FILED PURSUANT TO RULE 424B(2)
REGISTRATION NO. 333-113925
KAHIKI FOODS, INC.
100,000 Common Shares
This registration statement relates to 100,000 common shares of Kahiki
Foods, Inc.
The common shares, may be offered to the public by the selling shareholder
and we will not receive any proceeds from the sale of the common shares.
The common shares are not traded on any national securities exchange or on
the NASDAQ stock market. The common shares are quoted on the pink sheets under
the symbol "KSCI." The selling shareholder will be required to sell its common
shares at $3.75 per share, until our common shares are quoted on the
Over-the-Counter Bulletin Board and thereafter at prevailing market prices or
privately negotiated prices. We will pay all expenses of registering the
securities.
THE SECURITIES OFFERED HEREBY INVOLVE A CERTAIN DEGREE OF RISK. SEE 'RISK
FACTORS" BEGINNING ON PAGE 4
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED
UPON THE ACCURACY AND ADEQUACY OF THIS OFFERING. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Registration Statement is October 19, 2004.
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SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this registration statement. Prospective
investors should read the entire prospectus before making an investment
decision.
ABOUT US
Kahiki Foods, Inc. was incorporated in Ohio in 1982. Our principal
business is to develop, manufacture and market frozen and other finished Asian
food products. In 1982, we acquired a Polynesian restaurant in Columbus, Ohio
known as the Kahiki Restaurant. We began a food processing operation in 1988 and
in 1995 we opened a 7,000 square foot FDA approved processing facility. In 2000
we sold the restaurant and focused solely on our food processing business.
Today, foods sold by us are packaged in bulk and/or frozen containers and
include a wide variety of products, including egg rolls, appetizers, fried rice,
sauces, meal kits, single serve entrees and family meal entrees. Our products
are distributed to foodservice companies and institutions, retail grocery store
chains and warehouse club stores. Our principal executive offices are located at
1100 Morrison Road, Columbus, Ohio 43230 and our telephone number is (614)
332-3180.
TERMS OF OFFERING
SECURITIES OFFERED: Common shares.
OFFERING PERIOD: The common shares are being offered on a "best efforts"
basis by the selling shareholder from time to time at a
price of $3.75 per share.
COMMON SHARES
OUTSTANDING 3,588,848 common shares.
SUMMARY FINANCIAL INFORMATION
The following information has been derived from our financial statements
included elsewhere in this prospectus and should be read in conjunction with
such financial statements and the related notes thereto.
INCOME STATEMENT DATA Year Ended March 31 Three Months Ended June 30
- --------------------- -------------------------------------------------- -------------------------------
2004 2003 2002 2004 2003
----------- ------------ ----------- ----------- ------------
(unaudited)
Net Sales $14,761,923 $ 9,204,684 $ 9,374,917 $ 5,306,536 $ 1,801,301
Net Income (loss) $ 698,113 (85,923) 77,451 $ 145,087 (70,668)
Net Income Per Share $ 0.24 (.03) .03 $ 0.04 (0.02)
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BALANCE SHEET DATA March 31 2004 June 30, 2004
------------- -------------
(unaudited)
Total Assets $13,028,737 $13,789,962
Working Capital $ 701,103 $ 517,256
Long Term Debt $ 5,148,181 $ 5,018,138
Total Liabilities $ 9,680,870 $ 9,706,055
Shareholders' Equity $ 3,347,592 $ 3,483,907
RISK FACTORS
Prospective purchasers should carefully consider the following risk
factors, in addition to the other information contained in this prospectus,
before purchasing the securities being offered.
We depend on a few key employees and the loss of our
president should have a severe impact on us -The applied talent and
experience of our President, Michael C. Tsao, provides the critical
management skills necessary to guide and protect our financial and
operational well being. Our prospects would be severely affected if
Mr. Tsao, for any reason, were unable to continue to perform his
duties. For example, it is an event of default under our current
bank financing if Mr. Tsao ceases to serve as our President.
Our Management holds a majority of our outstanding
common shares, which may affect the ability of minority shareholders
to influence our activities - Assuming no exercise of warrants or
options, current management owns approximately 57.50% of our
outstanding common shares. As a result, current management is in a
position to effectively elect all of our Directors and control our
affairs and policies.
If we are unable to obtain additional funding, we may be
unable to fully implement our plan of operations - The rapid
expansion of our business and the costs associated with constructing
and equipping our new manufacturing facility have strained our cash
flow. As a result, we are seeking additional financing through
traditional bank financing or a debt or equity offering. There can
be no assurances of our ability to obtain financing for our
operations.
Raw material cost increases could materially impact our
business - We purchase the raw materials (vegetables, rice and
meats) which go into our products from a variety of sources locally
and regionally. We have not entered into any long term supply
contracts with our raw material suppliers. Increases in the costs of
raw materials could have a material adverse effect on our business
and our ability to compete with larger, integrated food
manufacturers.
We may be exposed to potential product liability claims
which could have an adverse impact on our business - While we
endeavor to sell safe products, there is a possibility that a vendor
could handle our products improperly or that someone could have an
adverse reaction to a product. We maintain commercial general
liability insurance in the amount of $1,000,000 per occurrence and
$2,000,000 aggregate. Although we believe that the amount of
insurance coverage is sufficient for our operations, there is no
assurance that the coverage will be adequate. Any successful claims
against us in excess of our insurance coverage could have a material
adverse effect on Kahiki.
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Governmental regulations may lead to increased costs and
decreased revenues, both of which may negatively affect our
potential profitability - We are subject to extensive regulations by
federal, state and local governmental authorities regarding the
quality, purity, manufacturing, distribution and labeling of food
products. Our manufacturing facility is subject to regulation and
inspection by the United States Department of Agriculture, the
United States Food and Drug Administration, and the State of Ohio
Departments of Agriculture and Health. A finding of a failure to
comply with one or more regulatory requirements can result in the
imposition of sanctions including the closing of all or a portion of
our facility for a period of time. In addition to licensing
requirements, a regulatory agency could declare a food product
hazardous or limit its use or require a recall. We believe that we
are in substantial compliance with all material governmental
regulations regarding our products and that we have all government
permits, licenses, qualifications and approvals required for our
operations. However, there can be no assurance that we will be able
to continue to comply with those regulations, or comply with future
regulations, without inordinate costs or interruption of our
operations.
Because we depend on a limited number of principal
customers for a majority of our sales, a loss of one principal
customer could materially adversely affect our business and
financial condition - Our ten largest accounts represented 64.4% of
our sales in the year ended March 31 2004 and 67.9% of our sales in
the year ended March 31, 2003. For the year ended March 31, 2004,
Costco represented approximately 26.75%, Meijer's represented
approximately 7.12% and Wal-Mart represented approximately 14.5% of
our total sales. For the year ended March 31, 2003, Costco
represented approximately 11%, Wal-Mart represented approximately
11.3% and Sam's Club represented approximately 20% of our total
sales. We do not have contractual arrangements with our principal
customers. If these companies cease ordering products from us, our
business could be materially adversely affected.
Our business could be adversely affected if we are
unable to adequately protect our proprietary technology - The
proprietary technology we own or intend to acquire or develop will
be one of the keys to our performance and ability to remain
competitive. Our current intellectual property consists of recipes
and cooking processes for our products and four trademarks. We may
rely on a combination of patent, trademark, copyright and trade
secret laws to establish and protect our proprietary rights. We will
also use technical measures, confidentiality agreements and
non-compete agreements to protect our proprietary rights. We may
however not be able to secure significant protection for service
marks or trademarks we obtain. Our competitors or others could adopt
product names similar to ours. Any of these actions by others might
impede our ability to build brand identity and could lead to
consumer confusion. Our inability to protect our brand name
adequately could adversely affect our business and financial
condition.
The steps we take to protect our proprietary information
may not prevent misappropriation of our technology, and the
agreements we enter into for that purpose might not be enforceable.
The laws of other countries may not provide us with adequate or
effective protection of our intellectual property.
Our initial public offering price may have little or no
relationship to the price that would be established using
traditional valuation methods, and therefore, the initial public
offering price may not be sustainable once trading begins. The
selling shareholder determined the offering price for our common
shares. The offering price of our shares may have a little or no
relationship to the price that would be established using
traditional indicators of value, such as our future prospects and
those of our industry in general; our sales, earnings and other
financial and operating information; multiples of earnings, cash
flows, and other operating metrics; market prices of securities and
other financial and operating information of companies engaged in
activities similar to ours; and the views of research analysts. As a
result, our initial public price may not be sustainable once trading
begins, and the price of our common shares may decline.
An active trading market for our shares may never
develop which may lead to increased investment risk and inability to
sell your shares - Our common shares are not listed for trading on
any established market and trade infrequently. We will endeavor to
list our common shares on the OTC Bulletin Board and, eventually, on
NASDAQ. We cannot provide any assurance that our common shares will
be quoted
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or continue to be quoted on the OTC Bulletin Board or NASDAQ. If
there is no market for trading our common shares, the market price
of our common shares will be materially and adversely affected.
We will incur increased costs as a result of being a
public company - As a public company, we will incur significant
legal, accounting and other expenses that we did not incur as a
private company. We will incur costs associated with our public
company reporting requirements. We also anticipate that we will
incur costs associated with recently adopted corporate governance
requirements, including requirements under the Sarbanes-Oxley Act of
2002, as well as new rules implemented by the Securities and
Exchange Commission and the NYSE and NASDAQ. We expect these rules
and regulations to increase our legal and financial compliance costs
and to make some activities more time-consuming and costly. As a
result, it may be more difficult for us to attract and retain
qualified individuals to serve on our board of directors or as
executive officers. We are currently evaluating and monitoring
developments with respect to these new rules, and we cannot predict
or estimate the amount of additional costs we may incur or the
timing of such costs.
DIVIDEND POLICY
We have never paid cash dividends on our common shares. Holders of
common shares are entitled to receive dividends when, as and if declared by our
Board of Directors out of funds legally available therefore. Our ability to pay
dividends will depend upon our future earnings and net worth. We are restricted
by Ohio law from paying dividends on any of our outstanding shares while
insolvent or if such payment would result in a reduction of our stated capital
below the required amount.
It is the intention of our Board periodically to consider the payment of
dividends, based on future earnings, operating and financial condition, capital
requirements and other factors deemed relevant by the Board. There is no
assurance that we will be able or will desire to pay dividends in the near
future or, if dividends are paid, in what amount. Our Board may decide not to
pay dividends in the near future, even if funds are legally available therefore,
in order to provide us with more funds for operations. See "DESCRIPTION OF
SECURITIES - Common Shares".
USE OF PROCEEDS
We will not receive any proceeds from the sale of the common shares by the
selling shareholder.
SELLING SHAREHOLDER
The following table set forth the name of the selling shareholder,
position with Kahiki Foods, Inc., if any, and the number of common shares,
warrants and options owned by them. The number of common shares being registered
are a portion of the common shares and warrants owned by such person. The number
of common shares which may actually be sold by the selling shareholder will be
determined from time to time by them, and will depend upon a number of factors,
including the price of our common shares from time to time. Because the selling
shareholder may offer all, some or none of the common shares that they hold, and
because any potential offering by the selling shareholder is not being
underwritten, no estimate can be given as to the number of common shares that
will be held by the selling shareholder upon termination of such offering. See
"Plan of Distribution." The table sets forth such information as of September
30, 2004, concerning the beneficial ownership of the common shares and warrants
by the selling shareholder. All information as to beneficial ownership has been
furnished by the selling shareholder.
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Number of Number of Number of Number of Percentage of
Name and Address Common Common $2.25 Number of Common Common
of Shareholder Shares Shares Being Warrants $3.00 Warrants Shares Owned Shares Owned
(Position with Owned prior Sold in this Owned prior Owned prior to subsequent to subsequent to
Kahiki) to Offering Offering to Offering Offering Offering(3) Offering(6)
------- ----------- -------- ----------- -------- ----------- -----------
Barron Partners LP(1) (2) 588,235 100,000 294,117 294,117 488,235 13.6%
730 Fifth Avenue
9th Floor
New York, N.Y.
(None)
- ---------------------------
(1) Barron Partners LP is a Delaware limited partnership. The general partner
of Barron Partners LP is Barron Capital Advisors LLC, a Delaware limited
liability company. Andrew Barron Worden is the managing member of the
Barron Capital Advisors LLC.
(2) Except as a shareholder since February 27, 2004, Barron Partners LP has
not had a material relationship with Kahiki in the past three years.
(3) Assumes that all securities offered are sold
DETERMINATION OF OFFERING PRICE
The selling shareholder has determined the offering price for the
selling shareholder's shares. The offering price has been arbitrarily determined
and does not bear any relationship to our assets, results of operations, or book
value, or to any other generally accepted criteria of valuation. Prior to this
offering, there has been a very limited market for our common shares. The
selling shareholder will be required to sell their shares at a price of $3.75
per share until our shares are quoted on the Over-the-Counter Bulletin Board and
thereafter at prevailing market prices or privately negotiated prices.
PLAN OF DISTRIBUTION
We will receive no proceeds from the sale of 100,000 common shares by the
selling shareholder. The common shares, may be sold from time to time to
purchasers directly by the selling shareholder. The selling shareholder has not
indicated any current plan to distribute the common shares, and it is
anticipated that they will either offer the common shares for sale for their own
account or retain them for investment.
The selling shareholder may, from time to time, sell any or all of their
common shares on any stock exchange, market or trading facility on which the
shares are then traded or in private transactions at the price listed on the
cover page of this prospectus until our shares are quoted on the
Over-the-Counter Bulletin Board and thereafter at prevailing market prices or
privately negotiated prices. The selling shareholder may use any one or more of
the following methods to sell their shares: ordinary brokerage transactions and
transactions in which the broker-dealer solicits purchasers; block trades in
which the broker-dealer will attempt to sell the shares as agent but may
position and resell a portion of the block of shares as principal to facilitate
the transaction; purchases by a broker-dealer as principal and resale by the
broker-dealer for its account; an exchange distribution in accordance with the
rules of the applicable exchange; privately negotiated transactions; a
combination of any such methods of sale; and any other method permitted pursuant
to applicable law.
The selling shareholder, acting alone or in concert with others, may be
considered statutory underwriters under the Securities Act of 1933 if they are
directly or indirectly conducting an illegal distribution of the securities on
behalf of our corporation. If the selling shareholder is determined to be an
underwriter, they may be liable for securities violations in connection with any
material misrepresentations or omissions made in this prospectus.
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We intend to seek qualification for sale of the securities in those states
where the securities will be offered. That qualification is necessary to resell
the securities in the public market. The securities may only be resold if the
securities are qualified for sale or are exempt from qualification in the states
in which the selling shareholder or proposed purchasers reside. There is no
assurance that the states in which we seek qualification will approve of the
security resales.
In addition, the selling shareholder and any brokers and dealers through
whom sales of the securities are made may be deemed to be "underwriters" within
the meaning of the Securities Act of 1933, and the commissions or discounts and
other compensation paid to such persons may be regarded as underwriters'
compensation.
The selling shareholder may pledge all or a portion of their securities as
collateral for margin accounts or in loan transactions, and the securities may
be resold pursuant to the terms of such pledges, accounts or loan transactions.
Upon default by such selling shareholder, the pledgee in such loan transaction
would have the same rights of sale as the selling shareholder under this
prospectus. The selling shareholder may also enter into exchange traded listed
option transactions, which require the delivery of the securities listed under
this prospectus. The selling shareholder may also transfer securities owned in
other ways not involving market makers or established trading markets, including
directly by gift, distribution, or other transfer without consideration, and
upon any such transfer the transferee would have the same rights of sale as such
selling shareholder under this prospectus.
In addition to the above, the selling shareholder and any other person
participating in a distribution will be affected by the applicable provisions of
the Securities Exchange Act of 1934, including, without limitation, Regulation
M, which may limit the timing of purchases and sales of any of the securities by
the selling shareholder or any such other person.
There can be no assurances that the selling shareholder will sell any or
all of the securities. In order to comply with state securities laws, if
applicable, the securities will be sold in jurisdictions only through registered
or licensed brokers or dealers. In various states, the securities may not be
sold unless these securities have been registered or qualified for sale in such
state or an exemption from registration or qualification is available and is
complied with. Under applicable rules and regulations of the Securities Exchange
Act of 1934, as amended, any person engaged in a distribution of the securities
may not simultaneously engage in market-making activities in these securities
for a period of one (1) or five (5) business days prior to the commencement of
such distribution.
All of the foregoing may affect the marketability of the securities.
Pursuant to the various agreements we have with the selling shareholder, we will
pay all the fees and expenses incident to the registration of the securities,
other than underwriting discounts and commissions, if any, which are to be paid
by the selling shareholder.
Should any substantial change occur regarding the status or other matters
concerning the shareholder, we will file an amendment to this prospectus
disclosing such matters.
