need additional financing, which may not be available, to achieve our
long-term objectives.
Government Regulation
In November of 2001, we received from Recyc-Quebec, our certification
as a Commercial Recycling Center to recycle tires.. We have applied for
operating permits, have overcome most of the concerns presented to us to date.
The obtaining of an operating permit could require that we install a sprinkler
system. We are in discussion with the City of Montreal as to how much of the
building would have to be sprinklered, insofar as substantial portions of the
building are not in use and nor would they become in use even with a re-starting
of rubber crumb production operations. If the entire building would have to be
sprinklered, the cost would be approximately Cdn$200,000 (approximately
US$126,000). Should the City insist on full-building sprinklering, Management
will undertake an analysis of how much it would cost to relocate to smaller,
already sprinklered premises where the monthly rent could be less expensive,
versus the cost of installing such a sprinkler system in a building which is
leased.
Pending receipt of adequate funding to effect the purchase of the
heretofore leased components and to effect necessary repairs and to provide
adequate working capital to restart rubber crumb production operations, which
funding cannot be presumed, and subject to a consideration that we are at an
advanced stage in negotiations with respect to the sale of a system for local
installation, it would otherwise be our intention to operate our Production
Model TCS-1 Plant as a Certified Commercial Recycling Center. In that regard we
have recently submitted a scientific report on our technology to the Federal and
Provincial governments in Quebec Canada, which was accepted, and as a result, we
recently started receiving Research and Development tax credit refunds in
respect of our Fiscal Year ended June 30, 2002. After deduction of arrearages in
employee tax deductions , the Government of Canada issued a partial refund check
of approximately Cdn$61,000 (approximately US$38,400) and a second check of
approximately Cdn$70,000 (approximately US$44,100 is expected in the days
following date of this Report. The Quebec Government, after deducting arrearages
for employee taxes, owes the Company approximately Cdn$119,000 (approximately
US$75,000). Insofar as the Quebec Government believes that Tirex Canada R&D Inc.
owes money to Company President, John Threshie, as a result of advances made by
Mr. Threshie to pay suppliers and payroll, the Quebec Government issued a Notice
10
of Seizure, the effect of which is their establishing their legal right to seize
the tax credit check. With the assistance of Canadian legal counsel, we have met
with Revenue Quebec to establish with them that, in fact, Tirex Canada Inc. does
not owe money to Mr. Threshie and that advances made and expenses paid by Mr.
Threshie have been reimbursed through stock issuances from The Tirex
Corporation. This practice is long-established within Tirex and documentation to
this effect was provided to the Revenue Quebec employees. While Management
believes that it has established a substantial case with Revenue Quebec for them
to lift the seizure, there can be no assurances that the seizure will actually
be lifted. In the event that the seizure would not be lifted, the Company would
not receive some or perhaps all of the approximately Cdn$119,000 otherwise
receivable. Failure to receive these funds would seriously impair the Company's
ability to continue as a going concern.
The TCS-System is a "closed loop" system which does not use any
chemicals, solvents, gases or other substances which could result in emissions
of any kind from the operation of the Plant. To the best of the Company's
knowledge, operation of a TCS-System will not result in the emission of air
pollutants, the disposal of combustion residues, the storage of hazardous
substances, or the production of any significant amounts of solid waste which
would have to be landfilled. However, the operation of a TCS System will
involve, to varying degrees and for varying periods of time, the storage of
scrap tires or tire pieces representing the feedstock to the System. Whole
tires, with their size, volume and composition, can pose potentially serious
environmental problems. While the Company does not believe that such storage
will normally involve quantities of tires so large or storage periods so
extensive as to constitute the "stockpiling" of scrap tires, it should be noted
that stockpiling, should it occur, could constitute a particularly serious
environmental problem. Among the numerous problems relating to scrap tires, is
that when stockpiled above ground, tires create serious public health and
environmental hazards. These range from scrap tire fires, which generate large
and dense clouds of black smoke and cause serious soil pollution and are
extremely difficult to extinguish, to the creation of vast breeding grounds for
mosquitoes and vermin.
As a result, many US states and Canadian provinces have either passed
or have pending legislation regarding discarded tires including legislation
limiting the storage of used tires to specifically designated areas. We and
operators of other TCS Systems will therefore be subject to various local,
state, and federal laws and regulations including, without limitation,
regulations promulgated by federal and state environmental, health, and labor
agencies. Establishing and operating a TCS System for tire recycling will
require numerous permits and compliance with environmental and other government
regulations, on the part of our customers, both in the United States and Canada
and in most other foreign countries. The process of obtaining required
regulatory approvals may be lengthy and expensive for us and customers of our
TCS Systems. Moreover, regulatory approvals, if granted, may include significant
limitations on operations. The US-EPA and comparable US state and local
regulatory agencies, and similar government bodies in Canada and in other
jurisdictions where TCS Systems will be marketed actively enforce environmental
regulations and conduct periodic inspections to determine compliance with
government regulations. Failure to comply with applicable regulatory
requirements can result in, among other things, fines, suspension of approvals,
seizure or recall of products, operating, restrictions, and criminal
prosecutions.
We believe that existing government regulations, while extensive, will
not result in the disenabling of its TCS System customers to operate profitably
and in compliance with such regulations. While these regulations are usually
stringent, the huge scrap tire problem must also be dealt with on a daily basis
and the need for economic and environmentally friendly recycling operations is
critical. The burden of compliance with laws and regulations governing the
installation and/or operation of TCS Systems could, nonetheless, discourage
potential customers from purchasing a TCS System. This would adversely affect
our business, prospects, results, and financial condition. As a result, our
business could be directly and indirectly affected by government regulations.
11
ITEM 2. DESCRIPTION OF PROPERTY
Our corporate headquarters and plant are located at 3828 St. Patrick,
Montreal, Quebec, Canada, H4E 1A4. On February 17, 1998, we entered into a
five-year term lease (the "Tri-Steel Lease") with Tri-Steel Industries Inc.
("Tri-Steel"), effective as of March 1, 1998 for a 90,000 square foot research
and manufacturing facility on a completely fenced 180,000 square foot contiguous
lot located at 3828 Saint Patrick Street and 2200 Pitt Street in Montreal,
Canada. This site is situated adjacent to an interstate highway and a Canadian
National Railway line in an industrial area located approximately two miles from
the principal downtown Montreal business center.
The Tri-Steel Lease provides for rental payments, as follows:
o year-one (commencing March 1, 1998): Cdn$10,000 per month
(approximately US$7,000);
o year-two: Cdn$20,000 per month (approximately US$14,000); and
o years-three, four, and five: Cdn$25,000 per month (approximately
US$17,500).
We have been in arrears in the payment of our rent. In June 2001 the
landlord instituted a Motion in resiliation of lease and to recover rent due in
the amount of Canadian$177,973.62 (approximately US$113,900). We have filed
defenses claiming breach of contract and negligence on the pert of the landlord
and are currently in negotiation with Tri-Steel Industries. The action is still
pending. As of June 30, 2002, the Company was in arrears in terms of rent,
property taxes paid by the landlord etc., for an amount of approximately
Cdn$371,000 (approximately US$233,700).
Quebec sales taxes ("QST") and (Canadian) Government sales taxes
("GST") are also payable by us on all rental payments. Under present
regulations, these taxes are either refundable to us or are available as
reductions of required remissions of sales taxes collected on sales made to
other taxable Canadian entities. Up to now, such taxes have been refunded to us
or, on occasion, offset against amounts due by us with respect to payroll taxes.
In fiscal year ended June 30, 2002 we have been credited for sales taxes in the
amount of $58,055, of which $32,812 was applied by the respective governments
against payroll tax arrearages and the balance was receivable as of June 30,
2002.
In addition to the taxes, we are obligated to pay additional costs,
including:
o all fuel and utility charges;
o real estate taxes; and
o Premium for insurance on the premises for not less than approximately
$2,800,000 and public liability insurance for not less than
approximately $2,100,000.
The aggregate amount of such additional costs during fiscal year ended
June 30, 2002 was approximately $138,744.
ITEM 3. LEGAL PROCEEDINGS
We are presently a party in the following legal proceedings:
IM2 Merchandising and Manufacturing, Inc and David B. Sinclair v. The
Tirex Corporation, Tirex Corporation Canada, Inc., et al.
The Plaintiffs, a Canadian resident and a Canadian corporation sued in
the Delaware, U.S. Federal District Court claiming fraud, breach of contract,
unjust enrichment and other allegations, that the alleged Defendants, which
include Tirex Corporation Canada and The Tirex Corporation, jointly conspired to
profit from their failure to comply with terms of a manufacturing agreement. The
monetary demand of this complaint was unspecified. We were prepared to move to
dismiss Plaintiffs' Complaint, but after consultations with the Plaintiffs'
Attorneys, the Plaintiffs' withdrew this complaint voluntarily. Plaintiffs later
filed a second action in the Chancery Court of Delaware alleging certain of the
same allegations; fraud, breach of contract, unjust enrichment, breach of
fiduciary duty and misrepresentation, but eliminated other counts including the
securities fraud allegations. The Defendants in the State Court action are the
same named in the Federal Court action, and again the monetary damages are
12
unspecified. We moved to dismiss the State Court Chancery case alleging
defective service of process and asserting that the Court had no jurisdiction
over the Defendants in Delaware and for removal of the case to Canada based on
forum non convenience and other considerations. Our motion was granted and the
case dismissed.
Subsequently, on or about April 25, 2001, the Plaintiffs instituted a
lawsuit in Superior Court, judicial district of Montreal alleging breach of
contract and claims damages of Canadian$794,690 (approximately US$508,600)
representing expenses and an additional Canadian$5,411,158 (approximately
US$1,874,000) in loss of profits. We have filed a detailed answer denying all
liability, stating further that Plaintiffs failed to comply with their
obligations. We believe we have meritorious defenses to all of the Plaintiffs'
claims. The action is still pending.
Surgent v. The Tirex Corporation
An action was brought by the Plaintiff against us, alleging that we had
agreed to issue 1,000,000 shares of our Common Stock to the Plaintiff in
consideration for expenses allegedly paid by the Plaintiff on our behalf in the
amount of approximately $150,000. These expenses allegedly were incurred in
relation to the rental of certain office space and performance of administrative
services. The Plaintiff's complaint sought to impose an equitable trust or lien
on 1,000,000 of our unissued common shares, demanded the issuance of the
1,000,000 shares and alleged breach of contract and claimed damages of
$1,400,000.
We moved to dismiss the case on various procedural grounds and in
September 2000 the Court granted our motion based upon the lack of venue in
Union County, New Jersey. A new action was instituted by Plaintiff in the
Superior Court of New Jersey, Bergen County in April 2001 alleging similar
claims as set forth in the previous action (Docket L-08060-00). We denied all of
plaintiff's allegations. On July 24, 2002, The Superior Court of New Jersey,
Bergen County, dismissed, with prejudice, the plaintiff,s complaint for "Lack of
Prosecution".
Lefebvre Freres Limited v. The Tirex Corporation
Lefebvre Freres Limited instituted an action against us on August 13,
2001 in the Superior Court, judicial district of Montreal claiming Canadian
$98,513 (approximately US$63,000) is due and owing for the manufacture and
delivery of car tire disintegrators. We are preparing a defense and cross claim
against Plaintiff as the product delivered was defective and we believe we are
entitled to a reimbursement of sums paid. The action is still pending.
Tri-Steel Industries Inc. v. The Tirex Corporation
Our landlord Tri-Steel Industries Inc. instituted an action against us,
and our subsidiaries Tirex Canada and Tirex Canada R & D Inc., on or about June
22, 2001 for arrears of rent in the amount of Canadian $177,973.62
(approximately US $113,900). We are currently in negotiation with Tri-Steel
Industries and the action is still pending.
No director, officer, or affiliate of the Company, or any associate of
any of them, is a party to or has a material interest in any proceeding adverse
to us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fiscal year ended June 30, 2002 no matters were submitted to a
vote of the shareholders of the Company.
13
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock, is traded on a limited basis in the
over-the-counter market and quoted on the OTC Electronic Bulletin Board
maintained by the National Association of Securities Dealers, Inc. (the "OTC
Bulletin Board"). The following table sets forth representative high and low bid
prices by calendar quarters as reported in the OTC Bulletin Board during the
last two fiscal years. The level of trading in the Company's common stock has
been limited and the bid prices reported may not be indicative of the value of
the common stock or the existence of an active market. The OTC market quotations
reflect inter-dealer prices without retail markup, mark-down, or other fees or
commissions, and may not necessarily represent actual transactions.
Bid Prices
Period Common Stock
------ ------------
Fiscal Year Ending June 30, 2001 Low High
September 29, 2000 $ 0.28 $ 0.26
December 29, 2000 0.09 0.09
March 30, 2001 0.07 0.08
June 29, 2001 0.06 0.05
Fiscal Year Ending June 30, 2002 Low High
September 28, 2001 $ 0.08 $ 0.02
December 31, 2001 0.03 0.01
March 30, 2002 0.02 0.01
June 29, 2002 0.03 0.01
Shareholders
As of October 11, 2002, the number of holders of record of the
Company's common stock, $.001 par value, was less than 500, which does not
include shares held by persons or companies in street or nominee name.
Dividends
The Company has paid no cash dividends and has no present plan to pay
cash dividends, intending instead to reinvest its earnings, if any. Payment of
future cash dividends will be determined from time to time by its Board of
Directors, based upon its future earnings (if any), financial condition, capital
requirements and other factors, the company is not presently subject to any
contractual or similar restriction on its present or future ability to pay such
dividends.
