EXHIBIT 20(a)
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ADDENDUM DATED FEBRUARY 26, 1998
TO
CONFIDENTIAL PRIVATE OFFERING MEMORANDUM
DATED NOVEMBER 5, 1997
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The Tirex Corporation
(the "Company")
28 Units
PLACEMENT AGENT
X.X. XXXXXX & CO., INC.
0000 Xx. Xxxx Xxxxxx
Xxxxxxxxx, Xxx Xxxx 00000
(000) 000-0000
February 26, 1998
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ADDITIONAL FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION
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In addition to the filings of the Company with the Securities and Exchange
Commission (the "Commission"), attached to the Confidential Private Offering
Memorandum, dated November 5, 1997, of the Tirex Corporation (the "Company"), as
Exhibits, the following Commission filings are available upon request without
charge. Requests should be directed to Xxxx Xxxxxxxx, Secretary, The Tirex
Corporation, 000 Xx. Xxxxxxx, Xxxxx 000, Xxxxxxxx, Xxxxxx X0X 0X0. Telephone:
(000) 000-0000; Facsimile: (000) 000-0000.
Quarterly Report on Form 10-QSB for the fiscal quarter ended December 31, 1997.
Current Report on Form 8-K of Registrant, dated February 3, 1998.
2
ADDENDUM, DATED FEBRUARY 26, 1998
TO
CONFIDENTIAL PRIVATE OFFERING MEMORANDUM
of November 5, 1997
Name of Offeree________________________ Copy No. _____
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28 Units
$25,000 per Unit
THE TIREX CORPORATION
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THE FOLLOWING IS AN ADDENDUM TO THE CONFIDENTIAL PRIVATE PLACEMENT
OFFERING MEMORANDUM, DATED NOVEMBER 5, 1997, OF THE TIREX CORPORATION (THE
"OFFERING MEMORANDUM") EXCEPT WHERE THIS ADDENDUM MODIFIES THE OFFERING
MEMORANDUM, IT IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED DESCRIPTIONS OF THE
COMPANY AND ITS BUSINESS APPEARING IN THE OFFERING MEMORANDUM AND THE EXHIBITS
THERETO, FOR A COPY OF WHICH HAS BEEN PROVIDED TO YOU.
1. Revision To Terms of Offering
Pursuant to the agreement of The Tirex Corporation (the "Company") and
X.X. Xxxxxx & Co., Inc., (the "Placement Agent") the terms of the following
offering have been revised as follows:
The Tirex Corporation, a Delaware corporation (the "Company"), is offering
to sell through X.X. Xxxxxx & Co., Inc., as placement agent (the "Placement
Agent"), up to 28 units (the "Units") of its securities (the "Offering" or the
"Private Placement") ) at a price of $25,000 per Unit. The Units are being
offered only to "accredited investors", as that term is defined in Rule 501(a)
of the Securities Act of 1933, as amended (the "Securities Act"), with the
requisite investment sophistication and ability to bear the economic risk of an
investment in the Units, including the possibility of the loss of the entire
investment. Each Unit consists of one 10% Convertible Subordinated Debenture in
the principal amount of $25,000 (the "Debenture") and 100,000 warrants to
purchase a like number of shares of the Company's Common Stock, $.001 par value,
at an exercise price of $.001 per share (the "Warrants"). For further
information concerning the securities being offered hereunder, see page 20, "The
Offering". The Units will be offered and sold on behalf of the Company by the
Placement Agent, a broker-dealer registered with the National Association of
Securities Dealers, Inc. (the "NASD"). The Placement Agent may also utilize the
services of other broker-dealers ("Selected Dealers") who are members of the
NASD in connection with the offer and sale of the Units. The first 4 Units will
be offered and sold on a "best efforts, all-or-none" basis. The remaining 18
Units will be offered and sold on a "best efforts" basis.
The Units are being offered on a "best efforts, minimum-maximum basis."
The Company expects to hold an initial closing of this Offering at any time
after the 10 Unit Minimum has been subscribed for, and may hold one or more
additional closings, at any time, from time to time, on or prior to March 31,
1998 (unless extended by mutual agreement of the Company and the Placement Agent
for one or more additional 30-day periods) or such earlier date as the 28 Unit
Maximum has been subscribed for. The Placement Agent has agreed only to use its
"best efforts" and has not committed to sell, or buy for its own account, any of
the Units offered hereby.
3
2. Other Material Changes
On January 28, 1998 Tirex authorized the issuance of 600,000 shares of
Common Stock to Xxxxx X. Xxxxxxx pursuant to the terms of his consulting
agreement (the "X. Xxxxxxx Consulting Agreement"), executed at such date and
deemed by the parties to be effective as of January 1, 1997. Total compensation
under the X. Xxxxxxx Consulting Agreement consists of the said 1,000,000 shares
of Common Stock, 600,000 of which have been issued, as described above, and the
balance of 400,000 of which will be issued at such time as the parties agree.
On January 28, 1998, Tirex authorized the issuance of an aggregate of
4,000,000 shares to two of its executive officers and to its corporate attorney,
at a price of $.001 per share, as follows: Xxxxxxx X. Xxxxx - 2,000,000, Xxxxx
X. Xxxx - 1,000,000, and Xxxxxxx Xxxx Xxxxxx - 1,000,000. Such sales were made
pursuant to the exercise of options granted to such persons and subsequently
amended, as follows: On September 3, 1997, Registrant granted to the foregoing
individuals options to purchase the respective number of shares set forth above
at an exercise price equal to the full market price of the Common Stock at such
date, as follows: Xxxxxxx X. Xxxxx - 2,000,000, Xxxxx X. Xxxx - 1,000,000, and
Xxxxxxx Xxxx Xxxxxx - 1,000,000 (the "1997 Options"). Such bonuses were granted
for the fiscal year ended June 30, 1997 pursuant to the terms of their
respective employment agreements with Registrant. On January 13, 1998,
Registrant granted to each of these persons a bonus (the "1998 Bonus"), under
the terms of their respective employment agreements, for the fiscal year which
will end on June 30, 1998 (the "1998 Bonuses"). The 1998 Bonuses consisted of
amendments to the terms of the 1997 Options, reducing the option exercise price
$.001 per share.
Effective February 3, 1998, the certificate of incorporation of the
Company was amended so as to change the amount of capital stock, which the
Company is authorized to issue, from 70,000,000 shares of Common Stock, par
value $.001 per share to 69,900,000 shares of Common Stock, par value $.001 per
share and 100,000 shares of Open Stock, par value $.001 per share, and to invest
in the Board of Directors the power to designate the Open Stock in one or more
classes and/or series, with such rights and preferences as the Board of
Directors shall determine.
Management has agreed with the Placement Agent to obtain the Agreement of
all Officers, Directors, and 5% or more shareholders of the Company to refrain
from selling any of the shares of Common Stock held by them during the period
which shall commence as at the Closing of this Offering and which shall end 60
days after the effective date of a Registration Statement which includes the
shares of Common Stock issuable upon exercise of the Warrants and conversion of
the Debentures, which are included in the Units.
I have read this Addendum in conjunction with the Offering Memorandum,
a copy of which was furnished to me together with this Addendum.
Dated:__________ ______________________________
Signature of Investor
4
EXHIBIT 20(A)
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CONFIDENTIAL PRIVATE OFFERING MEMORANDUM
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The Tirex Corporation
(the "Company")
28 Units
PLACEMENT AGENT
X.X. XXXXXX & CO., INC.
0000 Xx. Xxxx Xxxxxx
Xxxxxxxxx, Xxx Xxxx 00000
(000) 000-0000
November 5, 1997
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TABLE OF CONTENTS
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Page
----
Exhibits .................................................................. 4
List of Filings with the Securities and Exchange Commission ............... 5
Cover Page ................................................................ 6
Investor Notices .......................................................... 7
Jurisdictional Notices and Representations ................................ 11
Available Information ..................................................... 12
Concurrent Offering and Proposed Acquisition .............................. 13
Confidentiality ........................................................... 13
Independent Evaluation .................................................... 13
Use of Proceeds ........................................................... 15
Terms of the Offering ..................................................... 18
General ................................................................ 18
Restrictions on Transferability ........................................ 18
Investor Suitability Standards ......................................... 18
Plan of Distribution ................................................... 19
Further Information .................................................... 19
Subscription Payments .................................................. 19
Possible Variance in Terms of Offering ................................. 19
The Offering .............................................................. 20
Securities Offered ..................................................... 20
Minimum Purchase ....................................................... 23
Capital Stock Outstanding Prior to Offering ............................ 23
Risk Factors ........................................................... 23
Use of Proceeds ........................................................ 23
Risk Factors .............................................................. 24
Development Stage Company
No Assurance as to Future Profitable Operations ........................ 24
No Guarantee of Product Acceptance in Market ........................... 24
Need for Substantial Additional Capital ................................ 24
Possibility of Material Changes in Offering
Terms; NASD Review ..................................................... 25
Risk of Company's Inability to Repay Debentures ........................ 25
No Collateral Security ................................................. 25
Restricted Securities .................................................. 26
Proposed Public Offering; Reverse Split ................................ 26
Arbitrary Offering Price ............................................... 26
Broad Discretion in
Use of Proceeds ........................................................ 26
2
Additional Interest Income Original Issue Discount ..................... 27
Dependance on Key Personnel ............................................ 27
Dependance on Major Customer ........................................... 27
Control by Present Officers ............................................ 27
Experience of Management ............................................... 28
Uncertainty of Product and Technology
Development: Technological Factors.................................... 28
Protection of Tirex Proprietary Technology
and Potential Infringement ........................................... 28
Limited Public Market .................................................. 29
Applicability of "Xxxxx Stock Rules to
Broker-Dealer Sales of Company Common Stock ............................ 29
Regulatory and Environmental Considerations ............................ 30
Production and Supply .................................................. 30
Technological Changes .................................................. 31
Competition ............................................................ 31
No Dividends and None Anticipated....................................... 32
Shares Available for Resale ............................................ 32
Authorization of Preferred Stock ....................................... 32
Affiliated Persons to be
Paid Out of Proceeds.................................................... 32
Price Range of Securities ................................................. 33
Shareholders .............................................................. 34
Dividends ................................................................. 34
Business .................................................................. 34
History ................................................................ 34
The Scrap Tire Disposal Business ....................................... 35
Products and Services .................................................. 37
Proposed Product - The TCS-1 System ................................. 37
Proposed Services TCS-1 System Service and Support .................. 48
Proposed Tire Shredding Operations ..................................... 49
Sales and Marketing .................................................... 51
Sales ............................................................... 51
Backlog ............................................................. 53
Dependence on Major Customer ........................................ 54
Marketing and Distribution .......................................... 54
Canadian Operations .................................................... 58
Tirex Canada ........................................................ 58
The Tirex Canada License ............................................ 59
Canadian Financial Assistance Grants and Commitments ................ 59
Research and Development ............................................... 60
Employees .............................................................. 61
Patent Protection ...................................................... 61
Competition ............................................................ 62
Government Regulation .................................................. 62
Properties ............................................................. 63
Legal Proceedings ......................................................... 64
Description of Securities ................................................. 65
Management ................................................................ 67
3
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EXHIBITS
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Annual Report on Form 10-KSB for the fiscal year ended
June 30, 1997............................................................... A
Quarterly Report on Form 10-QSB for the fiscal quarter ended
March 31, 1997.............................................................. B
Quarterly Report on Form 10-QSB for the fiscal quarter ended
December 31, 1996........................................................... C
Quarterly Report on Form 10-QSB for the fiscal quarter ended
September 30, 1996.......................................................... D
Current Report on Form 8-K, dated July 11, 1997............................... E
Current Report on Form 8-K, dated June 24, 1997............................... F
Current Report on Form 8-K, dated March 7, 1997............................... G
Current Report on Form 8-K, dated February 5, 1997............................ H
Current Report on Form 8-K, dated January 10, 1997............................ I
Current Report on Form 8-K, dated December 22, 1996........................... J
Form of 10% Convertible Subordinated Debenture................................ K
Form of Warrants.............................................................. L
Form of Securities Purchase Agreement......................................... M
Form of Registration Rights Agreement......................................... N
Form of Lock-Up Agreement..................................................... 0
Escrow Agreement.............................................................. P
4
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LIST OF FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION
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In addition to the filings of the Company with the Securities and Exchange
Commission (the "Commission"), attached to this Offering Memorandum as Exhibits,
the following Commission filings are available upon request without charge.
Requests should be directed to Xxxx Xxxxxxxx, Secretary, The Tirex Corporation,
000 Xx. Xxxxxxx, Xxxxx 000, Xxxxxxxx, Xxxxxx X0X 0X0. Telephone: (000) 000-0000;
Facsimile: (000) 000-0000.
Annual Reports on Forms 10-KSB for the fiscal years ended June 30, 1995 and
1996.
Quarterly Reports on Forms 10-QSB for the quarters ended September 30, 1995,
December 31, 1995, and March 31, 1996.
Quarterly Reports on Forms 10-QSB for the quarters ended September 30, 1994,
December 31, 1994, and March 31, 1995.
Registration Statement on Form S-8, as amended, filed with the Commission on
August 27, 1997, Registration No. 333 - 34369.
Registration Statement on Form S-8, filed with the Commission on March 31, 1997,
Registration No. 333 - 23759.
Registration Statement on Form S-8, filed with the Commission on July 22, 1996,
Registration No. 333 - 5310.
Registration Statement on Form S-8, filed with the Commission on June 20, 1996,
Registration No. 333 - 5090.
Current Report on Form 8-K of Registrant, dated December 31, 1995.
Annual Reports on Forms 10-K of Registrant for the years ended June 30, 1989,
1990, 1991, 1992, 1993, and 1994.
Transition Report on Form 10-K of Registrant for the transition period January
1, 1989 through June 30, 1989.
Annual Report on Form 10-K of Registrant for the year ended December 31, 1988.
Registration Statement on Form S-18, as amended, File No. 33-17598-NY.
5
CONFIDENTIAL PRIVATE OFFERING MEMORANDUM
November 5, 1997
Name of Offeree________________________ Copy No. _____
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28 Units
$25,000 per Unit
THE TIREX CORPORATION
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The Tirex Corporation, a Delaware corporation (the "Company"), is offering to
sell through X.X. Xxxxxx & Co., Inc., as placement agent (the "Placement
Agent"), up to 28 units (the "Units") of its securities (the "Offering" or the
"Private Placement") ) at a price of $25,000 per Unit. The Units are being
offered only to "accredited investors", as that term is defined in Rule 501(a)
of the Securities Act of 1933, as amended (the "Securities Act"), with the
requisite investment sophistication and ability to bear the economic risk of an
investment in the Units, including the possibility of the loss of the entire
investment. Each Unit consists of one 10% Convertible Subordinated Debenture in
the principal amount of $25,000 (the "Debenture") and 50,000 warrants to
purchase a like number of shares of the Company's Common Stock, $.001 par value,
at an exercise price of $.001 per share (the "Warrants"). For further
information concerning the securities being offered hereunder, see page 20, "The
Offering". The Units will be offered and sold on behalf of the Company by the
Placement Agent, a broker-dealer registered with the National Association of
Securities Dealers, Inc. (the "NASD"). The Placement Agent may also utilize the
services of other broker-dealers ("Selected Dealers") who are members of the
NASD in connection with the offer and sale of the Units. The first 10 Units will
be offered and sold on a "best efforts, all-or-none" basis. The remaining 18
Units will be offered and sold on a "best efforts" basis. The Company and the
Placement Agent reserve the right to offer the Units on more favorable terms to
one or more investors, who are not affiliates of the Company or of the Placement
Agent, without notice to other investors. The basis for any such variance in the
terms of the Offering set forth herein will include without limitation the
amount of the individual investment and the point in the Offering Period when
such investment is made. In such event, other investors will not be entitled to
rescission of their investments in this Private Placement.
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Price to Placement Agent Proceeds to
Investors Commissions(1) the Company(2)
--------- -------------- --------------
Per Unit (Investors) ..... $ 25,000 $ 2,500 $ 22,500
Minimum .................. 250,000 25,000 225,000
Maximum .................. 700,000 70,000 630,000
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(1) Before deduction of expenses of the offering payable by the Company,
estimated to be approximately $11,500 (for the Minimum) and $28,000 (for the
Maximum), including a non accountable expense allowance of 3% of the proceeds
from the sales of all Units sold. See "PLAN OF DISTRIBUTION."
(2) The Offering is for the sale of a minimum of 10 Units (the "Minimum") and a
maximum of 28 Units (the "Maximum"). Prior to the sale of the Minimum, all
proceeds from the sale of the Units being offered hereby will, upon payment by
the subscribers thereof, be placed in an escrow account (the "Escrow Account")
with Xxxxxx, Xxxxxxx & Xxxxx, 000 Xxxxxxx Xxxxx, Xxxxxxxxx, XX 00000, as escrow
agent (the "Escrow Agent"). All proceeds will be promptly refunded in full,
without interest or deduction, unless at least 10 Units have been sold on or
before December 31, 1997 (the "Offering Period"); provided however, that the
Company and the Placement Agent, in their sole discretion, may agree to extend
such Offering Period for one or more 30-day periods. If at least the Minimum of
10 Units have been subscribed for on or before the termination of the Offering
Period, the proceeds being held in the Escrow Account will be released to the
Company, and proceeds of subscribers for additional Units received following
receipt of the Minimum, but prior to the expiration of the Offering Period, will
be paid from the Escrow Account to the Company in one or more subsequent
closings.
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6
The Offering of the Units is being made in reliance upon the availability
of an exemption from the registration provisions of the Securities Act by virtue
of the Company's intended compliance with the provisions of ss 4(2) and Rule 506
of Regulation D thereof. Accordingly, solicitation of offers or sales shall not
be made to any person unless the Company has reasonable grounds to believe and
does believe, immediately prior to making such sale, that such person, either
alone or together with one or more of his purchaser representatives (if any),
has such knowledge and experience in financial and business matters that he is
capable of evaluating the merits and risks of an investment in the Units
described in this Memorandum. See "Terms of the Offering." There are
restrictions on the transfer of Units.
PLACEMENT AGENT:
X.X. Xxxxxx & Co., Inc.
0000 Xx. Xxxx Xxxxxx
Xxxxxxxxx, Xxx Xxxx 00000
(000) 000-0000
The Units are offered hereby on a "best efforts, minimum-maximum basis."
The Company expects to hold an initial closing of this Offering at any time
after the 10 Unit Minimum has been subscribed for, and may hold one or more
additional closings, at any time, from time to time, on or prior to December 31,
1997 (unless extended by mutual agreement of the Company and the Placement Agent
for one or more additional 30-day periods) or such earlier date as the 28 Unit
Maximum has been subscribed for. The Placement Agent has agreed only to use its
"best efforts" and has not committed to sell, or buy for its own account, any of
the Units offered hereby.
This Memorandum does not contain all of the information that would
normally appear in a prospectus for an offering registered under the Securities
Act or that may be necessary to make an informed investment decision regarding
an investment in the Units. The Company will furnish additional information to
interested offerees upon request. Purchasers of the Units will be required to
acknowledge at the time of purchase that they have requested and received all
information necessary to make an informed decision to purchase the Units.
SEE "INVESTOR NOTICES" AND "JURISDICTIONAL NOTICES AND REPRESENTATIONS."
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INVESTOR NOTICES
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THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED WITH THE SECURITIES
AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT") OR WITH ANY STATE OR REGULATORY AGENCY UNDER ANY SECURITIES
LAWS OF ANY STATE IN RELIANCE UPON EXEMPTIONS FROM REGISTRATION PROVIDED IN SUCH
LAWS AND THE RULES AND REGULATIONS THEREUNDER, AND MAY NOT BE RESOLD OR
TRANSFERRED IN THE ABSENCE OF THE SATISFACTION OF CERTAIN CONDITIONS, INCLUDING
AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH LAWS OR AN OPINION OF COUNSEL
SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
THIS CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM CONSTITUTES AN OFFER ONLY
TO THE PERSON OR ENTITY WHOSE NAME APPEARS ON THE COVER PAGE (THE "OFFEREE").
7
THE UNITS ARE BEING OFFERED ONLY TO INVESTORS WHO QUALIFY AS "ACCREDITED
INVESTORS", AS SUCH TERM IS DEFINED IN RULE 501 OF REGULATION D, AS PROMULGATED
UNDER THE SECURITIES ACT. ALL INVESTORS MUST MEET CERTAIN SUITABILITY STANDARDS
ESTABLISHED BY THE COMPANY, SUBJECT TO THE COMPANY'S RIGHT TO REJECT
SUBSCRIPTIONS, IN WHOLE OR IN PART. THE MINIMUM SUBSCRIPTION WILL BE $25,000,
UNLESS OTHERWISE APPROVED BY THE COMPANY IN ITS SOLE DISCRETION. AN INVESTMENT
IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. THESE
SECURITIES ARE HIGHLY SPECULATIVE AND SHOULD ONLY BE PURCHASED BY PERSONS WHO
CAN AFFORD TO LOSE THEIR ENTIRE INVESTMENT. PROSPECTIVE PURCHASERS SHOULD
CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER "RISK FACTORS" BEFORE
PURCHASING SUCH SECURITIES.
THE UNITS OFFERED HEREBY WILL BE SOLD SUBJECT TO THE PROVISIONS OF A
SECURITIES PURCHASE AGREEMENT (THE "SECURITIES PURCHASE AGREEMENT") CONTAINING
CERTAIN REPRESENTATIONS, WARRANTIES, TERMS AND CONDITIONS. ANY INVESTMENT IN THE
UNITS OFFERED HEREBY SHOULD BE MADE ONLY AFTER A COMPLETE AND THOROUGH REVIEW OF
THE PROVISIONS OF THE SECURITIES PURCHASE AGREEMENT. THE COMPANY RESERVES THE
RIGHT IN ITS DISCRETION TO ACCEPT OR REJECT, IN WHOLE OR PART, ANY PROPOSED
INVESTMENT IN THE UNITS.
NEITHER THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS PASSED UPON THE MERITS OF, OR GIVEN APPROVAL TO, ANY
SECURITIES OFFERED HEREBY, OR UPON THE TERMS OF THE OFFERING, NOR HAVE THEY
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS MEMORANDUM OR ANY OTHER SELLING
LITERATURE. THE SECURITIES ARE OFFERED BY THE COMPANY PURSUANT TO EXEMPTIONS
FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND APPLICABLE STATE
SECURITIES LAWS. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS MADE AN INDEPENDENT DETERMINATION THAT THE SECURITIES
OFFERED HEREUNDER ARE EXEMPT FROM REGISTRATION. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE SECURITIES DESCRIBED HEREIN ARE BEING OFFERED PURSUANT TO AN EXEMPTION
FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, AND APPLICABLE STATE
SECURITIES LAWS RELATING TO TRANSACTIONS NOT INVOLVING A PUBLIC OFFERING OR
SOLICITATION. SUCH EXEMPTIONS LIMIT THE NUMBER AND TYPES OF INVESTORS TO WHOM
THE OFFERING IS MADE AND RESTRICT SUBSEQUENT TRANSFER OF THE SECURITIES
DESCRIBED HEREIN.