DIRECTORS AND EXECUTIVE OFFICERS
The names of, and certain information with respect to, each of our
officers and Directors are as follows:
Michael C. Tsao 53 Chairman of the Board, President and 1982
chief Executive Officer
Alice W. Tsao 53 Vice President, Secretary and Director 1982
Dr. Winston Bash 67 Director 1993
Alan Hoover 49 Senior Vice President-Sales and Marketing, 1999
Director
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Bob Binsky 64 Director 1995
Bradford M. Sprague 53 Director 2004
Charles Dix 41 Director 2004
Allen J. Proctor 52 Director 2004
R.L. Richards 56 Director 2004
Julia A. Fratianne 41 Chief Financial Officer and Treasurer N/A
Kenneth H. Kisner 64 Controller N/A
Alfred Cheung 49 Vice President, Operations N/A
All Directors are elected at the Annual Meeting of the Shareholders to
serve for one year or until their successors are duly elected and qualified.
Officers serve at the pleasure of the Board of Directors.
The following is a brief summary of the business experience of each of our
Directors and executive officers:
MICHAEL C. TSAO is our President and Chairman and has served in those
capacities since 1982. Mr. Tsao has over thirty years of experience in the
restaurant industry. He has served in an executive capacity for both full
service and fast food restaurants. Prior to 1982, he served as President and
General Manager of The Columbus Sheraton Plaza, a 400 room hotel. His experience
in the food processing industry includes finance, operations, marketing
analysis, purchasing, food preparation and facility management. Mr. Tsao managed
and operated the Kahiki Restaurant for more than twenty years. From 1995 to
2000, Mr. Tsao was a director of Cable Link, Inc. (nka A Novo Broadband ) a
major supplier of new and used cable tv equipment. Mr. Tsao is a graduate of
Pasadena City College (Business Administration).
ALICE W. TSAO is our Vice-President, Secretary and a Director and has
served in those capacities since 1982. She has an Associates Degree from the Los
Angeles Business College, with a major in computer science. Mrs. Tsao has been
active in Kahiki's business with her husband Michael C. Tsao for the past twenty
years.
DR. WINSTON BASH has been a member of our Board of Directors since 1993.
From 1983-2001 Dr. Bash held various positions with The Ohio State University
including being the Director of Food Industries Center (College of Agriculture)
and an instructor of several departments with most of the classes majoring in
Food Process and Technology. He received his Ph.D., M.S. and B.S., from The Ohio
State University. Dr. Bash's past experience prior to 1983 includes owning and
operating the Rockford Meat Processing Company in Rockford, Ohio. He also was
Vice-President and Production Manager of Friday Canning Corporation in New
Richmond, Wisconsin and the General Sales Manager of the FMC Corporation, in the
Eastern Operation Food Processing Machinery Division, located in Hoopeston,
Illinois. Dr. Bash is also the co-inventor on a patent issued in 1972 on Forced
Draft Evaporative Cooling for Hydroflex Sterilizers assigned to FMC Corporation.
Dr. Bash is also accredited for many publications on food processing procedures.
ALAN L. HOOVER became a Director in September, 1999. Mr. Hoover joined us
in May, 1999 as Senior Vice President, Sales and Marketing. Prior to joining us,
Mr. Hoover was Vice President, National Accounts for Tenneco
Packaging/Pressware, a manufacturer of packaging and labels, in Columbus, Ohio.
Mr. Hoover received his B.S. (Administrative Management) from Clemson University
and his M.B.A. (Financial Management) from Benedictine University.
BOB BINSKY has been a member of our Board of Directors since 1995. He was
a Director and Executive Vice President of Cable Link Inc. (nka A Novo Broadband
Incorporated), a major supplier of new and used cable tv equipment, from 1994 to
August 2000. From August, 2000 to September, 2002, Mr. Binsky was a Director and
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Manager of New Business Development of A Novo Broadband, Incorporated. Since
October 2002, Mr. Binsky has been a business consultant providing cost
containment, financial and marketing advice to various privately-held companies.
BRADFORD M. SPRAGUE became a member of our Board of Directors in 2004.
Since 2001, Mr. Sprague has been the Senior Vice President of First Capital
Financial Group (dba Prism Financial Solutions), a financial advisory firm
located in Columbus, Ohio. For ten years prior to forming Prism Financial
Solutions, Mr. Sprague was the manager of A.G. Edwards & Sons, Inc.'s Columbus,
Ohio public finance office. Mr. Sprague earned an undergraduate degree from
Miami University and a Masters of Public Administrative from the Ohio State
University.
CHARLES DIX became a member of our Board of Directors in 2004. Since 1989,
Mr. Dix has held various positions with Townsends, Inc., a Delaware based
family-owned poultry corporation, including as General Manager - Townsends
Culinary (1997-1998); as Complex Manager - Delaware Business Unit (1998 - 2000);
and as the President and Chief Operating Officer (2000-present). Townsends, Inc,
supplies chicken products to Kahiki at competitive prices. Mr. Dix received his
BSBA in Management degree from Shippensburg University.
ALLEN J. PROCTOR became a member of our Board of Directors in 2004. Since
2001, Dr. Proctor has been the principal of Allen Proctor Consulting, LLC, a
Columbus Ohio based advisor to CEO's on strategic planning, financial reporting
and investment oversight. Prior to forming Allen Proctor Consulting, LLC, Dr.
Proctor was the Executive Director of the Ohio Police & Fire Pension Fund
(1997-2001) and Vice President of Finance of Harvard University (1994-1997). Dr.
Proctor's prior experience includes stints with the New York State Financial
Control Board; Columbia University Graduate School of Business; Office of
Management and Budget, City of New York; the Federal Reserve Bank of New York;
and the International Bank for Reconstruction and Development. Dr. Proctor is a
member of various non profit boards. He received his A.B. degree from Harvard
University and PhD in international trade and finance from the University of
Wisconsin-Madison.
R.L. RICHARDS became a member of our Board of Directors in 2004. Since
1978, Mr. Richards has been Trustee of the R. David Thomas Trust, or its
affiliates, directing the private business activities of the Thomas Family. Mr.
Richards also serves on the boards of Acceptance Insurance Companies, Inc.,
Fifth Third Bank, Columbus, Ohio Division and Stanley Steemer International,
Inc. Mr. Richards received a B.A. Economics and Political Science from
Wittenberg University and J.D. from the Ohio State University - Michael Moritz
College of Law.
JULIA A. FRATIANNE joined us in March, 2004 as our Chief Financial Officer
and became Treasurer in August 2,004. From 1987 to 2003, Ms. Fratianne held
various finance positions with Metatec, Inc. (nka Inoveris, LLC), a Dublin, Ohio
manufacturer of CD-ROMs, including as Vice President, Finance, Secretary and
Treasurer from May, 1997 to October, 1998, and as Vice President, Finance and
Administration from October 1998 to December, 2003. Ms. Fratianne received her
B.S. (Accounting) from Miami University and is a certified public accountant.
KENNETH H. KISNER is our Controller and was Treasurer until August, 2004.
He is a graduate of Griswold Business College, with a major in Accounting. Mr.
Kisner has been with us for the past fifteen years and prior to that he was
controller for the Columbus Sheraton for approximately five years. Mr. Kisner is
in charge of management support, payrolls, accounts receivable and payable, and
maintaining and updating of all our records.
ALFRED CHEUNG joined us in 2003 as our Vice President, Operations. Mr.
Cheung has over 25 years of experience in the food industry in research and
development, quality management and food processing. From 1998 to 2003, Mr.
Cheung was a lecturer with the University of Hong Kong, Graduate School, Food
Industry Management and Marketing. Additionally, from 2001-2002, Mr. Cheung was
a consultant to Yum! Brands (the parent company of KFC, Pizza Hut and Taco
Bell), Hong Kong, and from 1998-2001, a consultant and director, Technical &
Engineering Services of Tung Chun Company, a food manufacturer located in Hong
Kong. Mr.
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Chung received his B.S. in food science degree from the University of Minnesota
and his masters degree in food science from the University of Illinois.
The Board of Directors recently formed three committees. The Compensation
Committee, which is charged with setting the compensation of our executive
officers, consists of Bradford Sprague, Dr. Winston Bash and Charles Dix. The
Audit committee, which will select the firm of independent public accountants
that audit our financial statements, discuss the scope and results of the audit
and discuss our financial accounting and reporting principles and the adequacy
of our financial controls with the accountants and management, consists of Allen
Proctor, Bradford Sprague and R.L. Richards. The Strategy Committee, which will
chart the direction of Kahiki, consists of R.L. Richards, Allen Proctor, Bob
Binsky, Charles Dix, and Bradford Sprague.
All Directors are elected at the Annual Meeting of the Shareholder to
serve for one year or until their successors are duly elected and qualified.
Officers serve at the pleasure of the Board of Directors.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our Amended Articles of Incorporation provide that Kahiki shall indemnify
any Director or Officer (and may indemnify any other employee or agent of Kahiki
or of another entity) who was or is a party or is threatened to be made a party,
to any threatened, pending, or completed action, suit, or proceeding, whether
civil, criminal, administrative, or investigative, by reason of the fact that he
is or was a director, officer, employee, or agent of Kahiki or is or was serving
at the request of Kahiki as a director, officer, trustee, employee or agent of
another company, domestic or foreign, non-profit or for-profit, partnership
joint venture, trust or other enterprise, against expenses, including attorneys'
fees, judgments, fines, and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit, or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of Kahiki, and with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit, or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best interest
of Kahiki.
Determination of rights to indemnification shall be made by a majority
vote of a quorum of the directors, or by the court in which such action, suit or
proceeding was brought.
We may obtain and maintain liability insurance against liabilities of its
directors, officers, employees and agents, sufficient to cover its obligations
under these indemnification provisions, and may obtain such liability insurance
for liabilities of such persons not subject to any obligations of Kahiki under
these indemnification provisions.
The indemnification provided thereunder shall not be deemed exclusive of
any other rights to which those seeking indemnification may be entitled under
any agreement or vote of shareholders or disinterested directors. In addition,
if at any time the Ohio Revised Code ("Code") shall have been amended to
authorize further elimination or limitation of the liability of directors or
officers, then the liability of each director and officer of Kahiki shall be
eliminated or limited to the fullest extent permitted by such provisions, as so
amended, without further action by the shareholders, unless the provisions of
the Code require such action. The provision does not limit the right of Kahiki
or its shareholders to seek injunctive or other equitable relief not involving
payments in the nature of monetary damages.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers, and controlling persons of Kahiki
pursuant to the Articles of Incorporation, or otherwise, Kahiki has been advised
that in the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of September 30, 2004, certain
information concerning stock ownership of all persons known by us to own
beneficially five percent (5%) or more of our outstanding common shares, and
each director or officer and all officers and directors as a group:
Name and Address of Number of Common Percent of
Beneficial Owner Shares Owned(1) Class
---------------- ------------ -----
Michael C. Tsao 1,735,600(2) 34.45%
1100 Morrison Road
Columbus, Ohio 43230
Alice W. Tsao 1,735,600(2) 34.45%
1100 Morrison Road
Columbus, Ohio 43230
Dr. Winston Bash 66,922 1.33%
4093 Roselea Place
Columbus, Ohio 43214
Bob Binsky 500,392 9.93%
20185 E. County Club Dr.
North Miami Beach, Fl 33180
Alan Hoover 296,666 5.89%
1100 Morrison Road
Columbus, Ohio 43230
Bradford M. Sprague 5,400 .11%
1636 Sherbourne Lane
Powell, OH 43085
Charles Dix 2,000 .04%
30098 Southampton Bridge Road
Salisbury, Maryland 21804
Allen J. Proctor 4,000 .08%
471 Highgate Avenue
Worthington, Ohio 43085
R.L. Richards 3,000 .06%
5598 Preston Mill Way
Dublin, OH 43017
Julia A. Fratianne 0 0%
1100 Morrison Road
Columbus, Ohio 43230
Alfred Cheung 0 0%
1100 Morrison Road
Columbus, Ohio 43230
11
Kenneth H. Kisner 38,250 1.07%
1100 Morrison Road
Columbus, Ohio 43230
Barron Partners LP
730 Fifth Ave., 9th Floor 1,176,469(3) 23.35%
New York, New York 10019
Officers and Directors as a Group 2,652,230 52.68%
(11 Persons)
(1) Unless otherwise provided, the stated number of shares are owned directly
by the person named. Shares shown include the following shares subject to
options currently exercisable: Mr. Tsao, 12,000 shares; Ms. Tsao, 12,000
shares; Dr. Bash, 54,600 shares; Mr. Binsky, 200,600 shares; Mr. Hoover,
270,666 shares; Mr. Sprague, 3,000 shares; Mr. Dix, 2,000 shares; Mr.
Richards, 3,000 shares; Mr. Proctor, 4,000 shares; and Mr. Kisner, 28,000
shares.
(2) Michael C. Tsao and Alice W. Tsao are husband and wife. The listed shares
include 700,600 shares owned directly by Alice W. Tsao with respect to
which Michael C. Tsao disclaims beneficial ownership and 1,035,000 shares
owned by Michael C. Tsao with respect to which Alice W. Tsao disclaims
beneficial ownership.
(3) Includes shares issuable upon the exercise of 294,117 $2.25 Warrants and
294,117 $3.00 Warrants.
12
DESCRIPTION OF SECURITIES
COMMON SHARES
Our authorized capital consists of 10,000,000 common shares, without par
value. As of the date hereof, 3,588,848 common shares are outstanding. In
addition, 1,472,700 common shares are reserved for issuance upon exercise of
warrants and options.
Each holder of common shares is entitled to one vote for each share held
on any matter properly submitted to the shareholders for a vote but is not
entitled to vote cumulatively in the election of directors. The holders of
common shares do not have any preemptive, subscription or redemption rights. The
holders of common shares are entitled to receive dividends if, as and when
declared by the Board of Directors. See "DIVIDEND POLICY".
WARRANTS
We have authorized the issuance of 324,117 $2.25 Warrants. Each $2.25
Warrant is immediately exercisable and entitles the holder thereof to purchase
one common share at an exercise price of $2.25 per share until February 27,
2009. Additionally, we have authorized the issuance of 294,117 $3.00 Warrants.
Each $3.00 Warrant is immediately exercisable and entitles the holder thereof to
purchase one common share at an exercise price of $3.00 per share until February
27, 2009. The number of shares to be received upon exercise, and the exercise
price, are subject to adjustment in the event of a corporate reorganization,
restructuring, share dividend or other corporate action, to maintain the rights
of the warrant holders substantially as if such action had not occurred. We have
reserved 618,234 common shares for issuance upon the exercise of the warrants.
OPTIONS
We have authorized the issuance of 80,000 Common Share Purchase Options,
each option entitling the holder thereof to purchase one common share at an
exercise price of $1.80 per share until January 24, 2006. The number of shares
to be received upon exercise, and the exercise price, are subject to adjustment
in the event of a corporate reorganization, restructuring, share dividend or
other corporate actions, to maintain the rights of the option holders
substantially as if such action had not occurred. We have reserved 80,000 common
shares for issuance upon the exercise of the options.
CERTAIN STATUTORY PROVISIONS
Section 1701.831 of the Ohio Revised Code generally provides that certain
"control share acquisitions" of shares of an "issuing public corporation" may be
made only with the prior authorization of the shareholders of the corporation,
unless the articles or code of regulations of the corporation otherwise provide.
In addition, Chapter 1704 of the Ohio Revised Code, known as the "merger
moratorium" chapter, generally prohibits a wide range of business combinations
and transactions between or involving an issuing public corporation that is a
reporting company under the Securities Exchange Act of 1934 and a person who,
alone or with others, beneficially owns 10% or more of the voting power of the
corporation (an "interested shareholder"). A corporation may provide in its
Articles of Incorporation that Chapter 1704 shall not apply to the corporation.
In addition, if the corporation's board of directors has approved the interested
shareholder's acquisition of his shares or has approved the specific business
combination or transaction in question, the general prohibitions of Chapter 1704
do not apply.
Our Amended Articles of Incorporation and Code of Regulations do not
contain any language excepting us from the provisions of Section 1701.831 or
Chapter 1704 of the Ohio Revised code, and therefore both are applicable to us.
13
LEGAL PROCEEDINGS
We are not currently engaged in any material legal proceedings.
LEGAL MATTERS
The validity of the common shares, warrants and options offered hereby
will be passed upon for us by Carlile Patchen & Murphy LLP, Columbus, Ohio.
Andrew J. Federico, of counsel to Carlile Patchen & Murphy LLP, holds options to
purchase 30,600 of our common shares at $.22 per share; 10,000 common shares at
$.56 per share; 6,000 common shares at $.625 per share; and 6,000 common shares
at $.65 per share.
