-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Go2qtKPSZvA82wXn5nOBiaYuwUHu3GFAnK1kVFiS+c1k2DaxPJGIIf4G6fnS4hH2 3/Bov3ih+aMAIQQzLM8Djg== 0001050234-02-000063.txt : 20020620 0001050234-02-000063.hdr.sgml : 20020620 20020619192935 ACCESSION NUMBER: 0001050234-02-000063 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 20020620 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KNUTEK HOLDINGS INC CENTRAL INDEX KEY: 0001175579 IRS NUMBER: 943409937 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2 SEC ACT: 1933 Act SEC FILE NUMBER: 333-90816 FILM NUMBER: 02682680 BUSINESS ADDRESS: STREET 1: 2713 SAN PABLO AVE CITY: BERKELEY STATE: CA ZIP: 94702 BUSINESS PHONE: 5105499071 MAIL ADDRESS: STREET 1: 2713 SANPABLO AVE CITY: BERVELEY STATE: CA ZIP: 94702 SB-2 1 sb2.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 KNUTEK HOLDINGS, INC. (Name of small business issuer in its charter) CALIFORNIA 2844 94-3409937 ---------- ----------------- ------------------ (State or (Primary Standard (I.R.S. Employer jurisdiction of Industrial Identification No.) incorporation or Classification organization) Code Number) 2713 San Pablo Avenue, Berkeley, California 94702 ------------------------------------------------- Telephone: (510) 549-9071 ------------------------- (Address and telephone number of principal executive offices) 2713 San Pablo Avenue, Berkeley, California 94702 ------------------------------------------------- (Address of principal place of business or intended principal place of business) Jean L. Batman, Esq., Duane Morris LLP -------------------------------------- 100 Spear Street, 15th Floor, San Francisco, California 94105 ------------------------------------------------------------- Telephone: (415) 371-2200 ------------------------- (Name, address and telephone number of agent for service) Approximate date of proposed sale to the public: From time to time after this Registration Statement becomes effective. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] _________________________________ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] _________________________________________________ If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] _________________________________________________ If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [ ] 1 CALCULATION OF REGISTRATION FEE Tile of each Dollar Proposed Proposed Amount of class of securities amount to maximum maximum registration to be registered be registered offering aggregate fee price per offering unit price Common Stock, 1,969,999 1.00 1,969,999 181 No Par Value The offering price per share for the selling security holders was estimated solely for the purpose of calculating the registration fee pursuant to Rule 457 of Regulation C. The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. PART I Item 1. Front of Registration Statement and Outside Front Cover of Prospectus. KNUTEK HOLDINGS, INC. 2713 San Pablo Avenue, Berkeley, California 94702 Telephone: (510) 549-9071 1,969,999 Shares of Common Stock The selling shareholders named in this prospectus are offering all of the shares of common stock offered through this prospectus. Our Common Stock is not currently listed on any national securities exchange or the Nasdaq Stock Market. THE PURCHASE OF THE SECURITIES OFFERED THROUGH THIS PROSPECTUS INVOLVES A HIGH DEGREE OF RISK. SEE SECTION ENTITLED "RISK FACTORS". NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this prospectus is June 18, 2002. 2 Item 2. Inside Front and Outside Back Cover Pages of Prospectus. TABLE OF CONTENTS PART I 2 Item 1. Front of Registration Statement and Outside Front Cover of Prospectus. 2 Item 2. Inside Front and Outside Back Cover Pages of Prospectus. 3 TABLE OF CONTENTS 3 Item 3. Risk Factors. 5 Item 4. Use of Proceeds. 11 Item 5. Determination of Offering Price. 11 Item 6. Dilution. 11 Item 7. Selling Security Holders. 11 Item 8. Plan of Distribution. 13 Item 9. Legal Proceedings. 15 Item 10. Directors, Executive Officers, Promoters and Control Persons. 15 DIRECTORS: 15 EXECUTIVE OFFICERS: 16 TERM OF OFFICE 16 SIGNIFICANT EMPLOYEES 16 We also have a number of independent contractors who are key to our success. 17 FAMILY RELATIONSHIPS 17 Item 11. Security Ownership of Certain Beneficial Owners and Management. 17 Item 12. Description of Securities. 17 GENERAL 17 COMMON STOCK 18 PREFERRED STOCK 18 TRANSFER AGENT AND REGISTRAR 18 DIVIDEND POLICY 18 NO OTHER SECURITIES 18 Item 13. Interest of Named Experts and Counsel. 18 Item 14. Disclosure of Commission Position of Indemnification for Securities Act Liabilities. 19 Item 15. Organization Within Last Five Years. 19 Item 16. Description of Business. 19 OVERVIEW. 19 BUSINESS DEVELOPMENT 21 HIGH QUALITY PRODUCTS. 21 ATTRACTIVE DISTRIBUTOR COMPENSATION PROGRAM. 21 3 COMPREHENSIVE DISTRIBUTOR SUPPORT SERVICES. 21 GROWTH SRATEGY. 22 PRODUCT OVERVIEW. 22 SALES AND DISTRIBUTION METHODS. 23 OUR MARKET. 24 OUR MATERIALS AND SUPPLIERS. 26 PRODUCT RETURN AND BUY-BACK POLICIES. 26 COMPETITION. 26 INTELLECTUAL PROPERTY. 27 GOVERNMENTAL APPROVALS AND REGULATION. 27 TOTAL NUMBER OF EMPLOYEES AND NUMBER OF FULL TIME EMPLOYEES. 31 REPORTS TO SECURITIES HOLDERS 31 Item 17. Management's Discussion and Analysis. 31 Item 18. Description of Property. 34 Item 19. Certain Relationships and Related Transactions. 34 Item 20. Market for Common Equity and Related Stockholder Matters. 34 NO PUBLIC MARKET 34 HOLDERS OF OUR COMMON STOCK 34 REGISTRATION RIGHTS 34 DIVIDENDS 35 RULE 144 SHARES 35 Item 21. Executive Compensation. 35 SUMMARY COMPENSATION TABLE 35 COMMITTEES OF THE BOARD OF DIRECTORS 36 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION 36 EMPLOYMENT AGREEMENTS 36 STOCK OPTION GRANTS 36 Item 22. Financial Statements. 36 Item 23. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure. 37 PART II 37 Item 24. Indemnification of Directors and Officers. 37 Item 25. Other Expenses of Issuance and Distribution. 37 Item 26. Recent Sales of Unregistered Securities. 38 Item 27. Exhibits. 39 Item 28. Undertakings. 39 SIGNATURES 41 4 Item 3. Risk Factors. An investment in our common stock involves a high degree of risk. You should consider carefully the risks described below and the other information in this prospectus and any other filings we may make with the United States Securities and Exchange Commission in the future before investing in our common stock. If any of the following risks occur, our business, operating results and financial condition could be seriously harmed. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment. THE SUCCESS OF OUR BUSINESS DEPENDS ON THE CONTINUED SERVICE AND PERFORMANCE OF OUR KEY EMPLOYEES. We are largely dependent on certain key management personnel, particularly our President and Chief Executive Officer, Jim Knut Larsson, for our success. The loss of services of Mr. Larsson or other executive officers would have a materially adverse effect upon our business. Additionally, we believe we will need to attract, retain and motivate talented management and other highly skilled employees to be successful. Competition for employees that possess knowledge of our target market is intense. We may be unable to retain our key employees or attract, assimilate and retain other highly qualified employees in the future. We currently do not have employment agreements or any "key person" insurance on any of our executive officers or key employees. WE HAVE A LIMITED OPERATING HISTORY. It is difficult to evaluate our business and prospects because we have a limited operating history. We were formed on August 13, 2001, as a California corporation and operated for approximately three years prior to that time as the sole proprietorship of Jim Knut Larsson doing business as GAIA International. Our limited operating history makes it difficult to evaluate our current business and prospects or to accurately predict our future revenue or results of operations. Our revenue and income potential are unproven, and our business model is constantly evolving. To better evaluate our business prospects, you should evaluate the risks, uncertainties, expenses and difficulties frequently encountered by companies in early stages of development generally. WE OPERATED OUR BUSINESS AT A LOSS IN OUR MOST RECENT FISCAL YEAR. We experienced an operating loss in 2001 and anticipate losses and negative cash flow for the foreseeable future. We anticipate that our operating losses will increase significantly from current levels because we plan to significantly increase our expenditures for sales and marketing, product development and technology and infrastructure development to enhance the kNutek brand. With increased expenses, we will need to generate significant additional revenue to achieve profitability, we may never achieve profitability, and even if we do achieve profitability, we may not sustain or increase profitability on a quarterly or annual basis in the future. If we do not achieve or sustain profitability in the future, then we will be unable to continue our operations. 5 WE ARE DEPENDENT ON OUR DISTRIBUTORS FOR A SIGNIFICANT PORTION OF OUR BUSINESS. Our success depends in significant part upon our ability to attract, maintain and motivate a large base of retail product distributors. In our efforts to attract and retain distributors, we compete with other network marketing organizations, including those in the personal care product, weight management, and food and dietary supplement industries. We do not believe that the loss of any key distributor would necessarily result in the loss of a significant number of that distributor's downline organization members because of our good relations with our distributors and because of the significant incomes that many distributors would forego by ceasing to distribute our products. However, the loss of a key distributor, together with a significant number of downline distributors, or the loss of a significant number of distributors for any reason, could adversely affect sales of our products and could impair our ability to attract new distributors. Our ability to attract and retain distributors could be negatively affected by adverse publicity and regulatory action relating to the Company, our products, or operations, including its network marketing system. OUR BUSINESS COULD BE ADVERSELY EFFECTED BY CHANGES IN THE REGUATION OF OUR PRODUCTS OR MARKETING ORGANIZATION. The adoption of new regulations in the United States or in international markets, or changes in the interpretation of existing regulations, could have a material adverse effect on our business. For example the United States Food & Drug Administration (the "FDA") periodically issues regulations that govern the labeling of dietary supplements, including how to declare nutritional information, how to make permissible "statements of nutritional support" and when additional, defined terminology may be used on dietary supplements. Changes in such regulations may make it necessary for us to conduct tests, revise labels, or incur other expenses. Further, in certain markets, including the U.S., claims made with respect to weight management, dietary supplement, personal care or other products may change the regulatory status of the products. In the U.S., for example, it is possible that the FDA could take the position that claims relating to certain products fall within an "over-the- counter monograph", such that the regulatory status of those products in the U.S. is or could become unclear. The U.S. Federal Trade Commission ("FTC"), which exercises jurisdiction over the advertising of all the Company's products, continues to institute enforcement actions against dietary supplement companies for false and misleading advertising of certain products. These enforcement actions have resulted in consent decrees and monetary payments by the companies involved. In addition, the FTC has increased its scrutiny of the use of testimonials, which are utilized by the Company. While we have not been the target of any FTC enforcement action, there can be no assurance that the FTC will not question our advertising or other operations in the future. As a marketer of food and dietary supplements and other products that are ingested by consumers, we are subject to the risk that one or more of the ingredients in our products may become the subject of adverse regulatory action. A limited number of the products we sell may be labeled as over-the-counter ("OTC") drugs as opposed to dietary supplements, conventional foods or personal care items. Many OTC drug products do not require pre-approval by the FDA, but must comply with applicable OTC monographs, which prescribe permissible ingredients and appropriate labeling language. In addition, either the Company or its supplier must register and file annual drug listing information with the FDA. Because the FDA could take the position that claims made with respect to any of our products fall within an OTC monograph, the regulatory status of some of our products is or could become unclear. If any enforcement were undertaken, we could be required to re-label or reformulate such products. Governmental 6 regulations in countries where we plan to commence or expand operations may prevent or delay entry into the market. In addition, our ability to sustain satisfactory levels of sales in certain markets is dependent in significant part on our ability to introduce additional products into such markets. However, government regulations, both domestic and international, can delay or prevent the introduction, or require the reformulation or withdrawal, of certain products. Further, regulatory action, whether or not it results in a final determination adverse to the Company, can create negative publicity with detrimental effects on the motivation and recruitment of retail product distributors and, consequently, on sales. The Company may be subject to challenges with regard to the implementation of its network marketing system. While we believe that our network marketing system complies with all applicable laws, there can be no assurance that such challenges will not be made or made successfully or that other legal developments in this area will not have a material adverse effect on the Company. WE ARE SUBJECT TO THE UNCERTAINTIES INHERENT IN BUSINESS EXPANSION. Our continued growth is dependent upon our ability to expand our operations. Our expansion into new markets may be adversely affected by regulatory barriers, new regulatory systems and problems related to entering new markets with different cultural and political bases. In addition, our success will be significantly dependent on our ability to manage rapid growth, through establishment and expansion of worldwide personnel and management and information, order processing and fulfillment, inventory and shipping systems and other aspects of operations. From time to time, we may experience out-of- stock situations with respect to certain products. We anticipate that we will be required to add hardware and software to our infrastructure to accommodate increased content and use of our website and network marketing organization. If we are unable to increase the capacity of our website fast enough to accommodate our expansion, our website may become unstable and may fail to operate for unknown periods of time, which would adversely impact our business. As we continue to add distributors, products and new markets to our operations, the ability to manage this growth will represent an increasing challenge. We have retained special legal counsel to advise us on the development and implementation of our network marketing program to help guard against any such challenges. OUR BUSINESS MAY BE ADVERSELY EFFECTED BY THE ABSENCE OF CLINICAL STUDIES AND SCIENTIFIC REVIEW OR BY THE POTENTIAL FOR MISUSE OF OUR PRODUCTS. In general, our products consist of personal care products, weight management products, and food and dietary supplements (a limited number of which have been or may be classified in the U.S. as OTC drugs) which we believe do not require approvals from the FDA or, in the United States market, other regulatory agencies, prior to sale. We do not conduct clinical studies of our products. Our products consist of herbs, vitamins, minerals and other ingredients that we regard as safe when taken as suggested. However, because we are highly dependent upon consumers' perception of the safety and quality of our products as well as similar products distributed by other companies, we could be adversely affected in the event any of our products or any similar products distributed by other companies should prove or be asserted to be harmful to consumers. In addition, because of our dependence upon consumer perceptions, any adverse publicity associated with illness or other adverse effects resulting from consumers' use or misuse of our products or any similar products distributed by other companies could have a material adverse impact on our business. 7 WE ARE ENGAGED IN A HIGHLY COMPETITIVE BUSINESS. We are subject to significant competition for the recruitment of distributors from other network marketing organizations, including those that market personal care products, weight management, and food and dietary supplements as well as other types of products. Many of our competitors are substantially larger and have available considerably greater financial resources than we do. Our ability to remain competitive depends, in significant part, on our success in recruiting and retaining distributors through an attractive compensation plan and other incentives. In addition, the business of marketing personal care products, weight management, and food and dietary supplements is highly competitive. This market segment includes numerous manufacturers, distributors, marketers, retailers and physicians that actively compete for the business of consumers both in the United States and abroad. The market is highly sensitive to the introduction of new products or weight management plans (including various prescription drugs) that may rapidly capture a significant share of the market. As a result, the Company's ability to remain competitive depends in part upon the successful introduction of new products. We may have difficulty competing for or executing strategic alliances and acquisitions. Our business strategy includes entering into strategic alliances and may include acquiring complementary businesses and products. We may be unable to complete suitable strategic alliances and acquisitions on commercially reasonable terms, if at all. We expect to face competition for strategic alliance and acquisition candidates. This competition could impair our ability to successfully pursue these aspects of our business strategy. See "Business--Competition." OUR GROWTH IS DEPENDENT UPON OUR ABILITY TO DEVELOP OUR BRAND. Our growth will depend on our ability to develop our brand. We believe that our growth and brand recognition will be largely based on word of mouth. We also believe that strengthening our brand will be critical to achieving widespread acceptance of our products. Favorable public perception of our brand will depend largely on our ability to provide customers with high quality products and the success of our marketing efforts. We plan to increase our marketing expenditures to create and maintain brand recognition. However, brand promotion activities may not yield increased revenues and, even if they do, any increased revenues may not offset the expenses we incur in building our brand. FUTURE SALES OF STOCK BY AFFILIATES AND THIRD PARTIES MAY ADVERSELY IMPACT THE PRICE OF OUR STOCK. In the future, various shares previously issued to founders and various third parties (e.g. prior investors and outside consultants) will be available for sale and may adversely impact the market price of our stock. You should understand that various shares previously issued to management and founders of the company and various other third parties are also being registered and will be available for sale. These sales, if and when they occur, may have a substantial adverse impact on the market price of all shares of our stock, should a public market subsequently develop, because of the large number of such shares. See "There is no current market for our securities" in "Risk Factors" below. 8 STRATEGIC ALLIANCES OR ACQUISITIONS COULD DISRUPT OUR ONGOING BUSINESS. We intend to pursue certain strategic alliances and/or acquisitions as part of our business strategy. However, a strategic alliance or acquisition could disrupt our ongoing business, distract our management and employees and increase our expenses. If we acquire a company, we could face difficulties assimilating that company's personnel and operations. In addition, the key personnel of the acquired company may decide not to work for us. If we finance the acquisitions by incurring debt or issuing equity securities, this could dilute our existing stockholders. Any amortization of goodwill or other assets, or other charges resulting from the costs of such acquisitions, could adversely affect our operating results. WE MAY BE EXPOSED TO PRODUCT LIABILITY CLAIMS OR INDEMNIFICATION LOSSES FOR WHICH WE CURRENTLY DO NOT CARRY INSURANCE. As a marketer of food and dietary supplements and other products that are ingested by consumers or applied to their bodies, we may be subjected to various product liability claims, including, among other things, that our products contain contaminants or include inadequate instructions as to use or inadequate warnings concerning side effects and interactions with other substances. While no such claims have been made to date, it is possible that widespread product liability claims and the resultant adverse publicity could negatively affect the Company. We also could experience losses due to indemnification of our officers and directors pursuant to our Bylaws, which provide for the indemnification of our directors, officers, employees, and agents, under certain circumstances, against attorneys' fees and other expenses incurred by them in any litigation to which they become a party as a result of their activities on behalf of the company. We currently do not carry insurance covering these risks. THERE IS NO CURRENT MARKET FOR OUR SECURITIES. There is currently no market for our common stock and we cannot assure investors that a market will develop. The mere completion of this registration statement will not insure that a public market will or can be developed for the trading of our shares. If we are not able to develop a public trading market for our common stock, there may be limited liquidity of the shares, investors may be forced to hold such shares for an indefinite period of time and rely upon the uncertain prospects of private sales of their securities in order to have some type of exit strategy. Even if a public market develops, there is no reasonable projection that can be made at what price our common stock might trade. IN THE EVENT A MARKET FOR OUR SECURITIES IS DEVELOPED WE ARE LIKELY TO BE SUBJECT TO ADDITIONAL REGULATION AS A PENNY STOCK. Almost certainly our stock will initially be a penny stock and subject to certain additional regulations in trading, if a trading market for our securities is established. If it successfully trades, our stock will almost certainly trade initially as a defined "low price" stock of an unseasoned business entity such that your shares will be subject to special regulations by the SEC known as "penny stock rules" which require additional screening and limitations on trading by individuals buying or selling through a broker dealer. Some of these restrictions are more particularly described under "Plan of Distribution" below. 