INVESTMENT IN THE SECURITIES DESCRIBED HEREIN SHOULD BE CONSIDERED ONLY BY
A PERSON WHO OR ENTITY THAT CAN AFFORD TO SUSTAIN THE LOSS OF HIS, HER OR ITS
ENTIRE INVESTMENT. POTENTIAL INVESTORS ARE HEREBY CAUTIONED THAT SUCH INVESTORS,
SHOULD THEY INVEST IN THE SECURITIES DESCRIBED HEREIN, COULD BE REQUIRED TO BEAR
THE FINANCIAL RISKS OF SUCH AN INVESTMENT FOR A SUBSTANTIAL AND/OR INDEFINITE
PERIOD OF TIME. AN INVESTOR WHO PURCHASES THE SECURITIES DESCRIBED HEREIN SHALL
BE REQUIRED TO REPRESENT THAT HE, SHE OR IT IS ABLE TO SUSTAIN SUCH A LOSS, IS
FAMILIAR WITH AND UNDERSTANDS THE TERMS OF THE OFFERING OF SUCH SECURITIES AND
THAT HE, SHE OR IT MEETS CERTAIN SUITABILITY STANDARDS.
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFERING OF
SECURITIES DESCRIBED HEREIN OTHER THAN THOSE CONTAINED IN THIS MEMORANDUM
8
(INCLUDING THE EXHIBITS HERETO AND THE DOCUMENTS INCORPORATED HEREIN BY
REFERENCE). IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS SHOULD NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OTHER PERSON. NO
PERSON OR ENTITY SHOULD CONSIDER INVESTING IN THE SECURITIES DESCRIBED HEREIN
UNTIL SUCH PERSON HAS FULLY READ AND UNDERSTOOD THE CONTENTS OF THIS MEMORANDUM
(INCLUDING THE EXHIBITS HERETO AND ALL DOCUMENTS INCORPORATED HEREIN BY
REFERENCE).
THE SECURITIES DESCRIBED HEREIN ARE RESTRICTED WITH RESPECT TO
TRANSFERABILITY AND RESALE. SUCH SECURITIES MAY NOT BE RESOLD OR OTHERWISE
DISPOSED OF BY AN INVESTOR UNLESS, IN THE OPINION OF COUNSEL SATISFACTORY TO THE
COMPANY, REGISTRATION UNDER THE SECURITIES ACT, OR APPLICABLE STATE SECURITIES
LAWS IS NOT REQUIRED OR COMPLIANCE IS MADE WITH SUCH REGISTRATION REQUIREMENTS.
THIS MEMORANDUM DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY THE SECURITIES DESCRIBED HEREIN IN ANY JURISDICTION WHERE, OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION. EXCEPT AS OTHERWISE INDICATED HEREIN, THIS MEMORANDUM SPEAKS AS OF
THE DATE HEREOF. NEITHER THE DELIVERY OF THIS MEMORANDUM NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY AFTER THE DATE HEREOF.
THE SALE OF THE SECURITIES DESCRIBED HEREIN IS SUBJECT TO THE PROVISIONS
OF, AND EACH OF THE INVESTORS PURCHASING SECURITIES WILL BE REQUIRED TO EXECUTE,
A SECURITIES PURCHASE AGREEMENT. ANY PURCHASE OF THE SECURITIES DESCRIBED HEREIN
BY AN INVESTOR SHOULD BE MADE ONLY AFTER A COMPLETE AND THOROUGH REVIEW HEREOF
AND OF THE PROVISIONS OF SUCH SECURITIES PURCHASE AGREEMENT, IN THE FORM
ATTACHED HERETO AS EXHIBIT M. IN THE EVENT THAT ANY OF THE TERMS, CONDITIONS OR
OTHER PROVISIONS OF SUCH AGREEMENT ARE INCONSISTENT WITH OR CONTRARY TO A
DESCRIPTION OR THE TERMS SET FORTH IN THIS MEMORANDUM, SUCH AGREEMENT SHALL
CONTROL. IN PARTICULAR, AND WITHOUT LIMITING THE FOREGOING, THE REPRESENTATIONS
AND WARRANTIES CONTAINED IN SUCH AGREEMENT SHALL BE DEEMED TO SUPPLEMENT AND
REPLACE WHERE INCONSISTENT ANY INFORMATION CONTAINED HEREIN.
NO OFFERING LITERATURE OR ADVERTISING SHALL BE EMPLOYED IN THE OFFERING OF
THE SECURITIES DESCRIBED HEREIN, EXCEPT THE INFORMATION CONTAINED HEREIN
(INCLUDING THAT WHICH HAS BEEN INCORPORATED BY REFERENCE). THE DELIVERY OF THIS
MEMORANDUM DOES NOT IMPLY THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF.
THIS MEMORANDUM IS SUBMITTED IN CONNECTION WITH THE OFFERING OF THE
SECURITIES DESCRIBED HEREIN AND MAY NOT BE REPRODUCED OR USED FOR ANY OTHER
PURPOSE. BY ACCEPTING DELIVERY OF THIS MEMORANDUM, EACH POTENTIAL INVESTOR
AGREES THAT HE, SHE OR IT WILL NOT DIVULGE THE CONTENTS HEREOF TO ANY PERSON OR
ENTITY AND WILL RETURN IT (WITH ALL RELATED DOCUMENTS OR MATERIALS) TO THE
COMPANY UPON REQUEST IF SUCH INVESTOR DOES NOT AGREE TO PURCHASE ANY OF THE
SECURITIES. ANY REPRODUCTION OR DISTRIBUTION OF THIS DOCUMENT WITHOUT THE PRIOR
WRITTEN CONSENT OF THE COMPANY IS PROHIBITED.
PROSPECTIVE INVESTORS ARE NOT TO CONSTRUE THE CONTENTS OF THIS MEMORANDUM
AS LEGAL, TAX OR ACCOUNTING ADVICE, BUT SHOULD CONSULT THEIR LEGAL
9
COUNSEL, ACCOUNTANTS AND BUSINESS ADVISORS ABOUT LEGAL, TAX AND ACCOUNTING
MATTERS CONCERNING AN INVESTMENT IN THE SECURITIES DESCRIBED HEREIN.
PROSPECTIVE INVESTORS ARE URGED TO READ THIS MEMORANDUM CAREFULLY. ALL
PROSPECTIVE INVESTORS WILL HAVE AN OPPORTUNITY TO TALK WITH REPRESENTATIVES OF
THE COMPANY TO VERIFY ANY OF THE INFORMATION INCLUDED HEREIN AND TO OBTAIN
ADDITIONAL INFORMATION REGARDING THE COMPANY. CERTAIN PROVISIONS OF VARIOUS
DOCUMENTS AND RECORDS ARE BRIEFLY SUMMARIZED IN THIS MEMORANDUM. SUCH SUMMARIES
ARE NOT AND DO NOT PURPORT TO BE COMPLETE AND REFERENCE MUST BE MADE DIRECTLY TO
SUCH DOCUMENTS AND RECORDS FOR COMPLETE INFORMATION CONCERNING THE RIGHTS AND
OBLIGATIONS OF THE PARTIES. COPIES OF SUCH DOCUMENTS, IF NOT INCLUDED HEREWITH,
ARE AVAILABLE, UPON REQUEST, FROM THE COMPANY WITHOUT CHARGE AND WILL BE MADE
AVAILABLE TO PROSPECTIVE INVESTORS FOR INSPECTION DURING NORMAL BUSINESS HOURS,
UPON REQUEST TO THE COMPANY.
EXCEPT AS HEREIN DISCUSSED, NO PERSON HAS BEEN AUTHORIZED BY THE COMPANY
TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION CONCERNING THE COMPANY
OTHER THAN THOSE CONTAINED IN THIS MEMORANDUM IN CONNECTION WITH THE OFFERING
DESCRIBED HEREIN AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATION
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. IN MAKING AN
INVESTMENT DECISION, INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE COMPANY
AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED.
ANY ESTIMATES OR FORECASTS AS TO EVENTS THAT OCCUR IN THE FUTURE ARE BASED
UPON THE BEST JUDGMENT OF THE COMPANY'S MANAGEMENT AS OF THE DATE OF THIS
MEMORANDUM. WHETHER SUCH ESTIMATES OR FORECASTS MAY BE ACHIEVED WILL DEPEND UPON
THE COMPANY ACHIEVING ITS OVERALL BUSINESS OBJECTIVES AND THE AVAILABILITY OF
FUNDS, INCLUDING FUNDS FROM THE SALE OF THE SECURITIES OFFERED HEREBY. THERE IS
NO GUARANTEE THAT ANY OF THESE FORECASTS WILL BE ATTAINED. ACTUAL RESULTS WILL
VARY FROM THE FORECASTS AND SUCH VARIATIONS MAY BE MATERIAL.
NEITHER THE DELIVERY OF THIS MEMORANDUM NOR ANY SALES MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF, OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF
THIS MEMORANDUM.
THE COMPANY MAY ACCEPT OR REJECT ANY OFFER TO PURCHASE THE SECURITIES
DESCRIBED HEREIN, IN WHOLE OR IN PART, FOR ANY REASON, AND THE COMPANY MAY
WITHDRAW OR CANCEL THE OFFERING WITHOUT NOTICE. AFFILIATES OF THE COMPANY MAY
ACQUIRE SECURITIES IN THIS OFFERING.
THE COMPANY AND X.X. XXXXXX & CO., INC. (THE "PLACEMENT AGENT"), RESERVE
THE RIGHT TO ALLOT TO ANY PROSPECTIVE INVESTOR LESS THAN THE AMOUNT OF
SECURITIES SUCH INVESTOR DESIRES TO PURCHASE.
THE COMPLETION OF EACH PURCHASE AND SALE OF THE WILL BE AT A PLACE AND
TIME SPECIFIED BY THE COMPANY AND THE PLACEMENT AGREEMENT AND IN ACCORDANCE WITH
THE PROVISIONS IN THE FORM OF SECURITIES PURCHASE AGREEMENT.
10
--------------------------------------------------------------------------------
JURISDICTIONAL NOTICES AND REPRESENTATIONS
--------------------------------------------------------------------------------
The following information is specifically directed to residents in each of
the states noted below. Each prospective investor is urged to review all of the
following information with specific focus on the particular information provided
for the state in which such investor resides:
FOR CALIFORNIA RESIDENTS
THE SALE OF SECURITIES WHICH ARE THE SUBJECT OF THIS MEMORANDUM HAS NOT
BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA
AND THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE
CONSIDERATION THEREFORE PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE
OF SECURITIES IS EXEMPT FROM THE QUALIFICATION BY SECTION 25100, 25102, OR 25105
OF THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT
ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE
SALE IS SO EXEMPT.
FOR CONNECTICUT RESIDENTS
THE SECURITIES HAVE NOT BEEN REGISTERED UNDER SECTION 36b-16 OF THE
CONNECTICUT UNIFORM SECURITIES ACT BUT WILL BE SOLD IN RELIANCE ON AN EXEMPTION
FROM SUCH REGISTRATION SET FORTH IN SECTION 36b-21(9)(A) OF SAID ACT AND
REGULATIONS PROMULGATED THEREUNDER. THE SECURITIES CANNOT BE RESOLD WITHOUT
REGISTRATION UNDER SECTION 36b-16 OF SAID ACT OR UNLESS AN EXEMPTION FROM
REGISTRATION IS AVAILABLE PURSUANT TO SECTION 36b-21 OF SAID ACT.
FOR ILLINOIS RESIDENTS
THE OFFERING AND SALE OF THE SECURITIES OFFERED HEREBY HAS NOT BEEN
REGISTERED UNDER SECTION 5 OF THE ILLINOIS SECURITIES LAW, AND SUCH SECURITIES
CANNOT BE SOLD OR TRANSFERRED EXCEPT UNDER SAID LAW OR IN A TRANSACTION WHICH IS
OTHERWISE IN COMPLIANCE WITH SAID LAW.
FOR NEW JERSEY RESIDENTS
THE SECURITIES REFERRED TO IN THIS MEMORANDUM WILL BE SOLD TO AND ACQUIRED
BY THE HOLDERS IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE NEW JERSEY
STATE UNIFORM SECURITIES LAW, SECTION 49-3-50(b)(12). THEREFORE, THE DEPARTMENT
OF LAW AND PUBLIC SAFETY, DIVISION OF LAW, BUREAU OF SECURITIES HAS NOT PASSED
ON THE ADEQUACY OF THE DISCLOSURE IN THE OFFERING LITERATURE OR ON THE MERITS OF
THIS OFFERING.
11
FOR NEW YORK RESIDENTS
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION, NOR HAS THE ATTORNEY GENERAL OF NEW YORK OR
ANY OFFICIAL OF SIMILAR CAPACITY OF ANY STATE PASSED UPON THE ACCURACY,
ADEQUACY, OR COMPLETENESS OF THE MEMORANDUM OR THE MERITS OF THIS OFFERING. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
FOR GEORGIA RESIDENTS
THESE SECURITIES HAVE BEEN ISSUED OR SOLD IN RELIANCE ON PARAGRAPH (13) OF
CODE SECTION 10-5-9 OF THE GEORGIA SECURITIES ACT OF 1973, AND MAY NOT BE SOLD
OR TRANSFERRED EXCEPT IN A TRANSACTION WHICH IS EXEMPT UNDER SUCH ACT OR
PURSUANT TO AN EFFECTIVE REGISTRATION UNDER SUCH ACT.
--------------------------------------------------------------------------------
AVAILABLE INFORMATION
--------------------------------------------------------------------------------
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and in accordance
therewith is required to file reports, and other information with the Securities
and Exchange Commission (the "Commission"). Such reports, and other information
may be inspected and copied at the Commission's public reference room located in
Room 1024 at 000 Xxxxx Xxxxxx, X.X., Xxxxxxxxxx, X.X. 00000, and at the
Commission's Regional Offices located at Citicorp Center, 000 Xxxx Xxxxxxx
Xxxxxx, Xxxxx 0000, Xxxxxxx, Xxxxxxxx 00000, and at 0 Xxxxx Xxxxx Xxxxxx, 00xx
Xxxxx, Xxx Xxxx, Xxx Xxxx 00000. The Commission also maintains a web site at
"http:\\xxx.xxx.xxx" where such material filed electronically can be examined.
Copies of such materials may also be obtained at prescribed rates from the
Public Reference Section of the Commission located in Room 1024 at 000 Xxxxx
Xxxxxx, X.X., Xxxxxxxxxx, X.X. 00000 or, upon request, from the Company at no
charge.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Memorandum and prior to
completion or termination of the Offering shall be deemed to be incorporated by
reference in their entirety herein and to be a part hereof from the date of
filing of such documents.
The information set forth herein should be read together with, and is
qualified in its entirety by reference to the information contained in, the
exhibits hereto and any documents deemed incorporated herein by reference.
Prospective investors should read the exhibits hereto, including financial
statements, in their entirety. To the extent that such information is not
consistent with the information set forth herein, the information herein will be
deemed superseded by the information contained in such exhibits or incorporated
herein by reference.
12
--------------------------------------------------------------------------------
CONCURRENT OFFERING AND PROPOSED ACQUISITION
--------------------------------------------------------------------------------
Concurrently herewith, RPM Incorporated, a Delaware corporation ("RPM"),
is offering to sell, through the Placement Agent (the "RPM Offering"), shares of
RPM common stock ("RPM Common") and subordinated debentures of RPM ("RPM
Debentures") on terms which differ materially from the terms pursuant to which
the Units are being offered in this Private Placement. The terms of the RPM
Offering require that at the closing thereof: (a) the net proceeds, after
deduction of commissions and offering expenses, from the RPM Offering, ranging
from a minimum of $266,000 to $761,000, will remain in RPM, and (b) the Company,
either by way of a merger or an acquisition, will acquire all of the issued and
outstanding common stock of RPM for the following consideration: (i) one share
of The Common Stock of the Company for every issued and outstanding share of RPM
Common, and (ii) the Company's assumption of all of RPM's obligations and
liabilities under the RPM Debentures. A confidential private placement
memorandum respecting the RPM Offering is available upon request from the
Placement Agent.
--------------------------------------------------------------------------------
CONFIDENTIALITY
--------------------------------------------------------------------------------
The information contained in this Memorandum is confidential and
proprietary to the Company and is being submitted to prospective investors
solely for such investors' confidential use with the express understanding that,
without the prior written permission of the Company, such prospective investors
will not release this document or discuss the information contained herein or
make reproductions of or otherwise use this Memorandum for any purpose other
than evaluating a potential investment in the securities described herein. This
Memorandum contains certain financial and other information (incorporated by
reference or otherwise) concerning the Company which is material non-public
information and should be treated as confidential. Receipt and acceptance of
this Memorandum constitutes the recipient's acknowledgement that the information
contained herein will be maintained in strict confidence by the recipient and
will not be disclosed to any third parties.
A prospective investor, by accepting delivery of this Memorandum, further
agrees to promptly return to the Company this Memorandum and any other documents
or information furnished if the prospective investor elects not to purchase any
of the securities described herein or upon request of the Company.
--------------------------------------------------------------------------------
INDEPENDENT EVALUATION
--------------------------------------------------------------------------------
This Memorandum does not purport to be all-inclusive or to contain all of
the information that a prospective investor may desire in evaluating an
investment in the securities of the Company. Prior to the consummation of the
offer and sale of any of the securities described herein, the Company will
afford prospective investors an opportunity to ask questions of and receive
answers from the Company concerning the terms and conditions of the securities
described herein, the Company or other relevant matters and to obtain additional
information to the extent the Company possesses such information or can
13
acquire it without reasonable effort or expense. Any such questions should be
directed to Xxxx X. Xxxxxxxx at The Tirex Corporation, 000 Xx. Xxxxxxx, Xxxxx
000 Xxxxxxxx, Xxxxxx #0X 0X0. Telephone: (000) 000-0000; Facsimile: (514)
878-9847.
No person or entity has been authorized to give any information or to make
representations about the Company or the Offering and, if given or made, any
such information or representation by any other person or entity must not be
relied upon as having been authorized by the Company. Each prospective investor
must conduct and rely on his own evaluation of the Company and the terms of the
Offering (including the merits and risks involved) in making an investment
decision with respect to the securities described herein. Investment in the
Units involves a high degree of risk and is suitable only for investors capable
of sustaining a loss of their entire investment. See "RISK FACTORS."
14
--------------------------------------------------------------------------------
USE OF PROCEEDS
--------------------------------------------------------------------------------
The Company estimates that the net proceeds from the sale of the Units
offered hereby, after deducting estimated offering expenses and commissions,
will be approximately $213,500 (the "Minimum") assuming the minimum of 10 Units
are sold and $602,000 (the "Maximum") assuming the maximum of 28 Units are sold.
The Company intends to utilize all of the net proceeds from the Minimum to pay
the costs of completing the first production model of the TCS-1 System. Unless
circumstances require otherwise, to the extent the Company raises more than the
Minimum, the proceeds will be expended in the order of priority set forth in the
table, below. Assuming the RPM Offering is successfully completed, RPM will be
acquired by the Company. The Company estimates that at the time of such
acquisition, RPM will have cash assets, representing the proceeds of the RPM
Offering, ranging from a minimum of $266,000 to a maximum of $761,000. A
discussion of the use of the combined proceeds from this Private Placement and
from the RPM Offering (the "Combined Proceeds"), is included below. If both this
Private Placement and the RPM Offering are fully subscribed, the Company expects
to use all of the proceeds within six months from the closing. The Company will
have to seek other financing, for all items not payable out of the proceeds.
Possible alternative financing sources may include, but not be limited to: (i)
Canadian government grants, loans, and/or refundable tax credits and (ii) debt
financing from banks or other lending institutions. There can be no assurance
that, even if this Private Placement is completed and closed, the RPM Offering
will be completed. Nor can there be any assurance that the Company will be able
to obtain alternative sources of financing on beneficial terms, if at all. The
failure to accomplish either of the foregoing would have a material adverse
effect upon the Company's ability to commence business operations on a timely
basis, if at all.
Approximate
Application Dollar Amount
----------- -------------
Minimum Maximum
------- -------
Capital Expenditures
Completion of First Production
Model of TCS-1 System (1)
Cryogenic - Freezing
Section $213,500 $213,500
Disintegration System -0- 125,000
Comprehensive Engineering
and Design -0- 175,000
Working Capital
Corporate Headquarters (4)(9) -0- 10,000
Manufacturing Facility (5)(9) -0- 50,000
Employee Salaries (6)(9) 28,500
-------- --------
Total $213,500 $602,000
----------
Notes to this table follow the "USE OF COMBINED PROCEEDS" table, below.
15
USE OF COMBINED PROCEEDS
Assuming the RPM Offering is successfully completed, RPM will be acquired
by the Company. The Company estimates that at the time of such acquisition, RPM
will have cash assets, representing the proceeds of the RPM Offering, ranging
from a minimum of $266,000 (the "RPM Minimum") to a maximum of $761,000 (the
"RPM Maximum"). For purposes of this discussion, the net proceeds from the RPM
Offering, which the Company will acquire when it acquires RPM, together with the
net proceeds from this Private Placement will be referred to as the "Combined
Proceeds". Based upon the foregoing assumptions, the Company estimates that the
net Combined Proceeds from the RPM Offering and the sale of the Units offered
hereby, will range from approximately $479,500 (the "Combined Minimum") to
$1,363,000 (the "Combined Maximum"). Unless circumstances require otherwise, to
the extent the Company raises more than the Combined Minimum, the proceeds will
be expended in the order of priority set forth in the table, below. As noted in
the "USE OF PROCEEDS" table, above, if both this Private Placement and the RPM
Offering are fully subscribed, the Company expects to use all of the proceeds
within six months from the closing. The Company will have to seek other
financing for all items not payable out of the Combined Proceeds. Possible
alternative financing sources may include, but not be limited to: (i) Canadian
government grants, loans, and/or refundable tax credits and (ii) debt financing
from banks or other lending institutions. There can be no assurance that, even
if this Private Placement is completed and closed, the RPM Offering will be
completed. Nor can there be any assurance that the Company will be able to
obtain alternative sources of financing on beneficial terms, if at all. The
failure to accomplish either of the foregoing would have a material adverse
effect upon the Company's ability to commence business operations on a timely
basis, if at all.
Approximate
Application Dollar Amount
----------- -------------
Minimum Maximum
------- -------
Capital Expenditures
Completion of First Production
Model of TCS-1 System (1)
Front End of TCS-1 System $ -0- $ 110,000
Cryogenic - Freezing
Section 213,500 213,500
Disintegration System 125,000 125,000
Comprehensive Engineering
and Design 141,000 243,800
Other Capital Investments
Tire Shredding
Equipment Leases (2)(9) -0- 75,000
Tire Dumps (3)(9) -0- 250,000
Working Capital
Corporate Headquarters (4)(9) -0- 10,000
Manufacturing Facility (5)(9) -0- 50,000
Employee Salaries (6)(9) -0- 55,700
Salaries to Affiliates (7)(9) -0- 134,000
Consultant Fees (8)(9) -0- 96,000
-------- ---------
Total $479,500 1,363,500
16
Notes:
(1) The Company believes that it will require proceeds from this Private
Placement to cover the costs of completing the design engineering and
construction of only the first production model TCS-1 System. The Company
believes that it will be able to obtain conventional construction debt financing
from banks or other lending institutions and/or "pre-commencement" lease
financing to cover construction costs of subsequent systems. There can, however,
be no assurance that the Company will be able to obtain such financing on
commercially reasonable terms, if at all.
(2) Includes total lease payment costs for three tire shredders for a
six-month period. Tire shredders will be required in the event that the Company
successfully concludes its current negotiations respecting its proposed entry
into the on-site tire shredding business (see the discussion under "BUSINESS:
Proposed Tire Shredding Operations", below). As at the date hereof, there can be
no assurance that such negotiations will be successful, that the Company will
commence any tire shredding operations, or that if it does, such operations will
be profitable.
