UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
KNUTEK HOLDINGS, INC.
(Name of small business issuer in its charter)
CALIFORNIA 2844 94-3409937
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(State or (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification No.)
incorporation or Classification
organization) Code Number)
2713 San Pablo Avenue, Berkeley, California 94702
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Telephone: (510) 549-9071
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(Address and telephone number of principal executive offices)
2713 San Pablo Avenue, Berkeley, California 94702
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(Address of principal place of business or intended
principal place of business)
Jean L. Batman, Esq., Duane Morris LLP
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100 Spear Street, 15th Floor, San Francisco, California 94105
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Telephone: (415) 371-2200
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(Name, address and telephone number of agent for service)
Approximate date of proposed sale to the public: From time to time after this
Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
_________________________________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] _________________________________________________
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] _________________________________________________
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ]
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CALCULATION OF REGISTRATION FEE
Tile of each Dollar Proposed Proposed Amount of
class of securities amount to maximum maximum registration
to be registered be registered offering aggregate fee
price per offering
unit price
Common Stock, 1,969,999 1.00 1,969,999 181
No Par Value
The offering price per share for the selling security holders was estimated
solely for the purpose of calculating the registration fee pursuant to Rule 457
of Regulation C.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
PART I
Item 1. Front of Registration Statement and Outside Front Cover of Prospectus.
KNUTEK HOLDINGS, INC.
2713 San Pablo Avenue, Berkeley, California 94702
Telephone: (510) 549-9071
1,969,999 Shares of Common Stock
The selling shareholders named in this prospectus are offering all of the shares
of common stock offered through this prospectus.
Our Common Stock is not currently listed on any national securities exchange or
the Nasdaq Stock Market.
THE PURCHASE OF THE SECURITIES OFFERED THROUGH THIS PROSPECTUS INVOLVES A HIGH
DEGREE OF RISK. SEE SECTION ENTITLED "RISK FACTORS".
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is June 18, 2002.
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Item 2. Inside Front and Outside Back Cover Pages of Prospectus.
TABLE OF CONTENTS
PART I 2
Item 1. Front of Registration Statement and Outside Front
Cover of Prospectus. 2
Item 2. Inside Front and Outside Back Cover Pages of Prospectus. 3
TABLE OF CONTENTS 3
Item 3. Risk Factors. 5
Item 4. Use of Proceeds. 11
Item 5. Determination of Offering Price. 11
Item 6. Dilution. 11
Item 7. Selling Security Holders. 11
Item 8. Plan of Distribution. 13
Item 9. Legal Proceedings. 15
Item 10. Directors, Executive Officers, Promoters and Control Persons. 15
DIRECTORS: 15
EXECUTIVE OFFICERS: 16
TERM OF OFFICE 16
SIGNIFICANT EMPLOYEES 16
We also have a number of independent contractors who are
key to our success. 17
FAMILY RELATIONSHIPS 17
Item 11. Security Ownership of Certain Beneficial
Owners and Management. 17
Item 12. Description of Securities. 17
GENERAL 17
COMMON STOCK 18
PREFERRED STOCK 18
TRANSFER AGENT AND REGISTRAR 18
DIVIDEND POLICY 18
NO OTHER SECURITIES 18
Item 13. Interest of Named Experts and Counsel. 18
Item 14. Disclosure of Commission Position of
Indemnification for Securities Act Liabilities. 19
Item 15. Organization Within Last Five Years. 19
Item 16. Description of Business. 19
OVERVIEW. 19
BUSINESS DEVELOPMENT 21
HIGH QUALITY PRODUCTS. 21
ATTRACTIVE DISTRIBUTOR COMPENSATION PROGRAM. 21
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COMPREHENSIVE DISTRIBUTOR SUPPORT SERVICES. 21
GROWTH SRATEGY. 22
PRODUCT OVERVIEW. 22
SALES AND DISTRIBUTION METHODS. 23
OUR MARKET. 24
OUR MATERIALS AND SUPPLIERS. 26
PRODUCT RETURN AND BUY-BACK POLICIES. 26
COMPETITION. 26
INTELLECTUAL PROPERTY. 27
GOVERNMENTAL APPROVALS AND REGULATION. 27
TOTAL NUMBER OF EMPLOYEES AND NUMBER OF FULL TIME EMPLOYEES. 31
REPORTS TO SECURITIES HOLDERS 31
Item 17. Management's Discussion and Analysis. 31
Item 18. Description of Property. 34
Item 19. Certain Relationships and Related Transactions. 34
Item 20. Market for Common Equity and Related Stockholder Matters. 34
NO PUBLIC MARKET 34
HOLDERS OF OUR COMMON STOCK 34
REGISTRATION RIGHTS 34
DIVIDENDS 35
RULE 144 SHARES 35
Item 21. Executive Compensation. 35
SUMMARY COMPENSATION TABLE 35
COMMITTEES OF THE BOARD OF DIRECTORS 36
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION 36
EMPLOYMENT AGREEMENTS 36
STOCK OPTION GRANTS 36
Item 22. Financial Statements. 36
Item 23. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure. 37
PART II 37
Item 24. Indemnification of Directors and Officers. 37
Item 25. Other Expenses of Issuance and Distribution. 37
Item 26. Recent Sales of Unregistered Securities. 38
Item 27. Exhibits. 39
Item 28. Undertakings. 39
SIGNATURES 41
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Item 3. Risk Factors.
An investment in our common stock involves a high degree of risk. You should
consider carefully the risks described below and the other information in this
prospectus and any other filings we may make with the United States Securities
and Exchange Commission in the future before investing in our common stock. If
any of the following risks occur, our business, operating results and financial
condition could be seriously harmed. The trading price of our common stock could
decline due to any of these risks, and you may lose all or part of your
investment.
THE SUCCESS OF OUR BUSINESS DEPENDS ON THE CONTINUED SERVICE AND PERFORMANCE OF
OUR KEY EMPLOYEES.
We are largely dependent on certain key management personnel, particularly our
President and Chief Executive Officer, Jim Knut Larsson, for our success. The
loss of services of Mr. Larsson or other executive officers would have a
materially adverse effect upon our business. Additionally, we believe we will
need to attract, retain and motivate talented management and other highly
skilled employees to be successful. Competition for employees that possess
knowledge of our target market is intense. We may be unable to retain our key
employees or attract, assimilate and retain other highly qualified employees in
the future. We currently do not have employment agreements or any "key person"
insurance on any of our executive officers or key employees.
WE HAVE A LIMITED OPERATING HISTORY.
It is difficult to evaluate our business and prospects because we have a limited
operating history. We were formed on August 13, 2001, as a California
corporation and operated for approximately three years prior to that time as the
sole proprietorship of Jim Knut Larsson doing business as GAIA International.
Our limited operating history makes it difficult to evaluate our current
business and prospects or to accurately predict our future revenue or results of
operations. Our revenue and income potential are unproven, and our business
model is constantly evolving. To better evaluate our business prospects, you
should evaluate the risks, uncertainties, expenses and difficulties frequently
encountered by companies in early stages of development generally.
WE OPERATED OUR BUSINESS AT A LOSS IN OUR MOST RECENT FISCAL YEAR.
We experienced an operating loss in 2001 and anticipate losses and negative cash
flow for the foreseeable future. We anticipate that our operating losses will
increase significantly from current levels because we plan to significantly
increase our expenditures for sales and marketing, product development and
technology and infrastructure development to enhance the kNutek brand. With
increased expenses, we will need to generate significant additional revenue to
achieve profitability, we may never achieve profitability, and even if we do
achieve profitability, we may not sustain or increase profitability on a
quarterly or annual basis in the future. If we do not achieve or sustain
profitability in the future, then we will be unable to continue our operations.
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WE ARE DEPENDENT ON OUR DISTRIBUTORS FOR A SIGNIFICANT PORTION OF OUR BUSINESS.
Our success depends in significant part upon our ability to attract, maintain
and motivate a large base of retail product distributors. In our efforts to
attract and retain distributors, we compete with other network marketing
organizations, including those in the personal care product, weight management,
and food and dietary supplement industries. We do not believe that the loss of
any key distributor would necessarily result in the loss of a significant number
of that distributor's downline organization members because of our good
relations with our distributors and because of the significant incomes that many
distributors would forego by ceasing to distribute our products. However, the
loss of a key distributor, together with a significant number of downline
distributors, or the loss of a significant number of distributors for any
reason, could adversely affect sales of our products and could impair our
ability to attract new distributors. Our ability to attract and retain
distributors could be negatively affected by adverse publicity and regulatory
action relating to the Company, our products, or operations, including its
network marketing system.
OUR BUSINESS COULD BE ADVERSELY EFFECTED BY CHANGES IN THE REGUATION OF OUR
PRODUCTS OR MARKETING ORGANIZATION.
The adoption of new regulations in the United States or in international
markets, or changes in the interpretation of existing regulations, could have a
material adverse effect on our business. For example the United States Food &
Drug Administration (the "FDA") periodically issues regulations that govern the
labeling of dietary supplements, including how to declare nutritional
information, how to make permissible "statements of nutritional support" and
when additional, defined terminology may be used on dietary supplements.
Changes in such regulations may make it necessary for us to conduct tests,
revise labels, or incur other expenses. Further, in certain markets, including
the U.S., claims made with respect to weight management, dietary supplement,
personal care or other products may change the regulatory status of the
products. In the U.S., for example, it is possible that the FDA could take the
position that claims relating to certain products fall within an "over-the-
counter monograph", such that the regulatory status of those products in the
U.S. is or could become unclear. The U.S. Federal Trade Commission ("FTC"),
which exercises jurisdiction over the advertising of all the Company's products,
continues to institute enforcement actions against dietary supplement companies
for false and misleading advertising of certain products. These enforcement
actions have resulted in consent decrees and monetary payments by the companies
involved. In addition, the FTC has increased its scrutiny of the use of
testimonials, which are utilized by the Company. While we have not been the
target of any FTC enforcement action, there can be no assurance that the FTC
will not question our advertising or other operations in the future. As a
marketer of food and dietary supplements and other products that are ingested by
consumers, we are subject to the risk that one or more of the ingredients in our
products may become the subject of adverse regulatory action. A limited number
of the products we sell may be labeled as over-the-counter ("OTC") drugs as
opposed to dietary supplements, conventional foods or personal care items. Many
OTC drug products do not require pre-approval by the FDA, but must comply with
applicable OTC monographs, which prescribe permissible ingredients and
appropriate labeling language. In addition, either the Company or its supplier
must register and file annual drug listing information with the FDA. Because
the FDA could take the position that claims made with respect to any of our
products fall within an OTC monograph, the regulatory status of some of our
products is or could become unclear. If any enforcement were undertaken, we
could be required to re-label or reformulate such products. Governmental
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regulations in countries where we plan to commence or expand operations may
prevent or delay entry into the market. In addition, our ability to sustain
satisfactory levels of sales in certain markets is dependent in significant part
on our ability to introduce additional products into such markets. However,
government regulations, both domestic and international, can delay or prevent
the introduction, or require the reformulation or withdrawal, of certain
products. Further, regulatory action, whether or not it results in a final
determination adverse to the Company, can create negative publicity with
detrimental effects on the motivation and recruitment of retail product
distributors and, consequently, on sales. The Company may be subject to
challenges with regard to the implementation of its network marketing system.
While we believe that our network marketing system complies with all applicable
laws, there can be no assurance that such challenges will not be made or made
successfully or that other legal developments in this area will not have a
material adverse effect on the Company.
WE ARE SUBJECT TO THE UNCERTAINTIES INHERENT IN BUSINESS EXPANSION.
Our continued growth is dependent upon our ability to expand our operations.
Our expansion into new markets may be adversely affected by regulatory barriers,
new regulatory systems and problems related to entering new markets with
different cultural and political bases. In addition, our success will be
significantly dependent on our ability to manage rapid growth, through
establishment and expansion of worldwide personnel and management and
information, order processing and fulfillment, inventory and shipping systems
and other aspects of operations. From time to time, we may experience out-of-
stock situations with respect to certain products. We anticipate that we will be
required to add hardware and software to our infrastructure to accommodate
increased content and use of our website and network marketing organization. If
we are unable to increase the capacity of our website fast enough to accommodate
our expansion, our website may become unstable and may fail to operate for
unknown periods of time, which would adversely impact our business. As we
continue to add distributors, products and new markets to our operations, the
ability to manage this growth will represent an increasing challenge. We have
retained special legal counsel to advise us on the development and
implementation of our network marketing program to help guard against any such
challenges.
OUR BUSINESS MAY BE ADVERSELY EFFECTED BY THE ABSENCE OF CLINICAL STUDIES AND
SCIENTIFIC REVIEW OR BY THE POTENTIAL FOR MISUSE OF OUR PRODUCTS.
In general, our products consist of personal care products, weight management
products, and food and dietary supplements (a limited number of which have been
or may be classified in the U.S. as OTC drugs) which we believe do not require
approvals from the FDA or, in the United States market, other regulatory
agencies, prior to sale. We do not conduct clinical studies of our products.
Our products consist of herbs, vitamins, minerals and other ingredients that we
regard as safe when taken as suggested. However, because we are highly
dependent upon consumers' perception of the safety and quality of our products
as well as similar products distributed by other companies, we could be
adversely affected in the event any of our products or any similar products
distributed by other companies should prove or be asserted to be harmful to
consumers. In addition, because of our dependence upon consumer perceptions,
any adverse publicity associated with illness or other adverse effects resulting
from consumers' use or misuse of our products or any similar products
distributed by other companies could have a material adverse impact on our
business.