9 OUR MANAGEMENT LACKS PUBLIC COMPANY EXPERIENCE AND WE ARE DEPENDENT UPON OUTSIDE ADVISORS. Our management is not experienced in the operation of a public company. If this registration is successful, you will be relying upon our management to comply with complex reporting requirements and to learn and discharge other responsibilities incident to the operation of a publicly held reporting company. To supplement the business experience of our officers and directors, we have been and in the future expect we will continue to employ accountants, technical experts, attorneys, and other consultants and advisors. Our management will make the selection of any such advisors without any input from stockholders. It is anticipated that such persons will be engaged on an "as needed" basis without a continuing fiduciary or other obligation to the company. In the event our management considers it necessary to hire outside advisors, we may hire persons who are affiliates, if they are able to provide the required services. WE DO NOT ANTICIPATE ISSUING ANY DIVIDENDS TO OUR COMMON STOCK HOLDERS. We have not previously issued any dividends to our shareholders and we do not anticipate that we will issue dividends to our shareholders in the foreseeable future. To the extent we are able to generate revenues which exceed our operating expenses, we plan to retain such earnings to fund our continued expansion. THIS DOCUMENT CONTAINS FORWARD-LOOKING STATEMENTS WHICH MAY DIFFER FROM OUR ACTUAL RESULTS. Some of the statements contained in this Form SB-2 that are not historical facts are "forward-looking statements" which can be identified by the use of terminology such as "estimates," "projects," "plans," "believes," "expects," "anticipates," "intends," or the negative or other variations, or by discussions of strategy that involve risks and uncertainties. We urge you to be cautious of the forward-looking statements, that such statements, which are contained in this Form SB-2, reflect our current beliefs with respect to future events and involve known and unknown risks, uncertainties and other factors affecting our operations, market growth, services, products and licenses. No assurances can be given regarding the achievement of future results, as actual results may differ materially as a result of the risks we face, and actual events may differ from the assumptions underlying the statements that have been made regarding anticipated events. Factors that may cause actual results, our performance or achievements, or industry results, to differ materially from those contemplated by such forward-looking statements include without limitation: 1. Our ability to maintain, attract and integrate management and information systems; 2. Our ability to generate customer demand for our products; 3. The intensity of competition; 4. Our ability to meet production demands; and 5. General economic conditions. All written and oral forward-looking statements made in connection with this Form SB-2 that are attributable to us or persons acting on our behalf are 10 expressly qualified in their entirety by these cautionary statements. Given the uncertainties that surround such statements, you are cautioned not to place undue reliance on such forward-looking statements. Item 4. Use of Proceeds. We will not receive any proceeds from the sale of the common stock offered through this prospectus by the selling shareholders. Item 5. Determination of Offering Price. We will not determine the offering price of the common stock. The offering price will be determined by market factors and the independent decisions of the selling shareholders. Item 6. Dilution. The common stock to be sold by the selling shareholders is common stock that is currently issued and outstanding. Accordingly, there will be no dilution to our existing shareholders as the result of sales of common stock by the selling shareholders pursuant to this registration statement. Item 7. Selling Security Holders. The selling shareholders named in this registration statement are offering all of the one million, nine hundred sixty-nine thousand, nine hundred ninety- nine (1,969,999) shares of common stock being offered. The shares include the following: 1. Seven hundred nineteen thousand, nine hundred ninety-nine (719,999) shares of our common stock that the selling shareholders acquired under section 4(2) of the Securities Act on August 21, 2001; and 2. One million (1,000,000) shares of our common stock that the selling shareholders acquired under Regulation S of the Securities Act of 1933 pursuant to an option dated September 28, 2001. [1] 3. Two hundred fifty thousand (250,000) shares of our common stock that the selling shareholders acquired as the result of the merger of Domestic Transmission Technologies, Inc. into kNutek Holdings, Inc. pursuant to California Corporations Code Section 1110. These shares are held by four hundred fifty (450) persons and are referred to collectively below as the "DTT Shareholders". [2] _______________________________ 1 This assumes that a $50,000 wire initiated by our investor is located and credited to the company, which we anticipate will be resolved prior to the effective date of this registration statement. 2 This assumes the completion of a short-form merger pursuant to California Corporations Code Section 1110 of Domestic Transmission Technologies, Inc. into the company, which we anticipate will be completed by the effective date of this registration statement. 11 The following table provides as of the date of this prospectus, information regarding the beneficial ownership of our common stock held by each of the selling shareholders, including: 1. The number of shares owned by each before this offering; 2. The total number of shares that are to be offered for each; 3. The total number of shares that will be owned by each upon completion of the offering; 4. The percentage owned by each; and 5. The identity of the beneficial holder of any entity that owns the shares. -------------------------------------------------------------------------- Name and Address of Shares Number of Shares to be Percent Owned Selling Stockholder Owned Shares to be Owned Upon Upon Completion Prior to Offered for Completion of of This This Selling This Offering Offering Offering Shareholders' Account Jim Knut Larsson 6,000,000 50,000 5,950,000 66 2713 San Pablo Ave. Berkeley, CA 94702 International Assets 1,000,000 1,000,000 0 0 Services & Holdings, Ltd. P.O. Box 199 08870 Sitges, Spain David Evertsen 223,333 223,333 0 0 592 Oakley Street Salt Lake City, UT 84116 Tom Hinkle & Lois Hinkle 223,333 223,333 0 0 JTWROS 1119 Mercedes Way Salt Lake City, UT 84108 Jetaime Ventures, LLC 223,333 223,333 0 0 2790 N. Ashwood Orange, CA 92865 DTT Shareholders c/o 250,0003 250,000 0 0 BAC Consulting Corporation 19900 MacArthur Blvd., Ste. 660 Irvine, CA 92612 -------------------------------------------------------------------------- 12 Except as otherwise noted in the above list, the named party beneficially owns and has sole voting and investment power over all shares or rights to these shares. The numbers in this table assume that none of the selling shareholders sells shares of common stock not being offered in this prospectus or purchases additional shares of common stock, and assumes that all shares offered are sold. The percentages are based on eight million, nine hundred ninety-nine thousand, nine hundred ninety-nine (8,999,999) shares of common stock outstanding on the date of this prospectus. Except for Mr. Jim Knut Larsson, who is our President and CEO, none of the selling shareholders or their beneficial owners: * Has had a material relationship with us other than as a shareholder at any time within the past three years; or * Has ever been one of our officers or directors or an officer or director of our predecessors or affiliates, or is related to one of our officers or directors. Item 8. Plan of Distribution. The selling shareholders may sell some or all of their common stock in one or more transactions, including block transactions: 1. On such public markets or exchanges as the common stock may from time to time be trading; 2. In privately negotiated transactions; 3. Through the writing of options on the common stock; 4. In short sales; or 5. In any combination of these methods of distribution. The sales price to the public may be: 1. The market price prevailing at the time of sale; 2. A price related to such prevailing market price; or 3. Such other price as the selling shareholders determine from time to time. ____________________________________ 3 This assumes the completion of a short-form merger pursuant to California Corporations Code Section 1110 of Domestic Transmission Technologies, Inc. into the company, which we anticipate will be completed by the effective date of this registration statement. 13 The shares may also be sold in compliance with the Securities and Exchange Commission's Rule 144. The selling shareholders may also sell their shares directly to market makers acting as principals or brokers or dealers, who may act as agent or acquire the common stock as a principal. Any broker or dealer participating in such transactions as agent may receive a commission from the selling shareholders, or, if they act as agent for the purchaser of such common stock, from such purchaser. The selling shareholders will likely pay the usual and customary brokerage fees for such services. Brokers or dealers may agree with the selling shareholders to sell a specified number of shares at a stipulated price per share and, to the extent such broker or dealer is unable to do so acting as agent for the selling shareholders, to purchase, as principal, any unsold shares at the price required to fulfill the respective broker's or dealer's commitment to the selling shareholders. Brokers or dealers who acquire shares as principals may thereafter resell such shares from time to time in transactions in a market or on an exchange, in negotiated transactions or otherwise, at market prices prevailing at the time of sale or at negotiated prices, and in connection with such re-sales may pay or receive commissions to or from the purchasers of such shares. These transactions may involve cross and block transactions that may involve sales to and through other brokers or dealers. If applicable, the selling shareholders may distribute shares to one or more of their affiliates or assignees who are unaffiliated with us. Such affiliates or assignees may, in turn, distribute such shares as described above. We cannot assure investors that all or any of the common stock offered will be sold by the selling shareholders. We are bearing all costs relating to the registration of the common stock. The selling shareholders, however, will pay any commissions or other fees payable to brokers or dealers in connection with any sale of the common stock. The selling shareholders must comply with the requirements of the Securities Act and the Securities Exchange Act in the offer and sale of the common stock. In particular, during such times as the selling shareholders may be deemed to be engaged in a distribution of the common stock, and therefore be considered to be an underwriter, they must comply with applicable law and may, among other things: 1. Not engage in any stabilization activities in connection with our common stock; 2. Furnish each broker or dealer through which common stock may be offered, such copies of this prospectus, as amended from time to time, as may be required by such broker or dealer; and 3. Not bid for or purchase any of our securities or attempt to induce any person to purchase any of our securities other than as permitted under the Securities Exchange Act. The Securities Exchange Commission has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the 14 Nasdaq system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system). The penny stock rules require a broker-dealer, before a transaction in a penny stock not otherwise exempt from those rules, deliver a standardized risk disclosure document prepared by the Commission, which: (a) contains a description of the nature and level of risk in the market for penny stocks in both public offerings and secondary trading; (b) contains a description of the broker's or dealer's duties to the customer and of the rights and remedies available to the customer with respect to a violation to such duties or other requirements of Securities' laws; (c) contains a brief, clear, narrative description of a dealer market, including "bid" and "ask" prices for penny stocks and significance of the spread between the "bid" and "ask" price; (d) contains a toll-free telephone number for inquiries on disciplinary actions; (e) defines significant terms in the disclosure document or in the conduct of trading in penny stocks; and (f) contains such other information and is in such form (including language, type, size and format), as the Commission shall require by rule or regulation. The broker-dealer also must provide, before effecting any transaction in a penny stock, the customer: (a) with bid and offer quotations for the penny stock; (b) the compensation of the broker-dealer and its salesperson in the transaction; (c) the number of shares to which such bid and ask prices apply, or other comparable information relating to the depth and liquidity of the market for such stock; and (d) monthly account statements showing the market value of each penny stock held in the customer's account. In addition, the penny stock rules require that before a transaction in a penny stock not otherwise exempt from those rules; the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written acknowledgment of the receipt of a risk disclosure statement, a written agreement to transactions involving penny stocks, and a signed and dated copy of a written suitably statement. These disclosure requirements may have the effect of reducing the trading activity in the secondary market for our stock if it becomes subject to these penny stock rules. Therefore, if our common stock become accountable to the penny stock rules, stockholders may have difficulty selling those securities. We have advised shareholders of their rights and obligations with respect to the resale of our common shares. However, we advise investors that there are no lock-up or other agreements in place between our company and the shareholders regarding the resale of the common shares by shareholders. Item 9. Legal Proceedings. There are no legal proceedings pending or threatened against us. 15 Item 10. Directors, Executive Officers, Promoters and Control Persons. DIRECTORS: Name of Director Age - ---------------------- --- Jim Knut Larsson 49 Myra Dudley 58 Currently, we have one vacancy on our board. EXECUTIVE OFFICERS: Name of Officer Age Office - -------------------- --- ------- Jim Knut Larsson 49 President, Chief Executive Officer Secretary and Treasurer The following describes the business experience of our directors and executive officers, including other directorships held in reporting companies: Mr. Larsson founded the Company's business in 1997. Since that time, Mr. Larsson has controlled the operations of the business as the sole proprietor of the business from inception to August 2001, and as the President and CEO of kNutek Holdings, Inc., the California corporation through which the business has been conducted from August 2001 to the present. Mr. Larsson is also the President and CEO of kNutek International, Inc., a wholly owned subsidiary of kNutek Holdings, Inc., formed as a Delaware corporation to develop the company's network marketing organization. Mr. Larsson serves on the Board of Directors of both kNutek Holdings, Inc. and kNutek International, Inc. Born in Sweden, Mr. Larsson has a Bachelor of Arts degree from Handels Akademiet in Oslo, Norway, and an MBA from Arizona State University. Ms. Dudley has been a member of our Board of Directors since August 2001 and has served as our production manager since 1998, responsible for the mixing of products, bottling, shipping, inventory, ordering, customer service, order taking, product education, and invoicing. She has a Bachelor of Science Degree in Microbiology and Chemistry from the University of Oklahoma. There is currently one vacancy on our Board of Directors. TERM OF OFFICE Our directors are appointed for a one-year term to hold office until the next annual general meeting of our shareholders or until removed from office in accordance with our bylaws. Our officers are appointed by our board of directors and hold office until removed by the board. SIGNIFICANT EMPLOYEES Ms. Brie Kaanoi, is a key member of our sales and marketing organization. She is a former Miss World, Beauty and Fitness, and a graduate of the University of Hawaii. Ms. Kaanoi is an experienced fitness educator and performer, as well as a recording artist and composer. Mr. Richard Bsharah, Jr. is a key member of our sales and marketing organization. He is an experienced live radio broadcasting host, health food store manager, and a lecturer in nutrition. 16 We also have a number of independent contractors who are key to our success. FAMILY RELATIONSHIPS There are no family relationships among our directors, executive officers, or persons nominated or chosen to become directors or executive officers. Item 11. Security Ownership of Certain Beneficial Owners and Management. The following table provides the names and addresses of each person known to us to own more than 5% of our outstanding common stock as of the date of this prospectus, and by the officers and directors, individually and as a group. Except as otherwise indicated, all shares are owned directly and the percentage shown is based on eight million, nine hundred ninety-nine thousand, nine hundred ninety-nine (8,999,999) shares of common stock issued and outstanding on June 10, 2002. ----------------------------------------------------------------------- Title of Name and Address of Amount and Percent of Class Beneficial Owner Nature of Class Beneficial Owner Common Jim Knut Larsson 6,000,000 67 Stock 2713 San Pablo Avenue Berkeley, CA 94702 Common International Assets 1,000,000 11 Stock Services & Holdings, Ltd. P.O. Box 199 08870 Sitges, Spain ----------------------------------------------------------------------- Item 12. Description of Securities. GENERAL The securities being offered are our common stock, without par value. Under our articles of incorporation, we are authorized to issue 20,000,000 shares of common stock, without par value. As of June 10, 2002, a total of eight million, nine hundred ninety-nine thousand, nine hundred ninety-nine (8,999,999) shares of our common stock were issued and outstanding and held by four hundred fifty-eight (458) shareholders, including two hundred-fifty thousand (250,000) shares to be issued to the shareholders of Domestic Transmission Technologies, Inc. [4] See "Organization Within Last Five Years" below. _______________________________ 4 This assumes the completion of a short-form merger pursuant to California Corporations Code Section 1110 of Domestic Transmission Technologies, Inc. into the company, which we anticipate will be completed by the effective date of this registration statement. 17 COMMON STOCK Our authorized capital stock consists of 20,000,000 shares of common stock, no par value per share. The holders of common stock (i) have equal ratable rights to dividends from funds legally available therefore, when, as and if declared by our bard of directors; (ii) are entitled to share ratably in all of the assets of the Company available for distribution or winding up of the affairs of the Company; (iii) do not have preemptive subscription or conversion rights and there are no redemption rights applicable thereto; and (iv) are entitled to cumulative voting on all matters which shareholders may vote on at all meetings of shareholders. The holders of shares of our common stock have cumulative voting rights pursuant to the California General Corporation law. Upon the effective election of cumulative voting by any shareholder, each shareholder entitled to vote at any election of directors may cumulate such shareholder votes and give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which the shareholder's shares are normally entitled, or distribute the shareholder's votes on the same principle among as many candidates as the shareholder sees fit. PREFERRED STOCK We currently do not have any authorized preferred stock. TRANSFER AGENT AND REGISTRAR We have engaged the services of Transfer Online as our transfer agent and registrar. Transfer Online is located at 227 SW Pine Street, Suite 300, Portland, Oregon 97204. Telephone: (503)227-2950. Fax: (503)227-6874. Internet: www.transferonline.com. DIVIDEND POLICY To date, we have not paid or declared any dividends and we have no intention of declaring or paying any dividends in the foreseeable future. If we decide to pay dividends, that decision will be made by our board of directors, which will likely consider, among other things, our earnings, our capital requirements and our financial condition, as well as other relevant factors. We currently intend to retain future earnings, if any, to finance the expansion of our business. NO OTHER SECURITIES We do not currently have any other form of securities outstanding. Item 13. Interest of Named Experts and Counsel. No expert or counsel named in this prospectus as having prepared or certified any part of this prospectus or having given an opinion upon the validity of the securities being registered or upon other legal matters in connection with the registration or offering of the common stock was employed on a contingency basis, or had, or is to receive, in connection with the offering, a substantial interest, direct or indirect, in the registrant or any of its parents or subsidiaries. Nor was any such person connected with the registrant or any of its parents or subsidiaries as a promoter, managing or principal underwriter, voting trustee, director, officer, or employee. 18 Duane Morris LLP, our independent legal counsel, has provided an opinion on the validity of our common stock. The financial statements included in this prospectus and the registration statement have been audited by Hansen, Barnett & Maxwell, certified public accountants, to the extent and for the periods set forth in their report appearing elsewhere herein and in the registration statement, and are included in reliance upon such report given upon the authority of said firm as experts in auditing and accounting. Item 14. Disclosure of Commission Position of Indemnification for Securities Act Liabilities. Our Articles of Incorporation and Bylaws provide extensive indemnification rights to our directors and officers. Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers and controlling persons of the small business issuer pursuant to the foregoing provisions, or otherwise, the small business issuer has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. If a claim for indemnification against such liabilities is asserted by one of our directors, officers, or controlling persons in connection with the securities being registered, we will, unless in the opinion of our legal counsel the matter has been settled by controlling precedent, submit the question of whether such indemnification is against public policy to a court of appropriate jurisdiction. We will then be governed by the court's decision. Item 15. Organization Within Last Five Years. We were incorporated as kNutek Holdings, Inc. on August 13, 2001, under the laws of the State of California. In October 2001, we entered into an agreement whereby kNutek Holdings, Inc. acquired a ninety-seven and one-half percent (97.5%) interest in Domestic Transmission Technologies, Inc., a California corporation with four hundred fifty (450) shareholders ("DTT"), which had no prior operations. In June 2002, DTT merged into kNutek Holdings, Inc. pursuant to California Corporations Code Section 1110, whereby a subsidiary which is ninety percent (90%) or more owned by its parent may be statutorily merged into the parent company. [5] Prior to its incorporation on August 13, 2001, kNutek Holdings, Inc. was owned and operated as a sole proprietorship by our President, Jim Knut Larsson, for approximately three (3) years. Item 16. Description of Business. OVERVIEW. kNutek is a growing company involved in the manufacture and distribution of products aimed at consumers in the health, beauty and therapeutic skin and body care markets. Our current line of skin care and nutritional products is _____________________________ 5 This assumes the completion of a short-form merger pursuant to California Corporations Code Section 1110 of Domestic Transmission Technologies, Inc. into the company, which we anticipate will be completed by the effective date of this registration statement. 