10KSB 1 g0854.txt ANNUAL REPORT FOR THE YEAR ENDED 1/31/04 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, 2005 [ ] 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, 2005 was $2,462,977. The aggregate market value of the voting common equity held by non-affiliates as of May 13, 2005 was approximately $154,438 based upon 25,171,865 shares outstanding of which 7,721,865 are held by non_affiliates and a share price of $0.02. No non_voting common equity is outstanding. As of May 13, 2005, there were 25,171,865 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 12 Item 10 Executive Compensation 13 Item 11 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 13 Item 12 Certain Relationships and Related Transactions 14 Item 13 Exhibits and Reports on 8-K 14 Item 14 Principal Accountant Fees and Services 14 SIGNATURES 15 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 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. 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. 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 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, 2005 - approximately $2.4 million 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. 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. 4 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. 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 5 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 In prior years, the Company's principal raw materials are purchased from a sole supplier was 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 could have experienced a negative economic impact. The Company is developing additional sources of supply of it's key raw materials 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. 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 May 13, 2004, the Company has approximately 17 full-time employees, including 2 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 $106,428 and $102,340 for each of the years ended January 31, 2005 and 2004, respectively. Future amounts due under this lease agreement for facilities are as follows: Year ending January 31, Amount ----------- ------ 2006 $142,364 ======== 6 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 May 13, 2004, there were 25,171,865 shares of $0.001 par value common stock (the "Common Stock") of the Company outstanding and owned by approximately 62 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, 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 Fiscal Year ended January 31, 2005 First quarter 2005 (February 1, 2004 - April 30, 2004) $0.05 $0.03 Second quarter 2005 (May 1, 2004 - July 31, 2004) $0.11 $0.04 Third quarter 2005 (August 1, 2004 - October 31, 2004) $0.08 $0.03 Fourth quarter 2005 (November 1, 2004 - January 31, 2005) $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, 7 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. On July 22, 2004, the Company issued 150,000 restricted, unregistered shares of common stock to The Compeller Group, LTD. in payment of a contract for professional services. This transaction was valued at approximately $6,000, 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. 8 ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW During Fiscal 2005 and 2004, the Company achieved revenues of approximately $2,463,000 and $3,639,000 as compared to approximately $3,155,000 for Fiscal 2003. These revenues were derived primarily from the sale of tire products. Net loss for the years ended January 31, 2005 and 2004 was approximately $(435,000) and $199,000) as compared to a net loss of approximately ($12,700) for the year ended January 31, 2003. The net losses for Fiscal 2005 and 2004 each include 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 per share of common stock outstanding for Fiscal 2004 and 2003 was approximately $(0.02) and $(0.01) 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, 2005 AS COMPARED TO JANUARY 31, 2004 The Company posted net sales of approximately $2,463,000 for the fiscal year ended January 31, 2005 as compared to net sales of approximately $3,639,000 for the fiscal year ended January 31, 2004. This decrease reflects a change in the Company's product demand and distribution and the negative impact of foreign competition. The Company's cost of sales decreased by approximately $676,000 to approximately $2,441,000 for the year ended January 31, 2005 as compared to approximately $3,117,000 for the year ended January 31, 2004. This decrease profiles favorably to the decrease in sales volume during Fiscal 2005 and increases in prices in raw materials during the year. The Company has experienced certain price increases in key raw materials which have not been passed through in their entirety due to competitive pressures from comparable products produced in Asian markets. All other costs related to production were relatively stable during Fiscal 2005. The Company continued to experience a deterioration in the gross profit margin to approximately 8.94% (approximately $220,000) for Fiscal 2005 as compared to approximately 14.39% (approximately $522,000) for Fiscal 2004. 