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WE ARE ENGAGED IN A HIGHLY COMPETITIVE BUSINESS.
We are subject to significant competition for the recruitment of distributors
from other network marketing organizations, including those that market personal
care products, weight management, and food and dietary supplements as well as
other types of products. Many of our competitors are substantially larger and
have available considerably greater financial resources than we do. Our ability
to remain competitive depends, in significant part, on our success in recruiting
and retaining distributors through an attractive compensation plan and other
incentives. In addition, the business of marketing personal care products,
weight management, and food and dietary supplements is highly competitive. This
market segment includes numerous manufacturers, distributors, marketers,
retailers and physicians that actively compete for the business of consumers
both in the United States and abroad. The market is highly sensitive to the
introduction of new products or weight management plans (including various
prescription drugs) that may rapidly capture a significant share of the market.
As a result, the Company's ability to remain competitive depends in part upon
the successful introduction of new products. We may have difficulty competing
for or executing strategic alliances and acquisitions. Our business strategy
includes entering into strategic alliances and may include acquiring
complementary businesses and products. We may be unable to complete suitable
strategic alliances and acquisitions on commercially reasonable terms, if at
all. We expect to face competition for strategic alliance and acquisition
candidates. This competition could impair our ability to successfully pursue
these aspects of our business strategy. See "Business--Competition."
OUR GROWTH IS DEPENDENT UPON OUR ABILITY TO DEVELOP OUR BRAND.
Our growth will depend on our ability to develop our brand. We believe that our
growth and brand recognition will be largely based on word of mouth. We also
believe that strengthening our brand will be critical to achieving widespread
acceptance of our products. Favorable public perception of our brand will
depend largely on our ability to provide customers with high quality products
and the success of our marketing efforts. We plan to increase our marketing
expenditures to create and maintain brand recognition. However, brand promotion
activities may not yield increased revenues and, even if they do, any increased
revenues may not offset the expenses we incur in building our brand.
FUTURE SALES OF STOCK BY AFFILIATES AND THIRD PARTIES MAY ADVERSELY IMPACT THE
PRICE OF OUR STOCK.
In the future, various shares previously issued to founders and various third
parties (e.g. prior investors and outside consultants) will be available for
sale and may adversely impact the market price of our stock. You should
understand that various shares previously issued to management and founders of
the company and various other third parties are also being registered and will
be available for sale. These sales, if and when they occur, may have a
substantial adverse impact on the market price of all shares of our stock,
should a public market subsequently develop, because of the large number of such
shares. See "There is no current market for our securities" in "Risk Factors"
below.
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STRATEGIC ALLIANCES OR ACQUISITIONS COULD DISRUPT OUR ONGOING BUSINESS.
We intend to pursue certain strategic alliances and/or acquisitions as part of
our business strategy. However, a strategic alliance or acquisition could
disrupt our ongoing business, distract our management and employees and increase
our expenses. If we acquire a company, we could face difficulties assimilating
that company's personnel and operations. In addition, the key personnel of the
acquired company may decide not to work for us. If we finance the acquisitions
by incurring debt or issuing equity securities, this could dilute our existing
stockholders. Any amortization of goodwill or other assets, or other charges
resulting from the costs of such acquisitions, could adversely affect our
operating results.
WE MAY BE EXPOSED TO PRODUCT LIABILITY CLAIMS OR INDEMNIFICATION LOSSES FOR
WHICH WE CURRENTLY DO NOT CARRY INSURANCE.
As a marketer of food and dietary supplements and other products that are
ingested by consumers or applied to their bodies, we may be subjected to various
product liability claims, including, among other things, that our products
contain contaminants or include inadequate instructions as to use or inadequate
warnings concerning side effects and interactions with other substances. While
no such claims have been made to date, it is possible that widespread product
liability claims and the resultant adverse publicity could negatively affect the
Company. We also could experience losses due to indemnification of our officers
and directors pursuant to our Bylaws, which provide for the indemnification of
our directors, officers, employees, and agents, under certain circumstances,
against attorneys' fees and other expenses incurred by them in any litigation to
which they become a party as a result of their activities on behalf of the
company. We currently do not carry insurance covering these risks.
THERE IS NO CURRENT MARKET FOR OUR SECURITIES.
There is currently no market for our common stock and we cannot assure investors
that a market will develop. The mere completion of this registration statement
will not insure that a public market will or can be developed for the trading of
our shares. If we are not able to develop a public trading market for our
common stock, there may be limited liquidity of the shares, investors may be
forced to hold such shares for an indefinite period of time and rely upon the
uncertain prospects of private sales of their securities in order to have some
type of exit strategy. Even if a public market develops, there is no reasonable
projection that can be made at what price our common stock might trade.
IN THE EVENT A MARKET FOR OUR SECURITIES IS DEVELOPED WE ARE LIKELY TO BE
SUBJECT TO ADDITIONAL REGULATION AS A PENNY STOCK.
Almost certainly our stock will initially be a penny stock and subject to
certain additional regulations in trading, if a trading market for our
securities is established. If it successfully trades, our stock will almost
certainly trade initially as a defined "low price" stock of an unseasoned
business entity such that your shares will be subject to special regulations by
the SEC known as "penny stock rules" which require additional screening and
limitations on trading by individuals buying or selling through a broker dealer.
Some of these restrictions are more particularly described under "Plan of
Distribution" below.
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OUR MANAGEMENT LACKS PUBLIC COMPANY EXPERIENCE AND WE ARE DEPENDENT UPON OUTSIDE
ADVISORS.
Our management is not experienced in the operation of a public company. If this
registration is successful, you will be relying upon our management to comply
with complex reporting requirements and to learn and discharge other
responsibilities incident to the operation of a publicly held reporting company.
To supplement the business experience of our officers and directors, we have
been and in the future expect we will continue to employ accountants, technical
experts, attorneys, and other consultants and advisors. Our management will
make the selection of any such advisors without any input from stockholders. It
is anticipated that such persons will be engaged on an "as needed" basis without
a continuing fiduciary or other obligation to the company. In the event our
management considers it necessary to hire outside advisors, we may hire persons
who are affiliates, if they are able to provide the required services.
WE DO NOT ANTICIPATE ISSUING ANY DIVIDENDS TO OUR COMMON STOCK HOLDERS.
We have not previously issued any dividends to our shareholders and we do not
anticipate that we will issue dividends to our shareholders in the foreseeable
future. To the extent we are able to generate revenues which exceed our
operating expenses, we plan to retain such earnings to fund our continued
expansion.
THIS DOCUMENT CONTAINS FORWARD-LOOKING STATEMENTS WHICH MAY DIFFER FROM OUR
ACTUAL RESULTS.
Some of the statements contained in this Form SB-2 that are not historical facts
are "forward-looking statements" which can be identified by the use of
terminology such as "estimates," "projects," "plans," "believes," "expects,"
"anticipates," "intends," or the negative or other variations, or by discussions
of strategy that involve risks and uncertainties. We urge you to be cautious of
the forward-looking statements, that such statements, which are contained in
this Form SB-2, reflect our current beliefs with respect to future events and
involve known and unknown risks, uncertainties and other factors affecting our
operations, market growth, services, products and licenses. No assurances can
be given regarding the achievement of future results, as actual results may
differ materially as a result of the risks we face, and actual events may differ
from the assumptions underlying the statements that have been made regarding
anticipated events. Factors that may cause actual results, our performance or
achievements, or industry results, to differ materially from those contemplated
by such forward-looking statements include without limitation:
1. Our ability to maintain, attract and integrate management and
information systems;
2. Our ability to generate customer demand for our products;
3. The intensity of competition;
4. Our ability to meet production demands; and
5. General economic conditions.
All written and oral forward-looking statements made in connection with
this Form SB-2 that are attributable to us or persons acting on our behalf are
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expressly qualified in their entirety by these cautionary statements. Given the
uncertainties that surround such statements, you are cautioned not to place
undue reliance on such forward-looking statements.
Item 4. Use of Proceeds.
We will not receive any proceeds from the sale of the common stock offered
through this prospectus by the selling shareholders.
Item 5. Determination of Offering Price.
We will not determine the offering price of the common stock. The offering
price will be determined by market factors and the independent decisions of the
selling shareholders.
Item 6. Dilution.
The common stock to be sold by the selling shareholders is common stock that is
currently issued and outstanding. Accordingly, there will be no dilution to our
existing shareholders as the result of sales of common stock by the selling
shareholders pursuant to this registration statement.
Item 7. Selling Security Holders.
The selling shareholders named in this registration statement are offering
all of the one million, nine hundred sixty-nine thousand, nine hundred ninety-
nine (1,969,999) shares of common stock being offered. The shares include the
following:
1. Seven hundred nineteen thousand, nine hundred ninety-nine (719,999)
shares of our common stock that the selling shareholders acquired under section
4(2) of the Securities Act on August 21, 2001; and
2. One million (1,000,000) shares of our common stock that the selling
shareholders acquired under Regulation S of the Securities Act of 1933 pursuant
to an option dated September 28, 2001. [1]
3. Two hundred fifty thousand (250,000) shares of our common stock that the
selling shareholders acquired as the result of the merger of Domestic
Transmission Technologies, Inc. into kNutek Holdings, Inc. pursuant to
California Corporations Code Section 1110. These shares are held by four
hundred fifty (450) persons and are referred to collectively below as the "DTT
Shareholders". [2]
_______________________________
1 This assumes that a $50,000 wire initiated by our investor is located and
credited to the company, which we anticipate will be resolved prior to the
effective date of this registration statement.
2 This assumes the completion of a short-form merger pursuant to California
Corporations Code Section 1110 of Domestic Transmission Technologies, Inc. into
the company, which we anticipate will be completed by the effective date of this
registration statement.
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The following table provides as of the date of this prospectus, information
regarding the beneficial ownership of our common stock held by each of the
selling shareholders, including:
1. The number of shares owned by each before this offering;
2. The total number of shares that are to be offered for each;
3. The total number of shares that will be owned by each upon completion of
the offering;
4. The percentage owned by each; and
5. The identity of the beneficial holder of any entity that owns the shares.
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Name and Address of Shares Number of Shares to be Percent Owned
Selling Stockholder Owned Shares to be Owned Upon Upon Completion
Prior to Offered for Completion of of This
This Selling This Offering Offering
Offering Shareholders'
Account
Jim Knut Larsson 6,000,000 50,000 5,950,000 66
2713 San Pablo Ave.
Berkeley, CA 94702
International Assets 1,000,000 1,000,000 0 0
Services
& Holdings, Ltd.
P.O. Box 199
08870 Sitges, Spain
David Evertsen 223,333 223,333 0 0
592 Oakley Street
Salt Lake City, UT
84116
Tom Hinkle & Lois Hinkle 223,333 223,333 0 0
JTWROS
1119 Mercedes Way
Salt Lake City, UT
84108
Jetaime Ventures, LLC 223,333 223,333 0 0
2790 N. Ashwood
Orange, CA 92865
DTT Shareholders c/o 250,0003 250,000 0 0
BAC Consulting
Corporation
19900 MacArthur Blvd.,
Ste. 660
Irvine, CA 92612
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Except as otherwise noted in the above list, the named party beneficially owns
and has sole voting and investment power over all shares or rights to these
shares. The numbers in this table assume that none of the selling shareholders
sells shares of common stock not being offered in this prospectus or purchases
additional shares of common stock, and assumes that all shares offered are sold.
The percentages are based on eight million, nine hundred ninety-nine thousand,
nine hundred ninety-nine (8,999,999) shares of common stock outstanding on the
date of this prospectus.
Except for Mr. Jim Knut Larsson, who is our President and CEO, none of the
selling shareholders or their beneficial owners:
* Has had a material relationship with us other than as a shareholder at any
time within the past three years; or
* Has ever been one of our officers or directors or an officer or director
of our predecessors or affiliates, or is related to one of our officers or
directors.
Item 8. Plan of Distribution.
The selling shareholders may sell some or all of their common stock in one or
more transactions, including block transactions:
1. On such public markets or exchanges as the common stock may from time to
time be trading;
2. In privately negotiated transactions;
3. Through the writing of options on the common stock;
4. In short sales; or
5. In any combination of these methods of distribution.
The sales price to the public may be:
1. The market price prevailing at the time of sale;
2. A price related to such prevailing market price; or
3. Such other price as the selling shareholders determine from time to time.
____________________________________
3 This assumes the completion of a short-form merger pursuant to California
Corporations Code Section 1110 of Domestic Transmission Technologies, Inc. into
the company, which we anticipate will be completed by the effective date of this
registration statement.
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The shares may also be sold in compliance with the Securities and Exchange
Commission's Rule 144.
The selling shareholders may also sell their shares directly to market makers
acting as principals or brokers or dealers, who may act as agent or acquire the
common stock as a principal. Any broker or dealer participating in such
transactions as agent may receive a commission from the selling shareholders,
or, if they act as agent for the purchaser of such common stock, from such
purchaser. The selling shareholders will likely pay the usual and customary
brokerage fees for such services. Brokers or dealers may agree with the selling
shareholders to sell a specified number of shares at a stipulated price per
share and, to the extent such broker or dealer is unable to do so acting as
agent for the selling shareholders, to purchase, as principal, any unsold shares
at the price required to fulfill the respective broker's or dealer's commitment
to the selling shareholders.
