10KSB 1 g0509.txt ANNUAL REPORT FO RTHE YEAR ENDED 1/31/04 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Form 10-KSB -------------------------------------------------------------------------------- (Mark one) [X] Annual Report Under Section 13 or 15(d) of The Securities Exchange Act of 1934 For the fiscal year ended January 31, 2004 [ ] Transition Report Under Section 13 or 15(d) of The Securities Exchange Act of 1934 For the transition period from ______________ to _____________ -------------------------------------------------------------------------------- Commission File Number: 0-30197 KIK TECHNOLOGY INTERNATIONAL, INC. (Exact name of small business issuer as specified in its charter) California 91-2021602 (State of incorporation) (IRS Employer ID Number) 590 Airport Road, Oceanside, California 92054 (Address of principal executive offices) (760) 967-2777 (Issuer's telephone number) -------------------------------------------------------------------------------- Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: Common Stock $.001 par value -------------------------------------------------------------------------------- Check whether the issuer has (1) filed all reports required to be files by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period the Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of Company's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] The issuer's revenues for the fiscal year ended January 31, 2004 was $3,639,289. The aggregate market value of the voting common equity held by non-affiliates as of April 20, 2004 was approximately $272,587 based upon 25,021,865 shares outstanding of which 7,571,865 are held by non-affiliates and a share price of $0.036. No non-voting common equity is outstanding. As of April 20, 2004, there were 25,021,865 shares of Common Stock issued and outstanding. Transitional Small Business Disclosure Format: Yes [ ] No [X] KIK TECHNOLOGY INTERNATIONAL, INC. INDEX TO CONTENTS Page Number ----------- PART I Item 1 Description of Business 3 Item 2 Description of Property 6 Item 3 Legal Proceedings 7 Item 4 Submission of Matters to a Vote of Security Holders 7 PART II Item 5 Market for Company's Equity and Related Stockholder Matters 7 Item 6 Management's Discussion and Analysis or Plan of Operation 9 Item 7 Financial Statements 12 Item 8 Changes in and Disagreements with Accountants on Accounting and Financial Disclosures 12 Item 8A Controls and Procedures 12 PART III Item 9 Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act 13 Item 10 Executive Compensation 13 Item 11 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 14 Item 12 Certain Relationships and Related Transactions 15 Item 13 Exhibits and Reports on 8-K 15 Item 14 Principal Accountant Fees and Services 15 SIGNATURES 17 2 CAUTION REGARDING FORWARD-LOOKING INFORMATION Certain statements contained in this annual filing, including, without limitation, statements containing the words "believes", "anticipates", "expects" and words of similar import, constitute forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: international, national and local general economic and market conditions: demographic changes; the ability of the Company to sustain, manage or forecast its growth; the ability of the Company to successfully make and integrate acquisitions; raw material costs and availability; new product development and introduction; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; the loss of significant customers or suppliers; fluctuations and difficulty in forecasting operating results; changes in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to protect technology; and other factors referenced in this and previous filings. Given these uncertainties, readers of this Form 10-KSB and investors are cautioned not to place undue reliance on such forward-looking statements. The Company disclaims any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained herein to reflect future events or developments. PART I ITEM 1 - DESCRIPTION OF BUSINESS BUSINESS DEVELOPMENT On September 4, 2001, KIK Technology International, Inc. (KTII) (formerly Russian-Imports.com) issued 16,700,000 shares of restricted, unregistered common stock to KIK Tire Technologies Inc. (a publicly-owned Canadian corporation) (KTTI) for 100.0% of the issued and outstanding stock of KIK Technology, Inc. (a wholly-owned subsidiary of KTTI). By virtue of this transaction, KIK Technology, Inc. became a wholly-owned subsidiary of KTII and KTTI became an approximate 73.6% shareholder in KTII. Concurrent with this transaction, Russian-Imports.com changed it's corporate name to KIK Technologies International, Inc. At the transaction date, KTII was a "shell company" as the Company had no assets or liabilities, had generated no revenues since inception and had incurred total expenses of approximately $940,000 since its inception on February 1, 2000 through the September 4, 2001 transaction. The acquisition of KIK Technology, Inc. (KTI), on September 4, 2001, by KTII effected a change in control of KTII and was accounted for as a "reverse acquisition" whereby KTI is the accounting acquiror for financial statement purposes. For accounting purposes, the acquisition was treated as an acquisition of the Company by KIK and as a recapitalization of KIK. The historical shareholders' equity of KIK, prior to the transaction, was retroactively restated for the equivalent number of shares exchanged in the transaction after giving effect to any difference in the par value of the Company and KIK's common stock, with an offset to additional paid-in capital. Accordingly, the historical consolidated financial statements of the Company are those of KTI from it's inception and those of the consolidated entity subsequent to the September 4, 2001 transaction date. The Company follows the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America and has adopted a year-end of January 31. The Company operates through it's wholly-owned subsidiary, KIK Technology, Inc. (KTI). KTI operates from its manufacturing plant and marketing offices located at Oceanside, California and manufactures and markets an extensive and high quality line of off-highway micro-cellular polyurethane tires for the healthcare, light industrial, lawn and garden and recreational industries. 3 The current KIK production processes, formulations, manufacturing equipment, and line of some 150 products are the result of over ten years of research and development, funded by over $5 million of invested capital, and protected by trade secrets and licensing agreements. In its formative years, KIK, through it's research and development efforts, developed new and tougher varieties of urethane formulations for it's products; obtained tooling for new products; and added extensive production capacity. The Company introduced initiated various marketing programs as capital was available resulting in the following revenues: Year ended January 31, 2004 - approximately $3.6 million Year ended January 31, 2003 - approximately $3.2 million Year ended January 31, 2002 - approximately $2.6 million Year ended January 31, 2001 - approximately $3.7 million Revenues are generated through direct sales to the medical market segment (primarily wheelchair tires) and through a network of third party marketing distributors. KIK continues to develop the implementation of other marketing strategies, directly and through carefully selected new strategic partners as the necessary funds are available. The manufacturing infrastructure sufficient to meet projected demand through the next few years is in place. The Company has relied upon Section 4(2) of the Securities Act of 1933, as amended (the "Act") and Rule 506 of Regulation D promulgated thereunder ("Rule 506") for it's issuances of its unregistered securities. In each instance, such reliance was based upon the fact that (i) the issuance of the shares did not involve a public offering, (ii) there were no more than thirty-five (35) investors (excluding "accredited investors"), (iii) each investor who was not an accredited investor either alone or with his purchaser representative(s) has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective investment, or the issuer reasonably believes immediately prior to making any sale that such purchaser comes within this description, (iv) the offers and sales were made in compliance with Rules 501 and 502, (v) the securities were subject to Rule 144 limitations on resale and (vi) each of the parties was a sophisticated purchaser and had full access to the information on the Company necessary to make an informed investment decision by virtue of the due diligence conducted by the purchaser or available to the purchaser prior to the transaction (the "506 Exemption"). BUSINESS STRATEGY KIK is a manufacturer of micro-cellular polyurethane (MCP) tires with the technology and equipment to take advantage of the growing market for flat-free tires. It has developed what it considers is an excellent reputation within the industry. It is the objective of the Company to become a major force throughout the world as a MCP tire producer. The Company believes the tire industry is looking for an alternative to pneumatic tires and that the KIK tires provide a viable, "value added" alternative. The Company's initial focus is to determine the needs of existing and potential customers and supplying a superior product at competitive prices. The Company will also continue to pursue and evaluate new business diversification opportunities available to it using its technology. PRODUCT KIK manufactures polyurethane tires by blending hydrocarbon-based quality isocyanate intermediates with glycol-based polyols and other chemicals. The resulting compound makes a light but tough tire which the Company believes will set an evolutionary trend in the tire industry. KIK tires are environmentally friendly, puncture and leak proof and maintenance free. They ride like a pneumatic tire but last much longer due to their tough polymer construction. The Company also manufactures non-tire urethane products, for non-tire customers. 4 THE COMPANY'S EQUIPMENT AND PRODUCTION LINE CAPABILITIES KIK owns all the equipment necessary to turn raw material to the finished product - including tires and completed wheel assemblies. The Company's technology and equipment enable it to produce a large variety of tires and other products. Although the Company is licensed for three variant features of MCP tire technologies, it has developed its own unique chemical formulations and manufacturing processes. The Company's production process requires the dispensing of catalyzed liquid chemicals into a spinning mold. This centrifugal casting of mixed, activated polyurethane base stock raw materials results in a tough molded polymer with smooth, solid outer skin and a lighter, uniformly dense porous foam core. KIK tires can be designed and molded to virtually any tread specification and are available in a variety of colors. The spin casting results in perfectly balanced tires. The Company has the equipment to produce, depending on the size of the tire, 1,500,000 to 2,000,000 tires annually. The Company has a machine shop and maintains its own testing and quality assurance equipment and program. Completed tires must meet specific protocols such as weight and pressure. Whenever possible, the Company purchases bulk raw materials in volumes to produce significant cost savings in the manufacturing process. The Company is constantly looking into developing new products and modifying existing products for its production lines, and is evaluating improvements to its technology designed to lower production costs and improve competitiveness in its markets. PROPRIETARY TECHNOLOGY The Company operates under perpetual licensing agreements with patent holders that cover various aspects of tire and equipment designs, chemical formulations and manufacturing processes. MARKETING AND SALES DISTRIBUTION The Company has grouped the worldwide market for off-highway tires into four major market segments, each possessing identifiable business characteristics requiring separate sales strategies. HEALTHCARE: The Company's immediate focus is penetration of the existing wheelchair and power scooter pneumatic tire business, with emphasis at the OEM level. This has been the "prototype" industry around which the Company has developed and perfected its MCP tire technology. Through trade shows, trade magazine advertising, distributors and direct sales contacts, an excellent base has been established to facilitate future growth in this sector. INDUSTRIAL: KIK markets light, off-highway industrial and utility tires through its strategic alliance with ARNCO, A Los Angeles based producer of pneumatic tire sealants and foam-fill compounds. ARNCO, a world leader in their field, has a North American distribution network in place providing an immediate and natural sales outlet for KIK's "Carefree" branded products. KIK private-labels tires for ARNCO under the "Carefree Tire" registered trademark, and for selected high volume customers. RECREATIONAL: Although the Company has products for recreational devices such as golf carts and skate boards, this market is dominated by bicycles. Previously, KIK has discussed the manufacture of bicycle tires outside of North America through selected strategic (joint venture) partners in countries such as China active in export markets, and where users are reliant on the bicycle as basic transportation. During Fiscal 2004, the Company has become aware of the Chinese manufacture of products of comparable quality, which directly compete with the Company's products. At this time, the expansion of manufacturing outside the Oceanside, California plant is uncertain. LAWN & GARDEN: KIK will attack the international lawn and garden OEM market directly and through established distributors. Most of Carefree Tire's North American downstream tire distribution network services this industry parallel to the industrial market. Initial results indicate that users embrace this new technology enthusiastically for such applications as wheelbarrows, powered lawn mowers, snow blowers, and farm carts, etc. OEMs are also being aggressively pursued in the United States, Canada and Europe. 