(3) $250,000 have been allocated out of the Maximum to cover the costs of
acquiring 25,000,000 scrap tires which the Company will require in order to meet
its obligations under a contract, which the Company is currently negotiating
with CG TIRE, Inc., in connection with the Company's proposed tire shredding
operations (see the discussion under "BUSINESS: Proposed Tire Shredding
Operations", below). As at the date hereof, there can be no assurance that such
negotiations will be successful, that the Company will commence any tire
shredding operations, or that if it does, such operations will be profitable.
(4) Includes monthly rental payments of approximately $2,000 for six
months. See the discussion under "BUSINESS: Properties".
(5) Includes estimated costs, for a six-month period, of leasing a
manufacturing facility of not less than 100,000 square feet. Such facility will
be used to assemble and operate the first production model TCS-1 System during a
six-month test phase and to assemble and test subsequent TCS-1 Systems.
(6) Includes salaries for a six-month period for one secretarial, two
engineering, and one in-house corporate counsel.
(7) See, "RISK FACTORS: Affiliated Persons To Be Paid Out Of Offering
Proceeds"
(8) Includes fees payable for a six-month period for to one government
liaison consultant, one business and professional organization liaison
consultant, and one consultant who provides advice and guidance respecting
engineering, product development, and tire shredding program management.
(9) Pending the expenditure of the proceeds of this offering, as set forth
above, the Company may make temporary investments in short-term United States
government obligations or other high-quality short-term interest bearing
securities.
17
--------------------------------------------------------------------------------
TERMS OF THE OFFERING
--------------------------------------------------------------------------------
General
The Offering made hereby consists of up to 28 Units which are being
offered by the Placement Agent on behalf of the Company to certain "accredited
investors" as that terms is defined in Section 501(a) of Regulation D of the
Securities Act ("Accredited Investors"). The Units are being offered at a price
of $25,000 per Unit. Each Unit consists of one 10% Convertible Subordinated
Debenture in the principal amount of $25,000 and 50,000 warrants (the
"Warrants") to purchase a like number of shares of the Company's Common Stock
(the "Underlying Shares") at an exercise price of $.001 per share (the
"Warrants"). For a detailed description of the securities comprising the Units,
see "The Offering". None of the Units will be sold unless a minimum of 10 Units
offered are purchased and paid for in accordance with the terms of the Offering.
This Offering will remain open until December 31, 1997, unless extended for one
or more additional 30-day periods by mutual agreement of the Company and the
Placement Agent. Investors will not have recision rights if the Offering Period
is extended prior to the receipt of subscriptions for the ten Unit minimum. The
number of Units being offered hereby may be increased upon agreement between the
Company and the Placement Agent. The Company reserves the right to reject any
subscription, to accept one subscription over another, and to allocate available
Units among subscribers as it deems appropriate.
Restrictions on Transferability
The securities described herein are: (i) not registered under the
Securities Act or the securities laws of any state; and (ii) are being offered
and sold in reliance upon exemptions from the registration provisions of federal
and state securities laws. The Warrants comprising part of the Units will be
subject to lock-up Agreements restricting their sale or transfer for a period
ending on the earlier of: (i) one year from the effective date of the Proposed
Public Offering of the common stock of the Company; or (ii) such longer period
as may be required by any regulatory agency in connection with the proposed
public offering. Investors purchasing such securities will, therefore, not be
able to resell or otherwise transfer such securities in the absence of
registration under the Securities Act or unless an exemption from the
registration requirements thereof is made available. Additionally, all
applicable state laws requiring registration or qualification must also be
satisfied before any resale or transfer of the securities is permitted.
Investor Suitability Standards
An investment in the Units is suitable only for sophisticated investors
who understand and are economically capable of accepting the risks associated
with a speculative investment, including the complete loss of such investment.
Units will only be sold to "Accredited Investors" within the meaning prescribed
by Regulation D and Rule 501 of the Securities Act. Each investor will be
required to represent that: (i) he is an Accredited Investor; (ii) the
investment is suitable for him; (iii) he is purchasing the Units for investment
and not with a view to a distribution or resale, and (iv) he is purchasing the
Units for his own account and not for the account of others. The Company may
require additional information with respect to any subscriber. Subscription
information will be used by the Company to determine whether or not to accept
subscriptions and will be kept confidential and not disclosed except to counsel,
the
18
Placement Agent and, if required, to governmental and regulatory authorities.
The Company reserves the right, in its sole discretion, to reject any
subscription or to accept one subscription over another.
Plan of Distribution
The Placement Agent is offering the securities described herein on a "best
efforts" basis. None of the Units will be sold unless a minimum of 10 Units are
subscribed and paid for in accordance with the terms of the Offering during an
offering period which expires on December 31, 1997, unless extended for one or
more 30-day periods by mutual agreement of the Company and the Placement Agent.
All proceeds will be deposited in an escrow account with Xxxxxx, Xxxxxxx & Xxxxx
(by noon of the day following the broker's receipt thereof), and promptly
returned to the subscribers, in full, without interest, if the Company is not
successful in obtaining subscriptions for at least 10 of the Units. Subscribers
will have no right to the return of their funds during the term of the escrow.
The Company has also agreed to pay to the Placement Agent a non-accountable
expense allowance of 3% of the aggregate gross proceeds from the sale of the
Units. The Company will also pay all other expenses of this Private Placement,
including legal and accounting fees and expenses.
Further Information
Upon request, prospective investors will have the opportunity to meet with
and ask questions of the Officers and Directors of the Company concerning the
Company, its operations and prospects and the terms and conditions of the
Offering. The Company will provide prospective investors with such further
information as they may reasonably request to supplement the information
contained in this Memorandum. Prospective investors are urged to avail
themselves of this opportunity. All such additional information is considered
confidential and proprietary information of the Company and is subject to the
confidentiality restrictions applicable to the Memorandum. See "INDEPENDENT
EVALUATION."
Subscription Payments
The purchase price of Units subscribed for must be paid by check or wire
transfer. The minimum investment for each investor is one Unit, although the
Company may, in its discretion, accept subscriptions for lesser amounts and
fractional Units.
Possible Variance in Terms of Offering
The Company and the Placement Agent may agree, in their discretion and
without notice to other investors or offerees, to offer the Units to certain
investors, who are not affiliates of the Company or of the Placement Agent, on
terms more favorable than those set forth herein. The basis for any such
variance in the terms of the Offering will include, but may not be limited to,
the amount of the individual investment and the point in the Offering Period
when such investment is made. In such event, other investors will not be
entitled to rescission of their investments in this Private Placement.
19
--------------------------------------------------------------------------------
THE OFFERING
--------------------------------------------------------------------------------
Securities Offered:
The Units The Company is offering 28 Units, each Unit
consisting of one 10% Convertible Subordinated
Debenture in the principal amount of $25,000 (the
"Debenture") and fifty thousand (50,000) warrants to
purchase a like number of shares of the Company's
common stock, $.001 par value, at an exercise price
of $.001 per share (the "Warrants") to Accredited
Investors pursuant to this Confidential Private
Offering Memorandum (the "Memorandum").
Effects of Possible
Reverse Split The Company intends to make a public offering of its
Common Stock prior to March 31, 1998 (the "Proposed
Public Offering"). The terms which have been proposed
for such offering will require that not more than ten
million shares of the Company's Common Stock be
issued and outstanding prior to the commencement of
the public offering. There are presently 38,774,625
shares of the Company's Common Stock issued and
outstanding. The effectuation of proposed such Public
Offering will, therefore, require a reverse split of
the Company's securities. Such action will affect the
number of Warrants held by the purchasers thereof,
the number of shares of the Company's Common Stock
issuable upon the exercise of the Warrants, and the
number of shares issuable upon conversion of the
Debentures. See RISK FACTORS: "Proposed Public
Offering: Reverse Split."
The Debentures
Interest The Debentures shall bear interest at an annual rate
of 10%, payable upon maturity.
Maturity The Debentures shall be due and payable on the first
to occur of: (i) the completion and closing of an
underwritten public offering of the securities of the
Company, yielding gross proceeds to the Company of
not less than $8,000,000 (the "Proposed Public
Offering"); (ii) the completion and closing of any
debt or equity financing of the Company in excess of
$4,500,000; or (iii) one year from the issuance of
the Debenture.
Premium on
Redemption
After
March 31, 1998 If a Debenture is not converted, it may be redeemed
by the holder any time after Maturity at 100% of the
principal amount of the Debenture plus all interest
accrued thereon. Redemptions effected after March 31,
1998,
20
however, will be made at a premium of 125% of the
principal amount of the Debenture plus all interest
accrued thereon.
Conversion
Rights The Debentures shall be convertible, in whole or in
part, at any time prior to maturity at a conversion
rate, on or prior to March 31, 1998, equal to 85%,
and after March 31, 1998, equal to 75%, of the
average of the closing bid price of the Common Stock,
as reported by the National Association of Securities
Dealers Automated Quotation Small Cap Market System
("NASDAQ"), during the five-day period preceding the
Company's receipt of a notice of conversion from a
Debenture holder. In the event the Company's Common
Stock is not then quoted on NASDAQ, the above stated
conversion rates shall be equal to the average of the
closing bid prices of the Common Stock, as traded in
the over-the-counter ("OTC") market and quoted in the
OTC Electronic Bulletin Board of the NASD, during the
five-day period preceding the Company's receipt of a
notice of conversion from a Debenture holder.
Voting Rights: The Debentures have no voting rights. Each of the
shares of Common Stock issuable upon conversion of
the Debentures will have one vote.
The Conversion Shares
Registration
Rights The Company has agreed to file a registration
statement under the Securities Act covering the
shares of Common Stock issuable upon conversion of
the Debentures (the "Conversion Shares") as promptly
as practicable after the expiration of the Offering
Period and to use its best efforts to cause such
registration statement to be declared effective by
the SEC within 120 days after the expiration of the
Offering Period and to keep such registration
statement effective at all times until: (i) all of
the Debentures, which are eligible for conversion,
are converted, and the delivery of a prospectus is no
longer required in connection with any resale of any
of the Conversion Shares and there are no unpaid,
unconverted debentures outstanding, and (ii) all of
the Warrants have been exercised and the delivery of
a prospectus is no longer required in connection with
resale of any of the shares issuable upon the
exercise of such Warrants. If such registration
statement is not declared effective by the commission
within 120 days after the termination of the Offering
Period, the Company will pay the holders of the
Debentures liquidated damages in the amount of 1% of
the principal face value of the Debenture for the
first 30 day-period, commencing on the 121st day
following the termination of the Offering Period,
that such registration statement is not declared
effective and 2% of the principal face value of the
Debenture for each subsequent 30 day-period. The
Debenture is not transferrable under any condition
prior to March 31, 1998. If for any reason, the
Company fails to register the Conversion Shares, or
to keep the Registration Statement respecting the
Conversion Shares effective, as set
21
forth above, then the holders of the Debentures shall
have the following additional registration rights:
During the one-year period following May 31, 1998, on
one occasion only, the Company shall, pursuant to the
written demand of the holders of 50% or more of the
aggregate principal amount of the Debentures, file a
registration statement under the Securities Act,
covering the Conversion Shares, as promptly as
practicable following such demand; The Company shall
use its best efforts to cause such registration
statement to be declared effective by the SEC within
120 days following such demand and to keep such
registration statement effective at all times, as set
forth above, and if, at any time during the one-year
period following May 31, 1998, the Company intends to
file a registration statement, under the Securities
Act, then, not later than twenty days prior to the
intended filing date for such registration statement,
the Company shall give written notice to the
Debenture holders of its intention to file a
registration statement and each of the Debenture
holders shall have the right, upon their written
instructions, received by the Company within ten days
of the intended filing date of the registration
statement, to have included in such registration
statement the number of Conversion Shares issuable to
them as they shall so instruct. The Company shall use
its best efforts to cause such registration statement
to be declared effective by the SEC as promptly as
possible and to keep such registration statement
effective at all times, as set forth above.
Penalty for Early
Conversion The Debentures and Warrants comprising the Units are
not separable or transferable under any conditions
prior to March 31, 1998. Any conversion, prior to
March 31, 1998, of all or any part of a Debenture
shall be deemed to be an "early conversion." In the
event a Debenture is made subject, in whole or in
part, to an early conversion, the holder of such
Debenture shall lose the right to exercise his or her
Warrants in proportion to the percentage of the
principal amount of the Debenture which has been thus
converted. For Example: (i) One Unit consists of one
Debenture in the principal amount of $25,000 and
50,000 Warrants; (ii) Prior to March 31, 1998, the
holder of a Unit converts $5,000 (or 20%) of the
principal amount of the Debenture which comprises one
part of the Unit; (iii) By way of a penalty for such
early conversion, the Unit holder or any subsequent
holder of the Warrants will lose the right to convert
10,000 (or 20%) of the 50,000 Warrants which comprise
the second part of the Unit.
The Warrants
Exercise and
Restrictions
on transfer The Warrants may be exercised at a price of $.001 per
share commencing on the earlier of: (i) the effective
date of the Proposed Public Offering or (ii) May 31,
1998. Notwithstanding the foregoing, the number of
Warrants eligible for conversion by any holder
thereof will be reduced to the extent that the
Debenture issued in conjunction with such Warrants
had, prior to March 31, 1998, been subject to an
early conversion. See
22
"Penalty for Early Conversion," above. The Warrants
will not be transferable, under any circumstances,
prior to March 31, 1998.
Voting
Rights: The Warrants have no voting rights. Each of the
Underlying Shares issuable upon the exercise of the
Warrants will have one vote.
The Underlying Shares
Registration
Rights The Company shall include the shares of Common Stock
underlying the Warrants (the "Underlying Shares") in
any registration statement pertaining to the Common
Stock underlying the Debentures. Purchasers of the
Units shall agree not to sell or transfer any of the
Underlying Shares for a period of one year following
the effective date of the registration statement
relating to the Proposed Public Offering. See "The
Conversion Shares - Registration Rights", above.
Minimum Purchase: Unless otherwise agreed to by the Company, the
minimum purchase by each prospective investor is one
Unit (or $25,000).
Capital Stock
Outstanding Prior to
the Offering: 38,774,625 shares of the Common Stock of the Company
were issued and outstanding prior to the Offering
being made hereunder.
Risk Factors: An investment in the Units involves a high degree of
risk and should only be undertaken by investors able
to lose their entire investment. Prospective
investors should review carefully and consider the
factors described under "RISK FACTORS."
Use of Proceeds: The Company plans to use the net proceeds of this
Offering for the completion of the first production
model of the TCS-1 System, general corporate purposes
and for working capital. (See "USE OF PROCEEDS.")
23
--------------------------------------------------------------------------------
RISK FACTORS
--------------------------------------------------------------------------------
Purchase of the securities offered hereby involves a high degree of risk
and must be considered a speculative investment. An investment in the securities
is suitable only for persons of adequate means, who have no need for liquidity
in their investment, who can afford the loss of their entire investment and who
meet the "Accredited Investor" requirements of Rule 501(a) of Regulation D, as
promulgated under the Securities Act. Prospective investors should, prior to any
purchase of Units, carefully consider the following risk factors, as well as the
other information contained in this Memorandum, attached hereto as Exhibits and
incorporated by reference herein.
Development Stage Company; No Assurance as to Future Profitable Operations
There is no assurance that the Company will generate net income or
successfully expand its operations in the future. Because it is in the
development stage and has had no significant operations to date, the Company
cannot predict with any certainty the future success or failure of its
operations. Its proposed operations are subject to all of the risks inherent in
the establishment of a new business enterprise, including the absence of any
significant operating history. The likelihood of the success of the Company must
be considered in light of the problems, expenses, difficulties, complications
and delays frequently encountered in connection with the formation of a new
business and the competitive environment in which the Company will operate. The
Company has had no significant operating revenues to date and there can be no
assurance of future revenues. There is limited evidence at this time upon which
to base an assumption that the Company's proposed business will prove successful
or that its proposed TCS-1 System will be successfully developed, manufactured,
and marketed. As a consequence, there is no assurance that the Company will be
able to operate profitably in the future. Additionally, the Company has a very
limited business history which investors can analyze to aid them in making an
informed judgment as to the merits of an investment in the Company. Any
investment in the Company should therefore be considered a high risk investment
because investors will be placing their funds at risk in an unseasoned start-up
company.
No Guarantee of Product Acceptance in Market
The first production model of the TCS-1 System has not yet been completed
and there is no history of commercial operations of the TCS-1 System. There can
be no assurance that the TCS-1 System will be accepted in the market for tire
disintegration equipment. Moreover, the Company has not conducted market
research that focuses on the potential demand for the TCS-1 System to the
exclusion of other types of tire disintegration equipment. Therefore, the
Company is not able to estimate with any assurance the potential demand for the
TCS-1 System, if any. There can be no assurance that sufficient market
penetration can be achieved so that projected production levels of the TCS-1
System will be absorbed by the market (see "Business-Sales and Marketing").
Need for Substantial Additional Capital
The Company presently requires funding to complete the development of the
TCS-1 System and to commence manufacturing and marketing operations. The
proceeds from this Offering are expected to permit the Company to operate only
through the end of 1997. The Company anticipates that only limited revenues will
be available to fund its operations without substantial additional capital.
Further, although
24
the Company has signed a Letter of Intent with the Placement Agent for the
Proposed Public Offering of its Common Stock in an amount of not less than
$8,000,000, there can be no assurance that such public offering will be
successfully completed or, even if it is completed, that the Company will
receive adequate financing from the Proposed Public Offering. See "PROPOSED
OFFERING; REVERSE STOCK SPLIT." The Company does not currently have in place,
other current options to fund its continued existence in the event the Proposed
Public Offering does not occur or does not occur within a reasonable time
following this Private Placement. The result of the Company's inability to raise
sufficient funding to accomplish its present goals would have a material adverse
effect upon its business, prospects, operating results, and financial condition.
Moreover, if the Proposed Public Offering does not occur on a timely basis, the
Company may be unable to fund its business plan and may be forced to cease to
operate. In such event, investors will lose their entire investment.
Possibility of Material Changes in Offering Terms; NASD Review
Following the closing of this Private Placement, the Company intends to
effect a public offering of its Common Stock in an amount of not less then
$8,000,000. Should such public offering take place, the Company intends to apply
for inclusion of its Common Stock on the National Association of Securities
Dealers ("NASD") Automated Quotation Small Cap Market ("NASDAQ"). In connection
with such application, the NASD may require that the terms of this Private
Placement be materially modified. Such potential modifications may include, but
may not be limited to, an increase in the time such investors must refrain from
selling the Common Stock acquired in this Private Placement beyond the "lock-up"
dates specified in the Lock-Up Agreement attached hereto and described herein.
See "DESCRIPTION OF THE SECURITIES." By executing the Securities Purchase
Agreement, each investor will acknowledge and agree that such modifications may
occur.
Risk of Company's Inability to Repay Debentures
There is no assurance that the Company will be able to repay the
Debentures which are being offered hereby. Repayment of the Debentures depends
in part upon the completion of the Company's Proposed Public Offering and no
assurance can be given that such offering will be completed. See the Risk
Factor, below, "Proposed Offering; Reverse Split" below. If such public offering
is not completed, the Company will need to generate cash flow from its
operations or find other sources of financing. There are no other financing
sources currently available to the Company and no assurance can be given that
additional financing will be available when needed. It is unlikely that the
Company's business will be able to generate sufficient cash flow to repay the
Debentures when they become due if the Proposed Public Offering is not
completed. In such event, the Company will be unable to repay the Debentures and
the investors may be required to wait a substantial period of time for repayment
or may lose their entire investment.
No Collateral Security
Repayment of the Debentures is not secured by any collateral. The assets
and net worth of the Company are insufficient to collateralize the principal of,
or interest on, the Debentures. If the Company does not complete the Proposed
Public Offering, the Company will be unable to pay the principal or interest on
the Debentures and it will have insufficient cash, assets, or net worth to
satisfy the amount due on the debt. In such event, the principal and interest
may be uncollectible and investors may lose their entire investment in the
Company. See "Need for Substantial Additional Capital."
25
Restricted Securities
The resale or transfer of the Securities, which comprise the Units being
offered hereby, are specifically restricted and all certificates representing
such securities will bear restrictive legends, as described in "DESCRIPTION OF
SECURITIES." In no event will the securities comprising the Units be
transferable prior to March 31, 1998. The shares of Common Stock issuable upon
exercise of the Warrants will be "locked up" because of limitations on the
rights of the Warrant holders to exercise the Warrants until one year following
the earlier of: (i) the effective date of the Proposed Public Offering or (ii)
May 31, 1998. If the Proposed Public Offering should occur, the shares of Common
Stock underlying the Warrants will be subject to a further "lock-up" restricting
their sale or transfer for a period of one year from the effective date of the
Proposed Public Offering or such greater period as may be required by any
regulatory agency.
Proposed Public Offering: Reverse Split
The proposed terms for the Proposed Public Offering require that not more
than 10,000,000 shares of the Company's Common Stock be issued and outstanding
prior to the commencement of the public offering. There are presently 38,774,625
shares of the Company's Common Stock issued and outstanding. While the number of
shares outstanding prior to the Proposed Public Offering may be adjusted to
reflect a change in the development and consequent valuation of the Company,
investors in this Private Placement should note that such requirement will
necessitate a reverse split of all of the Company's issued and outstanding
securities. This will necessarily affect the number of Warrants held by the
purchasers thereof, the number of shares of the Company's Common Stock issuable
upon the exercise of the Warrants, and the number of shares issuable upon
conversion of the Debentures. While the exact ratio of the projected reverse
split cannot be determined prior to the finalization of the terms thereof, the
effect of a 1-for-4 reverse split would affect an investor in this Private
Placement, as follows: (i) the number of Warrants included in each Unit (and the
number of shares purchasable upon the exercise of the Warrants) would be reduced
from 50,000 to 12,500; (ii) the number of shares of Common Stock issuable upon
conversion of the Debentures would be reduced to the extent that the market
price of the Common Stock increases to reflect the decrease in the number of
shares of the Company's Common Stock issued and outstanding after the reverse
split.
Arbitrary Offering Price
The price at which the Units are being offered hereby was arbitrarily
determined by the Company and the Placement Agent based on consideration of a
number of factors. The offering price bears no relationship to any objective
criteria of value and should not be regarded as an indication of future market
price of the Company's securities.
Broad Discretion in Use of Proceeds
The net proceeds from this Private Placement have been generally allocated
by management of the Company for the various uses specified under "USE OF
PROCEEDS." As a result, purchasers of Units in this Offering will be entrusting
their funds to management, who will have broad discretion in determining
specific expenditures of the funds. Accordingly, this uncertainty increases the
risk of an investment in the Company since investors will not have an
opportunity to review and evaluate the specific expenditures which may be made
by the Company. See "USE OF PROCEEDS."
26
Additional Interest Income -- Original Issue Discount
For federal income tax purposes, the issue price of a Unit (in general,
the price paid therefor) must be allocated among the Debenture and the shares of
Common Stock underlying the Warrants (the "Underlying Shares") in proportion to
their respective fair market values. The portion allocated to the Debenture and
the Underlying Shares will become the respective tax basis for each class of
asset. The excess of the face amount of the Debenture over the basis assigned
thereto will constitute original issue discount. The amount of that original
issue discount will be amortized over the life of the Debenture, and will
constitute additional interest income to the investor. Consequently, the
investor will be required to report additional interest income during the period
he holds the Debenture which will be greater that the 10% interest rate payable
on the Debenture. The Company has not at this time determined what the fair
market value of the shares of Common Stock is likely to be, or, as a result, how
much original issue discount will be attributed to the Debentures, although it
will make such determination in connection with its annual information reporting
obligations to the Internal Revenue Service. Each investor is urged to consult
his own tax advisor with respect to the foregoing matters.
Dependence on Key Personnel
The Company believes that its success depends to a significant extent on
the efforts and abilities of certain of its senior management, in particular
those of Xxxxxxx X. Xxxxx, President and Chief Executive Officer; and Xxxxx X.
