UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended - December 31, 2005
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from -
Commission file number - 333-113925
Kahiki Foods, Inc.
--------------------------------- ---------------------------------
(Exact name of small business issuer as specified in its charter)
Ohio
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(State or other jurisdiction or incorporation or organization)
31-1056793
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(I.R.S. Employer Identification No.)
1100 Morrison Road, Gahanna, Ohio 43230
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(Address of principal executive offices)
(614) 322-3180
-------------------------------
(Issuer's telephone number)
Previously reported address: 1100 Morrison Blvd, Columbus, Ohio 43230
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes No
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 3,700,848 common shares.
Transitional Small Business Disclosure Format (Check One): Yes [X] No [ ]
2
KAHIKI FOODS, INC.
INDEX PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 4
o Balance Sheets as of December 31, 2005 (Unaudited) and
March 31, 2005
o Statements of Income (Unaudited) for the Three Months and
Nine Months Ended December 31, 2005 and 2004
o Statement of Changes in Stockholders' Equity (Unaudited) for
the Nine Months Ended December 31, 2005
o Statements of Cash Flows (Unaudited) for the Nine Months
Ended December 31, 2005 and 2004
o Notes to Unaudited Financial Statements
Item 2. Management's Discussion and Analysis or Plan of Operations 13
Item 3. Controls and Procedures 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 19
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matter to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
Index to Exhibits 21
Exhibits 22
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KAHIKI FOODS, INC.
BALANCE SHEETS
DECEMBER 31, 2005
(unaudited) March 31, 2005
----------------- --------------
ASSETS
CURRENT ASSETS
Cash $ 326,622 $ --
Accounts receivable 2,123,488 1,519,498
Inventories 1,848,069 1,891,985
Prepaid expenses 30,000 42,250
Restricted deposits - current portion 277,126 --
Refundable income taxes 320,000 44,787
Deferred income taxes 35,000 75,000
----------- -----------
TOTAL CURRENT ASSETS 4,960,305 3,573,520
----------- -----------
PROPERTY AND EQUIPMENT, NET 12,472,786 10,883,292
OTHER ASSETS
Deferred loan fees 202,539 219,992
Restricted deposits 391,040 --
Other deposits 23,166 29,589
----------- -----------
TOTAL OTHER ASSETS 616,745 249,581
----------- -----------
----------- -----------
TOTAL ASSETS $18,049,836 $14,706,393
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long term debt $ 760,860 $ 832,242
Related party note payable 150,000 150,000
Accounts payable 1,443,313 2,231,781
Accrued expenses 646,052 447,565
Income taxes payable -- 5,350
----------- -----------
TOTAL CURRENT LIABILITIES 3,000,225 3,666,938
----------- -----------
Deferred income taxes 301,000 --
Long-term debt 8,584,308 6,617,427
Related party debt 2,000,000 1,000,000
----------- -----------
TOTAL LIABILITIES 13,885,533 11,284,365
----------- -----------
STOCKHOLDERS" EQUITY
Common stock, no par value, 10,000,000 shares
authorized; 3,700,848 and 3,649,848 issued and
outstanding, respectively 2,794,186 2,780,756
Retained earnings 1,370,117 641,272
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 4,164,303 3,422,028
----------- -----------
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $18,049,836 $14,706,393
=========== ===========
See notes to financial statements.
4
KAHIKI FOODS, INC.
STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED DECEMBER 31,
2005 2004
----------- -----------
Net sales $ 6,163,462 $ 4,174,878
Cost of sales 4,733,788 3,267,493
----------- -----------
GROSS PROFIT 1,429,674 907,385
Selling, general and administrative expenses 1,067,116 828,422
----------- -----------
INCOME FROM OPERATIONS 362,558 78,963
----------- -----------
Other income (expense):
Interest expense (160,960) (37,547)
Interest and dividend income 9,313 567
Life insurance proceeds 503,442 --
----------- -----------
Total other income (expense) 351,795 (36,980)
----------- -----------
Income before income taxes 714,353 41,983
Income tax expense 156,400 16,792
----------- -----------
NET INCOME $ 557,953 $ 25,191
=========== ===========
Weighted average shares outstanding:
Basic 3,690,848 3,627,848
=========== ===========
Diluted 4,229,263 4,917,317
=========== ===========
NET INCOME PER COMMON SHARE:
Basic $ 0.15 $ 0.01
=========== ===========
Diluted $ 0.13 $ 0.01
=========== ===========
See notes to financial statements.
