UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended - June 30, 2005
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from -
Commission file number - 333-113925
Kahiki Foods, Inc.
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(Exact name of small business issuer as specified in its charter)
Ohio
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(State or other jurisdiction or incorporation or organization)
31-1056793
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(I.R.S. Employer Identification No.)
1100 Morrison Blvd., Columbus, Ohio 43230
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(Address of principal executive offices)
(614) 322-3180
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(Issuer's telephone number)
N/A
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(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X]
No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to
be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution
of securities under a plan confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 3,670,848 common shares.
Transitional Small Business Disclosure Format (Check One): Yes [X] No [ ]
KAHIKI FOODS, INC.
INDEX PAGE
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Part I. Financial Information:
Item 1. Financial Statements 4-7
Notes to Financial Statements 8-9
Item 2. Arrangements, Discussion and Analysis or Plan of Operation 8-12
Item 3. Controls and Procedures 12
Part II Other Information
Item 1. Legal Proceedings 12
Item 2. Changes in Securities and Business
Issuer Purchases of Equity Securities 12
Item 3. Defaults upon Senior Securities 12
Item 4. Submission of Matter to a Vote of Security Holders 12-13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 15-18
Signatures 14
2
1. ORGANIZATION AND NATURE OF OPERATIONS
UNAUDITED INTERIM FINANCIAL STATEMENTS
The accompanying unaudited interim condensed financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-QSB of Regulation S-B. They do not include all
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. The interim
unaudited financial statements should be read in conjunction with the financial
statements for the year ended March 31, 2005, which is included in the Company's
Form SB-2 filed with the Securities and Exchange Commission. In the opinion of
management, all adjustments considered necessary for a fair presentation,
consisting solely of normal recurring adjustments, have been made. Operating
results for the three months ended June 30, 2005 are not necessarily indicative
of the results that may be expected for the year ending March 31, 2006.
Stock-based Compensation - In December 2004, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 123 (revised 2004),
"Share-Based Payment" (SFAS 123R), which requires entities to measure the cost
employee services received in exchange for an award of equity instruments based
on the grant-date fair value of the award (with limited exceptions). The cost is
recognized as an expense over the period during which the employee is required
to provide service in exchange for the award, which is usually the vesting
period.
As required by SFAS 123R, the Company will estimate the fair value of all stock
options on each grant date, using an appropriate valuation approach such as the
Black-Scholes option pricing model. The provisions of this Statement will be
effective for the Company beginning with its fiscal year ending March 31, 2006.
We are currently evaluating the impact of this new standard will have on its
financial position, results of operation, or cash flows.
ITEM 2. Management's Discussion and Analysis or Plan of Operation
During the first quarter, we engaged our auditors to perform agreed upon
procedures on the inventory observation procedures for June 30, 2005. Their
procedures included, among others, attending Management's planning meeting,
reviewing established procedures, performing recounts, etc. As a result of their
procedures, they concluded that inventory observation procedures are established
and are in effect. They also commented on the need to consider the use of an ERP
system to more accurately track inventory.
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 renovated and equipped this facility to meet USDA regulations for
the manufacture of food products. The facility is used to prepare, freeze,
package, store and ship our products, and house our administrative offices.
3
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
KAHIKI FOODS, INC.