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 declined from approximately $718,000 for Fiscal 2004 to approximately $654,000 in Fiscal 2004. At the KIK operating subsidiary level, all general and administrative costs were virtually consistent (approximately $527,000 for Fiscal 2005 versus $575,000 for Fiscal 2004). 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 in both Fiscal 2005 and 2004, respectively. Overall, the Company experienced a net loss of approximately $(435,000) and $(199,000) for Fiscal 2005 and 2004, respectively and recognized a net loss per weighted-average share outstanding of approximately $(0.02) and $(0.01), respectively. 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. 9 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. LIQUIDITY AND CAPITAL RESOURCES The Company had cash and cash equivalents of approximately $60,000 and $81,000 and $27,000 at January 31, 2005, 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 both Fiscal 2005 and 2004, operations were principally 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, 2005, 2004 and 2003, the Company's operating activities generated positive net cash flows of approximately $500, $118,000 and $18,000, respectively. Net cash provided by 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 used in investing activities was approximately $(10,000) and $(60,000) for the years ended January 31, 2005 and 2004, respectively. The Fiscal 2005 and 2003 cash utilizations were due to the acquisition of equipment. The Company experienced cash used in financing activities of approximately $(11,000) and $(3,800) in Fiscal 2005 and 2004, respectively. The Fiscal 2005 and 2004 usage included the payment of principal on a long-term capital lease payable of approximately $(4,100) and $(3,800), respectively and the repayment on long-term notes payable to investors of approximately $(7,000). 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, 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, 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 January 31, 2005, the Company has paid approximately $7,000 in principal and $7,600 in cumulative accrued interest. 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. 10 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). 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. 11 In December 2004, the FASB issued SFAS 123(R), "Share-Based Payment." SFAS 123(R) amends SFAS 123, "Accounting for Stock-Based Compensation," and APB Opinion 25, "Accounting for Stock Issued to Employees." SFAS 123(R) requires that the cost of share-based payment transactions (including those with employees and non-employees) be recognized in the financial statements. SFAS 123(R) applies to all share-based payment transactions in which an entity acquires goods or services by issuing (or offering to issue) its shares, share options, or other equity instruments (except for those held by an ESOP) or by incurring liabilities (1) in amounts based (even in part) on the price of the entity's shares or other equity instruments, or (2) that require (or may require) settlement by the issuance of an entity's shares or other equity instruments. This statement is effective (1) for public companies qualifying as SEC small business issuers, as of the first interim period or fiscal year beginning after December 15, 2005, or (2) for all other public companies, as of the first interim period or fiscal year beginning after June 15, 2005, or (3) for all nonpublic entities, as of the first fiscal year beginning after December 15, 2005. Management anticipates no significant impact to the Company's financial statements upon the adoption of SFAS No. 123(R). 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 None 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 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 69 Chairman and Director William M. Knooihuizen 61 President and Director Kuldip C. Baid 57 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 12 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 2004, 2003 and 2002 and all plan and non-plan compensation awarded to, earned by or paid to certain designated executive officers.