BUSINESS
This Registration Statement contains certain forward-looking statements
including without limitation, statements concerning our operations, economic
performance, financial condition and prospects, including in particular
statements relating to our growth strategy. The words "estimate," "project,"
"intent," "believe," "expect," "anticipate," and other similar expressions
generally identify forward-looking statements. Investors are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date of this statement. These forward-looking statements are based largely
on our current expectations and are subject to a number of risks and
uncertainties, including, without limitation, those risk factors identified
below and elsewhere in this statement. In addition, important factors to
consider in evaluating such forward-looking statements include changes in
external market factors, changes in our business or growth strategy or an
inability to execute our strategy due to changes in our industry or the economy
generally, the emergence of new or growing competitors and various competitive
factors. Our actual results could differ materially from the results anticipated
in these forward-looking statements as a result of the risk factors described
below and elsewhere in this statement. In light of these risks and
uncertainties, there can be no assurance that the matters referred to in the
forward-looking statements contained in this statement will in fact occur.
Except as required by law, we disclaim any obligation to update or revise any of
these forward-looking statements.
Kahiki Foods, Inc. was incorporated under the laws of the State of Ohio in
June 1982 for the primary purpose of acquiring a full-service restaurant in
Columbus, Ohio known as the Kahiki Restaurant. The restaurant was founded in
1961 as a theme based Polynesian restaurant. The exterior roof resembled a
massive Polynesian war canoe and the interior ceilings reached 60 feet in
height. The restaurant's decor included authentic Polynesian artifacts, stone
tiki gods and an authentic outrigger canoe. The restaurant was recognized as one
of the Top 10, Five Star Diamond restaurants in the Asian-Pacific category. It
won the Millennium Award as one of the Top 100 restaurants of the 20th Century
and was named the top Polynesian restaurant in America in the 20th Century.
From 1982 to 1988, our sole business was operation of the Kahiki
Restaurant. We began a food processing operation in December of 1988 to
manufacture and process frozen and other finished Chinese/Polynesian foods for
wholesale distribution. Initially, production facilities consisted of part of
the basement and food preparation areas of the Kahiki Restaurant. No automation
was used in the production process, meaning all of the products distributed were
processed completely by hand. In 1995, we opened an approximately 7,000 square
foot automated food processing facility that received FDA approval.
In the summer of 2000, we sold the land that the restaurant was located
on, closing the restaurant on August 26, 2000. In September 2000, a medium sized
(22,000 square feet) USDA approved food processing facility was opened.
In December 2002, we acquired an existing approximately 119,000 square
foot building on approximately 14.1 acres of land in Gahanna, Ohio a suburb of
Columbus. We are currently renovating and equipping this
14
facility to meet FDA regulations for the manufacture of food products. Upon
completion, the facility will be used to prepare, freeze, package, store and
ship our products, and house our administrative offices.
We manufacture and sell oriental foods packaged in bulk and frozen
containers. We have a wide variety of offerings which include: Egg Rolls,
Appetizers, Fried Rice, Sauces, Stir-fry Meal Kits, Single Serve Entrees, and
Family Meal Entrees. All of the foregoing products are marketed at the retail
and bulk institutional levels.
In March 2001, Kahiki was named "Best Asian Handheld Foods" by the
American Tasting Institute during their "Awards of the Americas" ceremony at
Carnegie Hall. Kahiki was awarded their prestigious "Best of Show" and "Gold
Medal Taste" awards for several entrees, including egg roll and potsticker
frozen food products.
Our products are produced and distributed to three broad market segments:
foodservice, retail and warehouse clubs. Product mix and packaging is directed
to each of those segments.
The Foodservice segment entails the distribution of bulk institutional
products to wholesale distributors, academic and governmental institutions and
restaurants. Products in this category may also be redistributed by wholesale
distributors to their own retail accounts. Our major customers in this segment
include Gordon Food Service, Best Express, Abbott Foods/Sysco, Magic Wok,
Orlando Foodservice, and U.S. Foodservice. The foodservice segment represented
approximately 9.27% of our revenues in fiscal year 2003 and approximately 9.25%
of our revenues in fiscal year 2004.
The Retail segment entails the distribution of both bulk institutional
products and individually packaged products to grocery store chains for sale to
consumers. These products are generally sold in the delicatessen or frozen food
sections of the grocery store. We may call directly on the grocery store chain
or utilize a food broker. Our major customers in this segment include The Kroger
Company, Albertson's, C&S Wholesale, H.E. Butt, Publix, Meijer, Smart & Final,
SuperValu, Wakefern and Wal-Mart Supercenters. The retail segment represented
approximately 51.28% of our revenues in fiscal year 2003 and approximately
70.73% of our revenues in fiscal year 2004.
The Warehouse Clubs segment entails the distribution of bulk retail
products to warehouse clubs for sale to consumers and small businesses. These
products are generally in larger servings and are sold in the delicatessen or
frozen food sections of the store. We may call directly on the chain or utilize
a food broker. Our major customers in this segment included Sam's Club and
Costco. The warehouse club segment represented approximately 28.90% of our
revenues in fiscal year 2003 and approximately 31.28% of our revenues in fiscal
year 2004.
Our ten largest accounts represented 64.4% of our sales in the year ended
March 31, 2004 and 67.9% of our sales in the year ended March 31, 2003. For the
year ended March 31, 2004, Costco represented approximately 26.75%, Meijer's
represented approximately 7.12% and Wal-Mart represented approximately 14.5% of
our total sales. For the year ended March 31, 2003, Costco represented
approximately 11%, Wal-Mart represented approximately 11.3% and Sam's Club
represented approximately 20% of our total sales.
PRODUCTS
Our products are segmented into three main categories. They are as
follows:
- CONVENIENCE MEALS. Includes 11 oz. single serve entrees, 11
oz. "Deli Entrees", 12 oz. "Bowl & Roll Combos", 24oz "Meals
for Two" entrees, 32 oz. "Twin Packs" 40 oz "Asian In Minutes"
kits, and 48 oz. "Family Meals."
- HAND-HELD PRODUCTS. Includes egg rolls, potstickers, and other
appetizers.
15
- FOODSERVICE PRODUCTS. Includes meal components such as fried
rice, marinated meats, tempura meats, and Pacific Rim sauces.
Convenience meals currently account for 56.64% of sales, hand-held
products 34.11%, and foodservice products 9.25%.
Our retail, deli and warehouse club product lines include:
- ENTREES: 11 oz. single serve, 11 oz. "Deli Entrees," 12oz.
Bowl & Roll combos, 24 oz. "Meals for Two" entrees, 32 oz.
"Twin Packs" 40 oz. "Asian In Minutes" kits, and 48 oz.
"Family Meals."
- EGG ROLLS: 3 oz. Egg rolls, 1 oz. Minis, and individually
wrapped 3 oz. Egg rolls using a suscepter sleeve.
- APPETIZERS: POTSTICKERS, Tempura Chicken, and Tiki Bites.
- PLATTERS: 28.5 oz. "Aloha Party Platters" and 37.5 oz. "PuPu
Platter."
Our foodservice product lines include:
- EGG ROLLS: Bulk packed 3 oz. Egg rolls, 1 oz. Minis and
individually wrapped 3 oz. Egg rolls "To-Go!" using a
suscepter sleeve.
- APPETIZERS: Bulk packed potstickers, Tempura Chicken and Tiki
Bites plus the "Appetizers To-Go Line" [for vending and
C-Stores].
- STIR-FRY MEAL KITS: 3-component system that can feed 9-12
people.
- PACIFIC RIM SAUCES: Eight varieties of institutional size
stir-fry sauces packed frozen and five shelf stable bottled
sauces.
- MEATS: Bulk packed meat components (cooked, sliced and
marinated, or tempura style).
- RICES: Premium fried rice and steamed white rice.
KEY PRODUCT ATTRIBUTES
- CONVENIENCE. Ease of use through the microwave oven is a
significant factor for consumers and institutional foodservice
operators. Our product line requires simple preparation and
heating steps. Virtually every product is ready-to-serve
within 20 minutes, providing quick and easy meal solutions for
our customers.
- AUTHENTIC TASTE AND STRONG FLAVOR PROFILES: We employ recipes
and sauces used in the award-winning Kahiki restaurant to
enhance the authenticity of our products. This allows us to
achieve the best aroma, appearance, and flavor profile for our
products.
- HEALTH: Health conscious consumers generally recognize Pan
Asian foods as offering health benefits. Kahiki does not use
preservatives such as MSG and we only use the highest quality
ingredients.
- PACKAGING: Our products are enhanced through the use of modern
packaging innovations, techniques, and graphics designs. We
also utilize packaging that is environmentally responsible.
Kahiki products incorporate bold, colorful graphics that
command shelf attention.
PRICING
Our pricing strategy focuses on avoiding price competition; this is
accomplished in three ways. First, since the products are positioned in the
gourmet and specialty food category, the shopper is conditioned not to make
16
direct price comparisons with ordinary Asian foods. Second, by providing
shoppers with a superior quality product, not only is the specialty status
reinforced but consumers expect to pay a premium price if they are convinced
that they are receiving far greater value than is available in the rest of the
market. Finally, we focused our efforts on non-price competition, such as
packaging and promotional activities, as a means of boosting sales revenue. Even
though retail outlets are free to choose their own policies, this non-price
competition is essential in encouraging them not to engage in price competition.
This pricing strategy also provides greater long term flexibility
through the growth curve of our products. As changes occur in customer demand,
the market supply pricing policies will require revision. There is usually less
customer resistance in starting with a premium price and revising it downward
than by starting with a low price and attempting to increase it.
DISTRIBUTION.
We ship directly to customers or to their distribution facilities. Some
retail accounts employ a distributor because they do not own an in-house
distribution warehouse. We will ship to their chosen distributor in this case.
On the foodservice side of our business, we ship to various distributors who
stock our products and re-sell them to end-users such as small restaurant
operators, casinos, vending machine operators, etc.
MARKETING.
We primarily advertise in trade journals such as Frozen Food Age, Deli
Business, and Refrigerated & Frozen Food Retailer. These advertisements are
generally a full page, in color, and focus on creating awareness of our products
to the buyers and category managers at retail supermarkets. We market our
products to various channels such as retain supermarkets (frozen food section,
meat department, and deli grab & go section), dollar stores, convenience stores,
membership warehouse clubs, and foodservice operators. We have a direct sales
force of four sales managers with specific areas of responsibility. They direct
the efforts of approximately 40 broker groups across the United States and
Mexico. Our sales force will meet with buyers and category managers in an effort
to sell our products to them.
REGULATIONS
Our food processing facilities are subject to various federal, state and
local regulations and inspection, and to extensive regulations and inspections,
regarding sanitation, quality, packaging and labeling. Our manufacturing
facility is subject to regulation and inspection by the United States Department
of Agriculture, the United States Food and Drug Administration, and the State of
Ohio Departments of Agriculture and Health. A finding of a failure to comply
with one or more regulatory requirements can result in the imposition of
sanctions including the closing of all or a portion of our facility for a period
of time. In addition to licensing requirements, a regulatory agency could
declare a food product hazardous or limit its use or require a recall. We
believe that we are in substantial compliance with all material governmental
regulations regarding our products and that we have all government permits,
licenses, qualifications and approvals required for our operations.
COMPETITION
We operate in a competitive environment and many of our competitors have
greater financial, distribution and marketing resources. The oriental frozen
food business is currently dominated by a select number of competitors of
considerable size and financial resources, including Tyson Foods, Nestle,
ConAgra Chung's, Schwan's Pillsbury, Hormel, Windsor Foods, and Kikkoman. Our
market share in the retail entree business is less than 1%. In the frozen egg
roll category, our market share is approximately 7%. All of these competitors
have strong brand name recognition in the markets they serve. We believe that
our quality products, pricing and niche marketing strategies will permit it to
maintain a strong competitive position in its market.
17
SUPPLIERS
Perishable food items, including meat, sea food, dairy and produce, are
purchased locally or regionally by us. We have not experienced any material
shortages of food or other products necessary to our operations and do not
anticipate such shortages in the foreseeable future. We are not dependent upon
any particular supplier or suppliers as a source for ingredients used in our
products or for other items used in our operations.
EMPLOYEES
As of September 30, 2004, we had approximately 121 full-time employees. Of
these, 101 were involved in food processing operations and 20 in management and
administrative capacities. We consider our employee relations to be good, and to
date we have not experienced a work stoppage due to a labor dispute. None of our
employees is represented by a labor union.
TRADEMARKS
We currently have four active registered trademarks including our logo
"KAHIKI" in three different classifications and the phrase "ASIAN IN MINUTES"
with respect to prepared foods. We also have pending active registrations for
"BOWL & ROLL" and "IT'S ASIAN TONIGHT", both of which we expect to have
finalized in the very near future.
RESEARCH AND DEVELOPMENT
We maintain a continuing research and development program to improve
existing products and to develop new products. At the present time, 2 of our
employees are directly involved in research and development. During fiscal years
2002, 2003, and 2004, we estimate that we spent $101,000, $82,000 and
$34,561,respectively, on research and development activities.
PROPERTY
We currently lease an approximately 22,000 square foot facility at 3004
East 14th Avenue, Columbus, Ohio. The lease requires monthly payments of $6,400
and runs through March 2005. We have the option to renew the lease for two
additional three year terms. The structure currently meets FDA regulations for
the manufacture of food products. The building houses equipment for preparing,
freezing, packaging and storing our products. As we recently moved into the
Gahanna, Ohio facility described below, we will attempt to sub-lease this
Columbus, Ohio facility. There can be no assurance that we will be successful in
attracting a tenant for the remaining term of the lease.
In December 2002, we acquired an existing approximately 119,000 square
foot building on approximately 14.1 acres of land in Gahanna, Ohio at a cost of
$2.25 million. We recently renovated and equipped this facility to meet FDA
regulations for the manufacture of food products. We have spent approximately
$5.36 million on this renovation and the purchase of equipment. The State of
Ohio holds a first mortgage and security interest in the land and equipment of
the facility.
The Gahanna facility will be used to prepare, freeze, package, store and
ship our products, and house our administrative offices. The facility is
expected to meet our needs for the foreseeable future. Since we moved into the
Gahanna, Ohio facility in August, 2004, to avoid any production lapses, we
intend to occupy both the Columbus and the Gahanna facility until we are certain
that the Gahanna facility is fully functional.
Management believes that our properties are adequately covered by
insurance.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Kahiki was founded in 1961 as a theme based Polynesian restaurant. It was
recognized as one of the top restaurants in Asian-Pacific category. In 1995, we
built a small (7,000 sq ft) USDA approved food-manufacturing facility on the
restaurant site and began to market frozen Polynesian/Asian foods for wholesale
distribution under the Kahiki(R) brand for retail and foodservice markets.
In 2000, the Kahiki was named "The Coolest Bar in the World" by Food &
Wine Magazine and "The Best Polynesian Restaurant in the World" by Restaurant &
Hospitality Rating Bureau. In June 2000, we sold the land that the restaurant
was located on to Walgreen's for $2,000,000, and we closed the restaurant on
August 26, 2000. Since September 2000, we have concentrated on manufacturing of
frozen foods and a medium sized (22,000 square foot) USDA approved facility was
opened.
For the year ended March 31, 2001, our highlights were disposing of assets
like equipment, land, and building where the restaurant and plant were located,
ceased our restaurant operation, declared stock dividends of 3 for 1 to all
shareholders, opened a new processing plant, established a new corporate office,
assembled a strong sales team, invested over $1,479,728 into leasehold
improvements, processing equipment, and research and development.
In December 2002, we arranged a state economic development bond with the
State of Ohio for 4.18 million dollars. The proceeds were used to purchase a
large production facility in the form of a 119,000 square foot food processing
plant for 2.25 million dollars. The balance of the bond was used for leasehold
improvements and equipment which sum had to be supplemented by additional funds
from us in order to continue the project to completion. We have, or will have
spent an additional $1.6 million on leasehold and expenses and opened the
facility for operation in August of this year. We believe that this facility
will meet our needs for the foreseeable future without having to expand the
facility. If necessary, the property has an additional 17 acres for possible
sale or expansion. The lease on our present 22,000 square foot facility will
terminate in January 2005. We expect we will run somewhat parallel in operations
until we are confident that all systems in the new facility are operating
properly.
In May of 2003, we delivered a two-for-one split for all shareholders.
In February of 2004, we arranged the sale of 588,235 units ($1,000,000),
consisting of 588,235 of our common shares and 588,234 of our warrants, to
Barron Partners LP of New York and 14,705 ($25,000) to Bill Velmer of Salt Lake
City, Utah at $1.70 per share.
The transaction also included 294,117 Warrants at an exercise price of
$2.25/common share and for 294,117 Warrants at an exercise price of $3.00/common
share. The expenses associated with this offering included $70,000 to Laconia
Capital and 30,000 Warrants to Laconia Capital for services as our placement
agent. We are required to keep the common shares and warrants registered for a
period of two years.
