UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
AMENDMENT No. 2
(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.
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(Exact name of small business issuer as specified in its charter)
Ohio
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(State or other jurisdiction or incorporation or organization)
31-1056793
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(I.R.S. Employer Identification No.)
1100 Morrison Road, Gahanna, Ohio 43230
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(Address of principal executive offices)
(614) 322-3180
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(Issuer's telephone number)
- --------------------------------------------------------------------------------
(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 [ ]
EXPLANATORY NOTE TO AMENDED AND RESTATED FORM 10-QSB
On February 14, 2006, KAHIKI FOODS, INC. ("Kahiki" or "we") filed its Quarterly
Report on Form 10-QSB for its fiscal quarter ended December 31, 2005. On March
30, 2006, Kahiki filed Amendment Number 1 to its Quarterly Report on Form 10-QSB
for its fiscal quarter ended December 31, 2005 ("Amendment Number 1") to restate
certain information. This filing is Amendment Number 2 to Kahiki's Quarterly
Report on Form 10-QSB for its fiscal quarter ended December 31, 2005 ("this
Amendment"). We believe this Amendment is necessary to modify and restate the
report to comply with generally accepted accounting principles in the United
States and Kahiki's filing obligations under the Exchange Act. In this
Amendment, we amended and restated certain amounts and disclosures in the
accompanying balance sheets, statements of cash flows, in sales and cost of
sales (but not net income) on the income statements, and in footnotes to the
financial statements. We also amended the Management's Discussion And Analysis
Or Plan Of Operation to include additional information. We inserted the word
"restated" above tabular information that has been restated. We identified
paragraphs that have been restated, and paragraphs that have been added, since
Amendment Number 1. The events in this Amendment are as of the initial filing
date of February 14, 2006, and do not include subsequent events. This Amendment
does not modify the disclosures in the original filing other than as described
in this explanatory note. We have included the entire amended Form 10-QSB in
this filing for the reader's convenience. This 10-QSB/A (Amendment Number 2) is
being filed to amend and restate the following items:
1. In Amendment Number 1, we amended and restated the balance sheet as of March
31, 2005 to show a net cash overdraft at that date as an addition to accounts
payable in current liabilities rather than as a negative asset. Those
adjustments also changed numerous subtotals and totals on the balance sheet, and
in the restated statement of cash flows. This is a change in disclosure.
2. In Amendment Number 1, we amended the reported value of machinery and
equipment as of March 31, 2005 by $1 to correct for rounding errors. This is a
change in disclosure.
3. In this Amendment, we amended and restated the balance sheet as of December
31, 2005 to show debt which had technical defaults at that date as current
liabilities and not as long-term debt. This is a change in disclosure.
4. In Amendment Number 1, we increased net sales and cost of sales by $123,000
for the three- and nine- month periods ended December 31, 2005 to reflect
invoiced freight discounts to a customer which were originally subtracted from
reported net sales. That was in error. In this Amendment, we restated net sales
and related cost of sales by $125,413 and $105,918 for the three-month periods
ended December 31, 2005 and 2004, and by $317,308 and $300,012 for the
nine-month periods ended December 31, 2005 and 2004, all respectively and all
from their original amounts, to reflect invoiced freight discounts to customers
as a reduction in sales rather than as freight costs included as part of cost of
sales. The freight discounts are more properly shown as a reduction in revenue
per the conclusions reached in Emerging Issues Task Force Issue No. 01-9. This
represents a correction in policy as well as a correction in disclosure.
5. In this Amendment, we corrected and restated disclosure of new borrowings of
debt and of payments of debt in the accompanying statement of cash flows for the
2
nine months ended December 31, 2004. There was no change in total cash flows
from financing activities from this correction. This is a change in disclosure.
6. We include herein as footnote 13 to the accompanying unaudited financial
statements a summary of the error corrections and restatements identified in
paragraphs 1, 2, 3, 4, and 5 above.
7. We restated the description of our revenue recognition accounting policy
included in footnote 2 to the accompanying unaudited financial statements. This
represents only a correction in disclosure and not a change in policy.
8. We added a description of our freight credits accounting policy to footnote 2
to the accompanying unaudited financial statements. This represents a correction
in disclosure and a change in policy.
