Filed Pursuant to Rule 424(b)(2)
Registration No. 333-126268
KAHIKI FOODS, INC.
4,938,048 Common Shares
This prospectus relates to the resale of up to 4,938,048 of our common
shares by the selling shareholders listed in this prospectus. The selling
shareholders will receive all of the proceeds from the sale of common shares
hereunder. Of these shares, 1,378,700 shares are issuable upon the exercise of
warrants or options. We will receive the proceeds from any cash exercise of the
warrants and options by the selling shareholders. The shares offered by this
prospectus may be sold from time to time by the selling shareholders at
prevailing market prices or prices negotiated at the time of sale. The
securities offered by this prospectus were issued to the selling shareholders in
transactions exempt from registration under the Securities Act of 1933, as
amended. We will pay all expenses of registering the securities.
Our common shares are listed on the OTC Bulletin Board Quotation System, or the
OTCBB, under the symbol "KSCI". On September 21, 2005, the last reported sale
price of our common shares on the OTCBB was $1.45.
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 Prospectus is September 29, 2005.
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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 shareholders from time to time at a
prices available in the market.
COMMON SHARES
OUTSTANDING 3,670,848 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.
Thrree Months ended June 30
Year Ended March 31 (unaudited)
--------------------------------------- ---------------------------
INCOME STATEMENT DATA 2005 2004 2003 2005 2004
- --------------------- ------------ ----------- ------------ ----------- --------------
Net Sales $ 18,894,267 $14,193,124 $ 9,204,684 $5,098,006 $ 5,021,263
Net Income (loss) $ 63,528 $ 676,388 $ (85,923) $ (220,394) $ 145,006
Net Income Per Share $ 0.02 $ 0.23 $ (0.03) $ (.06) $ .04
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March 31 2005
BALANCE SHEET DATA Actual June 30, 2005
- -------------------- ------------- -------------
Total Assets $ 14,695,825 $ 17,842,596
Working Capital $ (93,418) $ 1,603,409
Long Term Debt $ 7,617,427 $ 10,954,582
Total Liabilities $ 11,273,797 $ 14,632,531
Shareholders' Equity $ 3,422,028 $ 3,210,064
(1) Assumes that the warrants and options offered hereby are all
exercised.
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.
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 49.38% 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.
Our credit facility contains restrictive covenants that limit
our financial and operational flexibility and our ability to pay dividends
-Our credit facility with Key Bank contains restrictive covenants that
limit our ability to incur debt, require us to maintain financial ratios,
such as a debt service coverage ratio and leverage ratio, and restrict our
ability to pay dividends. These restrictions may adversely affect our
ability to conduct and expand our operations. Adequate funds may not be
available when needed or may not be available on favorable terms. Even if
available, our credit facility may restrict our ability to raise
additional funds. If we are unable to raise capital, our finances and
operations may be adversely affected..
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
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claims against us in excess of our insurance coverage could have a
material adverse effect on Kahiki.
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% of our sales in the year ended March 31
2004 and 69% of our sales in the year ended March 31, 2005. For the year
ended March 31, 2004, Costco represented approximately 27%, Meijer's
represented approximately 7% and Wal-Mart represented approximately 15% of
our total sales. For the year ended March 31, 2005, Costco represented
approximately 25%, Wal-Mart represented approximately 7% and Sam's Club
represented approximately 12% 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.
4
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 listed for trading on the OTC Bulletin
Board and trade infrequently. We will endeavor to list our common shares
eventually on NASDAQ. We cannot provide any assurance that our common
shares will be quoted 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 shareholders. Any proceeds from the sale of shares by us to the selling
shareholders upon exercise of the warrants and options will be used for general
corporate purposes, including capital expenditures and to meet working capital
needs. General corporate purposes may also include, without limitation,
repayment of debt.
SELLING SHAREHOLDERS
The following table sets forth the names of the selling shareholders,
positions 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 shareholders will be
determined from time to time by them, and will depend upon a number of
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factors, including the price of our common shares from time to time. Because the
selling shareholders may offer all, some or none of the common shares that they
hold, and because any potential offering by the selling shareholders is not
being underwritten, no estimate can be given as to the number of common shares
that will be held by the selling shareholders upon termination of such offering.
See "Plan of Distribution." The table sets forth such information as of July 22,
2005, concerning the beneficial ownership of the common shares, warrants and
options by the selling shareholder. All information as to beneficial ownership
has been furnished by the selling shareholders.
Number
Number of Number of Number of of
Common $2.25 $3.00 Number of Shares
Shares Warrants Warrants Options Issuable Percent
Owned and Owned and Owned and Owned and on of
Available Available Available Available Conver-sion Total class
Name and Address of for sale for sale for sale for sale of Number of After
Shareholder prior to prior to prior to prior to Preferred Shares Offering
(Position with Kahiki) Offering Offering Offering Offering Shares Offered (1) (1)
- ------------------------- ---------- ---------- ---------- ---------- ----------- ----------- --------
Barron Partners LP (2) 588,235(6) 294,117(6) 294,117(6) None None 1,176,469 0%
730 Fifth Avenue
9th Floor
New York, N.Y.
(None)
Bob Binsky 249,792(6) None None 200,600(6) None 450,392 0%
20185 E. Country Club
Drive
North Miami Beach, Fl
(Former Director)
Winston Bash 12,372(7) None None 54,600(6) None 54,600 *
4093 Roselea Pl.
Columbus, Ohio
(Former Director)
Karl F. Birkenfeld(3) None 24,000(6) None None None 24,000 0%
2 Greenvale Avenue
Yonkers, New York
(None)
Laconia Capital Corp.(4) None 3,000(6) None None None 3,000 0%
17 Battery Place
Suite 709
New York, New York
(None)
William Velmar None 3,000(6) None None None 3,000 0%
2274 Arbor Lane #2
Salt Lake City, Utah
(None)
Townsends, Inc.(5) None None None None 888,889 (7) 888,889 0%
Suite 420
919 North Market Street
Wilmington, Delaware
(Supplier)
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Charles Dix(5) None None None 2000(6) None 2,000 0%
30098 Southhampton
Bridge Rd.
Salisbury, Maryland
(Director)
Allen J. Proctor 7500(7) None None 4000(6) None 4,000 *
471 Highgate Avenue
Worthington, OH
(Director)
R.L. Richards 500(7) None None 3,000(6) None 3,000 *
5598 Preston Mill Way
Dublin, Ohio
(Director)
Bradford M. Sprague 2,400(7) None None 3,000(6) None 3,000 *
1636 Sherborne Lane
Powell, Ohio
(Director)
Alan Hoover 56,000(6) None None 240,666(6) None 240,666 *
1100 Morrison Road
Gahanna, Ohio
(Acting President)
Alfred Cheung 5,000(7) None None 100,000(6) None 100,000 *
1100 Morrison Road
Gahanna, Ohio
(Vice President)
Julia A. Fratianne None None None 25,000(6) None 25,000 *
1100 Morrison Road
Gahanna, Ohio
(Treasurer, CFO)
Estate of Michael C. 1,023,000(6) None None 12,000(6) None 512,000 9.02%
Tsao(8)
c/o Alice Tsao, Executor
1100 Morrison Road
Gahanna, Ohio
(Former Chairman,
President, Director)
Alice W. Taso 688,660(6) None None 12,000(6) None 512,000 3.08%
1100 Morrison Road
Gahanna, Ohio
(Vice President,
Secretary, Director)
Andrew J. Federico None None None 52,600(6) None 52,600 0
366 East Broad Street
Columbus, Ohio
(Outside Counsel)
Kenneth Kisner 21,000(6) None None None None 21,000 0
523 Lincolnshire Road
Gahanna, Ohio
(None)
Hai Ping Liu 7,000(6) None None 16,000(6) None 23,000 0
821 Monarda Pl.
Reynoldsburg, Ohio
(Employee)
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Theang Ngo 6,000(6) None None 16,000(6) None 22,000 0
6440 Gossmer Ct.
Westerville, Ohio
(Employee)
Gil Wilson 3,000(6) None None 13,000(6) None 16,000 0
1100 Morrison Road
Gahanna, Ohio
(Employee)
Dan Copley None None None 6,000(6) None 6,000 0
1100 Morrison Road
Gahanna, Ohio
(Employee)
- ------------
(1) Assumes the sale of all securities offered.