14
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
Management's Discussion and Analysis
Of Financial Condition and Results of Operations
The following discussion of our financial condition and results of
operations should be read in conjunction with the financial statements and notes
thereto included elsewhere in this prospectus. This document contains certain
forward-looking statements including, among others, anticipated trends in our
financial condition and results of operations and our business strategy. These
forward-looking statements are based largely on our current expectations and are
subject to a number of risks and uncertainties. Actual results could differ
materially from these forward-looking statements. Important factors to consider
in evaluating such forward-looking statements include (i) changes in external
competitive market factors or in our internal budgeting process which might
impact trends in the our results of operations; (ii) unanticipated working
capital or other cash requirements; (iii) changes in the our business strategy
or an inability to execute its strategy due to unanticipated changes in the
industries in which we operates; and (iv) various competitive factors that may
prevent the us from competing successfully in the marketplace.
Results of Operations
In March 2000, we announced that our tire recycling technology was
ready for replication and commercialization. During Fiscal 2001 and 2002, we
demonstrated our technology to numerous groups from Asia, Europe, North and
South and America and the Caribbean, as well as to some shareholders and
potential strategic alliance partners. While numerous Letters of Intent have
been received form potential customers, as of this date, no purchase/sale
contracts have been written. The status of certain of our Letters of
Intent/Memorandum of Understanding, are as follows:
Potential System Sales Initiated Prior to Fiscal 2002
o Puerto Rico - A letter of intent was signed to set up a TCS-2
facility and joint venture on a crumb rubber product
manufacturing facility in Puerto Rico. The Puerto Rican
representatives presented their project, which includes our
technology, to the Government of Puerto Rico in June 2001 to
secure approval to proceed, and again in September of 2001 for
purposes of securing public funding for the project. The Puerto
Rican group was able to secure partial funding from the Puerto
Rican Development Bank but has not yet succeeded in securing all
of the top-up financing required to complete the project
financing, despite the availability of a partial loan guarantee
to be supplied by an agency of the Puerto Rican government. We
cannot predict when, if ever, the Puerto Rican entrepreneurs will
be able to complete their financing package. Regardless, we have
finalized our pricing with Simpro with respect to the Puerto
Rican project. We and now awaiting a draft of a license agreement
to be received from Simpro to define the relationship between our
two companies with respect to the Puerto Rican project and a
Canadian project, discussed later, such that these two projects
can come closer to resolution. However, there still remains some
uncertainties and thus there can be no guarantees that a
transaction with these Puerto Rican interests will be
consummated.
o Recycletron Inc. - We entered into a letter of intent with
Recycletron in July of 1997 wherein Recycletron agreed to
purchase a TCS-1 upon our completing the design of the system and
demonstrating its performance on a 24-hour basis over a
significant period of time. Although it has taken us longer than
expected to establish a fully operational Production Model,
Recycletron continues to indicate interest in our technology.
Marketing Efforts initiated or Pursued During Fiscal 2002
During 2002, the Company responded to numerous requests for information
and gave numerous system demonstrations. Out of these requests and
demonstrations, several opportunities presented themselves which
Management is pursuing. In addition to the Puerto Rican project,
Management actively pursued other initiatives relative to proposed
installations in the northeastern United States, eastern Canada, Brazil
and in the Ukraine. To date, none of these initiatives have resulted in
firm, unconditional Purchase and Sales Agreements.
During the fourth quarter of Fiscal 2002, the Company became involved
in negotiations respecting a TCS-2 with a company based in eastern
Ontario, Canada, with the system to be purchased to be installed in
15
southwestern Quebec. As of the end of Fiscal 2002, the Purchase and
Sale Agreement had not been completed. We have finalized pricing for
this system with Simpro. As with the Puerto Rican opportunity, we are
awaiting the draft of a license agreement from Simpro However, there
still remains some uncertainties and thus there can be no guarantees
that a transaction with these Canadian interests will be consummated.
While initial contact was made with the Brazilians prior to Fiscal
2002, a proposed Letter of Intent was not requested until late in
Fiscal 2002. While a Letter of Intent represents a significant
expression of interest, it is not in itself a binding contract, and
Management cannot provide any assurances that an unconditional Purchase
and sales Agreement will evolve from this Letter of Intent.
With respect to the Ukraine, a conditional sales contract was signed
with the Ukrainian entrepreneur in May of 2002. This contract is
conditional upon the purchaser's being able to complete the project`s
financing and Management is providing what assistance it can to bring
financial backers to the project. There can be no assurance that the
conditional sales contract will result in an unconditional sales
contract.
The Company has also initiated discussions for sales of TCS Systems
with potential customers in the northeastern USA and in Mexico. These
discussions are still considered to be preliminary and the Company
cannot offer any assurance that these discussions will actually lead to
orders.
Marketing Structure
-------------------
We entered into a conditional agreement with Tirex-Europe in April 2001
respecting market development activities to be undertaken in most of Europe, the
Middle East and those North African countries bordering on the Mediterranean
Sea. This agreement originated from a previous letter of intent we entered into
with European Transformation Resources (ETR), a company to be incorporated under
the laws of the Grand Duchy of Luxembourg, for the marketing of TCS Systems in
these same regions. Under the terms of the agreement with Tirex-Europe, the
Gross Revenue and Cost of Systems Sold resulting from its sales of TCS Systems
would be recorded on its books rather than on ours. Revenue would thus be
attributed to us on the basis of a gross profit sharing proportion applied to
such sales concluded by Tirex-Europe. These gross profit sharing proportions are
variable as a function of whether or not the sale is being made to a new
customer or an existing customer and how many sales are being made to the same
customers. The variable scale is not country-specific. Also under the terms of
the Tirex-Europe Agreement, Tirex-Europe will pay to us the sum of $500,000,
payable over the sale of the first ten TCS Systems but with an overall deadline
of twelve months. The contract with Tirex-Europe does not come into effect until
Tirex-Europe delivers to us a first firm purchase order for a TCS System. To
date, Tirex Europe has not delivered any firm purchase orders and thus the Tirex
Europe Agreement remains ineffective. As such, we are completely at liberty to
undertake any marketing activities we feel appropriate in those countries and
regions where Tirex Europe was to be active.
In January 2000, we signed a License Agreement with Ocean Equipment
Manufacturing and Sales Co. ("OEMS") of New Jersey, a company owned by Louis A.
Sanzaro who is also a director and a significant shareholder of Tirex, for the
marketing and for the manufacturing, installation and service of our tire
recycling systems in the U.S. market. Under this Agreement, the Company was to
receive a royalty with respect to systems sold by OEMS, subject to adjustments
respecting actual manufacturing costs. As of the date of this Report, OEMS had
not concluded any sales of TCS Systems in the USA to independent parties. As a
result, Mr. Sanzaro has verbally relinquished his exclusivity right to the US
market and the Company expects to deal with potential customers either directly
or through independent parties.
In October 1999 we entered into an agreement with Allied International
Management. Under the terms of the Agreement, Allied was to be an exclusive
advisor and consultant to us with respect to business in Central and South
America. On November 15, 2000, we exercised our right to terminate the
agreement, to take effect December 15, 2000. As a result, Allied no longer has
exclusivity as to business in Central and South America. To date no business has
been generated by Allied and we have paid no compensation.
16
On January 31, 2001, we entered into an Agreement with James Conway, an
Australian national, under which he was named Business Development Manager Asia.
Under this Agreement, Mr. Conway was directed to find a Japanese licensee to
produce and sell TCS Systems. The Japanese company eventually selected would
have exclusive rights to the Japanese market and non-exclusive rights in other
Asian markets. This five-year agreement with Mr. Conway provides for the payment
of 10% of the License Fee paid by the Japanese company plus a 1% commission on
sales made within five years on all sales made by the licensed Japanese
manufacturer. On August 10, 2001, we further appointed Mr. Conway as a Sales
Representative in Asian markets which would be outside of Japan, the territory
which would be attributed to an eventual Japanese licensee. Under the terms of
this three-year agreement, Mr. Conway would receive a commission equal to 5% of
the selling price, before any sales or value-added taxes, customs and excise
taxes and similar levies which might be imposed by a government. This Agreement
will expire on August 8, 2004. To date, no sales have been made and nor have any
license agreements been concluded. Contact with Mr. Conway has become minimal.
The lack of a significant track record relative to the operation and
output of the TCS System has proven to be difficult hurdle to overcome in making
TCS System sales. The installed cost of a TCS-1 System to an entrepreneur,
depending on the system configuration, the condition of the feedstock and the
output requirements, and excluding building and infrastructure costs, is in the
vicinity of $3,000,000. For a TCS-2, the comparable cost to the entrepreneur is
in the vicinity of $5,000,000. This represents a substantial investment for an
entrepreneur and, without performance guarantees to substitute for the lack of a
significant operating history, entrepreneurs or their financial backers have
been unwilling to accept the risk of purchasing this new technology.
In order to overcome this difficulty, the Company attempted to
negotiate Performance Bonds to be backed by insurance policies. While
substantial progress was accomplished, the financial condition of the Company
and the lack of a proven track record for the TCS System the Company was, in the
end, unable to secure the amount of insurance required to back the demanded
Performance Bond. As a result, the Company's Manufacturing Partner, Simpro
S.p.A. of Turin, Italy, proposed that it would facilitate getting the bonds
necessary to close the first two TCS System sales, if the insurance companies
would be looking strictly at the Simpro Balance Sheet and at their track record
in product design and manufacturing, rather than bring the Tirex Balance Sheet
into the picture, which was having a negative effect on the ability to acquire
the insurance coverage. Based on this, Simpro proposed that, with respect to the
first two systems, these being proposed systems to be sold to Puerto Rican
interests and to a Canadian company (both opportunities discussed previously)
that a License Agreement could replace the initially conceived Joint Venture
Agreement. Based on our expression of interest in this approach, Simpro did, in
fact, succeed in securing the required insurance coverage at an acceptable cost.
As of the date of this Report, the Company was still awaiting the draft of the
Licensing Agreement from Simpro, and, while our relations with Simpro have been
and continue to be good, there can be no assurances that an acceptable version
of such a Licensing Agreement will, in fact, be received.
Prior to the Simpro proposal, the Company had engaged in extensive
discussions with the Export Development Corporation (EDC), a corporation wholly
owned by the Government of Canada and whose mandate is to provide financial and
non-financial support for Canadian-based companies to export their products. The
EDC expressed a willingness to support half of the requested performance bond
but the Company was unable to find another source to secure the remaining half
of the Performance Bond. However, the Company is now well known to the EDC and
there could arise occasions where it would be advantageous for us to work with
them to secure export sales. In order to qualify for EDC assistance, there are
minimum Canadian content percentage rules. Insofar as such rules could reduce or
even preclude our ability to work with Simpro on any given contract, the Company
introduced itself to a highly qualified Canadian engineering construction
company. This Quebec-based company has been in business for over thirty years,
has completed contracts in over forty countries, and in addition to its Quebec
head office, also maintains operations in India, Tunisia, Morocco, France and
17
Costa Rica. This Company has expressed interest in working with us, but only
after the first system is running Thus, while we have a potential second
manufacturing partner, it is unlikely that the Company will be unable to do any
business with this other company for at least one year.
Prior to the License Agreement noted above, Tirex had completed an
agreement in principle with Simpro S.p.A. of Turin, Italy respecting the
manufacturing, installation and provision of post-sales service for our European
clientele. This agreement in principle was followed by the final form of the
contract, which concretized certain terms of Simpro's previous letter of intent
with us, and was signed during the third quarter of Fiscal 2001. Since signing,
we worked with Simpro to finalize costing of the TCS System on a components
basis in such a format as to facilitate quotations for potential customers to
respond to their input and output requirements. Final pricing with respect to
two (2) TCS-2 Systems was received in September 2002 and, at the suggestion of
Simpro, the Company indicated a willingness to enter into an acceptable
Licensing Agreement with Simpro with respect to these systems rather than use
the Manufacturing Agreement previously signed or a Joint Venture arrangement
which had also been considered.. The Company is still awaiting a draft of the
Licensing Agreement.
In the event that the Company would finalize a License Agreement with
Simpro with respect to the first two systems, the effect of this arrangement
would mean that the gross revenues from these sales would be recorded on
Simpro's books, not in the books of Tirex. The amount remitted back to Tirex
would take the form of a royalty and would be accounted for as such. Even if
such potential sales would have been set up in such a way as to be recordable on
the books of Tirex, generally accepted accounting principles in effect in the
USA would have prevented the Company from recognizing the revenue as such until
the systems would have been accepted by the customers. Given the time line
required to manufacture, install and have accepted the systems which could be
sold to the Puerto Rican and canadian interests, it is quite unlikely that these
revenues would become recognizable during our fiscal year which will end June
30, 2003. By extension, the same principles would apply to the royalty to be
received by Tirex. While the Company wouldl benefit from the periodic cash
inflows resulting from progress payments during the next approximately ten
months in the event that such sales would be finalized, any royalty resulting
therefrom would, in fact, not have been earned until the systems are accepted by
the customers.
During Fiscal 2001, we converted our TCS-1 Production Model in Montreal
into a full-scale commercial recycling center and in July 2001 received a
production order from Xerus, Inc. for 10,000 pounds per month of our crumb
rubber, Rutex. This order was followed by a one-year supply contract with Animat
Inc. of Sherbrooke, Quebec calling for delivery of 100,000 lbs of rubber crumb
per month. We delivered the first 10,000 pounds to Xerus in August. . Production
for the Animat commitment was started. The rubber crumb for the Xerus contract
was be used to make, under contract, mud flaps for buses and large trucks and
for the production of protective tiles which are installed on artificial playing
surfaces such as soccer and football fields such as during half-time shows.