9. We added a description of our accounting policy on impairment of assets with
long lives to footnote 2 to the accompanying unaudited financial statements.
This represents only a correction in disclosure and not a change in policy.
10. We added a description of our accounting policy on our interest rate swap to
footnote 2 to the accompanying unaudited financial statements. This represents
only a correction in disclosure and not a change in policy.
11. We added to footnote 10 to the accompanying unaudited financials statements
a description of guarantees of some of Kahiki's debt by two of its officers.
This is a change in disclosure.
12. We deleted a sentence from footnote 11 to the accompanying unaudited
financial statements that indicated that Kahiki was in compliance with all debt
covenants at December 31, 2005. This is a change in disclosure.
13. We amended and restated the disclosures of debt in footnote 11 to the
accompanying unaudited financials statements to report and explain the technical
defaults in Kahiki's debt. This is a change in disclosure.
14. We amended and restated the discussion in Item 2: "Management's Discussion
And Analysis Or Plan Of Operations - Liquidity And Capital Resources" to include
discussion of technical defaults in various debt agreements. These technical
defaults existed as of December 31, 2005. We also included discussion of
guarantees of some of Kahiki's debt by two of its officers. These are all
corrections in disclosure. In Item 2, we also adjusted tabular information on
percentages of sales, and commentary in our comparisons of operations compared
to a year ago.
15. We amended Item 3 Controls and Procedures to provide a better explanation of
the results of our evaluation of disclosure controls and procedures.
16. We amended the Index to Exhibits to include reference to all exhibits. We
filed as new exhibits the following documents:
Exhibit 31.1 - Certification of the Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002;
Exhibit 31.2 - Certification of the Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002; and
3
Exhibit 32 - Certification of the Chief Executive Officer and Chief Financial
Officer pursuant to Rule 15d-14(b) and 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.
17. We added disclosure to Part II, Item 3 Defaults Upon Senior Securities to
include discussion of technical defaults in various debt agreements.
4
KAHIKI FOODS, INC.
INDEX PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 6
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 18
Item 3. Controls and Procedures 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 25
Item 3. Defaults upon Senior Securities 25
Item 4. Submission of Matter to a Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 26
Index to Exhibits 27
Exhibits 30
5
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KAHIKI FOODS, INC.
BALANCE SHEETS
DECEMBER 31, 2005
(unaudited) March 31, 2005
(restated) (restated)
----------------- --------------
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 $11,052,497 $ 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 13,291,862 3,666,938
----------- -----------
Deferred income taxes 301,000 --
Long-term debt 292,671 6,617,427
Related party debt -- 1,000,000
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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.
6
KAHIKI FOODS, INC.
STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED DECEMBER 31,
2005 2004
(restated) (restated)
----------- -----------
Net sales $ 6,038,049 $ 4,068,960
Cost of sales 4,608,375 3,161,575
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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.
7
KAHIKI FOODS, INC.
STATEMENTS OF INCOME (UNAUDITED)
NINE MONTHS ENDED DECEMBER 31,
2005 2004
(restated) (restated)
------------ ------------
Net sales $ 16,161,976 $ 13,759,848
Cost of sales 12,995,057 10,631,165
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GROSS PROFIT 3,166,919 3,128,683
Selling, general and administrative expenses 3,221,242 2,789,009
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INCOME (LOSS) FROM OPERATIONS (54,323) 339,674
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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.
8
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
9
KAHIKI FOODS, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED DECEMBER 31,
2005 2004
(restated) (restated)
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITES:
Net income $ 728,845 $ 88,184
Adjustments to reconcile net income to net 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 1,000,000
Proceeds from long-term debt 2,363,617 2,275,992
Payments on long-term debt (654,555) (1,521,610)
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.
10
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.
[The following paragraph was restated since Amendment Number 1.]
Revenue recognition
We record revenue when rights and risk of ownership have passed to our
customers, the price and terms are finalized, and collection of the resulting
receivables is reasonably assured. This generally occurs when products are
delivered to the customer. Customers do not have the right to return products
unless the products are damaged. We sometimes offer promotions or co-operative
advertising, and pay slotting fees to customers to obtain shelf space in retail
locations. All of such amounts are recorded as a decrease in sales in the period
incurred.