Xxxx, Vice President in charge of Engineering. The loss of Xx. Xxxxx, or Xx.
Xxxx could have a material adverse affect on the Company's business, prospects,
operating results, and financial condition. The Company does not presently have
key man life insurance policies, but intends to try to obtain such coverage in
the amount of $1,000,000 for Xx. Xxxxx and $500,000 for Xx. Xxxx. There can be
no assurance that such policies will be available to the Company on commercially
reasonably terms, if at all. Additional, the ability of the Company to realize
its business plan could be jeopardized if any of its senior management becomes
incapable of fulfilling his obligations to the Company and a capable successor
is not found on a timely basis. There can however be no assurance that, in such
event, the Company will be able to locate and retain a capable successor to any
member of its senior management.
Dependence on Major Customer
To date the Company has received orders for ten TCS-1 Systems, eight of
which were ordered by Ocean/Ventures III, Inc.("O/V III") of Toms River, New
Jersey ("O/V III") and one of which was ordered by Oceans Tire Recycling &
Processing Co., Inc. ("OTRP"). O/V III and OTRP are New Jersey corporations
affiliated with each other through common control. The loss of either or both of
these two customers would have an adverse effect on the Company. See BUSINESS:
"Dependence on Major Customer".
Control by Present Officers
Xxxxxxx X. Xxxxx, the Company's President and Chief Executive Officer,
owns of record and controls beneficially by way of irrevocable voting proxies
11,619,430 shares of the Company's Common Stock. Xxxxx X. Xxxx owns of record
4,681,191 shares of the Company's Common Stock. Accordingly, Messrs. Xxxxx and
Xxxx collectively control an aggregate of 16,300,621, or 42%, of the currently
issued and outstanding Common Stock of the Company. They are therefore in a
position to substantially influence the election of a majority of the Company's
directors and otherwise control the Company. The Company is not aware of any
other written or oral voting agreements respecting the Company's Common Stock.
27
Experience of Management
Although Management has general business and engineering experience,
potential investors should be aware that no member of management has been
directly involved in administering a tire disintegration, recycling, or tire
disintegration equipment manufacturing, business.
Uncertainty of Product and Technology Development: Technological Factors
The Company has not completed development and testing of the TCS-1 System.
The Company's success will depend upon the TCS-1 System's meeting targeted
performance and cost objectives and its timely introduction into the
marketplace. The Company continues to be required to commit the bulk of its
time, effort, and resources to finalizing the development of the TCS-1 System.
Although the Company anticipates that the development of the TCS-1 System will
be successfully concluded prior to the end of 1997, such an outcome will be
subject to all of the risks inherent in the development of a new product and
technology (including unanticipated delays, expenses, and difficulties, as well
as the possible insufficiency of funding to complete development). There can be
no assurance as to when, or whether, the Company's efforts to complete the
development of the TCS-1 System will be successful. In addition, there can be no
assurance that the TCS-1 System will satisfactorily perform the functions for
which it is designed, that it will meet applicable price or performance
objectives, or that unanticipated technical or other problems will not occur
which would result in increased costs or material delays in development. There
can be no assurance that, despite testing by the Company, problems will not be
encountered in the TCS-1 System after the commencement of commercial manufacture
and sales, resulting in loss or delay in market acceptance.
Protection of Tirex Proprietary Technology and Potential Infringement
The success of the Company's proposed business depends in part upon its
ability to protect its proprietary technology and the proposed TCS-1 System
which will utilize such technology. On December 18, 1996, the Company filed
patent applications with the United States Patent and Trademark Office in the
United States and with the proper authorities in Canada. Because the Company had
previously filed "preliminary patent applications" on December 19, 1995, the
priority date of its definitive patent application is retroactive to such
earlier date. Prior to such filings, the Company relied on trade secrets,
proprietary know-how and technological innovation to develop its technology and
the designs and specifications for the TCS-1 System. Except where the terms of
their employment agreements would make it redundant or, in the sole discretion
of management, it is determined that because of the non-technical nature of
their duties, such agreements are not necessary or appropriate, the Company has,
and will continue to, enter into confidentiality and invention assignment
agreements with all employees and consultants which limit access to, and
disclosure or use of, the Company's proprietary technology. There can be no
assurance, however, that the steps taken by the Company to deter
misappropriation or third party development of its technology and/or processes
will be adequate, that others will not independently develop similar technology
and/or processes or that secrecy will not be breached. In addition, although the
Company believes that its technology has been independently developed and does
not infringe on the proprietary rights of others, there can be no assurance that
the Company's technology does not and will not so infringe or that third parties
will not assert infringement claims against the Company in the future. Moreover,
there can be no assurance that the Company will be granted a patent pursuant to
its application or, that if a patent is granted, the Company will have the
resources to defend it by bringing patent infringement or other proprietary
rights actions.
28
Limited Public Market
To date there has been only a limited and sporadic public market for the
Company's Common Stock. There can be no assurance that an active and reliable
public market will develop or, if developed, that such market will be sustained.
Purchasers of the securities offered hereby may, therefore, have difficulty in
selling the shares of Common Stock issuable upon the conversion of the
Debentures or the exercise of the Warrants. As a result, investors may find it
impossible to liquidate their investment in the Company should they desire to do
so. The Company's Common stock is currently traded in the over-the-counter
market and quoted on the NASD Over-the-Counter Electronic Bulletin Board. The
Company expects to apply for inclusion in NASDAQ. As at the date hereof,
however, the Company is not eligible for inclusion in NASDAQ or for listing on
any national stock exchange. All companies applying and authorized for listing
with NASDAQ are required to have not less than $4,000,000 in total assets and
$2,000,000 in capital and surplus. Unless the Company is able to increase its
net worth substantially, either through the accumulation of surplus out of
earned income or successful capital raising financing activities, it will never
be able to meet the eligibility requirements of NASDAQ. In order to qualify for
listing on a national stock exchange similar minimum criteria respecting, among
other things, the Company's net worth and/or income from operation must be met.
Accordingly, market transactions in the Company's common stock are subject to
the "Xxxxx Stock Rules" of the Securities and Exchange Act of 1934, which are
discussed in more detail, below, under "Applicability of Xxxxx Stock Rules to
Broker-Dealer Sales of Company Common Stock". These rules could make it
difficult to trade the Common Stock of the Company because compliance with them
can delay and/or preclude certain trading transactions. This could have an
adverse effect on the ability of an investor to sell any shares of the Company's
Common Stock, issuable upon the exercise of the Warrants or the conversion of
the Debentures purchased hereunder, as well as on the price obtainable for such
shares of Common Stock.
Applicability of "Xxxxx Stock Rules" to Broker-Dealer Sales of Company Common
Stock
The Securities and Exchange Commission has adopted special regulations
(referred to herein as the "Xxxxx Stock Rules") which define a security that has
a market price of less than $5 and is not listed on a national stock exchange or
quoted on NASDAQ as a "Xxxxx Stock". These regulations subject all broker-dealer
transactions involving such securities to the special Xxxxx Stock Rules set
forth in Rule 15g- 9 of the Securities Exchange Act of 1934 (the "34 Act"). It
may be necessary for the Selling Shareholders to utilize the services of
broker-dealers who are members of the NASD. The current market price of the
Company's Common Stock is substantially less than $5 per share and such stock
can, for at least for the foreseeable future, be expected to continue to trade
in the over-the-counter market at a per share market price of less than $5 (see
"Price Range of Securities"). Accordingly, any broker-dealer sales of the shares
being offered hereunder, as well as any subsequent market transactions in the
Company's Common Stock, will be subject to the Xxxxx Stock Rules. These Rules
affect the ability of broker-dealers to sell the Company's securities and also
may affect the ability of purchasers in this offering to sell their shares in
the secondary market, if such a market should ever develop.
The Xxxxx Stock Rules also impose special sales practice requirements on
broker-dealers who sell such securities to persons other than their established
customers or "Accredited Investors." Among other things, the Xxxxx Stock Rules
require that a broker-dealer make a special suitability determination respecting
the purchaser and receive the purchaser's written agreement to the transaction
prior to the sale. In addition, the Xxxxx Stock Rules require that a
broker-dealer deliver, prior to any transaction, a disclosure schedule prepared
in accordance with the requirements of the Commission relating to the xxxxx
stock market. Disclosure also has to be made about commissions payable to both
the broker-dealer and the registered representative and the current quotations
for the securities. Finally, monthly statements have to be sent to any holder of
such xxxxx stocks disclosing recent price information for the xxxxx stock
29
held in the account and information on the limited market in xxxxx stocks.
Accordingly, for so long as the Xxxxx Stock Rules are applicable to the
Company's Common Stock, it will be difficult to trade such stock because
compliance with such Rules can delay and/or preclude certain trading
transactions. This could have an adverse effect on the liquidity and/or price of
the Company's Common Stock.
Regulatory and Environmental Considerations
The Company does not expect that its equipment manufacturing operations
will be subject to any unusual or burdensome governmental regulations. However,
the Company is currently making preparations to enter into a five-year tire
shredding project in Quebec (see "Proposed Tire Shredding Operations"). These
operations and the businesses of the Company's customers may involve, to varying
degrees and for varying periods of time, the storage or "stockpiling" of scrap
tires which, with their size, volume and composition, can pose a particularly
serious environmental problem. Among the numerous problems relating to
stockpiling scrap tires, is the fact that when stockpiled above ground, tires
create serious fire, public health, and environmental hazards ranging from
fires, which generate large and dense clouds of black smoke and are extremely
difficult to extinguish, to the creation of vast breeding grounds for mosquitoes
and vermin. As a result, many states have either passed or have pending
legislation regarding discarded tires including legislation limiting the storage
of used tires to specifically designated areas. For reasons including, but not
limited to the problems described above, the Company and the purchasers of its
TCS-1 Systems will 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. Compliance with applicable
environmental and other laws and regulations governing the business of the
Company may impose a financial burden upon the Company that could adversely
affect its business, financial condition, prospects, and results of operations.
Likewise, the burden of compliance with laws and regulations governing the
installation and/or operation of TCS-1 Systems could discourage potential
customers from purchasing a TCS-1 System which would adversely affect the
Company's business, prospects, results, and financial condition. Actions by
federal, state, and local governments concerning environmental or other matters
could result in regulations that could increase the cost of producing the
recyclable rubber, steel, and fiber which are the by-products from the operation
of the TCS-1 System and make such by-products less profitable or even impossible
to sell at an economically feasible price level.
The Company believes that it will be able to operate in compliance with
such regulations. In this regard, it has retained environmental attorneys in
Montreal to advise it with respect to compliance with local environmental
regulations applicable to its proposed tire shredding operations. It has also
engaged a consultant to advise purchasers of its TCS-1 Systems with respect to
compliance with local environmental regulations applicable to the installation
and operation of the TCS-1 System. To date, the Company has not had to make
significant capital expenditures relating to environmental compliance because it
has not yet commenced operations. However, the inception of equipment
manufacturing and, possibly, tire shredding operations together with continually
changing compliance standards and technology, may affect the Company's future
capital expenditure requirements relating to environmental compliance. See
BUSINESS.
Production and Supply
The Company intends to begin manufacturing the TCS-1 System on a
commercial basis within the current fiscal year. The Company will be dependent
on arrangements with its subcontractors for the manufacture and assembly of the
principal components incorporated into the TCS-1 System (see BUSINESS
"Agreements With Subcontractors", below). It will therefore be substantially
dependent on the
30
ability of such subcontractors to satisfy performance and quality specifications
and to dedicate sufficient production capacity for all TCS-1 System scheduled
delivery dates. The Company believes that all of its subcontractors have the
requisite manufacturing capabilities and the willingness to dedicate sufficient
amounts of their manufacturing capacity to allow the Company to meet all TCS-1
System delivery dates, currently scheduled or expected to be scheduled within
the next two years. However, no assurance can be given that this will in fact be
the case and failure on the part of the Company's subcontractors in these
regards would adversely affect the Company's ability to manufacture and deliver
TCS-1 Systems on a timely and competitive basis. In such event the Company would
have to replace or supplement its present subcontractors. There can be no
assurance that should it be necessary to do so, the Company would be able to
find capable replacements for its subcontractors on a timely basis and on terms
beneficial to the Company, if at all; The Company's inability to do so would
have a material adverse effect on its business (see BUSINESS: "Production and
Supply").
Components of the TCS-1 Systems, which are not manufactured by the
Company's subcontractors specifically for the TCS-1 System, will be purchased,
either directly by the Company or indirectly through its subcontractors from
third-party manufacturers. The Company believes that numerous alternative
sources of supply for all such components are readily available.
Technological Changes
To date, the market for tire disintegration equipment has not, to the best
of management's knowledge, been characterized by rapid changes in technology.
However, there can be no assurance that new products or technologies, presently
unknown to the Company, will not, at any time in the future and without warning,
render the Company's tire disintegration technology less competitive or even
obsolete. Moreover, the technology upon which the Company's tire disintegration
system is based, could be susceptible to being analyzed and reconstructed by an
existing or potential competitor. Although the Company has filed a patent
application respecting its proprietary disintegration system, there cannot, at
this time be any guarantee that a patent will, in fact, be granted pursuant to
such application. Moreover, even in the event that the Company is granted a
patent, the Company may not have the financial resources to successfully defend
such patent by bringing patent infringement suits against parties that have
substantially greater resources than are available to the Company. The Company
must continue to create innovative new products reflecting technological changes
in design, engineering, and development, not only of new tire disintegration
machinery, but of products, and machinery capable of producing products, which
incorporate and recycle the rubber, steel, and/or fiber by-products which will
be produced by the operation of the TCS-1 System. Failure to do so, could
prevent to Company from gaining and maintaining a significant market for its
products. This may require a continuing high level of product development,
innovation, and expenditures. To the extent that the Company does not respond
adequately to such technological advances, its products may become obsolete and
its growth and profitability may be adversely affected.
Competition
Although management believes that the Tirex Technology has distinct
advantages over other existing tire disintegration methods, the Company will
face competition from other equipment manufacturers, virtually all of whom will
be larger than the Company, and will have substantially more assets and
resources than the Company has. Management intends to meet such competition by
developing technological innovations which will make the TCS-1 System more
economical and efficient than other tire disintegration methods. To do so, the
Company will have to raise sufficient funding to complete and continue its
development program and to employ highly qualified personnel. There cannot
31
however be any assurance that the Company will be able to raise the capital
necessary to enable it to do so or that it will be able to locate or retain such
personnel.
No Dividends and None Anticipated
The Company has not paid any cash dividends, nor does it contemplate or
anticipate paying any dividends upon its Common Stock in the foreseeable future.
Shares Available for Resale
Excluding any options that could be exercised, there were 38,774,625
shares of the Company's Common Stock issued and outstanding as of the date of
this Memorandum. 15,948,127 shares of such shares are "restricted securities"
within the meaning of Rule 144 of the Securities Act ("Rule 144") and thus may
be sold only in compliance with an exemption from registration under the
Securities Act or pursuant to a registration statement under the Securities Act.
All of such shares will become eligible for resale under Rule 144 between the
date hereof and July 18, 1998. A sale of shares by shareholders, whether
pursuant to Rule 144 or otherwise, may have a depressing effect upon the market
price of the Common Stock.
Authorization of Preferred Stock
The Company's Amended Certificate of Incorporation authorizes the issuance
of "open" stock with such designations, rights and preferences as may be
determined from time to time by the Board of Directors. Accordingly, the Board
of Directors is empowered, without shareholder approval, to designate and issue
the "open" stock as preferred stock with dividend, liquidation, conversion,
voting or other rights which could adversely affect the voting power or other
rights of the holders of the Company's Convertible Debentures, Warrants, and
Common Stock. Also, the voting power and percentage of stock ownership of the
shareholders of the Company's outstanding capital stock can be substantially
diluted by such preferred stock issuance. In addition, the issuance of such
preferred stock may have the effect of rendering more difficult or discouraging
an acquisition of the Company or changes in control of the Company. The Company
does not have any provisions in its Certificate of Incorporation which would
have an anti-takeover effect. However, certain provisions in the employment
agreements of certain of the Company's officers could have such effect.
Moreover, the Company may adopt anti-takeover measures in the future. Such
measures could include, but may not necessarily be limited to, the issuance of
preferred stock with anti-takeover provisions to discourage bidders from making
offers at a premium to the market price. In addition, the mere existence of an
anti-takeover device could have a depressive effect on the market price of the
Company's Common Stock.
Affiliated Persons To Be Paid Out Of Offering Proceeds
The Company does not intend to spend any of the proceeds from this
offering or from the RPM Offering on payments to affiliates unless the maximum
proceeds from both offerings are received (see "USE OF PROCEEDS", above). In
such event, the Company has budgeted $134,000 from the Maximum Combined Proceeds
for salaries to Affiliates. However, the following should be noted: The Company
intends to expend all of the proceeds from this Private Placement and from the
RPM Offering during the six months following the closing thereof. Because of its
limited financial resources, the Company has met, and during the period
preceding the Proposed Public Offering the Company may continue to meet, a
substantial portion of its salary obligations to its executive officers and its
in-house corporate counsel by issuing to them unregistered shares of its Common
Stock at a 50% discount from the average market price
32
of the stock during the period when such unpaid salaries were earned. The
Company has entered into employment agreements with its four executive officers
which call for annual salaries in the approximate aggregate amount of $515,000.
If all of the following factors occur: (i) the Company spends all of the
proceeds from this Private Placement within six months; (ii) during such
six-month period, the Company receives no cash resources other than the proceeds
from this Private Placement; and (iii) the Company discontinues its established
practice of paying part of its executives' salaries in stock instead of cash and
pays 100% of its salary obligations in cash, then the Company could expend up to
$257,500 on salaries to affiliates. If this entire amount was taken from the
Combined Maximum Proceeds, it would constitute approximately 192% thereof. As
noted above, if the Maximum Combined Proceeds are raised, the Company's present
budget allocates a total of $134,000 to salaries to affiliates. Such amount
would constitute less than 10% of the Maximum Combined Proceeds. For further
details respecting the Company's compensation of its executive officers,
reference is made to ITEM 10. "EXECUTIVE COMPENSATION" of the Company's annual
report on Form 10-K for the fiscal year ended June 30, 1997, enclosed as an
exhibit hereto.
--------------------------------------------------------------------------------
PRICE RANGE OF SECURITIES
--------------------------------------------------------------------------------
The Company's Common Stock, is traded on a limited basis in the
over-the-counter market and quoted on the NASD's OTC Electronic Bulletin Board
(the "OTC Bulletin Board"). The following table sets forth representative high
and low bid prices by calendar quarters as reported by the NASD's OTC Electronic
Bulletin Board System (the "OTC Bulletin Board") during the last two fiscal
years and the subsequent interim period through October 20, 1997. 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, xxxx-down, or other fees or commissions, and may not
necessarily represent actual transactions. The shares of Common Stock underlying
the Warrants and issuable upon conversion of the Debentures are subject to
restrictions on transferability.
Bid Prices
Period Common Stock
------ ------------
Low High
--- ----
Fiscal Year Ended June 30, 1996
September 30, 1995 0.125 0.75
December 31, 1995 0.125 0.375
March 31, 1996 0.125 0.28
June 30, 1996 0.10 0.56
Fiscal Year Ended June 30, 1997
September 30, 1996 0.19 0.45
December 31, 1996 0.13 0.44
March 31, 1997 0.23 0.58
June 30, 1997 0.18 0.44
Fiscal Year Ending June 30, 1998
October 20, 1997 0.13 0.46
33
--------------------------------------------------------------------------------
SHAREHOLDERS AND DIVIDENDS
--------------------------------------------------------------------------------
Shareholders
As of September 25, 1997, the number of holders of record of the Common
Stock, $.001 par value, of the Company was 311.
Dividends
The Company has paid no cash dividends and has no present plan to pay cash
dividends in the foreseeable future, intending instead to reinvest its earnings,
if any. Payment of future cash dividends will be determined from time to time by
the 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.
--------------------------------------------------------------------------------
BUSINESS
--------------------------------------------------------------------------------
History
The Tirex Corporation (hereinafter, the "Company" or "Tirex") was
incorporated in Delaware on August 19, 1987 under the name "Concord Enterprises,
Inc." Its name was changed to "Stopwatch Inc." on June 20, 1989(1) and to the
"Tirex America Inc." on March 10, 1993. On July 11, 1997, in order to encompass
the current and projected international scope of its operations, the Company's
name was changed to "The Tirex Corporation". The Company, directly and through
its subsidiary "Tirex Canada Inc.",(2) is presently engaged in the business of
developing, manufacturing, selling, and leasing a cryogenic tire disintegration
system (the "TCS-1 System") which integrates proprietary disintegration
technology with established conventional mechanical and technologies. It is also
currently conducting negotiations with C.G. Tire, Inc., a wholly-owned
subsidiary of Continental General Tire Inc., respecting a five-year tire
shredding project for the province of Quebec. In addition, the Company is
exploring, with the Montreal operation of Solutia Inc. (a successor to part of
the business of Monsanto Canada Inc.), the feasibility of
----------
(1) For a discussion of the merger with Stopwatch, the healthcare business
which was intended, but was never commenced, by Stopwatch, and the reasons
for the termination of the Stopwatch business plan, reference is made to
Item 1 of Registrant's annual report on Form 10-K for the fiscal year
ended December 31, 1988, its transition report on Form 10-K for the
transition period ended June 30, 1989, and its annual report on Form
10-KSB for the fiscal year ended June 30, 1995.
(2) Unless context necessarily requires otherwise, references hereinafter to
the "Company" refer to The Tirex Corporation and its subsidiary, Canadian
Corporation 3143619 (known and doing business as "Tirex Canada Inc."),
collectively.
34
expanding the Company's operations to include thermoplastic/rubber compounding
operations at the former Monsanto Montreal facility.
The Company acquired its proprietary tire disintegration technology (the
"Tirex Technology") in the fall of 1992(3). Since the beginning of 1993, it has
devoted the bulk of its efforts to completing the design and development, and
commencing the manufacture, of the TCS-1 System and raising the financing
required for such project. In August of 1995, the Company moved its corporate
headquarters to Quebec and formed its subsidiary, 3143619 Canada Inc. (known and
doing business, and hereinafter referred to, as "Tirex Canada Inc.").
Construction of the first full scale prototype of the TCS-1 began in February of
1997 and is expected to be completed by the end of November 1997. The Company
began taking orders on the TCS-1 System in October of 1995 and, to date, has
received deposits of $25,000 each on five Systems. The Company has located and
entered into written and oral agreements with various engineering and
manufacturing subcontractors and component suppliers, which Management believes
will supply it with sufficient production capacity to meet all current and
projected orders, on a timely basis, commencing upon satisfactory completion of
testing operations of the initial TCS-1 System (see "Products and Services"
below).
The Scrap Tire Disposal Business
Overview
If both this Private Placement and the RPM Offering are successfully
completed, the Company expects to complete the construction, and initiate
testing, the first production model of its proprietary cryogenic scrap tire
disintegration system (the "TCS-1 System") before the end of 1997. It intends
immediately thereafter to initiate full scale marketing and manufacturing
operations. The TCS-1 System comprises a complete, turn-key, environmentally
safe, cryogenic tire disintegration system designed to: (i) disintegrate scrap
tires, using substantially 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 for at least a portion of the process, but which still rely on
chopping and/or shredding the tire), and (ii) produce commercially exploitable,
high quality, clean rubber crumb and unshredded steel and fiber.