In March of 2004, we sold a small warehouse for $110,000 and realized a
gain of $75,271 on the sale.
Currently, we have three marketing segments throughout the country;
retail, foodservices, and warehouse clubs. Key customers in retail supermarket
segments are: Wal-Mart Supercenters, The Kroger Co., Albertson's , C & S
Wholesale, H.E. Butt, Publix, Meijer, Smart & Final, SuperValu, and Wakefern; in
foodservice segments are: Gordon Food Service, Best Express, Abbott Foods/Sysco,
Magic Wok, Orlando Food Service, and U.S. Food Service; and in warehouse clubs
segments are: Sam's Club and Costco.
Our current activities include:
- Product research and development
19
- Development of markets and distribution
- Market search of strategic alliances
- Development of corporate infrastructure
- Production of high quality Asian products under USDA guidelines
DISCUSSION OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenues are recognized when the goods are delivered.
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 of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from these
estimates.
CASH
For purposes of the statements of cash flows, cash includes cash on hand
and demand deposits held by banks.
We maintain our cash in three accounts with one financial institution. The
carrying value is a reasonable estimate of the fair value.
MARKETABLE TRADING SECURITIES
Management determines the appropriate classification of marketable
securities at the time they are acquired and evaluates the appropriateness of
such classification at each balance sheet date. Our marketable securities are
classified as trading. Trading securities are held for resale in anticipation of
short-term fluctuations in market prices and are held at market value. Realized
and unrealized gains and losses on the marketable securities are included in
income.
Marketable securities consist of an equity mutual fund with a cost basis
of $555,032 as of March 31, 2004. The unrealized loss as of March 31, 2004 was
$19,553.
ACCOUNTS RECEIVABLE - TRADE
Accounts receivable are uncollateralized customer obligations due under
normal trade terms requiring payment within 15 days of the invoice date.
Accounts receivable are stated at the amount billed to the customer. Customer
account balances 60 days past the invoice date are considered delinquent.
Payments received for accounts receivable are allocated to the specific invoices
identified on the customer remittance advice or, if unspecified, are applied to
the earliest unpaid invoices. We do not charge interest on past due account
balances.
The carrying amount of accounts receivable is reduced when necessary, by a
valuation allowance that reflects management's best estimate of the amount that
will not be collected. Management individually reviews all customer account
balances on a monthly basis, and based on an assessment of current credit
worthiness, estimates the portion, if any, of the balance that will not be
collected. After management's review of all accounts receivable balances,
management believes all amounts are collectible and a valuation allowance is not
necessary.
20
INVENTORIES
Inventories consist of perishable food products and paper supplies. The
inventories are valued at the lower of cost (first-in, first-out method) or
market. Impairment and changes in market value are evaluated on a per item
basis.
If the cost of the inventory exceeds the market value evaluation based on
total inventory, provisions are made for the difference between the cost and the
market value. Provision for potential obsolete or slow moving inventory is made
based on analysis of inventory levels, age of inventory and future sales
forecasts.
PROPERTY AND EQUIPMENT
Property and equipment is carried at cost, less accumulated depreciation
computed using the straight-line method. Major renewals and betterments are
capitalized and depreciated; maintenance and repairs that do not extend the life
of the respective assets are charged to expense as incurred. Upon disposal of
assets, the cost and related accumulated depreciation are removed from the
accounts and any gain or loss is included in income. Property and equipment are
depreciated over their estimated useful lives of 5 to 39 years.
EARNINGS PER SHARE
Earnings per share are computed on the weighted average number of common
shares outstanding including any dilutive options.
LONG-TERM DEBT
Long-term debt is subject to certain covenants and restrictions including
maintenance of certain financial requirements. Rates currently available from
the bank for debt with similar terms and remaining maturities are used to
estimate the fair value of the debt. Our carrying value approximates the fair
value of the debt.
STOCK OPTIONS
We apply Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for our stock option plan for employees. The
vesting period of the options granted range from immediately exercisable to four
years.
LEASE COMMITMENTS
We lease a facility used for our wholesaling operations under an agreement
that is accounted for as an operating lease. This lease requires monthly
payments of $6,400 through January 2005. We have the option to renew for two
additional three-year terms.
We also lease manufacturing equipment under operating lease agreements.
These leases expire at various dates through 2008 and require total monthly
payments of $18,621.
21
RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 30, 2004
The following table contains certain amounts, expressed as a percentage of
net revenues, reflected in our statements of income for the quarters ended June
30, 2004 and 2003:
QUARTERS ENDED JUNE 30
(in %)
2004 2003
Revenues 100 100
Cost of Revenues 71 72
--- ---
Gross profit 29 28
Operating Expenses 23 35
--- ---
Income from operations 6 (7)
Interest expense (1) (2)
Interest and dividend income 0 2
Net Gain (loss) on marketable securities 0 1
--- ---
Income from continuing operations before
Income tax 5 (6)
---
Income tax 2 (2)
--- ---
Net Income 3 (4)
=== ===
REVENUES
Revenues for the quarter ended June 30, 2004 were $5,215,735 compared to
$1,801,301 revenues for the comparable quarter ended June 30, 2003. The increase
is primarily due to food manufacturing sales efforts with the increase of new
accounts, both retail and club stores, and due to the introduction of new items.
COST OF GOODS
The gross margin on sales of products was $1,535,780 for the quarter ended
June 30, 2004 compared to $505,883 for the quarter ending June 30, 2003. Gross
margins vary widely depending on factors such as the product commodity prices
and labor costs for the item produced. Cost of food increased significantly in
the quarter ended June 30, 2004 to 31% of sales, compared to 23% of sales for
the year ended March 31, 2004.The mass production of product line to club
markets and higher volumes of business partially offset these higher raw
material costs in the quarter ended June 30, 2004.
Cost of sales include cost of food, freight, packaging, labor, and other
expenses related to the manufacturing and distribution of the products produced.
Depreciation related to manufacturing and distribution is expensed to cost of
goods sold, and depreciation and amortization related to sales, general, and
administration is expensed as an operating expense.
OPERATING EXPENSES
Operating expenses for the quarter ended June 30, 2004 were
$1,224,242 compared to $638,472 for the comparable period in 2003, which is an
increase of $585,770 or 92%. Most of the increase was
22
attributable to marketing and advertising expenses, which increased to $780,183
for the quarter ended June 30, 2004, from $327,154 for the quarter ended June
30, 2003.
RESEARCH AND DEVELOPMENT
Expenditures on research and development were $14,026 for the quarter
ended June 30, 2004 compared to $8,657 for the quarter ended June 30, 2003, an
increase of 62%. The increase was due to increased development activities.
NET INCOME
Our net income for the quarter ended June 30, 2004 was $145,007, as
compared to a loss of $70,668 for the quarter ended June 30, 2003.
RESULTS OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 2004
The following table contains certain amounts, expressed as a percentage of
net revenues, reflected in our statements of income for the years ended March
31, 2004 and 2003.:
YEARS ENDED MARCH 31 (in %)
2004 2003
Revenues...................................... 100 100
Cost of revenues.............................. 69 72
--- ---
Gross profit 31 28
Operating Expenses............................ 23 29
--- ---
Income from operations........................ 8 (1)
Interest expense.............................. (1) (1)
Interest and dividend income.................. 0 1
Net Gain (less) on marketable securities...... 0 0
--- ---
Income from continuing operations before
Income tax................................... 7 (2)
Income tax.................................... 2 (1)
--- ---
Net income.................................... 5 (1)
=== ===
REVENUES
Revenues for the year ended March 31, 2004 were $14,761,923 compared to
$9,204,684 revenues for the comparable year ended March 31, 2003. The increase
is primarily due to food manufacturing sales efforts with the increase of new
accounts, both retail and club stores, and due to the introduction of new items.
COST OF GOODS
The gross margin on sales of products was $4,487,049 for the year ended
March 31, 2004 compared to $2,494,820 for the year ending March 31, 2003. Gross
margins vary widely depending on factors such as the product commodity prices
and labor costs for the item produced. The higher volume of business we
experienced in the year ended March 31, 2004, resulted in a higher gross margin
in 2004. We expect that the gross margins of the last twelve months reflect
fairly our present volume.
Cost of sales include cost of food, freight, packaging, labor, and other
expenses related to the manufacturing and distribution of the products produced.
Depreciation related to manufacturing and distribution is expensed to
23
cost of goods sold, and depreciation and amortization related to sales, general,
and administration is expensed as an operating expense.
OPERATING EXPENSES
Operating expenses for the year ended March 31, 2004 were $3,320,378
compared to $2,648,616 for the comparable period in 2003,which is an increase of
$747,588 or 29%. Most of the increase was attributable to marketing and
advertising expenses, which increased to $1,904,049 in 2004 from $1,409,725 in
2003, or 35%.
RESEARCH AND DEVELOPMENT
Expenditures of $34,561 for the year ended March 31, 2004 compared to
$82,000 for the year ended March 31, 2003, a decrease of 58%. The decrease was
due to our concentration on the construction of our new facility and the
introduction of fewer new products during the year. We expect research and
development activities to increase once we are in the new facility.
NET INCOME
Our net income for the year ended March 31, 2004 was $698,338, as compared
to a loss of $85,923 for the year ended March 31, 2003.
YEARS ENDED MARCH 31, 2003
The following table contains certain amounts, expressed as a percentage of
net revenues, reflected in our statements of income for the years ended March
31, 2003 and 2002:
YEARS ENDED MARCH 31 (in %)
2003 2002
---- ----
Revenues......................... 100 100
Cost of revenues................. 72 68
--- ---
Gross profit..................... 28 32
Operating expenses............... 29 30
--- ---
Income (loss) from operations.... (1) 2
Interest expense................. (1) (1)
Other Income..................... 0 0
--- ---
Income before income tax......... (2) (1)
Income tax....................... 1 0
--- ---
Net income....................... (1) 1
=== ===
REVENUES
Revenues for the year ended March 31, 2003 were $9,204,684, a 2% decrease
from the previous year when revenues totaled $9,374,914. We stopped selling to
one of our major club stores, but generated enough new business among many
smaller accounts to keep our sales almost level.
COST OF GOODS
The gross margin on sales of products was 28% for the year ended March 31,
2003 compared to 32% for the same period in 2002. Gross margins on our various
products vary widely and are affected by both commodity
24
prices and labor supply for the period. Gross margins decreased for the year
ended March 31, 2003 due to lower sales and accelerated depreciation expense on
assets to be abandoned.
OPERATING EXPENSES
Operating expenses for the year ended March 31, 2003 were $2,648,616
compared to $2,834,939 for the same period ended March 31, 2002 and decreased by
9% due to our concentration on fewer products which were more in demand by our
customers.
RESEARCH AND DEVELOPMENT
Expenditures for research and development of $82,000 for the year ended
March 31, 2003 were down 19% compared to 101,000 for the year ended March 31,
2002. The decrease was due to the introduction of fewer new products during the
year.
NET INCOME
Our net loss for the year ended March 31, 2003 was $(85,923) compared to
net income of $77,541 for the year ended March 31, 2002. Lower sales and
accelerated depreciation on assets to be abandoned contributed to the net loss
for the year ended March 31, 2003.
LIQUIDITY AND CAPITAL RESOURCE
BANK FINANCING MATTERS
We had two lines of credit from various banks totaling $1,200,000. As of
March 31, 2004, $1,000,000 was outstanding, compared to $1,037,396 at March 31,
2003. A $100,000 line of credit was paid off in March, 2004. The $1,100,000 line
of credit accrues interest at a rate equal to the prime rate of the bank, and
was scheduled to matured on May 19, 2004. On May 18, 2004 the $1,100,000 line of
credit was extended for three months. On June 2, 2004, the $1,100,000 line of
credit was paid off.
On June 1, 2004, we entered into a two year agreement with a bank for a
revolving loan facility. The borrowing base of the revolving loan facility is
limited to the lesser of (i) $2,500,000 or (ii) the sum of (A) 85% of eligible
accounts receivable, plus (B) 50% of eligible inventory. The line will be used
to pay off the existing $1,100,000 line, and provide working capital. As of June
30, 2004, $1,001,556 was outstanding. The revolving loan matures on May 31,
2006. At June 30, 2004, we had working capital of approximately $700,000.
Our receivables as of March 31, 2004 were $1,964,941 compared to $607,248
for the period ended March 31, 2003. Our payables for March 31, 2004 were
$1,905,171 compared to $785,198 for the period ended March 31, 2003. Although
sales for the year ended March 31, 2004 increased only 63% over prior year,
sales for the quarter ended March 31, 2004 increased 166%, as compared to sales
for the quarter ended March 31, 2003, and sales for the month ended March 31,
2004 increased 291%, as compared to the month ended March 31, 2003. These high
sales increases in the last quarter caused an increase in accounts receivable
for the year ended March 31, 2004 of 224% over prior year. Accounts payable
increased due to higher year end sales, as well as increased accounts payable
related to the construction of the new facility. Accounts payable included
approximately $316,000 in construction costs at March 31, 2004.
In December 2002, we arranged a state economic development bond with the
State of Ohio for 4.18 million dollars. The bond matures December 1, 2022, and
with interest rates and maturity dates as follows: $1,100,000 matures December
1, 2010 at an interest rate of 4.55%; $1,040,000 matures December 1, 2015, at an
interest rate of 5.25%; and $2,040,000 matures December 1, 2022, at an interest
rate of 5.85%. The proceeds were used to
25
purchase a large production facility in the form of a 117,000 square foot food
processing plant for 2.25 million dollars. The balance of the bond was used for
building improvements and equipment, which sum had to be supplemented by
additional funds in order to continue the project to completion. During the year
ended March 31, 2004, $1,815,000 was drawn on the bond, completing the $4.18
million financing.
During the fiscal year ended March 31, 2004, we spent $3,108,168 in
building improvements and equipment. As of August 31, 2004, we have spent an
additional $2,400,000, and anticipate spending approximately an additional
$1,800,000 to complete the new plant for occupancy. Due to current cash flow
shortages related to these additional building costs, we have recently ceased
construction activities on the plant while we actively seek new debt or equity
financing, the availability of which is uncertain. We do not believe that
current cash and liquidity sources can satisfy our funding needs beyond the
middle of our third fiscal quarter and, as stated above, we are exploring
additional financing sources, which we believe are available to us. There can be
no assurances of our ability to obtain additional financing.
During the year ended March 31, 2004, we sold a marketable security,
providing $536,000 in cash.
We have raised approximately $862,000 in equity in February of 2004.
FORWARD LOOKING STATEMENTS
This prospectus contains forward-looking statements. Such statements are
not based on historical facts and are based on current expectations, including,
but not limited to statements regarding our plan for future development and the
operation of our business. Words such as "anticipates," "expects," "intends,"
"plans," "believes," "seeks," "estimates," and similar expressions identify such
forward-looking statements. These statements are not guarantees of future
performance and are subject to certain risks and uncertainties that could cause
actual results to differ materially from those expressed or forecasted. Among
the factors that could cause actual results to differ materially are the
following: a lack of sufficient capital to finance our business plan on
commercially acceptable terms; changes in labor, equipment and capital costs;
our inability to attract strategic partners; general business and economic
conditions; and the other risk factors described from time to time in our
reports filed with the Securities and Exchange Commission. You should not rely
on these forward-looking statements, which reflect only Kahiki Food's opinion as
of the date of this prospectus.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On August 9, 2004, our Board of Directors authorized the issuance of
options to purchase 2000 common shares each at an exercise price of $3.40 per
share (the then current market price) to Dr. Winston Bash, Bob Binsky, and
Charles Dix (each a director) 3,000 common shares each at an exercise price of
$3.40 per share to Bradford Sprague and R.L. Richards (each a director and the
chairman of the Compensation Committee and Strategy Committee, respectively);
and 4000 common shares at an exercise price of $3.40 per share to Allen Proctor
(a director and chairman of the Audit Committee). Each option is exercisable
through August 8, 2009.
On January 24, 2004, our Board of Directors authorized the issuance of
options to purchase 80,000 common shares at an exercise price of $1.80 per share
(the then-current market price) to Bob Binsky (a Director) for consulting
services rendered to us. Mr. Binsky is consulting with Kahiki on cost
containment, financing options, financial matters and public relations. Each
option is exercisable through January 23, 2006.
On August 18, 2003, Alice Tsao, an officer and Director, loaned Kahiki
$150,000 pursuant to a Subordinated Promissory Note bearing interest at the
prime rate announced from time to time by Bank One, N.A., plus two percent. The
promissory note matures on February 1, 2005, and is subordinated to all
indebtedness of Kahiki to financial institutions.
26
On April 18, 2003, our Board of Directors authorized the issuance of
options to purchase 6000 common shares (as adjusted for share dividends) each at
an exercise price of $.65 per share (the then-current market price, as adjusted
for share dividends) to Dr. Winston Bash and Bob Binsky (each a Director) and
Andrew J. Federico (our counsel). Each option is exercisable through April 18,
2008.