[The following paragraph was added since Amendment Number 1.]
Freight Credits
We give some customers an invoiced credit for freight. We initially recorded
such credits as an expense in cost of sales. However, in accordance with the
conclusions reached in Emerging Issues Task Force Issue No. 01-9, we now record
such credits as a reduction of sales. We restated sales and cost of sales in the
accompanying income statements to reflect this correction in accounting policy.
[The following paragraph was added since Amendment Number 1.]
Impairment of assets with long lives
We make a review at least annually to determine if there is a reduction in value
(an impairment in value) of any property and equipment or other asset with an
extended life. Based on those reviews, if circumstances indicate that we will
not recover the remaining cost of the asset from its use in future operations,
we write down the value of the asset to the value of the discounted cash flows
expected to result from the use of the asset or from its eventual disposition.
[The following paragraph was added since Amendment Number 1.]
Interest rate swap
In December 2004, Kahiki entered into an interest rate swap agreement to help
manage its interest costs and risks associated with changing interest rates. We
account for this swap at its fair value, based on market quotes. We record the
fair value in other non-current assets or other non-current liabilities in the
accompanying balance sheets, with an offsetting amount shown as an adjustment to
interest expense. The value was negligible at March 31, 2005 and at December 31,
2005. In this swap, we pay a fixed rate of 6.96% and receive a variable rate of
LIBOR plus 2.5% on a notional principal amount. Our notional principal amount
was initially $1,000,000, and was approximately $900,000 at December 31, 2005.
The notional principal amount decreases monthly as we make payments on our term
debt with KeyBank National Association ("KeyBank"). KeyBank is the counterparty
in the swap agreement. We monitor the bank's creditworthiness as part of our
quarterly reviews of the swap. The swap terminates in June 2012. We record the
differential paid or received on the swap each month as an adjustment to
interest expense. Kahiki does not have any other derivative instruments.
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
11
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.
12
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
========== ==========
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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.
14
[The following paragraph was added since Amendment Number 1.]
Mr. Michael Tsao (former Chairman of Kahiki until his death) and Mrs. Alice Tsao
(currently Chairwoman of Kahiki) personally guaranteed several of Kahiki's
loans, including, for Mr. Tsao, the ODOD loan. At March 31, 2005, these
guarantees totaled $4,648,000 on ten loans. ODOD released the guarantee from Mr.
Tsao and from his estate in October 2005. At December 31, 2005, the remaining
guarantees by Mrs. Tsao, and Mr. Tsao's estate, total $467,000 on six loans. All
of these notes are cognovit notes, under which Kahiki (and Mrs. Tsao as
guarantor) has waived notice and empowered the lenders to confess judgment if
there is a default.
[The following footnote was restated since Amendment Number 1.]
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.
Most of our debt instruments include financial and other covenants that we must
meet. We were not in technical compliance with all covenants in our financial
and debt instruments at December 31, 2005. Our lenders have a variety of
responses available to them, including standing still, increases in some
interest rates on the debt, and withholding rights to operate the revolver loan.
In addition, the lenders may call the debt that is in default. No lender has
exercised any such rights.
Kahiki is current in all required payments of principal and interest on all our
debt. The defaults, as noted individually below, are caused by the death of Mr.
Tsao (which cannot be cured), by a restriction on capital additions in one debt
instrument (which cannot be cured), by cross-default clauses in debt instruments
(which cannot be cured until all defaults are cured), and/or by our failure to
submit in a timely manner certain reports required by the loan documents. We are
in the process of complying with the requirements to file reports. We have
requested waivers from all lenders to remove the loans from default status.
Total debt in default was $10,872,040 at December 31, 2005.
Our debt is collateralized by all of our property and equipment, receivables,
inventory, cash, a certificate of deposit, short- and long-term deposits with
ODOD, a letter of credit, and personal guarantees of our Chairwoman. In
addition, Kahiki's debt to Mrs. Tsao is subordinated to some of its other debt.
The following discussion summarizes each of Kahiki's loans in which there is a
technical default.