(2) 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.. 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) Karl F. Birkenfeld is an associated person of Westcap Securities, a
licensed broker dealer. Mr. Birkenfeld received his warrants as
compensation for investment banking services rendered to Kahiki in
2004.
(4) Laconia Capital Corp. is a licensed broker dealer and received its
warrants as compensation for investment banking services rendered to
Kahiki in 2004. Michael Franzese, President of Laconia Capital
Corp., exercises the power to vote or dispose of the securities
offered.
(5) Townsends, Inc. has entered into a Supply Agreement with Kahiki to
supply chicken to Kahiki and a Co-Pack Agreement pursuant to which
Kahiki produces product for Townsends. Charles Dix, President and
Chief Operating Officer of Townsends and a Director of Kahiki, and
David Burton, Chief Financial Officer of Townsends, share the power
to vote or dispose of the securities offered.
(6) These securities were acquired directly from Kahiki in private
placement transactions.
(7) These securities were acquired in open market transactions in the
Over the Counter market.
(8) Alice Tsao, as executor, has sole power to vote and dispose of these
securities.
* Less than one percent.
PLAN OF DISTRIBUTION
We will receive no proceeds from the sale of 4,938,048 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 shareholders have
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 shareholders 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 prevailing market prices or
privately negotiated prices. The selling shareholders 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.
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The selling shareholders, 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 shareholders are determined to be
underwriters, they may be liable for securities violations in connection with
any material misrepresentations or omissions made in this prospectus.
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 shareholders 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 shareholders 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 shareholders, the pledgee in such
loan transaction would have the same rights of sale as the selling shareholders
under this prospectus. The selling shareholders may also enter into exchange
traded listed option transactions, which require the delivery of the securities
listed under this prospectus. The selling shareholders 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 shareholders 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 shareholders or any such other person.
There can be no assurances that the selling shareholders 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.
9
DIRECTORS AND EXECUTIVE OFFICERS
The name of, and certain information with respect to each of our officers
and Directors are follows:
NAME AGE POSITION DIRECTOR SINCE
- ------------------- --- ----------------------------------------- --------------
Alice W. Tsao 54 Chairman of the Board, Vice President and 1982
Secretary
Alan Hoover 50 Acting President 1999
Bradford M. Sprague 54 Director 2004
Charles Dix 42 Director 2004
Allen J. Proctor 53 Director 2004
R.L. Richards 57 Director 2004
John F. Dix 63 Director 2005
Julia A. Fratianne 42 Chief Financial Officer and Treasurer N/A
Alfred Cheung 50 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:
ALICE W. TSAO has been our Vice-President, Secretary and a Director since
1982. In August, 2005, Mrs. Tsao was also named Chairman of the Board of
Directors. She has an Associates Degree from the Los Angeles Business College,
with a major in computer science. Mrs. Tsao founded Kahiki with her deceased
husband, Michael Tsao, and has been active in Kahiki's business for the past
twenty years.
ALAN L. HOOVER was a Director from September, 1999 to August 2005. Mr.
Hoover joined us in May, 1999 as Senior Vice President, Sales and Marketing. Mr.
Hoover became Acting President in July, 2005 upon the death of our founder and
President, Michael Tsao. 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.
BRADFORD M. SPRAGUE became a member of our Board of Directors in 2004.
Since 2001, Mr. Sprague has been the owner/manager of Prism Municipal Advisors,
a financial advisory firm located in Columbus, Ohio. For ten years prior to
forming Prism Municipal Advisors, 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
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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, Dublin, Ohio.
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.
JOHN F. DIX became a member of our Board of Directors in August, 2005. Mr.
Dix is the founder and President of Business Development Index Limited, Inc. Mr.
Dix has over 30 years of industry leadership experience. Prior to founding
Business Development Index Limited, Inc. in 1994, Mr. Dix served as Group Vice
President of Bordon Foods Corporation from 1977 to 1994. Since 1985 Mr. Dix has
taught strategic planning in the MBA program at The Ohio State University. Also
at The Ohio State University, Mr. Dix is the co-director of the Center for
Excellence in Manufacturing Management. Mr. Dix has served on the board of
directors of Acordia McElroy/Minister, Co., Lord, Sullivan & Yoder, Inc. Fiesta
Salons, Inc., Excel Management Systems, Inc., Shared Resources, Inc., Trillium
Health Care Products, Inc., and New Products Innovations, Inc. Mr. Dix graduated
in 1963 from John Carroll University with a Bachelor of Science in Business
Administration. He also completed the Harvard Business School Program for
Management Development in 1975.
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.
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. Chung
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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.
RECENT EVENTS
On July 19, 2005, Michael Tsao, our President, Chairman of the Board and
Chief Executive Officer, became seriously ill. Mr. Tsao died on July 22, 2005.
Our Board of Directors met on July 26, 2005 and elected Alan Hoover as Acting
President. Mr. Hoover has been with Kahiki since 1999. Additionally, we named an
Executive Committee of our Board of Directors consisting of Alice Tsao
(Chairman), Allen Proctor, R.L. Richards and Charles Dix. We expect the
Executive Committee to meet frequently for the next fiscal quarter to assist our
management team in this transition period.
COMMITTEES
The Audit Committee has the responsibility of reviewing our financial
statements, evaluating internal accounting controls, reviewing reports of
regulatory authorities, and determining that all audits and examinations
required by law are performed. The Audit Committee also approves the appointment
of the independent auditors for the next fiscal year, approves the services to
be provided by the independent auditors and the fees for such services, reviews
and approves the auditor's audit plans, review and reports upon various matters
affecting the independence of the independent auditors, and review with the
independent auditors the results of the audit and management's responses.
The Audit Committee is composed of Dr. Proctor, Mr. Richards and Mr.
Sprague. All of the members of the Audit Committee are considered "independent",
as independence for Audit Committee members is defined in applicable rules of
the National Association of Securities Dealers' listing standards. The Board of
Directors has determined that Allen Proctor is an audit committee financial
expert as defined by Item 401(e) of Regulation S-B of the Securities Exchange
Act of 1934, as amended, and is independent within the meaning of Item
7(d)(e3)(iv) of Schedule 14A of the Securities Exchange Act of 1934. The Audit
Committee met three times during the year ended March 31, 2005.
The Compensation Committee is composed of Mr. Sprague, Mr. John Dix and
Mr. Charles Dix. Our Compensation Committee is responsible for establishing our
compensation plans. Its duties include the development with management of all
benefit plans for our employees, the formulation of bonus plans, incentive
compensation packages and medical and other benefit plans. The Compensation
Committee met one time in the fiscal year ended March 31, 2005.