5
KAHIKI FOODS, INC.
STATEMENTS OF INCOME (UNAUDITED)
NINE MONTHS ENDED DECEMBER 31,
2005 2004
------------ ------------
Net sales $ 16,479,284 $ 14,059,860
Cost of sales 13,312,365 10,931,177
------------ ------------
GROSS PROFIT 3,166,919 3,128,683
Selling, general and administrative expenses 3,221,242 2,789,009
------------ ------------
INCOME (LOSS) FROM OPERATIONS (54,323) 339,674
------------ ------------
Other income (expense):
Interest expense (416,265) (182,826)
Interest and dividend income 16,615 12,542
Net loss on marketable securities -- (22,420)
Life insurance proceeds 1,254,218 --
------------ ------------
Total other income (expense) 854,568 (192,704)
------------ ------------
Income before income taxes 800,245 146,970
Income tax expense 71,400 58,786
------------ ------------
NET INCOME $ 728,845 $ 88,184
============ ============
Weighted average shares outstanding:
Basic 3,674,326 3,602,265
============ ============
Diluted 4,224,289 4,889,592
============ ============
NET INCOME PER COMMON SHARE:
Basic $ 0.20 $ 0.02
============ ============
Diluted $ 0.17 $ 0.02
============ ============
See notes to financial statements.
6
KAHIKI FOODS, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
Retained
Common Stock Earnings Total
------------ ----------- -----------
BALANCE AT MARCH 31, 2004 $ 2,770,123 $ 577,744 $ 3,347,867
Stock options exercised 19,600 19,600
Costs related to issuance of common stock (8,967) (8,967)
Net Income 63,528 63,528
----------- ----------- -----------
BALANCE AT MARCH 31, 2005 2,780,756 641,272 3,422,028
Stock options exercised 13,430 13,430
Net Income 728,845 728,845
----------- ----------- -----------
BALANCE AT DECEMBER 31, 2005 $ 2,794,186 $ 1,370,117 $ 4,164,303
=========== =========== ===========
See notes to financial statements
7
KAHIKI FOODS, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED DECEMBER 31,
2005 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITES:
Net income $ 728,845 $ 88,184
Adjustments to reconcile net income to net cash
cash provided by (used in) operating activities:
Depreciation and amortization 648,913 371,366
Deferred taxes 341,000 --
Unrealized loss on marketable securities -- 14,980
Net loss on disposal of property and equipment 1,263 --
Changes in operating assets and liabilities:
Accounts receivable (603,990) 224,848
Inventories 36,230 (266,669)
Refundable income taxes (275,213) --
Other assets (649,492) 344,004
Accounts payable (788,467) 303,682
Accrued expenses 42,087 (293,854)
Income taxes payable 151,050 (403,873)
----------- -----------
Net cash provided by (used in) operating activities (367,774) 382,668
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (1,170,782) (99,003)
Purchase of new facility improvements (1,051,701) (2,991,486)
Proceeds from the disposal of property and equipment 200 --
Proceeds from the sale of marketable securities -- 540,052
----------- -----------
Net cash used in investing activities (2,222,283) (2,550,437)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on line of credit 1,292,270 --
Proceeds from long-term debt 2,363,617 2,275,992
Payments on long-term debt (654,555) (521,610)
Capitalized cost of financing 7,750 (80,713)
Costs from stock issuance -- (8,967)
Payments of bond obligation (105,833) (114,213)
Proceeds from the exercise of stock options 13,430 8,600
----------- -----------
Net cash provided by financing activities 2,916,679 1,559,089
----------- -----------
Net increase (decrease) in cash 326,622 (608,680)
Cash - beginning of period -- 1,073,901
----------- -----------
Cash - end of period $ 326,622 $ 465,221
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 366,443 $ 277,013
Income taxes 5,350 462,459
See notes to financial statements.