On April 18, 2003, our Board of Directors declared a share dividend of one
share for every share outstanding to shareholders of record as of May 1, 2003.
On August 12, 2002, our Board of Directors authorized the issuance of
options to purchase 6000 common shares (as adjusted for share dividends) each at
an exercise price of $.625 per share (the then-current market price, as adjusted
for share dividends) to Dr. Winston Bash and Bob Binsky (each a Director) and
Andrew J. Federico (our counsel). Each option is exercisable through August 12,
2007.
Options granted to Messrs. Binsky, Bash and Federico in 2003 and 2002 (as
noted above) were in recognition of their service to the Board of Directors and
on the Board's compensation committee. Each of the options were issued at market
price, and no compensation was recorded.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
We currently have 3,588,848 common shares, 618,234 warrants and 854,465
options issued and outstanding. The common shares sold in this offering will be
fully tradeable without restrictions or further registration under the
Securities Act.
At present, approximately 2,206,567 of our 3,588,848 common shares issued
and outstanding are "restricted" securities as that term is defined in Rule 144
under the Securities Act, and substantially all of these shares have been held
for over one year. In general, under Rule 144, as currently in effect, subject
to the satisfaction of certain other conditions, a person, including an
affiliate, who has owned restricted common shares beneficially 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% of the total number of outstanding shares of
the same class or the average weekly trading volume during the four calendar
months preceding the sale. A person who has not been an affiliate of ours for at
least three months immediately preceding the sale and who has beneficially owned
common shares for at least two years is entitled to sell such shares under Rule
144 without regard to any of the limitations described above.
Prior to this offering, there has been only a limited market for our
common shares, which are traded on the Pink Sheets under the symbol "KSCI". The
effect, if any, of public sales of our restricted common shares or the
availability of such shares for future sale at prevailing market prices cannot
be predicted. Nevertheless, the possibility that substantial amounts of
restricted shares may be resold in the public market may adversely affect
prevailing market prices for our common shares and could impair our ability to
raise capital through the sale of equity securities.
We have agreed with Barron Partners LP to keep the registration statement
of which this prospectus is a part effective until the shares being offered
hereby may be sold without registration or restriction pursuant to Rule 144(k),
or if earlier, until the distribution contemplated in this prospectus has been
completed. We have also agreed to indemnify, in certain circumstances, Barron
Partners LP, any underwriters that participate in the distribution of the shares
and certain control and other persons related to the foregoing persons against
certain liabilities, including liabilities under the Securities Act. Barron
Partners has agreed to indemnify us, as well as certain related persons, in
certain circumstances against certain liabilities, including liabilities under
the Securities Act. We will pay all the fees and expenses incident to the
registration of the securities, other than underwriting discounts and
commissions, if any, which are to be paid by the selling shareholder.
27
Stocks selling for less than $5.00 per share, excluding any broker or
dealer commissions, may be designated as "penny stocks" and may be subject to
certain requirements imposed by Rule 15g-9 of the Securities Exchange Act of
1934. Among other things, Rule 15g-9 requires broker/dealers to advise potential
purchasers of a penny stock of the lowest offer and highest bid quotations for
such stock and disclose to the potential purchaser its compensation in
connection with the transaction. The net effect of such regulations may be to
delay the sale of shares which are characterized as penny stocks. Our common
shares are being offered at an initial offer price of $3.75 per share. However,
we believe that the penny stock restrictions will not be applicable to our
securities based on an exemption provided in Rule 3 (a) 51-1 of the Securities
Exchange Act of 1934 which, among other things, provides an exemption from the
penny stock restrictions for securities of companies that have had average
revenues of at least $6,000,000 for the last three years. Kahiki has had average
revenues of approximately $11,190,000 for the last three years.
At September 30, 2004, there were approximately 220 holders of record of
our common shares. No cash dividends have been declared or paid on our common
shares during the last two fiscal years.
EXECUTIVE COMPENSATION
The following table sets forth the amount accrued by us during Fiscal
Years 2002, 2003 and 2004 for services rendered by our officers. This includes
all compensation awarded to, earned by or accrued for the executive officers
listed below during the periods in question:
Compensation
Name and Awards
Position Year Salary Bonus(2) Other(3) Stock Options(1) Total
-------- ---- ------ -------- -------- ---------------- -----
Michael C. Tsao 2004 $135,000 $ 28,884 $ 9,318 0 0 $175,026
Chairman, President and CEO 2003 $135,000 $ 0 $ 0 0 0 $135,000
2002 $136,792 $ 5,000 $ 0 0 0 $141,792
Alice W. Tsao 2004 $ 55,000 $ 14,600 $ 12,381 0 0 $ 83,985
Vice President and Secretary 2003 $ 55,000 $ 0 $ 0 0 0 $ 55,000
2002 $ 49,537 $ 3,000 $ 0 0 0 $ 52,537
Alan Hoover 2004 $135,000 $ 28,884 $ 11,696 0 0 $177,584
Senior Vice President 2003 $135,000 $ 5,000 $ 0 0 1,000 $140,000
2002 $140,144 $ 5,000 $ 0 0 0 $145,144
(1) Number of shares issuable upon exercise of options granted during the
fiscal year, adjusted for share dividends.
(2) 2004 bonus paid in 2005
(3) Includes car allowance and 401k match
Number of Securities Value of Unexercised in the
Shares Underlying Unexercised money options at FY-
Acquired on Option at FY-End End
Name Exercise Value Realized Exercisable/Unexercisable Exercisable/Unexercisable
- ---- -------- -------------- ------------------------- -------------------------
Michael C. Tsao 0 $0 $12,000/$0 $35,640/$0
Alan Hoover 0 $0 $270,666/$0 $928,389/$0
Alice Tsao 0 $0 $12,000/0 $35,640/$0
28
INCENTIVE STOCK OPTION PLAN
In July, 2001, the Shareholders adopted and approved Kahiki's 2001 Non
Qualified and Incentive Stock Option Plan ("Plan"). Pursuant to the Plan,
600,000 common shares have been reserved for issuance upon the exercise of
options. Options granted under the Plan may be either (1) options intended to
constitute incentive stock options ("ISO's") under the Internal Revenue Code of
1986 or (2) non qualified options. ISO's may be granted under the Plan to
employees and officers of Kahiki. Non qualified options may be granted to
consultants, directors (whether or not they are employees), employees or
officers of Kahiki. The Plan is administered by the Board of Directors. The
Board, within the limitation of the plan, determines the persons to whom options
and awards may be granted, the number of shares to be covered by each option,
whether the options granted are intended to be ISO's, the duration and rate of
exercise of each option, the option purchase price per share and the manner of
exercise.
ISO's granted under the Plan may not be granted at a price less than the
fair market value of the common shares on the date of grant (or 110% of fair
market value in the case of persons holding 10% or more of the voting stock of
Kahiki). The aggregate fair market value of shares for which ISO's granted to
any employee are exercisable for the first time by such employee during any
calendar year may not exceed $100,000. Non qualified options granted under the
plan may not be granted at a price less than the lesser of (1) the book value of
share of common stock as of the end of the fiscal year immediately preceding the
date of such grant, or (2) 80% of the fair market value of the common shares on
the date of grant. Options granted under the Plan will expire not more than 10
years from the date of grant (5 years in the case of ISO's granted to persons
holding 10% or more of the voting securities of Kahiki).
All options granted under the Plan are not transferable during an
optionee's lifetime but are transferable at death by will or by the laws of
descent and distribution. Options granted terminate within a specified period of
time following termination of an optionee's employment or position as a director
or consultant.
We will not grant options and warrants in excess of 15% of the outstanding
shares to officers, directors, employees, 5% shareholders or affiliates for a
one year period following the conclusion of this offering.
COMPENSATION OF DIRECTORS
In January, 2004, we engaged Bob Binsky, a member of our Board of
Directors, as a consultant. Mr. Binsky's duties included advising Kahiki on cost
containment planning, assisting in raising capital and public relations. For his
services, Mr. Binsky was paid $25,000 and was issued options to purchase 80,000
common shares at $1.80 per share (the fair market value of the common shares on
the date of grant.)
Outside Directors of the Company are paid $1,000 for each Board of
Director's meeting personally attended and $500 for each committee meeting. No
fees are paid to directors for participation in telephonic meetings of the board
or actions taken in writing.
REPORTS TO SHAREHOLDERS
Kahiki Foods, Inc. is not a reporting company as defined by the Securities
Exchange Act. If the Securities and Exchange Commission declares this
registration statement effective, we will become subject to the information and
reporting requirements of that act and we will file periodic reports, proxy
statements and other information with the Securities and Exchange Commission..
Following completion of this offering, we will furnish our shareholders with
annual reports containing audited financial information for each fiscal year and
will file quarterly reports for the first three quarters of each fiscal year
containing unaudited summary financial information with the Securities and
Exchange Commission. Our fiscal year ends on March 31.
29
ADDITIONAL INFORMATION
We have filed a registration statement under the Securities Act of 1933 with the
SEC with respect to the common shares, warrants and options offered hereby. This
prospectus does not contain all of the information set forth in the registration
statement, its amendments, schedules, and exhibits, certain portions of which
are entitled as permitted by the rules and regulations of the Commission. For
further information with respect to Kahiki Foods, Inc. and the common shares,
warrants and options, please see the registration statement and the exhibits
thereto. The registration statement may be examined at, and copies of the
Registration Statement may be obtained at prescribed rates from, the Public
Reference Section of the Commission, Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549. The SEC also maintains a Web site (http://www.sec.gov)
that contains reports, proxy and information statements and other information
the public companies file electronically with the Commission. Additional
information regarding the operation of the public reference room may be obtained
by calling the SEC at 1-800-0330.
30
KAHIKI FOODS, INC.
BALANCE SHEETS
JUNE 30, 2004
(UNAUDITED) MARCH 31, 2004
----------- --------------
ASSETS
Cash $ 295,215 $ 1,073,901
Marketable Securities $ 30,000 $ 585,032
Accounts Receivable $ 1,509,592 $ 1,964,941
Inventories $ 2,207,153 $ 1,565,863
Prepaid Expenses $ 133,657 $ 16,055
Refundable income taxes $ - $ -
Deferred Income Taxes $ 28,000 $ 28,000
------------ ------------
Total current assets $ 4,203,617 $ 5,233,792
------------ ------------
Land $ 114,485 $ 114,485
Building & Improvements $ 2,499,262 $ 2,499,262
Machinery & equipment $ 2,076,900 $ 2,052,144
Furniture & fixtures $ 68,533 $ 67,146
Vehicles $ 146,269 $ 146,269
CIP $ 5,090,680 $ 3,776,366
------------ ------------
$ 9,996,128 $ 8,655,672
------------ ------------
less: accum depreciation $ (1,623,304) $ (1,475,370)
------------ ------------
Net property & equipment $ 8,372,824 $ 7,180,302
------------ ------------
Deferred bond fees $ 146,107 $ 147,988
Deferred Taxes $ 27,000 $ 27,000
Other $ 440,414 $ 439,655
------------ ------------
Total other assets $ 613,521 $ 614,643
------------ ------------
TOTAL ASSETS $ 13,189,962 $ 13,028,737
============ ============
LIABILITIES & EQUITY
Current debt $ 529,491 $ 529,491
Current portion of bond $ 140,000 $ 140,000
Line of credit $ - $ 1,000,000
Accounts Payable $ 2,453,535 $ 1,905,171
Accrued expenses $ 413,664 $ 545,027
Income taxes payable $ 149,671 $ 413,000
------------ ------------
Total current liabilities $ 3,686,361 $ 4,532,689
------------ ------------
Bond Obligation $ 3,967,545 $ 4,002,546
Line of credit $ 1,001,556 $ -
Long-term debt $ 1,050,593 $ 1,145,635
------------ ------------
Total Liabilities $ 9,706,055 $ 9,680,870
------------ ------------
Stockholders' Equity
Common stock, no par value, 10,000,000
shares authorized; 3,588,848 and 3,588,848 $ 2,761,156 $ 2,770,123
Issued
Retained earnings $ 722,751 $ 577,744
------------ ------------
Total stockholders' equity $ 3,483,907 $ 3,347,867
------------ ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 13,189,962 $ 13,028,737
============ ============
See notes to the consolidated financial statements.
31
KAHIKI FOODS, INC.
STATEMENT OF OPERATIONS (unaudited)
THREE MONTHS ENDED JUNE 30,
2004 2003
---- ----
Sales $ 5,215,735 $ 1,801,301
Cost of sales:
Cost of sales 3,548,807 1,169,688
Depreciation 131,148 125,730
----------- -----------
Total cost of sales 3,679,955 1,295,418
----------- -----------
Gross margin 1,535,780 505,883
Operating expenses:
Depreciation & amortization 18,666 15,864
General and administrative expenses 1,205,576 622,608
----------- -----------
Total operating expenses 1,224,242 638,472
----------- -----------
Income (loss) from operations 311,538 (132,589)
----------- -----------
Other income (expense):
Interest expense (54,187) (33,246)
Interest and dividend income 6,747 36,982
Net gain (loss) on marketable securities (22,420) 21,780
----------- -----------
Total other income (expense) (69,860) 25,516
----------- -----------
Income (loss) before income taxes 241,678 (107,073)
Income tax expense (benefit) 96,671 (36,405)
----------- -----------
Net income (loss) 145,007 (70,668)
=========== ===========
Weighted average shares outstanding:
Basic 3,588,848 2,964,888
=========== ===========
Diluted 4,292,430 2,964,888
=========== ===========
Net income (loss) per common share:
Basic $ 0.04 $ (0.02)
=========== ===========
Diluted $ 0.03 $ (0.02)
=========== ===========
See notes to the consolidated financial statements.
32
KAHIKI FOODS, INC.
STATEMENTS OF CASH FLOWS (Unaudited)
THREE MONTHS ENDED JUNE 30,
2004 2003
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 145,007 $ (70,668)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities
Depreciation and amortization 149,814 125,730
Unrealized (gain) loss on marketable securities 14,980 (23,092)
(Increase) decrease in operating assets:
Accounts Receivable 455,349 54,323
Inventories (641,290) (234,435)
Refundable income taxes - 56,000
Other assets (118,361) (52,697)
Increase (decrease) in operating liabilities:
Accounts Payable 548,364 481,787
Accrued Expenses (131,363) (1,639)
Income taxes payable (263,329) (91,414)
----------- -----------
Net cash provided by operating activities 159,171 243,895
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment (26,143) (32,969)
Purchase of new facility improvements (1,314,312) (831,745)
Proceeds from the sale of marketable securities 540,052 287,314
----------- -----------
Net cash used in investing activities (800,403) (577,400)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings on line of credit 1,556 (6,000)
Proceeds from long-term debt - 73,908
Proceeds from the issuance of bond obligation - 339,351
Payments on long-term debt (95,042) -
Costs from stock issuance (8,967) -
Payment of bond obligation (35,001) -
----------- -----------
Net cash provided by financing activities (137,454) 407,259
----------- -----------
Net increase (decrease) in cash (778,686) 73,754
Cash - beginning of period 1,073,901 182,672
----------- -----------
Cash - end of period $ 295,215 $ 256,426
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 54,186 $ 33,246
Income taxes $ 360,000 $ -
See notes to the consolidated financial statements.
33
KAHIKI FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2004
NOTE 1 Basis of Presentation
The accompanying unaudited financial statements of Kahiki Foods, Inc.
("Company") have been prepared in accordance with Securities and Exchange
Commission requirements for interim financial statements. Therefore, they do not
include all of the information and footnotes required by accounting principles
generally accepted in the United States for complete financial statements. The
financial statements should be read in conjunction with the Form SB-2 of the
Company.
The interim financial information is unaudited. In the opinion of management,
all adjustments necessary to present fairly the financial position as of June
30, 2004, the results of operations and cash flows for the three month periods
ended June 30, 2004 and 2003, have been included in the financial statements.
Interim results are not necessarily indicative of results of operations for the
full year.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
34
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Kahiki Foods, Inc.
Columbus, Ohio
We have audited the accompanying balance sheet of Kahiki Foods, Inc. (an Ohio
corporation) as of March 31, 2004, and the related statements of operations,
changes in stockholders' equity, and cash flows for the year then ended. 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 audit. The 2003 financial statements were audited by other auditors who
issued an unqualified opinion dated May 6, 2003.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States of America). Those standards require
that we plan and perform the audit 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
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Kahiki Foods, Inc. as of March
31, 2004 and the results of its operations, changes in stockholders' equity, and
its cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 11, certain errors resulting in overstatements of
previously reported Net sales and general and administrative expenses for the
years ended March 31, 2004 and 2003 were discovered during the current year.
Accordingly, the 2004 and 2003 Statements of Operations have been restated to
correct the errors.