The Board of Directors has no standing nominating committee. Kahiki
believes that, as a result of the role of the independent directors, as
described below, it is not necessary to have a separate nominating committee at
this time. Four of our eight current Directors are independent as determined
utilizing the standards for director "independence" set forth in applicable
rules of the National Association of Securities Dealers' listing standards. The
entire Board selects nominees for election as Directors by majority vote, thus
ensuring approval of all Director nominees by a majority of our independent
Directors. In selecting nominees for Director, the Board does not operate
pursuant to a charter.
In selecting Director nominees, the Board considers, among other factors,
the existing composition of the Board and their evaluation of the mix of Board
members appropriate for the perceived needs of Kahiki. The Board believes that
continuity in leadership and Board tenure maximizes the Board's ability to
exercise meaningful Board oversight. Because qualified incumbent Directors are
generally uniquely positioned to provide shareholders the benefit of
12
continuity of leadership and seasoned judgment gained through experience as a
Director, the Board will generally consider as potential candidates those
incumbent Directors interested in standing for re-election who they believe have
satisfied Director performance expectations, including regular attendance at,
preparation for and meaningful participation in Board and committee meetings.
Generally, the Board will consider shareholder recommendations of proposed
Director nominees if such recommendations are serious and timely received. To be
timely, recommendations must be received in writing at our principal executive
offices at least 120 days prior to the anniversary date of mailing of our proxy
statement for the prior year's annual meeting. In addition, any shareholder
director nominee recommendation must include the following information:
- the proposed nominee's name and qualifications and the reason for
such recommendation;
- the name and record address of the shareholder(s) proposing such
nominee;
- the number of shares of our stock which are beneficially owned by
such shareholder(s); and
- a description of any financial or other relationship between the
shareholder(s) and such nominee or between the nominee and Kahiki.
In order to be considered by the Board, any candidate proposed by one or
more shareholders will be required to submit appropriate biographical and other
information equivalent to that required of all other Director candidates.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of our executive officers has served:
- as a member of the compensation committee of another entity which
has had an executive officer who has served on our compensation
committee;
- as a director of another entity which has had an executive officer
who has served on our compensation committee; or
- as a member of the compensation committee of another entity which
has had an executive officer who has served as one of our 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
13
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.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of August 1, 2005, 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
- ------------------------------ ---------------- ----------
Estate of Michael C. Tsao 1,735,660(2) 28.32%
c/o Alice W. Tsao, as Executor
1100 Morrison Road
Columbus, Ohio 43230
Alice W. Tsao 1,735,660(2) 28.32%
1100 Morrison Road
Columbus, Ohio 43230
Dr. Winston Bash 66,922 1.09%
4093 Roselea Place
Columbus, Ohio 43214
14
Bob Binsky 450,392 7.34%
20185 E. County Club Dr.
North Miami Beach, Fl 33180
Alan Hoover 296,666 4.84%
1100 Morrison Road
Columbus, Ohio 43230
Bradford M. Sprague 5,400 .09%
1636 Sherborne Lane
Powell, OH 43085
Charles Dix 890,889(4) 14.54%
30098 Southampton Bridge Road
Salisbury, Maryland 21804
Allen J. Proctor 11,750 .19%
471 Highgate Avenue
Worthington, Ohio 43085
R.L. Richards 3,500 .06%
5598 Preston Mill Way
Dublin, OH 43017
Julia A.. Fratianne 25,000(1) .41%
1100 Morrison Road
Columbus, Ohio 43230
Alfred Cheung 105,000 1.71%
1100 Morrison Road
Columbus, Ohio 43230
Barron Partners LP
730 Fifth Ave., 9th Floor 1,176,469(3) 19.19%
New York, New York 10019
Townsends, Inc.
Suite 420
919 North Market Street
Wilmington, Delaware 18801 890,889(4) 14.54%
Officers and Directors as a Group 3,140,787(4) 51.24%
(9 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: Estate of Michael C. Tsao, 12,000 shares;
Ms. Tsao, 12,000 shares; Dr. Bash, 54,600 shares; Mr. Binsky, 200,600
shares; Mr. Hoover, 240,666 shares; Mr. Sprague, 3,000 shares; Mr. Dix,
2,000 shares; Mr. Richards, 3,000 shares; Mr. Proctor, 4,000 shares; Ms.
Fratianne, 25,000 shares; and Mr. Cheung, 100,000 shares.
(2) Michael C. Tsao and Alice W. Tsao were husband and wife. The listed shares
include 688,660 shares owned directly by Alice W. Tsao and 1,023,000
shares owned by the Estate of Michael C. Tsao with respect to which Alice
W. Tsao, as Executor, has the sole power to vote and dispose of such
shares.
(3) Includes shares issuable upon the exercise of 294,117 $2.25 Warrants and
294,117 $3.00 Warrants.
(4) Includes 888,889 shares issuable to Townsends, Inc. upon conversion of
888,889 Preferred Shares. Mr. Dix is President of Townsends, Inc.
15
DESCRIPTION OF SECURITIES
COMMON SHARES
Our authorized capital consists of 10,000,000 shares of capital stock,
consisting of 9,000,000 common shares without par value, and 1,000,000 Series A
Convertible Preferred Shares without par value. As of the date hereof, 3,670,848
common shares are outstanding. In addition, 2,267,588 common shares are reserved
for issuance upon exercise of warrants and options and conversion of preferred
shares.
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".
SERIES A CONVERTIBLE PREFERRED SHARES
Our Amended and Restated Articles of Incorporation authorize the issuance
of up to 1,000,000 Series A Convertible Preferred Shares without par value. The
preferred shares provide for cumulative annual dividends at an annual rate of
$.1125 per share, are convertible into common shares on a share for share basis
(subject to anti-dilution rights), have a liquidation preference of 1.5 times
the invested amount and entitle the class to elect up to two members of our
Board of Directors. Townsends, Inc. will acquire 888,889 preferred shares on
conversion of $2,000,000 aggregate principal amount of Kahiki's outstanding
Convertible Notes.
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. The
common shares underlying the warrants are being registered pursuant to this
prospectus. We have reserved 618,234 common shares for issuance upon the
exercise of the warrants.
OPTIONS
We have authorized the issuance of 760,466 Common Share Purchase Options,
each option entitling the holder thereof to purchase one common share at various
exercise prices. 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. The common shares underlying the options are being registered
pursuant to this prospectus. We have reserved 760,466 common shares for
issuance upon the exercise of the options.
16
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.
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
17
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 renovated and equipped this facility to meet FDA regulations for
the manufacture of food products. We consolidated all of our operations in this
facility in May, 2005. The facility is 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 9.25% of our revenues in fiscal year 2004 and approximately 3% of
our revenues in fiscal year 2005.
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
18
approximately 69% of our revenues in fiscal year 2004 and approximately 60% of
our revenues in fiscal year 2005.
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 31% of our revenues
in fiscal year 2004 and approximately 37% of our revenues in fiscal year 2005.
Our ten largest accounts represented 64% of our sales in the year ended
March 31, 2004 and 69% of our sales in the year ended March 31, 2005. For the
year ended March 31, 2004, Costco represented approximately 27%, Meijer's
represented approximately 7% and Wal-Mart represented approximately 15% of our
total sales. For the year ended March 31, 2005, Costco represented approximately
25%, Wal-Mart represented approximately 7% and Sam's Club represented
approximately 12% 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.
- FOODSERVICE PRODUCTS. Includes meal components such as fried
rice, marinated meats, tempura meats, and Pacific Rim sauces.
Convenience meals currently account for 76% of sales, hand-held products
17%, and foodservice products 7%.
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.
19
- 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
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.