8
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS
Kahiki Foods, Inc. ("Kahiki" or the "Company") is engaged in one business
segment, the manufacture and processing of frozen and other finished Asian and
Pacific Rim foods for wholesale distribution.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim financial information
Kahiki's interim financial statements are
unaudited. They reflect all adjustments (consisting only of normal recurring
adjustments) which management deems necessary for a fair presentation of the
financial position and operating results for the interim periods. The operating
results for the three and nine month periods ended December 31, 2005 and 2004
are not necessarily indicative of the results for Kahiki's full fiscal year.
Kahiki operates on a fiscal year which ends on March 31. These unaudited interim
financial statements are presented in accordance with the requirements of Form
10-QSB and, consequently, do not include all of the disclosures made in Kahiki's
annual report on Form 10-KSB. You should read these financial statements and
notes in conjunction with the financial statements and notes thereto included in
Kahiki's Form 10-KSB for the fiscal year ended March 31, 2005.
Use of estimates
Management prepares these interim financial statements in accordance with
accounting principles generally accepted in the United States of America. Such
principles require the use of estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements, and
the results of operations for the reporting periods. Actual results could differ
from these estimates.
Reclassifications
Certain previously reported amounts have been reclassified to conform to current
classifications.
Revenue recognition
Kahiki recognizes revenue when its products are shipped. Our products are
perishable frozen foods with a shelf life. Kahiki offers various discounts and
promotional allowances to its customers. We record such allowances in the period
in which they are incurred. In addition, Kahiki pays slotting fees to customers
to obtain shelf space in retail locations. These are one-time fees, and are also
netted against sales in the period incurred.
NOTE 3. INSURANCE PROCEEDS
On July 22, 2005, Michael Tsao, Founder, Chairman of the Board of Directors,
President and Chief Executive Officer of Kahiki died. Kahiki had maintained key
man life insurance on Mr. Tsao. A total of $750,000 of the insurance had been
pledged as collateral on certain
9
loans. Kahiki received that amount of proceeds from the life insurance policies,
plus interest, in the quarter ended September 30, 2005. Kahiki received an
additional $500,000 of proceeds, plus interest, in the quarter ended December
31, 2005 (all of which were used in operations). All of the proceeds are
included as other income in the accompanying unaudited financial statements.
Kahiki deposited the $750,000 proceeds with a commercial bank acting as trustee
on Kahiki's State Economic Development Revenue Bonds. Kahiki received a letter
from the Ohio Department of Development ("ODOD") which indicated that ODOD is
prepared to release Michael Tsao and his estate as a guarantor of the loan
relating to the bonds. Also, the letter indicated that the deposit is being used
to make payments to the State of Ohio on the ODOD loan to Kahiki for the next
twelve months starting with the October 2005 payment. ODOD further indicated
that the balance of the deposit will be maintained by the trustee as a reserve
to be applied toward the final loan payments. The portion of this deposit
representing payments due on the loan through September 30, 2006, $277,126, is
included in "Restricted deposits - current portion" on the accompanying
unaudited balance sheet. The remaining portion of the deposit, $391,040, is
included in "Restricted deposits" in Other Assets on the accompanying unaudited
balance sheet.
NOTE 4. INCOME TAXES
For interim reporting, Kahiki estimates a full year tax rate, and applies that
rate to its year-to-date income. For the three and nine month periods ended
December 31, 2005, Kahiki's overall tax rate differs from the 34% federal rate.
This is due to a combination of effects from: substantial amounts of non-taxable
life insurance proceeds included in income, increased depreciation for tax
purposes on the new facility and equipment resulting in expected operating loss
carrybacks, a completed federal tax audit for the year ended March 31, 2004, and
state taxes.
NOTE 5. STOCK BASED COMPENSATION
In December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment"
(SFAS 123R), which requires entities to measure the cost of employee services
received in exchange for an award of equity instruments based on the grant-date
fair value of the award (with limited exceptions). The cost is recognized as an
expense over the period during which the employee is required to provide service
in exchange for the award, which is usually the vesting period.
As required by SFAS 123R, the Company will estimate the fair value of all stock
options on each grant date, using an appropriate valuation approach such as the
Black-Scholes option pricing model. The provisions of this Statement will be
effective for the Company beginning with its fiscal year starting April 1, 2006.