Animat is a high-volume consumer of rubber crumb for the production of
industrial and agricultural floor mats. With the Company being forced to suspend
rubber production operations at the beginning of 2002 because of cash flow
problems, the Company was not able to continue with these agreements. Subject to
the receipt of cash flow expected from the two Purchase and Sales Agreements
Management hopes will be signed in the near future, and subject to market
conditions, capital expenditure requirements and other consideration, the
Company will consider a decision to purchase the previously leased components of
the Air Plant, effect a necessary repair to the Air Plant, and thence to restart
rubber crumb production operations. The Company believes that Quebec-based
customers for rubber crumb have an ongoing requirement for very large volumes of
rubber crumb and that the supply contracts previously signed could be put into
effect once again. However, despite the very large rubber crumb requirements of
Quebec-based manufacturers, there can be no guarantee that, in fact, these
supply contracts will be restarted on terms acceptable to the Company.
We also entered into a Product and Market Development Agreement with
Xerus, Inc. on April 11, 2001 for the purpose of establishing a partnership to
develop new products, applications and markets for recycled rubber, including,
18
but not limited to, rubber and plastic compound formulations. The terms of the
agreement requires us to invest $150,000 for 15% of Xerus' outstanding stock.
Further, we have an option to purchase up to an additional 10% of Xerus. To
date, US$95,000 has been invested. The remainder will be invested if and when
adequate funds become available. Xerus was incorporated in January of 2001.
Messrs. Andre Valois and Michel DeBlois, the President and Vice-President of
Xerus respectively, are consultants to us. Prior to the conclusion of the Xerus
Agreement, Mr. DeBlois provided technical consulting services to us under the
aegis of his consulting company, MD Technologies Inc., and was responsible for
developing resin/rubber crumb formulations for molding and extrusion
applications for us.
We have been able to identify a potentially significant market for
large volumes of fine mesh rubber crumb. These volumes of fine mesh rubber crumb
would require a System output profile by mesh size different from what the TCS-1
Production Model is currently capable to produce. To satisfy this apparent
market requirement would require adding additional equipment to the original TCS
configuration and augmenting the freezing capability of the System. Most of this
work was actually completed in Fiscal 2001 and during the first two quarters of
Fiscal 2002. We have also been working with Simpro on the design and integration
of auxiliary equipment, ancillary to the System, to augment to the primary TCS
System and enhance its flexibility so to assure its capability to meet different
demand requirements.
Heretofore, the competent authorities of the City of Montreal had
accepted our assertion that we had not been producing such volumes of rubber
crumb during the system testing stage as to require operating permits with
respect to a commercial recycling center. Considering our potential business for
the production and sale of rubber crumb, such operating permits will be required
and we have initiated the process of obtaining such permits. While the Company
has been designated an accredited tire recycling center by Recyc-Quebec, the
Quebec government agency which oversees recycling and which is responsible for
the payment of subsidies relative to tire recycling, the ability to benefit from
this accreditation will depend upon our receiving our operating permits. This
will require certain modifications to our facilities, notably for fire
prevention and control equipment. With our operating permits, the Recyc-Quebec
accreditation will enable us to receive tipping fees, which at prevailing
foreign exchange rates, equate to approximately sixty cents per tire. While we
have no reason to believe that these permits will be denied, we cannot provide
any assurances that these permits will be issued or that any conditions, which
might be required for such issuance, would be within our means and/or
capability.
In February of 2001, we concluded a private financing with an investor
group. Under the terms of the Agreement, we had the contractual right to require
the Investor to purchase up to US$5,000,000 of put notes. We drew down
US$750,000 of this amount and used the proceeds of this financing toward legal
and consulting fees due, normal operating expenses such as payroll, rent and
taxes and the acquisition of equipment for our Production Model TCS-1 Plant. In
July of 2001, the Company entered into a technical default with respect to the
Agreement by not having an SB-2 Registration Statement declared effective by the
SEC. After several months of negotiations, the Company entered into a Settlement
Agreement with the Investor Group which provided for a cash paydown of the
amount owed, including interest and penalties over a period of approximately two
years starting with the date the Settlement Agreement was signed, the right of
the Investor Group to continue to be able to sell up to 600,000 collateral and
Rule 144 shares per month and the issuance of three series of warrants, 500,000
each, exercisable at prices of one cent, five cents and ten cents over a three
year period. This Settlement Agreement was announced in April of 2002, and
details of the terms of the Agreement are filed as an Exhibit to this Report.
The Company was unable to generate the cash flow necessary to pay down its
obligations under the Convertible Note in accordance with the terms of the
Settlement Agreement and thus far, has not completed negotiations for a new
Settlement Agreement. Numerous recourses are available to the holders of the
Convertible Notes, but to date, these recourses have not been exercised.
Because of the lengthy delay preceding the commencement of commercial
operations, we have historically had to cover our overhead costs from sources
other than from commercial revenues. We expect that some portion of our future
overhead costs, which may be quite significant, will continue to be covered from
19
sources other than commercial revenues. Until December of 2001, our monthly
operating costs were about US$100,000 per month. With the suspension of rubber
crumb production activities and the scaling back of research and development
expenditures starting in January of 2002, our monthly costs have been reduced to
approximately US$35,000 per month. Ours cash flow deficit condition will
continue until such time as the Company will start generating revenues from the
sale of TCS Systems.
We have been forced to suspend production of rubber crumb because of
our lack of financial resources to purchase the previously leased portions of
the Air Plant, to complete an essential repair to our Air Plant, to complete the
acquisition and installation of capital equipment required for us to be able to
produce the quantities 15 to 30 mesh rubber crumb requested by our customers and
to support production activities until such time as the Company would be able to
start collecting on any trade receivables. Accordingly, we did not generate any
gross sales during Fiscal 2001 and only insignificant incidental revenues in
Fiscal 2002. Unless and until we successfully develop and commence TCS System
manufacturing and sales operations on a full-scale commercial level, we will not
generate significant revenues from operations. If we are unable to recommence
rubber crumb production operations, we would be obligated to seek other sources
of funds to support operations until TCS Systems sales and manufacturing
operations would occur. In the event of such a circumstance, there can further
be no assurance that such funding would be available at all or on terms
acceptable to Management. Except for the foregoing, we have never engaged in any
significant business activities.
Liquidity and Capital Resources
As of June 30, 2002, we had total assets of $1,302,955 as compared to
$3,072,245 as at June 30, 2001 reflecting a decrease of $1,769,290. Fiscal
year-end total assets at June 30, 2001 had reflected a previous decrease of
$215,139 over $3,287,384 at June 30, 2000. We attribute the decrease in total
assets at June 30, 2002 principally mainly to the writedown of the carrying
value of the TCS-1 Production Model from its original carrying value of
$2,000,000 to the revised value of $500,000, a reduction of $1,500,000. This
writedown was booked at year-end as a result of the termination of the lease for
certain components of the Air Plant during the fourth quarter of Fiscal 2002,
the failure of an essential component of the Air Plant, also during the fourth
quarter of Fiscal Funding may not be available to purchase the previously leased
portions of the Air Plant nor to effect its repair. Without the Air Plant, the
TCS-1 Production Model cannot be operated. In such circumstances, rubber crumb
operations would not be restarted. Most of the components of the TCS-1
Production Model were designed and manufactured for us and have limited market
value in any other context than being used as a TCS System. For these reasons,
the decision was made to write down this asset on the books of Fiscal 2002 to
its estimated Net Realizable Value. Further changes in assets include (i) a
decrease of $114,059 in Tax Credits Receivable from $361,029 as of June 30, 2001
to $246,970 as of June 30, 2002, and (ii) a decrease of $193,297 in Prepaid
expenses and deposits from $436,25331 as of June 30, 2001 to $242,956 as of June
30, 2002. The reduction in tax credits receivable is attributed to a slightly
smaller amount of Research and Development incurred by us. The reduction in
Prepaid expenses and deposits is attributable to amortization and
reclassifications to assets and against expenses during the fiscal year ended
June 30, 2002.
As of June 30, 2002, we had total liabilities of $4,049,140 as compared
to $4,105,736 at June 30, 2001, reflecting a marginal decrease in liabilities of
$56,596. Total liabilities at June 30, 2001 had reflected a previous increase of
$15,487 over $4,121,223 in total liabilities at June 30, 2000. We attribute such
increases in total liabilities at June 30, 2002 primarily to: (i) increases in
convertible notes in an amount of $182,240 from $935,556 as of June 30, 2001 to
$1,117,796 as of June 30, 2002, (ii) decreases in accounts payable and accrued
liabilities and current portion of long-term debt in an amount of $92,758 from
$1,640,557 as of June 30, 2001 to $1,547,799 as of June 30, 2002, and (iii)
decreases in loans from related parties in an amount of $191,885 from $1,204,663
as of June 30, 2001 to $1,012,778 as of June 30, 2002.
Reflecting the foregoing, the financial statements indicate that as at
June 30, 2002, we had a working capital deficit (current assets minus current
liabilities) of $1,127,115 and that as at June 30, 2001, we had a working
20
capital deficit of $1,014,881, an increase of $119,735. There were reductions in
current assets as noted in the second preceding paragraph, particularly in Tax
Credits Receivable, which reductions were offset by decreases in current
liabilities due to third parties.
The success of our tire recycling equipment manufacturing business and
our ability to continue as a going concern will be dependent upon our ability to
obtain adequate financing to commence profitable, commercial manufacturing and
sales activities and the TCS Systems' ability to meet anticipated performance
specifications on a continuous, long term, commercial basis.
Results of Operations
As noted above, we are presently in the very early stages of the
business of manufacturing and selling TCS Systems, and similarly only initiated
production of rubber crumb for resale during the first quarter of Fiscal 2002.
Rubber crumb operations were suspended at the end of the second quarter of
Fiscal 2002 because of financial considerations, and the subsequent termination
of the lease in mid-April 2002 with respect to certain components of the Air
Plant and the concurrent failure of an essential component thereof during
preparation for a System demonstration have raised doubt if rubber crumb
production operations will be restarted. As a result of these uncertainties,
Management wrote down the carrying value of the Air Plant from the previous
$2,000,000 to its current carrying value of $500,000 giving a writedown amount
of $1,500,000. We had no income from operations during Fiscal years 2001 and
only incidental revenues for Fiscal 2002 related to the sale of a relatively
small quantity of rubber crumb and the sale of surplus equipment. Despite the
temporary and limited revenues which became available to us from the sale of
rubber crumb during Fiscal 2002, unless and until we successfully develop our
marketing and manufacturing operations related to TCS Systems on a full-scale
commercial basis, we will continue to generate no revenues from operations to
support our monthly cash requirements.
The financial statements, which are included in this Report, reflect
total general and administrative expenses of $1,209,913 for fiscal 2002, which
reflects an decrease of $782,646 over Fiscal 2001, when general and
administrative expenses were $1,992,559. During fiscal 2002, our total operating
costs increased by $613,232, from $2,947,442 for fiscal 2001 to $3,560,674 for
fiscal 2002. The majority of such increase is the result of the $1,500,000
writedown of the carrying value of the TCS-1 prototype. Research and development
expenditures, excluding the writedown, fell from $807,272 in Fiscal 2001 to
$797,577 in Fiscal 2002, a decrease of $9,695. The increase in total operating
costs was mitigated by a decrease in general and administrative expenses, as
noted above, in the amount of $782,646.
We believe that the amounts accrued to date in respect of the shares
issued to compensate the executive officers and consultants reflect the fair
value of the services rendered, and that the recipients of such shares received
such shares at an appropriate and reasonable discount from the then current
public market price.
From inception (July 15, 1987) through June 30, 2002, we have incurred
a cumulative net loss of $25,884,723. Approximately $1,057,356 of such
cumulative net loss was incurred, prior to the inception of our present business
plan, in connection with our discontinued proposed health care business and was
due primarily to the expending of costs associated with the unsuccessful attempt
to establish such health care business. We never commenced our proposed health
care operations and therefore, generated no revenues therefrom.
ITEM 7. FINANCIAL STATEMENTS
Our financial statements required to be included in this Report
pursuant to Item 310(a) of Regulation S-B, are set forth below.
21
ITEM 8. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There was no resignation or dismissal of our principal independent
accountant during the two most recent fiscal years and the interim period
subsequent thereto.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
Directors, Executive Officers and Significant Employees
The following sets forth, as of June 30, 2002 the names and ages of all
directors, executive officers, and other significant employees of the Company;
and all positions and offices in the Company held by each, and the terms of said
offices. Each director will hold office until the next annual meeting of
shareholders and until his or her successor has been elected and qualified:
Offices Term of
Name Age Held Office
--------------------- ---- ----------------------- ----------------
John L. Threshie, Jr. 48 Chairman of the November 1999 -
Board of Directors and present
Chief Executive Officer
Director June 1995 -
February 1999
Vice President June 1995-
November 1999
Secretary December 1996
February 1999
Louis V. Muro 70 Vice President January 1996 -
of Engineering present
and Director
President March 1994 -
January 1995
Director December 1992 -
January 1995
Secretary December 1992 -
March 1994
Louis Sanzaro 52 Director January 1997 -
present
President February 1999 -
November 1999
Vice President January 1998 -
Of Operations February 1999
Michael D.A. Ash 53 Secretary, Treasurer, February 1999-
and Chief Financial present
and Accounting Officer
The Board of Directors has no standing committees.