19 marketed and sold in approximately 2,500 skin care salons, spas and clinics nationwide. Our products are scientifically formulated to help skin repair itself, from both inside and out, thereby beautifying, slowing the effects of aging, and providing therapeutic benefits to people with problem skin conditions and symptoms of aging. We believe we are poised to capitalize on our success to date by embarking on a comprehensive marketing and sales program designed to increase brand awareness and product availability in addition to developing new sales channels. Our unique approach is designed to permit us to develop a network sales force of customer/salespeople while maintaining the strong ties we have developed with professional care establishments. The strength of our marketing to date has been our ability to utilize our salon network to sell our products. Salon clients hear about our products from health and beauty professionals, and are able to sample products in the salons. We plan to bring this approach to a broader audience by recruiting a network of distributors or sales associates from our base of existing customers. These sales associates will then receive commissions and discounts on products for selling products to others. We plan to conduct a national advertising campaign, and to provide sales associates with product samples and marketing materials in addition to performing order fulfillment activities. This will help us to retain customers by ensuring that they can purchase products without needing to contact their sales associates, and will help sales associates by avoiding the need for them to purchase inventory to resell to consumers. Our advertising campaign will support the individual sales efforts of our network sales associates. In addition, it will allow us to capitalize on the great strengths of the beauty, health and fitness industry - its ability to demonstrate products to a captive, receptive audience. The industry is a fragmented one, consisting of thousands of small operators with insufficient resources to conduct significant advertising or provide extensive customer service and communication facilities. We will work closely with professional care establishments to create a mutually beneficial relationship: we will provide products and advertising designed to bring customers to the care facilities. The facilities will benefit from referrals to their establishments, and will in turn demonstrate and promote our products. Thus, by providing a strong marketing and order fulfillment infrastructure, we can build on the industry's strengths in order to maximize our own sales and profit. In the longer term, we hope that the success of our products and the development of a comprehensive marketing and distribution infrastructure will position us to acquire other companies in the manufacturing, research & development, distribution and sales aspects of the beauty, health and fitness industry. We intend to position ourselves as a network marketing company with a wide range of personal care products, weight management products, and food and dietary supplements worldwide. Our products are marketed through a network marketing system as well as through skin care salons, spas, clinics, and other retail outlets. Our independent distributors or sales associates earn profits by selling our products to retail consumers and other distributors. Distributors may also develop their own distributor organizations by sponsoring other distributors to do business in any market where the Company operates, entitling the sponsors to receive royalties and bonuses on product sales within their downline organizations. We believe this integrated network marketing system is 20 ideally suited to our products, which emphasize beauty and a healthy lifestyle, because sales of such products are strengthened by ongoing personal contact between retail consumers and distributors, many of whom use our products themselves. We believe our network marketing system will appeal to a broad cross-section of people throughout the world, particularly those seeking to supplement family income, start a home business or pursue employment opportunities other than conventional, full-time employment. BUSINESS DEVELOPMENT Our business was started by Jim Knut Larsson in 1997 with one product, the Omega Peel, which was marketed to skin care salons, spas and clinics. Since that time, we have developed and brought to market many additional products, including nutritional supplements, and have moved our product research and development and skin care product manufacturing in-house. We were incorporated as kNutek Holdings, Inc. on August 13, 2001, under the laws of the State of California. On September 4, 2001, we formed a wholly owned subsidiary in Delaware, kNutek International, Inc., to carry out our sales and marketing plan. Our unique product line is comprised of holistic products developed by our founder, Mr. Jim Knut Larsson, as well as products identified by him and purchased from other laboratories. Our goal is to make our clients look and feel great with the latest scientific products within the field of skin care and nutritional supplements. Our products are of therapeutic quality used in clinics for skin treatments, combining topically used products with supplements to be taken orally for unparalleled skin care and anti-aging results. We believe the key to our success is in our commitment to serving the needs of our distributors. We provide our distributors with high quality products and an appealing network marketing system with a highly attractive compensation program. We are developing a strong operating platform to support distributors and facilitate future growth. The key components of this platform include high quality products, an attractive distributor compensation program, distributor support services, advanced information systems, and a defined growth strategy. HIGH QUALITY PRODUCTS. We offer high quality products, many of which emphasize herbs and other natural ingredients in order to appeal to consumer demand for products that contribute to a healthy lifestyle. ATTRACTIVE DISTRIBUTOR COMPENSATION PROGRAM. We believe that we offer one of the most financially rewarding compensation programs in the network marketing industry through our wholly owned subsidiary, kNutek International, Inc. Distributors' earnings are derived from two primary sources: profits on the resale of products and a series of royalties and production bonuses on product sales within a distributor's down-line organization. COMPREHENSIVE DISTRIBUTOR SUPPORT SERVICES. We are committed to training and motivating our distributors. We strive to effectively and efficiently communicate with our distributor base by capitalizing on new technologies and marketing techniques. We regularly conduct motivational events and training seminars, both live and via teleconferences, and utilize a range of promotional literature, including catalogs and newsletters, tailored to meet the particular needs of our distributors. We seek to inspire distributor loyalty by making prompt product deliveries and royalty payments and by providing detailed distributor earnings statements. 21 GROWTH SRATEGY. Our strategy for growth consists of expansion into new markets and expansion of its product line. We continue to develop and offer new products and introduce existing products into markets where they are not currently offered. The expansion of our product offerings is designed to create enthusiasm among distributors and serve as a promotional tool in selling other products. In addition, we will continue our strategy of introducing our most popular existing products into markets where they are not currently offered (subject to our ability to reformulate its products as necessary to obtain required regulatory approvals). We will continue to seek to enhance sales in our existing markets. including training and motivational events and teleconferences, the hiring of additional distributor support representatives, the introduction of new products, and the opening of additional distributor service centers. PRODUCT OVERVIEW. We currently offer the following unique products and ingredients: . MSM (Organic Sulfur), used in skin care and as supplements. . Colostrum, for use in skin care and as supplements. . Omega Peel, a breakthrough exfoliant using a new technology in exfoliation, making the skin brighter, smoother and silkier in 90 seconds. . Microdermabrasion Cream, which replaces expensive microdermabrasion machines used in clinics for skin resurfacing and "instant face-lifts". . Oxygen Plasma, a substance originally developed as artificial blood by medical researchers that has demonstrated incredible results in skin care applications, including treatment of rosacea, acne and other previously untreatable skin conditions in addition to its beauty and anti-aging benefits. . The "Yes Gel", an external sexual stimulant cream for women. . And a variety of weight loss, anti-aging, diet, and nutritional supplement products marketed as a unified system based on the most up-to-date information obtained from scientific and medical research in this area, carefully developed to avoid health issues that have plagued other weight loss programs. Some of our products, such as the Omega Peel, are designed to bring in new customers, while others are designed to increase sales to existing customers. Our twofold product development strategy is to continuously work to create new product lines using new ingredients and scientific developments, while simultaneously adding depth to our existing product lines by developing new products using our existing ingredients and technologies. For example, a customer who has experienced great results with our skin care products containing MSM and Oxygen Plasma, may be inclined to purchase hair products with 22 the same ingredients. Similarly, Oxygen Plasma is effective in naturally killing anaerobic bacteria on the skin. It has been proven as well to kill the bacteria causing periodontitis of the gums, and so we may work to develop a toothpaste using Oxygen Plasma. In this way we plan to leverage "ingredient awareness" to sell entire product lines developed from a single set of ingredients. Along these lines, we are currently working to introduce a Microdermabrasion scrub for the body as an extension of our success with Microdermabrasion face cream. Our current goal is to introduce one new product every three months to hold the interest of our existing customers, while simultaneously expanding our base of new consumers. As the business grows, we anticipate we will be able to increase the pace of our new product development. In addition to our own new product development, we hope to utilize our growth to acquire some of the many small to medium sized private label companies and laboratories in the industry holding patents and other proprietary technologies, but with virtually no ability to conduct their own advertising or marketing. Acquisition of some of these companies will enable us to more rapidly expand our product offerings, and our marketing and distribution infrastructure will permit us to market these products much more effectively to existing markets and to leverage acquired technologies into additional unique products. SALES AND DISTRIBUTION METHODS. We view everything we do as contributing to sales of our products, and we have put extensive effort into honing our sales strategy as well as our general appearance to customers. The customers' kNutek experience is formed through every interaction with us. The salesperson's voice and manner over the telephone, the packaging for products delivered to the customer, the timeliness and accuracy of the shipment, the brochure and special offer materials inside the shipment are all part of our overall sales approach. Our web site is also an important part of our interaction with new and existing customers and distributors. Our web site gives new and existing customers and distributors a sense of community through the ability to obtain information, entertainment, and order products online. We have also developed a comprehensive, approach for our salespeople in working with our salons, spas and clinics. The strategy governs everything from the initial contact, using an introductory product to generate interest, to frequent telephone contacts to explain the full product line, offers to demonstrate products in person and identification of applicable discounts and promotions. Once an outlet has agreed to carry the products, we maintain frequent contact by phone, special mailings and a quarterly newsletter to discuss the products, product sales levels, announce local workshops and generally to make the outlet feel involved in helping to promote the products. We value our professional care facilities very highly as part of our sales and distribution network, giving new customers a place to learn about, sample, and purchase our products. Our sales and marketing plan is designed to support these establishments. In order to ensure that the professional care establishments are adequately compensated for sales they generate, we have integrated them into our network program. We foresee a great deal of crossover between sales by the professional establishments and our network sales associates. We have a sophisticated database to track sales origination and 23 ongoing sales support. We believe this is a truly unique aspect of our plan. We know of no other companies, in the network sales or retail arenas, that have gone to this length to maintain strong ties with a professional care base while making their products available on a mass-market basis. In addition to salons, spas and clinics, our products are distributed through a network marketing system consisting of an extensive network of distributors or sales associates. Distributors are generally independent contractors who purchase products directly from us or from other distributors for resale to retail consumers and other distributors. Distributors may elect to work on a full-time or part-time basis. We believe our network marketing system appeals to a broad cross-section of people worldwide, particularly those seeking to supplement family income, start a home business or pursue employment opportunities other than conventional, full-time employment, and that a majority of our distributors therefore work on a part-time basis. We believe our network marketing system is ideally suited to marketing our products because sales of such products are strengthened by ongoing personal contact between retail consumers and distributors, many of whom use our products themselves. We encourage distributors to use our products and to communicate the results of their use of such products to their retail customers. Distributors' earnings are derived from several sources. First, distributors may earn profits by purchasing our products at wholesale prices (which are discounted from suggested retail prices depending on the distributor's level within the Company's distributor network) and selling our products to retail customers at retail prices. Second, distributors may earn profits by selling products to other distributors who do not qualify for the same level of discount as the selling distributor. Third, distributors who sponsor other distributors and establish their own distributor organizations may earn royalties on product sales within their distributor organization and production bonuses on product sales within their down-line organizations. We believe that the right of distributors to earn royalties and production bonuses will contribute significantly to our ability to retain our most productive distributors. OUR MARKET. We are currently focused on two market segments. The first addresses beautification and fitness, primarily in the baby boom generation, and the second addresses the therapeutic needs of people with skin diseases, abnormal skin conditions and other physiological conditions that respond to skin treatments, nutritional supplements and herbs. The beauty and fitness market segment consists largely of middle to upper class women between 35 to 65 years of age who are conscious of their beauty, fitness, and health. These are women who go to salons or spas for facials and other anti- aging or beauty treatments. The consumer non-durables industry sector produces household products as well as personal care items, such as our products. Worldwide, it is estimated that consumers spend about $120 billion on these everyday items, with the U.S. accounting for about 25% of the total. [6] The market for over-the-counter health products, such as dietary and weight-loss aids, nutritional products and vitamins, supplements, and other health-related products, is not included in this $120 billion dollar figure. Although the U.S., Canada, Europe and Japan consume the vast majority of personal care products worldwide, companies are being forced to look beyond those markets for growth in the personal care segment. A slowdown in population growth and market saturation have reduced the growth potential in these traditionally targeted _________________________ 6 Guy Holland, "Personal Care & Household Cleaning Products" Hoover's Online 5/17/02. 24 markets and have increased the perceived value of global brands. [7] We believe that the aging of the baby boomer generation will lead to an increasingly strong market for both over-the-counter health as well as personal care products in the U.S. in coming years. The therapeutic market segment is comprised of people with skin diseases, abnormal skin conditions and other physiological conditions, especially acne, rosacea, psoriasis, eczema and scars, who go to salons, spas and clinics seeking professional treatment. We promote the therapeutic uses of our products through skin care experts. The high level of credibility of these professionals is extremely advantageous to our marketing efforts in this segment. The market potential of this segment is very significant. For example, acne rosacea is a skin condition affecting at least 14 million people in the U.S. alone, and is considered incurable by the medical community. Our Oxygen Plasma has proven to be an effective treatment for reducing the effects of this condition when applied in salons and clinics. We believe this represents a small percentage of the overall therapeutic market segment. The salon market is fragmented, with approximately 230,000 salons in the U.S. comprised of an estimated 12,000 skin care salons, spas and clinics, 50,000 full service salons (offering hair styling, skin care and/or nail care), and the remainder made up of hair and nail salons. To date, we have only actively marketed ourselves to the estimated 12,000 skin care salons. We will pursue the larger segment of the salon market with the introduction of our hair product line, which will work synergistically with our skin care products, and expand the reach of our salon distribution network up to 20 times. Of the estimated 12,000 skin care salons, spas and clinics in the U.S. we are currently targeting, our products have been sold to approximately 2,500 or 20%. Our marketing plan is designed to fold these existing sales outlets into a larger network marketing infrastructure to ensure that consumers have access to our products and to the beauty and health professionals who can demonstrate, promote and administer the products. Both of our target markets have a very important common denominator in so far as they less sensitive to price than perceived value and have high degrees of product loyalty. Potential customers in both markets can also be reached through "opinion leaders" and can be educated verbally as to the benefits of the products by professional authorities. Our marketing strategy therefore focuses on generating name recognition among the general public, and at the same time educating beauty and health care professionals as to the benefits and unique qualities of our products. We believe pricing can help support the perceived value of a product and promote sales through word of mouth. Our Oxygen Plasma, for example, is positioned as a luxury item and is expensive enough to be the subject of discussion among customers and distributors. Having thus sparked a heightened level of interest in the product, we give away samples so customers will try it. Further, we bundle products together into regimens with significant package discounts, thereby up-selling our existing customers. We have developed a multi-level marketing plan to include our customers in our sales efforts. Our multi-level marketing plan links salons, clinics, spas, kiosks and network sales associates into a unified framework in which all parties benefit from product referrals, so the kNutek brand will be presented to prospective customers through numerous channels. We believe we are unique in the health and beauty industry in promoting this integrated approach. ______________________________ 7 Id. 25 OUR MATERIALS AND SUPPLIERS. New product development and identification of new ingredients is an important part of our operation. We review major trade magazines for newly available raw materials and suppliers. However, most of our new product ideas are formulated based on review of scientific developments applicable to our industry. We have the capacity to manufacture products from scratch, but because such production can be complex and costly, we prefer to do so only when necessary to maintain proprietary technology and information. We anticipate that as we grow, we will start to produce more of our products in-house from start to finish. A much more economical solution for the present is to purchase the "base" for a skin care product from a larger manufacturer and then add our own proprietary ingredients at our facility to make our products unique. This allows us to create some of the most sophisticated products on the market without the complexity and costs associated with manufacturing products from scratch. Raw materials and base products are readily available from multiple sources in the industry. All of our weight management products and food and dietary supplements are manufactured by outside companies. The Company does not own the proprietary rights to its weight management products and food and dietary supplements such that there can be no assurance that another company will not replicate one of our products. We work with a variety of outside third party suppliers for product manufacturing. PRODUCT RETURN AND BUY-BACK POLICIES. All of our products include a customer satisfaction guarantee. Within thirty days of purchase, any customer who is not satisfied with one of our products for any reason may return it or any unused portion of it to the Company for a full refund or credit toward purchase of another product. Distributors may obtain replacements from the Company for products returned to them by consumers if they return such products to the Company on a timely basis. Historically, product returns and buy-backs have not been significant. COMPETITION. We place a strong emphasis on marketing proprietary products with the latest medical or technical knowledge and ingredients. We are committed to positioning our products as superior to the competition and maintaining a reputation for innovative product development. Rather than trying to create product offerings comparable to our competitors, we strive to create distinctive products that offer significant improvements over those of our competitors. We also intend to be an industry leader in the development of innovative marketing channels. Whereas most health and beauty companies rely heavily on trade magazine advertising, we have utilized our own mailing lists to send targeted promotions to skin care salons, spas and clinics, as well as to our retail customers. As our marketing plan develops, we intend to place a strong emphasis on television and radio advertising, media traditionally ignored by the health and beauty industry. These advertising approaches communicate directly to the end users of our products to pull customers into our distribution network. 26 We are subject to significant competition for the recruitment of distributors from other network marketing organizations, including those that market personal care products, weight management products, and food and dietary supplements, as well as other types of products. Many of our competitors are substantially larger and have available considerably greater financial resources than we do. Our ability to remain competitive depends, in significant part, on our success in recruiting and retaining distributors through an attractive compensation plan and other incentives. We believe that our compensation and incentive programs provide our distributors with significant earning potential. However, there can be no assurance that our programs for the recruitment and retention of distributors will be successful. In addition, the business of marketing personal care products, weight management, and food and dietary supplements is highly competitive. This market segment includes numerous manufacturers, distributors, marketers, retailers and physicians that actively compete for the business of consumers both in the United States and abroad. The market is highly sensitive to the introduction of new products or weight management plans (including various prescription drugs) that may rapidly capture a significant share of the market. As a result, our ability to remain competitive depends in part upon our ongoing success at introducing new products. Our competitors include Aveda, Herbalife, L'Oreal, Dermalogica, Nu Skin Enterprises, Shiseido, MD Formulations, Avon, Dr. Murad, BeautiControl Cosmetics, Nature's Sunshine, Estee Lauder Companies, Forever Living Products International, GNC, and Mary Kay, among many others. INTELLECTUAL PROPERTY. We use the umbrella trademarks "kNutek" and a stylized "K" and several other trademarks and tradenames in connection with our products and operations. We consider our trademarks and tradenames to be an important factor in our business. Our product formulations are not protected by patents and are generally not patentable. We have applied for Federal Trademark protection for our stylized "K" and the "kNutek" name with the U.S. Patent and Trademark Office. GOVERNMENTAL APPROVALS AND REGULATION. In both its United States and foreign markets, we are subject to and affected by extensive laws, regulations, administrative determinations, court decisions and similar constraints (as applicable, at the federal, state and local levels) (hereinafter "regulations") including, among other things, regulations pertaining to (i) the formulation, manufacturing, packaging, labeling, distribution, importation, sale and storage of our products, (ii) product claims and advertising (including direct claims and advertising by the Company as well as claims and advertising by distributors, for which we may be held responsible), (iii) our network marketing system, (iv) transfer pricing and similar regulations that affect the level of foreign taxable income and customs duties, and (v) taxation of distributors, which in some instances may impose an obligation on the Company to collect taxes and maintain appropriate records. The formulation, manufacturing, packaging, storing, labeling, advertising, distribution and sale of our products may be subject to regulation by one or more governmental agencies, including the Food and Drug Administration ("FDA"), the Federal Trade Commission ("FTC"), the Consumer Product Safety Commission ("CPSC"), the United States Department of Agriculture ("USDA"), the Environmental Protection Agency ("EPA") and the United States Postal Service. Our activities may also be regulated by various agencies of the states, localities and foreign countries in which our products are manufactured, distributed and sold. The FDA, in particular, regulates the formulation, 27 manufacture and labeling of foods, dietary supplements and OTC drugs, such as those distributed by the Company. FDA regulations require that we and our suppliers meet relevant good manufacturing practice ("GMP") regulations for the preparation, packing and storage of many of these products. Manufacturers of dietary supplements which make a "statement of nutritional support" must have substantiation that the statement is truthful and not misleading. The majority of the dietary products marketed by the Company are classified as dietary supplements and do not have clearly established labeling requirements. Many states have become active in the regulation of dietary supplement products and may require the Company to modify the labeling or formulation of certain products sold in those states. As a marketer of food and dietary supplements and other products that are ingested by consumers, we are subject to the risk that one or more of the ingredients in its products may become the subject of adverse regulatory action. With changing regulation and varying regulation across jurisdictions, there is a risk that one or more of our products may become subject to further federal, state, local or foreign laws or regulations, which could result in us having to: (i) withdraw or reformulate one or more of our products, and/or (ii) re-label one or more of our products with different warnings or revised directions for use, and/or (iii) refrain from making certain statements with respect to one or more products. Even in the absence of further laws or regulation, we may elect to reformulate and/or re-label our products as