We are currently evaluating the impact this new standard will have on Kahiki's
financial position and results of operations. Kahiki did not issue any stock
options in the nine months ended December 31, 2005.
10
NOTE 6. MOVE TO NEW FACILITY
In December 2002, we acquired an existing 119,000 square foot building on
approximately 14 acres of land in Gahanna, Ohio a suburb of Columbus. We
renovated and equipped this facility to meet USDA regulations for the
manufacture of food products. We completed the renovation and moved all
operations into this facility in May 2005. Through May 2005, we capitalized
certain construction costs, including interest, as part of the cost of building.
Now that we are in the facility, no further amounts will be capitalized. All
manufacturing, plant, and administrative functions are now housed in this
facility. As part of the move, and because of the new equipment installed in the
building, we physically scrapped approximately $600,000 of fully depreciated
equipment.
NOTE 7. REGISTRATION STATEMENT
We filed a registration statement for the resale of up to 4,938,048 shares by
certain selling shareholders. The prospectus was dated September 29, 2005. Of
the shares registered, 1,378,700 shares are issuable only upon the exercise of
options or warrants. Kahiki will receive the cash proceeds from any cash
exercise of the options and warrants. Kahiki paid all costs of the registration
statement.
NOTE 8. INVENTORIES
Inventories included the following at December 31, 2005 and March 31, 2005:
Dec. 31, 2005 Mar. 31, 2005
------------- -------------
Finished goods $ 683,425 $1,085,833
Work in process 326,100 80,795
Raw food products 484,207 411,718
Packaging (net of a $25,000 and $10,000
reserve, respectively) 354,337 323,639
---------- ----------
Total inventories $1,848,069 $1,901,985
========== ==========
11
NOTE 9. PROPERTY AND EQUIPMENT
Property and equipment included the following at December 31, 2005 and March 31,
2005:
Dec. 31, 2005 Mar. 31, 2005
------------- -------------
Land $ 114,485 $ 114,485
Buildings and improvements 10,181,710 2,499,262
Machinery and equipment 3,684,084 2,323,312
Furniture and fixtures 146,574 115,713
Vehicles 63,089 146,269
Construction in progress -- 7,665,693
------------ ------------
14,189,942 12,864,734
Accumulated depreciation (1,717,156) (1,981,442)
------------ ------------
Total property and equipment $ 12,472,786 $ 10,883,292
============ ============
NOTE 10. RELATED PARTY TRANSACTIONS
In December 2005, Kahiki wrote down the value of two company-owned vehicles to
their remaining market value. The remaining market value was slightly less than
the remaining principal balance on loans on the two vehicles. Kahiki then
transferred ownership of the two vehicles to Alice Tsao, Chairwoman of the Board
of Kahiki. Mrs. Tsao also took over the remaining principal balance on loans on
the two vehicles, and traded in both vehicles on a new personal vehicle. Kahiki
will reimburse Mrs. Tsao for the difference between the market value and the
amount of the remaining loans on the vehicles.
In 2002, Mrs. Tsao loaned Kahiki $150,000. The loan was originally due in
February 2005 and was extended to February 2006. It is now due. The loan is
subordinated to Kahiki's senior debt. Kahiki has not received a release from its
senior lenders to pay this loan. Kahiki will try to again extend this loan from
Mrs. Tsao.
In June 2005, Kahiki received an additional $1,000,000 from Townsends, Inc.
under a convertible promissory note agreement, bringing the total of such
convertible promissory notes to $2,000,000. The notes are convertible into a
total of 888,889 shares of no par value Series A Convertible Preferred Shares.
The preferred shares provide for cumulative annual dividends at an annual rate
of $0.1125 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. Charles Dix, a Director of Kahiki, is President of
Townsends, Inc. Kahiki also maintains a poultry supply and co-pack and storage
agreement with Townsends, Inc.
12
NOTE 11. NOTES PAYABLE AND DEBT
In December 2005, Kahiki entered into a capital lease with a commercial lender
for the purchase of $94,476 of equipment. The lease has 72 monthly payments.
In January 2006, Kahiki entered into a capital lease with another commercial
lender for the purchase of $110,142 of new equipment, and the sale and leaseback
of $33,896 of recently purchased equipment. Proceeds for the sale and leaseback
were received in January 2006. The lease has 60 monthly payments.