Brokers or dealers who acquire shares as principals may thereafter resell such
shares from time to time in transactions in a market or on an exchange, in
negotiated transactions or otherwise, at market prices prevailing at the time of
sale or at negotiated prices, and in connection with such re-sales may pay or
receive commissions to or from the purchasers of such shares. These
transactions may involve cross and block transactions that may involve sales to
and through other brokers or dealers. If applicable, the selling shareholders
may distribute shares to one or more of their affiliates or assignees who are
unaffiliated with us. Such affiliates or assignees may, in turn, distribute
such shares as described above.
We cannot assure investors that all or any of the common stock offered will be
sold by the selling shareholders.
We are bearing all costs relating to the registration of the common stock. The
selling shareholders, however, will pay any commissions or other fees payable to
brokers or dealers in connection with any sale of the common stock.
The selling shareholders must comply with the requirements of the Securities Act
and the Securities Exchange Act in the offer and sale of the common stock. In
particular, during such times as the selling shareholders may be deemed to be
engaged in a distribution of the common stock, and therefore be considered to be
an underwriter, they must comply with applicable law and may, among other
things:
1. Not engage in any stabilization activities in connection with our common
stock;
2. Furnish each broker or dealer through which common stock may be offered,
such copies of this prospectus, as amended from time to time, as may be required
by such broker or dealer; and
3. Not bid for or purchase any of our securities or attempt to induce any
person to purchase any of our securities other than as permitted under the
Securities Exchange Act.
The Securities Exchange Commission has adopted rules that regulate broker-dealer
practices in connection with transactions in penny stocks. Penny stocks are
generally equity securities with a price of less than $5.00 (other than
securities registered on certain national securities exchanges or quoted on the
14
Nasdaq system, provided that current price and volume information with respect
to transactions in such securities is provided by the exchange or system). The
penny stock rules require a broker-dealer, before a transaction in a penny stock
not otherwise exempt from those rules, deliver a standardized risk disclosure
document prepared by the Commission, which: (a) contains a description of the
nature and level of risk in the market for penny stocks in both public offerings
and secondary trading; (b) contains a description of the broker's or dealer's
duties to the customer and of the rights and remedies available to the customer
with respect to a violation to such duties or other requirements of Securities'
laws; (c) contains a brief, clear, narrative description of a dealer market,
including "bid" and "ask" prices for penny stocks and significance of the
spread between the "bid" and "ask" price; (d) contains a toll-free telephone
number for inquiries on disciplinary actions; (e) defines significant terms in
the disclosure document or in the conduct of trading in penny stocks; and (f)
contains such other information and is in such form (including language, type,
size and format), as the Commission shall require by rule or regulation. The
broker-dealer also must provide, before effecting any transaction in a penny
stock, the customer: (a) with bid and offer quotations for the penny stock; (b)
the compensation of the broker-dealer and its salesperson in the transaction;
(c) the number of shares to which such bid and ask prices apply, or other
comparable information relating to the depth and liquidity of the market for
such stock; and (d) monthly account statements showing the market value of each
penny stock held in the customer's account. In addition, the penny stock rules
require that before a transaction in a penny stock not otherwise exempt from
those rules; the broker-dealer must make a special written determination that
the penny stock is a suitable investment for the purchaser and receive the
purchaser's written acknowledgment of the receipt of a risk disclosure
statement, a written agreement to transactions involving penny stocks, and a
signed and dated copy of a written suitably statement. These disclosure
requirements may have the effect of reducing the trading activity in the
secondary market for our stock if it becomes subject to these penny stock rules.
Therefore, if our common stock become accountable to the penny stock rules,
stockholders may have difficulty selling those securities.
We have advised shareholders of their rights and obligations with respect to the
resale of our common shares. However, we advise investors that there are no
lock-up or other agreements in place between our company and the shareholders
regarding the resale of the common shares by shareholders.
Item 9. Legal Proceedings.
There are no legal proceedings pending or threatened against us.
15
Item 10. Directors, Executive Officers, Promoters and Control Persons.
DIRECTORS:
Name of Director Age
- ---------------------- ---
Jim Knut Larsson 49
Myra Dudley 58
Currently, we have one vacancy on our board.
EXECUTIVE OFFICERS:
Name of Officer Age Office
- -------------------- --- -------
Jim Knut Larsson 49 President, Chief Executive Officer
Secretary and Treasurer
The following describes the business experience of our directors and executive
officers, including other directorships held in reporting companies:
Mr. Larsson founded the Company's business in 1997. Since that time, Mr.
Larsson has controlled the operations of the business as the sole proprietor of
the business from inception to August 2001, and as the President and CEO of
kNutek Holdings, Inc., the California corporation through which the business has
been conducted from August 2001 to the present. Mr. Larsson is also the
President and CEO of kNutek International, Inc., a wholly owned subsidiary of
kNutek Holdings, Inc., formed as a Delaware corporation to develop the company's
network marketing organization. Mr. Larsson serves on the Board of Directors of
both kNutek Holdings, Inc. and kNutek International, Inc. Born in Sweden, Mr.
Larsson has a Bachelor of Arts degree from Handels Akademiet in Oslo, Norway,
and an MBA from Arizona State University.
Ms. Dudley has been a member of our Board of Directors since August 2001 and has
served as our production manager since 1998, responsible for the mixing of
products, bottling, shipping, inventory, ordering, customer service, order
taking, product education, and invoicing. She has a Bachelor of Science Degree
in Microbiology and Chemistry from the University of Oklahoma.
There is currently one vacancy on our Board of Directors.
TERM OF OFFICE
Our directors are appointed for a one-year term to hold office until the next
annual general meeting of our shareholders or until removed from office in
accordance with our bylaws. Our officers are appointed by our board of
directors and hold office until removed by the board.
SIGNIFICANT EMPLOYEES
Ms. Brie Kaanoi, is a key member of our sales and marketing organization. She
is a former Miss World, Beauty and Fitness, and a graduate of the University of
Hawaii. Ms. Kaanoi is an experienced fitness educator and performer, as well as
a recording artist and composer.
Mr. Richard Bsharah, Jr. is a key member of our sales and marketing
organization. He is an experienced live radio broadcasting host, health food
store manager, and a lecturer in nutrition.
16
We also have a number of independent contractors who are key to our success.
FAMILY RELATIONSHIPS
There are no family relationships among our directors, executive officers, or
persons nominated or chosen to become directors or executive officers.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table provides the names and addresses of each person known to us
to own more than 5% of our outstanding common stock as of the date of this
prospectus, and by the officers and directors, individually and as a group.
Except as otherwise indicated, all shares are owned directly and the percentage
shown is based on eight million, nine hundred ninety-nine thousand, nine hundred
ninety-nine (8,999,999) shares of common stock issued and outstanding on June
10, 2002.
-----------------------------------------------------------------------
Title of Name and Address of Amount and Percent of
Class Beneficial Owner Nature of Class
Beneficial Owner
Common Jim Knut Larsson 6,000,000 67
Stock 2713 San Pablo Avenue
Berkeley, CA 94702
Common International Assets 1,000,000 11
Stock Services
& Holdings, Ltd.
P.O. Box 199
08870 Sitges, Spain
-----------------------------------------------------------------------
Item 12. Description of Securities.
GENERAL
The securities being offered are our common stock, without par value. Under our
articles of incorporation, we are authorized to issue 20,000,000 shares of
common stock, without par value. As of June 10, 2002, a total of eight
million, nine hundred ninety-nine thousand, nine hundred ninety-nine (8,999,999)
shares of our common stock were issued and outstanding and held by four hundred
fifty-eight (458) shareholders, including two hundred-fifty thousand (250,000)
shares to be issued to the shareholders of Domestic Transmission Technologies,
Inc. [4] See "Organization Within Last Five Years" below.
_______________________________
4 This assumes the completion of a short-form merger pursuant to California
Corporations Code Section 1110 of Domestic Transmission Technologies, Inc. into
the company, which we anticipate will be completed by the effective date of this
registration statement.
17
COMMON STOCK
Our authorized capital stock consists of 20,000,000 shares of common stock, no
par value per share. The holders of common stock (i) have equal ratable rights
to dividends from funds legally available therefore, when, as and if declared by
our bard of directors; (ii) are entitled to share ratably in all of the assets
of the Company available for distribution or winding up of the affairs of the
Company; (iii) do not have preemptive subscription or conversion rights and
there are no redemption rights applicable thereto; and (iv) are entitled to
cumulative voting on all matters which shareholders may vote on at all meetings
of shareholders. The holders of shares of our common stock have cumulative
voting rights pursuant to the California General Corporation law. Upon the
effective election of cumulative voting by any shareholder, each shareholder
entitled to vote at any election of directors may cumulate such shareholder
votes and give one candidate a number of votes equal to the number of directors
to be elected multiplied by the number of votes to which the shareholder's
shares are normally entitled, or distribute the shareholder's votes on the same
principle among as many candidates as the shareholder sees fit.
PREFERRED STOCK
We currently do not have any authorized preferred stock.
TRANSFER AGENT AND REGISTRAR
We have engaged the services of Transfer Online as our transfer agent and
registrar. Transfer Online is located at 227 SW Pine Street, Suite 300,
Portland, Oregon 97204. Telephone: (503)227-2950. Fax: (503)227-6874.
Internet: www.transferonline.com.
DIVIDEND POLICY
To date, we have not paid or declared any dividends and we have no intention of
declaring or paying any dividends in the foreseeable future. If we decide to pay
dividends, that decision will be made by our board of directors, which will
likely consider, among other things, our earnings, our capital requirements and
our financial condition, as well as other relevant factors. We currently intend
to retain future earnings, if any, to finance the expansion of our business.
NO OTHER SECURITIES
We do not currently have any other form of securities outstanding.
Item 13. Interest of Named Experts and Counsel.
No expert or counsel named in this prospectus as having prepared or certified
any part of this prospectus or having given an opinion upon the validity of the
securities being registered or upon other legal matters in connection with the
registration or offering of the common stock was employed on a contingency
basis, or had, or is to receive, in connection with the offering, a substantial
interest, direct or indirect, in the registrant or any of its parents or
subsidiaries. Nor was any such person connected with the registrant or any of
its parents or subsidiaries as a promoter, managing or principal underwriter,
voting trustee, director, officer, or employee.
18
Duane Morris LLP, our independent legal counsel, has provided an opinion on the
validity of our common stock.
The financial statements included in this prospectus and the registration
statement have been audited by Hansen, Barnett & Maxwell, certified public
accountants, to the extent and for the periods set forth in their report
appearing elsewhere herein and in the registration statement, and are included
in reliance upon such report given upon the authority of said firm as experts in
auditing and accounting.
Item 14. Disclosure of Commission Position of Indemnification for Securities Act
Liabilities.
Our Articles of Incorporation and Bylaws provide extensive indemnification
rights to our directors and officers. Insofar as indemnification for
liabilities arising under the Securities Act of 1933 (the "Act") may be
permitted to directors, officers and controlling persons of the small business
issuer pursuant to the foregoing provisions, or otherwise, the small business
issuer has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. If a claim for indemnification against such
liabilities is asserted by one of our directors, officers, or controlling
persons in connection with the securities being registered, we will, unless in
the opinion of our legal counsel the matter has been settled by controlling
precedent, submit the question of whether such indemnification is against public
policy to a court of appropriate jurisdiction. We will then be governed by the
court's decision.
Item 15. Organization Within Last Five Years.
We were incorporated as kNutek Holdings, Inc. on August 13, 2001, under the laws
of the State of California. In October 2001, we entered into an agreement
whereby kNutek Holdings, Inc. acquired a ninety-seven and one-half percent
(97.5%) interest in Domestic Transmission Technologies, Inc., a California
corporation with four hundred fifty (450) shareholders ("DTT"), which had no
prior operations. In June 2002, DTT merged into kNutek Holdings, Inc. pursuant
to California Corporations Code Section 1110, whereby a subsidiary which is
ninety percent (90%) or more owned by its parent may be statutorily merged into
the parent company. [5] Prior to its incorporation on August 13, 2001, kNutek
Holdings, Inc. was owned and operated as a sole proprietorship by our President,
Jim Knut Larsson, for approximately three (3) years.
Item 16. Description of Business.
OVERVIEW.
kNutek is a growing company involved in the manufacture and distribution of
products aimed at consumers in the health, beauty and therapeutic skin and body
care markets. Our current line of skin care and nutritional products is
_____________________________
5 This assumes the completion of a short-form merger pursuant to California
Corporations Code Section 1110 of Domestic Transmission Technologies, Inc. into
the company, which we anticipate will be completed by the effective date of this
registration statement.
19
marketed and sold in approximately 2,500 skin care salons, spas and clinics
nationwide. Our products are scientifically formulated to help skin repair
itself, from both inside and out, thereby beautifying, slowing the effects of
aging, and providing therapeutic benefits to people with problem skin conditions
and symptoms of aging. We believe we are poised to capitalize on our success to
date by embarking on a comprehensive marketing and sales program designed to
increase brand awareness and product availability in addition to developing new
sales channels. Our unique approach is designed to permit us to develop a
network sales force of customer/salespeople while maintaining the strong ties we
have developed with professional care establishments.
The strength of our marketing to date has been our ability to utilize our salon
network to sell our products. Salon clients hear about our products from health
and beauty professionals, and are able to sample products in the salons. We
plan to bring this approach to a broader audience by recruiting a network of
distributors or sales associates from our base of existing customers. These
sales associates will then receive commissions and discounts on products for
selling products to others. We plan to conduct a national advertising campaign,
and to provide sales associates with product samples and marketing materials in
addition to performing order fulfillment activities. This will help us to
retain customers by ensuring that they can purchase products without needing to
contact their sales associates, and will help sales associates by avoiding the
need for them to purchase inventory to resell to consumers.