BALANCE SHEETS
JUNE 30, 2005
(unaudited) March 31, 2005
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ASSETS
Cash $ 1,386,544 $ (10,568)
Accounts receivable 2,022,252 1,519,498
Inventories 1,629,539 1,891,985
Prepaid expenses 53,585 42,250
Refundable income taxes 39,498 44,787
Deferred income taxes 75,000 75,000
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Total current assets 5,206,418 3,562,952
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Land 114,485 114,485
Building & improvements 9,900,039 2,499,262
Machinery & equipment 3,403,982 2,323,312
Furniture & fixtures 139,734 115,713
Vehicles 127,114 146,269
Construction in progress - 7,665,693
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13,685,354 12,864,734
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Less: accum depreciation (1,278,633) (1,981,442)
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Net property & equipment 12,406,721 10,883,292
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Deferred loan fees 209,007 219,992
Other 20,450 29,589
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Total other assets 229,457 249,581
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------------ ------------
TOTAL ASSETS $ 17,842,596 $ 14,695,825
============ ============
LIABILITIES & EQUITY
Current debt $ 779,281 $ 688,909
Current portion of bond 143,333 143,333
Related party note payable 150,000 150,000
Accounts payable 2,216,259 2,221,213
Accrued expenses 389,077 447,565
Income taxes payable - 5,350
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Total current liabilities 3,677,950 3,656,370
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Bond obligation 3,815,000 3,850,000
Related party debt 2,000,000 1,000,000
Line of credit 2,500,000 1,157,605
Long-term debt 2,639,582 1,609,822
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Total liabilities 14,632,532 11,273,797
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Stockholders' Equity
Common stock, no par value, 10,000,000
shares authorized; 3,670,848 and 3,649,848 2,789,186 2,780,756
issued
Retained earnings 420,878 641,272
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Total stockholders' equity 3,210,064 3,422,028
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TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 17,842,596 $ 14,695,825
============ ============
See notes to the financial statements.
4
KAHIKI FOODS, INC.
STATEMENT OF OPERATIONS (unaudited)
THREE MONTHS ENDED JUNE 30,
2005 2004
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Sales $ 5,098,006 $ 5,021,263
Cost of sales 4,288,653 3,698,622
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Gross margin 809,353 1,322,641
Operating, general and administrative expenses 958,275 1,011,104
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Income (loss) from operations (148,922) 311,537
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Other income (expense):
Interest expense (71,860) (54,187)
Interest and dividend income 388 6,747
Net loss on marketable securities - (14,980)
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Total other expense (71,472) (62,420)
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Income (loss) before income taxes (220,394) 249,117
Income tax expense - 96,671
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Net income (loss) (220,394) 152,446
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Weighted average shares outstanding:
Basic 3,661,261 3,588,848
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Diluted 4,045,827 4,292,430
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Net income (loss) per common share:
Basic $ (0.06) $ 0.04
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Diluted $ (0.05) $ 0.04
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See notes to the financial statements.
5
KAHIKI FOODS, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
Retained Treasury
Common Stock Earnings Stock Total
------------ ----------- -------- -----------
BALANCE AT MARCH 31, 2005 $ 2,780,756 $ 641,272 $ - $ 3,422,028
Stock options exercised 8,430 8,430
Net loss (220,394) (220,394)
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BALANCE AT JUNE 30, 2005 (UNAUDITED) $ 2,789,186 $ 420,878 $ - $ 3,210,064
=========== =========== ======== ===========
See notes to the financial statements.
6
KAHIKI FOODS, INC.
STATEMENTS OF CASH FLOWS (Unaudited)
THREE MONTHS ENDED JUNE 30,
2005 2004
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CASH FLOWS FROM OPERATING ACTIVITES:
Net income (loss) $ (220,394) $ 152,446
Adjustments to reconcile net income (loss) to
net cash provided by operating activities
Depreciation and amortization 179,270 149,814
Unrealized loss on marketable securities - 14,980
Net loss on disposal of property and equipment 1,263 -
(Increase) decrease in operating assets:
Accounts receivable (502,754) 455,349
Inventories 262,446 (1,891,985)
Refundable income taxes 5,289 (44,787)
Other assets (2,196) (71,839)
Increase (decrease) in operating liabilities:
Accounts payable (4,954) 548,364
Accrued expenses (58,488) 447,565
Income taxes payable (5,350) 5,350
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Net cash used in operating activities (345,868) (234,743)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment (649,226) (26,143)
Purchase of new facility improvements (1,051,701) (1,314,312)
Proceeds from the disposal of property and equipment 200
Proceeds from the sale of marketable securities - 540,052
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Net cash used in investing activities (1,700,727) (800,403)
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CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings on line of credit 1,342,395 1,556
Proceeds from long-term debt 2,282,810 -
Payments on long-term debt (162,678) (95,042)
Capitalized cost of financing 7,750 (8,967)
Payments of bond obligation (35,000) (35,001)
Proceeds from the exercise of stock options 8,430
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Net cash provided by (used in) financing activities 3,443,707 (137,454)
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Net increase (decrease) in cash 1,397,112 (1,172,600)
Cash - beginning of period (10,568) -
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Cash - end of period $ 1,386,544 $(1,172,600)
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 109,051 $ 54,186
Income taxes $ 60 $ 360,000
See notes to the financial statements.