more information becomes available with regard to such products or their ingredients. It is a regular part of our business to monitor regulatory developments in the markets in which we participate and to determine the optimal strategy in each instance in which such a development arises. Some of our products are considered conventional foods and are currently labeled as such. Both this category of products and dietary supplements are subject to the Nutrition, Labeling and Education Act ("NLEA"), and regulations promulgated thereunder, which regulates health claims, ingredient labeling and nutrient content claims characterizing the level of a nutrient in the product. A limited number of the products sold by the Company may be labeled as OTC drugs as opposed to dietary supplements, conventional foods or personal care items. Many OTC drug products do not require pre-approval by the FDA, but must comply with applicable OTC monographs, which prescribe permissible ingredients and appropriate labeling language. In addition, either the Company or its supplier must register and file annual drug listing information with the FDA for such products. Because the FDA could take the position that claims made with respect to any of our products fall within an OTC monograph, the regulatory status of some of our products is or could become unclear. If any enforcement were undertaken, we could be required to relabel or reformulate such products, which we believe we could do without any material adverse effect on our business. In foreign markets, prior to commencing operations and prior to making or permitting sales of our products in the market, we may be required to obtain an approval, license or certification from the country's ministry of health or comparable agency. Such approvals may be conditioned on reformulation of our products or may be unavailable with respect to certain products or certain ingredients. Product reformulation or the inability to introduce certain products or ingredients into a particular market may have an adverse effect on sales. We must also comply with product labeling and packaging regulations that 28 vary from country to country. Our failure to comply with such regulations can result in, among other things, a product being removed from sale in a particular market, either temporarily or permanently. The FTC, which exercises jurisdiction over the advertising of all of our products, has instituted enforcement actions against a number of dietary supplement companies for false and misleading advertising of certain products. In some cases, these enforcement actions have resulted in consent decrees and monetary payments by the companies involved. In addition, the FTC has increased its scrutiny of the use of testimonials, which are utilized by the Company. While we have not been the target of any FTC enforcement action for the advertising of our products, there can be no assurance that the FTC will not question our advertising or other operations in the future. In certain countries, we may also be affected by regulations applicable to the activities of its distributors because in some countries we are, or regulators may assert that we are, responsible for our distributors' conduct, or such regulators may request or require that we take steps to ensure our distributors' compliance with regulations. The types of regulated conduct include, among other things, representations concerning our products, income representations made by the Company and/or distributors, public media advertisements (which in foreign markets may require prior approval by regulators) and sales of products in markets in which such products have not been approved, licensed or certified for sale. In certain markets, it is possible that improper product claims by distributors could result in our products being reviewed or re-reviewed by regulatory authorities and, as a result, being classified or placed into another category as to which stricter regulations are applicable. In addition, certain labeling changes might be required. However, our distributors are generally independent contractors, and we are not able to monitor directly all distributor activities. As a consequence, there can be no assurance that our distributors will comply with applicable regulations. Misconduct by distributors could have a material adverse effect on the Company in a particular market or in general. The Company is unable to predict the nature of any future laws, regulations, interpretations or applications, nor can it predict what effect additional governmental regulations or administrative orders, when and if promulgated, would have on its business in the future. They could, however, require the reformulation of certain products not able to be reformulated, imposition of additional recordkeeping requirements, expanded documentation of the properties of certain products, expanded or different labeling and scientific substantiation regarding product ingredients, safety or usefulness. Any or all such requirements could have a material adverse effect on our results of operations and financial condition. Our network marketing system is subject to a number of federal and state regulations administered by the FTC and various state agencies as well as regulations in foreign markets administered by foreign agencies. Regulations applicable to network marketing organizations are generally directed at ensuring that product sales are ultimately made to consumers (as opposed to other distributors) and that advancement within such organizations be based on sales of the organizations' products rather than investments in the organizations or other non-retail sales related criteria. For instance, in certain markets there are limits on the extent to which distributors may earn royalties on sales generated by distributors that were not directly sponsored by the distributor. 29 Where required by law, we obtain regulatory approval of our network marketing system or, where such approval is not required, the favorable opinion of counsel as to regulatory compliance. However, we remain subject to the risk that, in one or more of our markets, our marketing system could be found not to be in compliance with applicable regulations. Failure by the Company to comply with these regulations could have a material adverse effect on our business. We are also subject to the risk of challenges to the legality of our network marketing system. For example, in Webster V. Omnitrition International, Inc., 79 F.3d 776 (9th Cir. 1996), the "multi-level marketing" program of Omnitrition International, Inc. ("Omnitrition") was challenged in a class action by certain Omnitrition distributors who alleged that Omnitrition was operating an illegal "pyramid scheme" in violation of federal securities laws, state unfair practice and fraud laws and the Racketeer Influenced and Corrupt Organizations Act. Initially, the trial court in that case rendered summary judgment in favor of Omnitrition because the court found that Omnitrition had adopted policies designed to encourage retail sales that took the program outside the definition of a fraudulent pyramid scheme. The importance of such policies was established by two FTC cases. The first, In Re Koscot Interplanetary, Inc., 86 F.T.C. 1106 (1975), set forth a standard for determining whether a marketing system constituted a pyramid scheme. Under the Koscot standard, a pyramid scheme is characterized by the participants' payment of money to a company in return for (i) the right to sell a product and (ii) the right to receive, in return for recruiting other participants into the program, rewards that are unrelated to sales of the product to ultimate users. Applying the Koscot standard in In Re Amway Corp., 93 F.T.C. 618 (1979), the FTC determined that a company will not be classified as operating a pyramid scheme if it adopts and enforces policies that in fact encourage retail sales to consumers and prevent "inventory loading" (i.e., distributors' purchases of large quantities of non-returnable inventory to obtain the full amount of compensation available under the system). In Amway, the FTC found that Amway Corp.'s marketing system did not constitute a pyramid scheme, noting the following Amway policies: (i) participants were required to buy back, from any person they recruited, any saleable, unsold inventory upon the recruit's leaving Amway; (ii) every participant was required to sell at wholesale or retail at least 70% of the products bought in a given month in order to receive a bonus for that month; and (iii) in order to receive a bonus in a month, each participant was required to submit proof of retail sales made to ten different consumers. The U.S. appellate court in Omnitrition reversed the trial court decision and decided that triable issues of fact existed regarding whether Omnitrition's marketing system constituted a pyramid scheme under the Koscot standard. The appellate court emphasized the second of the Koscot tests, indicating that the right to earn compensation for, in effect, recruiting other participants into the marketing system, which compensation is unrelated to the sale of products to ultimate consumers, made the Omnitrition marketing system a pyramid scheme "on its face." As such, the appellate court indicated that Omnitrition was required to present evidence that the program's safeguards were enforced and actually served to deter inventory loading and encourage retail sales. The appellate court commented negatively on the fact that Omnitrition paid compensation to participants based on the suggested retail price of products ordered from the Company, rather than based on actual sales to consumers. The appellate court also rejected Omnitrition's argument that personal consumption of a product by a distributor could count towards satisfying the requirement that sales be to "ultimate users." 30 As is the case with other network marketing companies, the compensation we pay to our distributors is based in part on their own orders, which may include orders for products that they personally consume. We have retained special counsel to assist us in all aspects of the structure and implementation of our marketing plan and believe our network marketing system complies with existing law and does not and will not constitute a pyramid scheme under the standards set forth in Koscot, Amway, Omnitrition and other applicable law. In particular, in most jurisdictions (including the U.S.), in order to address the problem of "inventory loading," we make available an inventory buy-back program. As an ongoing part of our business, we monitor and respond to regulatory and legal developments, including those that may affect our network marketing system. However, there can be no assurance that the legality of our network marketing system would be upheld under the standards set forth in Koscot, Amway, Omnitrition and other applicable law, and any adverse decision in this regard could have a material adverse effect on our business. Among other things, such a decision could require that we make modifications to our network marketing system, result in negative publicity or have a negative impact on distributor morale, and any of these results could have a material adverse effect on our business. Further, adverse rulings in litigation involving other companies that employ network marketing systems could have a material adverse effect on our business, even if our network marketing system is not itself challenged or deficient. TOTAL NUMBER OF EMPLOYEES AND NUMBER OF FULL TIME EMPLOYEES. We currently have a total of eight (8) employees, all of which are full time employees of the company. REPORTS TO SECURITIES HOLDERS We intend to file regular reports with the Securities Exchange Commission. The public may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and information statement, and other information regarding issuers that file electronically with the SEC at www.sec.gov. Our web site address is www.knutek.com. Item 17. Management's Discussion and Analysis. THIS DOCUMENT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, INCLUDING, WITHOUT LIMITATION, STATEMENTS REGARDING OUR EXPECTATIONS, BELIEFS, INTENTIONS OR FUTURE STRATEGIES THAT ARE SIGNIFIED BY THE WORDS "EXPECTS", "ANTICIPATES", "INTENDS", "BELIEVES", OR SIMILAR LANGUAGE. THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS, UNCERTAINTIES AND OTHER FACTORS. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS PROSPECTUS ARE BASED ON INFORMATION AVAILABLE TO US ON THE DATE HEREOF AND SPEAK ONLY AS OF THE DATE HEREOF. THE FACTORS DISCUSSED BELOW UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS ARE AMONG THOSE FACTORS THAT IN SOME CASES HAVE AFFECTED OUR RESULTS AND COULD CAUSE THE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS. 31 The following discussion should be read in conjunction with the Financial Statements and Notes thereto. In the past twelve months, there has been a significant increase in spa, salon and skin care clinic closures due to changes in the economy. Trade show attendance is down in our industry. The therapeutic portion of the industry is fairing better than the relaxation and new age portion of the industry which is viewed as more discretionary. This has created an opportunity for the company to work with spas, salons, and skin care clinics to help them develop their mail order business, retain existing clients, and benefit from former clients. One of our strategies for marketing through these outlets is to do a joint marketing mailer to the existing and former clients of the outlet to promote our products and encourage customers to return to the retail facility for consultation and treatment. We believe we are well-positioned to take advantage of the current market conditions. The current economy may also lend itself to the ability to recruit additional distributors who might not otherwise consider self- employment. We have a limited operating history on which to base an evaluation of our business and prospects. Our prospects must be considered in light of the risks, expenses and difficulties encountered by companies in their early stage of development. See "Risk Factors" for a more complete description of the many risks we face. In the year 2000, we had an extremely small operation and were profitable. We have gone from being a boutique operation with three employees developing products and selling products to spas, salons, and skin care clinics to an operation with a broad multi-level marketing plan and an increased line of products in 2001. We also changed our name in the interest of brand-building with a name we could protect from a intellectual property perspective. This transition has required an investment in a sales office, a website, software for the implementation of our network marketing system, infomercial production, and other changes to our infrastructure to support our growth. In 2001, we also established our subsidiary, kNutek International, Inc. to implement our network marketing system. We established a facility in Columbus, Ohio, to host our marketing seminars and provide resources for our distributors based in that area. We did not begin to roll-out our network marketing system until late in 2001. Our sales increased $352,000 or 90% from 2000 to 2001, due to an increased marketing effort by the company. Our cost of goods sold increased $172,000 or 134% in 2001 as compared with the prior year. Cost of goods sold as a percentage of sales increased from 33% to 40% from 2000 to 2001 due to a change in product mix with lower margins. Our gross margin will fluctuate based on a number of factors, including, but not limited to, the cost of our products and supplies, including the extent of purchase volume discounts that we are able to obtain from suppliers, our pricing strategy relative to the cost of our products, the mix of products our customers purchase, our shipping pricing strategy relative to the cost of shipping, our distribution and fulfillment strategy, the extent to which we are able to control product damage, and shrinkage and expiration though inventory management practices. 32 General and administrative expense consists primarily of payroll and related expenses for executive and administrative personnel, corporate facility expenses, professional services, travel and other general corporate expenses. General and administrative expense increased from 2000 to 2001 primarily due to increased expenses associated with the addition of general and administrative personnel, additional professional fees and the cost of corporate facilities. We expect general and administrative expense to increase as we expand our staff and incur additional costs related to the anticipated growth of our business and being a public company. Selling, general and administrative expenses increased approximately $455,000 in 2001 versus 2000. The major increases in this area were in legal and consulting fees of $105,000 and $94,000, respectively, which were largely due to the company's planned merger and registration statement. We incurred an acquisition cost of $250,000 in 2001 in connection with our acquisition of Domestic Transmission Technologies, Inc. Marketing and sales expense consists primarily of commissions to our network marketing participants, advertising and promotional expenditures, distribution expenses, including order processing and fulfillment charges, equipment and supplies, and payroll and related expenses for other personnel engaged in marketing, merchandising, customer service, distribution and fulfillment activities. Our marketing and sales expenses continue to increase due to the establishment of our network marketing program, infomercial production and television airtime, and other expenses we incur as part of our marketing strategy. We intend to continue to pursue an aggressive marketing campaign and, therefore, expect marketing and sales expenses to increase. Marketing and sales expenses may vary considerably from quarter to quarter depending on the timing of our infomercial campaigns and the rate at which we expand our distribution and fulfillment activities. The additional $60,000 we spent in marketing costs in 2001 as compared with 2000 helped generate an increase in sales, while the increase of $136,000 in wages and commissions in 2001 is due to increased sales. Since inception, we have financed our operations primarily through operations and the private sale of our common stock. Our working capital remained approximately the same in 2001 as compared with 2000. Receivables increased $17,564 primarily due to increased sales being uncollected at year-end. Prepaid expenses of $20,488 in 2001 were for legal and accounting fees. Inventory increased over $31,000 as we needed to carry larger inventories to support our sales growth. Trade payables increased due to increased inventory and the increase in our cash position. Accrued liabilities increased in 2001 primarily due to consulting fees accrued but unpaid at year-end. We currently will rely on internally generated cash flow for our short-term liquidity. For the long-term, we anticipate raising funds through the capital markets to finance our ongoing growth and new business opportunities. Presently, we have no plans for capital expenditures. However, we anticipate capital expenditures will eventually be required, in part as a result of the equipment and facilities needed to support our continued growth in operations, infrastructure and personnel. If we raise additional funds through the issuance of equity, equity-related or debt securities, such securities may have rights, preferences or privileges senior to those of the rights of our common stock and our stockholders may experience dilution. We cannot be certain that additional financing will be available to us on acceptable terms when required, or at all. 33 Item 18. Description of Property. Our principal offices and operations are located at 2713 and 2715 San Pablo Avenue, Berkeley, California, 94702. Our Berkeley facility houses our executive offices, warehouse, laboratory and production facilities on approximately 3000 square feet with an additional 1000 square feet of outside storage space. We have a month to month lease on this property. Through our wholly owned subsidiary, kNutek International, Inc., we also have leased offices at 2586 Tiller Lane, Suite 1A, Columbus, Ohio, 43231. Item 19. Certain Relationships and Related Transactions. Except as noted below, none of the following parties has, since our date of incorporation, had any material interest, direct or indirect, in any transaction with us or in any presently proposed transaction that has or will materially affect us: - - Any of our directors or officers; - - Any person proposed as a nominee for election as a director; - - Any person who beneficially owns, directly or indirectly, shares carrying more than 10% of the voting rights attached to our outstanding shares of common stock; - - Any of our promoters; - - Any relative or spouse of any of the foregoing persons who has the same house as such person. Shortly after our formation, our President, Mr. Larsson entered into an Asset Transfer Agreement with the company where by Mr. Larsson transferred of all of the assets of the operating business formerly known as GAIA International pursuant to Section 351 of the Internal Revenue Code of 1986, as amended, to the company in exchange for six million (6,000,000) shares of the company's common stock. Our board of directors, of which Mr. Larsson is a member, determined that the fair market value of the assets so transferred and acquired was sixty thousand dollars ($60,000). Item 20. Market for Common Equity and Related Stockholder Matters. NO PUBLIC MARKET There is presently no public market for our common stock. We anticipate applying for trading of our common stock on the over the counter bulletin board upon the effectiveness of the registration statement of which this prospectus forms a part. However, we cannot assure investors that our shares will be traded on the bulletin board or, if traded, that a public market will materialize for our common stock. HOLDERS OF OUR COMMON STOCK As of the date of this registration statement, we had 458 registered shareholders. REGISTRATION RIGHTS We have not granted registration rights to the selling shareholders or to any other persons aside from the following (which will be satisfied as the result of the effectiveness of this registration statement): Mackenzie Shea, Inc. and International Assets Services & Holdings, Ltd. 34 DIVIDENDS There are no restrictions in our articles of incorporation or bylaws with regard to the declaration of dividends. However, the declaration of a dividend must be permitted under the corporate laws of the State of California. To date, we have not declared any dividends. We do not plan to declare any dividends in the foreseeable future. RULE 144 SHARES Not including shares being registered by way of this registration statement, a total of seven million, thirty thousand (7,030,000) shares of our common stock will be available for resale to the public after August 21, 2002, in accordance with the volume and trading limitations of Rule 144 of the Act. In general, under Rule 144 as currently in effect, a person who has beneficially owned shares of a company's common stock for at least one year is entitled to sell within any three month period a number of shares that does not exceed the greater of: 1. 1% of the number of shares of the company's common stock then outstanding which, in our case, will equal approximately ninety thousand (90,000) shares as of the date of this prospectus; or 2. The average weekly trading volume of the company's common stock during the four calendar weeks preceding the filing of a notice on form 144 with respect to the sale. Sales under Rule 144 also must comply with manner of sale provisions and notice requirements and to the availability of current public information about the company. Under Rule 144(k), a person who is not one of the company's affiliates at any time during the three months preceding a sale, and who has beneficially owned the shares proposed to be sold for at least 2 years, is entitled to sell shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. As of the date of this prospectus, persons who are our affiliates hold five million, nine hundred fifty thousand of the shares that may be sold pursuant to Rule 144 after August 21, 2002. Item 21. Executive Compensation.
SUMMARY COMPENSATION TABLE Long Term Compensation ------------------------ Annual Compensation Awards Payouts ----------------------------- ---------------------- -------- Securities All Name and Other Annual Restricted Underlying LTIP Other Principle Year Salary Bonus Compensation Stock Options/ Payouts Compensa- Position ($) ($) ($) Awards ($) SARs (#) ($) tion - --------- ---- ------ ----- ------------ ---------- ---------- -------- ---------- Jim Knut Larsson, President 2001 0 8,633 0 0 0 0 0 2000 N/A 0 N/A 0 0 0 0 1999 N/A 0 N/A 0 0 0 0 Myra 0 0 0 0 0 0 Dudley, 2001 44,450 Director 2000 35,303 0 0 0 0 0 0 1999 28,500 0 0 0 0 0 0