Our advertising campaign will support the individual sales efforts of our
network sales associates. In addition, it will allow us to capitalize on the
great strengths of the beauty, health and fitness industry - its ability to
demonstrate products to a captive, receptive audience. The industry is a
fragmented one, consisting of thousands of small operators with insufficient
resources to conduct significant advertising or provide extensive customer
service and communication facilities. We will work closely with professional
care establishments to create a mutually beneficial relationship: we will
provide products and advertising designed to bring customers to the care
facilities. The facilities will benefit from referrals to their establishments,
and will in turn demonstrate and promote our products. Thus, by providing a
strong marketing and order fulfillment infrastructure, we can build on the
industry's strengths in order to maximize our own sales and profit.
In the longer term, we hope that the success of our products and the development
of a comprehensive marketing and distribution infrastructure will position us to
acquire other companies in the manufacturing, research & development,
distribution and sales aspects of the beauty, health and fitness industry.
We intend to position ourselves as a network marketing company with a wide range
of personal care products, weight management products, and food and dietary
supplements worldwide. Our products are marketed through a network marketing
system as well as through skin care salons, spas, clinics, and other retail
outlets. Our independent distributors or sales associates earn profits by
selling our products to retail consumers and other distributors. Distributors
may also develop their own distributor organizations by sponsoring other
distributors to do business in any market where the Company operates, entitling
the sponsors to receive royalties and bonuses on product sales within their
downline organizations. We believe this integrated network marketing system is
20
ideally suited to our products, which emphasize beauty and a healthy lifestyle,
because sales of such products are strengthened by ongoing personal contact
between retail consumers and distributors, many of whom use our products
themselves. We believe our network marketing system will appeal to a broad
cross-section of people throughout the world, particularly those seeking to
supplement family income, start a home business or pursue employment
opportunities other than conventional, full-time employment.
BUSINESS DEVELOPMENT
Our business was started by Jim Knut Larsson in 1997 with one product, the Omega
Peel, which was marketed to skin care salons, spas and clinics. Since that
time, we have developed and brought to market many additional products,
including nutritional supplements, and have moved our product research and
development and skin care product manufacturing in-house. We were incorporated
as kNutek Holdings, Inc. on August 13, 2001, under the laws of the State of
California. On September 4, 2001, we formed a wholly owned subsidiary in
Delaware, kNutek International, Inc., to carry out our sales and marketing plan.
Our unique product line is comprised of holistic products developed by our
founder, Mr. Jim Knut Larsson, as well as products identified by him and
purchased from other laboratories. Our goal is to make our clients look and
feel great with the latest scientific products within the field of skin care and
nutritional supplements. Our products are of therapeutic quality used in
clinics for skin treatments, combining topically used products with supplements
to be taken orally for unparalleled skin care and anti-aging results. We
believe the key to our success is in our commitment to serving the needs of our
distributors. We provide our distributors with high quality products and an
appealing network marketing system with a highly attractive compensation
program. We are developing a strong operating platform to support distributors
and facilitate future growth. The key components of this platform include high
quality products, an attractive distributor compensation program, distributor
support services, advanced information systems, and a defined growth strategy.
HIGH QUALITY PRODUCTS.
We offer high quality products, many of which emphasize herbs and other natural
ingredients in order to appeal to consumer demand for products that contribute
to a healthy lifestyle.
ATTRACTIVE DISTRIBUTOR COMPENSATION PROGRAM.
We believe that we offer one of the most financially rewarding compensation
programs in the network marketing industry through our wholly owned subsidiary,
kNutek International, Inc. Distributors' earnings are derived from two primary
sources: profits on the resale of products and a series of royalties and
production bonuses on product sales within a distributor's down-line
organization.
COMPREHENSIVE DISTRIBUTOR SUPPORT SERVICES.
We are committed to training and motivating our distributors. We strive to
effectively and efficiently communicate with our distributor base by
capitalizing on new technologies and marketing techniques. We regularly conduct
motivational events and training seminars, both live and via teleconferences,
and utilize a range of promotional literature, including catalogs and
newsletters, tailored to meet the particular needs of our distributors. We seek
to inspire distributor loyalty by making prompt product deliveries and royalty
payments and by providing detailed distributor earnings statements.
21
GROWTH SRATEGY.
Our strategy for growth consists of expansion into new markets and expansion of
its product line. We continue to develop and offer new products and introduce
existing products into markets where they are not currently offered. The
expansion of our product offerings is designed to create enthusiasm among
distributors and serve as a promotional tool in selling other products. In
addition, we will continue our strategy of introducing our most popular existing
products into markets where they are not currently offered (subject to our
ability to reformulate its products as necessary to obtain required regulatory
approvals). We will continue to seek to enhance sales in our existing markets.
including training and motivational events and teleconferences, the hiring of
additional distributor support representatives, the introduction of new
products, and the opening of additional distributor service centers.
PRODUCT OVERVIEW.
We currently offer the following unique products and ingredients:
. MSM (Organic Sulfur), used in skin care and as supplements.
. Colostrum, for use in skin care and as supplements.
. Omega Peel, a breakthrough exfoliant using a new technology in
exfoliation, making the skin brighter, smoother and silkier in 90 seconds.
. Microdermabrasion Cream, which replaces expensive microdermabrasion
machines used in clinics for skin resurfacing and "instant face-lifts".
. Oxygen Plasma, a substance originally developed as artificial blood by
medical researchers that has demonstrated incredible results in skin care
applications, including treatment of rosacea, acne and other previously
untreatable skin conditions in addition to its beauty and anti-aging
benefits.
. The "Yes Gel", an external sexual stimulant cream for women.
. And a variety of weight loss, anti-aging, diet, and nutritional
supplement products marketed as a unified system based on the most
up-to-date information obtained from scientific and medical research in
this area, carefully developed to avoid health issues that have plagued
other weight loss programs.
Some of our products, such as the Omega Peel, are designed to bring in new
customers, while others are designed to increase sales to existing customers.
Our twofold product development strategy is to continuously work to create new
product lines using new ingredients and scientific developments, while
simultaneously adding depth to our existing product lines by developing new
products using our existing ingredients and technologies. For example, a
customer who has experienced great results with our skin care products
containing MSM and Oxygen Plasma, may be inclined to purchase hair products with
22
the same ingredients. Similarly, Oxygen Plasma is effective in naturally
killing anaerobic bacteria on the skin. It has been proven as well to kill the
bacteria causing periodontitis of the gums, and so we may work to develop a
toothpaste using Oxygen Plasma. In this way we plan to leverage "ingredient
awareness" to sell entire product lines developed from a single set of
ingredients. Along these lines, we are currently working to introduce a
Microdermabrasion scrub for the body as an extension of our success with
Microdermabrasion face cream.
Our current goal is to introduce one new product every three months to hold the
interest of our existing customers, while simultaneously expanding our base of
new consumers. As the business grows, we anticipate we will be able to increase
the pace of our new product development. In addition to our own new product
development, we hope to utilize our growth to acquire some of the many small to
medium sized private label companies and laboratories in the industry holding
patents and other proprietary technologies, but with virtually no ability to
conduct their own advertising or marketing. Acquisition of some of these
companies will enable us to more rapidly expand our product offerings, and our
marketing and distribution infrastructure will permit us to market these
products much more effectively to existing markets and to leverage acquired
technologies into additional unique products.
SALES AND DISTRIBUTION METHODS.
We view everything we do as contributing to sales of our products, and we have
put extensive effort into honing our sales strategy as well as our general
appearance to customers. The customers' kNutek experience is formed through
every interaction with us. The salesperson's voice and manner over the
telephone, the packaging for products delivered to the customer, the timeliness
and accuracy of the shipment, the brochure and special offer materials inside
the shipment are all part of our overall sales approach. Our web site is also
an important part of our interaction with new and existing customers and
distributors. Our web site gives new and existing customers and distributors a
sense of community through the ability to obtain information, entertainment, and
order products online.
We have also developed a comprehensive, approach for our salespeople in working
with our salons, spas and clinics. The strategy governs everything from the
initial contact, using an introductory product to generate interest, to frequent
telephone contacts to explain the full product line, offers to demonstrate
products in person and identification of applicable discounts and promotions.
Once an outlet has agreed to carry the products, we maintain frequent contact by
phone, special mailings and a quarterly newsletter to discuss the products,
product sales levels, announce local workshops and generally to make the outlet
feel involved in helping to promote the products.
We value our professional care facilities very highly as part of our sales and
distribution network, giving new customers a place to learn about, sample, and
purchase our products. Our sales and marketing plan is designed to support
these establishments. In order to ensure that the professional care
establishments are adequately compensated for sales they generate, we have
integrated them into our network program. We foresee a great deal of crossover
between sales by the professional establishments and our network sales
associates. We have a sophisticated database to track sales origination and
23
ongoing sales support. We believe this is a truly unique aspect of our plan.
We know of no other companies, in the network sales or retail arenas, that have
gone to this length to maintain strong ties with a professional care base while
making their products available on a mass-market basis.
In addition to salons, spas and clinics, our products are distributed through a
network marketing system consisting of an extensive network of distributors or
sales associates. Distributors are generally independent contractors who
purchase products directly from us or from other distributors for resale to
retail consumers and other distributors. Distributors may elect to work on a
full-time or part-time basis. We believe our network marketing system appeals
to a broad cross-section of people worldwide, particularly those seeking to
supplement family income, start a home business or pursue employment
opportunities other than conventional, full-time employment, and that a majority
of our distributors therefore work on a part-time basis. We believe our network
marketing system is ideally suited to marketing our products because sales of
such products are strengthened by ongoing personal contact between retail
consumers and distributors, many of whom use our products themselves. We
encourage distributors to use our products and to communicate the results of
their use of such products to their retail customers. Distributors' earnings
are derived from several sources. First, distributors may earn profits by
purchasing our products at wholesale prices (which are discounted from suggested
retail prices depending on the distributor's level within the Company's
distributor network) and selling our products to retail customers at retail
prices. Second, distributors may earn profits by selling products to other
distributors who do not qualify for the same level of discount as the selling
distributor. Third, distributors who sponsor other distributors and establish
their own distributor organizations may earn royalties on product sales within
their distributor organization and production bonuses on product sales within
their down-line organizations. We believe that the right of distributors to
earn royalties and production bonuses will contribute significantly to our
ability to retain our most productive distributors.
OUR MARKET.
We are currently focused on two market segments. The first addresses
beautification and fitness, primarily in the baby boom generation, and the
second addresses the therapeutic needs of people with skin diseases, abnormal
skin conditions and other physiological conditions that respond to skin
treatments, nutritional supplements and herbs.
The beauty and fitness market segment consists largely of middle to upper class
women between 35 to 65 years of age who are conscious of their beauty, fitness,
and health. These are women who go to salons or spas for facials and other anti-
aging or beauty treatments. The consumer non-durables industry sector produces
household products as well as personal care items, such as our products.
Worldwide, it is estimated that consumers spend about $120 billion on these
everyday items, with the U.S. accounting for about 25% of the total. [6] The
market for over-the-counter health products, such as dietary and weight-loss
aids, nutritional products and vitamins, supplements, and other health-related
products, is not included in this $120 billion dollar figure. Although the
U.S., Canada, Europe and Japan consume the vast majority of personal care
products worldwide, companies are being forced to look beyond those markets for
growth in the personal care segment. A slowdown in population growth and market
saturation have reduced the growth potential in these traditionally targeted
_________________________
6 Guy Holland, "Personal Care & Household Cleaning Products" Hoover's Online
5/17/02.
24
markets and have increased the perceived value of global brands. [7] We believe
that the aging of the baby boomer generation will lead to an increasingly strong
market for both over-the-counter health as well as personal care products in the
U.S. in coming years.
The therapeutic market segment is comprised of people with skin diseases,
abnormal skin conditions and other physiological conditions, especially acne,
rosacea, psoriasis, eczema and scars, who go to salons, spas and clinics seeking
professional treatment. We promote the therapeutic uses of our products through
skin care experts. The high level of credibility of these professionals is
extremely advantageous to our marketing efforts in this segment. The market
potential of this segment is very significant. For example, acne rosacea is a
skin condition affecting at least 14 million people in the U.S. alone, and is
considered incurable by the medical community. Our Oxygen Plasma has proven to
be an effective treatment for reducing the effects of this condition when
applied in salons and clinics. We believe this represents a small percentage of
the overall therapeutic market segment.
The salon market is fragmented, with approximately 230,000 salons in the U.S.
comprised of an estimated 12,000 skin care salons, spas and clinics, 50,000 full
service salons (offering hair styling, skin care and/or nail care), and the
remainder made up of hair and nail salons. To date, we have only actively
marketed ourselves to the estimated 12,000 skin care salons. We will pursue the
larger segment of the salon market with the introduction of our hair product
line, which will work synergistically with our skin care products, and expand
the reach of our salon distribution network up to 20 times. Of the estimated
12,000 skin care salons, spas and clinics in the U.S. we are currently
targeting, our products have been sold to approximately 2,500 or 20%. Our
marketing plan is designed to fold these existing sales outlets into a larger
network marketing infrastructure to ensure that consumers have access to our
products and to the beauty and health professionals who can demonstrate, promote
and administer the products.
Both of our target markets have a very important common denominator in so far as
they less sensitive to price than perceived value and have high degrees of
product loyalty. Potential customers in both markets can also be reached
through "opinion leaders" and can be educated verbally as to the benefits of the
products by professional authorities. Our marketing strategy therefore focuses
on generating name recognition among the general public, and at the same time
educating beauty and health care professionals as to the benefits and unique
qualities of our products. We believe pricing can help support the perceived
value of a product and promote sales through word of mouth. Our Oxygen Plasma,
for example, is positioned as a luxury item and is expensive enough to be the
subject of discussion among customers and distributors. Having thus sparked a
heightened level of interest in the product, we give away samples so customers
will try it. Further, we bundle products together into regimens with
significant package discounts, thereby up-selling our existing customers.