5 ADVERTISING & PROMOTION As the Company has available capital, the Company is developing a variety of collateral materials to support sales efforts. These materials include informational and instructional video tapes, brochures, product catalogs with data sheets, flyers, sample presentations etc. The Company also advertises and markets its products on its website - www.kiktire.com. COMPETITION Currently the Company knows of three tire manufacturers that utilize a manufacturing process similar to its own (Green Tire, U.K., Alshin Tire, U.S.A., Amerityre Corporation, U.S.A.). The Company has also heard of a manufacturer in India and one in China. To the best of the Company's knowledge, only a limited number of their tires have been marketed in the United States. The Company's main competition comes from firms that manufacture and market tires and tubes made from rubber. Several of these competitors are large well-established companies with considerably greater financial, marketing, sales and technical resources than those available to the Company. During Fiscal 2004, the Company has become aware of the Chinese manufacture of products of comparable quality, which directly compete with the Company's products. At this time, the expansion of manufacturing outside the Oceanside, California plant is uncertain. Further, many of the Company's present and potential competitors have capabilities that may allow such competitors to offer its products at prices which may compete with the Company's products. The Company's products could be made uneconomical by the introduction of new products or marketing or pricing actions by one or more of the Company's competitors, including foreign competition. However, the Company believes that once the superior characteristics of the MCP tires have been properly communicated to the consumers, an increasingly large percentage of consumers will switch to the Company's tires. SOURCES AND AVAILABILITY OF RAW MATERIALS The materials needed to produce the Company's products are widely available from numerous third parties. No shortage of materials is expected in the foreseeable future. RESEARCH AND DEVELOPMENT The Company constantly seeks to improve its MCP technology and develop new products. However, the Company does not anticipate that it will be required to commit any substantial funds for existing development projects or for new research and development. REGULATION AND ENVIRONMENTAL COMPLIANCE The Company is subject to general local, state and federal regulations governing environmental concerns. Management believes the Company has always been and continues to be in compliance with all such laws. EMPLOYEES As of April 20, 2004, the Company has approximately 22 full-time employees, including 3 management/clerical personnel. None of these employees are represented by a labor union. The Company considers its relations with its employees to be excellent. The Company may employ additional personnel, as necessary, to accommodate future expansion. ITEM 2 - DESCRIPTION OF PROPERTY The Company maintains its executive offices at 590 Airport Road, Oceanside, CA 92054. Its telephone number is (760) 967-2777. The Company leases approximately 13,480 square feet of space under a non-cancellable lease, expiring in May 2005, from an unrelated third-party landlord. The lease requires monthly payments as follows: $8,307 for the first 12 months; $8,639 for the next 12 months and $8,984 for the next 12 months. Rent expense incurred under this lease was approximately $102,340 and $97,800 for each of the years ended January 31, 2004 and 2003, respectively. 6 Future amounts due under this lease agreement for facilities are as follows: Year ending January 31, Amount ----------- ------ 2005 $106,428 2006 35,936 -------- Total $142,364 ======= ITEM 3 - LEGAL PROCEEDINGS The Company may become involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse impact either individually or in the aggregate on consolidated results of operations, financial position or cash flows of the Company. As of the date of this filing, the Company is not involved in any legal proceeding. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company has not conducted any meetings of shareholders during the preceding quarter or periods subsequent thereto. PART II ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS As of April 20, 2004, there were 25,021,865 shares of $0.001 par value common stock (the "Common Stock") of the Company outstanding and owned by approximately 63 shareholders of record, exclusive of shareholders holding their certificates in street name. Our Certificate of Incorporation authorizes the issuance of 100,000,000 shares of $0.001 par value common stock. Our Certificate of Incorporation does not allow for the issuance of any class of preferred stock. Holders of shares of common stock are entitled to one vote for each share on all matters to be voted on by the stockholders. Holders of common stock have cumulative voting rights. Holders of shares of common stock are entitled to share ratably in dividends, if any, as may be declared, from time to time by the Board of Directors in its discretion, from funds legally available therefor. In the event of a liquidation, dissolution, or winding up of the company, the holders of shares of common stock are entitled to share pro rata all assets remaining after payment in full of all liabilities. Holders of common stock have no preemptive or other subscription rights, and there are no conversion rights or redemption or sinking fund provisions with respect to such shares. During 2001, the Company filed a request for clearance of quotations on the OTC Bulletin Board under SEC Rule 15c2-11, Subsection (a)(5) with NASD Regulation Inc. A Clearance Letter was issued to the Company and was issued the trading symbol "KKTI". The ask/high and bid/low information for each calendar quarter since September 4, 2001, noting that the over-the-counter quotations provided herein reflect inter-dealer prices, without retail markup, mark-down or commission and may not represent actual transactions. High Low ---- --- FISCAL YEAR ENDED JANUARY 31, 2003 First quarter 2003 (February 1, 2002 - April 30, 2002) $0.33 $0.16 Second quarter 2003 (May 1, 2002 - July 31, 2002) $0.22 $0.13 Third quarter 2003 (August 1, 2002 - October 31, 2002) $0.19 $0.05 Fourth quarter 2003 (November 1, 2002 - January 31, 2003) $0.12 $0.04 7 High Low ---- --- FISCAL YEAR ENDED JANUARY 31, 2004 First quarter 2004 (February 1, 2003 - April 30, 2003) $0.06 $0.04 Second quarter 2004 (May 1, 2003 - July 31, 2003) $0.06 $0.04 Third quarter 2004 (August 1, 2003 - October 31, 2003) $0.07 $0.04 Fourth quarter 2004 (November 1, 2003 - January 31, 2004) $0.05 $0.02 DIVIDENDS The Company has never paid or declared any dividends on its common stock and does not anticipate paying cash dividends in the foreseeable future. RECENT SALES OF UNREGISTERED SECURITIES Effective at the end of each Fiscal quarter during the year ended January 31, 2003, the Company and the holders of the two convertible notes, James Hullihan and Vector II, LLC agreed for the payment of accrued interest in restricted, unregistered common stock. The Company issued an aggregate 101,964 shares of restricted, unregistered common stock in payment of accrued interest. These transactions were valued at an aggregate approximately $6,977. The convertible note terms allow for the payment of accrued interest with restricted, unregistered common stock using an average value of 50% of the daily average of the market price of the common stock for the 30 calendar days preceding the interest due date. In two instances, the closing stock price, as discounted was at or in excess of the closing price on the settlement date. In two instances, the closing stock price on the settlement date was in excess of the prescribed calculation. The differential between the discounted "fair value" and the settlement price resulted in a charge to operations of approximately $906 for compensation expense related to common stock issuances at less than "fair value". Effective February 1, 2003 and May 1, 2003, the Company and the holders of the two convertible notes, James Hullihan and Vector II, LLC, agreed for the payment of accrued interest in restricted, unregistered common stock. The Company issued an aggregate 206,987 shares of restricted, unregistered common stock in payment of accrued interest. These transactions were valued at an aggregate approximately $3,782. The convertible note terms allow for the payment of accrued interest with restricted, unregistered common stock using an average value of 50% of the daily average of the market price of the common stock for the 30 calendar days preceding the interest due date. In both instances, the closing stock price on the settlement date was in excess of the prescribed calculation. The differential between the discounted "fair value" and the settlement price resulted in a charge to operations of approximately $945 for compensation expense related to common stock issuances at less than "fair value". In February 2003, the Company issued 150,000 restricted, unregistered shares of common stock to David Gaal in payment of a contract for marketing services. This transaction was valued at approximately $3,000, which was equal to or in excess of the discounted closing price of the Company's common stock on the NASDAQ Electronic Bulletin Board on the date of each respective transaction. The Company relied upon Section 4(2) of The Securities Act of 1933, as amended, for an exemption from registration on these shares.. In April 2003, the Company issued 22,500 restricted, unregistered shares of common stock to Camden Securities in settlement of a January 31, 2003 trade account payable in the amount of approximately $552. The value of this transaction was equal to or in excess of the discounted closing price of the Company's common stock on the NASDAQ Electronic Bulletin Board on the date of each respective transaction. The Company relied upon Section 4(2) of The Securities Act of 1933, as amended, for an exemption from registration on these shares. In May 2003, the Company issued 575,664 restricted, unregistered shares of common stock in payment of trade accounts payable to Mintmire & Associates, the Company's primary legal counsel, in the amount of approximately $72,849. The value of this transaction was equal to or in excess of the discounted closing price of the Company's common stock on the NASDAQ Electronic Bulletin Board on the date of each respective transaction. The Company relied upon Section 4(2) of The Securities Act of 1933, as amended, for an exemption from registration on these shares. 