Kahiki is in compliance with all debt covenants at December 31, 2005.
NOTE 12. PAST DUE PAYABLES
At December 31, 2005 and February 9, 2006, Kahiki had $314,976 of accounts
payable over 90 days old. Of these, $263,586 related to disputed costs with one
contractor on the new facility.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
unaudited financial statements and the notes thereto included elsewhere in this
report on Form 10-QSB. Some of the information contained in this discussion and
analysis or set forth elsewhere in this Form 10-QSB, including information with
respect to our plans and strategies for our business, includes forward-looking
statements that involve risk and uncertainties. (See the section titled
"Forward-Looking Statements" for a more complete discussion.)
OVERVIEW
We are a specialty branded food company that manufactures, distributes and sells
frozen Asian and Pacific Rim food products throughout the United States, Canada,
and Mexico. Most of our products are branded as Kahiki; some are private labeled
products for certain customers. Our customers are mainly food stores, membership
warehouse clubs, and supermarkets. Our sales are concentrated in a few
customers. We actively engage in promotions, and we pay slotting fees to certain
customers to gain shelf space for our products. We believe that Kahiki foods are
better-tasting than competitors' products. We maintain an active research and
development function to develop and market new products.
13
RESULTS OF OPERATIONS
The following table sets forth, for the three and nine month periods ending
December 31, 2005 and 2004, the percentage of net sales represented by the
specified items included in our unaudited statements of income. We have included
this comparison because we believe it adds a meaningful basis for
period-to-period comparisons. This financial data should not be viewed as a
substitute for our historical unaudited statements of income determined in
accordance with accounting principles generally accepted in the United States of
America. This table does not purport to be indicative of future results of
operations.
Three months ended Nine months ended
Dec. 31, 2005 Dec. 31, 2004 Dec. 31, 2005 Dec. 31, 2004
------------- ------------- ------------- -------------
Percentages of net sales:
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 76.8 78.3 80.8 77.7
Gross profit 23.2 21.7 19.2 22.3
Selling, general, and
administrative expenses 17.3 19.8 19.5 19.8
Income (loss) from operations 5.9 1.9 (0.3) 2.4
Interest expense (2.6) (0.9) (2.5) (1.3)
Life insurance proceeds 8.1 -- 7.6 --
Other income (expense), net 0.2 -- 0.1 (0.1)
Income tax expense 2.5 0.4 0.4 0.4
Net income 9.1% 0.6% 4.4% 0.6%
INCREASED MANUFACTURING EFFICIENCIES
In the first and second quarters of our fiscal year, we absorbed the costs of
operating inefficiencies related to the move to the new facility. We began to
move Kahiki toward more efficient manufacturing, starting in September 2005. We
improved the flow of materials through our plant. We reduced finished goods
inventory. We are attempting to produce only what is being ordered by our
customers. This effort is ongoing. We expect that continued efforts to align
production with orders will help Kahiki improve its operations and cash flows,
and provide a basis for future growth. We saw the first substantial benefits
from this activity in the quarter ended December 31, 2005.
COMPARISON OF QUARTER ENDED DECEMBER 31, 2005 TO QUARTER ENDED DECEMBER 31, 2004
The quarter ended December 31, 2005 was the highest sales quarter in Kahiki's
history. Net sales for the quarter ended December 31, 2005 were $6,163,462
compared to $4,174,878 for the comparable quarter ended December 31, 2004, an
increase of over 47%. We increased capacity when we moved into the new facility.
In the quarter, we were successful in increasing sales to new accounts, both
retail and membership warehouse club stores, and also in the introduction of
successful new products to existing customers.
14
Early results from our improvements to product flow also improved the gross
margin in the quarter. The effort enabled us to recover some of the
inefficiencies of moving into the new facility. We increased inventory turns,
and we dramatically reduced finished product inventory compared to the March
2005 balances, by 37%. In the quarter, we focused on streamlining the
manufacturing process in the new facility and improving purchasing cost control,
especially for food costs. Gross margins improved to 23.2% of net sales in the
quarter. We expect margins to improve, but anticipate improvements happening
gradually over several quarters as we continue to adjust product flow to orders
and gain process improvements, and continue to work out start up issues related
to the new facility.