We have developed a multi-level marketing plan to include our customers in our
sales efforts. Our multi-level marketing plan links salons, clinics, spas,
kiosks and network sales associates into a unified framework in which all
parties benefit from product referrals, so the kNutek brand will be presented to
prospective customers through numerous channels. We believe we are unique in
the health and beauty industry in promoting this integrated approach.
______________________________
7 Id.
25
OUR MATERIALS AND SUPPLIERS.
New product development and identification of new ingredients is an important
part of our operation. We review major trade magazines for newly available raw
materials and suppliers. However, most of our new product ideas are formulated
based on review of scientific developments applicable to our industry.
We have the capacity to manufacture products from scratch, but because such
production can be complex and costly, we prefer to do so only when necessary to
maintain proprietary technology and information. We anticipate that as we grow,
we will start to produce more of our products in-house from start to finish. A
much more economical solution for the present is to purchase the "base" for a
skin care product from a larger manufacturer and then add our own proprietary
ingredients at our facility to make our products unique. This allows us to
create some of the most sophisticated products on the market without the
complexity and costs associated with manufacturing products from scratch. Raw
materials and base products are readily available from multiple sources in the
industry.
All of our weight management products and food and dietary supplements are
manufactured by outside companies. The Company does not own the proprietary
rights to its weight management products and food and dietary supplements such
that there can be no assurance that another company will not replicate one of
our products. We work with a variety of outside third party suppliers for
product manufacturing.
PRODUCT RETURN AND BUY-BACK POLICIES.
All of our products include a customer satisfaction guarantee. Within thirty
days of purchase, any customer who is not satisfied with one of our products for
any reason may return it or any unused portion of it to the Company for a full
refund or credit toward purchase of another product. Distributors may obtain
replacements from the Company for products returned to them by consumers if they
return such products to the Company on a timely basis. Historically, product
returns and buy-backs have not been significant.
COMPETITION.
We place a strong emphasis on marketing proprietary products with the latest
medical or technical knowledge and ingredients. We are committed to positioning
our products as superior to the competition and maintaining a reputation for
innovative product development. Rather than trying to create product offerings
comparable to our competitors, we strive to create distinctive products that
offer significant improvements over those of our competitors.
We also intend to be an industry leader in the development of innovative
marketing channels. Whereas most health and beauty companies rely heavily on
trade magazine advertising, we have utilized our own mailing lists to send
targeted promotions to skin care salons, spas and clinics, as well as to our
retail customers. As our marketing plan develops, we intend to place a strong
emphasis on television and radio advertising, media traditionally ignored by the
health and beauty industry. These advertising approaches communicate directly
to the end users of our products to pull customers into our distribution
network.
26
We are subject to significant competition for the recruitment of distributors
from other network marketing organizations, including those that market personal
care products, weight management products, and food and dietary supplements, as
well as other types of products. Many of our competitors are substantially
larger and have available considerably greater financial resources than we do.
Our ability to remain competitive depends, in significant part, on our success
in recruiting and retaining distributors through an attractive compensation plan
and other incentives. We believe that our compensation and incentive programs
provide our distributors with significant earning potential. However, there can
be no assurance that our programs for the recruitment and retention of
distributors will be successful. In addition, the business of marketing
personal care products, weight management, and food and dietary supplements is
highly competitive. This market segment includes numerous manufacturers,
distributors, marketers, retailers and physicians that actively compete for the
business of consumers both in the United States and abroad. The market is
highly sensitive to the introduction of new products or weight management plans
(including various prescription drugs) that may rapidly capture a significant
share of the market. As a result, our ability to remain competitive depends in
part upon our ongoing success at introducing new products.
Our competitors include Aveda, Herbalife, L'Oreal, Dermalogica, Nu Skin
Enterprises, Shiseido, MD Formulations, Avon, Dr. Murad, BeautiControl
Cosmetics, Nature's Sunshine, Estee Lauder Companies, Forever Living Products
International, GNC, and Mary Kay, among many others.
INTELLECTUAL PROPERTY.
We use the umbrella trademarks "kNutek" and a stylized "K" and several other
trademarks and tradenames in connection with our products and operations. We
consider our trademarks and tradenames to be an important factor in our
business. Our product formulations are not protected by patents and are
generally not patentable. We have applied for Federal Trademark protection for
our stylized "K" and the "kNutek" name with the U.S. Patent and Trademark
Office.
GOVERNMENTAL APPROVALS AND REGULATION.
In both its United States and foreign markets, we are subject to and affected by
extensive laws, regulations, administrative determinations, court decisions and
similar constraints (as applicable, at the federal, state and local levels)
(hereinafter "regulations") including, among other things, regulations
pertaining to (i) the formulation, manufacturing, packaging, labeling,
distribution, importation, sale and storage of our products, (ii) product claims
and advertising (including direct claims and advertising by the Company as well
as claims and advertising by distributors, for which we may be held
responsible), (iii) our network marketing system, (iv) transfer pricing and
similar regulations that affect the level of foreign taxable income and customs
duties, and (v) taxation of distributors, which in some instances may impose an
obligation on the Company to collect taxes and maintain appropriate records.
The formulation, manufacturing, packaging, storing, labeling, advertising,
distribution and sale of our products may be subject to regulation by one or
more governmental agencies, including the Food and Drug Administration ("FDA"),
the Federal Trade Commission ("FTC"), the Consumer Product Safety Commission
("CPSC"), the United States Department of Agriculture ("USDA"), the
Environmental Protection Agency ("EPA") and the United States Postal Service.
Our activities may also be regulated by various agencies of the states,
localities and foreign countries in which our products are manufactured,
distributed and sold. The FDA, in particular, regulates the formulation,
27
manufacture and labeling of foods, dietary supplements and OTC drugs, such as
those distributed by the Company. FDA regulations require that we and our
suppliers meet relevant good manufacturing practice ("GMP") regulations for the
preparation, packing and storage of many of these products. Manufacturers of
dietary supplements which make a "statement of nutritional support" must have
substantiation that the statement is truthful and not misleading. The majority
of the dietary products marketed by the Company are classified as dietary
supplements and do not have clearly established labeling requirements. Many
states have become active in the regulation of dietary supplement products and
may require the Company to modify the labeling or formulation of certain
products sold in those states. As a marketer of food and dietary supplements
and other products that are ingested by consumers, we are subject to the risk
that one or more of the ingredients in its products may become the subject of
adverse regulatory action. With changing regulation and varying regulation
across jurisdictions, there is a risk that one or more of our products may
become subject to further federal, state, local or foreign laws or regulations,
which could result in us having to: (i) withdraw or reformulate one or more of
our products, and/or (ii) re-label one or more of our products with different
warnings or revised directions for use, and/or (iii) refrain from making certain
statements with respect to one or more products. Even in the absence of further
laws or regulation, we may elect to reformulate and/or re-label our products as
more information becomes available with regard to such products or their
ingredients. It is a regular part of our business to monitor regulatory
developments in the markets in which we participate and to determine the
optimal strategy in each instance in which such a development arises.
Some of our products are considered conventional foods and are currently labeled
as such. Both this category of products and dietary supplements are subject to
the Nutrition, Labeling and Education Act ("NLEA"), and regulations promulgated
thereunder, which regulates health claims, ingredient labeling and nutrient
content claims characterizing the level of a nutrient in the product.
A limited number of the products sold by the Company may be labeled as OTC drugs
as opposed to dietary supplements, conventional foods or personal care items.
Many OTC drug products do not require pre-approval by the FDA, but must comply
with applicable OTC monographs, which prescribe permissible ingredients and
appropriate labeling language. In addition, either the Company or its supplier
must register and file annual drug listing information with the FDA for such
products. Because the FDA could take the position that claims made with respect
to any of our products fall within an OTC monograph, the regulatory status of
some of our products is or could become unclear. If any enforcement were
undertaken, we could be required to relabel or reformulate such products, which
we believe we could do without any material adverse effect on our business.
In foreign markets, prior to commencing operations and prior to making or
permitting sales of our products in the market, we may be required to obtain an
approval, license or certification from the country's ministry of health or
comparable agency. Such approvals may be conditioned on reformulation of our
products or may be unavailable with respect to certain products or certain
ingredients. Product reformulation or the inability to introduce certain
products or ingredients into a particular market may have an adverse effect on
sales. We must also comply with product labeling and packaging regulations that
28
vary from country to country. Our failure to comply with such regulations can
result in, among other things, a product being removed from sale in a particular
market, either temporarily or permanently.
The FTC, which exercises jurisdiction over the advertising of all of our
products, has instituted enforcement actions against a number of dietary
supplement companies for false and misleading advertising of certain products.
In some cases, these enforcement actions have resulted in consent decrees and
monetary payments by the companies involved. In addition, the FTC has increased
its scrutiny of the use of testimonials, which are utilized by the Company.
While we have not been the target of any FTC enforcement action for the
advertising of our products, there can be no assurance that the FTC will not
question our advertising or other operations in the future.
In certain countries, we may also be affected by regulations applicable to the
activities of its distributors because in some countries we are, or regulators
may assert that we are, responsible for our distributors' conduct, or such
regulators may request or require that we take steps to ensure our distributors'
compliance with regulations. The types of regulated conduct include, among
other things, representations concerning our products, income representations
made by the Company and/or distributors, public media advertisements (which in
foreign markets may require prior approval by regulators) and sales of products
in markets in which such products have not been approved, licensed or certified
for sale. In certain markets, it is possible that improper product claims by
distributors could result in our products being reviewed or re-reviewed by
regulatory authorities and, as a result, being classified or placed into another
category as to which stricter regulations are applicable. In addition, certain
labeling changes might be required. However, our distributors are generally
independent contractors, and we are not able to monitor directly all
distributor activities. As a consequence, there can be no assurance that our
distributors will comply with applicable regulations. Misconduct by
distributors could have a material adverse effect on the Company in a particular
market or in general.
The Company is unable to predict the nature of any future laws, regulations,
interpretations or applications, nor can it predict what effect additional
governmental regulations or administrative orders, when and if promulgated,
would have on its business in the future. They could, however, require the
reformulation of certain products not able to be reformulated, imposition of
additional recordkeeping requirements, expanded documentation of the properties
of certain products, expanded or different labeling and scientific
substantiation regarding product ingredients, safety or usefulness. Any or all
such requirements could have a material adverse effect on our results of
operations and financial condition.
Our network marketing system is subject to a number of federal and state
regulations administered by the FTC and various state agencies as well as
regulations in foreign markets administered by foreign agencies. Regulations
applicable to network marketing organizations are generally directed at ensuring
that product sales are ultimately made to consumers (as opposed to other
distributors) and that advancement within such organizations be based on sales
of the organizations' products rather than investments in the organizations or
other non-retail sales related criteria. For instance, in certain markets there
are limits on the extent to which distributors may earn royalties on sales
generated by distributors that were not directly sponsored by the distributor.
29
Where required by law, we obtain regulatory approval of our network marketing
system or, where such approval is not required, the favorable opinion of counsel
as to regulatory compliance. However, we remain subject to the risk that, in
one or more of our markets, our marketing system could be found not to be in
compliance with applicable regulations. Failure by the Company to comply with
these regulations could have a material adverse effect on our business. We are
also subject to the risk of challenges to the legality of our network marketing
system. For example, in Webster V. Omnitrition International, Inc., 79 F.3d 776
(9th Cir. 1996), the "multi-level marketing" program of Omnitrition
International, Inc. ("Omnitrition") was challenged in a class action by certain
Omnitrition distributors who alleged that Omnitrition was operating an illegal
"pyramid scheme" in violation of federal securities laws, state unfair practice
and fraud laws and the Racketeer Influenced and Corrupt Organizations Act.
Initially, the trial court in that case rendered summary judgment in favor of
Omnitrition because the court found that Omnitrition had adopted policies
designed to encourage retail sales that took the program outside the definition
of a fraudulent pyramid scheme. The importance of such policies was established
by two FTC cases. The first, In Re Koscot Interplanetary, Inc., 86 F.T.C. 1106
(1975), set forth a standard for determining whether a marketing system
constituted a pyramid scheme. Under the Koscot standard, a pyramid scheme is
characterized by the participants' payment of money to a company in return for
(i) the right to sell a product and (ii) the right to receive, in return for
recruiting other participants into the program, rewards that are unrelated to
sales of the product to ultimate users. Applying the Koscot standard in In Re
Amway Corp., 93 F.T.C. 618 (1979), the FTC determined that a company will not be
classified as operating a pyramid scheme if it adopts and enforces policies that
in fact encourage retail sales to consumers and prevent "inventory loading"
(i.e., distributors' purchases of large quantities of non-returnable inventory
to obtain the full amount of compensation available under the system). In
Amway, the FTC found that Amway Corp.'s marketing system did not constitute a
pyramid scheme, noting the following Amway policies: (i) participants were
required to buy back, from any person they recruited, any saleable, unsold
inventory upon the recruit's leaving Amway; (ii) every participant was required
to sell at wholesale or retail at least 70% of the products bought in a given
month in order to receive a bonus for that month; and (iii) in order to receive
a bonus in a month, each participant was required to submit proof of retail
sales made to ten different consumers. The U.S. appellate court in Omnitrition
reversed the trial court decision and decided that triable issues of fact
existed regarding whether Omnitrition's marketing system constituted a pyramid
scheme under the Koscot standard. The appellate court emphasized the second of
the Koscot tests, indicating that the right to earn compensation for, in effect,
recruiting other participants into the marketing system, which compensation is
unrelated to the sale of products to ultimate consumers, made the Omnitrition
marketing system a pyramid scheme "on its face." As such, the appellate court
indicated that Omnitrition was required to present evidence that the program's
safeguards were enforced and actually served to deter inventory loading and
encourage retail sales. The appellate court commented negatively on the fact
that Omnitrition paid compensation to participants based on the suggested retail
price of products ordered from the Company, rather than based on actual sales to
consumers. The appellate court also rejected Omnitrition's argument that
personal consumption of a product by a distributor could count towards
satisfying the requirement that sales be to "ultimate users."