7
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, 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
- 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
Revenue from the sale of products is generally recognized at the time of
shipment to the customer. Pursuant to EITF 01-9, Accounting for Consideration
Given by a Vendor to a Customer or a Reseller of the Vendors Products, certain
promotional payments paid to wholesalers or retailers by a vendor for the sale
of its products must be shown as a reduction of the revenues in the period they
are provided.
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.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 30, 2005
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,
2005 and 2004:
8
QUARTERS ENDED JUNE 30
(in %)
2005 2004
Revenues 100 100
Cost of revenues 84 74
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Gross profit 16 26
Operating expenses 19 20
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Income from operations (3) 6
Interest expense (1) (1)
--- ---
Income from continuing operations before
income tax (4) 5
---
Income tax 0 2
--- ---
Net income (4) 3
=== ===
REVENUES
Revenues for the quarter ended June 30, 2005 were $5,098,006 compared to
$5,021,263 revenues for the comparable quarter ended June 30, 2004.
COST OF GOODS
The gross margin on sales of products was $809,353 for the quarter ended June
30, 2005 compared to $1,322,641 for the quarter ending June 30, 2004. The
primary reason for the decline in gross margins for the quarter ended June 30,
2005 was the inefficiencies related to the start up of the new plant in May
2005. We expect margins to improve each quarter, but anticipate improvements
happening gradually over several months as we implement process improvements and
work out start up issues related to a new facility.
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, 2005 were $958,275 compared to
$1,018,544 for the comparable period in 2004, which is a decrease of $60,269 or
6%. Most of the decrease was attributable to marketing and advertising expenses,
which decreased to
9
$419,549 for the quarter ended June 30, 2005, from $585,010 for the quarter
ended June 30, 2004, primary due to a decrease in demo costs.
RESEARCH AND DEVELOPMENT
Expenditures on research and development were $72,287 for the quarter ended June
30, 2005 compared to $16,119 for the quarter ended June 30, 2004, an increase of
348%. The increase was due to developing new food products.
NET INCOME
Our net loss for the quarter ended June 30, 2005 was $220,394, as compared to
net income of $152,446 for the quarter ended June 30, 2004.
LIQUIDITY AND CAPITAL RESOURCE
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 was used to
pay off a pre-existing $1,100,000 line, and to provide working capital. The
revolving loan matures on May 31, 2007.
In December 2002, we arranged a state economic development bond with the State
of Ohio for $4.18 million. Principal payments commenced in December 2003. 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 purchase a large production
facility in the form of 14 acres of land and an 119,000 square foot food
processing plant for 2.25 million dollars. The balance of the bond, along with
additional funds, was used for building improvements and equipment needed to
complete the project.
On December 21, 2004, we completed a $4.227 million dollar financing package.
Under the terms of the agreements, $2.227 million was immediately available to
fund the completion of construction of our new 119,000 square foot plant in
Gahanna, Ohio, and for working capital. Upon start-up of the new plant, an
additional $2 million was available for working capital. The final $2 million
was received on June 3, 2005. The financing package also provides for a poultry
supply and co-pack and storage agreement.
FORWARD LOOKING STATEMENTS
This Quarterly Report 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
10
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 Quarterly Report. We do not assume any obligation
to revise forward-looking statements.