8 ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW During Fiscal 2004 and 2003, the Company achieved revenues of approximately $3,639,000 and $3,156,000 as compared to approximately $2,567,000 for Fiscal 2002. These revenues were derived primarily from the sale of tire products. Net loss for the year ended January 31, 2004 and 2003 was approximately $ (199,137) and $(12,700) as compared to a net loss of approximately ($179,000) for the year ended January 31, 2002. The net loss for Fiscal 2004 includes a $120,000 charge for administrative services to the Company from KIK Tire Technologies Inc., the Company's publicly-owned Canadian majority shareholder. The net loss in 2002 included an extraordinary gain of approximately $203,000 resulting from the extinguishment of trade accounts payable that related to prior business operations. The net loss per share of common stock for Fiscal 2004 and 2003 was approximately $(0.01) and $0.00 per share. RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and notes. YEAR ENDED JANUARY 31, 2004 COMPARED TO THE YEAR ENDED JANUARY 31, 2003 The Company posted net sales of approximately $3,639,000 for the fiscal year ended January 31, 2004 as compared to net sales of approximately $3,156,000 for the fiscal year ended January 31, 2003. This increase reflects sales of the Company's tire products to both key customers and other third party customers during the year as management made an effort to expand it's sales volume in all markets using the Company's products The Company's cost of sales increased by approximately $517,000 to approximately $3,117,000 for the year ended January 31, 2004 as compared to approximately $2,600,000 for the year ended January 31, 2003. This increase profiles favorably to the increase in sales volume during Fiscal 2004 and increases in prices in raw materials during the year. Virtually all of the increase is directly attributable to the costs of raw materials and direct labor needed for the increase in unit volume. All other costs related to production were relatively stable during Fiscal 2004. The Company experienced a gross profit margin of approximately 13.26% (approximately $522,000) for Fiscal 2004 as compared to approximately 17.71% (approximately $556,000) for Fiscal 2002. The deterioration of the gross profit margin was attributable to economic pricing pressures caused by foreign competition and increases in domestic raw material costs. Management is aware of this situation and is evaluating various remedies to restore the gross profit percentages experienced in prior years. General and administrative expenses increased from approximately $578,000 for Fiscal 2003 to approximately $718,000 in Fiscal 2004. At the KIK operating subsidiary level, all general and administrative costs were virtually consistent (approximately $575,000 for Fiscal 2004 versus $525,000 for Fiscal 2003). The difference reflects various overhead expenses at the corporate administrative level which are subject to random fluctuation based upon business and overhead activities, including a new administrative support charge of $120,000 which was assessed by KIK Tire Technologies Inc., the Company's publicly-owned Canadian majority shareholder. YEAR ENDED JANUARY 31, 2003 AS COMPARED TO THE YEAR ENDED JANUARY 31, 2002 The Company posted net sales of approximately $3,156,000 for the fiscal year ended January 31, 2003 as compared to net sales of approximately $2,567,000 for the fiscal year ended January 31, 2002. This increase reflects sales of the Company's tire products to both key customers and other new third party customers during the year as management made an effort to replace the business lost during Fiscal 2002. The Company's cost of sales increased by approximately $354,000 to approximately $2,600,000 for the year ended January 31, 2003 as compared to approximately $2,245,000 for the year ended January 31, 2002. This increase profiles favorably to the increase in sales volume during Fiscal 2003. Virtually all of the increase is directly attributable to increased raw material purchases. All other costs related to production were relatively stable during Fiscal 2 The Company experienced a gross profit margin of approximately 17.71% (approximately $556,000) for Fiscal 2003 as compared to approximately 12.54% (approximately $322,000) for Fiscal 2002. General and administrative expenses dropped from approximately $712,000 for Fiscal 2002 to approximately $578,000 in Fiscal 2003. At the KIK operating subsidiary level, all general and administrative costs were virtually consistent 9 (approximately $536,000 for Fiscal 2002 versus $525,000 for Fiscal 2003). The difference reflects various overhead expenses at the corporate administrative level which are subject to random fluctuation based upon business and overhead activities. The Company's results of operations have and continue to fluctuate depending on, amongst other things, the mix of products sold; success of the Company's distributors in penetrating new markets; the timing and availability of products developed by the Company and/or requested by its customers; and general economic and political conditions. LIQUIDITY AND CAPITAL RESOURCES The Company had cash and cash equivalents of approximately $81,000 and $27,000 at January 31, 2004 and 2003, respectively. The Company maintained business liquidity and capital resources during the year adequate to fund all capital and operating expense requirements. During Fiscal 2004, operations were primarily funded from internally generated funds. In prior years, operating capital needs were supplemented through line of credit borrowings and capital raised through a private placement of debt and/or equity securities. For the years ended January 31, 2004 and 2003, the Company's operating activities generated positive net cash flows of approximately $118,000 and $18,000, respectively. Net cash used in operating activities consists of cash received from sales of products to customers, less purchases of raw materials, payment of payroll and payment of other general operating expenses, including interest. Cash provided by (used in) investing activities was approximately $(60,000) and $80,000 for the years ended January 31, 2004 and 2003, respectively. The Fiscal 2003 increase was attributable to the release of a $100,000 certificate of deposit pledged as collateral on a revolving line of credit which was retired during Fiscal 2003. The Fiscal 2004 cash utilization was due to acquisition of equipment of $(60,000). The Company experienced cash provided by (used in) financing activities of approximately $(3,800) and $(87,000) in Fiscal 2004 and 2003, respectively. The Fiscal 2004 and 2003 usage included the payment of principal on a long capital lease payable of approximately $(3,800) and $(2,900), respectively. Additionally, during Fiscal 2003, the Company retired the entire balance on the Bank line of credit in the amount of approximately $100,000 and had cash advanced by the Company's publicly-owned Canadian majority shareholder of approximately $16,000. The Company believes that sufficient cash will be generated internally to fund its operations for the next twelve months. RESTRUCTURED CONVERTIBLE NOTE On February 16, 2004, the Company restructured the $50,000 convertible note payable to Vector II, LLC. Under the restructured terms, the Company paid all accrued interest and made a $3,000 principal reduction on March 16, 2 Thereafter, the Company is obligated to pay $2,000 per month, plus accrued interest, for the next six months and $1,000 per month, plus accrued interest, thereafter until all outstanding amounts are paid in full. The restructured note bears interest at 10.0% per annum. The restructured note is convertible into shares of unregistered, restricted common stock at the sole discretion of the Company provided that the daily average (calculated from the last sale price daily) of the market price of the Company's common stock for any 30 calendar day period equals or exceeds $1.00 per share, with the conversion being calculated at a 50% discount of such 30 day average. The Noteholder also has the election, with the Company's consent, to receive the monthly interest payments in restricted, unregistered common stock of the Company at the daily average (calculated from the last sale price daily) of the market price of the Company's common stock for the 30 calendar day period prior to the interest due date, with the number of shares to be issued calculated at a 50% discount of such 30 day average. Through March 31, 2004, the Company has paid approximately $5,000 in principal and $4,100 in cumulative accrued interest. 10 CRITICAL ACCOUNTING POLICIES Financial Reporting Release No. 60, of the U. S. Securities and Exchange Commission, requires all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. Note B to the Company's Consolidated Financial Statements includes a summary of the significant accounting policies and methods used in the preparation of the Company's Consolidated Financial Statements. The following is a brief discussion of the more significant accounting policies and methods used by the Company. REVENUE RECOGNITION Our revenue recognition policy is significant because our revenue is a key component of our results of operations. The Company recognizes revenue from the sale of tires and accessories. Revenue is recognized upon shipment to, or receipt by customers, depending upon contractual terms and when there is no significant uncertainty regarding the consideration to be received and the associated costs to be incurred. Additionally, we provide a reduction of recorded revenue for billing adjustments and billing corrections. ACCOUNTS RECEIVABLE The Company continuously monitors collections and payments from its customers and maintains an allowance for estimated uncollectible accounts based upon historical experience and specific customer collections issues that have been identified. Depending upon management's assessment of a customer's creditworthiness and order size, certain shipments are made on "COD" terms using common carriers. Since accounts receivable are concentrated in a relatively few customers, a significant change in the liquidity or financial position of any one of these customers could have a material adverse impact on the collectibility of the Company's accounts receivable and future operating results. In the event of complete non-performance by any customer or customers, the maximum exposure to the Company would be the recorded amount of trade accounts receivable shown on the balance sheet at the date of non-performance. INVENTORIES Inventories are valued at the lower of cost or market. Cost is determined principally on the average cost method. The Company regularly reviews inventory quantities on hand and records, when necessary, a provision for excess and obsolete inventory based primarily on the Company's estimated forecast of product demand and production requirements for the next twelve months. Demand for the Company's products can fluctuate significantly. A significant increase in the demand for the Company's products could result in a short-term increase in the cost of inventory purchases while a significant decrease in demand could result in an increase in the amount of excess inventory quantities on hand. In addition, the Company's industry is characterized by rapid technological change, frequent new product development and rapid product obsolescence that could result in an increase in the amount of obsolete inventory quantities on hand. Additionally, the Company's estimate of future product demand may prove to be inaccurate, in which case the Company may have understated or overstated the provision required for excess and obsolete inventory. Therefore, although the Company makes every effort to ensure the accuracy of its forecasts of future product demand, any significant unanticipated changes in demand or technological developments could have a significant impact on the Company's inventory value and reported operating results. STOCK-BASED COMPENSATION Statement of Financial Accounting Standards No. 123, Accounting for Stock Based Compensation, defines a fair-value based method of accounting for stock-based employee compensation plans and transactions in which an entity issues its equity instruments to acquire goods and services from non-employees, and encourages but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. For periods prior to November 1, 2002, the Company has chosen to account for employee stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25 (APB No. 25), Accounting for Stock Issued to Employees, and related interpretations. Accordingly, employee compensation cost for stock options and warrants is measured as the excess, if any, of the market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. This treatment was allowed under Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" (SFAS 123). 