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 2005 $-0- $-0- $-0- $-0- $-0- $-0- Chairman and Secretary 2004 $-0- $-0- $-0- $-0- $-0- $-0- 2003 $-0- $-0- $-0- $-0- $-0- $-0- William P. Knooihuizen 2005 $143,000 $15,000 $-0- $-0- $-0- $-0- President 2004 $143,000 $15,000 $-0- $-0- $-0- $-0- 2003 $143,000 $15,000 $-0- $-0- $-0- $-0- Kuldip C. Baid 2005 $72,000 $-0- $-0- $-0- $-0- $-0- Chief Financial Officer 2004 $72,000 $-0- $-0- $-0- $-0- $-0- 2003 $-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, 2005, the shares of Common Stock beneficially owned by all of the persons who served as the directors or officers of the Company during Fiscal 2005 as well as the principal shareholders (greater 13 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 66.34% Donald P. Dean 250,000 0.99% William M. Knooihuizen 250,000 0.99% Kuldip C. Baid 250,000 0.99% All officers and directors 17,450,000 69.32% 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. 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, 2005, 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 each of the years ended January 31, 2005 and 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: Year ended Year ended January 31, January 31, 2005 2004 ------- ------- a) Audit fees $18,644 $23,200 b) Audit-related fees -- -- c) Tax fees -- -- d) All other fees -- -- ------- ------- Totals $18,644 $23,200 ======= ======= 14 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". The Board reviewed the audited consolidated financial statements of the Company as of and for the year ended January 31, 2005 and 2004, 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, 2005, for filing with the Securities and Exchange Commission. The Company's principal accountant, S. W. Hatfield, CPA did not engage any other persons or firms other than the principal accountant's full-time, permanent employees. -------------------------------------------------------------------------------- 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: May 13, 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: May 13, 2004 by /s/ Donald P. Dean ------------ ------------------------------------ Donald P. Dean Chairman and Secretary Dated: May 13, 2004 /s/ William M. Knooihuizen ------------ ------------------------------------ William M. Knooihuizen President and Director Dated: May 13, 2004 /s/ Kuldip C. Baid ------------ ------------------------------------ Kuldip C. Baid Chief Financial Officer and Director 15 KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page ---- REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-2 CONSOLIDATED FINANCIAL STATEMENTS Consolidated Balance Sheets as of January 31, 2005 and 2004 F-3 Consolidated Statements of Operations and Comprehensive Loss for the years ended January 31, 2005 and 2004 F-4 Consolidated Statement of Changes in Stockholders' Equity for the years ended January 31, 2005 and 2004 F-5 Consolidated Statements of Cash Flows for the years ended January 31, 2005 and 2004 F-6 Notes to Consolidated Financial Statements F-7 F-1 LETTERHEAD OF S, W, HATFIELD, CPA REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 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, 2005 and 2004 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 audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also 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 audits provide 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, 2005 and 2004 and the results of their consolidated operations and cash flows for each of the years ended January 31, 2005 and 2005, respectively, in conformity with accounting principles generally accepted in the United States of America. /s/ S. W. HATFIELD, CPA Dallas, Texas April 14, 2005 F-2 KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS January 31, 2005 and 2004
January 31 January 31, 2005 2004 ----------- ----------- ASSETS CURRENT ASSETS Cash on hand and in bank $ 59,905 $ 80,514 Accounts receivable Trade, net of allowance for doubtful accounts of approximately $13,882 and $14,230, respectively 303,508 372,186 Other 9,679 7,543 Inventories 253,434 323,063 Prepaid expenses 384 2,692 ----------- ----------- TOTAL CURRENT ASSETS 626,910 785,998 ----------- ----------- PROPERTY AND EQUIPMENT - AT COST 646,801 636,780 Less Accumulated depreciation (517,661) (479,227) ----------- ----------- NET PROPERTY AND EQUIPMENT 129,140 157,553 ----------- ----------- OTHER ASSETS Funds held in trust by officer 53,400 53,400 Refundable deposits 4,800 4,800 ----------- ----------- TOTAL OTHER ASSETS 58,200 67,300 ----------- ----------- TOTAL ASSETS $ 814,250 $ 1,001,751 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Notes payable to investors, net of accompanying warrant discount of approximately $-0- and $-0- $ 49,000 $ 75,000 Current maturities of long-term debt 4,500 4,095 Accounts payable - trade 421,805 286,773 Other accrued expenses 39,762 42,454 Management fee payable to majority shareholder 240,000 120,000 Advances from majority shareholder 16,000 16,000 ----------- ----------- TOTAL CURRENT LIABILITIES 771,067 544,322 ----------- ----------- LONG-TERM DEBT Notes payable to investors, net of current maturities 19,000 -- Capital lease payable 5,806 10,336 ----------- ----------- TOTAL LIABILITIES 795,873 554,658 ----------- ----------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Common stock - $0.001 par value 100,000,000 shares authorized 25,171,865 and 25,021,865 shares issued and outstanding 25,172 25,022 Additional paid-in capital 5,152,423 5,146,573 Accumulated deficit (5,159,218) (4,724,502) ----------- ----------- TOTAL STOCKHOLDERS' EQUITY 18,377 447,093 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 814,250 $ 1,001,751 =========== ===========