ITEM 3. Controls and Procedures
No change has occurred in our internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter
ended June 30, 2005, that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
11
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings - Not Applicable.
ITEM 2. Change in Securities and Small Business Issuer Purchases of Equity
Securities - Not Applicable.
ITEM 3. Defaults Upon Senior Securities - Not Applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders. - At the annual
meeting of the shareholders of Kahiki Foods, Inc., held on August 8, 2005,
the following
Directors were elected to serve for one year or until their successors are
elected by the vote totals noted:
VOTES AGAINST OR
--------------------------------
NAME VOTES FOR WITHHELD ABSTAIN
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Alice W. Tsao 2,618,902 16,520 0
Bradford M. Sprague 2,628,822 6,600 0
Charles Dix 2,600,822 34,600 0
Allen J. Proctor 2,628,822 6,600 0
R. L. Richards 2,628,822 6,600 0
John Dix 2,600,822 34,600 0
Additionally by a vote of 2,623,822 shares for, 6,600 shares against and 5,000
shares abstain, the shareholders ratified and approved the selection of Plante &
Moran, PLLC as Kahiki's auditors for the fiscal year ended March 31, 2006.
By a vote of 2,614,202 shares for, 16,000 shares against and 5,220 shares
abstain, the shareholders adopted an amendment to Kahiki's Amended and Restated
Articles of
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Incorporation to designate 1,000,000 shares of capital stock as Preferred Shares
and to specify the terms and preferences of the Preferred Shares.
ITEM 5. Other Information.
On July 22, 2005, Michael Tsao, Director, President and Chief Executive Officer
of Kahiki Foods, Inc. died. At the time of his death, Mr. Tsao was the direct
owner of 1,023,000 common shares of Kahiki, representing approximately 27.87% of
Kahiki's outstanding common shares. Mr. Tsao's spouse, Alice Tsao, Director,
Vice President and Secretary of Kahiki, was named Executor of Mr. Tsao's estate.
As a result, Alice Tsao will control the common shares owned by Mr. Tsao's
estate. Alice Tsao also is the direct owner of 688,660 common shares of Kahiki,
representing approximately 18.76% of Kahiki's outstanding common shares.
Consequently, when added to the common shares held in Mr. Tsao's estate that she
will control, Alice Tsao will control approximately 47.28% of Kahiki's
outstanding common shares.
On July 26, 2005, Alan L. Hoover was named Acting President of Kahiki Foods,
Inc., succeeding Michael Tsao who died on July 22, 2005. Mr. Hoover, age 50,
joined Kahiki in May 1999 as Senior Vice President of Sales and Marketing and
has served on Kahiki's Board of Directors since September 1999. Prior to joining
Kahiki, 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. Mr. Hoover
currently serves as an Advisory Board member for the National Refrigerated and
Frozen Foods Association.
On August 8, 2005, Ms. Tsao was named Chairman of the Board, and the chair of
the executive committee of the board.
ITEM 6. Exhibits and Reports on Form 8.K.
(a) Exhibits.
Exhibits filed with this Quarterly Report on Form 10-QSB are attached
hereto. For a list of our exhibits, see "Index to Exhibits" (following the
signature page).
(b) Reports on Form 8-K. - not applicable
13
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
KAHIKI FOODS, INC.
(Registrant)
Date: August 10, 2005 /s/ Alan L. Hoover
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Alan L. Hoover, Acting President
Date: August 10, 2005 /s/ Julia A. Fratianne
----------------------------------------
Julia A. Fratianne, Treasurer and CFO
14
INDEX TO EXHIBITS
Exhibit No. Description Location
- ----------- ---------------------------------------------- ---------------
31.1 Certification of the Chief Executive Officer Filed herewith.
Pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer Filed herewith.
Pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
32 Certification pursuant to Rule 13a-14(b) and Filed herewith.
Section 1350 of Chapter 63 of Title 18 of the
United States Code, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
15