20
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.
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.
21
EMPLOYEES
As of July 22, 2005, we had approximately 197 full-time employees. Of
these, 164 were involved in food processing operations and 33 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
2003, 2004, and 2005, we estimate that we spent $82,000, $34,561 and $109,727,
respectively, on research and development activities.
PROPERTY
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 USDA
regulations for the manufacture of food products. We have spent approximately
$7.6 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 is 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.
Management believes that our properties are adequately covered by
insurance.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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.
INVENTORIES
Inventories are stated at the lower of cost or market. We determine cost
based on the first-in, first-out (FIFO) method for raw materials, packaging
materials and supplies, and based on
22
standard costs for finished goods. The realizability of raw material and
finished goods inventories is regularly evaluated based on a combination of
factors including the following: historical usage rates, forecasted sales or
usage, historical spoilage rates and other factors, and reserves established as
necessary.
STOCK OPTIONS
We have adopted the disclosure only provisions of Financial Accounting
Standard No. 123, Accounting for Stock-Based Compensation (SFAS 123). It applies
APB Opinion No. 25, Accounting for Stock Issued to Employees, in accounting for
its stock-based compensation plans. In December 2004, the FASB issued SFAS No.
123(R) (revised 2004), Share-Based Payment, which amends FASB Statement Nos. 123
and will be effective for public companies for interim or annual periods
beginning after June 15, 2005. The new standard will require us to expense
employee stock options and other share-based payments. The new standard may be
adopted in one of three ways - the modified prospective transition method, a
variation of the modified prospective transition method or the modified
retrospective transition method. We are currently evaluating the effect that the
adoption of SFAS 123(R) will have on its financial position and results of
operations.
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 years ended June 30,
2005 and 2004:
QUARTERS ENDED JUNE 30
(in %)
2005 2004
Revenues 100 100
Cost of Revenues 84 74
--- ---
Gross profit 16 26
Operating Expenses 19 20
--- ---
Income from operations (3) 6
Interest expense (1) (1)
--- ---
Income from continuing operations before
Income tax (4) 5
Income tax (1) 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.
23
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 $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 increased development activities.
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.
RESULTS OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 2005
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, 2005 and 2004:
YEARS ENDED MARCH 31
(in %)
2005 2004
Revenues 100 100
Cost of Revenues 78 73
--- ---
Gross profit 22 27
Operating Expenses 21 19
--- ---
Income from operations 1 8
Interest expense (1) (1)
Interest and dividend income 0 0
Net Gain (loss) on marketable securities 0 0
--- ---
Income from continuing operations before
24
Income tax 0 7
Income tax 0 2
--- ---
Net Income 0 5
=== ===
REVENUES
Revenues for the year ended March 31, 2005 were $18,894,267 compared to
$14,193,124 for the comparable year ended March 31, 2004, or a 33% increase. The
increase is primarily due to sales efforts with the increase of new accounts,
both retail and club stores, and the introduction of new items. We anticipate
that our revenue will continue to increase in the future.
COST OF GOODS
The gross margin on sales of products was $4,110,714 for the year ended
March 31, 2005 compared to $3,851,104 for the year ended March 31, 2004. 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 year ended March 31, 2005 to 32% of sales, compared to 24% of sales for the
year ended March 31, 2004. This increase in food costs was primarily due to
escalating chicken costs which peaked in the summer of 2004.
Cost of sales includes 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 year ended March 31, 2005 were $3,931,714
compared to $2,684,433 comparable period in 2004, which is an increase of
$1,247,281 or 46%. Most of the increase was attributable to marketing and
advertising expenses, which increased to $2,131,521 for the year ended March 31,
2005, from $1,335,250 for the year ended March 31, 2004. Marketing and
advertising expenses represented 11.3% of revenues for the year ended March 31,
2005 compared to 9.4% of revenues for the year ended March 31, 2004. We expect
to continue to invest significantly in marketing and advertising.
RESEARCH AND DEVELOPMENT
Expenditures on research and development were $109,727 for the year ended
March 31, 2005 compared to $34,561 for the year ended March 31, 2004, an
increase of 217%. The increase was due to increased development activities
related to new products, such as lettuce wraps, and product improvements. The
majority of the research and development costs were related to payroll. Research
and development will continue to be an important part of our strategy to achieve
continued growth in our markets.
NET INCOME
Our net income for the year ended March 31, 2005 was $63,528, as compared
to net income of $676,388 for the year ended March 31, 2004.
25
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.................................. 73 72
--- ---
Gross profit...................................... 27 28
Operating Expenses................................ 19 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 $14,193,124 compared to
$9,204,684 revenues for the comparable year ended March 31, 2003, or a 54%
increase. The increase is primarily due to sales efforts with the increase of
new accounts, both retail and club stores, and the introduction of new items. We
anticipate that our revenue will continue to increase in the future.
COST OF GOODS
The gross margin on sales of products was $3,851,104 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 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 $2,684,433
compared to $2,648,616 for the comparable period in 2003, which is an increase
of $35,817 or 1%.
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
26
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.
LIQUIDITY AND CAPITAL RESOURCES
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. We believe that with the addition of
this $4.227 million financing package we have an adequate level of working
capital to meet our anticipated needs for liquidity for the foreseeable future.
During the year ended March 31, 2005, we spent $3.6 million in building
improvements. As of March 31, 2005 there is approximately $1.1 million
additional needed to complete the building improvements.
During the year ended March 31, 2005, we sold marketable securities,
providing $540,052 in cash.
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
27
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 (then a member of our Board of
Directors) for consulting services rendered to us. Mr. Binsky's duties included
advising Kahiki on cost containment, financing options, financial matters and
public relations. Each option is exercisable through January 23, 2006. Mr.
Binsky was also paid $25,000.
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, 2006, and is subordinated to all
indebtedness of Kahiki to financial institutions.
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.
It is our policy that all transactions with officers, directors and 5%
shareholders will be on terms no less favorable to Kahiki than could be obtained
from independent third parties.
28
RECENT DEVELOPMENTS
In the second quarter of the Kahiki's 2005 fiscal year, Kahiki experienced
a cash flow shortage relating to the completion of construction of Kahiki's
manufacturing plant and actively sought new debt or equity financing. After
reviewing all options available, the Board of Directors (Mr. Charles Dix
abstaining) determined that entering into a strategic relationship with
Townsends, Inc. ("Townsends") was the best option available to Kahiki. Charles
Dix, one of our Directors, is President and Chief Operating Officer of
Townsends.
On December 21, 2004, Kahiki entered into a Convertible Note Purchase
Agreement (the "Purchase Agreement") with Townsends, Inc. ("Townsends"),
pursuant to which Kahiki issued a $1,000,000 Convertible Promissory Note due
December 31, 2009 (the "Note") to Townsends. The Note bears interest at the rate
of 5% per annum, which accrues to maturity, and is convertible into Preferred
Shares, to be authorized, or Common Shares, at a conversion price of $2,25 per
share. The Board of Directors determined that the terms of the transaction were
commercially reasonable based on the interest rate and payment terms of the
Note, the discount from market prices Townsends was offering on chicken prices,
and the then current market price of Kahiki's stock.
In connection with the Purchase Agreement, Kahiki and Towsends also
entered into (i) a Supply Agreement pursuant to which Kahiki will purchase a
minimum of 20,000 pounds and a maximum of 40,000 pounds per week of chicken
products from Townsends at current market prices less $0.09 per pound; and (ii)
a Co-pack and Storage Agreement pursuant to which Kahiki will manufacture
finished poultry products for Townsends on a cost plus 10% basis.