22
Family Relationships
No family relationships exist between any director or executive officer
of Company or any person contemplated to become such.
Business Experience
The following summarizes the occupation and business experience during
the past five years for each director, executive officer and significant
employee of the Company. A significant employee is a person who is not an
executive officer of the Company but who is expected to make a significant
contribution to the business of the Company.
JOHN L. THRESHIE, JR. Mr. Threshie has served as President and Chief Executive
Officer of the Company since November of 1999. Prior to that time he served as a
Vice President of the Company since June 1995. He was appointed Assistant
Secretary of the Company on February 11, 1999. From December 1996 until February
11, 1999, Mr. Threshie held the position of Secretary, and from June 1995 until
February 11, 1999, as a Director, of the Company. He also served as a Director
for The Tirex Corporation Canada Inc. and Tirex Canada R&D Inc. from June 1998
and June 1995, respectively, until February 11, 1999. He has more than fourteen
years of experience in the areas of management, marketing and sales primarily in
the field of advertising. Mr. Threshie holds a Bachelor of Science Degree in
Business from the University of North Carolina. He was employed as an insurance
and financial broker by Primerica Financial Services from 1991 through 1994.
From 1988 to 1990, Mr. Threshie was an advertising account supervisor for
Ammirati & Puris Inc., an advertising firm in New York. From 1983 to 1988 Mr.
Threshie was employed as a senior account executive at the advertising firm of
Saatchi and Saatchi, Inc. From 1979 to 1983 Mr. Threshie was employed by
Milliken & Co. as a sales representative.
LOUIS V. MURO. Mr. Muro acted as an engineering consultant to the Company from
January 18, 1995 until January 1, 1996 when he was appointed as a Director and
as Vice President in charge of engineering. Mr. Muro served as a Director of the
Company from December 29, 1992 until January 18, 1995. He also served as the
Company's Secretary from December 29, 1992 until March 1994 when he was
appointed President of the Company, a position he held until January 18, 1995.
He has also served as the Vice President in charge of engineering and as a
director of The Tirex Corporation Canada Inc. and Tirex Canada R&D Inc. since
June 1998 and May 1995 respectively. Mr. Muro received a B.S. degree in Chemical
Engineering from Newark College of Engineering in 1954, since which time he has
continually been employed as a chemical engineer. From 1974 to 1993 Mr. Muro has
been the sole proprietor of Ace Refiners Corp. of New Jersey, a precious metals
refinery. From 1971 to 1974, he worked as an independent consultant and from
1964 until 1971, he was director of research and development for Vulcan
Materials Corporation in Pittsburgh, Pa., a public company engaged in the
business of recovering useable tin and clean steel from scrap tin plate. From
1960 to 1964, Mr. Muro was the sole proprietor of Space Metals Refining Co. in
Woodbridge, NJ, a company involved in the purification of scrap germanium to
transistor grade metal. From 1959 to 1960 he was employed by Chemical
Construction Co., of New Brunswick, NJ, where he developed a process for the
waste-free production of urea from ammonia, carbon dioxide and water. From 1954
to 1959, Mr. Muro worked in the research and development department at U.S.
Metals Refining Co. in Carteret, NJ where he was involved with the refinement of
precious metals.
23
LOUIS SANZARO. Mr. Sanzaro has been a Director of the Company since January 1997
and a Director of The Tirex Corporation Canada Inc. since June 1998. He served
as a consultant to the Company from January 1, 1997 until June 1998, when he was
appointed Vice President of Operations and Chief Operating Officer. On February
11, 1999, Mr. Sanzaro resigned as Vice President of Operations and was appointed
to the position of President of the Company. Effective November 23, 1999, and to
avoid a possible future conflict of interest, Mr. Sanzaro resigned as President
of the Company. Mr. Sanzaro holds a degree in marketing from Marquette
University. In 1997, he was named "Recycler of the Year" for the State of New
Jersey and was also awarded the distinction of being named "Recycling Processor
of the Decade" by Ocean County, New Jersey. He is the President and a member of
the Board of Directors of the nation-wide, Construction Material Recycling
Association. Since 1986, Mr. Sanzaro has served as President and CEO of Ocean
County Recycling Center, Inc. ("Ocean County Recycling"), in Tom's River, New
Jersey. Ocean County Recycling is in the business of processing construction and
demolition debris for reuse as a substitute for virgin materials in the
construction and road building industries. In addition, since 1989, Mr. Sanzaro
has served as Vice President and COO of Ocean Utility Contracting Co., Inc., a
New Jersey company engaged in the installation of sewer and water main pipelines
and the construction of new roadway infrastructure. From 1973 until 1990, Mr.
Sanzaro was the President and CEO of J and L Excavating and Contracting Co.,
Inc., a company engaged in the construction of residential, commercial,
industrial, and government buildings.
MICHAEL D.A. ASH. Mr. Ash joined the Company on January 11, 1999. On February
11, 1999, Mr. Ash was appointed Secretary, Treasurer, and Chief Financial and
Accounting Officer of the Company. Mr. Ash graduated with a Bachelor's Degree in
Business Administration, Magna Cum Laude, from Bishop's University in Quebec in
1970, and with an MBA, With Distinction, from Harvard Business School in 1975.
Mr. Ash is also a Chartered Accountant, (Canadian equivalent to a CPA), having
qualified for this professional designation in 1972 while employed by Coopers &
Lybrand (now PriceWaterhouseCoopers). Since graduation from Harvard, Mr. Ash has
spent most of his career with the Government of Canada, first with the Office of
the Comptroller General in Ottawa and, for the subsequent eighteen years, with a
federal regional economic and industrial development agency in Montreal where he
gained exposure to a very large number of companies and industrial sectors,
ranging from developmental companies to major multi-national corporations. For
ten years during this time period, Mr. Ash was also a part-time lecturer in
accountancy at Concordia University in Montreal for students registered in the
program leading to the Chartered Accountancy designation.
Compliance With Section 16(a) of the Exchange Act.
None of the securities have been registered pursuant to Section 12 of
the Exchange Act of 1934, as amended (the "Exchange Act"). Therefore, Section
16(a) of the Exchange Act is not applicable.
ITEM 10. EXECUTIVE COMPENSATION
Current Remuneration
The following table sets forth information concerning the annual
compensation received or accrued for services provided in all capacities for the
fiscal years ended June 30, 2000, 2001 and 2002 by our chief executive and all
our executive officers serving as such as at June 30, 2002 or at any time during
the year ended June 30, 2002. Common stock issued in lieu of cash salary
payments was valued at a 30-50% discount from the average market price of such
stock during the periods in which such salary was earned. Determination of the
market price for such purpose was based upon the average of the bid and ask
prices of such stock, as traded in the over-the-counter market and quoted in the
OTC Bulletin Board. The discount from the market price was determined
arbitrarily, by negotiation between the Company and our executive officers and
did not bear any relationship to any established valuation criteria such as
assets, book value, or prospective earnings. The market prices of our common
stock and the liquidity of such market has historically been volatile. Future
announcements concerning us, our competitors, results of testing, technological
24
innovations or new commercial products may have a significant impact on the
market price of our common stock. We believe that, as of the dates when such
shares were issued, the actual market value of such shares was, and as of the
date hereof remains, highly contingent upon, and subject to, extremely high
risks.
SUMMARY COMPENSATION TABLE:
ANNUAL COMPENSATION
------------------------------------- ----------- -------------------- ------------ -------------
Name and Principal Position Year Salary $ Bonus $ Other $
------------------------------------- ----------- -------------------- ------------ -------------
John L. Threshie Jr. 2002 $125,000 (1) Nil nil
President 2001 $125,000 (2)
2000 $125,000 (3)
------------------------------------- ----------- -------------------- ------------ -------------
Louis V. Muro 2002 $150,000 (4) Mil nil
Vice President - Engineering 2001 $150,000 (5)
2000 $150,000 (6)
------------------------------------- ----------- -------------------- ------------ -------------
Louis A. Sanzaro Nil nil
Chief Operating Officer
(resigned November 1999) 2000 $175,000 (7)
------------------------------------- ----------- -------------------- ------------ -------------
Terence C. Byrne Nil nil
President
(Resigned November 1999) 2000 $250,000 (8)
------------------------------------- ----------- -------------------- ------------ -------------
Michael D.A. Ash 2002 $100,000 Nil nil
Secretary-Treasurer & CFO 2001 Note below
2000 Note below
------------------------------------- ----------- -------------------- ------------ -------------
In 1999, Mr. Ash abrogated his then existing Employment Agreement. This was
replaced by a Consulting Agreement for a period of sixteen (16) months to the
end of Calendar 2000. Under this consulting agreement, Mr. Ash received
2,000,000 shares of the common stock of the Company. A new employment Agreement
with an effective date of January 2001 was put into effect and the prior
Consulting Agreement was allowed to lapse. Under the existing Employment
Agreement, Mr. Ash earns a salary of $100,000 and Mr. Ash also has options to
purchase stock of the company at the lesser of 20(cent) for the first year
option, 40(cent) for the second year option and 50(cent) for the third year
option, or 50% of market applicable to each series. The options can be exercised
on a cashless basis.. Prorating the stock issuance over the sixteen month term
of the prior Consulting Agreement, in Fiscal 2000, Mr. Ash was entitled to
1,250,000 shares of stock. There was no cash salary in Fiscal 2000 for Mr. Ash.
For Fiscal 2001, Mr. Ash received the balance of his stock entitlement, i.e.
750,000 shares, and was entitled to receive $50,000 in cash. For Fiscal 2002,
Mr. Ash was entitled to receive $100,000.
--------------------------------------------------------------------------------
(1) In lieu of cash payment of salary, reimbursable expenses and other
benefits, Mr. Threshie was issued shares of our Common Stock and was permitted
to purchase shares during FY 2002 at a discount of 35% currently in effect
versus 50% in prior years, of the then current market price. The number of
shares issued to Mr. Threshie pursuant thereto during fiscal 2002aggregated
6,555,709 shares. It is our intention and that of Mr. Threshie to continue to
enter into similar transactions during fiscal year 2003 for all or part of his
salary and for reimbursement of expenses.
(2) In lieu of cash payment of salary, reimbursable expenses and other
benefits, Mr. Threshie was issued shares of our Common Stock and was permitted
to purchase shares in FY2001 and prior at a discount of 50% of the then current
market price. The rate of discount was reduced effective the beginning of Fiscal
2002. The number of shares issued to Mr. Threshie pursuant thereto during fiscal
2001aggregated 4,634,642 shares.
25
(3) In lieu of cash payment of salary, reimbursable expenses and other
benefits, Mr. Threshie was issued shares of our Common Stock and was permitted
to purchase shares at a discount of 50% of the then current market price. The
number of shares issued to Mr. Threshie pursuant thereto during fiscal 2000
aggregated 4,865,995 shares.
(4) In lieu of cash payment of salary, reimbursable expenses and other
benefits, Mr. Muro, from time to time, was issued shares of our Common Stock and
purchased shares during FY 2002 at a discount of 35% currently in effect, versus
50% in prior years, of the then current market price. The number of shares
issued to Mr. Muro pursuant thereto during fiscal 2002 aggregated 2,250,000
shares.
(5) In lieu of cash payment of salary, reimbursable expenses and other
benefits, Mr. Muro, from time to time, was issued shares of our Common Stock and
purchased shares during FY 2001 at a discount of 50% of the then current market
price. There were no issuances in respect of unpaid salaries and unreimbursed
expenses during fiscal 2001.
(6) In lieu of cash payment of salary, reimbursable expenses and other
benefits, Mr. Muro, from time to time, was issued our shares of Common Stock and
was purchased shares at a discount of 50% of the then current market price. The
number of shares issued to Mr. Muro pursuant thereto during fiscal 2000
aggregated 1,194,811 shares.
(7) In lieu of cash payment of salary, reimbursable expenses and other
benefits, Mr. Sanzaro was issued shares of our Common Stock at a discount of 50%
of the then current market price. The number of shares issued to Mr. Sanzaro
pursuant thereto during fiscal 2000 aggregated 632,308 shares.
(8) In lieu of cash payment of salary, reimbursable expenses and other
benefits, former Chairman and CEO, Mr. Terence Byrne was issued shares of our
Common Stock and purchased shares at a discount of 50% of the then current
market price. The number of shares issued to Mr. Byrne pursuant thereto during
fiscal 2000 aggregated 2,544,556 shares.
7) We believe that it is impossible to determine the actual current or
potential value of such shares in light of the fact that, as of the dates when
such shares were issued to the executive officers, the actual potential market
value of such shares were highly contingent upon, and subject to, extremely high
risks including but not limited to the following factors: (i) the very early
stage of development of our business; (ii) our lack of sufficient funds to
implement our business plan and the absence of any commitments from potential
investors to provide such funds; (iii) the absence of a reliable, stable, or
substantial trading market for such shares; and (iv) the uncertainty respecting
our ability to continue as a going concern.
The Tirex Corporation Stock Plan
On June 23, 2000 we adopted the Tirex Corporation Stock Plan (the
"Plan") to advance our interests and those of our shareholders by affording to
our key personnel, consultants and other persons who have made substantial
contributions to us an opportunity to acquire or increase their proprietary
interest in the Company by the issuance to such individuals of Awards, Options
or Grants under the terms set forth in the Plan. By thus encouraging such
individuals to become owners of our common stock we seek to motivate, retain,
and attract those highly competent individuals upon whose judgment, initiative,
leadership, and continued efforts our success in large part depends.