Scrap Tire Disposal Problems and Development of New Uses for Scrap Tires
The Company's management believes that there is a need to find
alternatives to conventional methods for disposing of the vast amounts of solid
waste which are continually being dumped into fast disappearing land-fill space
or burnt in incinerators. Even though scrap tires represent only about 1.2% of
the total tonnage of solid waste annually produced in North America, the
disposal of scrap tire can pose serious environmental problem. Among the
numerous problems relating to landfilling or stockpiling scrap tires, is the
fact that whole tires cannot be successfully buried in landfills because the
combination of their size, configuration, and weight causes buried tires
eventually to work their way up to the surface. Moreover, when stockpiled above
ground, tires can create serious fire, public health, and environmental
----------
(3) For discussions in detail of the Company's acquisition of the Tirex
Technology and the associated corporate and management changes which took
place between the autumn of 1992 and January of 1995, reference is made to
the discussions thereof included in Item I of the Company's annual reports
of Forms 10-KSB for the fiscal years ended June 30, 1995 and June 30,
1996.
35
hazards ranging from dump fires which generate large and dense clouds of black
smoke and are very difficult to extinguish, to the creation of vast breeding
grounds for mosquitoes and vermin. According to the Scrap Tire Management
Council ("STMC") "Scrap Tire Use/Disposal Study - 1996 Update", current
estimates for scrap tire stockpiles run from approximately 700 million to 800
million, which would correspond to a tire-to person ratio in the United States
of America between 2.5 and 3.0.
As a result, many states have either passed or have pending legislation
regarding discarded tires, including legislation limiting the dumping of used
tires to specifically designated areas. Also in recognition of the serious
environmental problems created by discarded tires, there has been a shift from
the dumping or landfilling of waste tires to development of various market
applications. According to the STMC, there are currently three major markets for
scrap tires:
(a) using scrap tires as "tire derived fuel" or "TDF" which comprises
burning the tires, either whole or after reduction to approximately
two inch chips;
(b) exporting scrap tires for refitting and re-use as tires; and
(c) disintegrating scrap tires into their components (rubber, steel
wire, and fiber) and recycling the salvageable steel and rubber into
new products;
The STMC 1996 update report indicated that the largest use presently being
made of scrap tires is burning them as tire derived fuel. From 1994 to 1996,
this usage grew 50% to 152 million tires burned in 1996. The second largest use
of scrap tires was exporting them (15 million in 1996). But, while ground rubber
represented only the third largest use of scrap tires, the STMC study indicated
that this area enjoyed "the biggest surge" with an increase of "177% over 1994".
As a result, approximately 190 pounds of crumb rubber were produced in 1996 (vs.
69 million pounds in 1994) In addition, 210 million pounds of tire buffings (a
by-product from the retreading industry were also processed for an overall
market demand for size reduced rubber (crumb rubber and buffings) of around 400
million pounds at the end of 1996. A more detailed discussion is included.
The Company believes that modern waste disposal problems combined with the
considerable depletion of natural, non-renewable resources, such as raw material
used for tire manufacture, the decreasing availability of many cultivated raw
materials, and the resulting increases in the costs thereof, will make the
recycling of waste products such as used tires into reusable raw materials a
critical imperative for society and for the economy. The Company also believes,
however, that because present market conditions demonstrate that the capital and
operating costs of currently available tire recycling systems are high, and,
because of the inefficiency of the technologies being used, the by-products
therefrom, expensive to produce, that tire recycling will not be an economically
viable industry until such problems are addressed. The Company believes that the
TCS-1 System will successfully address these problems. The TCS-1 System has been
designed not only to cost less in terms of initial capital outlay required, but
to cut maintenance, operating, and energy costs drastically and to significantly
increase the quantity and quality of the by-products yielded by the recycling
process.
The Company believes that the advent of a greater and more dependable
supply of high quality rubber crumb could contribute to and encourage the
continuance of the kind of huge growth in the market for rubber crumb which is
currently occurring. Should the TCS-1 System be developed by the Company, the
Company hopes to participate in such market. (See "Potential Markets" below).
36
Products and Services
Proposed Product
The TCS-1 System
The TCS-1 System comprises a complete, turn-key, environmentally safe,
cryogenic tire disintegration system which incorporates proprietary
disintegration and cryogenic technology with established conventional mechanical
and technological techniques. While the TCS-1 System is still in the research
and development stage, substantial progress has been made during and since the
end of the fiscal year ended June 30, 1997 with initial engineering design and
development nearing completion. Construction of the first full scale production
model began in February of 1997 and is expected to be completed by the end of
1997. A three to six month test phase is scheduled to begin immediately upon
completion of such production model for the purpose of optimizing the
performance of the System and eliminating any problems which may arise under
operating conditions. This will also allow the Company to definitively test the
limits of the System's production capabilities.
The TCS-1 System is designed to: (i) disintegrate scrap tires, using
substantially 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 for at least a portion of the process, but which still rely on
chopping and/or shredding the tire), and (ii) produce commercially exploitable,
high quality, clean rubber crumb and unshredded steel and fiber.
The principle features of the TCS-1 System which management believes make
it superior to other existing tire recycling systems on the market today
include:
* A cooling process which management believes will substantially
reduce the cost of refrigerants.
* A multiple stage tire disintegration unit which: (i) will not
subject the tire to shredding or hammer-milling operations; (ii)
will be environmentally safe; and (iii) is capable of yielding
rubber powder in a wide range of particle size, a capability which
Management believes will enable it to meet a variety of market
demands.
* The ability to produce steel, fiber cord, and rubber powder with
only insignificant intermingling.
* Highly efficient utilization of energy resulting in low energy
requirements and usage (more than 90% of the cold air generated will
be used to cool the tires).
* Low capital cost.
* Low maintenance requirements.
37
Construction and Design of the TCS-1 System
The functions and mechanisms of the proposed TCS-1 System have been
designed for the exclusive purpose of disintegrating automobile and truck tires,
which basically consist of the following elements:
* Two types of rubber. The sidewalls of tires are constructed of
material containing a higher percentage of natural, as opposed to
synthetic, rubber which is used in the treads. Management believes
that natural rubber, which is more flexible than synthetic rubber,
is capable of being reused in a significantly wider range of
products than is synthetic rubber. The TCS-1 System has been
designed to take advantage of these differences to produce a
separate rubber powder reclaimed exclusively from the sidewalls.
Management believes that such "sidewall" rubber powder will have a
higher market value than rubber produced today from a mixture of
tread and sidewall rubber.
* 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;
* Steel belting, which incorporates a thin layer of steel wires laid
out in a "xxxxxxx bone" pattern and which underlies the entire
surface of the tread area, and
* Fiber threads which are incorporated into the rubber used throughout
the tire.
The TCS-1 System will comprise four main sections consisting of
separation, cryogenic, disintegration, and product handling systems. An internal
computer will monitor all essential wear points as well as certain other aspects
of the System.
The principal feature of the TCS-1 System will be the Company's
proprietary, non-shredding disintegration mechanism which will, under cryogenic
conditions, disintegrate used tires into: (i) two types of rubber powder (rubber
from the sidewalls of the tire will be processed separately from the tread
rubber); (ii) steel wire sections; and (iii) fiber cord sections. The steel and
fiber yielded by the System will normally contain insignificant amounts of
rubber.
The basic components of the TCS-1 System will include:
(a) a tire preparation assembly which will remove the steel beads, clean
the tires, separate sidewalls from the tread, and cut both treads
and sidewalls;
(b) a refrigeration unit, approximately eight feet wide, sixteen feet
high, and 40 feet long;
(c) a completely enclosed cryogenic tire disintegration unit
approximately 20 feet wide, 16 feet high and 40 feet long;
(d) two freezing xxxxxxxx, each ten feet wide, twenty feet high, and
twelve feet long;
(e) a fiber baler used to bundle fibers into xxxxx with steel bonds; and
(f) miscellaneous conveyors and fiber separation equipment
38
In April of 1997, the Company replaced its original, one-quarter scale
model with a new, larger sized (1/2 scale) working prototype of the TCS-1
System's proprietary disintegration unit. This scale model disintegration
mechanism will be used to run test operations to discover, identify, and cure
any problems which may arise, as well as to test the limits of the System's
productive capacity, under operating conditions. This will enable the Company's
engineering team to design and develop, under operating conditions, the
components of the disintegration mechanism for the full-scale production model
of the TCS- 1 System, which is presently under construction. The scale model
disintegration mechanism is also being used to produce rubber crumb for the
purpose of testing the nature, quality, and potential marketability thereof.
The foregoing production schedule may not be met unless the Company
completes and closes a Private Placement of its securities in an amount of not
less than $700,000. Any failure or delay in the Company's ability to obtain such
financing will be directly reflected in a commensurate delay or failure in the
completion of the construction, and the commencement of the testing, of the
production model.
Economy of Operation
The TCS-1 System has been designed to substantially reduce the amount of
energy and equipment maintenance required to disintegrate tires, to increase the
ease and efficiency of separating the steel, rubber, and fiber components of
tires, and to produce what Management believes will be more saleable and more
highly valued by-products than are produced by other systems currently
available. Test operations indicate that the cost of disintegrating a tire using
the TCS-1 System will be about $.50 as compared with current tire disintegration
costs, using other technologies, of up to $2.00 per tire. Additionally all of
the end products which the TCS-1 System is designed to yield are expected to be
saleable
The TCS-1 System has been designed to operate continuously (with minimum
amounts of downtime for maintenance), and to consume approximately 650
horsepower operating at 460 volts, and is designed to require substantially less
energy than is used by presently existing equipment. TCS-1 System will be able
to process both automobile and truck tires in quantities equivalent to 180
automobile tires per hour, or 1,000,000 automobile tires per year.
Projected Functions, Operations, and Capabilities
The following discussion of the functions, operations, and capabilities of
the TCS-1 System are based upon engineering design plans and specifications and
test operations of: (i) the 1/2 scale prototype disintegration mechanism; (ii)
the automated front-end system; and (iii) various other components of the System
which have already been completed and tested separately. This discussion also
assumes that the System, when complete and fully integrated, will function as
planned, of which there can be no assurance. However, because the TCS-1 System
is still in the development stage, the Company cannot, as at the date hereof,
guaranty how long after the completion of the first full-scale production model,
if ever, the System will perform fully in accordance with Management's
expectations.
39
Step-by-Step Operations
The projected step-by step operations of the TCS-1 System will encompass
the following:
(a) The two sidewalls will be cut off and the tread will be cut into
lengths of about one foot. (The sidewalls will be kept separate from
the tread sections throughout the process).
(b) The two steel beads which are contained within each tire will be
pulled out;
(c) Sidewall and tread sections will automatically be placed onto
separate conveying systems which will then feed them into the TCS-1
System's freezing xxxxxxxx through separate air locks. The
temperature of the air within the freezing xxxxxxxx will be kept at
approximately 170 degrees below zero by constant recirculation
through a refrigeration unit. The sidewall and tread sections will
remain within the freezing xxxxxxxx until they are cooled to a point
between 90 and 100 degrees below zero (fahrenheit).
(d) The frozen sections will then pass through proprietary
disintegrators where the sidewall and tread rubber will be reduced
to two separate coarse powders. This operation will not involve any
chopping, shredding, or hammer-milling. Therefore, the steel wires
will not be cut or broken. Furthermore, although the fiber threads
may be broken into shorter lengths, they will still retain their
basic shapes and characteristics. No steel powder or fiber fluff
will be produced.
(e) The steel wires will be magnetically removed from the rubber
powders.
(f) The fiber and rubber powder will be passed through screens to
separate the powder from the fiber threads. The fiber threads will
then be conveyed out of the machine to a fiber baler.
(g) The rubber powders will then be conveyed out of the TCS-1 System.
(h) 100% of the rubber powders yielded by the TCS-1 System will pass
through a ten mesh screen. Supplementary grinders will be supplied
for customers desiring finer powders which can pass through 40 mesh
or 80 mesh screens.
Comparison of the Projected TCS-1 System
With Other, Existing Tire Recycling Equipment
There are two types of tire disintegration processes in use today which
produce rubber powder, normally referred to as "crumb": (i) cryogenic systems
and (ii) "ambient" systems. Management believes that the TCS-1 System will have
the distinct advantages over existing systems, as set forth in the comparisons
below. All references to "existing conventional cryogenic and ambient systems"
are to technologies which are widely available and known throughout the
industry. Such technologies include all mechanical, commercially feasible tire
disintegration systems of which the Company has knowledge. There can be no
assurance however that one or more new technologies, or improvements to existing
technologies, presently unknown to management, has not, or in the near future,
will not, become available. While it is conceivable that new technological
breakthroughs could provide benefits and advantages equal to or exceeding those
of the projected TCS-1 System, at this time, the Company is not aware of any
such tire disintegration system or technology.
40
Existing Conventional
Cryogenic and Ambient
Systems
Methods
Except for a small number of recyclers who remove the steel beads first, most
conventional cryogenic and ambient systems used today to produce rubber crumb,
feed whole tires into chopping, shredding, grinding, or pulverizing mechanisms,
or a combination of any two or more of such mechanisms. Because the entire tire
is subject to these operations, the steel which makes up the beads as well as
the steel wires embedded in the belting and the fiber components of the tire are
also chopped, shredded, and ground. In both conventional cryogenic and ambient
systems, this initial chopping and shredding is effected at ambient temperatures
(normal climatic conditions). Tires, however, are designed to be tough and
durable at these temperatures. The difficulty in chopping or shredding the tires
at these temperatures is compounded by the fact that all of the steel in the
tire is also being chopped and shredded.
Equipment, Energy and
Maintenance Requirements
Because of the toughness of rubber at ambient temperatures and the fact that
steel, as well as the rubber and fiber, are being chopped or shredded, very
large and powerful equipment and the application of substantial amounts of
energy are required to tear tires apart using conventional cryogenic or ambient
systems. Moreover, since tires are so tough and durable, they have to be
shredded in stages. The stages typically include: (i) initial shredding to
reduce the tire to strips of about 2 x 6 inches; (ii) a second shredding to
reduce such strips to pieces approximately 1 x 2 inches in size; (iii) a third
stage which further reduces the material to pieces of approximately 1/8 to 1/2
inches in size; and a fourth shredding operation which yields a coarse powder.
The foregoing shredding operations will consume a total of approximately one
thousand horsepower or more. Because of the foregoing requirements, the
machinery which
Projected
TCS-1
System
Methods
The projected TCS-1 System will be designed to remove and salvage the steel
beads of the tire before any other operation is commenced. Disintegration of the
tire will be accomplished solely by the exertion of pressure, in a proprietary
manner, on frozen rubber. This disintegration process will take place only after
the tire sections have been cooled to a temperature between 90 and 100 degrees
below zero, fahrenheit, at which point the material will take on a glass-like
brittleness. At no point in the process will the steel or fiber components be
subjected to any chopping, shredding, grinding, or pulverizing procedures which
would destroy the basic integrity of their respective wire-like and cord-like
configurations.
Equipment, Energy and
Maintenance Requirements
The projected TCS-1 System is designed to remove the steel beads from the tires
before any disintegration process commences. Additionally, the rubber will be in
an extremely brittle and easy to break condition during the disintegration
process. Therefore, the equipment required to break down the tires will be
considerably smaller and lighter, and the energy requirements will be
drastically lower than those required by conventional cryogenic or ambient
systems in use today. The TCS-1 System will be comparatively light in terms of
bulk and weight. Moreover, the TCS-1 System will have no shredding or chopping
surfaces that would require continuous sharpening and repairing. This will
result in an additional significant reduction in maintenance expenses.
41
is used to construct conventional cryogenic or ambient systems has more bulk
than the TCS-1 System. Moreover, there is great wear and tear on the cutting
edges of the chopping and shredding mechanisms which causes the cutting edge to
require constant maintenance, repair, and blade replacement.
Cooling Techniques
As discussed below, conventional cryogenic systems use liquid nitrogen to cool
the rubber before subjecting it to knife or hammer-mill operations. Liquid
nitrogen is an expensive coolant and none of the systems with which Management
is acquainted make any attempt to recycle any of the cold energy generated
thereby.
Costs and Expenses
As a result of the foregoing, initial capital outlays for the equipment and
continuing energy and maintenance costs are high.
Problems Associated With Tire Disintegration
Methods In Current Use.
The initial operations described above will chop or shred a complete tire until
it is reduced to chips ranging in size from about 2 x 2 inches to 2 x 6 inches.
These chips can be used as "TDF" (tire derived fuel") and possibly as fill to
assist drainage. Unless destined for these limited uses, the chips are normally
then fed into a second shredder which reduces them to 1 x 1 inch or 1 x 2 inch
pieces. They are then fed into a knife or hammer-mill where they are reduced to
rubber "crumb" consisting of particles of rubber, approximately 1/8 to 1/2 inch
in size. At this point, some of the steel will have been broken into small
pieces of wire, free of rubber, but
Cooling Techniques
The TCS-1 System will be designed to use mechanical refrigeration to cool the
tires to the required temperatures. Mechanical refrigeration is normally less
expensive to use than liquid nitrogen and the Company expects this to further
reduce operating costs. Moreover, unlike conventional cryogenic systems which do
not attempt to recover the cold energy from the rubber powder, the TCS-1 System
has been designed to use 90% of the available cold energy to reduce the
temperature of tires entering the system. A specialized cooling chamber makes
this possible.
Costs and Expenses
The foregoing is expected to result in significantly smaller initial capital
requirements and drastically lower continuing energy and maintenance costs.
Avoidance of Problems Associated With Tire
Disintegration Methods in Current Use.
The proposed TCS-1 System has been designed to avoid the problems described
opposite which arise out of current tire disintegration methods by insuring that
the steel and fiber components of the tire are not subjected, at any time, to
chopping, shredding, or hammer or knife-milling operations which destroy the
integrity of the wire or cord-like configurations of the steel and fiber. This
is expected to prevent the creation of steel powder and fiber fluff.
Disintegration will be accomplished solely through the exertion of pressure. The
TCS-1 System disintegration process is not expected to break the steel wires or
to affect their integrity in any way. Based
42
much of the steel will remain embedded in the rubber pieces. In addition, since
the fiber will have been subject to the chopping, shredding, and/or pulverizing
operations, much of it will have been broken, and its thread or cord-like
configuration destroyed. The broken, pulverized fibers will have formed a
"fluff" which entraps and holds both rubber and steel particles.
In order for this crumb to be useable, the steel will have to be separated and
removed. The use of strong magnets removes the free steel pieces, but such
magnets also remove all of the rubber particles in which the rest of the steel
is embedded, resulting in a loss of up to 15% of the rubber.
To avoid losing the substantial amounts of steel-bearing rubber which were
magnetically removed, and to obtain a finer crumb (the coarse crumb has very few
uses), the crumb must be subjected to a second re-grinding, which may or may not
be cryogenic. This is normally done in a knife mill capable of disintegrating
the crumb into smaller particles or in a hammer-mill.
In using a hammer or knife-mill for this operation, however, the following
problems arise: (i) running at an efficient speed, the fiber fluff (which is
contained in the rubber crumb) may clog the mechanism; and (ii) the action of
the hammer or knife-mill will heat the rubber to the point where it will become
so soft that instead of being pulverized into a powder, it will simply be
softened and mashed and thereby will further clog the mechanism.
To avoid these problems, the hammer or knife-milling operations can be conducted
at low feed rates, which will reduce the foregoing problems, but which may not
be economically feasible. Conventional cryogenic systems deal with this problem
by using liquid nitrogen to cool the previously chopped and shredded material
before feeding it into the hammer or knife-mill. Some ambient systems do not
freeze the rubber, but instead inject liquid nitrogen directly into the mill to
keep the rubber from softening.
upon performance tests of the TCS-1 System's proprietary disintegration
mechanism, the Company expects that the TCS-1 System's ability to prevent the
creation of steel powder will result in easy and efficient separation and
removal of the steel by magnetic means, without the substantial loss of rubber
powder which occurs with the methods described opposite.
The fiber, which will not lose its thread or cord-like configuration, will be
broken in the disintegration process into lengths of from 1/2 to 4 inches.
Rubber that is attached to the fiber creates a saleable product with unique
properties. Furthermore, tests indicate that, in this form, the fiber can be
easily separated from the rubber crumb by passing it through wire mesh screens.
The salvaged steel wire pieces and fiber threads will be useable and saleable.
Based on the foregoing and on test results, Management believes that: (i) the
rubber powder yielded by the TCS-1 System will contain only an insignificant
amount of fiber and steel; (ii) wastage of salvageable rubber powder will be
reduced from the approximately 30% associated with the use of conventional
cryogenic or ambient systems to an estimated 3%. (iii) instead of unusable steel
powder and fiber fluff, which recyclers must pay to have hauled away and
deposited in landfills, the TCS-1 System will yield clean useable, and saleable
reclaimed steel and fiber as well as two types of rubber powder containing only
insignificant amounts of fiber and steel.
43
Knife-milling or hammer-milling operations will create further problems because
all of the fiber and steel, which is mixed in with the rubber crumb, will have
been ground up and pulverized along with the rubber, with the following results:
(i) the steel components of the tires will have been ground or pulverized into a
fine powder, which cannot be allowed to remain as a contaminant in the rubber
powder if the rubber is to have any economic value. The steel must therefore be
removed magnetically. However, the fine steel powder will be thoroughly mixed in
with the rubber powder, the magnetic action which is meant to pull out the
minute particles of steel, will necessarily also draw out substantial amounts of
the surrounding rubber particles. Losses of rubber powder resulting from the
magnetic removal of the steel powder are estimated to amount to approximately
15% of the total rubber powder produced. Such wastage adds substantially to the
cost of useable product yielded by these systems. The steel powder is not
useable for any purpose and has no economic value. It must be transported and
deposited in landfills which again adds to the cost of any useable product
produced. (ii) The thread or cord-like configuration of the fiber will have been
disintegrated into the cotton-like "fluff" described above. This fluff will
attract and hold significant amounts of the powdered rubber and steel.
Separation of the steel and rubber particles from the fiber fluff is nearly
impossible because the fine particles are trapped in the entangling strands and
adhere to them. It is estimated that up to 15% of the rubber powder will be
trapped in the fiber fluff and drawn out with it. The fluff has no current
economic value and actually constitutes a liability because it must be
transported and disposed of, usually as landfill.
The wastage of up to 15% of the rubber powder, which results from losing the
rubber which is trapped in the fiber fluff, together with the additional 15% of
the rubber powder which clings to the pulverized steel particles when they are
removed magnetically, brings total losses of rubber powder to approximately 30%,
which is reflected in a concomitant increase in the cost of the product
produced.
44
Recovery Ratio
Current shredding operations recover on average twelve pounds, representing 75%,
of the rubber contained in every twenty pound tire. All of the fiber and steel,
and the balance of the rubber components of each tire are, in most cases, not
reclaimed, for the reasons described above. The result is a loss of
approximately eight pounds of unrecovered, unrecycled rubber, steel, and fiber,
representing 40% of the constituent materials of the tire, which must be
transported and disposed of in landfills or other solid waste disposal
facilities.
Recovery Ratio
For the reasons described above, and based on performance tests of the scale
model prototype of the TCS-1 System's proprietary disintegration mechanism,
Management expects that almost all of the rubber, steel, and fiber components of
the tire will be recovered in useable and saleable condition.
Production and Supply
The Company has been engaged in designing and developing, and intends
within the current fiscal year to begin manufacturing, on a commercial basis,
its proprietary cryogenic tire disintegration system, referred to herein as the
"TCS-1 System". The Company's activities to date have focused on the design and
creation of the TCS-1 System. In connection with these activities, the Company
has been dependent on arrangements with its subcontractors for the manufacture
and assembly of the principal components incorporated into the TCS-1 System (see
"Agreements With Subcontractors", below).