Pursuant to the Purchase Agreement, Townsends acquired a second $1,000,000
Note under the same terms on June 3, 2005. Kahiki was obligated to seek
shareholder approval of an amendment to Kahiki's Articles of Incorporation to
authorize convertible preferred shares at its next annual shareholders meeting.
Townsends is expected to convert the Note(s) to preferred shares. The Preferred
Shares provide for cumulative annual dividends at an annual rate of $.1125 per
share, are convertible into common shares on a share for share basis (subject to
anti-dilution rights), have a liquidation preference of 1.5 times the invested
amount, and entitle Townsends to appoint up to 2 members of Kahiki's Board of
Directors.
In connection with these transactions, Kahiki and Townsends entered into a
Registration Rights Agreement. Under this agreement, Kahiki is required to file
a registration statement with the U.S. Securities and Exchange Commission on
demand by Townsends between December 21, 2005 and December 20, 2009, for the
purpose of registering the resale of common shares into which the Notes and
preferred shares may be converted.
We believe that each of the agreements with Townsends are on terms no less
reasonable to Kahiki then could be obtained from independent third parties and
are beneficial to Kahiki. The Company utilized the proceeds raised in the
transaction with Townsends to complete construction of the Company's
manufacturing facility in Gahanna, Ohio.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
We currently have 3,670,848 common shares, 618,234 warrants and 760,466
options issued and outstanding. The common shares sold in this offering will be
fully tradeable without restrictions or further registration under the
Securities Act.
29
At present, approximately 2,383,167 of our 3,670,848 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 OTC Bulletin Board 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.
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 $14,362,000 for the last three years.
At July 22, 2005, 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.
30
EXECUTIVE COMPENSATION
The following table sets forth the amount accrued by us during Fiscal
Years 2003, 2004 and 2005 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 2005 $153,577 $ 0 $ 9,340 0 0 $ 162,917
Chairman, President and CEO 2004 $135,000 $ 23,107 $ 9,318 0 0 $ 167,425
2003 $135,000 $ 0 $ 0 0 0 $ 135,000
Alice W. Tsao 2005 $ 50,481 $ 0 $ 12,265 0 0 $ 62,746
Vice President and Secretary 2004 $ 55,000 $ 14,600 $ 12,381 0 0 $ 81,981
2003 $ 55,000 $ 0 $ 0 0 0 $ 55,000
Alan Hoover 2005 $155,176 $ 3,000 $ 7,453 0 0 $165,6294
Senior Vice President 2004 $135,000 $ 23,107 $ 7,965 0 0 $ 166,072
2003 $135,000 $ 5,000 $ 0 0 1,000 $ 140,000
Alfred Cheung 2005 $111,662 $ 3,000 $ 7,965 0 0 $ 122,627
Vice President, Operations 2004 $ 60,288 $ 20,100 $ 20,920 0 100,000 $ 101,308
2003 N/A N/A N/A N/A N/A N/A
Julia Fratianne 2005 $110,538 $ 3,000 $ 7,847 0 25,000 $ 121,385
CFO and Treasurer 2004 N/A N/A N/A N/A N/A N/A
2003 N/A N/A N/A N/A N/A N/A
(1) Number of shares issuable upon exercise of options granted during the fiscal
year, adjusted for share dividends.
(2) 2004 bonus paid in 2005. 2005 bonus paid in 2006.
(3) includes car allowance, relocation bonus, and 401k match
31
Number of Securities
Underlying Unexercised Value of Unexercised in the
Shares Acquired Option at FY-End money options at FY-End
Name on Exercise Value Realized Exerciseable/Unexercisable Exercisable/Unexercisable
- ------------------ --------------- -------------- -------------------------- ---------------------------
Michael C. Tsao - $ 0 12,000/0 $ 8,040/$0
Alan Hoover 44,667 $ 56,994 240,666/0 $ 272,675/$0
Julia A. Fratianne - $ 0 0/25,000 $ 0/$0
Alfred Cheung - $ 0 33,333/66,666 $ 26,666/$53,333
Alice Tsao - $ 0 12,000/0 $ 8,040/$0
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 greater 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) 85% 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 to officers, directors, employees,
5% shareholders or affiliates for a one year period following the date of this
registration statement.
COMPENSATION OF DIRECTORS
In January, 2004, we engaged Bob Binsky, then 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.)
32
Outside Directors of the Company are paid $2,000 for each Board of
Director's meeting personally attended and $1,000 for each committee meeting. No
fees are paid to directors for actions taken in writing.
REPORTS TO SHAREHOLDERS
Kahiki Foods, Inc. is not a reporting company as defined by the Securities
Exchange Act. We are subject to the information and reporting requirements of
that act and we 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.
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.
33
KAHIKI FOODS, INC.
BALANCE SHEET
June 30, 2005
(unaudited) March 31, 2005
-------------- --------------
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
-------------- --------------
TOTAL CURRENT ASSETS $ 5,206,418 $ 3,562,952
-------------- --------------
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
CIP $ - $ 7,665,693
-------------- --------------
$ 13,685,354 $ 12,864,733
-------------- --------------
LESS: ACCUM DEPRECIATION $ (1,278,633) $ (1,981,441)
-------------- --------------
NET PROPERTY & EQUIPMENT $ 12,406,721 $ 10,883,293
-------------- --------------
DEFERRED LOAN FEES $ 209,007 $ 219,992
OTHER $ 20,450 $ 29,589
-------------- --------------
TOTAL OTHER ASSETS $ 229,457 $ 249,581
-------------- --------------
-------------- --------------
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
-------------- --------------
TOTAL CURRENT LIABILITIES $ 3,677,949 $ 3,656,370
-------------- --------------
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
-------------- --------------
TOTAL LIABILITIES $ 14,632,531 $ 11,273,797
-------------- --------------
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
-------------- --------------
TOTAL STOCKHOLDERS' EQUITY $ 3,210,064 $ 3,422,028
-------------- --------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 17,842,596 $ 14,695,825
============== ==============
SEE NOTES TO THE FINANCIAL STATEMENTS.
34
KAHIKI FOODS, INC.
STATEMENT OF OPERATIONS (UNAUDITED)
Three months ended June 30,
2005 2004
-------------- -------------
SALES $ 5,098,006 $ 5,021,263
COST OF SALES 4,288,653 3,698,622
-------------- -------------
GROSS MARGIN 809,353 1,322,641
OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES 958,275 1,011,104
-------------- -------------
INCOME (LOSS) FROM OPERATIONS (148,922) 311,537
-------------- -------------
OTHER INCOME (EXPENSE):
INTEREST EXPENSE (71,860) (54,187)
INTEREST AND DIVIDEND INCOME 388 6,747
NET GAIN (LOSS) ON MARKETABLE SECURITIES - (22,420)
-------------- -------------
TOTAL OTHER INCOME (EXPENSE) (71,472) (69,860)
-------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES (220,394) 241,677
INCOME TAX EXPENSE (BENEFIT) - 96,671
-------------- -------------
NET INCOME (LOSS) (220,394) 145,006
============== =============
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC 3,661,261 3,588,848
============== =============
DILUTED 4,045,827 4,292,430
============== =============
NET INCOME (LOSS) PER COMMON SHARE:
BASIC $ (0.06) $ 0.04
============== =============
DILUTED $ (0.05) $ 0.03
============== =============
SEE NOTES TO THE FINANCIAL STATEMENTS.