11 In December 2002, FASB issued Statement of Financial Accounting Standards No. 148 "Accounting for Stock- Based Compensation - Transition and Disclosure" (SFAS 148). This statement amends SFAS 123 and provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. This statement also amends the disclosure requirements of SFAS 123 to require more prominent and frequent disclosures in financial statements about the effects of stock-based compensation. The transition guidance and annual disclosure provisions of SFAS 148 are effective for financial statements issued for fiscal years ending after December 15, 2002. Effective November 1, 2003, the first day of the reporting quarter including the effective date of SFAS 148, the Company's Board of Directors, in conjunction with public opinion and SFAS 148, elected to expense the imputed compensation cost related to any stock options granted during Fiscal 2003 and for future periods. The Company did not issue any stock options during Fiscal 2003 and the adoption of SFAS 148 did not have a material impact on our results of operations or financial condition. ITEM 7 - FINANCIAL STATEMENTS The required consolidated financial statements begin on Page F-1 of this document. ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On March 6, 2003, the Company dismissed the accounting firm of Horwath Gelfond Hochstadt Pangburn, P.C. of Denver, Colorado as the Company's independent auditors. The Company's Board of Directors made the decision to change accountants in an effort to reduce audit costs and limit overhead expenses. No accountant's report on the financial statements issued by Horwath Gelfond Hochstadt Pangburn, P.C. for either of the years ended January 31, 2002 or 2001, respectively, contained an adverse opinion or a disclaimer of opinion or was qualified or modified as to uncertainty, audit scope or accounting principles. During the Company's two fiscal years (ended January 31, 2002 and 2001) and from February 1, 2002 through the date of this Report, there were no disagreements with Horwath Gelfond Hochstadt Pangburn, P.C. on any matter of accounting principles or practices, financial disclosure, or auditing scope or procedure. There were no reportable events as described in Item 304(a)(1)(v) of Regulation S-K, during the Company's two fiscal years (ended January 31, 2002 and 2001) and from February 1, 2002 to the date of this Report. On March 6, 2003, the Company received a letter from Horwath Gelfond Hochstadt Pangburn, P.C. that it agreed with the statements contained in the Company's Current Report on Form 8-K filing. On March 6, 2003, the Company engaged the firm of S. W. Hatfield, CPA of Dallas, Texas as the Company's independent auditors. Prior to such engagement, the Registrant had not consulted S. W. Hatfield, CPA on any prior matters, including any matters relative to the application of accounting principles or any subject of disagreement with Horwath, Gelfond, Hochstadt, Pangburn, P.C. ITEM 8A - CONTROLS AND PROCEDURES As required by Rule 13a-15 under the Exchange Act, within the 90 days prior to the filing date of this report, the Company carried out an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of the Company's management, including the Company's President and Chief Executive Officer and the Company's Chief Financial Officer. Based upon that evaluation, the Company's President and Chief Executive Officer and the Company's Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective. There have been no significant changes in the Company's internal controls or in other factors, which could significantly affect internal controls subsequent to the date the Company carried out its evaluation. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in Company reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in Company reports filed under the Exchange Act is 12 accumulated and communicated to management, including the Company's Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure. ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT Name Age Position ---- --- -------- Donald P. Dean 68 Chairman and Director William M. Knooihuizen 60 President and Director Kuldip C. Baid 56 Chief Financial Officer and Director DONALD P. DEAN, P. ENG. Donald P. Dean serves as Secretary, Chairman of the Board and Director of KIK Technology International, Inc. He has been with KIK Technology, Inc. since 1987. From 1984 to 1987, he served as President of Jade Marble Crafts Ltd., a manufacturer of polyester resin-based plastic products and Twin Top Industries Ltd. Twin Top was a manufacturer of polyurethane foam insulated fiberglass well-head shelters and buildings. During the 1960's Mr. Dean worked as an engineer, distribution supervisor and plant manager of the Toronto Marketing and Chemical Distribution Terminal for Shell Canada Limited. Subsequently, he was President of a subsidiary of Trimac Limited providing worldwide transportation and logistics planning, and management consulting services to government and industry. Mr. Dean is a registered professional engineer. He received a B.Sc. in civil engineering from the University of Saskatchewan in 1960. Mr. Dean is also an executive officer of KIK Tire Technologies Inc., the Company's publicly-owned Canadian majority shareholder. WILLIAM M. KNOOIHUIZEN, PE William M. Knooihuizen serves as President and Director of KKTI. He joined KIK Technology, Inc. in May, 1993, and was appointed President and CEO of that company in 1996. He has over 34 years experience in urethane processing technology, where he has held the positions of V.P./General Manager for Dam Industries, Inc., United Foam Corporation and Evanite Permaglass. He received a degree in Chemical Engineering from Penn State University in 1966. KULDIP C. BAID, CA Kuldip C. Baid serves as CFO and Director of KKTI. He has been with KIK Technology, Inc. since 1987. Mr. Baid is a Canadian Chartered Accountant who from 1981 to 1986 was Manager of Tax with Turbo Resources Ltd. Previous work experience includes public accounting practice with Deloitte & Touche; employment as a financial analyst for Oxford Development Group Ltd.; and Manager of Accounting for Carma Developers Ltd.. Mr. Baid received a B. Commerce degree from the University of Alberta in 1976 and completed his certification as a Chartered Accountant in 1979. Mr. Baid is also an executive officer of KIK Tire Technologies Inc., the Company's publicly-owned Canadian majority shareholder. COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934 No Director, Officer, Beneficial Owner of more than ten percent (10%) of any class of securities of the Company failed to file reports required by Section 16(a) of the Exchange Act during the most recent fiscal year or prior fiscal years. ITEM 10 - EXECUTIVE COMPENSATION The following summary compensation table sets forth the aggregate cash compensation paid or accrued by the Company to each of the Company's executive officers for services rendered to the Company during the Company's fiscal years ended 2003, 2002 and 2001 and all plan and non-plan compensation awarded to, earned by or paid to certain designated executive officers. 13
Long-Term Compensation Annual Compensation Awards Payouts ------------------------ ------------------------- ------- Other Restricted Securities All Salary/ Annual Stock Underlying LTIP Other Name/Title Year Bonus Compensation Awards Options/SARs Payouts Compensation ---------- ---- ------- ------------ ------ ------------ ------- ------------ Donald P. Dean 2004 $-0- $-0- $-0- $-0- $-0- $-0- Chairman and Secretary 2003 $-0- $-0- $-0- $-0- $-0- $-0- 2002 $-0- $-0- $-0- $-0- $-0- $-0- William P. Knooihuizen 2004 $143,000 $15,000 $-0- $-0- $-0- $-0- President 2003 $143,000 $15,000 $-0- $-0- $-0- $-0- 2002 $143,000 $15,000 $-0- $-0- $-0- $-0- Kuldip C. Baid 2004 $72,000 $-0- $-0- $-0- $-0- $-0- Chief Financial Officer 2003 $72,000 $-0- $-0- $-0- $-0- $-0- 2002 $-0- $-0- $-0- $-0- $-0- $-0-
In May 2000, KIK entered into an employment agreement with William M. Knooihuizen, the Company's current President and Director. The term of the agreement is for a period of five (5) years. For such services, KIK agreed to pay Mr. Knooihuizen an annual salary in the amount of $143,000, to be paid weekly. COMPENSATION OF DIRECTORS The Company has no standard arrangements for compensating directors of the Company for their attendance at meetings of the Board of Directors. ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table shows, as of January 31, 2004, the shares of Common Stock beneficially owned by all of the persons who served as the directors or officers of the Company during Fiscal 2003 as well as the principal shareholders (greater than 5%) of the Company individually and, as to the directors and officers, as a group. The address of each person or entity, unless otherwise noted, is c/o KIK Technology International, Inc., 590 Airport Road, Oceanside, California 92054. The number of shares beneficially owned by each person or entity is determined under rules of the Securities and Exchange Commission, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares as to which the person has the sole or shared voting power or investment power and also any shares which the person has the right to acquire as of a date within 60 days after the relevant date through the exercise of any stock option or other right. % of Class Name and address Number of Shares Beneficially Owned ---------------- ---------------- ------------------ KIK Tire Technologies Inc. (1) 16,700,000 66.74% Donald P. Dean 250,000 1.00% William M. Knooihuizen 250,000 1.00% Kuldip C. Baid 250,000 1.00% All officers and directors 17,450,000 69.74% as a group (1) ---------- (1) Donald P. Dean and Kuldip C. Baid are Executive Officers of KIK Tire Technologies Inc., and as such, may be deemed to have voting control over the above listed shares by attribution. 14 ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In May 2001, the Company advanced $53,400 to its President, William Knooihuizen, to hold in trust as a contingency fund for the sole use of the Company in the event of a unanticipated cash shortfall. The advance bears interest at 4.0% annually and is unsecured. The original documentation required repayment of the advance and accrued, but unpaid, interest in May 2003. As of January 31, 2004, with the approval of the Company's Board of Directors, the Company's President continues to maintain these funds as trustee on behalf of the Company. During the year ended January 31, 2004, the Company accrued $120,000 payable to its majority shareholder, KIK Tire Technologies Inc. (a publicly-owned Canadian corporation) for administrative services. ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K Exhibits 31.1 Certification pursuant to Section 302 of Sarbanes-Oxley Act of 2002 - Chief Executive Officer 31.2 Certification pursuant to Section 302 of Sarbanes-Oxley Act of 2002 - Chief Financial Officer 32.1 Certification pursuant to Section 906 of Sarbanes-Oxley Act of 2002 Reports on Form 8-K None ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES The Company paid or accrued the following fees in each of the prior two fiscal years to it's principal accountant, either S. W. Hatfield, CPA of Dallas, Texas (for the year ended January 31, 2004) or Horwath Gelfond Hochstadt Pangburn, P.C. of Denver, Colorado (for the year ended January 31, 2003) Year ended Year ended January 31, January 31, 2004 2003 ------- ------- a) Audit fees $23,200 $43,950 b) Audit-related fees -- -- c) Tax fees -- -- d) All other fees -- -- ------- ------- Totals $23,200 $43,950 ======= ======= The Company has no formal audit committee. However, as defined in Sarbanes-Oxley Act of 2002, the entire Board of Directors is the Company's defacto audit committee. In discharging its oversight responsibility as to the audit process, the Board obtained from the independent auditors a formal written statement describing all relationships between the auditors and the Company that might bear on the auditors' independence as required by Independence Standards Board Standard No. 1, "Independence Discussions with Audit Committees." The Board discussed with the auditors any relationships that may impact their objectivity and independence, including fees for non-audit services, and satisfied itself as to the auditors' independence. The Board also discussed with management, the internal auditors and the independent auditors the quality and adequacy of the Company's internal controls. The Board reviewed with the independent auditors their management letter on internal controls, if one was issued by the Company's auditors. The Board discussed and reviewed with the independent auditors all matters required to be discussed by auditing standards generally accepted in the United States of America, including those described in Statement on Auditing Standards No. 61, as amended, "Communication with Audit Committees". 