If the Company is able to raise sufficient funding and if no presently
unforeseen problems with the technology develop, the Company expects to commence
manufacturing the TCS-1 System on a commercial basis prior to the end of 1997.
The Company intends to continue to effect all TCS-1 System manufacturing
operations through its subcontractors. It will therefore be substantially
dependent on the ability of such subcontractors to satisfy performance and
quality specifications and to dedicate sufficient production capacity for all
TCS-1 System scheduled delivery dates. The Company believes that all of its
subcontractors have the requisite manufacturing capabilities and the willingness
to dedicate sufficient amounts of their manufacturing capacity to allow the
Company to meet all TCS-1 System delivery dates, currently scheduled or expected
to be scheduled for not less than the next two years. However, no assurance can
be given that this will in fact be the case and failure on the part of the
Company's subcontractors in these regards would adversely affect the Company's
ability to manufacture and deliver TCS-1 Systems on a timely and competitive
basis. In such event the Company would have to replace or supplement its present
subcontractors. There can be no assurance that should it be necessary to do so,
the Company would be able to find capable replacements for its subcontractors on
a timely basis and on terms beneficial to the Company, if at all; The Company's
inability to do so would have a material adverse effect on its business.
Components of the TCS-1 Systems, which are not manufactured by the
Company's subcontractors specifically for the TCS-1 System, will be purchased,
either directly by the Company or indirectly through its subcontractors from
third-party manufacturers. The Company believes that numerous alternative
sources of supply for all such components are readily available.
45
Agreements With Subcontractors
The Company has entered into agreements with three machinery
manufacturing, engineering and designing firms located in Quebec. Two of such
firms have accepted unregistered and restricted shares of Company's Common Stock
in payment of part of their fees. The following is a discussion of the principal
terms of the subcontractor agreements:
Agreement with Fedico, Inc.
In January of 1997, the Company entered into an agreement (the "Fedico
Agreement") with Fedico, Inc. of St-Xxxxxx, Quebec ("Fedico"), a machinery
design firm located in Quebec. Prior thereto, Fedico had provided consulting and
other design engineering services to the Company since the spring of 1996.
Pursuant to the terms of the Fedico Agreement, Fedico will act as the project
leader, guiding the over-all design and engineering of the TCS-1 System. In
addition to supervising the over-all assembly and start-up procedures of the
first full-scale production model of the TCS-1 System, Fedico will design,
engineer, and fabricate certain peripheral equipment. The term of the Fedico
Agreement is for seven years, retroactively effective as of September, 1996.
The Agreement provides further that Fedico will:
(a) collaborate with the Company on development of initial specification
requirements, by way of: (i) researching and evaluating the
available applicable technologies; (ii) conceptualizing designs
concepts; (iii) preparing preliminary layout drawings of each
component and of the integration thereof into the TCS-1 System;
(b) prepare detailed preliminary layout designs of each element of the
TCS-1 System;
(c) prepare detailed drawings of each element of the TCS-1 System and
prepare the "xxxx of materials" which is a complete list of all
components of the System;
(d) be present or available, during the assembly of the TCS-1 System to
correct any problems that may arise;
(e) be present or available during start-up procedures upon completion
of the assembly of the TCS-1 System and correct any problems that
arise during the course of such procedures;
(f) upon commencement of satisfactory operation of the TCS-1 System,
revise all drawings to produce complete, final, "as-built" designs
and prepare a documentation package for the facilitation of the
operation and maintenance of the System.
The Fedico Agreement also provides for the retention of Fedico for a
minimum of five hundred hours per year during the course of such agreement at
reasonable, competitive hourly rates for technicians, draftsmen, and
intermediate engineers, with overtime, on-site services, and travel expenses at
prevailing market rates. The terms of the Fedico Agreement are substantially as
set forth in detail in the Company's annual report on Form 10-KSB for the year
ended June 30, 1996. For further details, reference is made to the discussion
contained in Item I of the 1996 10-K under "Proposed Product Proposed Agreement
with Fedico, Inc.".
46
Agreement with Xxxxxxxx Freres Limitee
In January of 1997, the Company entered into an agreement (the "Xxxxxxxx
Agreement") with Xxxxxxxx Freres Limitee ("Xxxxxxxx"), a subsidiary of Xxxxxxxx
Inc., of Montreal, Quebec. Xxxxxxxx, specializes in custom design and
fabrication of industrial machinery. With its sister companies, Foresteel
(specializing in pressure vessels and welding) and Atelier D'Usinage Xxxxxx
(specializing in high precision machining), Xxxxxxxx is widely recognized for
its extensive experience and expertise in designing and constructing equipment
used in the pulp and paper, metallurgy, fiber, power generation, and many other
industries. Xxxxxxxx had been providing the Company with design consulting and
other valuable design engineering services to the Company since the spring of
1996. In recognition of services rendered by Xxxxxxxx prior to the finalization
of the Xxxxxxxx Agreement, it was made retroactively effective as of July 23,
1996. Services provided by Xxxxxxxx prior to January 1997 included the
completion of the initial design specifications for the TCS-1 System's
Disintegration Unit Assembly.
Under the terms of the Xxxxxxxx Agreement, Xxxxxxxx was retained to design
and construct a prototype disintegration unit for the TCS-1 System at
competitive rates. Xxxxxxxx agreed to accept payment of approximately one-third
of its price for the foregoing in 340,160 unregistered shares of the common
stock of the Company. The stock portion of such price was issued to Xxxxxxxx on
January 17, 1997. Prior to such date, that part of the design work on the
disintegration system, which was allocated to the stock portion of the purchase
price, had been completed.
The terms of the Xxxxxxxx Agreement are substantially as set forth in
detail in the Company's annual report on Form 10-KSB for the year ended June 30,
1996. For further details, reference is made to the discussion contained in Item
I of the 1996 10-K under "Proposed Product - Proposed Agreement with Xxxxxxxx
Freres Limitee".
Agreement with Plasti-Systemes, Inc.
In January of 1997, the Company entered into an agreement (the
"Plasti-Systemes Agreement") with Plasti-Systemes, Inc. ("Plasti-Systemes") of
Ville D'Anjou Quebec. Prior to that date, Plasti-Systemes had been providing
consulting services respecting the design, construction, and installation of the
"front-end" of the TCS-1 System under agreed upon terms, but without a written
agreement. The Plasti-Systemes Agreement provides for Plasti-Systemes to design
(including rendering of all necessary engineering drawings), construct, and
install the "front-end" of the TCS-1 System. The Front End System will consist
of a series of mechanisms which will automatically, at the rate of three tires
per minute: (i) clean and debead the tires; (ii) separate the sidewalls from the
treads; (iii) cut both sidewalls and treads into sections ready for processing;
and (iv) transport the beads and tire sections into separate areas for disposal
or processing.
The Plasti-Systemes Agreement, which was made retroactively effective as
of October 16, 1996, covers mechanical work and equipment. Plasti-Systemes
agreed to accept payment of 26% of its total price for the foregoing 255,010
unregistered shares of the common stock of the Company. The stock portion of
such price was issued to Plasti-Systemes on January 17, 1997. Prior to such
date, that part of the design and engineering work on the front-end system,
which was allocated to the stock portion of the purchase price, had been
completed. The terms of the Plasti-Systemes Agreement are substantially as set
forth in detail in the Company's annual report on Form 10-KSB for the year ended
June 30, 1996. For further details, reference is made to the discussion
contained in Item I of the 1996 10-K under "Proposed Product - Proposed
Agreement with Plasti-Systemes, Inc.".
47
Proposed Services
TCS-1 System Maintenance:
Technical and Market Support
The Company requires all of its TCS-1 System purchasers to agree to enter
into a Maintenance and Technical and Market Support Agreement (the "Proposed
Maintenance Agreements"). In connection therewith the Company intends to provide
timely, high quality technical support to insure that the TCS-1 System will
perform in conformance with its specifications. Until the test phase of the
first production sized model of the TCS-1 System is completed, the Company will
be unable to finalize the definitive parameters of the services which it intends
to offer under the Proposed Maintenance Agreements. Currently proposed plans
call for the Company, or the Company's designated service provider, to provide,
or be responsible for, all technical and other labor necessary for the
maintenance of the TCS-1 System at a performance level capable of disintegrating
the equivalent of one million automobile tires per year on a twenty-four hour
per day, three hundred sixty-five day per year basis, in accordance with an
operations and performance specifications manual to be furnished to the
customer.
The Proposed Maintenance Agreements are expected to require the Company to
provide (i) regularly scheduled on-site preventive maintenance including but not
be limited to inspection and assessment of wear factors affecting all
constituent components of the System and determination and effectuation of
replacement and/or recalibration requirements and (ii) unscheduled remedial
maintenance, on an as needed basis. Other responsibilities which the Company, or
its authorized service provider, are intended to assume under the Proposed
Maintenance Agreements will include: (i) providing and maintaining computerized
equipment to monitor and document the performance by the operator of the TCS-1
System of all routine maintenance procedures; (ii) reviewing the data retrieved
thereby on a monthly, or more frequent, basis; (iii) immediately advising the
operator of any improper performance of any of such Procedures; (iv) providing
remedial instructions to the Operator's personnel with respect to the proper
performance of certain routine maintenance procedures to be performed by the
TCS-1 System Operator, and; (v) upon request of the Operator, re-training its
personnel. The Proposed Maintenance Agreements are intended also to provide that
the Company, or its authorized service provider, will provide an initial
training period for the operator's personnel as well as continuing training,
seminars and updates, on an as needed basis.
The Proposed Maintenance Agreements are also intended to provide for
additional technical and market support including Pre-Operational Support by way
of, among other things: (i) assistance to the Operator with respect to
procedures and requirements related to obtaining all licenses, permits, and
other requirements for the establishment and operation of a TCS-1 System Plant,
including the development, documentation, and furnishing of all required
technical, environmental, operational, and other information and data; (ii)
instructions and assistance with respect to all applicable federal, state, and
local regulations and requirements respecting the preparation of the site and
the installation and operation of a TCS-1 System at the site.
In addition, the Proposed Maintenance Agreements will require that the
Company, or its authorized service provider establish and maintain laboratory
facilities at which they shall:
(a) test and monitor the quality and properties of the rubber crumb
produced by the TCS-1 System, including but not limited to: (i)
total production rates (ii) the comparative percentages of various
crumb rubber mesh sizes produced, and (iii) wear factors existing or
developing in the disintegration mechanisms, so as to generate a
continual data base for the anticipation and determination of the
maintenance, remediation, and recalibration
48
requirements of the disintegration mechanisms and all other
constituent components of the System under actual operating
conditions;
(b) test and monitor, on a continuing basis, oil samples from the TCS-1
System so as to ascertain and monitor the wear factors on the
bearings and on other components of the System;
(c) record and maintain all test data and records for the TCS-1 System
in a monthly log to be furnished to the operator at regular
intervals on a monthly basis, or on request by the operator, and be
available to the Operator at all times to discuss the meaning and
significance of all test results and any remedial or other actions
which such data indicate is necessary or advisable;
(d) creating and developing new products and uses for rubber crumb
produced by the TCS-1 System.
It is intended that the Company, or its authorized service provider will
also be responsible for certain accounting and record keeping services,
including providing accounting software to monitor the operations and output of
the TCS-1 System. It is intended that the Proposed Maintenance Agreements will
also impose obligations upon the Company, or its authorized service providers to
stock replacement parts for the TCS-1 System in order to minimize any
interruptions in the continual operation of the System.
The monthly maintenance fee for all services to be provided by the
Company, or its authorized service provider under the Proposed Maintenance
Agreements is presently expected to be $9,500 per month.
Negotiations With Proposed Service Provider
The Company is presently negotiating with Xxxxx Xxxxxxx ("Xxxxxxx"), a
director of the Company and the controlling person of the two entities
(Ocean/Ventures III, Inc. and Oceans Tire Recycling & Processing Co., Inc.)
which have ordered nine of the ten TCS-1 Systems presently on order, to organize
and operate a maintenance company capable of serving as the Company's authorized
service provider and meeting all of the above described responsibilities. Xx.
Xxxxxxx has worked closely with the Company on the development of the TCS-1
System and the proposed maintenance and technical support program. Xx. Xxxxxxx
is a highly respected, knowledgeable, and experienced operator of recycling
organizations in New Jersey and the Company believes that he is eminently
qualified to organize and head its maintenance and technical support effort.
While the parties have not yet entered into an agreement respecting the terms
under which Xx. Xxxxxxx or an organization under his control will direct the
Company's maintenance services, they are currently in negotiations respecting
such arrangements. Currently, however, the Company expects that the service
provider to be organized and operated by Xx. Xxxxxxx will be paid a flat fee of
$4,000 per month to cover all of the services described above. The service
provider is also expected to furnish, at no additional cost, all equipment
necessary to effect the provision of such services.
Proposed Tire Shredding Operations
The Company has taken preliminary steps to enter a new related business
segment. Plans for these proposed operations include on-site scrap tire
shredding operations in Quebec under a five-year, government sponsored stockpile
abatement program (the "Quebec Program") which will fund the clean-up
49
of scrap tire stockpiles at the rate of Cdn $1.00 (approximately $0.72 U.S., at
current exchange rates) for every tire recycled and removed. In connection
therewith, the Company is presently engaged in negotiations with CG TIRE, Inc.
("CGT"), a wholly owned subsidiary of Continental General Tire Inc. ("General
Tire")(4) and Recyc-Quebec, the Canadian government agency involved in designing
and managing the Quebec Used Tire Program. According to Recyc-Quebec, there
could be more than 30 millions tires accumulated in about 40 stockpiles in the
province of Quebec. As it is always the case for stockpile estimates in North
America however, these numbers are only approximate.
In order to qualify to participate in the Quebec Program and receive the
Cdn $1.00 per tire payment, recycling operations must take place in Quebec and
must be effected by a recycling company located in Quebec. The Company is
located in Quebec and it has been advised by Recyc-Quebec that the on-site
shredding operations which the Company proposes to conduct will qualify as a
"recycling activity" for purposes of the Quebec Program. The Company is seeking
a long-term commitment from the Quebec government for a total of Cdn $20,000,000
(approximately $14,400,000 U.S., at current exchange rates) to be allocated to
tipping fees of Cdn $1.00 per tire for the Company. In connection therewith,
meetings have been held and discussions have occurred by and among the Company,
CGT, Mr. Xxxxxxx Xxxxxx (the Vice-Premier of Quebec), and Xx. Xxxxxx Xxxxxxx
(the President of Recyc-Quebec). While the Company is reasonably optimistic
about the outcome of such meetings and discussions, it is unable to give any
assurance that it will in fact be successful in obtaining the firm commitment
from the government which it will require in order to commence operations in
this area. Moreover, even if the Company is able to move forward with this
project, there can be no assurance at this time that it will be profitable.
The Company is currently negotiating the terms of an agreement with CGT
which, while not finalized, presently contemplates that: (i) CGT would be
obligated to accept, for a tipping fee of Cdn $0.25 (approximately $0.18 U.S.)
per tire to be paid to CGT, up to 4 million tires per year in 2 inch chips; (ii)
The Company would be responsible for delivery of the tires to CGT in North
Carolina, in accordance with an agreed upon schedule and other terms. Current
plans contemplate that the Company would be responsible for acquiring the tires
from various Quebec stockpile owners, reducing the whole tires into 2" X 2"
chips with mobile shredders, and removing the tire chips from the sites by means
of truck transportation to a train off-loading facility in Quebec for transport
by train to CGT's facility near Charlotte, North Carolina.
On August 12, 1997, the Company entered into an agreement with Xx. Xxxxxxx
Xxxxxxx (the "Xxxxxxx Agreement") for the purchase of approximately 4.5 million
scrap tires presently owned by Xx. Xxxxxxx and stockpiled on his property in
St-Xxxx-Chrystostome, Quebec, for an aggregate purchase price of Cdn $175,000
(approximately $126,000 U.S., or $0.028 per tire, at current exchange rates).
Payment terms required a nonrefundable downpayment of Cdn $15,000 (approximately
$10,800 U.S. at current exchange rates) upon execution, with the balance payable
at the closing of the Xxxxxxx Agreement, which must take place on or before
October 31, 1997. The Xxxxxxx Agreement also provides that the Company will have
access to the property on which the tires are stockpiled and will be permitted
to conduct the shredding of the tires thereat. The Company will acquire only the
tire inventory and not the land on which it is stored nor any piece of equipment
situated thereon. The Company is currently in negotiations, and has received a
letter of intent from, the owner of another Quebec stockpile (the "Ganby
Stockpile") of approximately 500,000 tires, to acquire such tires free of
charge. In addition the Company is engaged in negotiations with the owner of the
largest scrap tire stockpile in Quebec (the "Franklin Stockpile"), located in
Franklin, just a few miles north of the NY State border, to secure supply for up
to 25 million additional tires. The Company is unable to state at this time
whether it will be able to close on the Xxxxxxx
----------
(4) General Tire is the fourth largest tire manufacturer in the world. It has
denominated CG TIRE, Inc. as "The Continental General Tire Recycling
Effort")
50
Agreement within the required time period or what the eventual outcome of its
negotiations respecting the Ganby and Franklin Stockpiles will be.
The Company has retained Xxxxx de Xxxxx, a Montreal law firm specializing
in environmental law, to advise it with respect to any environmental liabilities
which the Company may incur in connection with these proposed operations and to
assist the Company with meeting all regulatory requirements and standards and
obtaining all permits and legal certificates required in connection therewith.
Sales and Marketing
Sales
The O/V III Agreements
On May 29, 1997, the Company entered into an Equipment Lease and Purchase
Agreement (the "O/V III L&P Agreement") with Ocean/Ventures III, Inc.("O/V III")
of Toms River, New Jersey ("O/V III"). This agreement modified the terms of, and
replaced, a prior agreement between the parties dated June 6, 1995 (the "Prior
O/V III Agreement").(4) O/V III is under common ownership and control with the
solid waste recycling firm, Ocean County Recycling Center, Inc. Under the terms
of the L&P Xxxxxxxxx, X/X XXX Xxxxxxxxx, X/X III will purchase and lease the
various components which comprise the constituent parts of the TCS-1 System. The
Agreement provides for lease and purchase arrangements for eight Systems at an
aggregate lease and purchase price of three million dollars ($3,000,000) each.
Pursuant to the terms of the O/V III Agreement, certain non-proprietary
equipment (the "NonProprietary Equipment") will be purchased by O/V III for a
total purchase price of $2,250,000. Such equipment includes, but may not be
limited to: (i) all bailing systems contained in the TCS-1 System, including all
associated ancillary equipment and conveyance and exit belts, chutes and/or
other components combined or integrated therewith, and (ii) freezing xxxxxxxx
and cryogenic systems.
The other constituent components of the TCS-1 System comprise equipment
which is proprietary to the Company (the "Proprietary Equipment"). Such
Proprietary Equipment is, under the terms of the O/V III L&P Agreement, subject
to a five year operating lease, with monthly lease payments of $12,500 each. The
Proprietary Equipment consists of (i) the disintegration system including but
not limited to all grinders contained therein, and (ii) the separation systems,
including but not limited to: (a) a magnetic separator; (b) a fiber/crumb
separator; (c) fiber collector; (d) crumb rubber sizing system; and (e) all
integrated conveyance and exit belts, chutes, and other components.
The O/V III L&P Agreement calls for the delivery of the first System by
October 1998, with seven additional Systems scheduled for delivery every three
months thereafter, through July 2000. The Agreement requires a downpayment of
$25,000 for each System to be paid not less than fourteen months prior to the
anticipated delivery date. In an effort to assist the Company at this early
stage of its development, to date, O/V III has prepaid $25,000 down payments on
five Systems. Other payment terms for each of the eight systems subject to the
O/V III L&P Agreement, call for a $50,000 payment six months
----------
(4) Reference is made to the detailed discussion of the terms of the Prior O/V
III Agreement included in the subtopic "Sales and Marketing" under the
caption, "The O/V III Agreements" in Item I of the Company's annual report
of Form 10-KSB for the fiscal year ended June 30, 1996, attached as an
Exhibit hereto.
51
prior to the anticipated delivery, an additional $100,000 to be paid three
months prior to the anticipated delivery date, and $1,825,000 on O/V III's
acceptance of the System.
Pursuant to the terms of the L&P Agreement, O/V III also entered into
certain ancillary agreements with the Company, consisting of the following:
(a) a royalty agreement (the "Royalty Agreement") pursuant to which O/V
III will pay the Company a royalty of three percent (3%) of the
gross proceeds from all sales of rubber crumb fiber and steel from
scrap tires disintegrated through the utilization of the TCS-1
System;
(b) a rubber crumb purchase option agreement (the "Rubber Crumb
Agreement") pursuant to which O/V III has granted to the Company and
option to purchase up to 40% of the rubber crumb, yielded by the
disintegration of scrap tires in the TCS-1 System, at negotiated
prices. The Company is currently exploring the feasibility of
vertically integrating its operations so as to include the rubber
crumb brokerage business and/or the value-added rubber crumb product
development business. It obtained the rubber crumb purchase option
in connection with the foregoing.
The parties also agreed that they would enter into a maintenance and
technical support agreement (the "Maintenance and Technical Support Agreement")
pursuant to which the Company or its designated service provider ("Service
Provider") will provide or be responsible for all technical and other labor
necessary for the maintenance of the TCS-1 System at a performance level capable
of disintegrating the equivalent of one million automobile tires per year on a
twenty-four hour per day, three hundred sixty-five day per year basis. Services
to be provided shall include but not be limited to the following: (i) regularly
scheduled on-site preventive maintenance, which shall include but not be limited
to inspection and assessment of wear factors affecting all constituent
components of the System and determination and effectuation of replacement
and/or recalibration requirements, and (ii) unscheduled remedial maintenance, on
an as needed basis. Both scheduled and unscheduled service maintenance will
include adjustments and replacement of parts, as deemed necessary by the Service
Provider. The Company is presently in negotiations with Xxxxx Xxxxxxx, a
principal of O/V III, with respect to the possibility of Xx. Xxxxxxx'x
establishing an equipment maintenance company to serve as the Company's Service
Provider for all Systems sold by the Company, including but not limiting to the
eight Systems to be purchased by O/V III;
Agreements with Oceans Tire Recycling & Processing Co., Inc.
On May 29, 1997, the Company 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 under common control with O/V III.
Pursuant to the OTRP L&P Agreement, OTRP will purchase the first production
model TCS-1 System. Under the terms of the Agreement, the anticipated delivery
date for this System was September 15, 1997. The parties have agreed however to
waive delivery at such date and to reschedule a new delivery date. OTRP will
accept delivery at the Company's facility in Montreal to allow initial test
phase operations to be conducted under supervision of both the Company and OTRP.
This will also create an opportunity for OTRP's personnel to be trained by the
Company's technical staff in the operation of the TCS-1 System.
The terms of the OTRP L&P Agreement, pursuant to which the constituent
components of the TCS-1 System will be leased and or purchased, are
substantially identical to those of the O/V III L&P Agreement, as described
above. The only significant differences are in the purchase price and payment
terms. The purchase price for the Non-Proprietary Equipment is $1,225,000 and
the terms of the 60-
52
month operating lease call for monthly lease payments of $8,770 each.
Accordingly, the aggregate lease/purchase price under the OTRP L&P Agreement is
$1,751,200. OTRP has obtained "pre-commencement" sale and lease-back financing
from an outside source for the Non-Proprietary Equipment being purchased under
the Agreement. Pursuant thereto, OTRP has been making lease payments since April
of 1997. The terms of OTRP's lease financing arrangements provide for the lessor
to deliver the purchase price payments directly to the Company, to be used to
fund the construction of the first TCS-1 production model. To date,
approximately $605,000 of such financing has been paid to the Company and used
for such purpose.