The Plan originally provided that up to 21,000,000 shares could be
issued for this purpose, 7 million shares to be given as awards, 7 million
shares to underlie options to purchase common stock, and 7 million shares to be
given as grants. Awards and Options can only be given to individuals who have
been either in our employ, an officer, director or consultant for the preceding
6 months. Awards are not fully vested until the end of three years with the
26
1/12th of the aggregate award vesting at the end of each quarter. If the Awardee
is terminated for cause or resigns the unvested portion of the award is
forfeited. Options can be exercised at any time and upon exercise the underlying
stock is fully vested with the purchaser. The Options are not transferable and
are exerciseable for two (2) years after which time they expire. If the Optionee
is terminated for cause or resigns all unexercised options are forfeited. A
Grant of Stock pursuant to the terms of the Plan can only be given to persons
who have made a substantial contribution to us and the shares are not
forfeitable. Subsequent to the Plan's adoption an additional 5,000,000 shares of
common stock were added to it and up to the 26,000,000 shares were made eligible
to be given as either Awards, Grants or Options.
As discussed elsewhere in this Report, the following is a summary of
those options and warrants outstanding with respect to the purchase of the
common stock of the Company:
------------------------------ ---------------------------- --------------------------- ----------------------------
Beneficiary Issuable Exercise Window Exercise Price
------------------------------ ---------------------------- --------------------------- ----------------------------
John L. Threshie Jr. 1,000,000 share options at Two years from date Series 1 - lesser of 20(cent)
(Employment Agreement) the beginning of each of issuable or 50% of market
Calendar Years 2002, 2003 Series 2 - lesser of 40(cent)
and 2004 or 50% of market
Series 3 - lesser of 50(cent)
or 50% of market
------------------------------ ---------------------------- --------------------------- ----------------------------
Michael Ash 1,000,000 share options at Two years from date Series 1 - lesser of 20(cent)
(Employment Agreement) the beginning of each of issuable or 50% of market
Calendar Years 2001, 2002 Series 2 - lesser of 40(cent)
and 2003 or 50% of market
Series 3 - lesser of 50(cent)
or 50% of market
------------------------------ ---------------------------- --------------------------- ----------------------------
Convertible Debenture 1,500,000 in three Series 1 - at any time Series -1 at 1(cent) each
series of 500,000 during the 3-year period
warrants each following the date of the
Settlement Agreement, to
wit, April 26, 2002
Series 2 - during the 2nd Series -2 at 5(cent)each
and 3rd years following
April 26, 2002
Series 3 - during the Series -3 at 10(cent)each
third year following
April 26, 2002
------------------------------ ---------------------------- --------------------------- ----------------------------
Compensation of Directors
The Directors of the Company were not compensated for their services as
such in fiscal 2000.
Employment Agreements
We seek to maintain employment agreements with all of our executive
officers (the "Executive Agreements"). We currently have an employment agreement
with Mr. Threshie that provides for an annual salary of $125,000 and is in
effect until December 31, 2003. Mr. Threshie also has options , as noted above,
to purchase shares of the Company. Mr. Threshie is granted options to purchase
1,000,000 shares at each anniversary date of his Employment Agreement for the
next three years, and, for each series of options, has a two-year period to
exercise that option. The options are exercisable at the lesser of 50% of market
and 20(cent) for the first series, 40(cent) for the second series and 50(cent)
for the third series. We currently employ Mr. Muro on a month-to-month basis,
based on an annual salary projection of $150,000. During fiscal 2000 Mr. Ash
voluntarily abrogated his Executive Agreement with us and entered into a new
agreement under which his compensation is in the form of shares. Under this new
agreement, Mr. Ash continued to act as Secretary-Treasurer and Chief Financial
27
Officer on a consulting basis. Under the terms of the original Executive
Agreement, Mr. Ash's annual compensation was US$125,000. The consulting
agreement extended to December 31, 2000 and was renewable by mutual consent of
the Company and Mr. Ash. Mr. Ash's compensation for the sixteen-month period
ended December 31, 2000 was 2,000,000 common shares, subject to prorated
adjustment in the event of a stock split. At the beginning of Calendar 2001, Mr.
Ash's consulting agreement was converted back to an Employment Agreement under
which Mr. Ash earns an annual salary of $100,000 and has options, as noted
above, to purchase company stock on terms identical identical to the options
granted to Mr. Threshie.
All of the above agreements provide for the payment of bonuses at the
sole discretion of the Board of Directors based upon an evaluation of the
executive's performance, with payment of any such bonuses to be reviewed
annually. The Executive Agreements also provide for the participation by each of
the foregoing persons in any pension plan, profit-sharing plan, life insurance,
hospitalization or surgical program, or insurance program hereafter adopted by
us, reimbursement of business related expenses, the non-disclosure of
information which we deem to be confidential to it, non-competition by the
executive with us for the one-year period following termination of employment
with us and for various other terms and conditions of employment.
The Executive Agreements with Messrs. Threshie, Muro and Ash also
include severance provisions which provide, among other things, for severance
compensation in the event that the employment of the executive is terminated by
us other than for cause, or by the executive for "good reason", as that term is
defined in the Executive Agreements, or pursuant to a change in control of the
Company. The various Executive Agreements provide for severance compensation, as
follows:
In the case of Messrs. Threshie and Muro, 200% of the amount of the
base salary for a period of twelve months;
In the case of Mr. Ash, the amount of severance compensation for
termination other than for cause, or by the executive for "good
reason", as that term is defined in the Executive Agreements, or
pursuant to a change in control of the Company, amounts to 1,000,000
common shares of the Company.
Because of the early stage of our development, our lack of operations
and insignificant cash flow, since January 18, 1995, we have not had the
resources to meet fully our financial obligations under the Executive
Agreements. As a result, the major portion of compensation which has been
available to our executive officers has consisted of shares of our common stock,
which such individuals accepted, in lieu of cash compensation, for a substantial
portion of salary and/or consulting fees due to them.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of October 1, 2000, with respect
to the persons known to the Company to be the beneficial owners of more than 5%
of the common stock, $.001 par value of the Company and of more than 5% of the
Class A Common Stock of the Company's subsidiary, Tirex R&D and of all Officers
and Directors of the Company as that term is defined in Item 402(a)(2) of
Regulation S-B. Neither the Company nor Tirex R&D have any shares of any other
class issued or outstanding.
Name and Amount and
Title Address of Nature of Percent
of Beneficial Beneficial of
Class Owner Ownership Class (1)
--------------------------------------------------------------------------------
Common John L. Threshie, Jr. 4,909,328(2) 2.18%
The Tirex 38 Cours Du Fleuve
Corporation Nun's Island (Verdun), Quebec
Canada, H3E 1X1
Class A
Common 34(5) 34%
Tirex
R&D
Common Louis V. Muro 3,819,104(2)(3) 1.70%
The Tirex 374 Oliver Avenue
Corporation Westmount, Quebec
Canada H3Z 3C9
28
Class A
Common 17(5) 17%
Tirex
R&D
Common Louis V. Sanzaro 12,781,088(2) 5.69%
The Tirex 1497 Lakewood Road
Corporation Toms River, NJ 08755
Common Michael Ash 1,180,000(4) 0.53%
The Tirex 310 Montee Sabourin
Corporation St. Bruno, Quebec
Canada, J3V 4P6
Common All directors and 22,689,520 10.10%
The Tirex officers as a group
Corporation (4 persons)
Class A All directors and 51 51.0%
Common officers as a group
Tirex (4 persons)
R&D
------------------------
(1) The percentages listed in the table is calculated on the basis of
224,757,559 shares of the common stock, $.001 par value, of the Company
outstanding as at October 11, 2002.
(2) Our executive officers, directors and principal shareholders have pledged
an aggregate of 11,986,315 (approximately 6% of our then outstanding shares) of
their personal shareholdings in the Company as a security interest for our
recent issuance of $750,000 of 8% convertible notes, pursuant to a Subscription
Agreement and Security Agreement dated February 26, 2001. Specifically, John L.
Threshie, Jr. pledged 1,891,204 shares, Louis Muro pledged 1,723,514 shares and
Louis Sanzaro pledged 8,371597 shares of our common stock. These shares are
currently being held in escrow, pending satisfaction of the terms of the notes.
We were served a notice of default by the investors of the notes in July 2001. A
Settlement Agreement was reached in April of 2002. The Company has been unable
to respect its financial obligations undser the terms of the Settlement
Agreement and negotiations with respect to a new settlement have not been
completed. As of the date of this Report, 6,081,597 collateral shares remained
in the hands of the Investors. This represents approximately 2.7% of our current
outstanding stock.
(3) Includes: (i) 3,085,104 shares held of record by Mr. Muro as of October 11,
2002; and (ii) 734,000 shares held of record by Mr. Muro's wife, Nina Aviles
Muro.
(4) Includes: (i) 950,000 shares held of record by Mr. Ash as of June 30, 2002;
and (ii) 230,000 shares held of record in the name of Loryta Investments Limited
an entity beneficially owned by the family of Mr. Ash.
(5) Messrs. Threshie and Muro hold all shares of Tirex R&D Class A Common Stock
pursuant to the terms of a Shareholders agreement among them and the Company
(the "Tirex R&D Shareholders Agreement"), pursuant to which they will be
obligated to transfer all such shares to the Company, for no consideration, on
May 2, 2001, unless the term of such Agreement is unilaterally extended by the
Company. The Company does not intend to take any actions of any kind with
respect to such shares which would be in violation of any Canadian government
regulations governing tax and other financial incentives which may be available
to Tirex R&D. The Company is in the process of preparing appropriate
documentation the effect of which would be to extend the duration of the
Agreement.
29
Changes in Control
On February 26, 2001 we issued $750,000 worth of convertible notes at
an annual rate of eight percent (8%) to certain investors. Interest payable on
these notes is payable quarterly commencing June 30, 2001. In addition, all
principal and unpaid interest due on the outstanding notes is immediately due
and payable on February 26, 2003, or earlier in the event of a default. One of
the conditions of this transaction was that we would file with the Securities
and Exchange Commission a Registration Statement on Form SB-2 to register
various securities issuable upon the conversion of notes by a date certain and
that the Registration Statement would be effective by August 15, 2001. We failed
to meet these deadlines and the investors served a notice of default on us on
July 19, 2001. Negotiations were undertaken throughout the remainder of Calendar
2001 and into 2002 until a Settlement Agreement was reached on April 26, 2002.
Under the terms of the Agreement, a copy of which is included as an Exhibit to
this Report, the Company is obligated to pay down the amount owed to the
Investor Group, including interest and penalties, over a period of approximately
two years. During the time when an amount continues to be owed to the Investor
Group, the Investor Group will have the right to sell up to 600,000 collateral
or Rule 144 shares per month and apply the proceeds to interest due, fees and
finally to reduction of the principle amount outstanding. Any remaining
collateral shares at the time the debt will have been totally repaid will be
returned to the original owners of the shares. The Investor Group was also given
three series of warrants for 500,000 shares each, exercisable at prices of
$0.01, $0.05 and $0.10 respectively and exercisable within pre-defined time
windows over a three year period starting with the date of signature of the
Settlement Agreement. . As of October24, 2002, the Investor Group had 6,081,597
collateral shares in their possession. As to the failure to have an SB-2
Registration Statement effective by August 15, 2001, the signing of the
Settlement Agreement negated the default. Due to a lack of financial resources,
the Company was forced to default on the terms of the Settlement Agreement. To
date, the Investors have sold 5,904,718 shares of the original 11,986,315
collateral shares held by them.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following is a description of transactions during the last two
fiscal years or any presently proposed transactions to which the Company was or
is to be a party, in which the amount involved in such transaction (or series of
transactions) was $60,000 or more and which any of the following persons had or
is to have a direct or indirect material interest: (i) any director or executive
officer of the Company; (ii) any person who owns or has the right to acquire 5%
or more of the issued and outstanding common stock of the Company; and (iii) any
member of the immediate family of any such persons.
Pursuant to a Subscription Agreement dated February 26, 2001 we issued
$750,000 of 8% convertible notes, due February 26, 2003 to three investors.
Under the Subscription Agreement, we have the option, subject to conditions, to
require the investors to purchase additional convertible put notes up to
$4,250,000. Interest only payments are due quarterly commencing June 30, 2001,
and the principal is due in one lump sum on February 26, 2003, or upon certain
events of default. The number of shares of common stock issuable upon conversion
of the convertible notes is 15,000,000, based on a conversion price of $0.05 per
share. One of the conditions of this transaction was that we would file with the
Securities and Exchange Commission a Registration Statement on Form SB-2 to
register various securities issuable upon the conversion of the notes by a date
certain and that the Registration Statement would be effective by August 15,
2001. We failed to meet these deadlines and the investors served a notice of
default on us on July 19, 2001. The conversion price for the convertible notes
is the lesser of (i) 80% of the average of the three lowest closing bid prices
of the common stock for the twenty-two (22) trading days prior to the closing
date, or (ii) 80% of the average of the five lowest closing bid prices of the
common stock for the sixty (60) trading days prior to the conversion date, as
defined in the convertible note. The maximum number of shares of common stock
that any subscriber or group of affiliated subscribers may own after conversion
at any given time is 4.99%.
During the years ended June 30, 2001 and 2002, the Company's executive
officers and certain consultants to the Company have waived substantial portions
of their salaries, fees and/or unreimbursed expenses made by them on behalf, and
for the account, of the Company, and have accepted shares of the Company's
common stock in lieu thereof. In connection therewith shares have been issued as
follows:
During fiscal 2002 various officers and former officers received Common
Stock in lieu of salaries and expense reimbursements and purchased shares of
Common Stock totaling 14,524,312 shares. The shares issued or sold to officers
were valued at thirty-five per cent (35%) of the then current market price.