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, 2005 and 2004
Year ended Year ended January 31, January 31, 2005 2004 ------------ ------------ REVENUES - net of returns and allowances $ 2,462,977 $ 3,629,289 COST OF SALES Raw materials 1,462,211 2,247,110 Direct labor and other costs 742,730 831,358 Depreciation 36,006 38,589 ------------ ------------ TOTAL COST OF SALES 2,440,947 3,117,057 ------------ ------------ GROSS PROFIT 220,030 522,232 ------------ ------------ OPERATING EXPENSES Selling and marketing expenses 625 6,500 General and administrative expenses Salaries and related expenses 91,336 91,772 Other operating expenses 440,262 487,634 Administrative service fee to majority shareholder 120,000 120,000 Depreciation and amortization 2,428 11,500 Compensation expense related to common stock issuances at less than "fair value" -- 945 ------------ ------------ TOTAL OPERATING EXPENSES 654,651 718,351 ------------ ------------ LOSS FROM OPERATIONS (432,621) (196,119) OTHER INCOME Interest expense (7,875) (13,823) Interest and other income 5,780 10,805 ------------ ------------ LOSS BEFORE PROVISION FOR INCOME TAXES AND EXTRAORDINARY ITEM (434,716) (199,137) PROVISION FOR INCOME TAXES -- -- ------------ ------------ NET LOSS (434,716) (199,137) OTHER COMPREHENSIVE INCOME -- -- ------------ ------------ COMPREHENSIVE LOSS $ (434,716) $ (199,137) ============ ============ Net loss per weighted-average share of common stock outstanding, calculated on Net Loss - basic and fully diluted $ (0.02) $ (0.01) ============ ============ Weighted-average number of shares of common stock outstanding 25,101,373 24,840,873 ============ ============
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, 2005 and 2004
Common Stock Additional -------------------- paid-in Accumulated Shares Amount capital deficit Total ------ ------ ------- ------- ----- BALANCES AT FEBRUARY 1, 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 Issuance of common stock for Payment of consulting fees 150,000 150 5,850 -- 6,000 Net loss for the year -- -- -- (434,716) (434,716) ---------- ------- ---------- ----------- --------- BALANCES AT JANUARY 31, 2005 25,171,865 $25,172 $5,152,423 $(5,159,218) $ 18,377 ========== ======= ========== =========== =========
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, 2005 and 2004
Year ended Year ended January 31, January 31, 2005 2004 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss for the year $(434,716) $(199,137) Adjustments to reconcile net loss to net cash provided by operating activities Depreciation and amortization 38,434 50,089 Amortization of warrant discount on notes payable -- 4,775 Provision for doubtful accounts receivable 4,158 (1,986) Expenses paid with common stock 6,000 6,780 Compensation expense related to common stock issuances at less than "fair value" -- 945 (Increase) Decrease in Accounts receivable - trade and other 62,384 (127) Inventory 69,629 (21,652) Prepaid expenses and other 2,308 (2,256) Increase (Decrease) in Accounts payable 135,032 189,727 Other accrued expenses (2,692) (29,566) Accrued management fees to parent company 120,000 120,000 --------- --------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 537 117,592 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment (10,021) (59,998) --------- --------- NET CASH USED IN INVESTING ACTIVITIES (10,021) (59,998) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Payments on notes payable to investors (7,000) -- Payments on long-term capital lease (4,125) (3,772) --------- --------- NET CASH USED IN FINANCING ACTIVITIES (11,125) (3,772) --------- --------- INCREASE (DECREASE) IN CASH (20,609) 53,822 Cash at beginning of period 80,514 26,692 --------- --------- CASH AT END OF PERIOD $ 59,905 $ 80,514 ========= ========= SUPPLEMENTAL DISCLOSURE OF INTEREST AND INCOME TAXES PAID Interest paid for the period $ 8,573 $ 3,439 ========= ========= Income taxes paid for the period $ -- $ -- ========= =========
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. 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. 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. In prior years, the Company's principal raw materials are purchased from a sole supplier was 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 could have experienced a negative economic impact. The Company is developing additional sources of supply of it's key raw materials 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 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 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. F-7 KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 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, 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 which are 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. 