35
KAHIKI FOODS, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
Three months ended June 30,
2005 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITES:
NET INCOME (LOSS) $ (220,394) $ 145,006
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO
NET CASH PROVIDED BY OPERATING ACTIVITIES
DEPRECIATION AND AMORTIZATION 179,270 149,814
UNREALIZED (GAIN) 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
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES (345,868) (242,183)
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
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (1,700,727) (800,403)
----------- -----------
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)
PAYMENT OF BOND OBLIGATION (35,000) (35,001)
PROCEEDS FROM THE EXERCISE OF STOCK OPTIONS 8,430
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,443,707 (137,454)
----------- -----------
NET INCREASE (DECREASE) IN CASH 1,397,112 (1,180,040)
CASH - BEGINNING OF PERIOD (10,568) -
----------- -----------
CASH - END OF PERIOD $ 1,386,544 $(1,180,040)
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID DURING THE YEAR FOR:
INTEREST $ 109,051 $ 54,186
INCOME TAXES $ 60 $ 360,000
See notes to the financial statements.
36
Independent Auditor's Report
To the Board of Directors
Kahiki Foods, Inc.
We have audited the accompanying balance sheet of Kahiki Foods, Inc. as of March
31, 2005 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 financial
statements of Kahiki Foods, Inc. as of March 31, 2004 were audited by other
auditors, whose report dated June 3, 2004 expressed an unqualified opinion on
those statements.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the 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 2005 financial statements referred to above present fairly,
in all material respects, the financial position of Kahiki Foods, Inc. at March
31, 2005 and the results of its operations and its cash flows for the year then
ended, in conformity with accounting principles generally accepted in the United
States of America.
37
(PLANTE & MORAN, PLLC)
Columbus, Ohio
May 26, 2005
38
KAHIKI FOODS, INC.
BALANCE SHEETS
March 31, 2005 and 2004
2005 2004
------------ ------------
ASSETS
Cash $ (10,568) $ 1,073,901
Marketable Securities $ - $ 585,032
Accounts Receivable $ 1,519,498 $ 1,964,941
Inventories $ 1,891,985 $ 1,565,863
Prepaid Expenses $ 42,250 $ 16,056
Refundable income taxes $ 44,787 $ -
Deferred Income Taxes $ 75,000 $ 28,000
------------ ------------
Total current assets $ 3,562,952 $ 5,233,792
------------ ------------
Land $ 114,485 $ 114,485
Building & Improvements $ 2,499,262 $ 2,499,262
Machinery & equipment $ 2,323,312 $ 2,052,144
Furniture & fixtures $ 115,713 $ 67,146
Vehicles $ 146,269 $ 146,269
CIP $ 7,665,693 $ 3,776,367
------------ ------------
$ 12,864,733 $ 8,655,672
------------ ------------
less: accum depreciation $ (1,981,441) $ (1,475,370)
------------ ------------
Net property & equipment $ 10,883,293 $ 7,180,302
------------ ------------
Deferred loan fees $ 219,992 $ 147,988
Deferred Taxes $ - $ 27,000
Other $ 29,589 $ 439,656
------------ ------------
Total other assets $ 249,581 $ 614,643
------------ ------------
------------ ------------
TOTAL ASSETS $ 14,695,825 $ 13,028,737
============ ============
LIABILITIES & EQUITY
Current debt $ 688,909 $ 529,491
Current portion of bond $ 143,333 $ 140,000
Related Party Note Payable $ 150,000 $ -
NP - LOC $ - $ 1,000,000
Accounts Payable $ 2,221,213 $ 1,905,171
Accrued expenses $ 447,565 $ 545,027
Income taxes payable $ 5,350 $ 413,000
------------ ------------
Total current liabilities $ 3,656,370 $ 4,532,689
------------ ------------
Bond Obligation $ 3,850,000 $ 4,002,546
Related Party Debt $ 1,000,000 $ -
Line of Credit $ 1,157,605 $ -
LT Debt $ 1,609,822 $ 1,145,635
------------ ------------
Total Liabilities $ 11,273,797 $ 9,680,870
------------ ------------
Stockholders' Equity
Common stock, no par value, 10,000,000
shares authorized; 3,649,848 and 3,588,848 $ 2,780,756 $ 2,770,123
issued
Retained earnings $ 641,272 $ 577,744
------------ ------------
Total stockholders' equity $ 3,422,028 $ 3,347,867
------------ ------------
------------ ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 14,695,825 $ 13,028,737
============ ============
See notes to financial statements.
39
KAHIKI FOODS, INC.
STATEMENT OF OPERATIONS
For the years ended March 31, 2005 and 2004
2005 2004
------------ ------------
Sales $ 18,894,267 $ 14,193,124
Cost of sales 14,783,553 10,342,020
------------ ------------
Gross margin 4,110,714 3,851,104
Operating, general and administrative expenses 3,931,714 2,684,433
------------ ------------
Income from operations 179,000 1,166,671
------------ ------------
Other income (expense):
Interest expense (73,374) (137,834)
Interest and dividend income 13,258 34,779
Net gain (loss) on marketable securities (22,420) 17,874
------------ ------------
Total other income (expense) (82,536) (85,181)
------------ ------------
Income (loss) before income taxes 96,464 1,081,490
Income tax expense (benefit) 32,936 405,102
------------ ------------
Net income (loss) 63,528 676,388
============ ============
Weighted average shares outstanding:
Basic 3,602,896 2,968,171
============ ============
Diluted 4,008,207 3,506,186
============ ============
Net income (loss) per common share:
Basic $ 0.02 $ 0.23
============ ============
Diluted $ 0.02 $ 0.19
============ ============
See notes to financial statements.
40
KAHIKI FOODS, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended March 31, 2005 and 2004
Additional Retained Treasury
Common Stock Paid-In Capital Earnings (Deficit) Stock Total
------------ --------------- ------------------ -------- -------------
BALANCE AT MARCH 31, 2003 $ 1,393,868 $ 485,565 $ (98,644) $ - $ 1,780,789
Reclass Additional Paid-In Capital 485,565 (485,565) -
Stock options exercised 3,530 3,530
Issuance of common stock 887,160 887,160
Net income 676,388 676,388
------------ --------------- ------------------ -------- -------------
BALANCE AT MARCH 31, 2004 2,770,123 - 577,744 - 3,347,867
Reclass Additional Paid-In Capital - - -
Stock options exercised 19,600 19,600
Costs related to issuance of common stock (8,967) (8,967)
Net income (loss) 63,528 63,528
------------ --------------- ------------------ -------- -------------
BALANCE AT MARCH 31, 2005 $ 2,780,756 $ - $ 641,272 $ - $ 3,422,028
============ =============== ================== ======== =============
See notes to financial statements.
41
KAHIKI FOODS, INC.