30
As is the case with other network marketing companies, the compensation we pay
to our distributors is based in part on their own orders, which may include
orders for products that they personally consume. We have retained special
counsel to assist us in all aspects of the structure and implementation of our
marketing plan and believe our network marketing system complies with existing
law and does not and will not constitute a pyramid scheme under the standards
set forth in Koscot, Amway, Omnitrition and other applicable law. In
particular, in most jurisdictions (including the U.S.), in order to address the
problem of "inventory loading," we make available an inventory buy-back program.
As an ongoing part of our business, we monitor and respond to regulatory and
legal developments, including those that may affect our network marketing
system. However, there can be no assurance that the legality of our network
marketing system would be upheld under the standards set forth in Koscot, Amway,
Omnitrition and other applicable law, and any adverse decision in this regard
could have a material adverse effect on our business. Among other things, such
a decision could require that we make modifications to our network marketing
system, result in negative publicity or have a negative impact on distributor
morale, and any of these results could have a material adverse effect on our
business. Further, adverse rulings in litigation involving other companies that
employ network marketing systems could have a material adverse effect on our
business, even if our network marketing system is not itself challenged or
deficient.
TOTAL NUMBER OF EMPLOYEES AND NUMBER OF FULL TIME EMPLOYEES.
We currently have a total of eight (8) employees, all of which are full time
employees of the company.
REPORTS TO SECURITIES HOLDERS
We intend to file regular reports with the Securities Exchange Commission. The
public may read and copy any materials we file with the SEC at the SEC's Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The public
may obtain information on the operation of the Public Reference Room by calling
the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that
contains reports, proxy and information statement, and other information
regarding issuers that file electronically with the SEC at www.sec.gov. Our web
site address is www.knutek.com.
Item 17. Management's Discussion and Analysis.
THIS DOCUMENT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT
OF 1934, INCLUDING, WITHOUT LIMITATION, STATEMENTS REGARDING OUR EXPECTATIONS,
BELIEFS, INTENTIONS OR FUTURE STRATEGIES THAT ARE SIGNIFIED BY THE WORDS
"EXPECTS", "ANTICIPATES", "INTENDS", "BELIEVES", OR SIMILAR LANGUAGE. THESE
FORWARD-LOOKING STATEMENTS INVOLVE RISKS, UNCERTAINTIES AND OTHER FACTORS. ALL
FORWARD-LOOKING STATEMENTS INCLUDED IN THIS PROSPECTUS ARE BASED ON INFORMATION
AVAILABLE TO US ON THE DATE HEREOF AND SPEAK ONLY AS OF THE DATE HEREOF. THE
FACTORS DISCUSSED BELOW UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS
ARE AMONG THOSE FACTORS THAT IN SOME CASES HAVE AFFECTED OUR RESULTS AND COULD
CAUSE THE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED IN THE
FORWARD-LOOKING STATEMENTS.
31
The following discussion should be read in conjunction with the Financial
Statements and Notes thereto.
In the past twelve months, there has been a significant increase in spa, salon
and skin care clinic closures due to changes in the economy. Trade show
attendance is down in our industry. The therapeutic portion of the industry is
fairing better than the relaxation and new age portion of the industry which is
viewed as more discretionary. This has created an opportunity for the company
to work with spas, salons, and skin care clinics to help them develop their mail
order business, retain existing clients, and benefit from former clients. One
of our strategies for marketing through these outlets is to do a joint marketing
mailer to the existing and former clients of the outlet to promote our products
and encourage customers to return to the retail facility for consultation and
treatment. We believe we are well-positioned to take advantage of the current
market conditions. The current economy may also lend itself to the ability to
recruit additional distributors who might not otherwise consider self-
employment.
We have a limited operating history on which to base an evaluation of our
business and prospects. Our prospects must be considered in light of the risks,
expenses and difficulties encountered by companies in their early stage of
development. See "Risk Factors" for a more complete description of the many
risks we face.
In the year 2000, we had an extremely small operation and were profitable. We
have gone from being a boutique operation with three employees developing
products and selling products to spas, salons, and skin care clinics to an
operation with a broad multi-level marketing plan and an increased line of
products in 2001. We also changed our name in the interest of brand-building
with a name we could protect from a intellectual property perspective. This
transition has required an investment in a sales office, a website, software for
the implementation of our network marketing system, infomercial production, and
other changes to our infrastructure to support our growth.
In 2001, we also established our subsidiary, kNutek International, Inc. to
implement our network marketing system. We established a facility in Columbus,
Ohio, to host our marketing seminars and provide resources for our distributors
based in that area. We did not begin to roll-out our network marketing system
until late in 2001.
Our sales increased $352,000 or 90% from 2000 to 2001, due to an increased
marketing effort by the company. Our cost of goods sold increased $172,000 or
134% in 2001 as compared with the prior year. Cost of goods sold as a
percentage of sales increased from 33% to 40% from 2000 to 2001 due to a change
in product mix with lower margins.
Our gross margin will fluctuate based on a number of factors, including, but not
limited to, the cost of our products and supplies, including the extent of
purchase volume discounts that we are able to obtain from suppliers, our pricing
strategy relative to the cost of our products, the mix of products our customers
purchase, our shipping pricing strategy relative to the cost of shipping, our
distribution and fulfillment strategy, the extent to which we are able to
control product damage, and shrinkage and expiration though inventory management
practices.
32
General and administrative expense consists primarily of payroll and related
expenses for executive and administrative personnel, corporate facility
expenses, professional services, travel and other general corporate expenses.
General and administrative expense increased from 2000 to 2001 primarily due to
increased expenses associated with the addition of general and administrative
personnel, additional professional fees and the cost of corporate facilities. We
expect general and administrative expense to increase as we expand our staff and
incur additional costs related to the anticipated growth of our business and
being a public company. Selling, general and administrative expenses increased
approximately $455,000 in 2001 versus 2000. The major increases in this area
were in legal and consulting fees of $105,000 and $94,000, respectively, which
were largely due to the company's planned merger and registration statement. We
incurred an acquisition cost of $250,000 in 2001 in connection with our
acquisition of Domestic Transmission Technologies, Inc.
Marketing and sales expense consists primarily of commissions to our network
marketing participants, advertising and promotional expenditures, distribution
expenses, including order processing and fulfillment charges, equipment and
supplies, and payroll and related expenses for other personnel engaged in
marketing, merchandising, customer service, distribution and fulfillment
activities. Our marketing and sales expenses continue to increase due to the
establishment of our network marketing program, infomercial production and
television airtime, and other expenses we incur as part of our marketing
strategy. We intend to continue to pursue an aggressive marketing campaign and,
therefore, expect marketing and sales expenses to increase. Marketing and sales
expenses may vary considerably from quarter to quarter depending on the timing
of our infomercial campaigns and the rate at which we expand our distribution
and fulfillment activities. The additional $60,000 we spent in marketing costs
in 2001 as compared with 2000 helped generate an increase in sales, while the
increase of $136,000 in wages and commissions in 2001 is due to increased sales.
Since inception, we have financed our operations primarily through operations
and the private sale of our common stock. Our working capital remained
approximately the same in 2001 as compared with 2000. Receivables increased
$17,564 primarily due to increased sales being uncollected at year-end. Prepaid
expenses of $20,488 in 2001 were for legal and accounting fees. Inventory
increased over $31,000 as we needed to carry larger inventories to support our
sales growth. Trade payables increased due to increased inventory and the
increase in our cash position. Accrued liabilities increased in 2001 primarily
due to consulting fees accrued but unpaid at year-end.
We currently will rely on internally generated cash flow for our short-term
liquidity. For the long-term, we anticipate raising funds through the capital
markets to finance our ongoing growth and new business opportunities.
Presently, we have no plans for capital expenditures. However, we anticipate
capital expenditures will eventually be required, in part as a result of the
equipment and facilities needed to support our continued growth in operations,
infrastructure and personnel. If we raise additional funds through the issuance
of equity, equity-related or debt securities, such securities may have rights,
preferences or privileges senior to those of the rights of our common stock and
our stockholders may experience dilution. We cannot be certain that additional
financing will be available to us on acceptable terms when required, or at all.
33
Item 18. Description of Property.
Our principal offices and operations are located at 2713 and 2715 San Pablo
Avenue, Berkeley, California, 94702. Our Berkeley facility houses our
executive offices, warehouse, laboratory and production facilities on
approximately 3000 square feet with an additional 1000 square feet of outside
storage space. We have a month to month lease on this property.
Through our wholly owned subsidiary, kNutek International, Inc., we also have
leased offices at 2586 Tiller Lane, Suite 1A, Columbus, Ohio, 43231.
Item 19. Certain Relationships and Related Transactions.
Except as noted below, none of the following parties has, since our date of
incorporation, had any material interest, direct or indirect, in any transaction
with us or in any presently proposed transaction that has or will materially
affect us:
- - Any of our directors or officers;
- - Any person proposed as a nominee for election as a director;
- - Any person who beneficially owns, directly or indirectly, shares
carrying more than 10% of the voting rights attached to our outstanding
shares of common stock;
- - Any of our promoters;
- - Any relative or spouse of any of the foregoing persons who has the same
house as such person.
Shortly after our formation, our President, Mr. Larsson entered into an Asset
Transfer Agreement with the company where by Mr. Larsson transferred of all of
the assets of the operating business formerly known as GAIA International
pursuant to Section 351 of the Internal Revenue Code of 1986, as amended, to the
company in exchange for six million (6,000,000) shares of the company's common
stock. Our board of directors, of which Mr. Larsson is a member, determined
that the fair market value of the assets so transferred and acquired was sixty
thousand dollars ($60,000).
Item 20. Market for Common Equity and Related Stockholder Matters.
NO PUBLIC MARKET
There is presently no public market for our common stock. We anticipate
applying for trading of our common stock on the over the counter bulletin board
upon the effectiveness of the registration statement of which this prospectus
forms a part. However, we cannot assure investors that our shares will be
traded on the bulletin board or, if traded, that a public market will
materialize for our common stock.
HOLDERS OF OUR COMMON STOCK
As of the date of this registration statement, we had 458 registered
shareholders.
REGISTRATION RIGHTS
We have not granted registration rights to the selling shareholders or to any
other persons aside from the following (which will be satisfied as the result of
the effectiveness of this registration statement): Mackenzie Shea, Inc. and
International Assets Services & Holdings, Ltd.
34
DIVIDENDS
There are no restrictions in our articles of incorporation or bylaws with regard
to the declaration of dividends. However, the declaration of a dividend must be
permitted under the corporate laws of the State of California. To date, we have
not declared any dividends. We do not plan to declare any dividends in the
foreseeable future.
RULE 144 SHARES
Not including shares being registered by way of this registration statement, a
total of seven million, thirty thousand (7,030,000) shares of our common stock
will be available for resale to the public after August 21, 2002, in accordance
with the volume and trading limitations of Rule 144 of the Act. In general,
under Rule 144 as currently in effect, a person who has beneficially owned
shares of a company's common stock for at least one year is entitled to sell
within any three month period a number of shares that does not exceed the
greater of:
1. 1% of the number of shares of the company's common stock then outstanding
which, in our case, will equal approximately ninety thousand (90,000) shares as
of the date of this prospectus; or
2. The average weekly trading volume of the company's common stock during the
four calendar weeks preceding the filing of a notice on form 144 with respect
to the sale.
Sales under Rule 144 also must comply with manner of sale provisions and notice
requirements and to the availability of current public information about the
company.
Under Rule 144(k), a person who is not one of the company's affiliates at any
time during the three months preceding a sale, and who has beneficially owned
the shares proposed to be sold for at least 2 years, is entitled to sell shares
without complying with the manner of sale, public information, volume limitation
or notice provisions of Rule 144.
As of the date of this prospectus, persons who are our affiliates hold five
million, nine hundred fifty thousand of the shares that may be sold pursuant to
Rule 144 after August 21, 2002.
Item 21. Executive Compensation.
SUMMARY COMPENSATION TABLE
Long Term Compensation
------------------------
Annual Compensation Awards Payouts
----------------------------- ---------------------- --------
Securities All
Name and Other Annual Restricted Underlying LTIP Other
Principle Year Salary Bonus Compensation Stock Options/ Payouts Compensa-
Position ($) ($) ($) Awards ($) SARs (#) ($) tion
- --------- ---- ------ ----- ------------ ---------- ---------- -------- ----------
Jim Knut
Larsson,
President 2001 0 8,633 0 0 0 0
0
2000 N/A 0 N/A 0 0 0 0
1999 N/A 0 N/A 0 0 0 0
Myra 0 0 0 0 0 0
Dudley, 2001 44,450
Director
2000 35,303 0 0 0 0 0 0
1999 28,500 0 0 0 0 0 0
Note: The estimated value of the personal or "fringe" benefits provided to Mr.