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. F-8 KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED 5. 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. 6. 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. 7. Earnings (loss) per share Basic earnings (loss) per share is computed by dividing the net income (loss) available to common shareholders by the weighted-average number of common shares outstanding during the respective period presented in our accompanying financial statements. Fully diluted earnings (loss) per share is computed similar to basic income (loss) per share except that the denominator is increased to include the number of 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, at either the beginning of the respective period presented or the date of issuance, whichever is later, and only if the common stock equivalents are considered dilutive based upon the Company's net income (loss) position at the calculation date. 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. 8. 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). (Remainder of this page left blank intentionally) F-9 KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED 8. Employee Stock Options - continued 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. 9. New and Pending Accounting Pronouncements In December 2003, the Financial Accounting Standards Board issued FASB Interpretation Number 46-R "Consolidation of Variable Interest Entities." FIN 46-R, which modifies certain provisions and effective dates of FIN 46, sets for the criteria to be used in determining whether an investment is a variable interest entity should be consolidated. These provisions are based on the general premise that if a company controls another entity through interests other than voting interests, that company should consolidate the controlled entity. The Company believes that currently, it does not have any material arrangements that meet the definition of a variable interest entity which would require consolidation. In November 2004, the FASB issued SFAS 151, "Inventory Costs." SFAS 151 amends the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) under the guidance in ARB 43, Chapter 4, "Inventory Pricing." Paragraph 5 of ARB 43, Chapter 4, previously stated that "...under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and rehandling costs may be so abnormal as to require treatment as current period charges...." This Statement requires that those items be recognized as current-period charges regardless of whether they meet the criterion of "so abnormal." In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. This statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Management does not expect adoption of SFAS 151 to have a material impact on the Company's financial statements. In December 2004, the FASB issued SFAS 152, "Accounting for Real Estate Time-Sharing Transactions." The FASB issued this Statement as a result of the guidance provided in AICPA Statement of Position (SOP) 04-2, "Accounting for Real Estate Time-Sharing Transactions." SOP 04-2 applies to all real estate time-sharing transactions. Among other items, the SOP provides guidance on the recording of credit losses and the treatment of selling costs, but does not change the revenue recognition guidance in SFAS 66, "Accounting for Sales of Real Estate," for real estate time-sharing transactions. SFAS 152 amends Statement 66 to reference the guidance provided in SOP 04-2. SFAS 152 also amends SFAS 67, "Accounting for Costs and Initial Rental Operations of Real Estate Projects", to state that SOP 04-2 provides the relevant guidance on accounting for incidental operations and costs related to the sale of real estate time-sharing transactions. SFAS 152 is effective for years beginning after June 15, 2005, with restatements of previously issued financial statements prohibited. Management does not expect adoption of SFAS 152 to have a material impact on the Company's financial statements. F-10 KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED 9. New and Pending Accounting Pronouncements - continued In December 2004, the FASB issued SFAS 153, "Exchanges of Nonmonetary Assets," an amendment to Opinion No. 29, "Accounting for Nonmonetary Transactions." Statement 153 eliminates certain differences in the guidance in Opinion No. 29 as compared to the guidance contained in standards issued by the International Accounting Standards Board. The amendment to Opinion No. 29 eliminates the fair value exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. Such an exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS 153 is effective for nonmonetary asset exchanges occurring in periods beginning after June 15, 2005. Earlier application is permitted for nonmonetary asset exchanges occurring in periods beginning after December 16, 2004. Management does not expect adoption of SFAS 153 to have a material impact on the Company's financial statements. In December 2004, the FASB issued SFAS 123(R), "Share-Based