STATEMENTS OF CASH FLOWS
For the years ended March 31, 2005 and 2004
2005 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITES:
Net income (loss) $ 63,528 $ 676,388
Adjustments to reconcile net income (loss) to
net cash provided by operating activities
Depreciation and amortization 521,378 531,236
Unrealized (gain) loss on marketable securities - (36,832)
Realized loss (gain) on sale of marketable securities 14,980 (9,383)
Net (gain) loss on disposal of property and equipment - (45,230)
Deferred income tax (benefit) expense (20,000) (49,000)
Bad debt provision 10,000
(Increase) decrease in operating assets:
Accounts Receivable 435,448 (1,357,696)
Inventories (332,554) (743,108)
Refundable income taxes (44,787) 56,000
Other assets 383,872 (419,625)
Increase (decrease) in operating liabilities:
Accounts Payable 316,040 1,119,975
Accrued Expenses (97,462) 431,523
Income taxes payable (407,650) 413,000
----------- -----------
Total adjustments 779,265 (109,140)
----------- -----------
Net cash provided by operating activities 842,793 567,248
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment (319,735) (102,624)
Purchase of new facility improvements (3,889,326) (3,108,168)
Proceeds from the disposal of property and equipment - 102,455
Proceeds from the sale of marketable securities 570,052 536,404
----------- -----------
Net cash used in investing activities (3,639,009) (2,571,933)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings on line of credit 157,605 (37,396)
Proceeds from long-term debt 1,275,992 583,236
Proceeds from related party debt 1,000,000
Proceeds from the issuance of bond obligation - 1,815,282
Payments on long-term debt (502,387) (355,900)
Payments on bond obligation (149,213) -
Capitalized costs of financing (80,882) -
Proceeds from stock issuance - 862,161
Costs from stock issuance (8,968) -
Proceeds from exercise of stock options 19,600 28,529
----------- -----------
Net cash provided by financing activities 1,711,747 2,895,913
----------- -----------
Net increase (decrease) in cash (1,084,469) 891,229
Cash - beginning of year 1,073,901 182,672
----------- -----------
Cash - ending of year $ (10,568) $ 1,073,901
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 379,255 $ 373,596
Income taxes $ 465,960 $ 35,000
See notes to financial statements.
42
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2005
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, we began the
manufacture and processing of frozen and other finished Chinese and Polynesian
foods for wholesale distribution.
We manufacture and sell Asian foods packaged in bulk and frozen containers. We
have a wide variety of offering 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 across three broad market segments: foodservice, retail, and warehouse
clubs. Product mix and packaging is directed to each of those segments. Products
are sold throughout the United States, Canada, and Mexico.
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. Our 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 sale of our products. Any credits for damaged goods
are netted against sales in the current period. During the year ended March 31,
2005 and 2004, sales returns were $73,153 and $64,863, respectively.
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.
We maintain our cash in two accounts with two financial institutions. 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, we maintained a Primary Reserve Account of $418,500 on deposit with a
trustee. During the year ended March 31, 2005 this deposit was replaced with a
letter of credit. We maintain $29,589 in deposits with various other vendors.
43
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.
During the year ended March 31, 2005, the equity mutual fund, with a cost basis
of $529,236 as of March 31, 2004, was sold.
Accounts Receivable - Trade
Accounts receivable are un-collateralized customer obligations due under normal
trade terms requiring payment within 15 to 30 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. As of March 31, 2005 the reserve for bad debts was $30,000. No
reserve was recorded at March 31, 2004.
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:
2005 2004
----------- -----------
Raw food products $ 411,718 $ 367,262
Work In process 80,795 -
Finished goods 1,085,833 923,231
Supplies 323,639 275,370
----------- -----------
Inventory reserve (10,000) -
----------- -----------
$ 1,891,985 $ 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
44
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 3 - 7 years
Vehicles 5 years
During the year ended March 31, 2005 and 2004, we capitalized interest related
to the acquisition and renovation of the new facility totaling approximately
$323,000 and $236,000, respectively. The capitalized interest is included in
construction in progress on the balance sheet.
Deferred Loan Costs
Included in other assets are deferred bond costs of $140,463 as of March 31,
2005, and $147,988 as of March 31, 2004, and $79,529 related to the construction
financing secured in December, 2004, which have no residual value. The deferred
loan costs will be amortized on a straight-line basis over the life of the bond
and loan obligations.
Advertising Expense
Advertising costs are expensed as incurred. Advertising expense for they years
ended March 31, 2005 and 2004 was $228,721 and $142,176, respectively.
Customer Incentives
We routinely offer discounts, rebates, slotting fees, or other customer
incentives, determined on a case-by-case basis by management at the senior
level. During the years ended March 31, 2005 and 2004, discounts, rebates,
slotting fees, and other customer incentives of $1,732,231 and $1,089,496,
respectively, were net against revenues.
Research and Development
We expense research and development costs as incurred. Research and development
costs for the years ended March 31, 2005 and 2004 were $109,727 and $34,561,
respectively.
Reclassification
Certain 2004 amounts have been reclassified to conform to the 2005 presentation.
NOTE 3 Earnings Per Share (EPS)
45
March 31, 2005 March 31, 2004
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- -------------- --------- ----------- -------------- ---------
Basic EPS
Income from continuing
operations available to
common stockholders' $ 63,528 3,602,896 $ 0.02 $ 676,388 2,968,171 $ 0.23
Effect of dilutive options 0 405,311 0.00 0 538,015 (0.04)
----------- --------- --------- ----------- --------- ---------
Diluted EPS
Income from continuing
operations available to
common stockholders' $ 63,528 4,008,207 $ 0.02 $ 676,388 3,506,186 $ 0.19
=========== ========= ========= =========== ========= =========
Earnings per share are computed on the weighted average number of common shares
outstanding including any dilutive options.
NOTE 4 Lines of Credit
On June 1, 2004, we 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. The interest rate
applied to the unpaid principal balance is the LIBOR rate plus two percent
(effective rate of 5.25% as of and for the ten month period ended March 31,
2005). Outstanding principal and all accrued unpaid interest are due by May 31,
2006. The line is collateralized by virtually all of our assets. Total amount
outstanding on lines of credit at March 31, 2005 and 2004 was $1,157,605 and
$1,000,000, respectively.
NOTE 5 Long-Term Debt
Long-term debt consisted of the following at March 31, 2005:
46
2005 2004
---------- ----------
Various notes payable to banks and financing companies for
purchases of equipement due in monthly installments
ranging from $414 to $12,003 including interest ranging
from 3 to 10.5 percent through December 2007. $ 850,411 $1,242,500
Note payable to a financial institution due in monthly
installments of $4,853 including interest at 8 percent,
through December 2007. 143,352 188,154
Capital lease to a governmental agency for land due in
monthly installments of $1,698 including interest at 4.25
percent, through May 2009. At the end of the lease term the
Company intends on excerising the bargain purchase option
of $100 contained in the lease agreement. 77,783 94,472
Bank term loan due in monthly installments of $26,514 plus
interest at 2.5 percent over the short LIBOR rate (an
effective rate of percent at March 31, 2005),
through June 2012. 1,227,187 -
---------- ----------
Total $2,298,733 $1,525,126
========== ==========
Less current portion 688,909 379,491
---------- ----------
Long-term portion $1,609,824 $1,145,635
========== ==========
Long-term debt for the years ended March 31 matures as follows:
2006 $ 688,909
2007 619,737
2008 563,716
2009 373,831
2010 52,540
Thereafter -
-------------
$ 2,298,733
=============
The above long-term debt is collateralized by virtually all of Kahiki's assets
and is subject to certain covenants and restrictions including maintenance of
certain financial requirements. As of March 31, 2005 we were in compliance with
all of our financial covenants. 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.
47
NOTE 6 Bond Obligation Payable
On November 26, 2002 we entered into an agreement with the State of Ohio to
provide funding for the acquisition of a facility by issuing $4,180,000 State
Economic Development Revenue Bonds. Under the terms of the agreement Kahiki is
required to pay monthly installments ranging from $19,519 to $31,239 including
interest ranging from 4.55 to 5.85 percent. The obligation is collateralized by
virtually all our assets.