15 The Board reviewed the audited consolidated financial statements of the Company as of and for the year ended January 31, 2004 and 2003, with management and the independent auditors. Management has the sole ultimate responsibility for the preparation of the Company's financial statements and the independent auditors have the responsibility for their examination of those statements. Based on the above-mentioned review and discussions with the independent auditors and management, the Board of Directors approved the Company's audited consolidated financial statements and recommended that they be included in its Annual Report on Form 10-KSB for the year ended January 31, 2004, for filing with the Securities and Exchange Commission. The Company's principal accountant, S. W. Hatfield, CPA and/or Horwath Gelfond Hochstadt Pangburn, P.C., did not engage any other persons or firms other than the principal accountant's full-time, permanent employees. 16 SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. KIK TECHNOLOGY INTERNATIONAL, INC. Dated: April 27, 2004 /s/ Kuldip C. Baid -------------- ---------------------------------- Kuldip C. Baid Chief Financial Officer and Director In accordance with the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the date as indicated. Dated: April 27, 2004 by /s/ Donald P. Dean -------------- ---------------------------------- Donald P. Dean Chairman and Secretary Dated: April 27, 2004 /s/ William M. Knooihuizen -------------- ---------------------------------- William M. Knooihuizen President and Director Dated: April 27, 2004 /s/ Kuldip C. Baid -------------- ---------------------------------- Kuldip C. Baid Chief Financial Officer and Director 17 KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE ---- REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-2 CONSOLIDATED FINANCIAL STATEMENTS Consolidated Balance Sheets as of January 31, 2004 and 2003 F-3 Consolidated Statements of Operations and Comprehensive Loss for the years ended January 31, 2004 and 2003 F-4 Consolidated Statement of Changes in Stockholders' Equity for the years ended January 31, 2004 and 2003 F-5 Consolidated Statements of Cash Flows for the years ended January 31, 2004 and 2003 F-6 Notes to Consolidated Financial Statements F-7 F-1 LETTERHEAD OF S. W. HATFIELD, CPA REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors and Stockholders KIK Technology International, Inc. We have audited the accompanying consolidated balance sheet of KIK Technology International, Inc. and Subsidiary (California corporations) as of January 31, 2004 and 2003 and the related consolidated statements of operations and comprehensive loss, changes in stockholders' equity and cash flows for each of the years ended January 31, 2004 and 2003, respectively. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. The consolidated financial statements referred to above, in our opinion, present fairly, in all material respects, the consolidated financial position of KIK Technology International, Inc. and Subsidiary as of January 31, 2004 and 2003 and the results of their consolidated operations and cash flows for each of the years ended January 31, 2004 and 2003, respectively, in conformity with accounting principles generally accepted in the United States of America. /s/ S. W. Hatfield, CPA ----------------------------- S. W. HATFIELD, CPA Dallas, Texas April 14, 2004 F-2 KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS January 31, 2004 and 2003
January 31, January 31, 2004 2003 ----------- ----------- ASSETS CURRENT ASSETS Cash on hand and in bank $ 80,514 $ 26,692 Accounts receivable Trade, net of allowance for doubtful accounts of approximately $14,230 and $16,215, respectively 372,186 372,209 Other 7,543 5,407 Inventories 323,063 301,411 Prepaid expenses 2,692 436 ----------- ----------- TOTAL CURRENT ASSETS 785,998 706,155 ----------- ----------- PROPERTY AND EQUIPMENT - AT COST 636,780 576,782 Less Accumulated depreciation (479,227) (438,239) ----------- ----------- NET PROPERTY AND EQUIPMENT 157,553 138,543 ----------- ----------- OTHER ASSETS Funds held in trust by officer 53,400 53,400 Refundable deposits 4,800 4,800 Deferred debt issuance costs, net of accumulated amortization of approximately $21,840 and $12,740, respectively -- 9,100 ----------- ----------- TOTAL OTHER ASSETS 58,200 67,300 ----------- ----------- TOTAL ASSETS $ 1,001,751 $ 911,998 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Notes payable to investors, net of accompanying warrant discount of approximately $-0- and $4,775 $ 75,000 $ 70,225 Current maturity of capital lease payable 4,095 3,738 Accounts payable - trade 286,773 170,447 Other accrued expenses 42,454 72,020 Advances from and amounts payable to majority shareholder 136,000 16,000 ----------- ----------- TOTAL CURRENT LIABILITIES 544,322 332,430 ----------- ----------- LONG-TERM DEBT Capital lease payable 10,336 14,465 ----------- ----------- TOTAL LIABILITIES 554,658 346,895 ----------- ----------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Common stock - $0.001 par value 100,000,000 shares authorized 25,021,865 and 24,086,964 shares issued and outstanding 25,022 24,087 Additional paid-in capital 5,146,573 5,066,381 Accumulated deficit (4,724,502) (4,525,365) ----------- ----------- TOTAL STOCKHOLDERS' EQUITY 447,093 565,103 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,001,751 $ 911,998 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-3 KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS Years ended January 31, 2004 and 2003
Year ended Year ended January 31, January 31, 2004 2003 ------------ ------------ REVENUES - net of returns and allowances $ 3,639,289 $ 3,155,541 COST OF SALES Raw materials 2,247,110 1,869,179 Direct labor and other costs 831,358 695,524 Depreciation 38,589 35,096 ------------ ------------ TOTAL COST OF SALES 3,117,057 2,599,799 ------------ ------------ GROSS PROFIT 522,232 555,742 ------------ ------------ OPERATING EXPENSES Selling and marketing expenses 6,500 -- General and administrative expenses Salaries and related expenses 91,772 110,672 Other operating expenses 487,634 454,049 Administrative service fee to majority shareholder 120,000 -- Depreciation and amortization 11,500 13,304 Compensation expense related to common stock issuances at less than "fair value" 945 906 ------------ ------------ TOTAL OPERATING EXPENSES 718,351 578,931 ------------ ------------ LOSS FROM OPERATIONS (196,119) (23,189) OTHER INCOME Interest expense (13,823) (16,032) Interest and other income 10,805 26,532 ------------ ------------ LOSS BEFORE PROVISION FOR INCOME TAXES AND EXTRAORDINARY ITEM (199,137) (12,689) PROVISION FOR INCOME TAXES -- -- ------------ ------------ NET LOSS (199,137) (12,689) OTHER COMPREHENSIVE INCOME -- -- ------------ ------------ COMPREHENSIVE LOSS $ (199,137) $ (12,689) ============ ============ Net loss per weighted-average share of common stock outstanding, calculated on Net Loss - basic and fully diluted $ (0.01) $ (0.00) ============ ============ Weighted-average number of shares of common stock outstanding 24,840,873 24,035,930 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-4 KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY Years ended January 31, 2004 and 2003
Common Stock Additional -------------------- paid-in Accumulated Shares Amount capital deficit Total ------ ------ ------- ------- ----- BALANCES AT FEBRUARY 1, 2002 23,985,000 $23,985 $5,058,600 $(4,512,676) $ 569,909 Issuance of common stock for Payment of accrued interest 101,964 102 6,875 -- 6,977 Compensation expense related to issuance of shares at less than "fair value" -- -- 906 -- 906 Net loss for the year -- -- -- (12,689) (12,689) ---------- ------- ---------- ----------- --------- BALANCES AT JANUARY 31, 2003 24,086,964 24,087 5,066,381 (4,525,365) 565,103 Issuance of common stock for Payment of accrued interest 186,737 187 3,595 -- 3,782 Compensation expense related to issuance of shares at less than "fair value" -- -- 945 -- 945 Payment of trade accounts payable 598,164 598 72,802 -- 73,400 Payment of consulting fees 150,000 150 2,850 -- 3,000 Net loss for the year -- -- -- (199,137) (199,137) ---------- ------- ---------- ----------- --------- BALANCES AT JANUARY 31, 2004 25,021,865 $25,022 $5,146,573 $(4,724,502) $ 447,093 ========== ======= ========== =========== =========
The accompanying notes are an integral part of these consolidated financial statements. F-5 KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended January 31, 2004 and 2003
Year ended Year ended January 31, January 31, 2004 2003 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss for the year $(199,137) $ (12,689) Adjustments to reconcile net loss to net cash provided by operating activities Depreciation and amortization 50,089 48,400 Amortization of warrant discount on notes payable 4,775 5,896 Provision for doubtful accounts receivable (1,986) 16,215 Expenses paid with common stock 6,780 6,977 Compensation expense related to common stock issuances at less than "fair value" 945 906 (Increase) Decrease in Accounts receivable - trade and other (127) 105,415 Inventory (21,652) 24,761 Prepaid expenses and other (2,256) -- Increase (Decrease) in Accounts payable 189,727 (216,699) Other accrued expenses (29,566) 38,576 Accrued management fees to parent company 120,000 -- --------- --------- NET CASH USED IN OPERATING ACTIVITIES 117,592 17,758 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Decrease in restricted cash -- 100,000 Purchase of property and equipment (59,998) (19,887) --------- --------- NET CASH USED IN INVESTING ACTIVITIES (59,998) 80,113 --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Payments on long-term capital lease (3,772) (2,877) Net borrowings (payments) on bank line of credit -- (99,981) Cash advanced by majority shareholder -- 16,000 --------- --------- NET CASH USED IN FINANCING ACTIVITIES (3,772) (86,858) --------- --------- INCREASE (DECREASE) IN CASH 53,822 11,013 Cash at beginning of period 26,692 15,679 --------- --------- CASH AT END OF PERIOD $ 80,514 $ 26,692 ========= ========= SUPPLEMENTAL DISCLOSURE OF INTEREST AND INCOME TAXES PAID Interest paid for the period $ 3,439 $ 2,636 ========= ========= Income taxes paid for the period $ -- $ -- ========= ========= SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES Acquisition of equipment on a long-term capital lease $ -- $ 21,080 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. F-6 KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - ORGANIZATION AND DESCRIPTION OF BUSINESS KIK Technology International, Inc. (KTII) was incorporated on February 1, 2000 under the laws of the State of California as Russian-Imports.com. Russian-Imports.com was initially founded to develop an internet e-commerce website which would sell handmade lacquer boxes, Matroshka dolls and crystal imported from Russia. This business plan was unsuccessful and, subsequently, terminated. The Company then adopted a business plan to locate and combine with an existing, privately-held company which is profitable or, in management's view, has growth potential, irrespective of the industry in which it is engaged. On September 4, 2001, KTII (formerly Russian-Imports.com) issued 16,700,000 shares of restricted, unregistered common stock to KIK Tire Technologies, Inc. (a publicly-owned Canadian corporation) (KTTI) for 100.0% of the issued and outstanding stock of KIK Technology, Inc. (a wholly-owned subsidiary of KTTI). By virtue of this transaction, KIK Technology, Inc. became a