Payment." SFAS 123(R) amends SFAS 123, "Accounting for Stock-Based Compensation," and APB Opinion 25, "Accounting for Stock Issued to Employees." SFAS 123(R) requires that the cost of share-based payment transactions (including those with employees and non-employees) be recognized in the financial statements. SFAS 123(R) applies to all share-based payment transactions in which an entity acquires goods or services by issuing (or offering to issue) its shares, share options, or other equity instruments (except for those held by an ESOP) or by incurring liabilities (1) in amounts based (even in part) on the price of the entity's shares or other equity instruments, or (2) that require (or may require) settlement by the issuance of an entity's shares or other equity instruments. This statement is effective (1) for public companies qualifying as SEC small business issuers, as of the first interim period or fiscal year beginning after December 15, 2005, or (2) for all other public companies, as of the first interim period or fiscal year beginning after June 15, 2005, or (3) for all nonpublic entities, as of the first fiscal year beginning after December 15, 2005. Management anticipates no significant impact to the Company's financial statements upon the adoption of SFAS No. 123(R). 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 2005 and 2004 as a result of any of these unsecured situations. F-11 KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE F - INVENTORIES Inventories consist of the following at January 31, 2005 and 2004: January 31, January 31 2005 2004 -------- -------- Raw materials $ 42,408 $114,120 Finished goods 211,026 208,943 -------- -------- Total $253,434 $323,063 ======== ======== NOTE G - PROPERTY AND EQUIPMENT Property and equipment consists of the following at January 31, 2005 and 2004: January 31, January 31, 2005 2004 Estimated life --------- --------- -------------- Machinery and Equipment $ 597,901 $ 587,880 7 years Office furniture and fixtures 25,441 25,441 5 years Leasehold improvements 14,180 14,180 2 years Vehicles 9,279 9,279 5 years --------- --------- 646,801 636,780 Less accumulated depreciation (517,661) (479,227) --------- --------- Net property and equipment $ 129,140 $ 157,553 ========= ========= Depreciation expense for the years ended January 31, 2005 and 2004 was approximately $38,434 and $40,988, respectively. NOTE H - 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, 2005, 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 I - 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. F-12 KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE I - NOTES PAYABLE TO INVESTORS - CONTINUED 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, received a commission equal to 10% of the gross proceeds, an unaccountable 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. 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 $0.60 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, was amortized to interest expense over the initial term of the underlying debt. During the years ended January 31, 2004, approximately $9,100 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 were fully contingent upon the occurrence of certain future events, the Company did not record a discount resulting from the beneficial conversion feature. The notes matured on November 12, 2003 ($50,000) and December 26, 2003 ($25,000), respectively. 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, as of February 16, 2004. The Company is obligated to pay $2,000 per month, plus accrued interest, for the period from March 16, 2004 through August 16, 2004 and $1,000 per month, plus accrued interest, on the 16th of each month thereafter until all outstanding amounts are paid in full. The restructured note bears interest at 10.0% per annum. F-13 KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE I - NOTES PAYABLE TO INVESTORS - CONTINUED The $50,000 restructured note is convertible into shares of unregistered, restricted common stock at the discretion of the Noteholder with the Company's consent, 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 $50,000 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 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 January 31, 2005, the Company has paid approximately $7,000 in principal and $6,667 in cumulative accrued interest on the $50,000 restructured convertible note. The $25,000 convertible note is in default and no demand for payment has been made to the Company. The Company continues to accrue interest on this convertible note in accordance with the original terms and conditions. The aggregate maturities of the notes are as follows: Balance as of January 31, 2005 $ 68,000 Less current portion (49,000) -------- Long-term portion $ 19,000 ======== NOTE J - CAPITAL LEASE PAYABLE Capital lease payable is as follows:
January 31, January 31, 2005 2004 -------- -------- $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 $ 10,306 $ 14,431 Less current maturities (4,500) (4,095) -------- -------- Long-term portion $ 5,806 $ 10,336 ======== ========
Future maturities of long-term capital leases payable are Year ending January 31, Amount ----------- ------ 2006 $ 4,468 2007 4,872 2008 966 ------- Total $10,306 ======= F-14 KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE K - INCOME TAXES The components of income tax (benefit) expense for the years ended January 31, 2005 and 2004, respectively, are as follows: January 31, January 31, 2005 2004 ------- ------- Federal: Current $ -- $ -- Deferred -- -- ------- ------- -- -- ------- ------- State: Current -- -- Deferred -- -- ------- ------- -- -- ------- ------- Total $ -- $ -- ======= ======= The Company has a net operating loss carryforward of approximately $5,000,000 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. The Company's income tax expense for the years ended January 31, 2005 and 2004, respectively, are as follows: January 31, January 31, 2005 2004 -------- -------- Statutory rate applied to loss before income taxes $(148,000) $(68,000) Increase (decrease) in income taxes resulting from: State income taxes -- -- Other, including reserve for deferred tax asset 148,000 68,000 --------- -------- 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, 2005 and 2004, respectively: January 31, January 31, 2005 2004 ----------- ----------- Deferred tax assets Net operating loss carryforwards $ 1,700,000 $ 1,564,000 Less valuation allowance (1,700,000) (1,564,000) ----------- ----------- Net Deferred Tax Asset $ -- $ -- =========== =========== During the Fiscal years ended January 31, 2005 and 2004, respectively, the valuation allowance for the deferred tax asset increased (decreased) by approximately $136,000 and $68,000. F-15 KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE L - COMMON STOCK TRANSACTIONS 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. In July 2004, the Company issued 150,000 restricted, unregistered shares of common stock in payment of a contract for professional services. This transaction was valued at approximately $6,000, 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. NOTE M - 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 expired in April 2004. (Remainder of this page left blank intentionally) F-16 KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE M - STOCK WARRANTS - CONTINUED The following table lists the issued and outstanding stock warrants as of January 31, 2005 and 2004, respectively: Warrants issued Exercise price ------ -------------- Balance at February 1, 2003 2,375,000 Granted -- Exercised -- Forfeited/Expired (75,000) $0.40 ---------- Balance at January 31, 2004 2,300,000 Granted -- Exercised -- Forfeited/Expired (2,300,000) ---------- Balance at January 31, 2005 -- ========== Warrants exercisable at January 31, 2005 -- ========== Weighted-average exercise price per warrant N/A ========== NOTE N - RELATED PARTY TRANSACTIONS During the years ended January 31, 2005 and 2004, respectively, the Company accrued approximately $120,000 in administrative service fees payable to KTTI. NOTE O - 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 $106,428 and $102,340 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 ----------- ------ 2006 $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-17 KIK TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE P - SIGNIFICANT CUSTOMERS During the year ended January 31, 2005, the Company had three separate customers responsible for an aggregate of approximately 71.86% (49.18%, 16.09% and 6.59%, respectively) of total net revenues. The largest customer was also a significant vendor of raw materials. The largest key customer was responsible for approximately 35.02% of accounts receivable and 59.37% of accounts payable at January 31, 2005. The second key customer was responsible for approximately 7.42% of accounts receivable and 0.12% of accounts payable at January 31, 2005. The third key customer was responsible for approximately 18.32% of accounts receivable and approximately 0.52% of accounts payable at January 31, 2005. 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. NOTE Q - SELECTED FINANCIAL DATA (UNAUDITED) The following is a summary of the quarterly results of operations for the years ended January 31, 2005 and 2004, respectively.
Quarter ended Quarter ended Quarter ended Quarter ended Year ended April 30, July 31, October 31, January 31, January 31, --------- -------- ----------- ----------- ----------- FISCAL 2005 Sales $ 791,111 $ 511,720 $ 704,469 $ 455,677 $ 2,462,977 Gross profit 107,642 14,866 119,193 (19,671) 222,030 Net earnings after provision for income taxes (56,101) (142,464) (32,265) (203,886) (434,716) Basic and fully diluted earnings per share nil $ (0.01) nil $ (0.01) $ (0.02) Weighted average number of shares issued and outstanding 25,021,865 25,038,169 25,171,865 25,171,865 25,101,375 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
F-18