Pursuant to the terms of the OTRP L&P Agreement, upon execution thereof,
the parties also entered, or agreed to enter, into the same types of ancillary
agreements as are described above with respect to the O/V III L&P Agreement,
i.e., a maintenance and technical support agreement, a royalty agreement, and a
rubber crumb purchase option agreement. The terms of all of such ancillary
agreements are identical to those described above in connection with the O/V III
Agreements.
The Recycletron Inc. Agreements
On July 8, 1997, the Company entered into an Equipment Lease and Purchase
Agreement (the "Recycletron L&P Agreement") with Recycletron Inc.
("Recycletron") of Montreal, Quebec. Pursuant to the Recycletron L&P Agreement,
Recycletron will purchase one TCS-1 System, with delivery scheduled for the end
of the second quarter of 1998. The terms of the Recycletron L&P Agreement,
pursuant to which the constituent components of the TCS-1 System will be leased
and or purchased, are substantially identical to those of the O/V III L&P
Agreement, as described above. The only significant differences are in the
purchase price and payment terms. The purchase price for the Non-Proprietary
Equipment is $2,000,000 and the terms of the 60-month operating lease call for
monthly lease payments of $12,500 each. Accordingly, the aggregate
lease/purchase price under the Recycletron L&P Agreement is $2,750,000. Upon
execution of the Agreement, Recycletron paid a $25,000 down payment. Other
payment terms require additional payments of $100,000 six months prior to the
anticipated delivery date, $125,000 prior to the anticipated delivery date, and
$1,750,000 upon Recycletron's acceptance of the System.
Pursuant to the terms of the Recycletron L&P Agreement, upon execution
thereof, the parties also entered, or agreed to enter, into the same types of
ancillary agreements as are described above with respect to the O/V III L&P
Agreement, i.e., a maintenance and technical support agreement, a royalty
agreement, and a rubber crumb purchase option agreement. The terms of all of
such ancillary agreements are identical to those described above in connection
with the O/V III Agreements.
Backlog
As of September 18, 1997, the Company's backlog amounted to $28,501,200.
Backlog includes firm orders under executed Equipment Lease and Purchase
Agreements. The amount shown includes the aggregate of: (i) the full purchase
price for those parts of the TCS-1 System which will be sold by the Company, and
(ii) total lease payments under the five-year operating lease which forms part
of every Equipment Lease and Purchase Agreement. The $28,501,200 backlog
presently booked includes: (i) one TCS-1 System ordered by OTRP for an aggregate
lease/purchase price of $1,751,200, for which the Company has already received
prepayment of $605,000 toward the purchase price; (ii) eight systems ordered by
O/V III for an aggregate lease/purchase price of $3,000,000 each, for which the
Company has already received over $130,000 by way of prepayments of the $25,000
downpayments (due for each system fourteen months before the scheduled delivery
date of such System) on five of the eight Systems
53
ordered by O/V III; and (iii) one TCS-1 System ordered by Recycletron for an
aggregate lease/purchase price of $2,750,000, for which the Company has received
a $25,000 down payment. The foregoing ten TCS-1 Systems are scheduled for
delivery between November 1997 and July 2000, with two of such Systems (the OTRP
and Recycletron Systems) scheduled for delivery during the current fiscal year.
The balance of the ten Systems currently on order are scheduled for delivery
between November 1998 and July 2000.
The Company has not included in its backlog any revenues which may result
from the Royalty Agreements which all TCS-1 System purchasers must enter into
with the Company. These Royalty Agreements entitle the Company to receive a
royalty in the amount of 3% of the gross revenues from sales of rubber crumb
produced by the TCS-1 System. The Company has also not included an additional
$5.7 million dollars in revenues which it expects to receive under the Proposed
Maintenance Agreements to be signed in connection with the ten Systems already
on order (see "Proposed Services", above in this Item I).
Although the stated backlog may be used as a guideline in determining the
value of orders which are presently scheduled for delivery during the period
indicated, it is subject to change by reason of several factors including
possible cancellation of orders, change in the terms of the contracts, and other
factors beyond the Company's control and should not be relied upon as being
necessarily indicative of the Company's revenues or of the profits which the
Company might realize when the results of such contracts are reported.
Dependence on Major Customer
To date the Company has received orders for ten TCS-1 Systems, eight of
which were ordered by Ocean/Ventures III, Inc.("O/V III") of Toms River, New
Jersey ("O/V III") and one of which was ordered by Oceans Tire Recycling &
Processing Co., Inc. ("OTRP"). Both O/V III and OTRP are under the control of
Xxxxx Xxxxxxx. The loss of either of these two customers would have a major
adverse effect on the Company. However, the Company also believes that while Xx.
Xxxxxxx'x companies comprise the initial TCS-1 System purchasers, future sales
efforts will be widespread and, as the Company matures and its business
develops, it will not be dependent upon the business of one or more major
customers.
Marketing and Distribution
Potential Markets
The Company believes that the potential market for its TCS-1 System can be
expected to 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-1 System will be capable of economically producing high quality
recycled rubber crumb, in a variety of sizes, capable of being used in a wide
range of products. While this accurately reflects management's present
expectations, it should be noted that the TCS-1 System is still in the research
and development stage. Further, because development of the TCS-1 System is at an
early stage, the Company cannot give any assurance with respect to if, or when,
it will in fact be able to complete the design and construction of the TCS-1
System in accordance with its plans and specifications or that, if completed,
the TCS-1 System will
54
perform as expected. Therefore, even if the demand for rubber crumb should
increase in accordance with the Company's expectations, there can be no
assurance that a concomitant development of demand for the TCS-1 System will
develop.
Effect of Environmental Concerns
on Development of New Markets for Scrap Tires
Until approximately 1990, low tipping fees made landfills the most popular
option for the disposal of scrap tires. In fact, according to the Scrap Tire
Management Council (the "STMC"), until that time, management and market
development efforts for scrap tires were non-existent or minimal. This was
reflected in the fact that in 1990, only 25 million (approximately 11%) of the
scrap tires generated annually in the United States were marketed for any
purpose whatsoever. The remaining 89% were dumped or stockpiled. However, within
the past few years, changes in the market for scrap tires has been swift and
dynamic, resulting in significant market application alternatives to the
landfilling and stockpiling of scrap tires.
The STMC reported in its "Scrap Tire Use Disposal Study - 1996 Update"
(which was published in April of 1997 and is referred to herein as the "STMC
Study"), that significant progress has been achieved with respect to development
of scrap tire management alternatives to landfilling and stockpiling. In 1996,
market applications were found for 76% of all scrap tires (or 202 million
tires). This means, however, that even as of 1996, 64 million additional tires
(or 24% of the annually generated scrap tires that year) were still being
landfilled or stockpiled in the United States alone.
Notwithstanding the foregoing progress, in most developed countries, the
traditional dumping of tires in landfills has been completely banned or the
number of tires legally permitted to be dumped has been substantially reduced.
Unfortunately, such measures often have the effect of simply exacerbating the
problem of illegal tire dumping and above ground stockpiling. Increasingly in
the United States, individual states sponsor scrap tire management programs. By
1994, 48 states had legislated laws governing and regulating proper handling,
recovery, reuse, and disposal of discarded scrap tires. To date, over 34 of such
states have provided at least some of the funding needed to build and support
the tire recycling infrastructure which is or will be required to assure that
the state's annual generation of scrap tires, as well as its already stockpiled
tires, will be recovered, reused, and recycled. In Canada, most provinces have
similar regulations. As a result of this proliferation of state regulations and
the influence of the environmental movement, national attention has increasingly
focused on the need to develop alternative methods of scrap tire disposal.
Market for Rubber Crumb
Rubber is a valuable raw material and the Company believes 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, and
absorbing shock and lessening the potential for injuries as a ground cover for
playgrounds and other recreational areas.
Recycling tires into reusable rubber crumb (or "ground rubber") was, as of
1996, the third largest use of scrap tires. "Rubber Crumb" is the end product of
the tire disintegration processes discussed in, "Products and Services" below.
The ideal rubber crumb is a powder, which can be produced in various particulate
sizes, ranging from relatively coarse to very fine, and which is not
significantly contaminated
55
by fiber and metal particles. As noted above, the STMC Study reported that the
largest use presently being made of scrap tires is burning them as tire derived
fuel, with export (for refitting and reuse as tires) taking second place.
However, as noted above, the use of scrap tires for ground rubber experienced an
enormous surge during the last two years, increasing two hundred and
seventy-seven percent (277%) from 4,500,000 tires in 1994 to 12,500,000 tires in
1996. Historically, most rubber crumb available and sold in the market was
derived not from recycled scrap tires, but from tire "buffings". This situation
has recently improved significantly, however, with tire buffings now
representing 52% and scrap tires representing 48% of source material for rubber
crumb. According to the STMC, the demand for rubber crumb for various uses could
experience further substantial increases over the next two to five years, with
expected overall growth in sales of rubber crumb from 25% to 33%. The Company
believes that because the supply of buffings is limited, the main source of an
increased supply of rubber crumb must come from scrap tires.
At present, there are at least seven general categories of markets for
rubber crumb of various sizes and grades. These consist of the following:
* Rubber Modified Asphalt ("RMA", 168 million pounds in 1996): Rubber
crumb can be blended with asphalt to modify the properties of
asphalt used in highway construction. Rubber crumb can be used
either as part of the asphalt rubber binder, seal coat, cape seal
spray, or joint and crack sealant (generally referred to as
"asphalt-rubber") or as an aggregate substitution (rubber modified
asphalt concrete or "RUMAC"). At present, the cost of using
asphalt-rubber and RUMAC is somewhat higher than conventional
materials. However, the service life of such products has proved in
some cases to be two to three times that of conventional asphalt
pavements. While the use of ground rubber in asphalt pavement has a
large potential market, certain technical issues must be addressed
before the potential can be reached. The ability to recycle asphalt
pavement containing ground rubber and the development of standards,
particularly for materials testing and the environment are the key
issues to be addressed. In general, asphalt-rubber, or the "wet
process", has proven to be the most successful product, representing
approximately 95% of the RMA market in 1996, according to the STMC.
States using RMA to a significant degree include Arizona, California
and Florida, with lesser activity in Kansas and Texas.
* Bound Rubber Products (134 million pounds in 1996): Ground or
powdered scrap tire rubber is formed into a set shape, usually held
together by an adhesive material such as urethane or epoxy. Examples
of such applications are injection molded products and extruded
goods such as railroad crossing pads; dock bumpers, patio floor
blocks, flooring material, roof walkway pads, and carpet underlay.
* New Tire Manufacturing (48 million pounds in 1996): Fine rubber
crumb or powder reclaimed from scrap tires can be used as a low
volume filler material in both the tread and the sidewalls of new
tires. The percentage of recycled rubber that can be used in new
tires is somewhat in excess of 1.5%.
* Athletic and Recreational Applications (24 million pounds in 1996):
Coarse rubber crumb can be used in several applications, such as in
running track material, grass surfaced playing areas, or as a
substitute for playground surfaces. The use of rubber crumb for
these purposes will generally make playing surfaces and running
tracks more resilient and less rigid, but capable of maintaining
traction and shape.
* Molded and Extruded Plastics and Rubber (18 million pounds in 1996):
Finely ground scrap tire rubber can be placed into production molds
to form products for the automotive industry, such as sound
insulation, step pads, truck and trailer liners, matting and drip
56
irrigation pipes. Management believes that there are significant
potential markets for these applications which may result from
continuing research and development of products using a surface
modified rubber. There has also been increasing interest on the part
of automotive manufacturers in the purchase of products which
contain recycled rubber.
* Friction Material (8 million pounds in 1996): Coarse rubber crumb is
used in friction brake materials for brake pads and brake shoes.
Possibilities for Market Expansion and Added Value
Through Availability of More, and Higher Quality, Product
Notwithstanding the recent growth in the use of scrap tires for ground
rubber, this application represented only 6% of the market for scrap tires in
1996. The Company attributes this limited market penetration principally to the
lack of available high quality product. The TCS-1 System, however, has been
specifically designed to address this problem through the economical production
of high quality crumb rubber than is, to the best of management's knowledge,
currently being produced from scrap tires. The Company believes that increases
in the amount and quality of available crumb, at economically reasonable prices,
creatively marketed, will inspire new uses for rubber crumb and expand the range
and variety of products composed, in whole or in part, of such product.
Moreover, the Company believes that as the demand for rubber crumb recycled from
scrap tires increases, this market value will increase in proportion to the
quantity of product sold and will that the product will be come inherently more
valuable.
The Company believes that growth in the market for rubber crumb will
directly reflect a number of factors, including but not limited to: (i) the
amount of rubber crumb available; (ii) the cost of available rubber crumb; (iii)
the quality and characteristics of available crumb; and (iv) the availability of
suitable substitutes for rubber crumb.
There can be no assurance at this time, however, that the availability of
rubber crumb quality which the Company expects that the TCS-1 will be able to
produce, will necessarily lead to a significant expansion of the market for such
product, or if it does, that the Company will necessarily benefit from such
expansion.
Distribution
The Company's objective is to market and distribute its products
worldwide, through national and international distributors and sales
representatives. However, to a large extent the Company has to date
concentrated, and is continuing to concentrate, its efforts on completing the
design, development, and construction of the first production model of the TCS-1
System and raising adequate financing to support such efforts. It has,
therefore, not yet commenced a full scale marketing campaign and does not intend
to do so until the production model is complete and adequate funding is
available to cover the costs thereof. During the last two fiscal years and the
subsequent period, the Company has however taken initial steps to prepare a
foundation for a world-wide marketing program. In connection therewith, the
Company has taken the following steps during the last fiscal year:
(a) Appointed Xxxxx Xxxxxx as Vice President of Market Development to
oversee market and product development activities;
(b) Entered into negotiations with Xxxx Xxxxxxxx, a director of the
Company, with respect to his serving as Sales and Marketing director
for Europe;
57
(c) Obtained the agreement of Xxxxx Xxxxxxx, a director of the Company
and the principal of Ocean Ventures III, Inc. and Oceans Tire
Recycling & Processing Co., Inc. to accept appointment as the
Company's exclusive sales distributor in the United States and
Puerto Rico (see the discussions under the caption, "Sales"; see
also Item 12. "Certain Relationships and Related Transactions" in
the Company's annual report on Form 10-KSB for the fiscal year ended
June 30, 1997, enclosed as an exhibit hereto).
The Company can make no assurances with respect to the success of its
distribution strategy. Furthermore, the Company has limited resources to achieve
the distribution of its products and no assurances can be given that the Company
will not require additional financing, which may not be available, to achieve
such objective.
Market Research and Development Studies
In January of 1997, the Company retained Gapco Inc., a market research
firm located in Madrid, Spain, headed by Xxxx Xxxxxxxx(5). The study indicated
that the tire recycling Industry in Spain is in its infancy but is under
pressure to desist from the current practice of landfilling with unshredded
tires, and concludes that there is therefore a possible opportunity at this time
for the introduction of alternative scrap tire disposal methods.
Similar studies are being conducted in the rest of Europe, India and
Pakistan. The company believes that both India and Pakistan are potential
importers of ground rubber, or rubber crumb. This is based on the fact that
these countries are expanding their tire and auto manufacturing capacities and
are already experiencing supply shortages in rubber and carbon black. Based on
the initial research, the Company believes that the recycling of tires would
eventually gravitate toward production of products that can be assimilated in
industries which manufacture any products which use rubber and plastic in their
manufacture.
Canadian Operations
Tirex Canada
The governments of Canada and, in particular, the province of Quebec, have
officially acknowledged the pivotal role played by business investment in
research and development in ensuring sustained economic growth and long-term
prosperity. In order to encourage such activities, these governments support
research and development programs by granting individuals and businesses tax
incentives that encourage technological development in Quebec. As a result,
Quebec offers the most generous tax incentives for research and development
programs of which the Company is aware. In May of 1995, in an effort to take
advantage of such financial incentives, the Company formed a Canadian
corporation, 3143619 Canada Inc. (referred to herein as "Tirex Canada") in the
Province of Quebec, Canada, for the purpose of completing all research and
development work on the first production model of the TCS-1 System and,
thereafter, to serve as the Company's manufacturing arm. For a discussion of the
initial capitalization of Tirex Canada, the distribution of its shares among the
Company and officers and directors of the Company who are Canadian residents,
the terms of the shareholders agreement pursuant to which such shares are held,
including but not limited to the rights of the Company to regain 100% record
ownership of Tirex Canada, reference is made to the discussion under the caption
"Existing
----------
(5) Xx. Xxxxxxxx, a director of the Company, was appointed as Sales and
Marketing Director for Europe in July of 1997 after the completion of such
study.
58
and Proposed Canadian Financing, Manufacturing, and Research and Development
Operations" in Item 1 of the Company's annual report on Form 10-K for the fiscal
year ended June 30, 1996, enclosed as an exhibit hereto.
The Tirex Canada License
Tirex Canada holds an exclusive, ten year license to design, develop, and
manufacture the TCS-1 System in North America. The terms of the said license
require that Tirex Canada may manufacture TCS- 1 Systems only upon and pursuant
to specific purchase orders and requires that Tirex Canada sell all TCS-1
Systems which it manufactures exclusively to the Company.
Canadian Financial Assistance - Grants and Commitments
Transfer of the Company's research and development, and its proposed
manufacturing, activities to Tirex Canada has made the Company eligible for
various Canadian and Quebec government programs which provide grants and tax
incentives for eligible investment, research and development, and
employee-training activities. Canadian and Quebec tax incentives take the form
of deductions and tax credits with respect to eligible research and development
expenditures. Certain tax credits are refundable when they exceed the tax
payable. 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 even slightly existing
processes, materials products or devices.
Refundable tax credits are calculated as a percentage of eligible research
and development expenses. They 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. During the last fiscal year, virtually all of the
activities connected with the development and construction of the first
production model of the TCS-1 System qualified as eligible expenses. Moreover,
some approved, anticipated tax credits for contemplated research and development
expenditures can serve as "receivables" for the collateralization of debt. In
this regard, the Company received the following grants and commitments since
moving its operations to Quebec in the summer of 1995:
(a) On March 22nd, 1996, the Ministry of Industry, Trade, and Commerce
of Quebec (the "Quebec MITC") accepted a feasibility study,
conducted by Techtran: Technology Transfer Institute, a
technology-based consulting and project financing organization
specializing in the development, financing, and project
implementation of new technologies. To qualify for financial aid
under this program, studies must be carried out by independent
Quebec consulting firms, be related to eligible projects to be
established in Quebec, and be done in respect of admissible
projects. To be deemed "admissible", projects must address one of
the industrial sectors under the responsibility of the Quebec
Ministry of Industry, Commerce, Science and Technology (the "Quebec
MICST") while being consistent with the government industrial
development policy. The development of the TCS-1 System was
confirmed as an "admissible project" in this regard when the
Techtran Feasibility Study was accepted by the Quebec MITC. In
connection therewith, the Company received a total of $36,800
Canadian dollars, from the Quebec MITC in refundable tax credits,
representing reimbursement of 40% of Company's costs for the said
study.
59
(b) On May 6, 1996, the Company received a commitment for a contribution
of up to $500,000 Canadian dollars (approximately $360,000 United
States dollars at current exchange rates) under the Industrial
Recovery Program for Southwest Montreal for the development of the
TCS-1 System. Such commitment comprises repayable loans in an
aggregate amount not to exceed the greater of (i) approximately US
$370,370 or (ii) twenty percent of the total costs actually paid by
the Company in connection with the development of the TCS-1 System.
To date, the Company has received a total of $450,000 Canadian
dollars (approximately $326,000 United States dollars at current
exchange rates) under such loan commitment. The balance will be
available to the Company upon completion of the project.
(c) On October 16, 1996, the Company obtained an "Agreement for
Financial Assistance For Technology Development" (the "Recyc-Quebec
Agreement") from La Societe Quebecoise de Recuperation et de
Recyclagez ("Recyc-Quebec"). Pursuant thereto, Recyc-Quebec, a
provincial government organization, has agreed to provide the
Company with financial assistance consisting of the grant of an
amount equal to fifty percent of the total eligible expenses of the
development of the first full scale, production model of the TCS-1
System (the "Project"), up to an amount of seventy five thousand
Canadian dollars (Cdn $75,000) (approximately fifty-four thousand
United States dollars [US $54,000] at current exchange rates). To
date the Company has received 50,000 Canadian dollars (approximately
thirty- eight thousand, four hundred United States dollars [US
$38,400] at current exchange rates) under this agreement. Such
payment was based upon Recyc-Quebec's receipt and acceptance of the
Company's proofs of payment of eligible expenses in the approximate
amount of Cdn $ 76,800 (approximately US $56,064). The Company will
be able to obtain the balance of 25,000 Canadian dollars
(approximately nineteen thousand, two hundred United States dollars
[$19,200] at current exchange rates) after it has paid 100% of all
eligible expenses related to the Project and a final report
respecting the achievements of the Project has been delivered to and
accepted by Recyc-Quebec.
Research and Development
The Company's technical expertise has been an important factor in its
development and is 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 System as well as to raising the financing necessary
for such activities. The Company expended approximately $600,000 on research and
development activities during the fiscal year ended July 1997, (virtually ) all
of which funds were applied to the design, development, and construction of the
first TCS-1 production model.
Research and Development activities during the fiscal year ended June 30,
1997, focused on completion of the engineering design of the TCS-1 System and
redesign of the front end system to increase automation and optimize
performance.
All of such activities were carried out by the Company's engineering and
technical staff, consisting of Xxxxx X. Xxxx, Vice President in Charge of
Engineering, and Xxxx Xxxx, Program Director, who devoted 100% of their time to
such projects. Such activities were conducted in conjunction with the Company's
outside Consultant, Bentley Environmental Engineering Inc., and the Company's
outside subcontractors, Plasti-Systemes, Fedico, Inc., and Xxxxxxxx Freres,
Limitee.
60
Although the basic design and development of the TCS-1 is expected to be
brought to completion by the end of 1997, the Company intends to continue to
seek to refine and enhance its tire disintegration technology and to enhance it
to comply with emerging regulatory or industry standards or the requirements of
a particular customer. The Company also intends to endeavor to develop new
products and uses for the rubber crumb produced by the operation of the TCS-1
System.
Employees
During the fiscal year ended June 30, 1997, the Company had seven
employees including its officers: Xxxxxxx X. Xxxxx, Xxxxx X. Xxxx, Xxxx
Xxxxxxxx, and Xxxxx Xxxxxx, its in-house Corporate and Securities Counsel, its
Technical Program Director, and one secretary-receptionist. All of the foregoing
persons devote their full time to the business and affairs of the Company. The
Company also utilizes the services of several part-time consultants to assist
them with market research and development and other matters. The Company intends
to hire additional personnel, as needed.
Patent Protection
On December 18, 1996, the Company filed patent applications in the United
States and Canada based on provisional priority under preliminary patent
applications filed on December 19, 1995. Prior to such filings, the Company
relied on trade secrets, proprietary know-how and technological innovation to
develop its technology and the designs and specifications for the TCS-1 System.
The Company has entered into confidentiality and invention assignment agreements
with certain employees and consultants which limit access to, and disclosure or
use of, the Tirex technology. There can be no assurance, however, that the steps
taken by the Company to deter misappropriation or third party development of its
technology and/or processes will be adequate, that others will not independently
develop similar technology and/or processes or that secrecy will not be
breached. In addition, although the Company believes that its technology has
been independently developed and does not infringe on the proprietary rights of
others, there can be no assurance that the Company's technology does not and
will not so infringe or that third parties will not assert infringement claims
against the Company in the future. The Company believes that the steps it has
taken to date will provide some degree of protection and that the issuance of a
patent pursuant to its application will materially improve this protection.