Larsson by the company, which benefits included health insurance, health club
membership, use of a company car, and other personal expenses.
COMMITTEES OF THE BOARD OF DIRECTORS
We do not currently have an audit committee, compensation committee or any
other committee of the board of directors.
DIRECTORS' COMPENSATION
Directors who are also our employees receive no additional compensation for
serving on the board. We do not currently have any non-employee directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
We did not have a compensation committee or any other committee of the board of
directors performing similar functions during the years ended December 31, 2000
and 2001. Mr. Jim Knut Larsson, our President, participated in deliberations of
the board of directors relating to his compensation.
EMPLOYMENT AGREEMENTS
We do not have employment or consultant agreements with either of our directors
or executive officers. We do not have any agreements providing for the future
compensation of our directors or executive officers.
STOCK OPTION GRANTS
Our directors and shareholders have adopted and approved a stock option and
stock issuance plan and have reserved one million (1,000,000) shares of our
common stock for issuance pursuant to the plan. However, we have not granted
any stock options to our directors or executive officers.
Item 22. Financial Statements.
The audited Financial Statements as of December 31, 2001 and for the years ended
December 31, 2001 and 2000 are attached and incorporated.
Item 23. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
We have no disagreements with our current or any other auditors for the company.
36
PART II
Item 24. Indemnification of Directors and Officers.
Our articles of incorporation and bylaws provide that the personal liability of
the directors and officers of this corporation for monetary damages shall be
eliminated to the fullest extent permissible under California law.
Pursuant to Sections 204 and 317 of the California Corporations Code, a
corporation generally has the power to indemnify its present and former
directors, officers, employees and agents against expenses incurred by them in
connection with any suit to which they are, or are threatened to be made, a
party by reason of their serving in such positions so long as they acted in good
faith and in a manner they reasonably believed to be in the best interests of
the corporation, and with respect to a manner they reasonably believed to be in
the best interests of the corporation, and with respect to any criminal action,
they had no reasonable cause to believe their conduct was unlawful. A
corporation may not eliminate liability: (i) for acts or omissions involving
intentional misconduct or knowing and culpable violations of law; (ii) for acts
or omissions that the individual believes to be contrary to the best interests
of the corporation or its shareholders or that involve the absence of good faith
on the part of the individual; (iii) for any transaction from which the
individual derived an improper personal benefit; (iv) for acts or omissions
involving a reckless disregard for the individual's duty to the corporation or
its shareholders when the individual was aware or should have been aware of a
risk of serious injury to the corporation or its shareholders; (v) for acts or
omissions that constitute an unexcused pattern of inattention that amounts to
any abdication of the individual's duty to the corporation or
its shareholders; or (vii) for improper distribution to shareholders and loans
to directors and officers. Also, a corporation may not eliminate liability for
any act or omission occurring prior to the date on which the corporation
authorizes indemnification of its directors, officers, employees and agents.
We currently do not have directors' and officers' liability insurance to defend
and indemnify directors and officers who are subject to claims made against them
for their actions and omissions as directors and officers. We intend to
purchase this insurance when funds are available.
Item 25. Other Expenses of Issuance and Distribution.
The following table sets forth an itemization of various expenses, all of which
we will pay, in connection with the sale and distribution of the securities
being registered. All of the amounts shown are estimates, except the Securities
and Exchange Commission registration fee.
Securities and Exchange Commission Registration Fee . . . . . . $ 200
Accounting Fees and Expenses . . . . . . . . . . . . . . . . . . $ 25,000
Legal Fees and Expenses . . . . . . . . . . . . . . . . . . . . $ 40,000
Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,000
--------
Total . . . . . . . . . . . . . . . . . . . . . . . . . $ 70,200
37
Item 26. Recent Sales of Unregistered Securities.
Within the past three years, we sold securities without registration
under the Securities Act of 1933, as amended (the "Act") as follows:
Date, Title and Names of Consideration Exemption From
Amount of Securities Investors Received Registration
Offered and Sold
- -------------------- -------------- ------------- ----------------
August 21, 2001 One individual $5,000 Section 4(2) of
6,000,000 shares of (1) the Act
common stock
August 21, 2001 One corporation $5,000 Section 4(2) of
1,749,999 shares of (2) the Act
common stock
September 28, 2001 One corporation $1,000,000 [8] Regulation S of
option to purchase up (3) the Act
to 1,000,000 shares
of common stock
(1) A total of 6,000,000 shares of common stock were issued to Jim Knut
Larsson in exchange for assets with a net book value of $5,000 and as founders
shares. The Company relied on an exemption under the Securities Act of 1933,
pursuant to Section 4(2) thereunder. Mr. Larsson is an officer and directors
of the Company.
(2) A total of 1,749,999 shares of common stock were issued in exchange for
services valued at $5,000 performed by Mackenzie Shea, Inc. pursuant to a
consulting agreement. The Company relied on an exemption under the Securities
Act of 1933, pursuant to Section 4(2) thereunder.
(3) An option was issued to International Asset Services & Holdings, Ltd. to
purchase up to 1,000,000 shares of common stock of the Company at $1.00 per
share. The option was given without compensation. A total of 1,000,000 shares
of common stock were issued pursuant to the option.[9] The Company relied on
an exemption under the Securities Act of 1933, pursuant to Regulation S
thereunder, for the issuance of both the option and the underlying shares.
____________________________
8 This assumes that a $50,000 wire initiated by our investor is located and
credited to the company, which we anticipate will be resolved prior to the
effective date of this registration statement.
9 This assumes that a $50,000 wire initiated by our investor is located and
credited to the company, which we anticipate will be resolved prior to the
effective date of this registration statement.
38
Item 27. Exhibits.
EXHIBIT
NUMBER DESCRIPTION
- ------------- --------------------
3.1 Articles of Incorporation
3.2 Bylaws
21 List of Subsidiaries
23 Consent of Hansen, Barnett & Maxwell, Independent Certified Public
Accountants
Item 28. Undertakings.
(a) The undersigned registrant hereby undertakes to:
(1) File, during any period in which offers or sales are being made, a post-
effective amendment to this registration statement:
(i) to include any prospectus required by section 10(a)(3) of the securities
act of 1933;
(ii) to reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually, or in the aggregate, represent a
fundamental change in the information set forth in the registration statement;
notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the commission pursuant to rule 424(b) (230.424(b) of this chapter)
if, in the aggregate, the changes in volume and price represent no more than a
20% change in the maximum aggregate offering price set forth in the "calculation
of registration fee" table in the effective registration statement; and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
registration statement is on Form S-3 or Form S-8, and the information required
to be included in a post-effective amendment by those paragraphs is contained in
periodic reports filed by the registrant pursuant to Section 13 or Section 15(d)
of the Securities and Exchange of 1934 that are incorporated by reference in the
registration statement.
39
(2) That, for the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934, that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
40
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of
Berkeley, State of California, on June 18, 2002.
KNutek Holdings, Inc.
By: /s/ Jim Knut Larsson
-------------------------------
Jim Knut Larsson, President, Chief
Financial Officer, and Director
By: /S/ Myra Dudley
-------------------------------
Myra Dudley, Director
41
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheet - December 31, 2001 F-3
Consolidated Statements of Operations for the Years Ended
December 31, 2001 and 2000 F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 2000 and 2001 F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2001 and 2000 F-6
Notes to Consolidated Financial Statements F-7
F-1
HANSEN, BARNETT & MAXWELL (801) 532-2200
A Professional Corporation Fax (801) 532-7944
CERTIFIED PUBLIC ACCOUNTANTS 5 Triad Center, Suite 750
Salt Lake City, Utah 84180
www.hbmcpas.com
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
kNutek Holdings, Inc.
We have audited the accompanying consolidated balance sheet of kNutek Holdings,
Inc. and Subsidiaries as of December 31, 2001 and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
ended December 31, 2001 and 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of kNutek Holdings,
Inc. and Subsidiaries as of December 31, 2001 and the results of their
operations and their cash flows for the years ended December 31, 2001 and 2000,
in conformity with accounting principles generally accepted in the United
States.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. During the year ended
December 31, 2001 the Company had a net loss of $475,864, used $406,723 to fund
operations and at December 31, 2001 had $38,391 in working capital. These
matters raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 1. The financial statements do not include any adjustments relating to
the recoverability and classification of asset carrying amounts or the amount
and classification of liabilities that might result should the Company be unable
to continue as a going concern.
/S/ HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
June 11, 2002
F-2
KNUTEK HOLDINGS, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2001
ASSETS
Current Assets
Cash and cash equivalents $ 95,563
Receivables 22,454
Prepaid expenses 20,488
Inventory 42,191
---------
Total Current Assets 180,696
---------
Property and Equipment
Furniture and fixtures 20,860
Equipment 16,190
Automobiles 4,360
Less: accumulated depreciation (8,987)
---------
Net Property and Equipment 32,423
---------
Other Assets-Deposits 3,000
---------
Total Assets $ 216,119
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Trade accounts payable $ 56,035
Accrued liabilities 80,246
Obligation under capital lease- current portion 6,024
---------
Total Current Liabilities 142,305
---------
Obligation Under Capital Lease- Long-Term Portion 5,540
---------
Stockholders' Equity
Common stock no par value; 20,000,000 shares
authorized; 8,249,999 and 6,000,000 shares issued
and outstanding, respectively 510,000
Accumulated deficit (441,726)
---------
Total Stockholders' Equity 68,274
---------
Total Liabilities and Stockholders' Equity $ 216,119
=========
See the accompanying notes to consolidated financial statements.
F-3
KNUTEK HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended
December 31,
-----------------------
2001 2000
---------- ----------
Sales $ 744,040 $ 391,986
Cost of Sales 300,227 128,065
---------- ----------
Gross Profit 443,813 263,921
---------- ----------
Expenses
Selling, general and administrative expense 668,059 212,637
Acquisition costs 250,000 --
Interest expense 1,618 --
---------- ----------
Total Expenses 919,677 212,637
---------- ----------
Net Income (Loss) $ (475,864) $ 51,284
========== ==========
Basic and Diluted Income (Loss) Per Common Share $ (0.07) $ 0.01
========== ==========
Weighted Average Number of Common
Shares Used in Per Share Calculation 6,909,945 6,000,000
========== ==========
See the accompanying notes to consolidated financial statements.
F-4
KNUTEK HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Total
---------------------- Accumulated Stockholders'
Shares Amount Deficit Equity
---------- ---------- ---------- ----------
Balance - December 31, 1999 6,000,000 $ 5,000 $ 16,422 $ 21,422
Distributions to owner - - (22,348) (22,348)
Net income - - 51,284 51,284
---------- ---------- ---------- ----------
Balance - December 31, 2000 6,000,000 5,000 45,358 50,358
Distributions to owner - - (11,220) (11,220)
Shares issued for consulting agreement 1,749,999 5,000 - 5,000
Shares issued for cash, $1.00 per share 500,000 500,000 - 500,000
Net loss - - (475,864) (475,864)
---------- ---------- ---------- ----------
Balance - December 31, 2001 8,249,999 $ 510,000 $ (441,726) $ 68,274
========== ========== ========== ==========
See the accompanying notes to consolidated financial statements.
F-5
KNUTEK HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years
Ended December 31,
-----------------------
2001 2000
---------- ----------
Cash Flows From Operating Activities
Net income (loss) $ (475,864) $ 51,284
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation 3,466 1,715
Common stock issued for services 5,000 --
Changes in operating assets and liabilities:
Accounts receivable (17,564) 883
Prepaid expenses (20,488) 780
Inventory (30,019) (12,172)
Accounts payable 56,035 --
Accrued liabilities 72,711 5,235
---------- ----------
Net Cash and Cash Equivalents Provided
by (Used in) Operating Activities (406,723) 47,725
---------- ----------
Cash Flows From Investing Activities
Purchase of property and equipment (15,779) (3,758)
Cash from notes receivable 2,900 --
Increase in other assets (3,000) --
---------- ----------
Net Cash and Cash Equivalents
Used In Investing Activities (15,879) (3,758)
---------- ----------
Cash Flows From Financing Activities
Proceeds from issuance of common stock 500,000 --
Distributions to owner (11,220) (22,348)
Payments on capital leases (2,279) --
---------- ----------
Net Cash and Cash Equivalents Provided
By (Used in) Financing Activities 486,501 (22,348)
---------- ----------
Net Increase in Cash and Cash Equivalents 63,899 21,619
Cash and Cash Equivalents at Beginning of Period 31,664 10,045
---------- ----------
Cash and Cash Equivalents at End of Period $ 95,563 $ 31,664
========== ==========
Supplemental Cash Flow Information
Interest paid $ 1,628 $ --
========== ==========
Non-Cash Investing and Financing Activities
Property and equipment acquired
with capital lease $ 13,843 $ --
========== ==========
See the accompanying notes to consolidated financial statements.
F-6
KNUTEK HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1- NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization -GaiaWorld International was organized in 1997 as a sole
proprietorship. From the date of inception through August 2001, capital
contributions of $5,000 were made in cash. The assets and liabilities of Gaia
World International were transferred to kNutek Holdings, Inc., a California
Corporation, in August 2001 for 6,000,000 shares of common stock. The
reorganization of the sole proprietorship into the corporation was a transfer
between enterprises under common control and the assets and liabilities
transferred were recorded by the corporation at their historical cost to the
sole proprietorship. In addition, the accompanying financial statements have
been restated to reflect the shares of common stock issued in the reorganization
as though they had been issued on the dates capital contributions were received
from the owner of the sole proprietorship. Accordingly, the accompanying
financial statements include the operations and distributions of the sole
proprietorship through August 2001.