During Fiscal 2001, the number of shares issued for these reasons was
12,234,642.
30
During fiscal 2000 the Company modified its agreement with Oceans Tire
Recycling & Processing Co., Inc. ("OTRP") to clarify various terms of the
parties prior agreements and to obtain a commitment by OTRP to pay future lease
payments on the Production Model system, if necessary. The Company also
exchanged its debt obligation to OTRP for 4,553,102 shares of its Common Stock,
which was issued, pursuant to OTRP's request, to its principal shareholder and
President.
ITEM 13. EXHIBITS
FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Financial Statements
The financial statements filed as a part of this report are as follows:
Consolidated Balance Sheet - June 30, 2002
Consolidated Statements of Operations for the years ended June 30, 2001 and
2002, and cumulative for the period from inception (July 15, 1987) to June
30, 2001
Consolidated Statements of Owners' Equity (Deficit) as at July 15, 1987 and
June 30, 2000 - 2002
Consolidated Statements of Cash Flows for the years ended June 30, 2001 and
2002 and cumulative for the period from inception (July 15,1987) to June
30, 2002
Financial Statement Schedules
Financial statements schedules have been omitted for the reason that
they are not required or are not applicable, or the required information is
shown in the financial statements or notes thereto.
31
Exhibits
The exhibits filed as a part of this Report or incorporated herein by
reference are as follows:
Exhibits Incorporated
Herein By Reference,
Exhibit No. As Filed
With Document
Indicated
---------
3. (a) Certificate of Incorporation filed August 19, 1987 3(a)
(b) Certificate of Amendment filed June 20, 1989 3(b)
(c) Certificate of Amendment filed March 10, 1993 3
(d) Certificate of Amendment filed December 5, 1995 3(e)
(e) By-Laws 3(b)
(f) Certificate of Amendment filed August 11, 1997
(g) Certificate of Amendment filed February 3, 1998 3
(h) Certificate of Incorporation of Tirex Acquisition Corp.,
filed with the Secretary of State of Delaware on
December 15, 1997 3(h)
(k) Certificate of Amendment to the Certificate of
Incorporation, filed with the Secretary of State
of Delaware on July 10, 1998 3
Reports on 8-K
The Company did not file any current reports on Form 8-K during the
last quarter of the period covered by this Report.
32
SIGNATURES
In accordance with Section 15(d) of the Exchange Act of 1934, the
Company has caused this Report to be signed on its behalf by the undersigned
thereunto duly authorized.
THE TIREX CORPORATION
By /s/ JOHN L. THRESHIE, JR.
--------------------------------------
Date: October 15, 2001 John L. Threshie, Jr.
Chairman of the Board of Directors and
Chief Executive Officer
In accordance with Section 15(d) of the Securities Exchange Act of
1934, this Report has been signed below by the following persons on behalf of
the Company in the capacities and on the dates indicated.
SIGNATURES TITLE Date
Principal Executive Officer:
/s/ JOHN L. THRESHIE, JR. Chairman of the Board October 15, 2002
-------------------------------- of Directors and Chief
John L. Threshie, Jr. Executive Officer
Principal Financial and Accounting Officer:
/s/ MICHAEL D.A. ASH Secretary, Treasurer, October 15, 2002
-------------------------------- and Chief Financial and
Michael D.A. Ash Accounting Officer
A Majority of the Board of Directors:
/s/ JOHN L. THRESHIE, JR. Chairman of the Board October 15, 2002
-------------------------------- of Directors
John L. Threshie, Jr.
/s/ LOUIS SANZARO Director October 15, 2002
--------------------------------
Louis Sanzaro
/s/ LOUIS V. MURO Director October 15, 2002
--------------------------------
Louis V. Muro
33
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH
REPORTS FILED PURSUANT TO SECTION 15(D) OF THE
EXCHANGE ACT BY NON-REPORTING ISSUERS
No annual report or proxy materials have been sent to security-holders
during the fiscal year ended June 30, 2002 or the subsequent interim period. As
at the date hereof, the Company plans to furnish proxy materials relating to its
annual meeting, which is presently intended to be held during the current fiscal
year. All such materials will be furnished to the Commission at the same time as
they are sent to securities holders.
34
THE TIREX CORPORATION
A DEVELOPMENT STAGE COMPANY
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
REPORT OF INDEPENDENT AUDITORS
Board of Directors
The Tirex Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheet of The Tirex
Corporation and Subsidiaries (a development stage company) as of June 30, 2002,
and the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for the years ended June 30, 2002 and 2001, and for the
cumulative period from March 26, 1993 (date of inception) to June 30, 2002.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We have conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a resonable basis for our opinion.
In our opinion, these consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The Tirex
Corporation and Subsidiaries (a development stage company) at June 30, 2002, and
the results of their operations, and their cash flows for the years ended June
30, 2002 and 2001, and for the cumulative period from March 26, 1993 (date of
inception) to June 30, 2002, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company is still in the development stage and it
cannot be determined at this time that the technology acquired will be developed
to a productive stage. The Company's uncertainty as to its productivity and its
ability to raise sufficient capital raise substantial doubt about the entity's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 2. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
October 15, 2002 Pinkham & Pinkham, P.C.
Cranford, New Jersey Certified Public Accountants
F-1
THE TIREX CORPORATION AND SUBSIDIARIES
A DEVELOPMENT STAGE COMPANY
CONSOLIDATED BALANCE SHEET
AS AT JUNE 30, 2002
----------------------------
June 30,
2002
------------
ASSETS
------
Current Assets
Cash and cash equivalents $ -
Accounts receivable 33,213
Notes receivable 19,291
Sales taxes receivable 22,089
Inventory 65,165
Research and Experimental Development tax credits receivable 246,970
Prepaid expenses and deposits 33,956
------------
420,684
Property and equipment, at cost, net of
accumulated depreciation of $251,279 583,771
------------
Other assets
Investment, at cost 89,500
Prepaid expenses and deposits 209,000
------------
298,500
------------
$ 1,302,955
============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current Liabilities
Accounts payable and accrued liabilties $ 1,485,767
Current portion of long-term debt 62,033
------------
1,547,799
Other liabilities
Long-term deposits and notes 217,500
Government loans (net of current) 139,708
Capital lease obligations (net of current) 13,559
Convertible notes 932,240
Convertible note 185,556
Loans from related parties 1,012,778
------------
2,501,341
------------
4,049,140
------------
Stockholders' Equity (Deficit)
Common stock, $.001 par value, authorized
250,000,000 shares, issued and outstanding
224,757,559 shares (June 30, 2001 - 176,366,408 shares) 224,758
Additional paid-in capital 24,618,899
Deficit accumulated during the development stage (27,389,673)
Unrealized gain (loss) on foreign exchange (200,169)
------------
(2,746,185)
------------
$ 1,302,955
============
See Notes to Consolidated Financial Statements
F-2
THE TIREX CORPORATION AND SUBSIDIARIES
A DEVELOPMENT STAGE COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
------------------------------
Twelve months ended Cumulative from
June 30, June 30, March 26, 1993 to
2002 2001 June 30, 2002
------------- ------------- -------------
Revenues $ 28,515 $ - $ 1,354,088
Cost of Sales 12,981 - 1,031,075
------------- ------------- -------------
Gross profit 15,534 - 323,013
------------- ------------- -------------
Operations
General and administrative 1,209,913 1,992,559 10,655,905
Depreciation and amortization 53,184 147,611 340,585
Research and development 2,297,577 807,272 14,946,966
------------- ------------- -------------
Total Expense 3,560,674 2,947,442 25,943,456
------------- ------------- -------------
Loss before other expenses (income) (3,545,140) (2,947,442) (25,620,443)
------------- ------------- -------------
Other expenses (income)
Interest expense 222,204 161,956 657,486
Interest income - - (45,443)
Income from stock options - - (10,855)
Loss on disposal of equipment - 4,549
------------- ------------- -------------
222,204 161,956 605,737
------------- ------------- -------------
Net loss (3,767,344) (3,109,398) (26,226,180)
------------- ------------- -------------
Other comprehensive loss
Loss (gain) on foreign exchange - 2,740 106,137
------------- ------------- -------------
Net loss and comprehensive loss $ (3,767,344) $ (3,112,138) $ (26,332,317)
============= ============= =============
Basic and Diluted net loss and comprehensive
loss per common share $ (0.02) $ (0.02) $ (0.55)
============= ============= =============
Weighted average shares of common
stock outstanding 204,212,265 170,139,483 47,673,720
============= ============= =============
See Notes to Consolidated Financial Statements
F-3
THE TIREX CORPORATION AND SUBSIDIARIES
A DEVELOPMENT STAGE COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
AS AT JUNE 30, 2002
--------------------------------------------------------
Deficit
Accumulated
Common Stocks Additional during Unrealized
---------------------------- Paid-in Development Foreign
Shares Amount Capital Stage Exchange Total
------------ ------------ ------------ ------------ ------------ ------------
Balance as at June 30, 2001 176,366,408 $ 176,366 $ 22,592,701 $(23,622,329) $ (180,229) $ (1,033,491)
------------ ------------ ------------ ------------ ------------ ------------
Stock issued for services 18,466,162 18,466 314,859 333,325
Stock issued for options -
Stock issued in exchange for debt 24,075,502 24,076 1,649,442 1,673,518
Conversion of debentures -
Issuance of common stock 5,849,487 5,850 61,897 67,747
Unrealized foreign exchange -
Grants issued -
Net loss for the year (2,262,394) (32,390) (2,294,784)
------------ ------------ ------------ ------------ ------------ ------------
Balance as at June 30, 2002 224,757,559 $ 224,758 $ 24,618,899 $(25,884,723) $ (212,619) $ (1,253,685)
============ ============ ============ ============ ============ ============
See Notes to Consolidated Financial Statements
F-4
THE TIREX CORPORATION AND SUBSIDIARIES
A DEVELOPMENT STAGE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
-----------------------------
Twelve months ended Cumulative from
June 30, June 30, March 26, 1993 to
2002 2001 June 30, 2002
------------ ------------ ------------
Cash flows from operating activities:
Net loss $ (3,767,344) $ (3,112,138) $(26,332,317)
------------ ------------ ------------
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 53,184 147,611 339,344
(Gain) loss on disposal and abandonment of assets 1,500,000 (47,492) 1,474,847
Stock issued in exchange for interest - 4,200 169,142
Stock issued in exchange for services and expenses 333,325 872,215 10,531,722
Stock options issued in exchange for services - 512,377 3,083,390
Unrealized (loss) gain on foreign exchange (19,940) (340,681) (200,189)
Changes in assets and liabilities:
(Increase) decrease in:
Account receivable (33,213) - (33,213)
Inventory 10,794 34,002 (65,165)
Sales tax receivable 25,261 (28,062) (22,089)
Research and experimental development tax credits receivable 114,059 114,192 (246,970)
Other assets 193,297 (109,361) (253,076)
(Decrease) increase in :
Accounts payables and accrued liabilities 135,447 285,512 1,622,515
Accrued salaries 90,874 (213,778) 290,072
Due to stockholders - - 5,000
------------ ------------ ------------
Net cash used in operating activities (1,364,256) (1,881,403) (9,636,987)
------------ ------------ ------------
Cash flow from investing activities:
Increase in notes receivable (5,949) - (256,943)
Reduction in notes receivable - 116,089 237,652
Investment (89,500) - (89,500)
Equipment - (60,769) (321,567)
Equipment assembly costs - - (1,999,801)
Organization cost - - 6,700
Reduction in security deposit - - (1,542)
------------ ------------ ------------
Net cash used in investing activities (95,449) 55,320 (2,425,001)
------------ ------------ ------------
Cash flow from financing activities:
Loans from related parties 1,070,823 728,305 4,221,235
Deferred financing costs 100,614 79,943 180,557
Proceeds from deposits - - 143,500
Payments on notes payable - - (409,939)
Proceeds from convertible notes - 754,999 754,999
Proceeds from notes payable - - 409,939
Payments on lease obligations (7,668) (57,339) (86,380)
Proceeds from issuance of convertible subordinated debentures - - 1,035,000
Proceeds from loan payable - - 591,619
Payments on loan payable (342,278) (75,147) (435,811)
Proceeds from issuance of stock options - - 20,000
Proceeds from grants 569,111 353,725 3,441,155
Proceeds from issuance of common stock 5,850 733 81,299
Proceeds from additional paid-in capital 61,897 39,427 2,114,558
------------ ------------ ------------
Net cash provided by financing activities 1,458,349 1,824,646 12,061,731
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (1,356) (1,437) (257)
Cash and cash equivalents - beginning of period 1,356 2,793 257
------------ ------------ ------------
Cash and cash equivalents - end of period $ - $ 1,356 $ -
============ ============ ============
See Notes to Consolidated Financial Statements
F-5
Supplemental Disclosure of Non-Cash Activities: During the years ended June 30,
2002 and June 30, 2001, the Company recorded an increase in common stock and
in additional paid-in capital of $1,673,518 and $1,559,101, respectively,
which was in recognition of the payment of debt. During the years ended June
30, 2002 and June 30, 2001, stock was issued in exchange for services
performed and expenses in the amount of $333,325 and $872,215, respectively.
During the year ended June 30, 2001, stock options were issued in exchange
for services totalling $512,377. No stock options were issued for services
performed and expenses during the year ended June 30, 2002.