Selling, general, and administrative costs increased in the quarter compared to
the same quarter last year, primarily from brokers fees and other selling costs
related to the higher sales. However, these expenses decreased as a percentage
of sales.
Interest expense increased in the quarter. This is due to higher debt incurred
to complete the new facility, and additional working capital loans. Also, we
capitalized interest while the new facility was being renovated. Now that
construction has been completed and we have moved into the new facility, all
interest is treated as expense and no further interest is capitalized.
On July 22, 2005, Michael Tsao, Founder, Director, President and Chief Executive
Officer of Kahiki died. Kahiki had maintained key man life insurance on Mr.
Tsao. Kahiki received $750,000 of life insurance proceeds, plus interest, in the
quarter ended September 30, 2005. Kahiki received an additional $500,000 of
proceeds, plus interest, in the quarter ended December 31, 2005. All of the
proceeds are included as other income in the accompanying unaudited financial
statements.
For interim reporting, Kahiki estimates a full year tax rate, and applies that
rate to its year-to-date income. For the three month period ended December 31,
2005, Kahiki's overall tax rate is substantially lower than the 34% federal
rate, and lower than the rate recorded for the quarter ended December 31, 2004.
The life insurance proceeds received this year are not taxable under federal
statutes. Other factors affecting the rate include a year-to-date operating loss
(excluding insurance proceeds), completion of a federal tax audit for the year
ended March 31, 2004, and state taxes.
Net income for the quarter improved because of higher sales, the initial effects
of improving product flow within the plant, life insurance proceeds, and a lower
effective tax rate.
COMPARISON OF THE NINE MONTH PERIOD ENDED DECEMBER 31, 2005 TO THE NINE MONTH
PERIOD ENDED DECEMBER 31, 2004
With higher sales in the quarter, year-to-date sales increased over the same
period last year. We increased capacity when we moved into the new facility. In
the nine month period, we were successful in increasing sales to new accounts,
both retail and membership warehouse club stores, and also in the introduction
of successful new products to existing customers.
15
The gross profit margin year-to-date was less than last year's year-to-date
margin. We experienced inefficiencies earlier this year when we moved to the new
facility, and these inefficiencies decreased our reported margins for the first
two quarters. Although the move increased our capacity, we will continue to have
higher depreciation and other facility costs with the new building.
Selling, general, and administrative costs increased in the year-to-date period
compared to the same period last year, primarily from brokers fees and other
selling costs related to the higher sales. On a year-to-date basis, these
expenses were about the same percentage as last year.
Kahiki incurred a year-to-date operating loss this year compared to a profit
last year. This is due primarily to the higher costs and inefficiencies in
moving to the new facility. Improvements to operating profits were made in the
quarter ended December 31, 2005, but not sufficient to bring year-to-date
results to a profit.
Interest expense increased substantially in the nine month period compared to
last year. This is due mainly to higher debt incurred to complete the new
facility, and additional working capital loans. Also, we capitalized interest
while the new facility was being renovated. Now that construction has been
completed and we have moved into the new facility, all interest is treated as
expense and no further interest is capitalized.
On July 22, 2005, Michael Tsao, Founder, Director, President and Chief Executive
Officer of Kahiki died. Kahiki had maintained key man life insurance on Mr.
Tsao. Kahiki received $750,000 of life insurance proceeds, plus interest, in the
quarter ended September 30, 2005. Kahiki received an additional $500,000 of
proceeds, plus interest, in the quarter ended December 31, 2005. All of the
proceeds are included as other income in the accompanying unaudited financial
statements.
For interim reporting, Kahiki estimates a full year tax rate, and applies that
rate to its year-to-date income. For the nine month period ended December 31,
2005, Kahiki's overall tax rate is substantially lower than the 34% federal
rate, and lower than the rate recorded for the nine months ended December 31,
2004. The life insurance proceeds received this year are not taxable under
federal statutes. Other factors affecting the rate include a year-to-date
operating loss (excluding insurance proceeds), completion of a federal tax audit
for the year ended March 31, 2004, and state taxes.