Child, Sullivan & Company
Certified Public Accountants
Salt Lake City, Utah
June 3, 2004, except Note 11, which is
dated September 16, 2004
35
KAHIKI FOODS, INC.
BALANCE SHEET
March 31, 2004
ASSETS
CURRENT ASSETS
Cash $ 1,073,901
Marketable trading securities 585,032
Accounts receivable - trade 1,964,941
Inventories 1,565,863
Prepaid expenses 16,055
Deferred income taxes 28,000
------------------
Total Current Assets 5,233,792
PROPERTY AND EQUIPMENT
Land 114,485
Building and improvements 2,499,262
Machinery and equipment 2,052,144
Furniture and fixtures 67,146
Vehicles 146,269
Construction in progress - new facility (Note 10) 3,776,366
------------------
8,655,672
Accumulated depreciation (1,475,370)
------------------
Net Property and Equipment 7,180,302
OTHER ASSETS
Deposits 439,655
Deferred bond fees (Net of amortization of 1998) 147,988
Deferred income taxes 27,000
------------------
Total Other Assets 614,643
------------------
TOTAL ASSETS $ 13,028,737
==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt (Note 5) $ 529,491
Current portion of bond obligation (Note 5) 140,000
Lines of credit (Note 4) 1,000,000
Accounts payable - trade 1,905,171
Accrued expenses 545,027
Accrued income taxes (Note 6) 413,000
------------------
Total Current Liabilities 4,532,689
OTHER LIABILITIES
Bond obligation (Note 5) 4,002,546
Long-term debt (Note 5) 1,145,635
------------------
Total Liabilities 9,680,870
STOCKHOLDERS' EQUITY
Common stock, no par value, 10,000,000 shares
authorized; 3,588,848 shares issued and outstanding 2,770,123
Retained earnings 577,744
------------------
3,347,867
------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 13,028,737
==================
See Notes to Financial Statements.
36
KAHIKI FOODS, INC.
STATEMENTS OF OPERATIONS
For the Years Ended March 31, 2004 and 2003
2004 2003
---------------- ---------------
Net sales (Note 2) $ 14,761,923 $ 9,204,684
Cost of sales:
Cost of sales 9,810,784 6,096,808
Depreciation and amortization 464,090 537,230
---------------- ---------------
Gross profit 4,487,049 2,570,646
Operating expenses:
Depreciation and amortization expense 67,146 0
General and administrative expenses (Note 2) 3,253,232 2,591,468
New facility expenses 0 57,148
---------------- ---------------
Income from operations 1,166,671 (77,970)
Other income (expenses):
Interest expense (137,834) (120,854)
Interest and dividend income 34,779 61,951
Net gain (loss) on marketable securities 17,874 (30,662)
---------------- ---------------
Income before income taxes 1,081,490 (167,535)
Income tax expense (benefit) 405,102 (81,612)
---------------- ---------------
Net income $ 676,388 $ (85,923)
================ ===============
Basic earnings per share:
Net income (loss) per share - weighted average shares
outstanding 2,968,171 (2,964,888 in 2003) $ 0.23 $ (0.03)
================ ===============
Diluted earnings per share:
Net income (loss) per share - weighted average shares
outstanding 3,506,186 (2,964,888 in 2003) $ 0.19 $ (0.03)
================ ===============
See Notes to Financial Statements
37
KAHIKI FOODS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
For the Years Ended March 31, 2004 and 2003
Additional Retained
Common Stock Paid-in Earnings Treasury
Shares Amount Capital (Deficit) Stock Total
--------- ------------- ------------- ------------- ------------- -------------
Balance at March 31, 2002 2,966,328 $ 1,479,868 $ 485,565 $ (12,721) $ (86,000) $ 1,866,712
Purchase of 16,500
treasury shares at cost (16,500) (16,500)
Reissue 16,500
treasury shares at cost 16,500 16,500
Retirement of 1,440
treasury shares (1,440) (86,000) 86,000 0
Net Income (Loss) (85,923) (85,923)
--------- ------------- ------------- ------------- ------------- -------------
Balance at March 31, 2003 2,964,888 1,393,868 485,565 (98,644) 0 1,780,789
Reclassify additional
paid-in capital 485,565 (485,565) 0
Stock options exercised 21,000 3,530 3,530
Issuance of common stock 602,960 887,160 887,160
Net Income (Loss) 676,388 676,388
--------- ------------- ------------- ------------- ------------- -------------
Balance at March 31, 2004 3,588,848 $ 2,770,123 $ 0 $ 577,744 $ 0 $ 3,347,867
========= ============= ============= ============= ============= =============
See Notes to Financial Statements
38
KAHIKI FOODS, INC.
STATEMENTS OF CASH FLOWS
For the Years Ended March 31, 2004 and 2003
2004 2003
---------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 676,388 $ (85,923)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 531,236 537,230
Unrealized (gain) loss on marketable securities (36,832) (111,457)
Realized (gain) loss on sale of marketable securities (9,383) 142,119
Treasury stock issued for compensation 0 10,000
Net (gain) loss on disposal of property and equipment (45,230) 0
Deferred income tax (benefit) expense (49,000) (16,000)
(Increase) decrease in operating assets:
Accounts receivable - trade (1,357,696) 349,782
Inventories (743,108) (47,420)
Refundable income taxes 56,000 (23,000)
Prepaid expenses and deposits (419,625) 279
Increase (decrease) in operating liabilities:
Accounts payable - trade 1,119,975 21,822
Accrued expenses 431,523 355
Income taxes payable 413,000 (16,000)
---------------- ---------------
Net cash provided by operating activities 567,248 761,787
---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the disposal of property and equipment 102,455 0
Purchase of equipment (102,624) (670,303)
Purchase of new facility 0 (2,254,999)
Purchase of new facility improvements (3,108,168) (668,200)
Proceeds from sales of marketable securities 536,404 0
Purchases of marketable securities 0 (57,572)
---------------- ---------------
Net cash used in investing activities (2,571,933) (3,651,074)
---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (payments) on lines of credit (37,394) 541,745
Proceeds from long-term debt 433,236 498,273
Proceeds from stockholder note 150,000 0
Proceeds from issuance of bond obligation 1,815,282 2,327,264
Payments on long-term debt (355,900) (234,180)
Proceeds from stock issuance 890,690 0
Payment of bond fees 0 (149,996)
Payment for repurchase of treasury stock 0 (16,500)
Proceeds from sale of treasury stock 0 6,500
---------------- ---------------
Net cash provided by financing activities 2,895,914 2,973,106
---------------- ---------------
Net increase in cash 891,229 83,819
Cash - beginning of year 182,672 98,853
---------------- ---------------
Cash - end of year $ 1,073,901 $ 182,672
================ ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS
Cash paid during the year for:
Interest $ 373,596 $ 120,854
Income taxes $ 35,000 $ 0
See Notes to Financial Statements
39
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2004
NOTE 1 Nature and Scope of Business
Kahiki Foods, Inc. was formed in 1982 to acquire a landmark restaurant in
Columbus, Ohio. (The restaurant was closed in 2000.) In 1988, the Company began
the manufacture and processing of frozen and other finished Chinese and
Polynesian foods for wholesale distribution.
NOTE 2 Summary of Significant Accounting Policies
In the opinion of management, all adjustments considered necessary for a fair
presentation of the results of operations and financial position have been
included and all such adjustments are of a normal recurring nature.
Revenue Recognition
Revenues are recognized when the goods are shipped. The Company's products are
perishable frozen foods with a limited life. Claims for damage during shipment
must be made immediately upon receipt of the products. There are no other
post-delivery obligations related to the Company's products. Any credits for
damaged goods are netted against sales in the current period. During the year
ended March 31, 2004, sales returns were $64,863 ($44,029 in 2003).
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 of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from these estimates.
Cash
For purposes of the statements of cash flows, cash and cash equivalents includes
cash on hand and demand deposits held by banks.
The Company maintains its cash in three accounts with one financial institution.
The carrying value is a reasonable estimate of the fair value.
Deposits
In accordance with a Loan Agreement dated December 1, 2002, with the State of
Ohio, the Company maintains a Primary Reserve Account of $418,500 on deposit
with a trustee. The Company also maintains $21,155 in deposits with various
other vendors
Marketable Trading Securities
Management determines the appropriate classification of marketable securities at
the time they are acquired and evaluates the appropriateness of such
classification at each balance sheet date. The Company's marketable securities
are classified as trading. Trading securities are held for resale in
anticipation of short-term fluctuations in market prices and are held at market
value. Realized and unrealized gains and losses on the marketable securities are
included in income.
Marketable securities consist of a $30,000 certificate of deposit with a bank
and an equity mutual fund with a cost basis of $529,236 as of March 31, 2004
($1,083,389 in 2003). The cumulative unrealized gain (loss) as of March 31, 2004
was $25,796 ($(8,168) in 2003).
Accounts Receivable - Trade
Accounts receivable are un-collateralized customer obligations due under normal
trade terms requiring payment within 15 days of the invoice date. Accounts
receivable are stated at the amount billed to the customer. Customer account
balances 60 days past the invoice date are considered delinquent. Payments
received for accounts receivable are allocated to the specific invoices
identified on the customer remittance advice or, if unspecified, are applied to
the earliest unpaid invoices. The Company does not charge interest on past due
account balances.
40
NOTE 2 Summary of Significant Accounting Policies (continued)
Accounts Receivable - Trade (continued)
The carrying amount of accounts receivable is reduced, when necessary, by a
valuation allowance that reflects management's best estimate of the amount that
will not be collected. Management individually reviews all customer account
balances on a monthly basis, and based on an assessment of current credit
worthiness, estimates the portion, if any, of the balance that will not be
collected. After management's review of all accounts receivable balances,
management believes all amounts outstanding at March 31, 2004 are collectible
and a valuation allowance is not necessary.
Inventories
Inventories consist of perishable food products and packaging supplies. The
inventories are valued at the lower of cost (first-in, first-out method) or
market. Impairment and changes in market value are evaluated on a per item
basis.
If the cost of the inventory exceeds the market value evaluation based on total
inventory, provisions are made for the difference between the cost and the
market value. Provision for potential obsolete or slow moving inventory is made
based on analysis of inventory levels, age of inventory and future sales
forecasts.
Inventories consisted of the following at March 31, 2004;
Raw Food Products $ 367,262
Finished good 923,231
Supplies 275,370
---------------
$ 1,565,863
===============
Property and Equipment
Property and equipment is carried at cost less accumulated depreciation computed
using the straight-line method. Major renewals and betterments are capitalized
and depreciated; maintenance and repairs that do not extend the life of the
respective assets are charged to expense as incurred. Upon disposal of assets,
the cost and related accumulated depreciation are removed from the accounts and
any gain or loss is included in income. Depreciation related to property and
equipment used in production is reported in cost of sales. Property and
equipment are depreciated over their estimated useful lives as follows:
Building and improvements 5 - 39 years
Machinery and equipment 5 - 9 years
Furniture and fixtures 5 - 7 years
Vehicles 5 years
During the year ended March 31, 2004, the Company capitalized interest related
to the acquisition and renovation of the new facility totaling approximately
$236,000 ($65,000 in 2003). The capitalized interest is included in construction
in progress on the balance sheet.
Deferred Bond Costs
Included in other assets are deferred bond costs of $147,988 (149,996 in 2003),
which have no residual value. The deferred bond costs will be amortized on a
straight-line basis over 22 years, the life of the bond obligation.
Advertising Expense
Advertising costs are expensed as incurred. Advertising expense amounted to
$1,904,049 for the year ended March 31, 2004 ($1,409,725 in 2003).
41
General and Administrative Expenses
General and administrative expenses for the years ended March 31, 2004 and 2003
were as follows:
2004 2003
----------- -------------
Advertising $ 1,904,049 $ 1,409,725
Salaries and wages 1,009,602 1,143,680
Taxes 152,470 44,592
Other 187,111 82,355
----------- -------------
Total $ 3,253,232 $ 2,515,642
=========== =============
Customer Incentives
The Company routinely offers discounts, rebates, slotting fees, or other
customer incentives, determined on a case-by-case basis by management at the
senior level. During the year ended March 31, 2004, slotting fees of $227,917
($75,826 in 2003) were netted against revenues.
Offering Costs
The Company's policy with respect to direct costs incurred in selling its
securities is to net them against the proceeds from those sales. Cash offering
costs in the amount of $137,840 associated with the sale of 602,940 shares of
common stock during the year ended March 31, 2004 were netted against the
proceeds from those stock sales. Additional offering costs of $140,613,
representing the estimated fair value (using the Black-Scholes model) of stock
options granted to consultants were netted against the proceeds.
Accounting for Stock-Based Compensation - Transition and Disclosure
In December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure. This statement amends SFAS
No. 123, Accounting for Stock-Based Compensation, to provide alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this statement
amends the disclosure requirements of SFAS No. 123 to require disclosures in
both annual and interim financial statements regarding the method of accounting
for stock-based employee compensation and the effect of the method used on
reported results. SFAS No. 148 is effective for fiscal years ending after
December 15, 2002. adoption of SFAS No. 148 did not have a material impact on
the Corporation's consolidated financial statements. As permitted by SFAS No.
148, the Corporation will continue to apply the provisions of Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock-Based
Compensation, for all employee stock option grants and has elected to disclose
pro forma net income and earnings per share amounts as if the fair-value based
method had been applied in measuring compensation costs. See Note 7 for
additional information.
Research and Development
The Company expenses research and development costs as incurred. Research and
development expenses were $34,561 during the year ended March 31, 2004 ($81,652
in 2003).
42
NOTE 3 Earnings Per Share (EPS)
March 31, 2004 March 31, 2003
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------- -------------- --------- ------------ -------------- ------------
Basic EPS
Income from continuing
operations available to
common stockholders' $ 676,388 2,968,171 $.023 $ (85,923) 2,964,888 $ (0.03)
Effect of dilutive
options 0 538,015 (0.04) 0 0 0
-------------- ------------- ---------- ------------- ----------- ------------
Diluted EPS
(Loss) income from
continuing operations
available to common
stockholders' $ 676,388 3,506,186 $ 0.19 $ (85,923) 2,964,888 $ (0.03)
============== ============= ========== ============= =========== ============
Earnings per share are computed on the weighted average number of common shares
outstanding including any dilutive options.
NOTE 4 Lines of Credit
The Company had available a $100,000 line of credit with a bank. The line of
credit is due on demand and is secured by receivables, inventories and property
and equipment. Interest is payable monthly at the prime rate plus 1-1/2%. The
balance due on the line of credit was $0 at March 31, 2004 ($29,000 in 2003).
The Company had available a line of credit with another bank for $1,100,000. The
credit line is due on demand and is secured by all assets of the Company.
Principal payments of $1,980 plus interest are payable monthly at the prime
rate. The balance due on the line of credit was $1,000,000 at March 31, 2004
($1,008,396 in 2003). The line of credit was scheduled to mature May 19, 2004.
On May 18, 2004, it was extended for three months. It was paid off June 2, 2004.
On June 1, 2004, the Company entered into a two-year agreement with a bank for a
revolving loan facility not to exceed $2,500,000, to be used for retirement of
the $1,100,000 credit line and additional working capital.
NOTE 5 Long-Term Debt
Long-term debt consisted of the following at March 31, 2004:
Terms
Interest % Per Month Current Long-Term
------------- ---------------- -------- ------------
025 Shareholder Note Prime + 2.00 Due 2/2005 $ 150,000 $ 0
001 Mortgage Note 8.00 $ 4,853 44,802 143,352
Equipment Notes
010 Bank 6.24 6,102 59,664 184,585
289 Bank 7.00 to 10.50 9,343 101,352 43,925
013 Bank 7.63 4,606 38,712 119,947
016 Financing Company 5.25 2,682 19,959 222,029
015 Financing Company 3.00 1,982 20,450 100,001
035 Bank 7.26 854 8,683 16,799
005 Financing Company 0.00 549 6,594 21,429
011 Community Capital
Development Corp. 5.00 2,711 28,732 56,747
007 City of Columbus 7.00 1,393 10,779 78,958
014 Community Capital
Development Corp. 2.83 2,161 23,076 80,079
060 Capital Lease - Land 4.25 1,698 16,688 77,784
--------- ------------
529,491 1,145,635
Bond Obligation 4.55 to 5.85 19,519 to 31,239 140,000 4,002,546
--------- ------------
$ 669,491 $ 5,148,181
========= ============
43
'NOTE 5 Long-Term Debt (continued)
Long-term debt for the years ended March 31 matures as follows:
2005 $ 669,491
2006 491,915
2007 450,649
2008 355,024
2009 230,762
Thereafter 3,619,831
---------------
$ 5,817,672
===============
The above long-term debt is subject to certain covenants and restrictions
including maintenance of certain financial requirements. The Company was in
compliance with all material covenants and restrictions at March 31, 2004. Rates
currently available from the bank for debt with similar terms and remaining
maturities are used to estimate the fair value of the debt. The Company's
carrying value approximates the fair value of the debt.