Convertible debentures were exchanged into common stock totaling $20,000 during
the year ended June 30, 2001. Accrued interest of $4,200 was also converted
into common stock during the year ended June 30, 2001. For the year ended
June 30, 2002, there were no convertible debentures or accrued interest
converted into common stock.
Supplemental Disclosure of Cash Flow Information:
Interest paid $ 59,456 $ 80,876 $ 211,724
============ ============ ===========
Income taxes paid $ - $ - $ -
============ ============ ===========
See Notes to Consolidated Financial Statements
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(AUDITED)
Note 1 SUMMARY OF ACCOUNTING POLICIES
CHANGE OF NAME
On July 11, 1997, the Company changed its name from Tirex America, Inc. to The
Tirex Corporation.
NATURE OF BUSINESS
The Tirex Corporation and Subsidiaries (the "Company") was incorporated under
the laws of the State of Delaware on August 19, 1987. The Company was originally
organized to provide comprehensive health care services, but due to its
inability to raise sufficient capital, was unable to implement its business
plan. The Company became inactive in November 1990.
REORGANIZATION
On March 26, 1993, the Company entered into an acquisition agreement (the
"Acquisition Agreement") with Louis V. Muro, currently an officer and a director
of the Company, and former Officers and Directors of the Company (collectively
the "Seller"), for the purchase of certain technology owned and developed by the
Seller (the "Technology") to be used to design, develop and construct a
prototype machine and thereafter a production quality machine for the cryogenic
disintegration of used tires. The Technology was developed by the Seller prior
to their affiliation or association with the Company.
DEVELOPMENTAL STAGE
At June 30, 2002, the Company is still in the development stage. The operations
consist mainly of raising capital, obtaining financing, developing equipment,
obtaining customers and supplies, installing and testing equipment and
administrative activities.
BASIS OF CONSOLIDATION
The consolidated financial statements include the consolidated accounts of The
Tirex Corporation, Tirex Canada R&D Inc., The Tirex Corporation Canada Inc.,
Tirex Advanced Products Quebec Inc. and Tirex Acquisition Corp. Tirex Canada R&D
Inc. is held 51% by certain shareholders of the Company. The shares owned by the
certain shareholders are held in escrow by the Company's attorney and are
restricted from transfer thereby allowing for a full consolidation of this
Company. The Tirex Corporation Canada Inc., Tirex Advanced Products Quebec Inc.
and Tirex Acquisition Corp. are 100% held by the Company. All subsidiary
companies except Tirex Canada R&D Inc. are dormant. All inter-company
transactions and accounts have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, all highly liquid debt instruments
purchased with a maturity of three months or less, were deemed to be cash
equivalents.
INVENTORY
The Company values inventory, which consists of finished goods and equipment
held for resale, at the lower of cost (first-in, first-out method) or market.
F-7
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of five years.
Repairs and maintenance costs are expensed as incurred while additions and
betterments are capitalized. The cost and related accumulated depreciation of
assets sold or retired are eliminated from the accounts and any gains or losses
are reflected in earnings.
INVESTMENT
An investment made by the Company, in which the Company owns less than a 20%
interest, is stated at cost value. The cost value approximates the fair market
value of the investment.
ESTIMATES
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 at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results may differ from those estimates.
ADOPTION OF STATEMENT OF ACCOUNTING STANDARD NO. 123
In 1997, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 123, Accounting for Stock-Based Compensation. SFAS 123 encourages,
but does not require, companies to record stock-based compensation and other
costs paid by the issuance of stock at fair value. The Company has chosen to
account for stock-based compensation, stock issued for non-employee services and
stock issued to obtain assets or in exchange for liabilities using the fair
value method prescribed in SFAS 123. Accordingly, compensation cost for stock
options is measured as the excess, if any, of the quoted market price of the
Company's stock at the date of the grant over the amount an employee must pay to
acquire the stock.
ADOPTION OF STATEMENT OF ACCOUNTING STANDARD NO. 128
In 1997, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 128, Earnings per Share. SFAS 128 changes the standards for
computing and presenting earnings per share (EPS) and supersedes Accounting
Principles Board Opinion No. 15, Earnings per Share. SFAS 128 replaces the
presentation of Primary EPS with a presentation of Basic EPS and replaces the
presentation of Fully Diluted EPS with a presentation of Diluted EPS. It also
requires dual presentation of Basic and Diluted EPS on the face of the income
statement for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the Basic EPS computation to
the numerator and denominator of the Diluted EPS computation. SFAS 128 is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods. SFAS 128 also requires restatement of all
prior-period EPS data presented.
As it relates to the Company, the principal differences between the provisions
of SFAS 128 and previous authoritative pronouncements are the exclusion of
common stock equivalents in the determination of Basic Earnings Per Share and
the market price at which common stock equivalents are calculated in the
determination of Diluted Earnings Per Share.
F-8
A Basic Earnings per Share is computed using the weighted average number of
shares of common stock outstanding for the period. Diluted Earnings per Share is
computed using the weighted average number of shares of common stock and
dilutive common equivalent shares related to stock options and warrants
outstanding during the period.
The adoption of SFAS 128 had no effect on previously reported loss per share
amounts for the year ended June 30, 1997. For the years ended June 30, 2002 and
June 30, 2001, Primary Loss per Share was the same as Basic Loss per Share and
Fully Diluted Loss per Share was the same as Diluted Loss per Share. A net loss
was reported in 2001 and 2000, and accordingly, in those years, the denominator
for the Basic EPS calculation was equal to the weighted average of outstanding
shares with no consideration for outstanding options and warrants to purchase
shares of the Company's common stock because to do so would have been
anti-dilutive.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of the Company's financial instruments, which principally
include cash, note receivable, accounts payable and accrued expenses,
approximates fair value due to the relatively short maturity of such
instruments.
The fair values of the Company's debt instruments are based on the amount of
future cash flows associated with each instrument discounted using the Company's
borrowing rate. At June 30, 2002 and June 30, 2001, respectively, the carrying
value of all financial instruments was not materially different from fair value.
INCOME TAXES
The Company has net operating loss carryovers of approximately $27.4 million as
of June 30, 2002, expiring in the years 2004 through 2017. However, based upon
present Internal Revenue Service regulations governing the utilization of net
operating loss carryovers where the corporation has issued substantial
additional stock and there has been a change in control as defined by the
Internal Revenue Service regulations, a substantial portion of this loss
carryover may not be available to the Company.
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
109, Accounting for Income Taxes, effective July 1993. SFAS No. 109 requires the
establishment of a deferred tax asset for all deductible temporary differences
and operating loss carryforwards. Because of the uncertainties discussed in Note
2, however, any deferred tax asset established for utilization of the Company's
tax loss carryforwards would correspondingly require a valuation allowance of
the same amount pursuant to SFAS No. 109. Accordingly, no deferred tax asset is
reflected in these financial statements.
The Company has research and experimental development tax credits receivable
from the Canadian Federal government and the Quebec Provincial government
amounting to $246,970 at June 30, 2002 compared to $361,029 as of June 30, 2001.
These are the result of tax credits for research and experimental development
expenditures made by the Company which are not contingent upon any offset
against any income taxes otherwise payable.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of non-U.S. subsidiaries that operate in a local currency
environment are translated to U.S. dollars at exchange rates in effect at the
balance sheet date for monetary items and historical rates of exchange for
non-monetary items with the resulting translation adjustment recorded directly
to a separate component of shareholders' equity. Income and expense accounts are
translated at average exchange rates during the year. Currency transaction gains
or losses are recognized in current operations.
F-9
REVENUE RECOGNITION
Revenue from the sale of TCS Systems will be recognized when the installed
product is accepted by the customer. All other revenue from other products will
be recognized when shipped to the customer.
Note 2 GOING CONCERN
As shown in the accompanying financial statements, the Company incurred a net
loss of $3,767,344 and $3,112,138 during the years ended June 30, 2002 and June
30, 2001, respectively.
In March 1993, the Company had begun its developmental stage with a new business
plan. As of March 2000, the Company had developed a production quality prototype
of its patented system for the disintegration of scrap tires, but nonetheless
continued its research and development efforts to improve the machine's
performance and to permit greater flexibility in design for specific customer
applications. Due to the Company's lack of working capital during the six month
period ended June 30, 2002, all rubber crumb production has ceased and research
and development efforts have been hampered. Pending receipt of funding from
operations, government assistance, loans or equity financing, crumb rubber
production and previous research and development efforts will not be resumed.
While the Company has engaged the process of marketing the TCS System to
numerous potential clients since the beginning of the fiscal year commencing
July 1, 2000, as of June 30, 2002, the Company had not yet consummated an
unconditional purchase order for a TCS System.
The Company is dependent on the success of its marketing of its TCS Plants,
and/or raising funds through equity sales, bank or investor loans, governmental
grants or a combination of these, to continue as a going concern. The Company's
uncertainty as to its ability to generate revenue and its ability to raise
sufficient capital, raise substantial doubt about the entity's ability to
continue as a going concern. The financial statements do not include any
adjustments that might be necessary if the Company is unable to continue as a
going concern.
Note 3 FINANCING COST
During the year ended June 30, 1999, the Company incurred costs of $158,255 in
connection with debt financing. These costs have been capitalized in other
assets and are being amortized over the terms of the financing. Amortization of
financing costs for the year ended June 30, 2000 was $125,291, reducing this
account balance to zero. During the year ended June 30, 2001, the Company
incurred costs of $180,557 in connection with debt financing. These costs have
been capitalized in other assets and are being amortized over the terms of the
financing. Amortization of financing costs for the years ended June 30, 2002 and
June 30, 2001 was $100,614 and $79,943, respectively.
Note 4 PROPERTY AND EQUIPMENT
As of June 30, 2002, plant and equipment consisted of the following:
Furniture, fixtures and equipment $ 159,889
Leasehold improvements 175,161
Manufacturing equipment 500,000
------------
Subtotal 835,050
Less: Accumulated depreciation and amortization 251,279
============
Total $ 583,771
Depreciation and amortization expense charged to operations for the years ended
June 30, 2002 was $53,184 and $147,611, respectively.
F-10
Note 5 GOVERNMENT LOANS
Canada Economic Development
Loan payable under the Industrial Recovery Program for Southwest Montreal
amounting to 20% of certain eligible costs incurred (maximum loan $333,300)
repayable over four years commencing March 31, 1999 and ending March 31, 2002,
unsecured and non-interest bearing. (If the Company defaults, the loans become
interest bearing).
Loans payable under the Program for the Development of Quebec SMEs based on 50%
of approved eligible costs for the preparation of market development studies in
certain regions. Loans are unsecured and non-interest bearing. (If the Company
defaults, the loans become interest bearing).
Loan repayable over five years commencing June 30, 2000 and ending
June 30, 2004 $ 51,438
Loan repayable over five years commencing June 30, 2001 and ending
June 30, 2005 56,402
Loan repayable in amounts equal to 1% of annual sales in Spain
and/or Portugal throughout June 30, 2007, to a maximum of the
balance of the loan outstanding. If no sales occur on or before
this date in Spain and Portugal, the loan will become non-repayable. 14,000
Loan repayable in amounts equal to 11/2% of annual sales in Spain
and/or Portugal through June 30, 2004 to a maximum of the
balance of the loan outstanding. If no sales occur before this
date in Spain and Portugal, the loan will become non-repayable. 66,500
---------
188,340
Less: Current portion 48,632
---------
Long-term portion $ 139,708
=========
Principal repayments are as follows:
June 30 Amount
------- ---------
2003 $48,632
2004 105,128
2005 20,580
2006 -
2007 14,000
$188,340
=========
During the year ended June 30, 2002, the Company was declared in default, with
respect to the loan under the Industrial Recovery Program for Southwest
Montreal, as a result of a late installment repayment and as such was obligated
to repay the entire remaining balance due on the loan at an earlier date than
the March 31, 2002 maturity date.
F-11
Note 6 CAPITAL LEASE OBLIGATIONS
The Company leases certain manufacturing equipment under agreements classified
as capital leases. The cost and the accumulated amortization for such equipment
as of June 30, 2002 was $62,400 and $37,440, respectively. The cost and
accumulated amortization for such equipment as of June 30, 2001 was $62,400 and
$24,960, respectively. The equipment under capital leases has been included in
property and equipment on the balance sheet. The Company is in arrears on
payment of these leases but default has not been declared. The leased equipment
is not part of the Company's TCS System prototype.
The following is a schedule by years of future minimum lease payments under
capital leases of equipment together with the obligations under capital leases
(present value of future minimum rentals) as at June 30, 2002:
Years ended June 30 Amount
------------------- ----------
2003 $ 15,513
2004 15,514
----------
Total minimum lease payments 31,027
Less: Amount representing interest 4,067
----------
Total obligations under capital lease 26,960
Less: Current portion of obligations under capital leases 13,401
----------
Long-term obligation portion of under capital leases, with interest rate of 10% 13,559
==========
Note 7 CONVERTIBLE SUBORDINATED DEBENTURES
The Company issued Type B Convertible Subordinated Debentures between December
1997 and February 1998. These debentures bore interest at 10% and were
convertible into common shares of the Company at $0.20 per share. The conversion
privilege on the remaining $55,000 of these debentures expired and the amount is
now included on the Balance Sheet in Long term deposits and notes.