Net income for the year-to-date period improved because of higher sales in the
third quarter, the initial effects of improving product flow within the plant,
life insurance proceeds, and a lower effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES
Kahiki used $367,774 in operations in the first nine months of fiscal 2006. In
addition, we purchased $2,222,283 of equipment and additions to the building to
complete the new facility. Funds used to support this activity came from
additions to term debt, borrowings on an available line of credit, capital
leases of certain equipment, and issuance of additional convertible debt to a
vendor. The facility is now complete. We expect new equipment
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additions to be considerably less over the next twelve months than in the last
twelve months. We also expect that no additional debt will be issued, other than
capital leases on purchases of capital items.
Our efforts at improving product flow within the plant have been initially
successful. We expect to continue on these activities. With this effort, we
freed up substantial cash from the sale of finished goods. We expect to be able
to fund future operations with cash flow from operating activities, although our
cash position will remain tight for the foreseeable future. Future financing
transactions may also include the issuance of common stock from exercise of
options or warrants.
CRITICAL ACCOUNTING POLICIES
Revenue from the sale of products is generally recognized at the time of
shipment to the customer. Pursuant to Emerging Issues Task Force (EITF) opinion
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 are shown as a reduction of
the revenues in the period they are provided.
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.
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.
FORWARD LOOKING STATEMENTS
This Quarterly Report contains forward-looking statements. Such statements are
not based on historical facts and are based on current expectations, including,
but not limited to statements regarding our plan for future development and the
operation of our business. Words such as "anticipates," "expects," "intends,"
"plans," "believes," "seeks," "estimates," "may", and similar expressions
identify such forward-looking statements. These statements are not guarantees of
future performance and are subject to certain risks and uncertainties that could
cause actual results to differ materially from those expressed or forecasted.
Among the factors that could cause actual results to differ materially are the
following: a lack of sufficient capital to finance our business plan on
commercially acceptable terms; changes in labor, equipment and capital costs;
our inability to attract strategic partners; general business and economic
conditions; and the other risk factors described from time to time in our
reports filed with the Securities and Exchange
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Commission. You should not rely on these forward-looking statements, which
reflect only Kahiki Food's opinion as of the date of this Quarterly Report. We
do not assume any obligation to revise forward-looking statements.
ITEM 3. CONTROLS AND PROCEDURES
As required by Rule 15d-15 under the Securities Exchange Act of 1934 (the
"Exchange Act"), we carried out an evaluation of the effectiveness of the design
and operation of our disclosure controls and procedures as of December 31, 2005.
This evaluation was carried out under the supervision and with the participation
of our President and Acting CFO. Based upon that evaluation, our President and
Acting CFO concluded that our disclosure controls and procedures are effective
in timely alerting management to material information relating to us that is
required to be included in our periodic SEC filings. There have been no changes
in our internal controls or in other factors that materially affect, or are
reasonably likely to materially affect, our internal controls over financial
reporting subsequent to the date we carried out our evaluation.
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in our reports
filed or submitted under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed in our reports filed under the Exchange Act is
accumulated and communicated to management, including our President and Acting
CFO, to allow timely decisions regarding required disclosure.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibits filed with this Quarterly Report on Form 10-QSB are attached hereto.
For a list of our exhibits, see "Index to Exhibits" following the signature
page.
(b) Reports on Form 8-K
On December 2, 2005, we filed a Form 8-K to report the appointment of Alan L.
Hoover as President and the resignation of Julie A. Fratianne as Chief Financial
Officer and Treasurer of Kahiki Foods, Inc.
On January 30, 2006, we filed a Form 8-K to report the appointment of Frederick
A. Niebauer as Chief Financial Officer and Treasurer of Kahiki Foods, Inc.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
KAHIKI FOODS, INC.
(Registrant)
Date: February 14, 2006 /s/ Alan L. Hoover
-----------------------------
Alan L. Hoover, President
Date: February 14, 2006 /s/ Alan L. Hoover
-----------------------------
Alan L. Hoover, Acting CFO
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INDEX TO EXHIBITS
Exhibit No. Description Location
- ----------- ----------- --------
31.1 Certification of the Chief Executive Officer Filed herewith.
Pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer Filed herewith.
Pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
32 Certification pursuant to Rule 13a-14(b) and Filed herewith.
Section 1350 of Chapter 63 of Title 18 of the
United States Code, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
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