Bond Obligations for the years ended March 31 matures as follows:
2006 $ 143,333
2007 150,000
2008 158,333
2009 168,333
2010 173,333
Thereafter 3,200,000
-----------
$ 3,993,333
===========
NOTE 7 Income Taxes
The provision (benefit) for income taxes consists of the following:
2005 2004
--------- ---------
Current (benefit) expense:
Federal $ 44,000 $ 381,000
State $ 9,000 73,102
Deferred (benefit) expense $ (20,000) (49,000)
--------- ---------
$ 33,000 $ 405,102
========= =========
The Components of the net deferred tax asset is as follows:
2005 2004
-------- --------
Assets:
Inventories $ 10,000 $ 9,000
Accrued vacation 10,000 20,000
Accrued wages 10,000 -
Bad debt reserve 10,000
Capital loss carry forward 57,000 58,000
Other - 3,000
-------- --------
Gross Deferred Tax Assets 97,000 90,000
-------- --------
Liabilities:
Unrealized gains on marketable securities - 4,000
Depreciation on property and equipement 10,000 31,000
Prepaid expenses 12,000 -
-------- --------
Gross Deferred Tax Liabilities 22,000 35,000
-------- --------
Total Net Deferral Tax Asset $ 75,000 $ 55,000
======== ========
48
NOTE 8 Stockholders' Equity and Stock Options
We adopted the 2001 Non Qualified and Incentive Stock Option Plan effective July
16, 2001. The Plan authorizes Kahiki 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. We also
have outstanding 240,666 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, 2005, one outside consultant held options to purchase a total of
52,600 shares of common stock, with exercise prices ranging from $.22 to $.65.
The options At March 31, 2005, 271,133 options were vested and the remaining
options vest at various times over the next four years. These options expire at
various dates through 2009.
We apply 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 our
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,
our net income and net income per share would change as indicated below:
2005 2004
-------- ---------
Net (Loss) Income:
As reported $ 63,528 $ 676,388
Total stock-based employee compensation
expense determined under fair value
based method for all awards, net of
related tax effects 48,559 44,234
-------- ---------
ProForma $ 14,969 $ 632,154
======== =========
Basic (Loss) Earnings Per Share:
As reported $ 0.02 $ 0.23
Pro Forma $ 0.00 $ 0.21
Diluted (Loss) Earnings Per Share:
As reported $ 0.02 $ 0.19
Pro Forma $ 0.00 $ 0.18
The fair value of each option grant is estimated on the date of grant using the
Back-Scholes option-pricing model with the following weighted-average
assumptions.
2005 2004
------- -------
Dividend yield 0 0%
Expected volatility 124.72 200%
Risk-free interest rates 4.18% 3%
Expected lives 5 years 5 years
49
A summary of the changes in the Company's employee stock option plan as of March
31, 2005 and 2004 is presented below:
2005 2004
----------------------------------------
Average Average
Exercise Exercise
Shares Price Shares Price
------- -------- ------- --------
April 1 439,799 $ 0.50 305,466 $ 0.34
Granted 51,000 3.30 155,333 1.25
Exercised (66,000) 0.35 (21,000) 0.17
Cancelled (20,000) 0.59 - 0.00
------- -------- ------- --------
March 31 404,799 $ 0.83 439,799 $ 0.50
======= ======== ======= ========
2005 2004
---------- --------
Options exercisable at year-end 271,133 153,800
Weighted-average fair value of options
granted during the year $ 3.30 $ 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 2005 (In Years) Price 2005 Price
- ------------ ----------- ----------- -------- ----------- --------
$.22 - $2.40 404,799 3.28 $ 0.83 439,799 $ 0.50
NOTE 9 Lease Commitments
We leased a facility used for our wholesaling operations under an agreement that
is accounted for as an operating lease. This lease requires monthly payments of
$6,444 through April 2005.
We also lease manufacturing equipment under operating lease agreements. These
leases expire at various dates through 2008 and require monthly payments ranging
from $410 to $8,415 per month.
Future annual minimum lease commitments as of March 31 are as follows:
2006 $ 61,873
2006 46,279
2007 19,276
2008 7,525
--------
$134,953
========
Our lease expense for the year ended March 31, 2005 was $338,397.
NOTE 10 Concentrations
Sales to three customers amounted to approximately 44% of total revenue in the
year ended March 31, 2005 and 48% for the year ended March 31, 2004). Accounts
receivable from one customer accounted for approximately 10% of total accounts
receivable as of March 31, 2005. Five customers accounted for approximately 74%
in 2004.
NOTE 11 Commitments
50
In December 2002, we purchased a new operating facility for $2,254,999. As of
March 31, 2005, we have spent an additional $7,665,693, which is reflected as
construction in progress. As of March 31, 2005, there was approximately
$1,100,000 of additional cost committed to complete the project.
NOTE 12 Related Party Transactions
On December 21, 2004, we entered into a $1,000,000 convertible note promissory
agreement with a raw material vender. Under the terms of the agreement we
received $1,000,000 from the vendor bearing interest at 5 percent and due
December 31, 2009. The note is convertible at $2.25 per share for either the
Kahiki's no par common stock or $.01 par preferred stock once approve by the
shareholders. In addition to this agreement we entered into a poultry supply and
co-pack and storage agreement with this vendor. During the year ended March 31,
2005 we purchased $1,856,166 of raw material from this vendor and included in
accounts payable at March 31, 2005 is $45,300 to this vendor.
Note Payable to shareholder totaling $150,000 at March 31, 2005 and 2004 were
originally due February 2005. During the year the note was extended to February
2006. Interest on the note accrues at 2 percent over prime and is paid on first
of each month.
51
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
51
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.
52
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
53
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
54
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
55
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.
56
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).
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
57
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).
58
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
---------- -----------
$ 669,49 $ 5,148,181
========== ===========
59
'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)
========= =========
60
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
61
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).
62
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."
63
TABLE OF CONTENTS
Summary.......................................................................................... 2
About Us......................................................................................... 2
Terms of Offering................................................................................ 2
Summary Financial Information.................................................................... 2
Risk Factors..................................................................................... 3
Dividend Policy.................................................................................. 5
Use of Proceeds.................................................................................. 5
Selling Shareholders............................................................................. 5
Plan of Distribution............................................................................. 9
Directors and Executive Officers................................................................. 10
Committee........................................................................................ 13
Compensation Committee Interlocks and Insider Participation...................................... 13
Indemnification of Directors and Officers........................................................ 13
Security Ownership of certain Beneficial Owners and Management................................... 14
Description of Securities........................................................................ 15
Common Shares.................................................................................... 15
Series A Convertible Preferred Shares............................................................ 16
Warrants......................................................................................... 16
Options.......................................................................................... 16
Certain Statutory Provisions..................................................................... 16
Legal Proceedings................................................................................ 17
Legal Matters.................................................................................... 17
Business......................................................................................... 17
Products......................................................................................... 19
Key Product Attributes........................................................................... 20
Pricing.......................................................................................... 20
Distribution..................................................................................... 20
Marketing........................................................................................ 20
Regulations...................................................................................... 21
Competition...................................................................................... 21
Suppliers........................................................................................ 21
Employees........................................................................................ 21
Trademarks....................................................................................... 21
Research and Development......................................................................... 22
Property......................................................................................... 22
Management Discussion and Analysis or Plan of Operations......................................... 22
Forward Looking Statements....................................................................... 27
Certain Relationships and Related Transactions................................................... 28
Market For Common Equity and Related Stockholders Matters........................................ 29
Executive Compensation........................................................................... 33
Incentive Stock Option Plan...................................................................... 33
Reports to Shareholders.......................................................................... 33
Additional Information........................................................................... 33
Financial Statements............................................................................. 34
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