On December 31, 2001, the Company paid a $250,000 finder's fee to a consulting
firm in order to facilitate an acquisition of 97.5% of the outstanding shares of
Domestic Transmission Technologies, Inc. (DTT). At the date of purchase, DTT
had no assets or liabilities and had no historical operations. Due to the lack
of assets and operating history of DTT, the $250,000 was expensed as a cost of
the acquisition. In June 2002, a merger was approved between DTT and the
Company (see Note 7).
Principles of Consolidation -The accompanying consolidated financial statements
include the accounts of kNutek Holdings, Inc. (the parent corporation) from the
date of the reorganization, the accounts of its majority-owned subsidiary,
Domestic Transmission Technologies, Inc., the accounts of kNutek Holdings,
L.L.C. from 1997 through August 2001, and the accounts of kNutek International,
a wholly-owned subsidiary, from the date of inception of August 30, 2001. These
entities are collectively referred to as the Company. All significant
intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts in the financial statements and accompanying notes. Actual results
could differ from those estimates.
Nature of Operations - The Company develops and manufactures beauty and health
and fitness products throughout the United States. The Company also distributes
their beauty and health and fitness products through independent sales agents,
skin care salons, day spas and clinics.
Business Condition - The Company has an accumulated deficit of $441,726 as of
December 31, 2001 and experienced a net loss of $475,864 and used $406,723 cash
for operations during the year ended December 31, 2001. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
The Company needs to obtain additional financing to fund payment of its
obligations and to provide working capital. Management is attempting to raise
additional financing through a private placement offering (see Note 3) and to
control operational expenses. The Company has received additional funds of
$450,000 through June 11, 2002 (see Note 7). The improvement of the Company's
financial condition is ultimately based upon obtaining profitable operations or
obtaining additional financing. There is no assurance additional financing or
profitable operations will be realized.
F-7
Cash Equivalents and Fair Value of Financial Instruments - Cash equivalents
include highly liquid investments with original maturities of three months or
less, readily convertible to known amounts of cash.
The amounts reported as cash and cash equivalents, receivables, trade accounts
payable and accrued liabilities are considered to be reasonable approximations
of their fair values. The fair value estimates were based on market information
available to management at the time of the preparation of the financial
statements. The reported fair values do not take into consideration potential
expenses that would be incurred in an actual settlement.
Accounts Receivable - Due to the subsequent collection of all accounts
receivables, there was no allowance recorded for accounts receivable as of
December 31, 2001.
Inventory - Inventories include direct materials, direct labor and manufacturing
overhead costs and are stated at the lower of cost (using the first-in,
first-out method) or market value. Inventories consist of the following at
December 31, 2001:
Finished goods $ 11,465
Work-in process 747
Parts and raw materials 29,979
---------
$ 42,191
=========
Provisions, when required, are made to reduce excess and obsolete inventories to
their estimated net realizable values. Due to competitive pressures and
technical innovation, it is possible that estimates of the net realizable value
could change in the near term.
Property Equipment - Property and equipment are recorded at cost and
depreciated over their estimated useful lives ranging from 5 to 7 years, using
the straight-line method. Depreciation expense for the years ended December 31,
2001 and 2000 was $3,466 and $1,715, respectively. Expenditures for repairs and
maintenance are charged directly to expense. Renewals and betterments are
capitalized.
Sales Recognition - The customer recognizes revenue from the sale of beauty and
health and fitness products upon delivery and acceptance.
Advertising Costs - The Company follows the policy of charging the costs of
advertising to expense as incurred. Advertising expense was $75,863 and $60,856
for the years ended December 31, 2001 and 2000, respectively.
Stock Based Compensation - The Company accounts for its stock options issued to
directors, officers and employees under Accounting Principles Board Opinion No.
25 and related interpretations ("APB 25"). Under APB 25, compensation expense is
recognized if an option's exercise price on the measurement date is below the
fair value of the Company's common stock. The Company accounts for options and
warrants issued to non-employees in accordance with SFAS No. 123, "Accounting
for Stock-Based Compensation" (SFAS 123) which requires these options and
warrants to be accounted for at their fair value.
F-8
Basic and Diluted Income (Loss) Per Share -Basic income (loss) per common share
is computed by dividing net income (loss) by the weighted-average number of
common shares outstanding during the period. Diluted income (loss) per share is
calculated to give effect to potentially issuable common shares, except during
loss periods when those potentially issuable common shares would decrease the
loss per share. There were no potentially issuable common shares at December 31,
2001 and 2000.
Income Taxes - Prior to August 2001, the Company was taxed as a sole
proprietorship. Under those provisions, the Company did not pay federal or state
corporate income taxes on its taxable income. Instead, the Company's income or
loss was passed through to the individual and reported on the individual's
income tax return. Beginning in August 2001, the Company recognizes an asset or
liability for the deferred tax consequences of all temporary differences between
the tax bases of assets or liabilities and their reported amounts in the
financial statements that will result in taxable or deductible amounts in future
years when the reported amounts of the asset or liabilities are recovered.
These deferred tax assets or liabilities are measured using the enacted tax
rates that will be in effect when the differences are expected to reverse.
Deferred tax assets are reviewed periodically for recoverability and valuation
allowances and adjustments are provided as necessary.
New Accounting Standards - SFAS No. 141, "Business Combinations," requires usage
of the purchase method for all business combinations initiated after June 30,
2001, and prohibits the usage of the pooling of interests method of accounting
for business combinations. The provisions of SFAS No. 141 relating to the
application of the purchase method are generally effective for business
combinations completed after July 1, 2001. Such provisions include guidance on
the identification of the acquiring entity, the recognition of intangible assets
other than goodwill acquired in a business combination and the accounting for
negative goodwill. The Company implemented SFAS 141 during the year ended
December 31, 2001.
SFAS No. 142, "Goodwill and Other Intangible Assets," changes the current
accounting model that requires amortization of goodwill, supplemented by
impairment tests, to an accounting model that is based solely upon impairment
tests. SFAS No. 142 also provides guidance on accounting for identifiable
intangible assets that may or may not require amortization. The provisions of
SFAS No. 142 related to accounting for goodwill and intangible assets will be
generally effective for the Company at the beginning of 2002, except that
certain provisions related to goodwill and other intangible assets are effective
for business combinations completed after July 1, 2001. The Company implemented
SFAS No.142 during the year ended December 31, 2001.
In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations." SFAS No.143 addresses financial accounting and reporting for
obligations associated with the retirement of intangible long-lived assets and
associated asset retirement costs. SFAS No. 143 requires that the fair value of
a liability for an asset retirement obligation be recognized in the period in
which it is incurred. The asset retirement obligations will be capitalized as a
part of the carrying amount of the long-lived asset. SFAS No. 143 applies to
legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development and normal operation of
long- lived assets. SFAS No. 143 is effective for years beginning after June
15, 2002, with earlier adoption permitted. The Company does not believe this
statement will have any impact to the Company.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 establishes a single accounting
model for long-lived assets to be disposed of by sale and the recognition of
impairment of long-lived assets to be held and used. SFAS No. 144 is effective
F-9
for fiscal years beginning after December 15, 2001, with an earlier adoption
encouraged. The Company is evaluating the impact of adopting SFAS No. 144 but
believes it will not have a material effect on the Company's results of
operations or financial position.
NOTE 3 - STOCKHOLDERS' EQUITY
Private Placement Offering -
The Company has issued an investor the right to purchase up to 1,000,000 shares
of common stock at a purchase price of $1.00 per share. The purchase option
expires September 28, 2002. The option may be exercised in full or in part up
until the expiration date. The value of the options was not recorded in the
accompanying financial statements as they were deemed a cost of raising the
capital and thus having no financial statement effect. As of December 31, 2001,
the investor had purchased 500,000 shares of stock for $500,000 under the stock
purchase option. The stock purchase option provides that in the event that the
Company has not filed an appropriate registration statement with the Securities
& Exchange Commission within ninety (90) days after receiving at least $750,000
pursuant to this stock purchase option, then the Company shall immediately
thereafter issue to the investor an additional amount of the Company's common
stock equal to 50% of the then total number of option shares.
In July 2001, the Company issued 1,749,999 shares to a consulting firm for
consulting services. The shares were valued at $5,000. See Note 5 for terms of
consulting agreement.
NOTE 4 - INCOME TAXES
There was no provision for or benefit from income tax for any period. Prior to
August 2001, the Company was taxed as a sole proprietorship. The components of
the net deferred tax asset at December 31, 2001 is as follows:
Benefit of operating loss carry forwards $ 191,396
Less: valuation allowance (191,396)
----------
Net Deferred Tax Asset $ -
==========
For tax reporting purposes, the Company has net operating loss carry forwards in
the amount of $476,846 which will expire in 2021.
The following is a reconciliation of the amount of tax benefit that would result
from applying the federal statutory rate to pretax loss with the benefit from
income taxes for August 2001 through December 2001:
Benefit at statutory rate (34%) $ 163,523
Non-deductible expenses (1,648)
Change in valuation allowance (191,396)
State tax benefit, net of federal tax effect 29,521
----------
Net Benefit From Income Taxes $ -
==========
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Agreements With Consulting Firms -Under the terms of a consulting agreement with
a business consulting firm entered into in July 2001, the Company is obligated
to pay the following monthly advisory fee: (i) months 1-3, $15,000, (ii) months
4-6, $9,000, (iii) months 7-9, $ 6,000 and (iv) months 10-12, $ 3,000. The
F-10
Company was allowed to accrue such monthly advisory fee until the earlier of
(i) a business combination involving kNutek being completed, including the first
of any debt or equity financing secured by kNutek, (ii) the expiration of six
months from the date of this Agreement or (iii) the Agreement's valid
termination, at which time all accrued and unpaid monthly fees will be due and
payable.
The consulting firm also received 1,749,999 shares of the Company's common stock
valued at $5,000. Up to 174,999 shares of the shares shall be subject to
cancellation in the event the shares issued to the consulting firm exceed 17.5%
of the Company's issued and outstanding securities (including without
limitation, common and preferred stock, warrants, options etc.) on a fully-
diluted basis at such time as the Company shall have (i) received up to
$2,000,000 of investment capital and/or debt financing, and (ii) issued equity
to its founder which shall in no event be later than one year from the date of
the agreement. Due to the fact that the consulting firm had provided substantial
services to the Company prior to its formal incorporation and such parties along
with the Company had agreed upon the consideration to be paid for such services
in the form of common stock once the Company was incorporated, the valuation of
the securities received by the consulting firm was based upon the estimated fair
market value of the Company at the time the services were rendered.
Capital Leases - The Company leases equipment under capital lease agreements.
Equipment under capital leases as of December 31, 2001 is as follows:
Equipment $ 13,843
Less: accumulated depreciation (1,017)
--------
$ 12,826
========
Future minimum lease payments and present values of the net minimum lease
payments are as follows:
Year Ending December 31,:
2002 $ 7,270
2003 5,988
2004 357
--------
Total minimum lease payments 13,615
Less: amount representing executory costs (1,215)
Less: amount representing interest (836)
--------
Present value of minimum lease payments 11,564
Less: current portion (6,024)
--------
Obligations Under Capital Leases- Long-Term $ 5,540
========
Operating Lease Agreements -
The Company has an operating lease for a building that expires in 2004. The
following is a schedule of future minimum rental payments required under the
lease:
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Years Ending December 31,
2002 $ 24,000
2003 43,200
2004 43,200
---------
Total Minimum Payments Required $ 110,400
=========
The Company also has entered into other short-term operating leases. Rental
expense for the years ending December 31, 2001 and 2000 was $21,140 and $27,331,
respectively.
NOTE 6 - STOCK OPTIONS
The Company, pending board approval, adopted the "2001 Stock Option Plan" with a
maximum of 1,000,000 shares of common stock reserved for issuance thereunder.
The 2001 Plan provides for both the direct award and sale of shares and for the
grant of options to purchase shares. Options may be granted to all employees,
non-employee members of the Board, non-employee members of the board of
directors of any Parent or subsidiary, consultants and other independent
advisors who provide services to the Corporation. The exercise price per share
shall not be less than 85% of the fair market value per share of common stock on
the option grant date. If the person to whom the option is granted is a 10%
Shareholder, then the exercise price shall not be less than 100% of the fair
market value per share of common stock on the option grant date. No option shall
have a term in excess of 10 years measured from the option grant date. No
options had been issued under the Plan as of December 31, 2001.
NOTE 7 - SUBSEQUENT EVENTS (UNAUDITED)
In January 2002, the Company entered into a note payable with a law firm to pay
for prior services performed. The note is for approximately $24,000, accrues
interest at 8% and requires monthly payments through July 2004.
Through June 11, 2002, the Company received an additional $450,000 under the
private placement agreement described in Note 3 and issued an additional 450,000
shares of common stock. If the registration statement is not filed by June 20,
2002, the Company will be required to issue an additional 475,000 shares of
common stock under the provisions of the agreement.
On June 7, 2002, the Board of Directors and shareholders of the Company approved
a merger between the Company and Domestic Transmission Technologies, Inc. (DTT).
As part of the merger agreement, each outstanding share of DTT will be converted
to 0.892 shares of the Company's common stock. Upon the effective date of the
merger all outstanding shares of DTT shall be deemed cancelled and the corporate
existence of DTT shall be terminated. Upon completion of the merger, the
Company will convert the DTT stock of existing shareholders into 250,000 shares
of the Company's common stock.
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