Note: The estimated value of the personal or "fringe" benefits provided to Mr. Larsson by the company, which benefits included health insurance, health club membership, use of a company car, and other personal expenses. COMMITTEES OF THE BOARD OF DIRECTORS We do not currently have an audit committee, compensation committee or any other committee of the board of directors. DIRECTORS' COMPENSATION Directors who are also our employees receive no additional compensation for serving on the board. We do not currently have any non-employee directors. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION We did not have a compensation committee or any other committee of the board of directors performing similar functions during the years ended December 31, 2000 and 2001. Mr. Jim Knut Larsson, our President, participated in deliberations of the board of directors relating to his compensation. EMPLOYMENT AGREEMENTS We do not have employment or consultant agreements with either of our directors or executive officers. We do not have any agreements providing for the future compensation of our directors or executive officers. STOCK OPTION GRANTS Our directors and shareholders have adopted and approved a stock option and stock issuance plan and have reserved one million (1,000,000) shares of our common stock for issuance pursuant to the plan. However, we have not granted any stock options to our directors or executive officers. Item 22. Financial Statements. The audited Financial Statements as of December 31, 2001 and for the years ended December 31, 2001 and 2000 are attached and incorporated. Item 23. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure. We have no disagreements with our current or any other auditors for the company. 36 PART II Item 24. Indemnification of Directors and Officers. Our articles of incorporation and bylaws provide that the personal liability of the directors and officers of this corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. Pursuant to Sections 204 and 317 of the California Corporations Code, a corporation generally has the power to indemnify its present and former directors, officers, employees and agents against expenses incurred by them in connection with any suit to which they are, or are threatened to be made, a party by reason of their serving in such positions so long as they acted in good faith and in a manner they reasonably believed to be in the best interests of the corporation, and with respect to a manner they reasonably believed to be in the best interests of the corporation, and with respect to any criminal action, they had no reasonable cause to believe their conduct was unlawful. A corporation may not eliminate liability: (i) for acts or omissions involving intentional misconduct or knowing and culpable violations of law; (ii) for acts or omissions that the individual believes to be contrary to the best interests of the corporation or its shareholders or that involve the absence of good faith on the part of the individual; (iii) for any transaction from which the individual derived an improper personal benefit; (iv) for acts or omissions involving a reckless disregard for the individual's duty to the corporation or its shareholders when the individual was aware or should have been aware of a risk of serious injury to the corporation or its shareholders; (v) for acts or omissions that constitute an unexcused pattern of inattention that amounts to any abdication of the individual's duty to the corporation or its shareholders; or (vii) for improper distribution to shareholders and loans to directors and officers. Also, a corporation may not eliminate liability for any act or omission occurring prior to the date on which the corporation authorizes indemnification of its directors, officers, employees and agents. We currently do not have directors' and officers' liability insurance to defend and indemnify directors and officers who are subject to claims made against them for their actions and omissions as directors and officers. We intend to purchase this insurance when funds are available. Item 25. Other Expenses of Issuance and Distribution. The following table sets forth an itemization of various expenses, all of which we will pay, in connection with the sale and distribution of the securities being registered. All of the amounts shown are estimates, except the Securities and Exchange Commission registration fee. Securities and Exchange Commission Registration Fee . . . . . . $ 200 Accounting Fees and Expenses . . . . . . . . . . . . . . . . . . $ 25,000 Legal Fees and Expenses . . . . . . . . . . . . . . . . . . . . $ 40,000 Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,000 -------- Total . . . . . . . . . . . . . . . . . . . . . . . . . $ 70,200 37 Item 26. Recent Sales of Unregistered Securities. Within the past three years, we sold securities without registration under the Securities Act of 1933, as amended (the "Act") as follows: Date, Title and Names of Consideration Exemption From Amount of Securities Investors Received Registration Offered and Sold - -------------------- -------------- ------------- ---------------- August 21, 2001 One individual $5,000 Section 4(2) of 6,000,000 shares of (1) the Act common stock August 21, 2001 One corporation $5,000 Section 4(2) of 1,749,999 shares of (2) the Act common stock September 28, 2001 One corporation $1,000,000 [8] Regulation S of option to purchase up (3) the Act to 1,000,000 shares of common stock (1) A total of 6,000,000 shares of common stock were issued to Jim Knut Larsson in exchange for assets with a net book value of $5,000 and as founders shares. The Company relied on an exemption under the Securities Act of 1933, pursuant to Section 4(2) thereunder. Mr. Larsson is an officer and directors of the Company. (2) A total of 1,749,999 shares of common stock were issued in exchange for services valued at $5,000 performed by Mackenzie Shea, Inc. pursuant to a consulting agreement. The Company relied on an exemption under the Securities Act of 1933, pursuant to Section 4(2) thereunder. (3) An option was issued to International Asset Services & Holdings, Ltd. to purchase up to 1,000,000 shares of common stock of the Company at $1.00 per share. The option was given without compensation. A total of 1,000,000 shares of common stock were issued pursuant to the option.[9] The Company relied on an exemption under the Securities Act of 1933, pursuant to Regulation S thereunder, for the issuance of both the option and the underlying shares. ____________________________ 8 This assumes that a $50,000 wire initiated by our investor is located and credited to the company, which we anticipate will be resolved prior to the effective date of this registration statement. 9 This assumes that a $50,000 wire initiated by our investor is located and credited to the company, which we anticipate will be resolved prior to the effective date of this registration statement. 38 Item 27. Exhibits. EXHIBIT NUMBER DESCRIPTION - ------------- -------------------- 3.1 Articles of Incorporation 3.2 Bylaws 21 List of Subsidiaries 23 Consent of Hansen, Barnett & Maxwell, Independent Certified Public Accountants Item 28. Undertakings. (a) The undersigned registrant hereby undertakes to: (1) File, during any period in which offers or sales are being made, a post- effective amendment to this registration statement: (i) to include any prospectus required by section 10(a)(3) of the securities act of 1933; (ii) to reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually, or in the aggregate, represent a fundamental change in the information set forth in the registration statement; notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the commission pursuant to rule 424(b) (230.424(b) of this chapter) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "calculation of registration fee" table in the effective registration statement; and (iii) to include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the registration statement is on Form S-3 or Form S-8, and the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed by the registrant pursuant to Section 13 or Section 15(d) of the Securities and Exchange of 1934 that are incorporated by reference in the registration statement. 39 (2) That, for the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (b) The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act, each filing of the registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934, that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. 40 SIGNATURES In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements of filing on Form SB-2 and authorized this registration statement to be signed on its behalf by the undersigned, in the City of Berkeley, State of California, on June 18, 2002. KNutek Holdings, Inc. By: /s/ Jim Knut Larsson ------------------------------- Jim Knut Larsson, President, Chief Financial Officer, and Director By: /S/ Myra Dudley ------------------------------- Myra Dudley, Director 41 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Certified Public Accountants F-2 Consolidated Balance Sheet - December 31, 2001 F-3 Consolidated Statements of Operations for the Years Ended December 31, 2001 and 2000 F-4 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2000 and 2001 F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 2001 and 2000 F-6 Notes to Consolidated Financial Statements F-7 F-1 HANSEN, BARNETT & MAXWELL (801) 532-2200 A Professional Corporation Fax (801) 532-7944 CERTIFIED PUBLIC ACCOUNTANTS 5 Triad Center, Suite 750 Salt Lake City, Utah 84180 www.hbmcpas.com REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders kNutek Holdings, Inc. We have audited the accompanying consolidated balance sheet of kNutek Holdings, Inc. and Subsidiaries as of December 31, 2001 and the related consolidated statements of operations, stockholders' equity, and cash flows for the years ended December 31, 2001 and 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of kNutek Holdings, Inc. and Subsidiaries as of December 31, 2001 and the results of their operations and their cash flows for the years ended December 31, 2001 and 2000, in conformity with accounting principles generally accepted in the United States. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. During the year ended December 31, 2001 the Company had a net loss of $475,864, used $406,723 to fund operations and at December 31, 2001 had $38,391 in working capital. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. /S/ HANSEN, BARNETT & MAXWELL Salt Lake City, Utah June 11, 2002 F-2 KNUTEK HOLDINGS, INC. CONSOLIDATED BALANCE SHEET DECEMBER 31, 2001 ASSETS Current Assets Cash and cash equivalents $ 95,563 Receivables 22,454 Prepaid expenses 20,488 Inventory 42,191 --------- Total Current Assets 180,696 --------- Property and Equipment Furniture and fixtures 20,860 Equipment 16,190 Automobiles 4,360 Less: accumulated depreciation (8,987) --------- Net Property and Equipment 32,423 --------- Other Assets-Deposits 3,000 --------- Total Assets $ 216,119 ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Trade accounts payable $ 56,035 Accrued liabilities 80,246 Obligation under capital lease- current portion 6,024 --------- Total Current Liabilities 142,305 --------- Obligation Under Capital Lease- Long-Term Portion 5,540 --------- Stockholders' Equity Common stock no par value; 20,000,000 shares authorized; 8,249,999 and 6,000,000 shares issued and outstanding, respectively 510,000 Accumulated deficit (441,726) --------- Total Stockholders' Equity 68,274 --------- Total Liabilities and Stockholders' Equity $ 216,119 ========= See the accompanying notes to consolidated financial statements. F-3 KNUTEK HOLDINGS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended December 31, ----------------------- 2001 2000 ---------- ---------- Sales $ 744,040 $ 391,986 Cost of Sales 300,227 128,065 ---------- ---------- Gross Profit 443,813 263,921 ---------- ---------- Expenses Selling, general and administrative expense 668,059 212,637 Acquisition costs 250,000 -- Interest expense 1,618 -- ---------- ---------- Total Expenses 919,677 212,637 ---------- ---------- Net Income (Loss) $ (475,864) $ 51,284 ========== ========== Basic and Diluted Income (Loss) Per Common Share $ (0.07) $ 0.01 ========== ========== Weighted Average Number of Common Shares Used in Per Share Calculation 6,909,945 6,000,000 ========== ========== See the accompanying notes to consolidated financial statements. F-4 KNUTEK HOLDINGS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Total ---------------------- Accumulated Stockholders' Shares Amount Deficit Equity ---------- ---------- ---------- ---------- Balance - December 31, 1999 6,000,000 $ 5,000 $ 16,422 $ 21,422 Distributions to owner - - (22,348) (22,348) Net income - - 51,284 51,284 ---------- ---------- ---------- ---------- Balance - December 31, 2000 6,000,000 5,000 45,358 50,358 Distributions to owner - - (11,220) (11,220) Shares issued for consulting agreement 1,749,999 5,000 - 5,000 Shares issued for cash, $1.00 per share 500,000 500,000 - 500,000 Net loss - - (475,864) (475,864) ---------- ---------- ---------- ---------- Balance - December 31, 2001 8,249,999 $ 510,000 $ (441,726) $ 68,274 ========== ========== ========== ==========
See the accompanying notes to consolidated financial statements. F-5 KNUTEK HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, ----------------------- 2001 2000 ---------- ---------- Cash Flows From Operating Activities Net income (loss) $ (475,864) $ 51,284 Adjustments to reconcile net loss to net cash used by operating activities: Depreciation 3,466 1,715 Common stock issued for services 5,000 -- Changes in operating assets and liabilities: Accounts receivable (17,564) 883 Prepaid expenses (20,488) 780 Inventory (30,019) (12,172) Accounts payable 56,035 -- Accrued liabilities 72,711 5,235 ---------- ---------- Net Cash and Cash Equivalents Provided by (Used in) Operating Activities (406,723) 47,725 ---------- ---------- Cash Flows From Investing Activities Purchase of property and equipment (15,779) (3,758) Cash from notes receivable 2,900 -- Increase in other assets (3,000) -- ---------- ---------- Net Cash and Cash Equivalents Used In Investing Activities (15,879) (3,758) ---------- ---------- Cash Flows From Financing Activities Proceeds from issuance of common stock 500,000 -- Distributions to owner (11,220) (22,348) Payments on capital leases (2,279) -- ---------- ---------- Net Cash and Cash Equivalents Provided By (Used in) Financing Activities 486,501 (22,348) ---------- ---------- Net Increase in Cash and Cash Equivalents 63,899 21,619 Cash and Cash Equivalents at Beginning of Period 31,664 10,045 ---------- ---------- Cash and Cash Equivalents at End of Period $ 95,563 $ 31,664 ========== ========== Supplemental Cash Flow Information Interest paid $ 1,628 $ -- ========== ========== Non-Cash Investing and Financing Activities Property and equipment acquired with capital lease $ 13,843 $ -- ========== ========== See the accompanying notes to consolidated financial statements. F-6 KNUTEK HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1- NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization -GaiaWorld International was organized in 1997 as a sole proprietorship. From the date of inception through August 2001, capital contributions of $5,000 were made in cash. The assets and liabilities of Gaia World International were transferred to kNutek Holdings, Inc., a California Corporation, in August 2001 for 6,000,000 shares of common stock. The reorganization of the sole proprietorship into the corporation was a transfer between enterprises under common control and the assets and liabilities transferred were recorded by the corporation at their historical cost to the sole proprietorship. In addition, the accompanying financial statements have been restated to reflect the shares of common stock issued in the reorganization as though they had been issued on the dates capital contributions were received from the owner of the sole proprietorship. Accordingly, the accompanying financial statements include the operations and distributions of the sole proprietorship through August 2001. On December 31, 2001, the Company paid a $250,000 finder's fee to a consulting firm in order to facilitate an acquisition of 97.5% of the outstanding shares of Domestic Transmission Technologies, Inc. (DTT). At the date of purchase, DTT had no assets or liabilities and had no historical operations. Due to the lack of assets and operating history of DTT, the $250,000 was expensed as a cost of the acquisition. In June 2002, a merger was approved between DTT and the Company (see Note 7). Principles of Consolidation -The accompanying consolidated financial statements include the accounts of kNutek Holdings, Inc. (the parent corporation) from the date of the reorganization, the accounts of its majority-owned subsidiary, Domestic Transmission Technologies, Inc., the accounts of kNutek Holdings, L.L.C. from 1997 through August 2001, and the accounts of kNutek International, a wholly-owned subsidiary, from the date of inception of August 30, 2001. These entities are collectively referred to as the Company. All significant intercompany transactions and balances have been eliminated in consolidation. Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results could differ from those estimates. Nature of Operations - The Company develops and manufactures beauty and health and fitness products throughout the United States. The Company also distributes their beauty and health and fitness products through independent sales agents, skin care salons, day spas and clinics. Business Condition - The Company has an accumulated deficit of $441,726 as of December 31, 2001 and experienced a net loss of $475,864 and used $406,723 cash for operations during the year ended December 31, 2001. These matters raise substantial doubt about the Company's ability to continue as a going concern. The Company needs to obtain additional financing to fund payment of its obligations and to provide working capital. Management is attempting to raise additional financing through a private placement offering (see Note 3) and to control operational expenses. The Company has received additional funds of $450,000 through June 11, 2002 (see Note 7). The improvement of the Company's financial condition is ultimately based upon obtaining profitable operations or obtaining additional financing. There is no assurance additional financing or profitable operations will be realized. F-7 Cash Equivalents and Fair Value of Financial Instruments - Cash equivalents include highly liquid investments with original maturities of three months or less, readily convertible to known amounts of cash. The amounts reported as cash and cash equivalents, receivables, trade accounts payable and accrued liabilities are considered to be reasonable approximations of their fair values. The fair value estimates were based on market information available to management at the time of the preparation of the financial statements. The reported fair values do not take into consideration potential expenses that would be incurred in an actual settlement. Accounts Receivable - Due to the subsequent collection of all accounts receivables, there was no allowance recorded for accounts receivable as of December 31, 2001. Inventory - Inventories include direct materials, direct labor and manufacturing overhead costs and are stated at the lower of cost (using the first-in, first-out method) or market value. Inventories consist of the following at December 31, 2001: Finished goods $ 11,465 Work-in process 747 Parts and raw materials 29,979 --------- $ 42,191 ========= Provisions, when required, are made to reduce excess and obsolete inventories to their estimated net realizable values. Due to competitive pressures and technical innovation, it is possible that estimates of the net realizable value could change in the near term. Property Equipment - Property and equipment are recorded at cost and depreciated over their estimated useful lives ranging from 5 to 7 years, using the straight-line method. Depreciation expense for the years ended December 31, 2001 and 2000 was $3,466 and $1,715, respectively. Expenditures for repairs and maintenance are charged directly to expense. Renewals and betterments are capitalized. Sales Recognition - The customer recognizes revenue from the sale of beauty and health and fitness products upon delivery and acceptance. Advertising Costs - The Company follows the policy of charging the costs of advertising to expense as incurred. Advertising expense was $75,863 and $60,856 for the years ended December 31, 2001 and 2000, respectively. Stock Based Compensation - The Company accounts for its stock options issued to directors, officers and employees under Accounting Principles Board Opinion No. 25 and related interpretations ("APB 25"). Under APB 25, compensation expense is recognized if an option's exercise price on the measurement date is below the fair value of the Company's common stock. The Company accounts for options and warrants issued to non-employees in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS 123) which requires these options and warrants to be accounted for at their fair value. F-8 Basic and Diluted Income (Loss) Per Share -Basic income (loss) per common share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted income (loss) per share is calculated to give effect to potentially issuable common shares, except during loss periods when those potentially issuable common shares would decrease the loss per share. There were no potentially issuable common shares at December 31, 2001 and 2000. Income Taxes - Prior to August 2001, the Company was taxed as a sole proprietorship. Under those provisions, the Company did not pay federal or state corporate income taxes on its taxable income. Instead, the Company's income or loss was passed through to the individual and reported on the individual's income tax return. Beginning in August 2001, the Company recognizes an asset or liability for the deferred tax consequences of all temporary differences between the tax bases of assets or liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years when the reported amounts of the asset or liabilities are recovered. These deferred tax assets or liabilities are measured using the enacted tax rates that will be in effect when the differences are expected to reverse. Deferred tax assets are reviewed periodically for recoverability and valuation allowances and adjustments are provided as necessary. New Accounting Standards - SFAS No. 141, "Business Combinations," requires usage of the purchase method for all business combinations initiated after June 30, 2001, and prohibits the usage of the pooling of interests method of accounting for business combinations. The provisions of SFAS No. 141 relating to the application of the purchase method are generally effective for business combinations completed after July 1, 2001. Such provisions include guidance on the identification of the acquiring entity, the recognition of intangible assets other than goodwill acquired in a business combination and the accounting for negative goodwill. The Company implemented SFAS 141 during the year ended December 31, 2001. SFAS No. 142, "Goodwill and Other Intangible Assets," changes the current accounting model that requires amortization of goodwill, supplemented by impairment tests, to an accounting model that is based solely upon impairment tests. SFAS No. 142 also provides guidance on accounting for identifiable intangible assets that may or may not require amortization. The provisions of SFAS No. 142 related to accounting for goodwill and intangible assets will be generally effective for the Company at the beginning of 2002, except that certain provisions related to goodwill and other intangible assets are effective for business combinations completed after July 1, 2001. The Company implemented SFAS No.142 during the year ended December 31, 2001. In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement Obligations." SFAS No.143 addresses financial accounting and reporting for obligations associated with the retirement of intangible long-lived assets and associated asset retirement costs. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred. The asset retirement obligations will be capitalized as a part of the carrying amount of the long-lived asset. SFAS No. 143 applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and normal operation of long- lived assets. SFAS No. 143 is effective for years beginning after June 15, 2002, with earlier adoption permitted. The Company does not believe this statement will have any impact to the Company. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 establishes a single accounting model for long-lived assets to be disposed of by sale and the recognition of impairment of long-lived assets to be held and used. SFAS No. 144 is effective F-9 for fiscal years beginning after December 15, 2001, with an earlier adoption encouraged. The Company is evaluating the impact of adopting SFAS No. 144 but believes it will not have a material effect on the Company's results of operations or financial position. NOTE 3 - STOCKHOLDERS' EQUITY Private Placement Offering - The Company has issued an investor the right to purchase up to 1,000,000 shares of common stock at a purchase price of $1.00 per share. The purchase option expires September 28, 2002. The option may be exercised in full or in part up until the expiration date. The value of the options was not recorded in the accompanying financial statements as they were deemed a cost of raising the capital and thus having no financial statement effect. As of December 31, 2001, the investor had purchased 500,000 shares of stock for $500,000 under the stock purchase option. The stock purchase option provides that in the event that the Company has not filed an appropriate registration statement with the Securities & Exchange Commission within ninety (90) days after receiving at least $750,000 pursuant to this stock purchase option, then the Company shall immediately thereafter issue to the investor an additional amount of the Company's common stock equal to 50% of the then total number of option shares. In July 2001, the Company issued 1,749,999 shares to a consulting firm for consulting services. The shares were valued at $5,000. See Note 5 for terms of consulting agreement. NOTE 4 - INCOME TAXES There was no provision for or benefit from income tax for any period. Prior to August 2001, the Company was taxed as a sole proprietorship. The components of the net deferred tax asset at December 31, 2001 is as follows: Benefit of operating loss carry forwards $ 191,396 Less: valuation allowance (191,396) ---------- Net Deferred Tax Asset $ - ========== For tax reporting purposes, the Company has net operating loss carry forwards in the amount of $476,846 which will expire in 2021. The following is a reconciliation of the amount of tax benefit that would result from applying the federal statutory rate to pretax loss with the benefit from income taxes for August 2001 through December 2001: Benefit at statutory rate (34%) $ 163,523 Non-deductible expenses (1,648) Change in valuation allowance (191,396) State tax benefit, net of federal tax effect 29,521 ---------- Net Benefit From Income Taxes $ - ========== NOTE 5 - COMMITMENTS AND CONTINGENCIES Agreements With Consulting Firms -Under the terms of a consulting agreement with a business consulting firm entered into in July 2001, the Company is obligated to pay the following monthly advisory fee: (i) months 1-3, $15,000, (ii) months 4-6, $9,000, (iii) months 7-9, $ 6,000 and (iv) months 10-12, $ 3,000. The F-10 Company was allowed to accrue such monthly advisory fee until the earlier of (i) a business combination involving kNutek being completed, including the first of any debt or equity financing secured by kNutek, (ii) the expiration of six months from the date of this Agreement or (iii) the Agreement's valid termination, at which time all accrued and unpaid monthly fees will be due and payable. The consulting firm also received 1,749,999 shares of the Company's common stock valued at $5,000. Up to 174,999 shares of the shares shall be subject to cancellation in the event the shares issued to the consulting firm exceed 17.5% of the Company's issued and outstanding securities (including without limitation, common and preferred stock, warrants, options etc.) on a fully- diluted basis at such time as the Company shall have (i) received up to $2,000,000 of investment capital and/or debt financing, and (ii) issued equity to its founder which shall in no event be later than one year from the date of the agreement. Due to the fact that the consulting firm had provided substantial services to the Company prior to its formal incorporation and such parties along with the Company had agreed upon the consideration to be paid for such services in the form of common stock once the Company was incorporated, the valuation of the securities received by the consulting firm was based upon the estimated fair market value of the Company at the time the services were rendered. Capital Leases - The Company leases equipment under capital lease agreements. Equipment under capital leases as of December 31, 2001 is as follows: Equipment $ 13,843 Less: accumulated depreciation (1,017) -------- $ 12,826 ======== Future minimum lease payments and present values of the net minimum lease payments are as follows: Year Ending December 31,: 2002 $ 7,270 2003 5,988 2004 357 -------- Total minimum lease payments 13,615 Less: amount representing executory costs (1,215) Less: amount representing interest (836) -------- Present value of minimum lease payments 11,564 Less: current portion (6,024) -------- Obligations Under Capital Leases- Long-Term $ 5,540 ======== Operating Lease Agreements - The Company has an operating lease for a building that expires in 2004. The following is a schedule of future minimum rental payments required under the lease: F-11 Years Ending December 31, 2002 $ 24,000 2003 43,200 2004 43,200 --------- Total Minimum Payments Required $ 110,400 ========= The Company also has entered into other short-term operating leases. Rental expense for the years ending December 31, 2001 and 2000 was $21,140 and $27,331, respectively. NOTE 6 - STOCK OPTIONS The Company, pending board approval, adopted the "2001 Stock Option Plan" with a maximum of 1,000,000 shares of common stock reserved for issuance thereunder. The 2001 Plan provides for both the direct award and sale of shares and for the grant of options to purchase shares. Options may be granted to all employees, non-employee members of the Board, non-employee members of the board of directors of any Parent or subsidiary, consultants and other independent advisors who provide services to the Corporation. The exercise price per share shall not be less than 85% of the fair market value per share of common stock on the option grant date. If the person to whom the option is granted is a 10% Shareholder, then the exercise price shall not be less than 100% of the fair market value per share of common stock on the option grant date. No option shall have a term in excess of 10 years measured from the option grant date. No options had been issued under the Plan as of December 31, 2001. NOTE 7 - SUBSEQUENT EVENTS (UNAUDITED) In January 2002, the Company entered into a note payable with a law firm to pay for prior services performed. The note is for approximately $24,000, accrues interest at 8% and requires monthly payments through July 2004. Through June 11, 2002, the Company received an additional $450,000 under the private placement agreement described in Note 3 and issued an additional 450,000 shares of common stock. If the registration statement is not filed by June 20, 2002, the Company will be required to issue an additional 475,000 shares of common stock under the provisions of the agreement. On June 7, 2002, the Board of Directors and shareholders of the Company approved a merger between the Company and Domestic Transmission Technologies, Inc. (DTT). As part of the merger agreement, each outstanding share of DTT will be converted to 0.892 shares of the Company's common stock. Upon the effective date of the merger all outstanding shares of DTT shall be deemed cancelled and the corporate existence of DTT shall be terminated. Upon completion of the merger, the Company will convert the DTT stock of existing shareholders into 250,000 shares of the Company's common stock. F-12 EX-3 3 ex3-1a.txt ARTICLES OF INCORPORATION - KNUTEK HOLDINGS, INC. EXHIBIT 3.1A STATE OF CALIFORNIA OFFICE OF THE SECRETARY OF STATE (Seal) SECRETARY OF STATE I, BILL JONES, Secretary of State of the State of California, hereby certify: That the attached transcript of 1 page(s) has been compared with the record on file in this office, of which it purports to be a copy, and that it is full, true and correct. IN WITNESS WHEREOF, I execute this certificate and affix the Great Seal of the State of California this day of Aug 21 2001 _______________________________ The Great Seal of the /s/ Bill Jones State of California Secretary of State 2355577 ENDORSED - FILED in the office of the Secretary of State of the State of California AUG 13 2001 BILL JONES, Secretary of State ARTICLES OF INCORPORATION OF KNUTEK HOLDINGS, INC. FIRST: The name of this corporation is KNUTEK HOLDINGS, INC. SECOND: The purpose of this corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code. THIRD: The total number of shares which the Corporation is authorized to issue is twenty million (20,000,000) shares, all of which shall be Common Stock having no par value. FOURTH: The name and address of the initial agent for service of process in the State of California is: Jean L. Batman, Esq. Duane, Morris & Heckscher LLP 100 Spear Street, 15th Floor San Francisco, CA 94105 FIFTH: (a) The personal liability of the directors of this corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. (b) This corporation is authorized to provide indemnification of its agents (as defined in Section 317 of the California General Corporation law) through bylaw provisions, agreements with the agents, votes of shareholders or disinterested directors or otherwise, in excess of the indemnification otherwise permitted by such Section 317, subject only to the applicable limits set forth in Section 204 of the California General Corporation law with respect to actions for breach of duty to the corporation and its shareholders. (c) Any repeal or modification of the foregoing provisions of this Article shall be prospective only, and shall not adversely affect any limitation on the personal liability of a director of this corporation with respect to any act or omission occurring prior to the time of such repeal or modification. By: /s/ Jean L. Batman ---------------------------- Jean L. Batman, Incorporator OFFICE OF THE SECRETARY OF STATE The Great Seal of the State of California EX-3 4 ex3-1b.txt ARTICLES OF INCORPORATION - KNUTEK INTERNATIONAL, INC. EXHIBIT 3.1B State of Delaware OFFICE OF THE SECRETARY OF STATE I, HARRIET SMITH WINDSOR, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF INCORPORATION OF "KNUTEK INTERNATIONAL, INC.", FILED IN THIS OFFICE ON THE FOURTH DAY OF SEPTEMBER, A.D. 2001, AT 2 O'CLOCK P.M. A FILED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE COUNTY RECORDER OF DEEDS. /S/ Harriet Smith Windsor ---------------------------------------- Harriet Smith Windsor, Secretary of State 3432331 8100 AUTHENTICATION: 1327059 010436538 DATE: 09-04-01 State of Delaware Secretary of State Division of Corporations Filed 02:00 PM 09/04/2001 010436538 - 3432331 CERTIFICATE OF INCORPORATION OF KNUTEK INTERNATIONAL, INC. * * * * * 1. The name of the corporation is kNutek International, Inc. 2. The address of its registered office in the State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle. The name of its registered agent at such address is The Corporation Trust Company. 3. The nature of the business or purposes to be conducted or promoted is: To engage in any lawful act or activity for which corporations may be organized under the General Corporation law of Delaware. 4. This corporation is authorized to issue one class of shares of stock to be designated "Common Stock". The total number of shares that the corporation is authorized to issue is one billion (1,000,000,000) shares with a par value of one-tenth of one cent ($0.001) per share. 5. The name and mailing address of the incorporator is as follows: NAME MAILING ADDRESS Jean L. Batman Duane, Morris & Heckscher LLP 100 Spear Street, 15th Floor San Francisco, California 94105 The name and mailing address of each person who is to serve as a director until the first annual meeting of the stockholders or until a successor is elected and qualified is as follows: Jim Knut Larsson kNutek Holdings, Inc. 2713 San Pablo Avenue Berkeley, CA 94702 6. The corporation is to have perpetual existence. 7. The corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. 8. A director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director except for liability (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived any improper personal benefit. THE UNDERSIGNED, being the incorporator herein before named, for the purpose of forming a corporation pursuant to the General Corporation Law of the State of Delaware, does make this Certificate, hereby declaring and certifying that this is his act and deed and the facts herein stated are true, and accordingly has hereunto set his hand this 31st day of August, 2001. /s/ Jean L. Batman ---------------------------- Jean L. Batman Duane, Morris & Heckscher LLP 100 Spear Street, 15th Floor San Francisco, California 94105 EX-3 5 ex3-2.txt BYLAWS EXHIBIT 3.2 BYLAWS OF kNUTEK HOLDINGS, INC. a California corporation TABLE OF CONTENTS ARTICLE I OFFICES 1 Section 1.1 Principal Executive Office. 1 Section 1.2 Other Offices. 1 ARTICLE II MEETINGS OF SHAREHOLDERS 1 Section 2.1 Place of Meetings. 1 Section 2.2 Annual Meeting. 1 Section 2.3 Notice of Annual Meeting. 2 Section 2.4 Special Meetings. 3 Section 2.5 Notice of Special Meetings. 3 Section 2.6 Quorum. 3 Section 2.7 Adjourned Meeting and Notice. 3 Section 2.8 Record Date. 4 Section 2.9 Voting. 4 Section 2.10 Proxies. 5 Section 2.11 Validation of Defectively Called or Noticed Meetings. 6 Section 2.12 Action Without Meeting. 6 Section 2.13 Inspectors of Election. 7 ARTICLE III BOARD OF DIRECTORS 7 Section 3.1 Powers; Approval of Loans to Officers. 7 Section 3.2 Number and Qualification of Directors. 8 Section 3.3 Election and Term of Office. 8 Section 3.4 Vacancies. 8 Section 3.5 Time and Place of Meetings. 9 Section 3.6 Notice of Special Meetings. 9 Section 3.7 Action at a Meeting: Quorum and Required Vote. 10 Section 3.8 Action Without a Meeting. 10 Section 3.9 Adjourned Meeting and Notice. 10 Section 3.10 Telephonic Meetings. 10 Section 3.11 Fees and Compensation. 11 Section 3.12 Appointment of Executive and Other Committees. 11 ARTICLE IV OFFICERS 12 Section 4.1 Officers. 12 Section 4.2 The Chairman of the Board. 12 Section 4.3 The President. 13 Section 4.4 Vice-Presidents. 13 Section 4.5 The Secretary. 13 Section 4.6 The Chief Financial Officer. 14 Section 4.7 The Controller. 14 ARTICLE V EXECUTION OF CORPORATE INSTRUMENTS, RATIFICATION, AND VOTING OF STOCKS OWNED BY THE CORPORATION 14 Section 5.1 Execution of Corporate Instruments. 14 Section 5.2 Ratification by Shareholders. 15 Section 5.3 Voting of Stocks Owned by the Corporation. 15 ARTICLE VI ANNUAL AND OTHER REPORTS 15 Section 6.1 Reports to Shareholders. 15 Section 6.2 Report of Shareholder Vote. 16 Section 6.3 Reports to the Secretary of State. 16 ii ARTICLE VII SHARES OF STOCK 17 ARTICLE VIII INSPECTION OF CORPORATE RECORDS 17 Section 8.1 General Records. 17 Section 8.2 Inspection of Bylaws. 18 ARTICLE IX INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS 18 Section 9.1 Right to Indemnification. 18 Section 9.2 Authority to Advance Expenses. 19 Section 9.3 Right of Claimant to Bring Suit. 19 Section 9.4 Provisions Nonexclusive. 20 Section 9.5 Authority to Insure. 20 Section 9.6 Survival of Rights. 20 Section 9.7 Settlement of Claims. 20 Section 9.8 Effect of Amendment. 20 Section 9.9 Subrogation. 20 Section 9.10 No Duplication of Payments. 20 ARTICLE X AMENDMENTS 21 Section 10.1 Power of Shareholders. 21 Section 10.2 Power of Directors. 21 ARTICLE XI DEFINITIONS 21 iii BYLAWS OF kNUTEK HOLDINGS, INC. a California corporation ARTICLE I Offices Section 1.1 Principal Executive Office. The principal executive office of the corporation shall be located at such place as the Board of Directors may from time to time authorize. If the principal executive office is located outside this state, and the corporation has one or more business offices in this state, the Board of Directors shall fix and designate a principal business office in the State of California. Section 1.2 Other Offices. Other business offices may at any time be established at any place or places specified by the Board of Directors. ARTICLE II Meetings of Shareholders Section 2.1 Place of Meetings. All meetings of shareholders shall be held at the principal executive office of the corporation, or at any other place, within or without the State of California, specified by the Board of Directors. Section 2.2 Annual Meeting. The annual meeting of the shareholders, after the year 2001, shall be held at the time and date in each year fixed by the Board of Directors. At the annual meeting, directors shall be elected, reports of the affairs of the corporation shall be considered, and any other business may be transacted that is within the power of the shareholders. 1 Section 2.3 Notice of Annual Meeting. Written notice of each annual meeting shall be given to each shareholder entitled to vote, either personally or by first-class mail, or, if the corporation has outstanding shares held of record by 500 or more persons (determined in accordance with Section 605 of the General Corporation Law) on the record date for the meeting, by third-class mail, or by other means of written communication, charges prepaid, addressed to such shareholder at the shareholder's address appearing on the books of the corporation or given by such shareholder to the corporation for the purpose of notice. If any notice or report addressed to the shareholder at the address of such shareholder appearing on the books of the corporation is returned to the corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice or report to the shareholder at such address, all future notices or reports shall be deemed to have been duly given without further mailing if the same shall be available for the shareholder upon written demand of the shareholder at the principal executive office of the corporation for a period of one year from the date of the giving of the notice or report to all other shareholders. If a shareholder gives no address, notice shall be deemed to have been given to such shareholder if addressed to the shareholder at the place where the principal executive office of the corporation is situated, or if published at least once in some newspaper of general circulation in the county in which said principal executive office is located. All such notices shall be given to each shareholder entitled thereto not less than ten (10) days (or, if sent by third-class mail, thirty (30) days) nor more than sixty (60) days before each annual meeting. Any such notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by other means of written communication. An affidavit of mailing of any such notice in accordance with the foregoing provisions, executed by the Secretary, Assistant Secretary or any transfer agent of the corporation shall be prima facie evidence of the giving of the notice. Such notice shall specify: (a) the place, the date, and the hour of such meeting; (b) those matters that the Board of Directors, at the time of the mailing of the notice, intends to present for action by the shareholders (but, subject to the provisions of subsection (d) below, any proper matter may be presented at the meeting for such action); (c) if directors are to be elected, the names of nominees intended at the time of the notice to be presented by the Board of Directors for election; (d) the general nature of a proposal, if any, to take action with respect to approval of (i) a contract or other transaction with an interested director, (ii) amendment of the Articles of Incorporation, (iii) a reorganization of the corporation as defined in Section 181 of the General Corporation Law, (iv) voluntary dissolution of the corporation, or (v) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, if any; and (e) such other matters, if any, as may be expressly required by statute. 2 Section 2.4 Special Meetings. Special meetings of the shareholders for any purpose or purposes whatsoever may be called at any time by the Chairman of the Board (if there be such an officer appointed), by the President, by the Board of Directors, or by one or more shareholders entitled to cast not less than ten percent (10%) of the votes at the meeting. Section 2.5 Notice of Special Meetings. Upon request in writing that a special meeting of shareholders be called for any proper purpose, directed to the Chairman of the Board (if there be such an officer appointed), President, Vice President or Secretary by any person (other than the Board of Directors) entitled to call a special meeting of shareholders, the officer forthwith shall cause notice to be given to the shareholders entitled to vote that a meeting will be held at a time requested by the person or persons calling the meeting, not less than thirty-five (35) nor more than sixty (60) days after the receipt of the request. Except in special cases where other express provision is made by statute, notice of any special meeting of shareholders shall be given in the same manner as for annual meetings of shareholders. In addition to the matters required by Section 2.3(a) and, if applicable, Section 2.3(c) of these Bylaws, notice of any special meeting shall specify the general nature of the business to be transacted, and no other business may be transacted at such meeting. Section 2.6 Quorum. The presence in person or by proxy of persons entitled to vote a majority of the voting shares at any meeting shall constitute a quorum for the transaction of business. If a quorum is present, the affirmative vote of a majority of the shares represented and voting at the meeting (which shares voting affirmatively also constitute at least a majority of the required quorum) shall be the act of the shareholders, unless the vote of a greater number or voting by classes is required by the General Corporation Law or the Articles of Incorporation. Any meeting of shareholders, whether or not a quorum is present, may be adjourned from time to time by the vote of the holders of a majority of the shares present in person or represented by proxy thereat and entitled to vote, but in the absence of a quorum no other business may be transacted at such meeting, except that the shareholders present or represented by proxy at a duly called or held meeting, at which a quorum is present, may continue to transact business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. Section 2.7 Adjourned Meeting and Notice. When any shareholders' meeting, either annual or special, is adjourned for more than forty-five (45) days, or if after adjournment a new record date is fixed for the adjourned meeting, notice of the adjourned meeting shall be given as in the case of an original meeting. Except as provided above, it shall not be necessary to give any notice of the time and place of the adjourned meeting or of the business to be transacted thereat, other than by announcement of the time and place thereof at the meeting at which such adjournment is taken. 3 Section 2.8 Record Date. (a) The Board of Directors may fix a time in the future as a record date for the determination of the shareholders entitled to notice of and to vote at any meeting of shareholders or entitled to give consent to corporate action in writing without a meeting, to receive any report, to receive any dividend or other distribution, or allotment of any rights, or to exercise rights in respect of any other lawful action. The record date so fixed shall be not more than sixty (60) days nor less than ten (10) days prior to the date of such meeting, nor more than sixty (60) days prior to any other action. A determination of shareholders of record entitled to notice of or to vote at a meeting of shareholders shall apply to any adjournment of the meeting unless the Board of Directors fixes a new record date for the adjourned meeting, but the Board of Directors shall fix a new record date if the meeting is adjourned for more than forty-five (45) days from the date set for the original meeting. When a record date is so fixed, only shareholders of record at the close of business on that date are entitled to notice of and to vote at any such meeting, to give consent without a meeting, to receive any report, to receive the dividend, distribution, or allotment of rights, or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date, except as otherwise provided in the Articles of Incorporation or these Bylaws. (b) If no record date is fixed: (1) The record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day preceding the day on which the meeting is held. (2) The record date for determining shareholders entitled to give consent to corporate action in writing without a meeting, when no prior action by the Board of Directors has been taken, shall be the day on which the first written consent is given. (3) The record date for determining shareholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto, or the sixtieth (60th) day prior to the date of such other action, whichever is later. Section 2.9 Voting. (a) Except as provided below with respect to cumulative voting and except as may be otherwise provided in the Articles of Incorporation, each outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote of shareholders. Any holders of shares entitled to vote on any matter may vote part of the shares in favor of the proposal and refrain from voting the remaining shares or vote them against the proposal, other than elections to office, but, if the shareholder fails to specify the number of shares such shareholder is voting affirmatively, it will be conclusively presumed that the shareholder's approving vote is with respect to all shares such shareholder is entitled to vote. (b) Subject to the provisions of Sections 702 through 704 of the General Corporation Law (relating to voting of shares held by a fiduciary, receiver, pledgee, or minor, in the name of a corporation, or in joint ownership), persons in whose names shares entitled to vote stand on the stock records of the corporation at the close of business on the record date shall be entitled to 4 vote at the meeting of shareholders. Such vote may be viva voce or by ballot; provided, however, that all elections for directors must be by ballot upon demand made by a shareholder at any election and before the voting begins. Shares of this corporation owned by a corporation more than twenty-five percent (25%) of the voting power of which is owned directly by this corporation, or indirectly through one or more majority-owned subsidiaries of this corporation, shall not be entitled to vote on any matter. (c) Subject to the requirements of the next sentence, every shareholder entitled to vote at any election for directors shall have the right to cumulate such shareholder's votes and give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which such shareholder's shares are normally entitled, or to distribute votes on the same principle among as many candidates as such shareholder thinks fit. No shareholder shall be entitled to cumulate votes unless such candidate's name or candidates' names have been placed in nomination prior to the voting and the shareholder has given notice at the meeting, prior to the voting, of the shareholder's intention to cumulate such shareholder's votes. If any one shareholder has given such notice, all shareholders may cumulate their votes for candidates in nomination. The candidates receiving the highest number of affirmative votes of shares entitled to be voted for them, up to the number of directors to be elected by such shares, shall be elected. Votes against a director and votes withheld shall have no legal effect. Section 2.10 Proxies. (a) Every person entitled to vote shares (including voting by written consent) may authorize another person or other persons to act by proxy with respect to such shares. "Proxy" means a written authorization signed by a shareholder or the shareholder's attorney-in-fact giving another person or persons power to vote with respect to the shares of such shareholder. "Signed" for the purpose of this Section means the placing of the shareholder's name on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the shareholder or the shareholder's attorney-in-fact. Any proxy duly executed is not revoked and continues in full force and effect until (i) a written instrument revoking it is filed with the Secretary of the corporation prior to the vote pursuant thereto, (ii) a subsequent proxy executed by the person executing the prior proxy is presented to the meeting, (iii) the person executing the proxy attends the meeting and votes in person, or (iv) written notice of the death or incapacity of the maker of such proxy is received by the corporation before the vote pursuant thereto is counted; provided that no such proxy shall be valid after the expiration of eleven (11) months from the date of its execution, unless otherwise provided in the proxy. Notwithstanding the foregoing sentence, a proxy that states that it is irrevocable, is irrevocable for the period specified therein to the extent permitted by Section 705(e) and (f) of the General Corporation Law. The dates contained on the forms of proxy presumptively determine the order of execution, regardless of the postmark dates on the envelopes in which they are mailed. (b) As long as no outstanding class of securities of the corporation is registered under Section 12 of the Securities Exchange Act of 1934, or is not exempted from such registration by Section 12(g)(2) of such Act, any form of proxy or written consent distributed to ten (10) or more shareholders of the corporation when outstanding shares of the corporation are held of record by 100 or more persons shall afford an opportunity on the proxy or form of written consent to specify a choice between approval and disapproval of each matter or group of related matters intended to be acted upon at the meeting for which the proxy is solicited or by such written consent, other than elections to office, and shall provide, subject to reasonable specified conditions, that where the person solicited specifies a choice with respect to any such matter the shares will be voted in accordance therewith. In any election of directors, any form of proxy in which the directors to be voted upon are named therein as candidates 5 and which is marked by a shareholder "withhold" or otherwise marked in a manner indicating that the authority to vote for the election of directors is withheld shall not be voted for the election of a director. Section 2.11 Validation of Defectively Called or Noticed Meetings. The transactions of any meeting of shareholders, however called and noticed, and wherever held, are as valid as though had at a meeting duly held after regular call and notice, if a quorum is present either in person or by proxy, and if, either before or after the meeting, each of the persons entitled to vote, not present in person or by proxy, signs a written waiver of notice or a consent to the holding of the meeting or an approval of the minutes thereof. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Attendance of a person at a meeting shall constitute a waiver of notice of and presence at such meeting, except when the person objects, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened and except that attendance at a meeting is not a waiver of any right to object to the consideration of matters required by these Bylaws or by the General Corporation Law to be included in the notice if such objection is expressly made at the meeting. Neither the business to be transacted at nor the purpose of any regular or special meeting of shareholders need be specified in any written waiver of notice, consent to the holding of the meeting or approval of the minutes thereof, unless otherwise provided in the Articles of Incorporation or these Bylaws, or unless the meeting involves one or more matters specified in Section 2.3(d) of these Bylaws. Section 2.12 Action Without Meeting. (a) Directors may be elected without a meeting by a consent in writing, setting forth the action so taken, signed by all of the persons who would be entitled to vote for the election of directors, provided that, without notice except as hereinafter set forth, a director may be elected at any time to fill a vacancy not filled by the directors (other than a vacancy created by removal of a director) by the written consent of persons holding a majority of the outstanding shares entitled to vote for the election of directors. Any other action that may be taken at a meeting of the shareholders, may be taken without a meeting, and without prior notice except as hereinafter set forth, if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. (b) Unless the consents of all shareholders entitled to vote have been solicited in writing: (1) notice of any proposed shareholder approval of (i) a contract or other transaction with an interested director, (ii) indemnification of an agent of the corporation, (iii) a reorganization of the corporation as defined in Section 181 of the General Corporation Law, or (iv) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, if any, without a meeting by less than unanimous written consent, shall be given at least ten (10) days before the consummation of the action authorized by such approval; and (2) prompt notice shall be given of the taking of any other corporate action approved by shareholders without a meeting by less than unanimous written consent to those shareholders entitled to vote who have not consented in writing. Such notices shall be given in the manner provided in Section 2.3 of these Bylaws. 6 (c) Any shareholder giving a written consent, or the shareholder's proxyholders, or a transferee of the shares or a personal representative of the shareholder or their respective proxyholders, may revoke the consent by a writing received by the corporation prior to the time that written consents of the number of shares required to authorize the proposed action have been filed with the Secretary of the corporation, but may not do so thereafter. Such revocation is effective upon its receipt by the Secretary of the corporation. Section 2.13 Inspectors of Election. (a) In advance of any meeting of shareholders, the Board of Directors may appoint inspectors of election to act at the meeting and any adjournment thereof. If inspectors of election are not so appointed, or if any persons so appointed fail to appear or refuse to act, the chairman of any such meeting may, and on the request of any shareholder or the holder of such shareholder's proxy shall, appoint inspectors of election (or persons to replace those who so fail or refuse) at the meeting. The number of inspectors shall be either one or three. If inspectors are appointed at a meeting on the request of one or more shareholders or holders of proxies, the majority of shares represented in person or by proxy shall determine whether one inspector or three inspectors are to be appointed. (b) The inspectors of election shall determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum and the authenticity, validity and effect of proxies; receive votes, ballots or consents; hear and determine all challenges and questions in any way arising in connection with the right to vote; count and tabulate all votes or consents; determine when the polls shall close; determine the result; and do such acts as may be proper to conduct the election or vote with fairness to all shareholders. (c) The inspectors of election shall perform their duties impartially, in good faith, to the best of their ability and as expeditiously as is practical. If there are three inspectors of election, the decision, act or certificate of a majority is effective in all respects as the decision, act or certificate of all. Any report or certificate made by the inspectors of election is prima facie evidence of the facts stated therein. ARTICLE III Board of Directors Section 3.1 Powers; Approval of Loans to Officers. (a) Subject to the provisions of the General Corporation Law and any limitations in the Articles of Incorporation relating to action required to be approved by the shareholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the Board of Directors. The Board of Directors may delegate the management of the day-to-day operation of the business of the corporation to a management company or other person provided that the business and affairs of the corporation shall be managed and all corporate powers shall be exercised under the ultimate direction of the Board of Directors. (b) The corporation may, upon approval of the Board of Directors alone, make loans of money or property to, or guarantee the obligations of, any officer (whether or not a director) of the corporation or of its parent, or adopt an employee benefit plan authorizing such loans or guaranties provided that: 7 (1) the Board of Directors determines that such a loan, guaranty, or plan may reasonably be expected to benefit the corporation; (2) the corporation has outstanding shares held of record by 100 or more persons (determined as provided in Section 605 of the General Corporation Law) on the date of approval by the Board of Directors; (3) the approval by the Board of Directors is by a vote sufficient without counting the vote of any interested director(s); and (4) the loan is otherwise made in compliance with Section 315 of the General Corporation Law. Section 3.2 Number and Qualification of Directors. The authorized number of directors shall be not less than three (3), nor more than five (5). The initial number of directors was established in the Statement of Incorporator. The number of directors shall always be within the authorized limits specified above, and as determined by resolution adopted by the Board of Directors. The authorized number of directors may be changed only by an amendment of the Articles of Incorporation or of these Bylaws, such amendment being duly adopted by a vote or written consent of holders of a majority of the outstanding shares, provided that any proposal to reduce the authorized number of directors to a number less than three (3) cannot be adopted if the votes cast against its adoption at a meeting, or the shares not consenting in the case of action by written consent, are equal to more than sixteen and two-thirds percent (16-2/3%) of the outstanding shares entitled to vote. Section 3.3 Election and Term of Office. The directors shall be elected at each annual meeting of shareholders, but, if any such annual meeting is not held or the directors are not elected thereat, the directors may be elected at any special meeting of shareholders held for that purpose. Each director, including a director elected to fill a vacancy, shall hold office until the expiration of the term for which elected and until a successor has been elected and qualified. Section 3.4 Vacancies. A vacancy in the Board of Directors shall be deemed to exist in case of the death, resignation or removal of any director, if a director has been declared of unsound mind by order of court or convicted of a felony, if the authorized number of directors is increased, if the incorporator or incorporators have failed to appoint the authorized number of directors in any resolution for appointment of directors upon the initial organization of the corporation, or if the shareholders fail, at any annual or special meeting of shareholders at which any director or directors are elected, to elect the full authorized number of directors to be voted for at that meeting. Vacancies in the Board of Directors, except for a vacancy created by the removal of a director, may be filled by a majority of the directors present at a meeting at which a quorum is present, or if the number of directors then in office is less than a quorum, (a) by the unanimous written consent of the directors then in office, (b) by the vote of a majority of the directors then in office at a meeting held pursuant to notice or waivers of notice in compliance with these Bylaws, or (c) by a sole remaining director. Each director so 8 elected shall hold office until his or her successor is elected at an annual or a special meeting of the shareholders. A vacancy in the Board of Directors created by the removal of a director may be filled only by the vote of a majority of the shares entitled to vote represented at a duly held meeting at which a quorum is present, or by the written consent of all of the holders of the outstanding shares entitled to vote. The shareholders entitled to vote may elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors. Any such election by written consent other than to fill a vacancy created by removal shall require the consent of holders of a majority of the outstanding shares entitled to vote. Any such election by written consent to fill a vacancy created by removal shall require the unanimous written consent of all shares entitled to vote for the election of such directors. Any director may resign effective upon giving written notice to the Chairman of the Board (if there be such an officer appointed), the President, the Secretary or the Board of Directors of the corporation, unless the notice specifies a later time for the effectiveness of such resignation. If the resignation is effective at a future time, a successor may be elected to take office when the resignation becomes effective. No reduction of the authorized number of directors shall have the effect of removing any director prior to the expiration of the director's term of office. Section 3.5 Time and Place of Meetings. The Board of Directors shall hold a regular meeting immediately after the meeting of shareholders at which it is elected and at the place where such meeting is held, or at such other place as shall be fixed by the Board of Directors, for the purpose of organization, election of officers of the corporation and the transaction of other business. Notice of such meeting is hereby dispensed with. Other regular meetings of the Board of Directors shall be held without notice at such times and places as are fixed by the Board of Directors. Special meetings of the Board of Directors may be held at any time whenever called by the Chairman of the Board (if there be such an officer appointed), the President, any Vice-President, the Secretary or any two directors. Except as hereinabove provided in this Section 3.5, all meetings of the Board of Directors may be held at any place within or without the State of California that has been designated by resolution of the Board of Directors as the place for the holding of regular meetings, or by written consent of all directors. In the absence of such designation, meetings of the Board of Directors shall be held at the principal executive office of the corporation. Special meetings of the Board of Directors may be held either at a place so designated or at the principal executive office of the corporation. Section 3.6 Notice of Special Meetings. Notice of the time and place of special meetings shall be delivered personally to each director or communicated to each director by telephone, telegraph or mail, charges prepaid, addressed to the director at the director's address as it is shown upon the records of the corporation or, if it is not so shown on such records or is not readily ascertainable, at the place at which the meetings of the directors are regularly held. In case such notice is mailed, it shall be deposited in the United States mail at least four (4) days prior to the time of the holding of the meeting. In case such notice is delivered personally or by telephone or telegraph, as above provided, it shall be so delivered at 9 least forty-eight (48) hours prior to the time of the holding of the meeting. Such mailing, telegraphing or delivery, personally or by telephone, as above provided, shall be due legal and personal notice to such director. Notice of a meeting need not be given to any director who signs a waiver of notice or a consent to holding the meeting or an approval of the minutes thereof, whether before or after the meeting, or who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to such director. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meetings. Section 3.7 Action at a Meeting: Quorum and Required Vote. Presence of a majority of the authorized number of directors at a meeting of the Board of Directors constitutes a quorum for the transaction of business, except as hereinafter provided. Members of the Board of Directors may participate in a meeting through use of conference telephone or similar communications equipment, so long as all members participating in such meeting can hear one another. Participation in a meeting as permitted in the preceding sentence constitutes presence in person at such meeting. Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present is the act of the Board of Directors, unless a greater number, or the same number after disqualifying one or more directors from voting, is required by law, by the Articles of Incorporation, or by these Bylaws. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for such meeting. Section 3.8 Action Without a Meeting. Any action required or permitted to be taken by the Board of Directors may be taken without a meeting, if all members of the Board of Directors shall individually or collectively consent in writing to such action. Such written consent or consents shall be filed with the minutes of the proceedings of the Board of Directors. Such action by written consent shall have the same force and effect as a unanimous vote of such directors. Section 3.9 Adjourned Meeting and Notice. A majority of the directors present, whether or not a quorum is present, may adjourn any meeting to another time and place. If the meeting is adjourned for more than twenty-four (24) hours, notice of any adjournment to another time or place shall be given prior to the time of the adjourned meeting to the directors who were not present at the time of the adjournment. Section 3.10 Telephonic Meetings. Unless specifically prohibited by the Articles of Incorporation of this corporation or these bylaws, members of the Board of Directors or of any committee of the Board of Directors may participate in and act at any meeting of such board or committee through the use of a telephone conference or other communication equipment by means of which all persons participating in the meeting can hear one another. Participation in such meetings shall constitute attendance and presence in person at the meeting of the person or persons so participating. 10 Section 3.11 Fees and Compensation. Directors and members of committees may receive such compensation, if any, for their services, and such reimbursement for expenses, as may be fixed or determined by resolution of the Board of Directors. Section 3.12 Appointment of Executive and Other Committees. The Board of Directors may, by resolution adopted by a majority of the authorized number of directors, designate one or more committees, each consisting of two or more directors, to serve at the pleasure of the Board of Directors. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent member at any meeting of the committee. The appointment of members or alternate members of a committee requires the vote of a majority of the authorized number of directors. Any such committee, to the extent provided in the resolution of the Board of Directors or in these Bylaws, shall have all the authority of the Board of Directors, except with respect to: (a) The approval of any action for which the General Corporation Law also requires shareholders' approval or approval of the outstanding shares. (b) The filling of vacancies on the Board of Directors or in any committee. (c) The fixing of compensation of the directors for serving on the Board of Directors or on any committee. (d) The amendment or repeal of these Bylaws or the adoption of new Bylaws. (e) The amendment or repeal of any resolution of the Board of Directors that by its express terms is not so amendable or repealable. (f) A distribution to the shareholders of the corporation, except at a rate, in a periodic amount or within a price range determined by the Board of Directors. (g) The appointment of other committees of the Board of Directors or the members thereof. The provisions of Sections 3.5 through 3.9 of these Bylaws apply also to committees of the Board of Directors and action by such committees, mutatis mutandis (with the necessary changes having been made in the language thereof). 11 ARTICLE IV Officers Section 4.1 Officers. The officers of the corporation shall consist of the President, the Secretary and the Chief Financial Officer, and each of them shall be appointed by the Board of Directors. The corporation may also have a Chairman of the Board, one or more Vice-Presidents, a Controller, one or more Assistant Secretaries and Assistant Treasurers, and such other officers as may be appointed by the Board of Directors, or with authorization from the Board of Directors by the President. The order of the seniority of the Vice-Presidents shall be in the order of their nomination, unless otherwise determined by the Board of Directors. Any two or more of such offices may be held by the same person. The Board of Directors shall designate one officer as the chief financial officer of the corporation. In the absence of such designation, the Treasurer shall be the chief financial officer. The Board of Directors may appoint, and may empower the President to appoint, such other officers as the business of the corporation may require, each of whom shall have such authority and perform such duties as are provided in these Bylaws or as the Board of Directors may from time to time determine. All officers of the corporation shall hold office from the date appointed to the date of the next succeeding regular meeting of the Board of Directors following the meeting of shareholders at which the Board of Directors is elected, and until their successors are elected; provided that all officers, as well as any other employee or agent of the corporation, may be removed at any time at the pleasure of the Board of Directors, or, except in the case of an officer chosen by the Board of Directors, by any officer upon whom such power of removal may be conferred by the Board of Directors, and upon the removal, resignation, death or incapacity of any officer, the Board of Directors or the President, in cases where he or she has been vested by the Board of Directors with power to appoint, may declare such office vacant and fill such vacancy. Nothing in these Bylaws shall be construed as creating any kind of contractual right to employment with the corporation. Any officer may resign at any time by giving written notice to the Board of Directors, the President, or the Secretary of the corporation, without prejudice, however, to the rights, if any, of the corporation under any contract to which such officer is a party. Any such resignation shall take effect at the date of the receipt of such notice or at any later time specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. The salary and other compensation of the officers shall be fixed from time to time by resolution of or in the manner determined by the Board of Directors. Section 4.2 The Chairman of the Board. The Chairman of the Board (if there be such an officer appointed) shall, when present, preside at all meetings of the Board of Directors and shall perform all the duties commonly incident to that office. The Chairman of the Board shall have authority to execute in the name of the corporation bonds, contracts, deeds, leases and other written instruments to be executed by the corporation (except where by law the signature of the President is required), and shall perform such other duties as the Board of Directors may from time to time determine. 