However, no assurance can be given that this will be the case or that the
Company will in fact be granted a patent. No assurance can be given, in the
absence of a final court determination, that any particular patent is valid and
enforceable or that any patent may not be the subject of patent infringement
claims. The Company has no present knowledge of any information which would
adversely affect the issuance of a patent pursuant to its current application
or, should a patent be granted, the validity thereof.
On or about September 13, 1996, the Company received a letter from
attorneys for a New York based recycling company respecting its filing for
worldwide patent protection for a tire recycling process utilizing a natural air
freezing system and claiming that, upon issuance of its Canadian patent, the
Company's recycling process would be the subject of a patent infringement claim.
The Company responded to such letter on September 20, 1996 stating its position
that any such claim would be completely without merit. The Company has received
no further communications respecting this matter. Since that time, a member of
the Company's engineering staff and the Company's patent agent have examined the
patent which was involved in this matter and have concluded that the
specifications thereof are different from those of the patent for which the
Company has applied and that no meritorious patent infringement claim could
arise in connection therewith.
61
Competition
The Company knows of no devices, apparatus or equipment, utilizing
technology which is identical or comparable to the TCS-1 System, which are
presently being sold or used anywhere in the world, nor is it aware of any
patents relating to the Technology. However, the Technology and the TCS-1
System, if and when developed, may reasonably be expected to compete with
related or similar processes, machines, apparata or devices for tire
disintegration, cryogenic or otherwise. Moreover prospective competitors which
may enter the field may be considerably larger than the Company 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 Company will
be able to apply to the TCS-1 System. Additionally, manufacturers of presently
available equipment may be 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
Company's Technology or the TCS-1 System, if developed, can successfully compete
with existing systems or with any improved or new systems which may be developed
in the future.
Government Regulation
While the Company's equipment manufacturing operations may not be directly
subject to extraordinary government regulations, the operations of the
purchasers and operators of such equipment may be subject to extensive and
rigorous government regulation designed to protect the environment. The
Company's proposed rubber crumb re-grinding, and on-site tire shredding,
operations will, however be directly subject to these types of government
regulation. As a result, the business of the Company will be directly or
indirectly subject to, and may be affected by, government regulations.
Management does not expect that the operation of the TCS-1 Systems, the
re-grinding operations, or the on-site tire shredding will result in the
emission of air pollutants, the disposal of combustion residues, or the storage
of hazardous substances (as is the case with other tire recycling processes such
as pyrolysis). However, establishing and operation any of the foregoing types of
plants for tire recycling will require numerous permits and compliance with
environmental and other government regulations, both in the United States and
Canada and in most other foreign countries. Moreover, the Company is currently
making preparations to enter into a five-year tire shredding project in Quebec
(see "Proposed Tire Shredding Operations"). These operations, as well as the
businesses of TCS-1 System operators, may involve, to varying degrees and for
varying periods of time, the storage or "stockpiling" of scrap tires which, with
their size, volume and composition, can pose a particularly serious
environmental problem. Among the numerous problems relating to stockpiling scrap
tires, is the fact that when stockpiled above ground, tires create serious fire,
public health, and environmental hazards ranging from fires, which generate
large and dense clouds of black smoke and are extremely difficult to extinguish,
to the creation of vast breeding grounds for mosquitoes and vermin. As a result,
many states have either passed or have pending legislation regarding discarded
tires including legislation limiting the storage of used tires to specifically
designated areas. For reasons including, but not limited to the problems
described above, the Company and the purchasers of its TCS-1 Systems will 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.
Compliance with applicable environmental and other laws and regulations
governing the business of the Company may impose a financial burden upon the
Company that could adversely affect its business, financial condition,
prospects, and results of operations. Likewise, the burden of compliance with
laws and regulations governing the installation and/or operation of TCS-1
Systems could discourage potential customers from purchasing a TCS-1 System
which would adversely affect the Company's business, prospects, results, and
financial condition. Actions by federal, state, and local governments concerning
62
environmental or other matters could result in regulations that could increase
the cost of producing the recyclable rubber, steel, and fiber which are the
by-products from the operation of the TCS-1 System and make such by-products
less profitable or even impossible to sell at an economically feasible price
level.
The process of obtaining required regulatory approvals may be lengthy and
expensive for both the Company and for its TCS-1 System customers. Moreover,
regulatory approvals, if granted, may include significant limitations on either
the Company's or its customer's operations. The EPA and comparable state and
local regulatory agencies 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, suspensions of approvals, seizure or recall of products,
operating restrictions, and criminal prosecutions. Furthermore, changes in
existing regulations or adoption of new regulations could impose costly new
procedures for compliance, or prevent the Company or its TCS-1 customers from
obtaining, or affect the timing of, regulatory approvals.
The Company believes that existing government regulations, while
extensive, will not result in the disability of either the Company or its TCS-1
System customers to operate profitably and in compliance with such regulations.
In this regard, it has retained environmental attorneys in Montreal to advise it
with respect to compliance with local environmental regulations applicable to
its proposed tire shredding operations. It has also engaged a consultant to
advise purchasers of its TCS-1 Systems with respect to compliance with local
environmental regulations applicable to the installation and operation of the
TCS-1 System. To date, the Company has not had to make significant capital
expenditures relating to environmental compliance because it has not yet
commenced operations. However, the inception of equipment manufacturing and,
possibly, tire shredding operations together with continually changing
compliance standards and technology, may affect the Company's future capital
expenditure requirements relating to environmental compliance. Moreover, since
all government regulations are subject to change and to interpretation by local
administrations, the effect of government regulation could conceivably prevent,
or delay for a considerable period of time, the development of the Company's
business as planned and/or impose costly requirements on the Company or on its
TCS-1 System customers, which could cause or result in competitive advantages to
the Company's competitors or make the Company's or its TCS-1 customers'
businesses less profitable, or unprofitable, to operate.
Properties
The Company's corporate headquarters are located at 000 Xx. Xxxxxxx, Xxxxx
000, Xxxxxxxx, Xxxxxx, X0X 0X0. The Company occupies a 1988 square foot suite in
a modern office building located in the commercial and business district of
South West Montreal. All of such facility is devoted to executive offices,
reception, and conference areas including six executive offices. The Company
occupies these premises under a three-year lease, dated June 23, 1997, (expires
on June 30,2000) with Les Immeubles 740 Saint-Xxxxxxx Inc. The lease provides
for monthly rental payments of 2,825 Canadian Dollars (approximately 2,034
United States Dollars at current exchange rates). Rental payments are inclusive
of all taxes, utilities, and any other applicable fees or charges. The lease is
renewable for an additional three years at market rates then prevailing.
The Company intends during the present fiscal year to rent or purchase a
manufacturing and storage facility of approximately 100,000 square feet to be
used for assembling and warehousing the TCS- 1 Systems, as they are manufactured
by the Company.
63
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LEGAL PROCEEDINGS
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The Company is the defendant in an action, commenced on June 18, 1997, in
the United States District Court for the District of New Jersey, entitled Great
American Commercial Funding Corp. vs. Tirex America Inc. The action arises out
of a certain "placement fee agreement", executed by the Company in February of
1996, under which the Company, among other things, undertook to pay the
plaintiff a "placement fee" in the amount of $250,000 and to grant to the
plaintiff an option to acquire 400,000 shares of the company's common stock, at
a price of $0.01 per share, in the event, and only in the event, that plaintiff
succeeded in obtaining financing acceptable to the Company. Although the amount
and terms of the "financing" were not mentioned in the documents, it was clearly
understood by the parties that the Company was then seeking to obtain, and that
the agreement contemplated, financing in an amount (assumed necessarily to be in
the multi-million dollar range), adequate to fund the design and development of
the TCS-1 System and to enable the Company to initiate manufacturing such
Systems on a commercial basis. Under the Agreement: (i) the plaintiff did not
undertake to do anything other than "attempt" to secure financing acceptable to
the Company and (ii) the Company had absolute discretion whether or not to
accept any and all "financing" proposals.
Several months elapsed after the Company signed the Agreement without
plaintiff ever introducing the Company to any third party which was ready,
willing, and able to produce the kind and type of financing which the plaintiff
knew the defendant was seeking and needed. However, plaintiff did recommend a
firm in Long Island which was engaged in the business of equipment lease
financing. The Company then introduced one of its customers to the such lease
financing firm. The customer ultimately entered into a lease financing
arrangement with such firm, pursuant to which the Company was able to obtain
some limited amounts of pre-delivery funds, but only because the customer agreed
to do so, and the customer's principals fully collateralized any and all advance
payments/loans made by or through the lease financing firm. Because the advances
made to the Company pursuant to that lease-financing arrangement clearly did not
in any way constitute the type of financing contemplated by the parties or the
Agreement, the Company believes it has no financial obligation to the plaintiff
pursuant to said "placement fee agreement".
The Company has filed an Answer denying any liability to the plaintiff in
light, among other things, of the foregoing facts, and asserting, among other
things, that: (i) the agreement was induced by plaintiff's material
misrepresentations; (ii) enforcement thereof would be clearly unconscionable in
the circumstances; (iii) plaintiff never introduced the Company to any third
party which was ready, willing, and able to produce the type of financing which
the plaintiff knew the Company was seeking and needed; and (iv) the so-called
"placement fee agreement" was merely an offer for a unilateral contract which
was terminated or revoked, and notice of such revocation was timely communicated
to plaintiff before it rendered any substantial performance in reliance upon the
offer. The Company and its litigation counsel, Xxxxxxx X. Xxxxx, believe that
the plaintiffs complaint is without merit and that the Company ultimately will
prevail in this litigation.
The Company is unaware of any other pending or threatened legal
proceedings to which Company is a party or of which any of its assets is the
subject. 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 the Company.
64
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DESCRIPTION OF SECURITIES
--------------------------------------------------------------------------------
Description of Securities Being Offered Hereby
Common Stock
The authorized capital stock of the Company consists of fifty million
shares (50,000,000) shares, par value $.001 per share, of which thirty-five
million (35,000,000) shares are designated Common Stock par value $.001 per
share, and fifteen million (15,000,000) shares are designated Open Stock, par
value $.001 per share. There are presently thirty-eight million, seven hundred
seventy-four thousand, six hundred twenty-five (38,774,625) shares of Common
Stock issued and outstanding. The Open Stock may be issued from time to time, in
one or more classes, or one or more series within any class thereof, in any
manner permitted by law, as determined from time to time by the Company's Board
of Directors, and stated in the resolution or resolutions providing for the
issuance of such shares adopted by the Company's Board of Directors, each class
or series to be appropriately designated, prior to the issuance of any shares
thereof, by some distinguishing letter, number designation or title. All shares
of stock in such classes or series may be issued for such consideration and have
such voting powers, full or limited, or no voting powers, and shall have such
designations, preferences and relative, participating, optional, or other
special rights, and qualifications, limitations or restrictions thereof,
permitted by law, as shall be stated and expressed in the resolution or
resolutions, providing for the issuance of such shares adopted by the Company's
Board of Directors pursuant to authority vested in the Company's Certificate of
Incorporation. The number of shares of stock of any class or series within any
class, so set forth in such resolution or resolutions may be increased (but not
above the total number of authorized shares) or decreased (but not below the
number of shares thereof then outstanding) by further resolution or resolutions
adopted by the Company's board of directors pursuant to authority vested in it
in the Company's Certificate of Incorporation.
The Company's Board of Directors may determine the times when, the terms
under which, and the consideration for which, the Company shall issue, dispose
of or receive subscriptions for its shares, including treasury shares, or
acquire its own shares. The consideration for the issuance of the shares shall
be paid in full before their issuance and shall not be less than the par value
per share. Upon payment of such consideration, such shares shall be deemed to be
fully paid and nonassessable by the Company.
The holders of shares of Common Stock are entitled to dividends when and
as declared by the Board of Directors from funds legally available therefore
and, upon liquidation, are entitled to share pro rata in any distribution to
shareholders. Holders of the Common Stock have one non-cumulative vote for each
share held. There are no pre-emptive, conversion or redemption privileges, nor
sinking fund provisions, with respect to the Common Stock.
Stockholders are entitled to one vote of each share of Common Stock held
of record on matters submitted to a vote of stockholders. The Common Stock does
not have cumulative voting rights. As a result, the holders of more than 50% of
the shares of Common Stock voting for the election of directors can elect all of
the directors if they choose to do so, and, in such event, the holders of the
remaining shares of Common Stock will not be able to elect any person or persons
to the board of directors of the Company.
65
Debentures
The Debentures bear interest at an annual rate of 10%, payable upon
maturity. They are due and payable on the first to occur of: (i) the completion
and closing of an underwritten public offering of the securities of the Company,
yielding gross proceeds to the Company of not less than $8,000,000 (the
"Proposed Public Offering"); (ii) the completion and closing of any debt or
equity financing of the Company in excess of $4,500,000; or (iii) one year from
the issuance date of the Debenture. If a Debenture is not converted, it may be
redeemed by the holder any time after Maturity at 100% of the principal amount
of the Debenture plus all interest accrued thereon. Redemptions effected after
March 31, 1998, however, will be made at a premium of 125% of the principal
amount of the Debenture plus all interest accrued thereon. The Debentures are
convertible, in whole or in part, at any time prior to maturity at a conversion
rate, prior to March 31, 1998, equal to 85% and, after March 31, 1998, equal to
75% of the average of the closing bid price of the Common Stock, as reported by
the National Association of Securities Dealers, Inc. Small Cap Market System
("NASDAQ"), during the five-day period preceding the Company's receipt of a
notice of conversion from a Debenture holder. In the event the Company's Common
Stock is not then traded on the NASDAQ Small Cap Market, the conversion price
will be equal to 85% of the average of the closing bid prices of the Common
Stock, as traded in the over-the-counter market and quoted in the OTC Electronic
Bulletin Board of the NASD, during the five-day period preceding the Company's
receipt of a notice of conversion from a Debenture holder. In the event that the
Proposed Public Offering is not declared effective on or before March 31, 1998,
the Debentures shall be convertible after Maturity at a conversion rate of 75%
of the average of the closing bid prices of the Common Stock, as traded in the
over-the-counter market and quoted in the OTC Electronic Bulletin Board of the
NASD, during the five-day period preceding the Company's receipt of a notice of
conversion. The Debentures have no voting rights. Each of the shares of Common
Stock issuable upon conversion of the Debentures (the "Conversion Shares") will
have one vote. The Company has agreed to file a registration statement under the
Securities Act covering the Conversion Shares as promptly as practicable after
the expiration of the offering period of the Private Placement being made
hereunder (the "Offering Period") and to use its best efforts to cause such
registration statement to be declared effective by the Commission. In the event
the Company fails to fulfill the foregoing obligation to register the Conversion
Shares, the Debenture holders will have demand and piggy-back registration
rights, as set forth above under "THE OFFERING". The Debentures and Warrants
comprising the Units are not separable or transferable under any conditions
prior to March 31, 1998. In the event that any portion of a Debenture is
converted prior to March 31, 1998, the holder thereof shall lose the right to
exercise his or her warrants in proportion, on a pro rata basis, to the
percentage of the principal amount of the Debenture which has been converted.
For Example: (i) The holder of one Unit will be the owner of one Debenture in
the principal amount of $25,000 and 50,000 Warrants; (ii) Prior to March 31,
1998, such holder converts $5,000 (or 20%) of the principal amount of the
Debenture; (iii) As a result of the foregoing, such holder will lose the right
to convert 10,000 (or 20%) of the 50,000 Warrants held by him or her.
The Warrants
Each Warrant entitles the holder thereof to purchase one share of the
Company's Common Stock at a price of $.001 commencing on the earlier of: (i) the
effectiveness with the Commission of the registration statement relating to the
Proposed Public Offering or (ii) May 31, 1998. The Warrants have no voting
rights. The Company shall include the Underlying Shares in the registration
statement pertaining to the shares issuable upon conversion of the Debentures
and shall use its best efforts to keep such registration statement effective at
all times until: (i) all of the Debentures, which are eligible for conversion,
are converted, and the delivery of a prospectus is no longer required in
connection with any resale of the shares issued on such conversion, and there
are no unpaid, unconverted debentures outstanding, and (ii)
66
all of the Warrants have been exercised and the delivery of a prospectus is no
longer required in connection with resale of any of the Underlying Shares.
--------------------------------------------------------------------------------
MANAGEMENT
--------------------------------------------------------------------------------
Directors and Executive Officers
The following sets forth the names and ages of all directors and executive
officers of Company and the date when each director was appointed, and all
positions and offices in Company held by each such person. Each director will
hold office until the next annual meeting of shareholders and until his or her
successor has been elected and qualified:
Date
Offices Appointed
Name Age Held Director
---- --- ---- --------
Xxxxxxx X. Xxxxx 39 President, January. 18, 1995
Treasurer & Director
Xxxxx X. Xxxx 63 Vice President January 1, 1996
of Engineering &
Director
Xxxx X. Xxxxxxx 50 Director February 21, 0000
Xxxx X. Xxxxxxxx, Xx. 00 Xxxxxxxxx,
Xxxx President June 1, 1996
of Operations &
Director
Xxxxx Xxxxxxx 47 Director January 17, 1997
Xxxx Xxxxxxxx 49 Director January 17, 1997
Xxxxx Xxxxxx 46 Vice President of September 1, 1996
Market Development
Family Relationships
No family relationship has ever existed between any director, executive
officer of Company or any person contemplated to become such.
67
Business Experience
The following summarizes the occupation and business experience during the
past five years for each director, executive officer, and significant employee
of Company:
XXXXXXX X. XXXXX. Xx. Xxxxx has served as President, Treasurer, and a
Director of Company since January 18, 1995. He holds a Bachelor's degree in
Economics from Villanova University in Philadelphia. Xx. Xxxxx has been the
controlling shareholder and an officer and director of Bartholemew & Xxxxx,
Inc., a consulting firm specializing in corporate finance and general business
consulting, since its founding in January 1993. From September 1992 through
August 1993, he directed European marketing and business development for Pacer
Systems Corporation, a public company engaged in the business of systems
engineering for high tech industries. From July 1989 to August 1992, Xx. Xxxxx
served as president of Digital Optronics Corporation, a public company which,
until August 1992, was engaged in the business of manufacturing digital optronic
measuring devices, principally for the defense industry. From November 1988
(prior to being acquired by Digital Optronics) until March 1992, Xx. Xxxxx also
served as president and a director of Xxxxx Industries, Inc.("BII"), a
wholly-owned subsidiary of Digital Optronics, Inc. BII was, until the drastic
down-turn in the defense industry in March of 1991, in the business of
manufacturing electronic defense equipment as a sub-contractor to major
multi-billion dollar defense industry companies, such as Lockheed Aviation.
XXXXX X. XXXX. Xx. Xxxx 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. Xx. Xxxx served as a Director of
Company from December 29, 1992 until January 18, 1995. He also served as
Company's Secretary from December 29, 1992 until March 1994 when he was
appointed President of Company, a position he held until January 18, 1995. Xx.
Xxxx 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 Xx. Xxxx as been the sole shareholder 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,
Pennsylvania, a public company engaged in the business of recovering useable tin
and clean steel from scrap tin plate. From 1960 to 1964, Xx. Xxxx was the sole
proprietor of Space Metals Refining Co. in Woodbridge, New Jersey, 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, New
Jersey, where he developed a process for the waste-free production of urea from
ammonia, carbon dioxide and water. From 1954 to 1959, Xx. Xxxx worked in the
research and development department at U.S. Metals Refining Co. in Carteret, New
Jersey where he was involved with the refinement of precious metals.
XXXX X. XXXXXXX. Xx. Xxxxxxx holds a Bachelor of Science Degree in
Economics from Manchester University in England. He has acted as a director of
Pacer Systems Inc. since 1985. Pacer Systems is a publicly held company with
offices in Boston, Massachusetts and is engaged in the business of Systems
Engineering for high tech industries. Since 1993, Xx. Xxxxxxx has also served as
a consultant to Xxxxx Xxxxxxx International, an investment banking firm
headquartered in Monaco.
XXXX X. XXXXXXXX, XX. Xx. Xxxxxxxx holds a Bachelor of Arts Degree from
the University of North Carolina at Chapel Hill. He was an independent
representative for Primerica Financial Services from 1991 through 1994. From
1988 to 1990, Xx. Xxxxxxxx was an advertising account supervisor for Xxxxxxxx &
Puris Inc., an advertising firm in New York, assigned to the BMW of North
America account. From 1982 to 1988, Xx. Xxxxxxxx was a senior account executive
at Saatchi & Saatchie, Inc. in New York, assigned to the Toyota Account.
68
XXXXX XXXXXXX. Xx. Xxxxxxx holds a degree in marketing from Marquette
University. He is the President and a member of the Board of Directors of the
nation-wide, Construction Material Recycling Association. Since 1986, he 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 remanufacturing construction and demolition debris for reuse as a
substitute for virgin materials in the construction and road building
industries. In addition, since 1989, Xx. Xxxxxxx has served as Vice President
and Chief Operating Officer 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, Xx. Xxxxxxx
was the President and Chief Executive Officer of J and L Excavating and
Contracting Co., Inc., a company engaged in the construction of residential,
commercial, industrial, and government building. Xx. Xxxxxxx was a member of the
Board of Directors of the New Jersey state-wide Utility Transportation
XXXX XXXXXXXX. Xx. Xxxxxxxx holds a degree in Economics from Cambridge
University in England and an MBA degree from INSEAD in France. In addition to
serving as a Director of the Company, Xx. Xxxxxxxx will participate in
developing and will have charge of implementing the Company's projected
marketing operations in Europe and Asia. Since 1986, Xx. Xxxxxxxx has served as
president of FAISLESA, Arganda del Rey in Madrid, Spain. FAISLESA, a company
which Xx. Xxxxxxxx established in 1986 as a venture capital project, is a
manufacturer and applicator of thermal insulants and water-proofing products for
the construction industry. FAISLESA runs a network of regional distributors
throughout Spain and has its own application crews in the Madrid area. Xx.
Xxxxxxxx has full executive responsibility in all areas of manufacturing,
marketing, research, and administration of FAISLESA. Xx. Xxxxxxxx'x previous
business experience includes his work as a Eurocurrency trader in the
International Division of X.X. Xxxxxxx and Co. Ltd., Merchant Bankers in London
from 1968 to 1970, a management consultant for McKinsey and Company, Inc. in
Brazil, France, Germany, Holland, Italy, Spain, Switzerland, the UK and the
United States from 1971 to 1977, Managing Director of Satlan, S.A., a Madrid
firm involved in International trading of petroleum products and various
commodities from 1977 to 1980 and, President of Gapco, S.A., a Madrid commercial
and financial consulting firm (1980-1994).
XXXXX XXXXXX. Xx. Xxxxxx holds a Bachelor's degree in English Literature
and has attended business management, marketing, and behavioral sciences courses
at XxXxxx University in Montreal. She was appointed Vice President In Charge of
Market Development for the Company on September 1, 1996. From 1992 until she
joined the Company, Xx. Xxxxxx worked as an independent consultant in the area
of market research and market development. Pfizer Canada, CP Rail marketing
division and Techtran Technology Transfer Company were among her clients during
this period. From 1989 until 1992, Xx. Xxxxxx was a training specialist for CP
Rail System where she designed and implemented a drug and alcohol abuse control
program throughout North America. From 1981 to 1989, Xx. Xxxxxx worked as a
consultant with, among others, Proudfoot Consulting Firm on projects with Xxxx
Canada, Alberta Great Telephone, Firestone Bridgestone, East Midland Electric
Board in England, Columbus McKennin, and International Paper.