wholly-owned subsidiary of KTII and KTTI became an approximate 73.6% shareholder in KTII. Concurrent with this transaction, Russian-Imports.com changed it's corporate name to KIK Technologies International, Inc. At the transaction date, KTII was a "shell company" as the Company had no assets or liabilities, had generated no revenues since inception and had incurred total expenses of approximately $940,000 since its inception on February 1, 2000 through the September 4, 2001 transaction. KIK Technology, Inc. (KTI) was incorporated in June 1988 under the laws of the State of California. KTI manufactures and markets an extensive and high quality line of off-highway micro-cellular polyurethane tires for the healthcare, light industrial, lawn and garden and recreational industries. KTI operates from a sole manufacturing plant and marketing offices located in Oceanside, CA. The Company's principal raw materials are purchased from a sole supplier who is also a major customer for the Company's products. In the event of any disruption in the availability of raw materials or a market for the Company's products purchased by this key supplier, the Company may experience a negative economic impact. The Company believes that suppliers of raw materials are available at comparable prices and management is seeking other avenues of distribution of the Company's products to consumers. Management is of the opinion that no interruption of either raw materials or product demand will occur. NOTE B - PREPARATION OF FINANCIAL STATEMENTS The acquisition of KIK Technology, Inc. (KTI), on September 4, 2001, by KTII effected a change in control of KTII and was accounted for as a "reverse acquisition" whereby KTI is the accounting acquiror for financial statement purposes. Accordingly, the historical consolidated financial statements of the Company are those of KTI from it's inception and those of the consolidated entity subsequent to the September 4, 2001 transaction date. The Company follows the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America and has adopted a year-end of January 31. 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 of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management further acknowledges that it is solely responsible for adopting sound accounting practices, establishing and maintaining a system of internal accounting control and preventing and detecting fraud. The Company's system of internal accounting control is designed to assure, among other items, that 1) recorded transactions are valid; 2) valid transactions are recorded; and 3) transactions are recorded in the proper period in a timely manner to produce financial statements which present fairly the financial condition, results of operations and cash flows of the Company for the respective periods being presented. F-7 KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE B - PREPARATION OF FINANCIAL STATEMENTS - CONTINUED For segment reporting purposes, the Company operated in only one industry segment during the periods represented in the accompanying financial statements and makes all operating decisions and allocates resources based on the best benefit to the Company as a whole. These financial statements reflect the books and records of KIK Technology International, Inc. (formerly Russian-Imports.com) (KTII) and KIK Technology, Inc. (KTI) as of and for the years ended January 31, 2004 and 2003, respectively. All significant intercompany transactions have been eliminated in consolidation. The consolidated entities are referred to as Company. NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 1. CASH AND CASH EQUIVALENTS For Statement of Cash Flows purposes, the Company considers all cash on hand and in banks, including accounts in book overdraft positions, certificates of deposit and other highly-liquid investments with maturities of three months or less, when purchased, to be cash and cash equivalents. Cash overdraft positions may occur from time to time due to the timing of making bank deposits and releasing checks, in accordance with the Company's cash management policies. 2. ACCOUNTS RECEIVABLE AND REVENUE RECOGNITION In the normal course of business, the Company extends unsecured credit to virtually all of its customers war located throughout the United States and are principally concentrated in the midwest region of the country. Depending upon management's assessment of creditworthiness and order size, certain shipments are made on "COD" terms using common carriers. Because of the credit risk involved, management has provided an allowance for doubtful accounts which reflects its opinion of amounts which will eventually become uncollectible. In the event of complete non-performance, the maximum exposure to the Company is the recorded amount of trade accounts receivable shown on the balance sheet at the date of non-performance. The Company recognizes revenue from the sale of tires and accessories upon shipment to, or receipt by customers, depending upon contractual terms and when there is no significant uncertainty regarding the consideration to be received and the associated costs to be incurred. Additionally, the Company recognizes reductions of recorded revenue for product returns from unsatisfied customers and other billing adjustments or corrections, at the point that the returned products are received by the Company or upon the completion of negotiations between the Company and it's customer. 3. INVENTORY Inventory consists of raw materials, principally chemical feedstocks, and finished goods, principally tires and accessories manufactured by the Company and other minor miscellaneous items purchased from third-party vendors for resale as a component of the Company's products. Inventory is valued at the lower of cost or market value, using principally the average cost method. F-8 KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED 4. PROPERTY AND EQUIPMENT Property and equipment are recorded at historical cost. These costs are depreciated over the estimated useful lives generally two (2) to seven (7) years, of the individual assets using the straight-line method. Gains and losses from the disposition of property and equipment are included in operations as incurred. In accordance with Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", the Company follows the policy of evaluating all property and equipment as of the end of each reporting quarter. For each of the years ended January 31, 2004 and 2003, no charges to operations were made for impairments in the future benefit of property and equipment. 5. DEFERRED DEBT ISSUE COSTS Deferred debt issue costs represent monies paid investment bankers and legal counsel in connection with the issuance of $75,000 in convertible notes payable. These costs are amortized as a component of operations over the life of the underlying debt instrument using the straight line method. 6. INCOME TAXES The Company uses the asset and liability method of accounting for income taxes. At January 31, 2004 and 2003, the deferred tax asset and deferred tax liability accounts, as recorded when material to the financial statements, are entirely the result of temporary differences. Temporary differences represent differences in the recognition of assets and liabilities for tax and financial reporting purposes, primarily accumulated depreciation and amortization, allowance for doubtful accounts and vacation accruals. As of January 31, 2004 and 2003, the deferred tax asset related to the Company's net operating loss carryforward is fully reserved. 7. ADVERTISING COSTS The Company does not conduct any direct response advertising activities. For non-direct response advertising, the Company charges the costs of these efforts to operations at the first time the related advertising is published. 8. EARNINGS (LOSS) PER SHARE Basic earnings (loss) per share is computed by dividing the net income (loss) by the weighted-average number of shares of common stock and common stock equivalents (primarily outstanding options and warrants). Common stock equivalents represent the dilutive effect of the assumed exercise of the outstanding stock options and warrants, using the treasury stock method. The calculation of fully diluted earnings (loss) per share assumes the dilutive effect of the exercise of outstanding options and warrants at either the beginning of the respective period presented or the date of issuance, whichever is later. As of January 31, 2004 and 2003, the Company's issued and outstanding, warrants, options and convertible debt are considered antidilutive due to the Company's net operating loss position. F-9 KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED 9. EMPLOYEE STOCK OPTIONS For periods prior to November 1, 2002, the Company chose to account for employee stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25 (APB No. 25), Accounting for Stock Issued to Employees, and related interpretations. Accordingly, employee compensation cost for stock options and warrants is measured as the excess, if any, of the market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. This treatment was allowed under Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" (SFAS 123). In December 2002, FASB issued Statement of Financial Accounting Standards No. 148 "Accounting for Stock- Based Compensation - Transition and Disclosure" (SFAS 148). This statement amends SFAS 123 and provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. This statement also amends the disclosure requirements of SFAS 123 to require more prominent and frequent disclosures in financial statements about the effects of stock-based compensation. The transition guidance and annual disclosure provisions of SFAS 148 are effective for financial statements issued for fiscal years ending after December 15, 2002. Effective November 1, 2003, the first day of the reporting quarter including the effective date of SFAS 148, the Company's Board of Directors, in conjunction with public opinion and SFAS 148, elected to expense the imputed compensation cost related to any stock options granted during Fiscal 2003 and for future periods. The Company did not issue any stock options during Fiscal 2004 or Fiscal 2003 and the adoption of SFAS 148 did not have a material impact on our results of operations or financial condition. 10. NEW AND PENDING ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standard (SFAS) No. 143 establishes accounting standards for the recognition and measurement of an asset retirement obligation and its associated asset retirement cost. It also provides accounting guidance for legal obligations associated with the retirement of tangible long-lived assets. SFAS No. 143 is effective in fiscal years beginning after June 15, 2002, with early adoption permitted. The Company adopted SFAS No. 143 effective February 1, 2003 and the adoption had no impact on its consolidated results of operations and financial position. SFAS No. 144 establishes a single accounting model for the impairment or disposal of long-lived assets, including discontinued operations. SFAS No. 144 superseded Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS No. 121), and APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions". The Company adopted SFAS No. 144 effective February 1, 2002. The adoption of SFAS No. 144 had no material impact on Company's consolidated financial statements. In April 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of SFAS No. 13, and Technical Corrections." This Statement rescinds SFAS, "Reporting Gains and Losses from Extinguishment of Debt", and an amendment of that Statement, SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements" and SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers". This Statement amends SFAS No. 13, "Accounting for Leases," to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale- leaseback transactions. We do not expect the adoption to have a material impact to our financial position or results of operations. F-10 KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED 10. NEW AND PENDING ACCOUNTING PRONOUNCEMENTS - continued In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. We do not expect the adoption of SFAS No. 146 to have a material impact to our financial position or results of operations. In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain Financial Institutions-an amendment of SFAS No. 72 and 144 and SFAS Interpretation No. 9," which removes acquisitions of financial institutions from the scope of both Statement 72 and Interpretation 9 and requires that those transactions be accounted for in accordance with SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets". In addition, this Statement amends SFAS No. 144, "Accounting for the Impairment or Disposal of Long- Lived Assets", to include in its scope long-term customer-relationship intangible assets of financial institutions such as depositor- and borrower-relationship intangible assets and credit cardholder intangible assets. The requirements relating to acquisitions of financial institutions are effective for acquisitions for which the date of acquisition is on or after October 1, 2002. The provisions related to accounting for the impairment or disposal of certain long-term customer-relationship intangible assets are effective on October 1, 2002. The adoption of this statement did not have a material impact to our financial position or results of operations as we have not engaged in either of these activities. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure," which amends SFAS No. 123, "Accounting for Stock-Based Compensation", to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The transition guidance and annual disclosure provisions of SFAS No. 148 are effective for fiscal years ending after December 15, 2002, with earlier application permitted in certain circumstances. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. The adoption of this statement did not have a material impact on our financial position or results of operations as we have not elected to change to the fair value based method of accounting for stock-based employee compensation. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities." Interpretation 46 changes the criteria by which one company includes another entity in its consolidated financial s Previously, the criteria were based on control through voting interest. Interpretation 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. A company that consolidates a variable interest entity is called the primary beneficiary of that entity. The consolidation requirements of Interpretation 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after June 15, 2 Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. We do not expect the adoption to have a material impact to our financial position or results of operations. F-11 KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED 10. NEW AND PENDING ACCOUNTING PRONOUNCEMENTS - continued In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities". SFAS No. 149 amends SFAS No. 133 to provide clarification on the financial accounting and reporting of derivative instruments and hedging activities and requires that contracts with similar characteristics be accounted for on a comparable basis. The provisions of SFAS No. 149 are effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 did not have a material impact on our results of operations or financial position. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity". SFAS No. 150 establishes standards on the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. The provisions of SFAS N15 are effective for financial instruments entered into or modified after May 31, 2003 and to all other instruments that exist as of the beginning of the first interim financial reporting period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a material impact on our results of operations or financial position. NOTE D - FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount of cash, accounts receivable, accounts payable and notes payable, as applicable, approximates fair value due to the short term nature of these items and/or the current interest rates payable in relation to current market conditions. Interest rate risk is the risk that the Company's earnings are subject to fluctuations in interest rates on either investments or on debt and is fully dependent upon the volatility of these rates. The Company does not use derivative instruments to moderate its exposure to interest rate risk, if any. Financial risk is the risk that the Company's earnings are subject to fluctuations in interest rates or foreign exchange rates and are fully dependent upon the volatility of these rates. The company does not use derivative instruments to moderate its exposure to financial risk, if any. NOTE E - CONCENTRATIONS OF CREDIT RISK KTII and KTI maintain their respective cash accounts in financial institutions subject to insurance coverage issued by the Federal Deposit Insurance Corporation (FDIC). Under FDIC rules, both KTII and KTI are entitled to aggregate coverage of $100,000 per account type per separate legal entity per financial institution. During the years ended January 31, 2004 and 2003, respectively, the various entities, from time-to-time, had deposits in a financial institution with credit risk exposures in excess of statutory FDIC coverage. The Company has incurred no losses during Fiscal 2004 and 2003 as a result of any of these unsecured situations. NOTE F - INVENTORIES Inventories consist of the following at January 31, 2004 and 2003: January 31, January 31 2004 2003 -------- -------- Raw materials $114,120 $ 57,271 Finished goods 208,943 244,140 -------- -------- Total $323,063 $301,411 ======== ======== F-12 KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE G - PROPERTY AND EQUIPMENT Property and equipment consists of the following at January 31, 2004 and 2003: January 31, January 31, 2004 2003 Estimated life --------- --------- -------------- Machinery and Equipment $ 587,880 $ 530,039 7 years Office furniture and fixtures 25,441 23,284 5 years Leasehold improvements 14,180 14,180 2 years Vehicles 9,279 9,279 5 years --------- --------- 636,780 576,782 Less accumulated depreciation (479,227) (438,239) --------- --------- Net property and equipment $ 157,553 $ 138,543 ========= ========= Depreciation expense for the years ended January 31, 2004 and 2003 was approximately $40,988 and $37,480, respectively. NOTE H - RESTRICTED CASH As collateral for a $100,000 line of credit at KIK's principal financial institution, KIK placed and pledged a $100,000 certificate of deposit as collateral. This amount was released and returned to KIK upon the repayment and termination of the line of credit during Fiscal 2003. NOTE I - FUNDS HELD IN TRUST BY OFFICER In May 2001, the Company advanced $53,400 to its President to hold in trust as a contingency fund for the sole use of the Company in the event of a unanticipated cash shortfall. The advance bears interest at 4.0% annually and is unsecured. The original documentation required repayment of the advance and accrued, but unpaid, interest in May 2003. As of January 31, 2004, with the approval of the Company's Board of Directors, the Company's President continues to maintain these funds as trustee on behalf of the Company. NOTE J - NOTES PAYABLE TO INVESTORS Pursuant to the terms of a private placement agreement, the Company attempted to raise up to $600,000 through the placement of two-year senior notes bearing interest at 10% payable quarterly. This Private Placement Memorandum was terminated by the Company during the fiscal quarter ended October 31, 2002. In November 2001, the Company entered into an agreement with an investment banker whereby the investment banker would act as exclusive dealer-manager in this private placement of securities to be issued by the Company pursuant to Regulation D of the Securities Act of 1933, as amended. As compensation, the investment banker was paid $15,000 for professional fees and will receive a commission equal to 10% of the gross proceeds, an expense allowance equal to 4% of the gross proceeds and, for every $500,000 raised, 150,000 shares of the Company's restricted, unregistered common stock. Such shares will be issued upon completion of the private placement. In addition, the investment banker will have the option to nominate one person to the Company's Board of Directors if at least $2,000,000 is raised. As of the termination of this Private Placement Memorandum, only $75,000 had been successfully raised. F-13 KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE J - NOTES PAYABLE TO INVESTORS - CONTINUED Note holders can elect, with the consent of the Company, to accept Company common stock in lieu of cash interest payments. Such payments in stock would be calculated at 50% of the daily average of the market price of the common stock for the 30-calendar days preceding the interest due date. After six months from the date of issue of the notes, the Company can convert the notes to common stock if the daily average market price of the Company's common stock for any 30-calendar days after the initial six-month period equals or exceeds $1.00. The conversion of the notes to common stock would also be calculated at 50% of the daily average market price for the 30 days prior to the Company giving notice of its plan to convert. In conjunction with the offering of the notes, each note holder was given one warrant for each $1.00 invested. Each warrant allows the holder to purchase one share of the Company's common stock at an initial exercise price of $per share, and is exercisable for two years. In March 2002, the Company repriced the outstanding warrants to an exercise price of $0.40 per share. Pursuant to the private placement, the Company sold a $50,000 convertible note on November 12, 2001 and a $25,000 convertible note on December 26, 2001 to two unrelated investors. Warrants to purchase a combined total of 75,000 shares of the Company's common stock at $0.60 per share were also issued to the investors. The warrants were valued at $11,789 using the Black-Scholes option-pricing model, and therefore $11,789 of the total debt proceeds of $75,000 was allocated to the warrants, resulting in a discount on the notes, which will be amortized to interest expense over the term of the underlying debt. During the years ended January 31, 2004 and 2003, approximately $9,100 and $5,900 of the discount was amortized to interest expense. The weighted average assumptions utilized to value the warrants using the Black-Scholes option-pricing model were as follows: Expected life of the option: The initial life of the corresponding option, generally two (2) years Expected volatility in the Company's stock price: 150.0%, which was based on fluctuations of the Company's stock price over the past Fiscal year. Expected dividends: Zero (0.00) based on past performance Anticipated risk free interest rate: Estimated to be 2.80%. The convertible notes contained a beneficial conversion feature valued at a combined total of approximately $63,000. However, because the conversion features are fully contingent upon the occurrence of certain future events, the Company did not record a discount resulting from the beneficial conversion feature. The aggregate maturities of the notes are as follows: Year ended January 31, 2004 $ 75,000 Less unamortized discount (4,775) -------- Year ended January 31, 2003 $ 70,225 ======== The Company recognized interest expense related to the all outstanding debt, including the notes payable, bank lines of credit and equipment financing, of approximately $14,000 and $16,000, for the years ended January 31, 2004 and 2003, respectively. F-14 KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE K - CAPITAL LEASE PAYABLE Capital lease payable is as follows: January 31, January 31, 2004 2003 -------- -------- $21,080 capital lease payable to a finance corporation Interest at 8.60%. Payable in monthly installments of approximately $432, including accrued interest Final maturity due in April 2007. Collateralized by equipment $ 14,431 $ 18,203 Less current maturities (4,095) (3,738) -------- -------- Long-term portion $ 10,336 $ 14,465 ======== ======== Future maturities of long-term capital leases payable are Year ending January 31, Amount ----------- ------ 2005 $ 4,095 2006 4,468 2007 4,872 2008 996 ------- Total $14,431 ======= NOTE L - INCOME TAXES The components of income tax (benefit) expense for the years ended January 31, 2004 and 2003, respectively, are as follows: January 31, January 31, 2004 2003 ------- ------- Federal: Current $ -- $ -- Deferred -- -- ------- ------- -- -- ------- ------- State: Current -- -- Deferred -- -- ------- ------- -- -- ------- ------- Total $ -- $ -- ======= ======= The Company has a net operating loss carryforward of approximately $4,600,000 to offset future taxable income. Subject to