NOTE 6 Income Taxes
The provision (benefit) for income taxes consists of the following:
2004 2003
------------- --------------
Current (benefit) expense:
Federal $ 381,000 $ (67,894)
State 73,102 2,282
Deferred (benefit) expense (49,000) 16,000
------------- --------------
$ 405,102 $ (81,612)
============= ==============
The components of the net deferred tax asset is as follows:
2004 2003
------------- --------------
Assets:
Inventories $ 9,000 $ 3,000
Accrued vacation 20,000 20,000
Unrealized loss on marketable
securities 0 3,000
Capital loss carry forward 58,000 57,000
Other 3,000 20,000
------------- --------------
Gross Deferred Tax Assets 90,000 103,000
------------- --------------
Liabilities:
Unrealized gains on marketable
securities 4,000 0
Depreciation on property and
equipment 31,000 97,000
------------- --------------
Gross Deferred Tax Liability 35,000 97,000
------------- --------------
Total Net Deferred Tax Asset (Liability) $ 55,000 $ 6,000
============= ==============
A reconciliation of the Company's effective tax (benefit) provision is as
follows:
2004 2003
------------- ------------
Income (benefit) tax at statutory rates $ 367,000 $ (56,962)
State and Local (benefit) taxes, net of
federal benefit 47,861 8,935
Permanent differences (5,245) 13,217
Surtax and other rate differences (4,514) 2,498
------------- ------------
Total (Benefit) Provision $ 405,102 $ (81,612)
============= ============
44
NOTE 7 Stockholders' Equity and Stock Options
The Company adopted the 2001 Non Qualified and Incentive Stock Option Plan
effective July 16, 2001. The Plan authorizes the Company to grant options to
purchase shares of common stock to directors, employees and consultants of the
Company. The maximum number of common shares that may be issued under the Plan
is 600,000. The Company also has outstanding 270,666 options for common shares
under a contractual agreement with an employee. These shares are considered to
be outside of the plan, but have been included in the disclosures for employee
options.
As of March 31, 2004, four outside consultants held options to purchase a total
of 323,800 shares of common stock, with exercise prices ranging from $.22 to
$1.80. The options were issued at fair market value of the Company's stock on
the date of issue. The Company records compensation based on the estimated fair
value (Black-Scholes) of these options to non-employees. During the year ended
March 31, 2004 a non-cash offering cost of $140,316 was netted against the
proceeds of a stock offering, as the fair value of options granted during the
year.
At March 31, 2004, a total of 520,966 qualified and non-qualified options were
vested and the remaining options vest at various times over the next four years.
These options expire at various dates through 2008.
The Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its stock option plan for employees. The
vesting period of the options granted range from immediately exercisable to four
years. Accordingly, no compensation cost has been recognized in the accompanying
financial statements for options issued under the plan since the exercise price
of the options was equal to the market value of the shares at the date of grant.
Had compensation costs for the Company's stock option plan been determined based
on the fair value at the grant dates for awards under the plan consistent with
the methodology of Financial Accounting Standards Board Statement No. 123,
Accounting For Stock - Based Compensation, the Company's net income and net
income per share would change as indicated below.
2004 2003
------------- ----------------
Net (Loss) Income:
As reported $ 676,388 $ (85,923)
Total stock-based employee compensation
expense determined under fair value
based method for all awards, net of
related tax effects 44,234 (21,983)
------------- ----------------
Pro Forma $ 632,154 $ (107,906)
============= ================
Basic (Loss) Earnings Per Share:
As reported $ 0.23 $ (0.03)
Pro Forma $ 0.21 $ (0.04)
Diluted (Loss) Earnings Per Share:
As reported $ 0.19 $ (0.03)
Pro Forma $ 0.18 $ (0.04)
In order to determine compensation on options issued to consultants, as well as
fair value disclosures for employee options, the fair value of each option grant
is estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions.
2004 2003
-------- ------------
Dividend yield 0.00% 0.00%
Expected volatility 200.00% 200.10%
Risk-free interest rates 3.00% 3.25% & 3.00%
Expected lives 5 years 5 years
45
NOTE 7 Stockholders' Equity and Stock Options (continued)
A summary of the changes in the Company's stock options as of March 31, 2004 and
2003 is presented below:
2004 2003
-------------------- --------------------------
Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------- --------- -------- -----------
April 1 606,466 $0.34 534,466 $ 0.38
Granted 139,333 1.26 174,000 0.63
Exercised (21,000) 0.17 0 0.00
Cancelled 0 0.00 (102,000) 1.08
------- ----- -------- -----------
March 31 724,799 $0.52 606,466 $ 0.34
======= ===== ======== ===========
2004 2003
-------- --------
Options exercisable at year-end 520,966 206,683
Weighted-average fair value of options
granted during the year $ 1.26 $ 0.62
Weighted
Average
Number Remaining Weighted Number Weighted
Range of Outstanding Contractual Average Outstanding Average
Exercise March 31, Life Exercise March 31, Exercise
Prices 2004 (In Years) Price 2003 Price
- -------------- ----------- ----------- -------- ----------- --------
$0.1235 - 1.80 724,799 4.07 $ 0.52 606,466 $ 0.34
NOTE 8 Lease Commitments
The Company leases a facility used for its wholesaling operations under an
agreement that is accounted for as an operating lease. This lease requires
monthly payments of $6,400 through January 2005. The Company has the option to
renew for two additional three-year terms.
During 2003, the Company entered into a capital lease arrangement with the City
of Gahanna, Ohio to acquire land valued at $114,485. Lease payments of $1,698
per month through May 2009 will be allocated between principal and interest at
4.3%, with a final buyout of $100 due June 1, 2009.
The Company also leases manufacturing equipment under operating lease
agreements. These leases expire at various dates through 2008 and require total
monthly payments of $18,621.
Future annual minimum lease commitments as of March 31 are as follows:
2005 $ 80,688
2006 17,412
2007 18,166
2008 18,954
2009 19,774
Thereafter 3,578
---------------
$ 158,572
===============
The Company's lease expense for the year ended March 31, 2004 was $317,766.
NOTE 9 Concentrations
Sales to three customers amounted to approximately 48% of total revenue in the
year ended March 31, 2004 (43% in 2003). Accounts receivable from five customers
accounted for approximately 74% of total accounts receivable as of March 31,
2004 (One customer accounted for approximately 15% in 2003).
46
NOTE 10 Commitments
In December 2002, the Company purchased a new operating facility for $2,254,999.
As of March 31, 2004, the Company has spent an additional $3,776,366, which is
reflected as construction in progress.
In March 2004, the Company filed a Form SB-2 Registration Statement with the
SEC. Management expects to incur an unknown amount of additional professional
fees in the process of completing that filing.
NOTE 11 Reclassification
"The statement of operations for the years ended March 31, 2004 and 2003
originally reported Net sales of $14,989,840 and $9,204684 respectively, and
General and administrative expenses of $3,481,149 and $2,591,468 respectively.
Slotting fees of $227,917 ($75,826 in 2003) have been reclassified as a
reduction of revenue. The reclassification had no effect on net income or
earnings per share amounts."
47
FINANCIAL STATEMENTS
* * * * * *
MARCH 31, 2003 AND 2002
48
C O N T E N T S
Page
INDEPENDENT AUDITORS' REPORT 3
BALANCE SHEETS 4
STATEMENTS OF OPERATIONS 6
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY 7
STATEMENTS OF CASH FLOWS 8
NOTES TO FINANCIAL STATEMENTS 9
To the Stockholders
Kahiki Foods, Inc.
Columbus, Ohio
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying balance sheets of Kahiki Foods, Inc. as
of March 31, 2003 and 2002, and the related statements of operations, changes in
stockholders' equity and cash flows for the years then ended. 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 audit 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 disclosure 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 financial statements referred to above, present
fairly, in all material respects, the financial position of Kahiki Foods, Inc.
as of March 31, 2003 and 2002, and the results of its operations and cash flows
for the years then ended in conformity with accounting principles generally
accepted in the United States of America.
/s/ GBQ Partners, LLC
Columbus, Ohio
May 6, 2003
(3)
KAHIKI FOODS, INC.
BALANCE SHEETS
March 31, 2003 and 2002
ASSETS
2003 2002
------------ ------------
CURRENT ASSETS
Cash $ 182,672 $ 98,853
Marketable securities 1,075,221 1,048,311
Accounts receivable - trade 607,248 957,030
Inventories 822,755 775,335
Refundable income taxes 56,000 33,000
Deferred income taxes 25,000 90,000
------------ ------------
Total current assets 2,768,896 3,002,529
------------ ------------
PROPERTY AND EQUIPMENT
Land 119,685 5,200
Building and improvements 291,063 291,063
Machinery and equipment 2,214,907 1,673,443
Furniture and fixtures 49,816 38,106
Vehicles 109,543 106,899
Construction in progress - new facility 2,254,999 -
Construction in progress - new facility improvements 668,200 -
------------ ------------
5,708,213 2,114,711
Less: accumulated depreciation (1,152,250) (615,020)
------------ ------------
Net property and equipment 4,555,963 1,499,691
------------ ------------
OTHER ASSETS
Deferred bond fees 149,996 -
Other 36,086 36,365
------------ ------------
Total other assets 186,082 36,365
------------ ------------
TOTAL ASSETS $ 7,510,941 $ 4,538,585
============ ============
(4)
KAHIKI FOODS, INC.
BALANCE SHEETS
MARCH 31, 2003 AND 2002
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 327,666 $ 221,697
Current portion of the bond obligation 46,667 -
Notes payable - lines of credit 1,037,396 495,651
Accounts payable - trade 785,198 763,376
Accrued expenses 113,504 113,149
Income taxes payable - 16,000
------------ ------------
Total current liabilities 2,310,431 1,609,873
DEFERRED INCOME TAXES 19,000 100,000
BOND OBLIGATION 2,280,597 -
LONG-TERM DEBT 1,120,124 962,000
------------ ------------
Total liabilities 5,730,152 2,671,873
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, no par value, 10,000,000 shares
authorized; 2,964,888 and 2,966,328 shares issued;
2,964,888 shares outstanding, respectively 1,393,868 1,479,868
Additional paid-in capital 485,565 485,565
Retained deficit (98,644) (12,721)
------------ ------------
1,780,789 1,952,712
Less: Treasury stock, 0 and 1,440 shares at cost
in 2003 and 2002, respectively 0 (86,000)
------------ ------------
Total stockholders' equity 1,780,789 1,866,712
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,510,941 $ 4,538,585
============ ============
The accompanying notes are in integral part of the financial statements
(5)
KAHIKI FOODS, INC.
STATEMENTS OF OPERATIONS
For the Years Ended March 31, 2003 and 2002
2003 2002
------------ ------------
Sales $ 9,204,684 $ 9,374,917
------------ ------------
Cost of sales:
Cost of sales 6,096,808 6,123,826
Depreciation and amortization expense 537,230 270,409
------------ ------------
Total cost of sales 6,634,038 6,394,235
------------ ------------
Gross margin 2,570,646 2,980,682
Operating expenses:
General and administrative expenses 2,622,214 2,834,939
New facility expenses 57,148 -
------------ ------------
Total operating expenses 2,679,362 2,834,939
------------ ------------
(Loss) income from operations (108,716) 145,743
------------ ------------
Other income (expense):
Interest expense (120,854) (115,428)
Interest and dividend income 61,951 86,424
Net loss on marketable securities (30,662) (79,478)
Other 30,746 57,336
------------ ------------
Total other income (expense) (58,819) (51,146)
------------ ------------
(Loss) income before income taxes (167,535) 94,597
Income tax (benefit) expense (81,612) 17,056
------------ ------------
Net (Loss) Income $ (85,923) $ 77,541
============ ============
Basic (loss) earnings per share:
Net (loss) income per share $ (.03) $ .03
============ ============
Weighted average shares outstanding for 2003 and 2002:
2,964,888 and 2,946,484, respectively
Diluted (loss) earnings per share:
Net (loss) income per share $ (.03) $ .02
============ ============
Weighted average shares outstanding for 2003 and 2002:
2,964,888 and 3,136,310, respectively
The accompanying notes are in integral part of the financial statements
(6)
KAHIKI FOODS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Years Ended March 31, 2003 and 2002
Additional
Common Paid-In Retained Treasury
Stock Capital (Deficit) Stock Total
------------ ------------ ------------ ------------ ------------
BALANCE - MARCH 31, 2001 $ 1,474,977 $ 485,565 $ (90,262) $ (86,000) $ 1,784,280
Exercise of stock options for
29,334 shares of common
stock at $0.33 per share on
November 13, 2001 4,891 - - - 4,891
Net income - - 77,541 - 77,541
------------ ------------ ------------ ------------ ------------
BALANCE - MARCH 31, 2002 1,479,868 485,565 (12,721) (86,000) 1,866,712
Purchase of 16,500 shares
treasury stock at cost - - - (16,500) (16,500)
Reissued 16,500 shares
treasury stock at cost - - - 16,500 16,500
Retirement of 1,440 shares
of treasury stock (86,000) - - 86,000 -
Net loss - - (85,923) - (85,923)
------------ ------------ ------------ ------------ ------------
BALANCE - MARCH 31, 2003 $ 1,393,868 $ 485,565 $ (98,644) $ - $ 1,780,789
============ ============ ============ ============ ============
The accompanying notes are in integral part of the financial statements
(7)
KAHIKI FOODS, INC.
STATEMENTS OF CASH FLOWS
For the Years Ended March 31, 2003 and 2002
2003 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (85,923) $ 77,541
------------ ------------
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Depreciation and amortization 285,449 270,409
Accelerated depreciation on assets to be abandoned 251,781 -
Unrealized (gain) loss on marketable securities (111,457) 79,478
Realized loss on sale of marketable securities 142,119 -
Treasury stock issued for compensation 10,000 -
Loss on disposal of property and equipment - 7,270
Deferred income tax (benefit) expense (16,000) 37,000
(Increase) decrease in operating assets:
Accounts receivable - trade 349,782 (20,992)
Inventories (47,420) (161,428)
Refundable income taxes (23,000) (33,000)
Other assets 279 8,288
Increase (decrease) in operating liabilities:
Accounts payable - trade 21,822 205,183
Accrued expenses 355 (109,746)
Income taxes payable (16,000) (238,804)
------------ ------------
Net cash provided by operating activities 761,787 121,199
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (670,303) (286,702)
Purchase of new facility (2,254,999) -
Purchase of new facility improvements (668,200) -
Proceeds from disposal of property and equipment - 11,000
Net purchases of marketable securities (57,572) (108,852)
------------ ------------
Net cash used in investing activities (3,651,074) (384,554)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on lines of credit 541,745 186,824
Proceeds from long-term debt 498,273 292,800
Proceeds from issuance of bond obligation 2,327,264 -
Payments on long-term debt (234,180) (296,679)
Proceeds from stock issuance - 4,891
Payment of bond fees (149,996) -
Payment for repurchase of treasury stock (16,500) -
Proceeds from sales of treasury stock 6,500 -
------------ ------------
Net cash provided by financing activities 2,973,106 187,836
------------ ------------
Net increase (decrease) in cash 83,819 (75,519)
Cash - beginning of year 98,853 174,372
------------ ------------
Cash - end of year $ 182,672 $ 98,853
============ ============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 120,854 $ 115,428
Income taxes - 242,723
The accompanying notes are in integral part of the financial statements
(8)
NATURE AND SCOPE OF BUSINESS
The Kahiki was founded in 1961 as a theme based, full-service Polynesian
restaurant. Kahiki Foods, Inc. was formed in 1988 to acquire and operate
the restaurant and to manufacture and process frozen and other finished
Chinese and Polynesian foods for wholesale distribution. The restaurant
was closed in August 2000 and the restaurant assets and land were sold.
After August 2000, the Company became completely concentrated on its
manufacturing and processing of frozen food.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. Actual
results could differ from these estimates.
CASH
For purposes of the statements of cash flows, cash includes cash on hand
and demand deposits held by banks.
MARKETABLE SECURITIES
Management determines the appropriate classification of marketable
securities at the time they are acquired and evaluates the appropriateness
of such classification at each balance sheet date. The Company's
marketable securities are classified as trading. Trading securities are
held for resale in anticipation of short-term fluctuations in market
prices and are held at market value. Realized and unrealized gains and
losses on the marketable securities are included in income.
ACCOUNTS RECEIVABLE - TRADE
Accounts receivable are uncollateralized customer obligations due under
normal trade terms requiring payment within 15 days of the invoice date.
Accounts receivable are stated at the amount billed to the customer.
Customer account balances 60 days past the invoice date are considered
delinquent. Payments received for accounts receivable are allocated to the
specific invoices identified on the customer remittance advice or, if
unspecified, are applied to the earliest unpaid invoices. The Company does
not charge interest on past due account balances.