Note 8 CONVERTIBLE NOTES
The Convertible Notes appearing on the balance sheet as of June 30, 2002
consisted of an investment arrangement with a group of institutional investors
involving a multi-stage financing under which the Company had access to, at its
option, up to $5,000,000. A first tranche of $750,000 was completed but no
further draw downs were made. The terms of the convertible note were:
Balance at June 30, 2002 and June 30, 2001 $ 750,000
Interest rate 8%, payable quarterly,
commencing June 30, 2001
Issue date February 26, 2001
Maturity date February 26, 2003
Redemption rights If not converted, the holder
may require the Company to
redeem at any time after
maturity for the principal
amount plus interest.
Conversion ratio Lower of (i) - 80% of the
average of the three lowest
closing bid prices for the
thirty trading days prior to
the issue date, which equals
$.073, or (ii) - 80% of the
average of the three lowest
closing bid prices for the
sixty trading days prior to the
conversion date.
F-12
Common stock warrants The Convertible Notes carried
an option to purchase Common
stock warrants at the rate of
one Warrant for each $1.25 of
purchase price. The exercise
price on the first tranche of $
750,000 is $.077 per share.
Certain Directors and Officers of the Company pledged approximately 12,000,000
of their personal shares of Common Stock of the Company as security for the
Convertible Notes until such time as the Company files with the Securities and
Exchange Commission a Registration Statement on Form SB-2, to register common
stock and warrants issuable upon the conversion of the notes, no later than 150
days after the issue date of the Convertible Notes. This deadline was not met
and, as such, the investors served a notice of default to the Company on July
19, 2001. The Registration Statement has still not been declared effective by
the Securities and Exchange Commission as of this date, and until such occurs,
the Convertible Notes cannot be converted to Common Stock nor may the Common
Stock warrants be exercised.
On April 24, 2002 the Company entered into a Settlement Agreement with the Note
holders. In the event of a default under the Settlement Agreement, the term of
the Convertible Notes would become effective once again. The conclusion of the
Settlement Agreement has negated the default. The main terms of the Settlement
Agreement are as follows:
Amount due including interest calculated to
June 30, 2002 and penalties to date, and
deducting proceeds from the sale of $932,240
collateral shares in the amount of $16,260
Interest rate on the debt 8%
$1,000 on May 15, 2002
Repayment terms $1,000 on June 15, 2002
$38,843.33 each month
for up to twenty-four
months starting August 1,
2002
Warrants for purchase of common shares 500,000 three-year
warrants exerciseable
immediately at a price
of $0.01 per share.
500,000 two-year warrants
exerciseable one year
from the date of the
Settlement Agreement at a
price of $0.05 per share.
500,000 one-year warrants
exerciseable two years
from the date of the
Settlement Agreement at a
price of $0.10 per share.
Right to sell collateral shares and Rule 144 shares The Investors have the
right to sell up to
600,000 collateral shares
and/or Rule 144 shares
per month, with proceeds
to be first applied
against interest and fees
and thereafter against
principal.
Right of prepayment The Company has the right
to pay amounts in excess
of the prescribed monthly
amount, without penalty.
Collateral shares As of the date of signing
of the Settlement
Agreement, the Investors
had 10,790,885 Collateral
Shares in their
possession.
F-13
During the year ended June 30, 2002, the Company authorized the investors to
sell 1,800,000 of the shares held as security.
Note 9 CONVERTIBLE NOTE
A convertible note, under a private arrangement, consists of the following:
Balance at June 30, 2002 and June 30, 2001 $ 185,556
Interest rate 8%
Issue date July 19th, 2000
Maturity date January 19th, 2002
Redemption rights If not converted, the holder
may require the Company to
redeem at any time after
maturity for the principal
amount plus interest.
Conversion ratio Not convertible prior to July
19th, 2001, at 20% discount to
market between July 19th, 2001
and January 19th, 2002 or at
25% to market if held to
maturity, to a maximum of not
more than 2,500,000 shares.
Note 10 RELATED PARTY TRANSACTIONS
Convertible loans include amounts primarily due to Directors, Officers and
employees. Historically, such amounts due have been repaid through the issuance
of stock. At June 30, 2002 and June 30, 2001, the balances owing to Directors
and Officers was $796,429 and $1,120,828, respectively. These amounts are
without interest or terms of repayment.
F-14
Various Notes Receivable from Officers, separately reported on the audited
Balance Sheet of June 30, 2000, plus accrued interest thereon, were offset
against amounts due to these Officers as of June 30, 2001.
Long-term deposits and notes included an amount of $118,500 at June 30, 2002,
which is payable to Ocean Tire Recycling & Processing Co., Inc., a company owned
by a Director of the Company.
Subsequent to June 30, 2000, the Company modified an agreement with Ocean Tire
Recycling & Processing Co., Inc. to clarify various terms of the parties' prior
agreements and to obtain a commitment by Ocean Tire Recycling & Processing Co.,
Inc. to pay, when necessary, lease payments on the prototype TCS System. As part
of the agreement, the Company will repay Ocean Tire Recycling & Processing Co.,
Inc. in cash or through the issuance of stock. The lease payments, under the
accounting provisions for an operating lease, have been recorded as a Research
and Development expense and the debt obligation included in loans from related
parties. During the year ended June 30, 2001, 6,500,000 common shares were
issued under the agreement as a partial Settlement. During the year period ended
June 30, 2002, an additional 4,553,102 common shares were issued under the
agreement to a designated person assigned by Ocean Tire Recycling & Processing
Co., Inc.
Note 11 EXCHANGE OF DEBT FOR COMMON STOCK
During the fiscal year ended June 30, 2001, the Company recorded an increase in
common stock and additional paid-in capital of $1,905,838 representing issuances
of stock in lieu of cash payments for debts owed. During the year ended June 30,
2002, the Company recorded increases in common stock and paid-in capital of
$1,673,518, reflecting the exchange of common stock for debts owed.
Note 12 COMMON STOCK
During the year ended June 30, 2002 and the year ended June 30, 2001, the
Company issued common stock in exchange for services performed totaling $333,325
and $1,388,792, respectively. Included in these amount are payments to Officers
of the Company in exchange for salary and expenses in the amount of $57,796 and
$1,115,784, respectively. The dollar amounts assigned to such transactions have
been recorded at the fair value of the services received.
On January 31, 2001, the Company's stockholders approved an amendment to the
Articles of Incorporation of the Company to increase the number of authorized
shares of common stock, par value $0.001, from 165,000,000 shares to 250,000,000
shares.
As at June 30, 2002, the Company had 224,757,559 Common shares issued and
outstanding.
Note 13 STOCK PLAN
The Company established a Stock Plan in June of 2000 whereby key personnel of
the Company, consultants and other persons who have made substantial
contributions to the Company may be issued shares as compensation and incentives
through Awards, Options or Grants under the terms set forth in the Stock Plan.
The Stock Plan originally called for the issuance of a maximum of 7,000,000
shares of stock as Awards, the issuance of a maximum of 7,000,000 shares of
stock to underlie Options and the issuance of a maximum of 7,000,000 shares of
stock that may be issued as Grants. Awards and Options can only be given to
individuals who have been either in the employ of the Company, an Officer,
Director or consultant for the preceding six months Awards are not fully vested
until the end of three years with one-twelfth of the aggregate award vesting at
the end of each quarter. If the Awardee is terminated for cause or resigns, the
unvested portion of the award is forfeited. Options can be exercised at any time
and upon exercise, the underlying stock is fully vested with the purchaser. The
Options are not transferable and are exercisable for two years after which time
they expire. If the Optionee is terminated for cause or resigns, all unexercised
options are forfeited. A Grant can only be given to persons who have made a
F-15
substantial contribution to the Company and the shares are not forfeitable. On
January 31, 2001, the Company amended the Stock Plan providing for an additional
3,000,000 shares being allocated as Grants and an additional 2,000,000 shares
allocated to be given as Options. On May 30, 2001, the Stock Plan was further
amended reallocating the 7,000,000 shares to be given as Awards to allow
5,000,000 of the shares to be used for Options and 2,000,000 of the shares to be
used as Grants. There were no stock issuances under the Stock Plan for the year
ended June 30, 2000.
During the year ended June 30, 2001, the Company issued 9,300,000 shares as
Grants under the Stock Plan at an average stock price of $.093 for an aggregate
consideration of $867,374. During the year ended June 30, 2002, the Company
issued 750,000 shares as Grants under the Stock Plan at an average stock price
of $.016 for an aggregate consideration of $12,031.
During the year ended June 30, 2001, the Company had the following transactions
as Options under the Stock Plan:
Number of Avg. exercise Aggregate
Shares price consideration
--------- ------------ ------------
Granted and unexercised at beginning
of year Nil - -
Granted and exercised during the year 9,698,228 $ 0.131 $ 1,273,334
Granted and unexercised at end of year Nil - -
The exercise price at the time the Options were granted and exercised was
approximately equal to the market price at that time.
There were no Options granted or exercised during the year period ended June 30,
2002.
Note 14 ACQUISITION BY MERGER OF RPM INCORPORATED
During November 1997, the Company entered into a merger agreement with RPM
Incorporated ("RPM"). The Company acquired all of the assets and liabilities of
RPM by acquiring all of the outstanding common stock of RPM in exchange for
common stock in the Company on a unit for unit basis. RPM ceased to exist
following the exchange.
The assets and liabilities acquired by the Company from RPM consisted of the
proceeds from the sale of debentures of $535,000. The financing fees on the
issuance of the debentures, totaling $61,755, were included as an expense in the
statement of operations for the year ended June 30, 1998. A total of 535,000
shares were issued as a result of the merger valued at $16,050. A total of
$16,050 was received for this stock.
The Company entered into an additional agreement with the former shareholders of
RPM for consulting services for a period of 5 years expiring in June 2002.
Pursuant to this consulting agreement, 3,000,000 shares of common stock were
issued valued at $240,000. Other than the consulting agreement and the issuance
of the debentures, RPM was inactive.
For accounting purposes, the Company recorded the merger as a purchase and not
as a pooling of interests.
Note 15 GOVERNMENT ASSISTANCE
The Company is eligible for and has made claims for tax credits related to
scientific research and experimental development expenditures made in Canada.
These amounts, under Canadian Federal and Provincial tax law in conjunction with
its annual tax return filings, need not be offset against taxes otherwise
payable to become refundable to the Company at the end of its fiscal year. As
such, during the year ended June 30, 2002, the Company received approximately
$569,111 which has been recorded as an increase in stockholders' equity paid-in
F-16
capital. Also, during the year ended June 30, 2001, the Company received
approximately $353,725 which has also been recorded as an increase in
stockholders' equity paid-in capital. During the year ended June 30, 2002, the
Company recorded additional tax credits in the amount of $246,970, bringing the
reported receivable balance from these governments from $361,029 as of June 30,
2001 to $246,970 as of June 30, 2002.
Note 16 COMMITMENTS
The Company leases office and warehouse space at an annual minimum rent of
$80,000 for the first year, $160,000 for the second year and $200,000 per year
for the third through the fifth years. The lease expires in 2003. The Company is
responsible for its proportionate share of any increase in real estate taxes and
utilities. Also under the terms of the lease, the Company is required to obtain
adequate public liability and property damage insurance. The minimum future
rental payments under this lease are as follows:
June 30, Amount
-------- ----------
2003 $ 141,261
----------
Rental expense for the years ended June 30, 2002 and June 30, 2001 amounted to
$205,141 and $215,237, respectively.
The lease contains a second ranking moveable hypothec in the amount of $300,000
on the universality of the Company's moveable property.
At June 30, 2002, the Company was in arrears of rent, including interest and
related charges, in the amount of $371,285.
Note 17 LITIGATION
An action was instituted by Plaintiffs, a Canadian resident and a Canadian
corporation, in a Canadian court alleging a breach of contract and claims
damages of approximately $508,600 representing expenses and an additional
approximate amount of $1,874,000 in loss of profits. The current action follows
two similar actions taken in United States courts, the first of which was
withdrawn and the second of which was dismissed based on forum non convenience
and other considerations. A detailed answer has been filed by the Company
denying all liability, stating further that Plaintiffs failed to comply with
their obligations. Counsel for the Company believes that the Company has
meritorious defenses to all of the Plaintiff's claims. The action is still
pending.
An action was brought by a Plaintiff against the Company, alleging that the
Company had agreed to issue 1,000,000 shares of its Common stock to the
Plaintiff in consideration for expenses allegedly paid by the Plaintiff in the
amount of approximately $150,000. These expenses allegedly were incurred in
relation to the rental of certain office space and performance of administrative
services. The Plaintiff's complaint seeks to impose an equitable trust or lien
on 1,000,000 of unissued shares of the Company, demands the issuance of
1,000,000 shares to the Plaintiff and seeks for breach of contract, monetary
damages of $1,400,000. Counsel for the Company denied all of the Plaintiff's
allegations and on July 24, 2002, a court dismissed the complaint for "Lack of
Prosecution".
An action was instituted by a Plaintiff, a Canadian corporation, in August 2001
in a Canadian court claiming approximately $63,000 is due and owing for the
manufacture and delivery of tire disintegrators. The Company is preparing its
defense and a cross claim against the Plaintiff as the product delivered was
defective and the Company believes it is entitled to a reimbursement of sums
paid. The action is still pending.
F-17
An action was instituted by a Plaintiff, the Company's landlord, against the
Company in June 2001 for arrears of rent in the amount of approximately
$113,900. The Company is currently in negotiation with its landlord and the
action is still pending. As of June 30, 2002, the Company was in arrears of rent
and property taxes to its landlord in the amount of approximately $233,700.
Note 18 ACCUMULATED OTHER COMPREHENSIVE INCOME
The deficit accumulated during the development stage included accumulated
comprehensive other income totaling $103,396.
F-18