current regulations, this carryforward will begin to expire in 2005. The amount and availability of the net operating loss carryforwards may be subject to limitations set forth by the Internal Revenue Code. Factors such as the number of shares ultimately issued within a three year look-back period; whether there is a deemed more than 50 percent change in control; the applicable long-term tax exempt bond rate; continuity of historical business; and subsequent income of the Company all enter into the annual computation of allowable annual utilization of the carryforwards. F-15 KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE L - INCOME TAXES - CONTINUED The Company's income tax expense for the years ended January 31, 2004 and 2003, respectively, are as follows: January 31, January 31, 2004 2003 -------- -------- Statutory rate applied to loss before income taxes $(68,000) $ (4,300) Increase (decrease) in income taxes resulting from: State income taxes -- -- Other, including reserve for deferred tax asset 68,000 4,300 -------- -------- Income tax expense $ -- $ -- ======== ======== Temporary differences, consisting primarily of net operating loss carryforwards, statutory deferrals of expenses for organizational costs and accrued, but unpaid, accruals for officer compensation and statutory differences in the depreciable lives for property and equipment, between the financial statement carrying amounts and tax bases of assets and liabilities give rise to deferred tax assets and liabilities as of January 31, 2004 and 2003, respectively: January 31, January 31, 2004 2003 ----------- ----------- Deferred tax assets Net operating loss carryforwards $ 1,564,000 $ 1,496,000 Less valuation allowance (1,564,000) (1,496,000) ----------- ----------- Net Deferred Tax Asset $ -- $ -- =========== =========== During the Fiscal years ended January 31, 2004 and 2003, respectively, the valuation allowance for the deferred tax asset increased (decreased) by approximately $68,000 and $(204,000). NOTE M - COMMON STOCK TRANSACTIONS Effective at the end of each Fiscal quarter during the year ended January 31, 2003, the Company and the holders of the two convertible notes agreed for the payment of accrued interest in restricted, unregistered common stock. The Company issued an aggregate 101,964 shares of restricted, unregistered common stock in payment of accrued interest. These transactions were valued at an aggregate approximately $6,977. The convertible note terms allow for the payment of accrued interest with restricted, unregistered common stock using an average value of 50% of the daily average of the market price of the common stock for the 30 calendar days preceding the interest due date. In two instances, the closing stock price, as discounted was at or in excess of the closing price on the settlement date. In two instances, the closing stock price on the settlement date was in excess of the prescribed calculation. The differential between the discounted "fair value" and the settlement price resulted in a charge to operations of approximately $906 for compensation expense related to common stock issuances at less than "fair value". The Company relied upon Section 4(2) of The Securities Act of 1933, as amended, for an exemption from registration on these shares. (Remainder of this page left blank intentionally) F-16 KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE M - COMMON STOCK TRANSACTIONS - CONTINUED Effective February 1, 2003 and May 1, 2003, the Company and the holders of the two convertible notes agreed for the payment of accrued interest in restricted, unregistered common stock. The Company issued an aggregate 206,987 shares of restricted, unregistered common stock in payment of accrued interest. These transactions were valued at an aggregate approximately $3,782. The convertible note terms allow for the payment of accrued interest with restricted, unregistered common stock using an average value of 50% of the daily average of the market price of the common stock for the 30 calendar days preceding the interest due date. In both instances, the closing stock price on the settlement date was in excess of the prescribed calculation. The differential between the discounted "fair value" and the settlement price resulted in a charge to operations of approximately $945 for compensation expense related to common stock issuances at less than "fair value". The Company relied upon Section 4(2) of The Securities Act of 1933, as amended, for an exemption from registration on these shares. In February 2003, the Company issued 150,000 restricted, unregistered shares of common stock in payment of a contract for marketing services. This transaction was valued at approximately $3,000, which was equal to or in excess of the discounted closing price of the Company's common stock on the NASDAQ Electronic Bulletin Board on the date of each respective transaction. The Company relied upon Section 4(2) of The Securities Act of 1933, as amended, for an exemption from registration on these shares. In April 2003, the Company issued 22,500 restricted, unregistered shares of common stock in settlement of a January 31, 2003 trade account payable in the amount of approximately $552. The value of this transaction was equal to or in excess of the discounted closing price of the Company's common stock on the NASDAQ Electronic Bulletin Board on the date of each respective transaction. The Company relied upon Section 4(2) of The Securities Act of 1933, as amended, for an exemption from registration on these shares. In May 2003, the Company issued 575,664 restricted, unregistered shares of common stock in payment of trade accounts payable to the Company's primary legal counsel in the amount of approximately $72,849. The value of this transaction was equal to or in excess of the discounted closing price of the Company's common stock on the NASDAQ Electronic Bulletin Board on the date of each respective transaction. The Company relied upon Section 4(2) of The Securities Act of 1933, as amended, for an exemption from registration on these shares. NOTE N - STOCK WARRANTS At January 31, 2004, the 75,000 warrants sold in conjunction with the convertible notes private placement had expired. In conjunction with the reverse acquisition, which was concluded in September 2001, The Company granted 2,300,000 warrants to certain shareholders of KTTI. These warrants have an exercise price of approximately $0.05 per share and expire in April 2004. The following table lists the issued and outstanding stock warrants as of January 31, 2004 and 2003, respectively: Warrants Warrants outstanding at originally January 31, issued 2004 Exercise price --------- --------- -------------- Balance at January 31, 2002 2,375,000 2,375,000 Granted -- -- Exercised -- -- Forfeited/Expired -- -- --------- --------- Balance at January 31, 2003 2,375,000 2,375,000 ========= ========= F-17 KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE N - STOCK WARRANTS - CONTINUED
Warrants Warrants outstanding at originally January 31, issued 2004 Exercise price --------- --------- -------------- Balance at January 31, 2003 2,375,000 2,375,000 Granted -- -- Exercised -- -- Forfeited/Expired Convertible note/warrants (75,000) (75,000) $0.40 ---------- ---------- Balance at January 31, 2004 2,300,000 2,300,000 ========== ========== Warrants exercisable January 31, 2004 2,300,000 ========== Weighted-average exercise price per warrant $ 0.05 ==========
NOTE O - RELATED PARTY TRANSACTIONS During the year ended January 31, 2004, the Company accrued approximately $120,000 in administrative service fees payable to KTTI. NOTE P - COMMITMENTS AND CONTINGENCIES LEASED FACILITIES The Company leases its facilities under a non-cancellable operating lease, which expires in May 2005. The lease requires monthly payments as follows: $8,307 for the first 12 months; $8,639 for the next 12 months and $8,984 for the next 12 months. Rent expense incurred under this lease was approximately $102,340 and $97,800 for each of the years ended January 31, 2004 and 2003, respectively. Future amounts due under this agreement are as follows: Year ending January 31, Amount ----------- ------ 2005 $106,428 2006 35,936 -------- Total $142,364 ======== EMPLOYMENT CONTRACT In May 2000, KIK entered into an employment agreement with William M. Knooihuizen, the Company's current President and Director. The term of the agreement is for a period of five (5) years. For such services, KIK agreed to pay Mr. Knooihuizen an annual salary in the amount of $143,000, to be paid weekly. F-18 KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE Q - SIGNIFICANT CUSTOMERS During the year ended January 31, 2004, the Company had two separate customers responsible for an aggregate of approximately 78.47% (69.06% and 9.41%, respectively) of total sales. The largest customer is also a significant vendor of raw materials. The largest key customer was responsible for approximately 48.95% of accounts receivable and 76.17% of accounts payable at January 31, 2004. The second key customer was responsible for approximately 1.72% of accounts receivable and 0.00% of accounts payable at January 31, 2004. There were no other customer(s) responsible for more than 10.0% of total net sales during Fiscal 2004. During the year ended January 31, 2003, the Company had two separate customers responsible for an aggregate of approximately 80.3% (68.2% and 12.1%, respectively) of total sales. The largest customer is also a significant vendor of raw materials. The largest key customer was responsible for approximately 57.2% of accounts receivable and 0.0% of accounts payable at January 31, 2003. The second key customer was responsible for approximately 9.02% of accounts receivable and 0.0% of accounts payable at January 31, 2003. There were no other customer responsible for more than 10.0% of total net sales during Fiscal 2003. NOTE R - SELECTED FINANCIAL DATA (UNAUDITED) The following is a summary of the quarterly results of operations for the years ended January 31, 2004 and 2003, respectively.
Quarter ended Quarter ended Quarter ended Quarter ended Year ended April 30, July 31, October 31, January 31, January 31, --------- -------- ----------- ----------- ----------- FISCAL 2004 Sales $ 792,156 $ 929,571 $ 990,843 $ 926,719 $ 3,639,289 Gross profit 122,215 137,817 116,462 145,738 522,232 Net earnings after provision for income taxes (61,636) (40,059) (49,959) (47,483) (199,137) Basic and fully diluted earnings per share nil nil nil nil $ (0.01) Weighted average number of shares issued and outstanding 24,311,934 24,990,579 25,021,865 25,021,865 24,840,873 FISCAL 2003 Sales $ 849,370 $ 779,391 $ 862,039 $ 664,741 $ 3,155,541 Gross profit 130,084 159,506 132,110 134,042 555,742 Net earnings after provision for income taxes (23,779) 8,816 (20,733) 23,007 $ (12,689) Basic and fully diluted earnings per share nil nil nil nil nil Weighted average number of shares issued and outstanding 23,985,000 24,000,606 24,028,950 24,087,471 24,035,930
F-19 KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE S - SUBSEQUENT EVENTS On February 16, 2004, the Company restructured the $50,000 convertible note. Under the restructured terms, the Company paid all accrued interest and a $3,000 principal reduction on March 16, 2004. Thereafter, the Company is obligated to pay $2,000 per month, plus accrued interest, for the next six months and $1,000 per month, plus accrued interest, thereafter until all outstanding amounts are paid in full. The restructured note bears interest at 10.0% per annum. The restructured note is convertible into shares of unregistered, restricted common stock at the sole discretion of the Company provided that the daily average (calculated from the last sale price daily) of the market price of the Company's common stock for any 30 calendar day period equals or exceeds $1.00 per share, with the conversion being calculated at a 50% discount of such 30 day average. The Noteholder also has the election to receive the monthly interest payments in restricted, unregistered common stock of the Company at the daily average (calculated from the last sale price daily) of the market price of the C common stock for the 30 calendar day period prior to the interest due date, with the number of shares to be issued calculated at a 50% discount of such 30 day average. Through March 31, 2004, the Company has paid approximately $5,000 in principal and $4,100 in cumulative accrued interest. F-20