(Continued)
(9)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
ACCOUNTS RECEIVABLE - TRADE (CONTINUED)
The carrying amount of accounts receivable is reduced by a valuation
allowance that reflects management's best estimate of the amount that will
not be collected. Management individually reviews all customer account
balances on a weekly basis, and based on an assessment of current credit
worthiness, estimates the portion, if any, of the balance that will not be
collected. After management's review of all accounts receivable balances,
management believes all amounts are collectible and a valuation allowance
is not necessary.
INVENTORIES
Inventories consist of perishable food products and paper supplies. The
inventories are valued at the lower of cost (first-in, first-out method)
or market. Impairment and changes in market value are evaluated on a per
item basis.
If the cost of the inventory exceeds the market value evaluation based on
total inventory, provisions are made for the difference between the cost
and the market value. Provision for potential obsolete or slow moving
inventory is made based on analysis of inventory levels, age of inventory
and future sales forecasts.
PROPERTY AND EQUIPMENT
Property and equipment is carried at cost, less accumulated depreciation
computed using the straight-line method. Major renewals and betterments
are capitalized and depreciated; maintenance and repairs that do not
extend the life of the respective assets are charged to expense as
incurred. Upon disposal of assets, the cost and related accumulated
depreciation are removed from the accounts and any gain or loss is
included in income. Property and equipment are depreciated over their
estimated useful lives as follows:
Building and improvements 5 - 39 years
Machinery and equipment 5 - 9 years
Furniture and fixtures 5 - 7 years
Vehicles 5 years
DURING 2003, THE COMPANY CAPITALIZED INTEREST RELATED TO THE ACQUISITION
AND RENOVATION OF THE NEW FACILITY TOTALING APPROXIMATELY $65,000. THE
CAPITALIZED INTEREST IS INCLUDED IN CONSTRUCTION IN PROGRESS ON THE
BALANCE SHEET.
(Continued)
(10)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
PROPERTY AND EQUIPMENT (continued)
During December 2002 and in anticipation of a move to a new operating
facility, management revised the estimated useful life of certain assets
located at the manufacturing facility classified as building and
improvements, furniture and fixtures and machinery and equipment. The
lives of these assets ranged from five to thirty-nine years and were
reduced to nine months. The effect of this change is recognized over the
remaining useful life of the respective assets. The total cost and
accumulated depreciation of the assets at December 31, 2002 was $1,004,891
and $358,058, respectively. Accordingly, depreciation expense for 2003 was
$251,781 more than it would have been had the estimated lives not been
revised. The remaining net book value of these assets was $395,052, which
will be depreciated fully in 2004.
DEFERRED BOND COSTS
Included in other assets are deferred bond costs of $149,996, which have
no residual value. The deferred bond costs will be amortized on a
straight-line basis over 22 years, the life of the bond obligation.
REVENUE RECOGNITION
Revenues are recognized when the goods are delivered.
EARNINGS PER SHARE (EPS)
2003 2002
------------------------------------- --------------------------------------
Loss Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
Basic EPS
(Loss) income from
continuing operations
available to common
stockholders $ (85,923) 2,964,888 $ (0.03) $ 77,541 2,946,484 $ 0.03
Effect of dilutive
options - - - - 189,826 (0.01)
--------- --------- --------- --------- --------- ---------
Diluted EPS
(Loss) income from
continuing operations
available to common
stockholders $ (85,923) 2,964,888 $ (0.03) $ 77,541 3,136,310 $ 0.02
--------- --------- --------- --------- --------- ---------
(Continued)
(11)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
EARNINGS PER SHARE (EPS) (continued)
Earnings per share are computed on the weighted average number of common
shares outstanding including any dilutive options.
Options to purchase 606,466 shares for the year ended March 31, 2003 were
not included in the computation of diluted EPS because they would be
anti-dilutive. Options to purchase 104,000 shares for the year ended March
31, 2002 were not included in the computation of diluted EPS because the
exercise price of the options is greater than the average market price of
common shares.
ADVERTISING EXPENSE
Advertising costs are expensed as incurred. Advertising expense amounted
to $573,885 and $863,804 for the years ended March 31, 2003 and 2002,
respectively.
RESEARCH AND DEVELOPMENT
The Company expenses research and development costs as incurred. Research
and development expenses were approximately $82,000 and $101,000 as of
March 31, 2003 and 2002, respectively.
RECLASSIFICATIONS
Certain reclassifications have been made to the 2002 balances in order to
conform to 2003 classifications.
CASH
The Company maintains its cash in three accounts with one financial
institution. The carrying value is a reasonable estimate of the fair
value.
MARKETABLE SECURITIES
Marketable securities, which are classified as trading securities, consist
of two equity mutual funds with a cost basis of $1,083,389 and $1,167,937
as of March 31, 2003 and 2002, respectively. The unrealized loss as of
March 31, 2003 and 2002 was $8,168 and $119,626, respectively. Included in
the above amounts at March 31, 2003 and 2002, is a $30,000 certificate of
deposit that is restricted until 2007. The certificate of deposit is
restricted based on debt covenants.
(Continued)
(12)
INVENTORIES
Inventories consisted of the following at March 31:
2003 2002
--------- ---------
Raw food products $ 73,480 $ 124,736
Finished goods 401,787 369,384
Supplies 347,488 281,215
--------- ---------
$ 822,755 $ 775,335
--------- ---------
NOTES PAYABLE - LINES OF CREDIT
The Company has available a $100,000 line of credit with a bank. The line
of credit is due on demand and is secured by receivables, inventories and
property and equipment. Interest is payable monthly at the prime rate plus
1-1/2% (5.75% and 5.25% at March 31, 2003 and 2002, respectively). The
balance due on the line of credit was $29,000 and $50,651 at March 31,
2003 and 2002, respectively.
The Company has available a line of credit with another bank for
$1,100,000. The credit line is due on demand and is secured by all assets
of the Company. Principal payments of $1,980 plus interest are payable
monthly at the prime rate (4.25% and 4.75% at March 31, 2003 and 2002,
respectively). The balance due on the line of credit was $1,008,396 and
$445,000 at March 31, 2003 and 2002, respectively.
The Company's carrying value approximates the fair value of the notes as
of March 31, 2003.
LONG-TERM DEBT
Long-term debt consisted of the following at March 31:
2003 2002
----------- -----------
Mortgage Note
Term note due to an investment company, payable in monthly
installments of $4,853 including interest at 8.0%, due October
2007. The note is unsecured.
$ 229,523 $ 267,721
(Continued)
(13)
LONG-TERM DEBT (CONTINUED)
2003 2002
------------ ----------
EQUIPMENT NOTES
TERM NOTE TO A BANK PAYABLE IN MONTHLY INSTALLMENTS OF $6,102,
INCLUDING INTEREST AT 6.24%, SECURED BY EQUIPMENT AND DUE DECEMBER
2007. 300,310 -
TERM NOTES DUE TO A BANK, PAYABLE IN MONTHLY INSTALLMENTS OF $9,343
INCLUDING INTEREST AT RATES RANGING FROM 7.0% TO 10.5%. THESE NOTES
ARE SECURED BY ALL ASSETS OF THE COMPANY AND DUE THROUGH VARIOUS
DATES THROUGH SEPTEMBER 2005. 242,077 331,637
TERM NOTE DUE TO A BANK, WITH MONTHLY INTEREST PAYMENTS AT PRIME PLUS
1.00% UNTIL JUNE 2002. MONTHLY PAYMENTS OF $4,606 INCLUDING
INTEREST AT 7.63%, SECURED BY EQUIPMENT AND DUE JUNE 2007. 200,098 159,173
TERM NOTE DUE TO A FINANCING COMPANY, PAYABLE IN MONTHLY INSTALLMENTS
OF $1,982 INCLUDING INTEREST AT 3.0%, DUE IN OCTOBER 2009. THE NOTE
IS SECURED BY EQUIPMENT. 140,298 150,000
TERM NOTE DUE TO COMMUNITY CAPITAL DEVELOPMENT CORPORATION, PAYABLE
IN MONTHLY INSTALLMENTS OF $2,711 INCLUDING INTEREST AT 5.0%, DUE
JANUARY 2007. THE NOTE IS SECURED BY ALL BUSINESS ASSETS. 112,744 138,618
TERM NOTE DUE TO THE CITY OF COLUMBUS, PAYABLE IN MONTHLY
INSTALLMENTS OF $1,393 INCLUDING INTEREST AT 7.0%, SECURED BY
EQUIPMENT AND DUE JANUARY 2011. 99,790 109,165
(Continued)
(14)
LONG-TERM DEBT (CONTINUED)
2003 2002
------------ ----------
TERM NOTES DUE TO A BANK, PAYABLE IN MONTHLY INSTALLMENTS OF $1,305
INCLUDING INTEREST AT RATES RANGING FROM 9.3% TO 10.52%, SECURED BY
VEHICLES. THESE NOTES ARE DUE AT VARIOUS DATES THROUGH MARCH 2004. 12,483 27,383
CAPITAL LEASE
CAPITAL LEASE DUE TO THE CITY OF GAHANNA, PAYABLE IN MONTHLY
INSTALLMENTS OF $1,698 INCLUDING INTEREST AT 4.30%, SECURED BY LAND
AND DUE JUNE 2009. 110,467
BOND OBLIGATION
BOND OBLIGATION PAYABLE TO THE STATE OF OHIO WITH INTEREST ONLY
PAYMENTS AT 4.55% DUE THROUGH NOVEMBER 2003. PRINCIPAL, INTEREST
PAYMENTS RANGING FROM $19,519 TO $31,239 FROM DECEMBER 2003 THROUGH
DECEMBER 2022 WITH INTEREST RANGING FROM 4.55% TO 5.85%, SECURED BY
SUBSTANTIALLY ALL ASSETS OF THE COMPANY. THE OBLIGATION IS
PERSONALLY GUARANTEED BY THE PRESIDENT OF THE COMPANY. 2,327,264
------------ ----------
3,775,054 1,183,697
Less: current portion (374,333) (221,697)
------------ ----------
$ 3,400,721 $ 962,000
============ ==========
(Continued)
(15)
LONG-TERM DEBT (CONTINUED)
Long-term debt for the years ended March 31 matures as follows:
2004 $ 374,333
2005 478,763
2006 428,057
2007 404,618
2008 325,760
Thereafter 1,763,523
----------
$3,775,054
==========
The bond obligation's face amount is $4,180,000. As of March 31, 2003, the
Company had only drawn $2,327,264. The remaining funds will be drawn to
fund the renovations and equipment purchases for the Company's new
facility.
The above long-term debt is subject to certain covenants and restrictions
including maintenance of certain financial requirements. Rates currently
available from the bank for debt with similar terms and remaining
maturities are used to estimate the fair value of the debt. The Company's
carrying value approximates the fair value of the debt.
INCOME TAXES
The provision (benefit) for income taxes consists of the following:
2003 2002
---- ----
Current (benefit) expense:
Federal $ (67,894) $ (20,067)
State 2,282 123
Deferred (benefit) expense (16,000) 37,000
------------- -----------
$ (81,612) $ 17,056
============= ===========
(Continued)
(16)
INCOME TAXES (continued)
The components of the net deferred tax asset is as follows:
2003 2002
---- ----
Assets:
Inventories $ 3,000 $23,000
Accrued vacation 20,000 17,000
Unrealized loss on marketable securities 3,000 48,000
Capital loss carry forward 57,000 -
Other 20,000 8,000
-------- --------
Gross deferred tax assets 103,000 96,000
-------- --------
Liabilities:
Depreciation on property and equipment 97,000 106,000
-------- --------
Total net deferred tax asset (liability) $ 6,000 ($10,000)
======== ========
A reconciliation of the Company's effective tax (benefit) provision is as
follows:
2003 2002
---- ----
Income (benefit) tax at statutory rates $(56,962) $ 32,163
State and local (benefit) taxes, net of federal benefit (8,935) 3,070
Permanent differences (3,217) (7,298)
Surtax and other rate differences (2,498) (879)
-------- --------
Total (benefit) provision $(81,612) $ 17,056
======== ========
STOCKHOLDERS' EQUITY AND STOCK OPTIONS
The Company adopted the 1995 Stock Option Plan effective May 1, 1995. The
1995 Plan authorizes the Company to grant options to purchase shares of
common stock to directors, employees and consultants of the Company. The
maximum number of common shares that may be issued under the 1995 Plan is
600,000. The Company also has outstanding 270,666 options for common
shares under a contractual agreement with an employee. These shares are
considered to be outside of the plan, but have been included in the
disclosures for employee options.
(Continued)
(17)
STOCKHOLDERS' EQUITY AND STOCK OPTIONS (continued)
As of March 31, 2003 and 2002, outside consultants held options to
purchase 66,600 and 46,600 shares of common stock, respectively,
with exercise prices ranging from $.22 to $.63. The options were
issued at their fair market value, and as such, no compensation
expense has been granted. At March 31, 2003 and 2002, only 206,683
and 92,133 options, respectively, were vested and the remaining
options vest at various times over the next four years. These
options expire at various dates through 2006.
The Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its stock option plan for
employees, consultants and the outside directors. The vesting period
of the options granted range from immediately exercisable to four
years. Accordingly, no compensation cost has been recognized in the
accompanying financial statements for options issued under the plan
since the exercise price of the options was equal to the market
value of the shares at the date of grant. Had compensation costs for
the Company's stock option plan been determined based on the fair
value at the grant dates for awards under the plan consistent with
the methodology of Financial Accounting Standards Board Statement
No. 123, Accounting For Stock - Based Compensation, the Company's
net income and net income per share would change as indicated below.
Net (loss) income:
As reported $ (85,923) $ 77,541
Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects (21,983) (23,648)
----------- ----------
Pro forma $ (107,906) $ 53,893
=========== ==========
Basic (loss) earnings per share:
As reported $ (0.03) $ 0.03
Pro forma $ (0.04) $ 0.02
Diluted (loss) earnings per share:
As reported $ (0.03) $ 0.02
Pro forma $ (0.04) $ 0.02
(Continued)
(18)
STOCKHOLDERS' EQUITY AND STOCK OPTIONS (continued)
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions.
2003 2002
---- ----
Dividend yield 0% 0%
Expected volatility 200.1% 229.5%
Risk-free interest rates 3.25% and 3.00% 3.50% and 3.25%
Expected lives 5 Years 5 Years
A summary of the status of the Company's employee stock option plan as of
March 31, 2003 and 2002 and changes for the years then ended are
presented below:
2003 2002
-------------------- --------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
April 1 534,466 $ 0.38 529,800 $0.36
Granted 174,000 $ 0.63 34,000 $0.59
Exercised - $ 0.00 (29,334) $0.17
-
Canceled (102,000) $ 1.08 - $0.00
-------- -------
March 31 606,466 $ 0.34 534,466 $0.38
======== =======
2003 2002
---- ----
Options exercisable at year-end 206,683 313,566
Weighted-average fair value of options
granted during the year $ 0.62 $ 0.47
Weighted Average Weighted Number Weighted
Number Remaining Average Outstanding Average
Range of Outstanding Contractual Life Exercise March 31, Exercise
Exercise Prices March 31, 2003 (In Years) Price 2002 Price
-------------- -------- ----- ---- -----
$0.17 - $0.85 606,466 6.16 $0.34 534,466 $0.38
(Continued)
(19)
LEASE COMMITMENTS
The Company leases a facility used for its wholesaling operations under an
agreement that is accounted for as an operating lease. This lease requires
monthly payments of $6,400 through January 2005. The Company has the
option to renew for two additional three-year terms.
The Company also leases manufacturing equipment under operating lease
agreements. These leases expire at various dates through 2008 and require
total monthly payments of $18,621.
Future annual minimum lease commitments as of March 31 are as follows:
2004 $ 300,783
2005 174,040
2006 24,126
2007 24,126
2008 24,126
------------
Total $ 547,201
============
The Company's lease expense for the years ended March 31, 2003 and 2002
was $334,943 and $328,871, respectively.
CONCENTRATIONS
Sales to three customers amounted to approximately 43% in 2003 and one
customer accounted for 53% in 2002 of total revenue. Accounts receivable
from one customer accounted for approximately 15% and from two customers
accounted for 59% of total accounts receivable as of March 31, 2003 and
2002, respectively.
COMMITMENTS
In December 2002, the Company purchased a new operating facility for
$2,254,999. The Company committed to pay approximately $1,000,000 to
upgrade the facility. As of March 31, 2003, the Company has spent an
additional $668,200, which is reflected as construction in progress.
SUBSEQUENT EVENTS
On April 18, 2003, the Company declared a 2 for 1 stock split for
stockholders of record as of May 1, 2003. All per share amounts in the
accompanying financial statements have been restated to reflect the stock
split.