12 Section 4.3 The President. Subject to such supervisory powers, if any, as may be given by the Board of Directors to the Chairman of the Board, the President shall be the chief executive officer of the corporation and shall perform all the duties commonly incident to that office. The President shall have authority to execute in the name of the corporation bonds, contracts, deeds, leases and other written instruments to be executed by the corporation. The President shall preside at all meetings of the shareholders and, in the absence of the Chairman of the Board or if there is none, at all meetings of the Board of Directors, and shall perform such other duties as the Board of Directors may from time to time determine. Section 4.4 Vice-Presidents. The Vice-Presidents (if there be such officers appointed), in the order of their seniority (unless otherwise established by the Board of Directors), may assume and perform the duties of the President in the absence or disability of the President or whenever the offices of the Chairman of the Board and President are vacant. The Vice-Presidents shall have such titles, perform such other duties, and have such other powers as the Board of Directors, the President or these Bylaws may designate from time to time. Section 4.5 The Secretary. The Secretary shall record or cause to be recorded, and shall keep or cause to be kept, at the principal executive office and such other place as the Board of Directors may order, a book of minutes of actions taken at all meetings of directors and committees thereof and of shareholders, with the time and place of holding, whether regular or special, and, if special, how authorized, the notice thereof given, the names of those present at directors' meetings, the number of shares present or represented at shareholders' meetings, and the proceedings thereof. The Secretary shall keep, or cause to be kept, at the principal executive office or at the office of the corporation's transfer agent, a share register or a duplicate share register in a form capable of being converted into written form, showing the names of the shareholders and their addresses, the number and classes of shares held by each, the number and date of certificates issued for the same, and the number and date of cancellation of every certificate surrendered for cancellation. The Secretary shall give, or cause to be given, notice of all the meetings of the shareholders and of the Board of Directors and committees thereof required by these Bylaws or by law to be given, and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or by these Bylaws. The President may direct any Assistant Secretary to assume and perform the duties of the Secretary in the absence or disability of the Secretary, and each Assistant Secretary shall perform such other duties and have such other powers as the Board of Directors or the President may designate from time to time. 13 Section 4.6 The Chief Financial Officer. The Chief Financial Officer shall keep and maintain, or cause to be kept and maintained, adequate and correct accounts of the properties and business transactions of the corporation. The books of account shall at all reasonable times be open to inspection by any director. The Chief Financial Officer shall deposit all moneys and other valuables in the name and to the credit of the corporation with such depositaries as may be designated by the Board of Directors. The Chief Financial Officer shall disburse the funds of the corporation as may be ordered by the Board of Directors, shall render to the President and directors, whenever they request it, an account of all of the Chief Financial Officer's transactions as Chief Financial Officer and of the financial condition of the corporation, and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or these Bylaws. The President may direct any Assistant Chief Financial Officer to assume and perform the duties of the Chief Financial Officer in the absence or disability of the Chief Financial Officer, and each Assistant Chief Financial Officer shall perform such other duties and have such other powers as the Board of Directors or the President may designate from time to time. Section 4.7 The Controller. The Controller (if there be such an officer appointed) shall be responsible for the establishment and maintenance of accounting and other systems required to control and account for the assets of the corporation and provide safeguards therefor, and to collect information required for management purposes, and shall perform such other duties and have such other powers as the Board of Directors or the President may designate from time to time. The President may direct any Assistant Controller to assume and perform the duties of the Controller, in the absence or disability of the Controller, and each Assistant Controller shall perform such other duties and have such other powers as the Board of Directors, the Chairman of the Board (if there be such an officer appointed) or the President may designate from time to time. ARTICLE V Execution of Corporate Instruments, Ratification, and Voting of Stocks Owned by the Corporation Section 5.1 Execution of Corporate Instruments. In its discretion, the Board of Directors may determine the method and designate the signatory officer or officers or other person or persons, to execute any corporate instrument or document, or to sign the corporate name without limitation, except where otherwise provided by law, and such execution or signature shall be binding upon the corporation. All checks and drafts drawn on banks or other depositaries on funds to the credit of the corporation, or in special accounts of the corporation, shall be signed by such person or persons as the Board of Directors shall authorize to do so. The Board of Directors shall designate an officer who personally, or through his representative, shall vote shares of other corporations standing in the name of this corporation. The authority to vote shares shall include the 14 authority to execute a proxy in the name of the corporation for purposes of voting the shares. Section 5.2 Ratification by Shareholders. In its discretion, the Board of Directors may submit any contract or act for approval or ratification of the shareholders at any annual meeting of shareholders, or at any special meeting of shareholders called for that purpose; and any contract or act that shall be approved or ratified by the holders of a majority of the voting power of the corporation shall be as valid and binding upon the corporation and upon the shareholders thereof as though approved or ratified by each and every shareholder of the corporation, unless a greater vote is required by law for such purpose. Section 5.3 Voting of Stocks Owned by the Corporation. All stock of other corporations owned or held by the corporation for itself, or for other parties in any capacity, shall be voted, and all proxies with respect thereto shall be executed, by the person authorized to do so by resolution of the Board of Directors, or in the absence of such authorization, by the Chairman of the Board (if there be such an officer appointed), the President or any Vice-President, or by any other person authorized to do so by the Chairman of the Board, the President or any Vice President. ARTICLE VI Annual and Other Reports Section 6.1 Reports to Shareholders. The Board of Directors of the corporation shall cause an annual report to be sent to the shareholders not later than 120 days after the close of the fiscal year, and at least fifteen (15) days (or, if sent by third-class mail, thirty-five (35) days) prior to the annual meeting of shareholders to be held during the next fiscal year. This report shall contain a balance sheet as of the end of that fiscal year and an income statement and statement of changes in financial position for that fiscal year, accompanied by any report thereon of independent accountants or, if there is no such report, the certificate of an authorized officer of the corporation that the statements were prepared without audit from the books and records of the corporation. This report shall also contain such other matters as required by Section 1501(b) of the General Corporation Law, unless the corporation is subject to the reporting requirements of Section 13 of the Securities Exchange Act of 1934, and is not exempted therefrom under Section 12(g)(2) thereof. As long as the corporation has less than 100 holders of record of its shares (determined as provided in Section 605 of the General Corporation Law), the foregoing requirement of an annual report is hereby waived. If no annual report for the last fiscal year has been sent to shareholders, the corporation shall, upon the written request of any shareholder made more than 120 days after the close of such fiscal year, deliver or mail to the person making the request within thirty (30) days thereafter the financial statements for such year as required by Section 1501(a) of the General Corporation Law. A shareholder or shareholders holding at least five percent (5%) of the outstanding shares of any class of the corporation may make a written request to the corporation for an income statement of the corporation for the three-month, six-month or nine-month period of the current fiscal year ended more than thirty (30) days prior to the date of the request and a balance sheet of the corporation as of the end of such period and, in addition, if no annual report 15 for the last fiscal year has been sent to shareholders, the annual report for the last fiscal year, unless such report has been waived under these Bylaws. The statements shall be delivered or mailed to the person making the request within thirty (30) days thereafter. A copy of any such statements shall be kept on file in the principal executive office of the corporation for twelve (12) months, and they shall be exhibited at all reasonable times to any shareholder demanding an examination of the statements, or a copy shall be mailed to the shareholder. The quarterly income statements and balance sheets referred to in this Section shall be accompanied by the report thereon, if any, of any independent accountants engaged by the corporation or the certificate of an authorized officer of the corporation that the financial statements were prepared without audit from the books and records of the corporation. Section 6.2 Report of Shareholder Vote. For a period of sixty (60) days following the conclusion of an annual, regular, or special meeting of shareholders, the corporation shall, upon written request from a shareholder, forthwith inform the shareholder of the result of any particular vote of shareholders taken at the meeting, including the number of shares voting for, the number of shares voting against, and the number of shares abstaining or withheld from voting. If the matter voted on was the election of directors, the corporation shall report the number of shares (or votes if voted cumulatively) cast for each nominee for director. If more than one class or series of shares voted, the report shall state the appropriate numbers by class and series of shares. Section 6.3 Reports to the Secretary of State. (a) Every year, during the calendar month in which the original articles of incorporation were filed with the California Secretary of State, or during the preceding five calendar months, the corporation shall file a statement with the Secretary of State on the prescribed form, setting forth the authorized number of directors; the names and complete business and residence addresses of all incumbent directors; the names and complete business or resident addresses of the chief executive officer, the secretary, and the chief financial officer; the street address of the corporation's principal executive office or principal business office in this state; a statement of the general type of business constituting the principal business activity of the corporation; and a designation of the agent of the corporation for the purpose of service of process, all in compliance with Section 1502 of the Corporations Code of California. (b) Notwithstanding the provisions of paragraph (a) of this section, if there has been no change in the information contained in the corporation's last annual statement on file in the Secretary of State's office, the corporation may, in lieu of filing the annual statement described in paragraph (a) of this section, advise the Secretary of State, on the appropriate form, that no changes in the required information have occurred during the applicable period. 16 ARTICLE VII Shares of Stock Every holder of shares in the corporation shall be entitled to have a certificate signed in the name of the corporation by the Chairman or Vice Chairman of the Board (if there be such officers appointed) or the President or a Vice-President and by the Chief Financial Officer or Any Assistant Chief Financial Officer or the Secretary or any Assistant Secretary, certifying the number of shares and the class or series of shares owned by the shareholder. Any of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate has ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if such person were an officer, transfer agent or registrar at the date of issue. Any such certificate shall also contain such legends or other statements as may be required by Sections 417 and 418 of the General Corporation Law, the Corporate Securities Law of 1968, federal or other state securities laws, and any agreement between the corporation and the issue of the certificate. Certificates for shares may be issued prior to full payment, under such restrictions and for such purposes as the Board of Directors or these Bylaws may provide; provided, however, that the certificate issued to represent any such partly paid shares shall state on the face thereof the total amount of the consideration to be paid therefor, the amount remaining unpaid and the terms of payment. No new certificate for shares shall be issued in lieu of an old certificate unless the latter is surrendered and cancelled at the same time; provided, however, that a new certificate will be issued without the surrender and cancellation of the old certificate if (1) the old certificate is lost, apparently destroyed or wrongfully taken; (2) the request for the issuance of the new certificate is made within a reasonable time after the owner of the old certificate has notice of its loss, destruction, or theft; (3) the request for the issuance of a new certificate is made prior to the receipt of notice by the corporation that the old certificate has been acquired by a bona fide purchaser; (4) the owner of the old certificate files a sufficient indemnity bond with or provides other adequate security to the corporation; and (5) the owner satisfies any other reasonable requirement imposed by the corporation. In the event of the issuance of a new certificate, the rights and liabilities of the corporation, and of the holders of the old and new certificates, shall be governed by the provisions of Sections 8104 and 8405 of the California Commercial Code. ARTICLE VIII Inspection of Corporate Records Section 8.1 General Records. The accounting books and records and the minutes of proceedings of the shareholders, the Board of Directors and committees thereof of the corporation and any subsidiary of the corporation shall be open to inspection upon the written demand on the corporation of any shareholder or holder of a voting trust certificate at any reasonable time during usual business hours, for a purpose reasonably related to such holder's interests as a shareholder or as the holder of such voting trust certificate. Such inspection by a shareholder or holder of a voting trust certificate may be made in person or by agent or attorney, and the right of inspection includes the right to copy and make extracts. Minutes 17 of proceedings of the shareholders, Board, and committees thereof shall be kept in written form. Other books and records shall be kept either in written form or in any other form capable of being converted into written form. A shareholder or shareholders holding at least five percent (5%) in the aggregate of the outstanding voting shares of the corporation or who hold at least one percent (1%) of such voting shares and have filed a Schedule 14B with the United States Securities and Exchange Commission relating to the election of directors of the corporation shall have (in person, or by agent or attorney) the right to inspect and copy the record of shareholders' names and addresses and shareholdings during usual business hours upon five (5) business days' prior written demand upon the corporation or to obtain from the transfer agent for the corporation, upon written demand and upon the tender of its usual charges for such list, a list of the shareholders' names and addresses, who are entitled to vote for the election of directors, and their shareholdings, as of the most recent record date for which it has been compiled or as of a date specified by the shareholder subsequent to the date of demand. The list shall be made available on or before the later of five (5) business days after the demand is received or the date specified therein as the date as of which the list is to be compiled. Every director shall have the absolute right at any reasonable time to inspect and copy all books, records and documents of every kind and to inspect the physical properties of the corporation and its subsidiaries. Such inspection by a director may be made in person or by agent or attorney, and the right of inspection includes the right to copy and make extracts. Section 8.2 Inspection of Bylaws. The corporation shall keep at its principal executive office in California, or if its principal executive office is not in California, then at its principal business office in California (or shall otherwise provide upon written request of any shareholder if it has no such office in California) the original or a copy of these Bylaws as amended to date, which shall be open to inspection by the shareholders at all reasonable times during office hours. ARTICLE IX Indemnification of Officers, Directors, Employees and Agents Section 9.1 Right to Indemnification. Each person who was or is a party or is threatened to be made a party to or is involved (as a party, witness, or otherwise), in any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative (hereafter a "Proceeding"), by reason of the fact that he, or a person of whom he is the legal representative, is or was a director, officer, employee, or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, or other enterprise, or was a director, officer, employee, or agent of a foreign or domestic corporation that was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation, including service with respect to employee benefit plans, whether the basis of the Proceeding is alleged action in an official capacity as a director, officer, employee, or agent or in any other capacity while serving as a director, officer, employee, or agent (hereafter an "Agent"), shall be indemnified and held harmless by the corporation to the fullest extent authorized by statutory and decisional law, as the same exists or may hereafter be interpreted or amended (but, in the case of any such amendment or interpretation, only to the extent that such amendment or interpretation permits the corporation to provide broader indemnification rights 18 than were permitted prior thereto) against all expenses, liability, and loss (including attorneys' fees, judgments, fines, ERISA excise taxes and penalties, amounts paid or to be paid in settlement, any interest, assessments, or other charges imposed thereon, and any federal, state, local, or foreign taxes imposed on any Agent as a result of the actual or deemed receipt of any payments under this Article) [reasonably] incurred or suffered by such person in connection with investigating, defending, being a witness in, or participating in (including on appeal), or preparing for any of the foregoing in, any Proceeding (hereafter "Expenses"); provided, however, that except as to actions to enforce indemnification rights pursuant to Section 9.3 of these Bylaws, the corporation shall indemnify any Agent seeking indemnification in connection with a Proceeding (or part thereof) initiated by such person only if the Proceeding (or part thereof) was authorized by the Board of Directors of the corporation. The right to indemnification conferred in this Article shall be a contract right. It is the corporation's intention that these bylaws provide indemnification in excess of that expressly permitted by Section 317 of the California General Corporation Law, as authorized by the corporation's Articles of Incorporation. Section 9.2 Authority to Advance Expenses. Expenses incurred by an officer or director (acting in his capacity as such) in defending a Proceeding shall be paid by the corporation in advance of the final disposition of such Proceeding, provided, however, that if required by the California General Corporation Law, as amended, such Expenses shall be advanced only upon delivery to the corporation of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the corporation as authorized in this Article or otherwise. Expenses incurred by other Agents of the corporation (or by the directors or officers not acting in their capacity as such, including service with respect to employee benefit plans) may be advanced upon the receipt of a similar undertaking, if required by law, and upon such other terms and conditions as the Board of Directors deems appropriate. Any obligation to reimburse the corporation for Expense advances shall be unsecured and no interest shall be charged thereon. Section 9.3 Right of Claimant to Bring Suit. If a claim under Section 9.1 or 9.2 of these Bylaws is not paid in full by the corporation within thirty (30) days after a written claim has been received by the corporation, the claimant may at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense (including attorneys' fees) of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending a Proceeding in advance of its final disposition where the required undertaking has been tendered to the corporation) that the claimant has not met the standards of conduct that make it permissible under the California General Corporation Law for the corporation to indemnify the claimant for the amount claimed. The burden of proving such a defense shall be on the corporation. Neither the failure of the corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper under the circumstances because he has met the applicable standard of conduct set forth in the California General Corporation Law, nor an actual determination by the corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the claimant had not met such applicable standard of conduct, shall be a defense to the action or create a presumption that claimant has not met the applicable standard of conduct. 19 Section 9.4 Provisions Nonexclusive. The rights conferred on any person by this Article shall not be exclusive of any other rights that such person may have or hereafter acquire under any statute, provision of the Articles of Incorporation, agreement, vote of stockholders or disinterested directors, or otherwise, both as to action in an official capacity and as to action in another capacity while holding such office. To the extent that any provision of the Articles, agreement, or vote of the stockholders or disinterested directors is inconsistent with these bylaws, the provision, agreement, or vote shall take precedence. Section 9.5 Authority to Insure. The corporation may purchase and maintain insurance to protect itself and any Agent against any Expense asserted against or incurred by such person, whether or not the corporation would have the power to indemnify the Agent against such Expense under applicable law or the provisions of this Article, provided that, in cases where the corporation owns all or a portion of the shares of the company issuing the insurance policy, the company and/or the policy must meet one of the two sets of conditions set forth in Section 317 of the California General Corporation Law, as amended. Section 9.6 Survival of Rights. The rights provided by this Article shall continue as to a person who has ceased to be an Agent and shall inure to the benefit of the heirs, executors, and administrators of such person. Section 9.7 Settlement of Claims. The corporation shall not be liable to indemnify any Agent under this Article (a) for any amounts paid in settlement of any action or claim effected without the corporation's written consent, which consent shall not be unreasonably withheld; or (b) for any judicial award, if the corporation was not given a reasonable and timely opportunity, at its expense, to participate in the defense of such action. Section 9.8 Effect of Amendment. Any amendment, repeal, or modification of this Article shall not adversely affect any right or protection of any Agent existing at the time of such amendment, repeal, or modification. Section 9.9 Subrogation. In the event of payment under this Article, the corporation shall be subrogated to the extent of such payment to all of the rights of recovery of the Agent, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable the corporation effectively to bring suit to enforce such rights. Section 9.10 No Duplication of Payments. The corporation shall not be liable under this Article to make any payment in connection with any claim made against the Agent to the extent the Agent has otherwise actually received payment (under any insurance policy, agreement, vote, or otherwise) of the amounts otherwise indemnifiable hereunder. 20 ARTICLE X Amendments Section 10.1 Power of Shareholders. New bylaws may be adopted or these Bylaws may be amended or repealed by the affirmative vote of a majority of the outstanding shares entitled to vote, or by the written assent of such shareholders entitled to vote such shares, except as otherwise provided by law or by the Articles of Incorporation. Section 10.2 Power of Directors. Subject to the right of shareholders as provided in Section 1 of this Article X to adopt, amend or repeal these Bylaws, these Bylaws (other than a bylaw or amendment thereof changing the authorized number of directors, or providing for the approval by the Board, acting alone, of a loan or guarantee to any officer or an employee benefit plan providing for the same) may be adopted, amended or repealed by the Board of Directors. ARTICLE XI Definitions Unless the context otherwise requires, the general provisions, rules of construction and definitions contained in the General Corporation Law as amended from time to time shall govern the construction of these Bylaws. Without limiting the generality of the foregoing, the masculine gender includes the feminine and neuter, the singular number includes the plural and the plural number includes the singular, and the term "person" includes a corporation as well as a natural person. 21 CERTIFICATE OF SECRETARY The undersigned, Secretary of kNUTEK HOLDINGS, INC., a California corporation, hereby certifies that the foregoing is a full, true and correct copy of the Bylaws of the corporation with all amendments to date of this Certificate. WITNESS the signature of the undersigned this___ day of _______, 2001. ____________________________________ Jim Knut Larsson, Secretary SF\25971.1 22 EX-21 6 ex21.txt LIST OF SUBSIDIARIES EXHIBIT 21 LIST OF SUBSIDIARIES OF kNUTEK HOLDINGS, INC. 1. KNutek International, Inc., organized under the Delaware General Corporation Law, also doing business as "kNutek, Inc." in the State of Ohio. EX-23 7 ex23.txt CONSENT OF ACCOUNTANT EXHIBIT 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders kNutek Holdings, Inc. As independent certified public accountants, we hereby consent to the use of our report dated June 11, 2002 with respect to the financial statements of kNutek Holdings, Inc., included in the Registration Statement on Form SB-2 and consent to the use of our name in the "Experts" section of this Registration Statement. /s/ HANSEN, BARNETT & MAXWELL June 18, 2002 Salt Lake City, Utah -----END PRIVACY-ENHANCED MESSAGE-----