Kahiki's two capital leases of equipment in default at December 31, 2005 are
with a commercial bank. The defaults arose from the death of Mr. Tsao, who had
guaranteed the loans, cross-default clauses in the debt instruments, and from
non-compliance with several covenants requiring the submission of periodic
15
reports. The loans have interest rates of 6.2% and 7.6%. They require monthly
payments of principal and interest of approximately $11,000 and mature in June
and December 2007. Mrs. Tsao has also personally guaranteed these notes. These
notes are cognovit notes, under which Kahiki (and Mrs. Tsao as guarantor) has
waived notice and empowered the lenders to confess judgment if there is a
default.
Kahiki's four loans payable in default at December 31, 2005 are with
governmental development agencies. The defaults arose from the death of Mr.
Tsao, who had guaranteed the loans, cross-default clauses in the debt
instruments, and from non-compliance with several covenants requiring the
submission of periodic reports. One loan also restricts any capital additions.
They have interest rates ranging from 2.8% to 7.0%. They require monthly
payments of principal and interest of approximately $8,000 and mature at various
dates through October 2009. One of them requires a balloon payment of
approximately $45,000 in December 2007. Mrs. Tsao has personally guaranteed
these notes. These notes are cognovit notes, under which Kahiki (and Mrs. Tsao
as guarantor) has waived notice and empowered the lenders to confess judgment if
there is a default.
Kahiki's loan payable to ODOD is in default at December 31, 2005 because of a
cross-default clause with other debt, as well as technical defaults in meeting
some of its financial reporting provisions. It has interest rates ranging from
4.6% on principal due by November 2010 to 5.9% on principal due in November
2022. It requires monthly payments of principal and interest of approximately
$31,000 and matures in November 2022.
In December 2004, we entered into a $2,000,000 convertible note agreement with
Townsends, Inc., a Delaware corporation, and we received $1,000,000 of proceeds
at that time. In June 2005, we received an additional $1,000,000 under this
agreement. These loans were in default at December 31, 2005 because of a
cross-default clause. The notes had interest at 5%. In February 2006, Townsends,
Inc. converted the principal of these notes, and accrued interest of $94,167,
into 930,741 shares of Kahiki's no par value Series A Convertible Preferred
Shares. The conversion price was $2.25 per share.
In December 2004, we entered into a $2,227,187 term loan agreement with KeyBank,
and we received $1,228,187 at that time. In June 2005, we received an additional
$1,000,000 under this agreement. The term debt with KeyBank has interest at
LIBOR plus 2.5% and is due in June 2012. Kahiki makes monthly payments of
approximately $27,000 of principal, plus interest on the term debt.
On June 1, 2004, we entered into an agreement with KeyBank 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) 40% of eligible inventory. We used this line to pay off a
pre-existing $1,100,000 line, and to provide working capital. The revolver has
interest at LIBOR plus 2.0% and is due in May 2007.
Kahiki's term and revolver loans payable to KeyBank are in default at December
31, 2005 because of cross-default clauses with other debt. Kahiki has technical
defaults in meeting some of the other financial reporting provisions as well.
The defaulted instruments with KeyBank include Kahiki's interest rate swap
agreement and its agreement underlying the required letter of credit in favor of
the State of Ohio under the ODOD loan. Because of the defaults, KeyBank may
rescind Kahiki's ability to make periodic draws under the revolver loan. The
term and revolver notes are cognovit notes, under which Kahiki has waived notice
and empowered KeyBank to confess judgment if there is a default.
We have requested waivers of defaults from all lenders. To the extent that
Kahiki's lenders have not waived the defaults, we classified all loans with
technical defaults as current liabilities at December 31, 2005. We are actively
trying to clear all of these defaults.
16
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.
[The following footnote was added since Amendment Number 1.]
NOTE 13. RECLASSIFICATIONS
Certain amounts in the balance sheets and statements of cash flows in the
original filing of this Quarterly Report on Form 10-QSB for the fiscal quarter
ended December 31, 2005 have been reclassified, restated, or corrected.
1. In Amendment Number 1, we amended and restated the balance sheet as of March
31, 2005 to show a net cash overdraft at that date as an addition to accounts
payable in current liabilities rather than as a negative asset.
2. In Amendment Number 1, we amended and restated the reported value of
machinery and equipment as of March 31, 2005 by $1 to correct for rounding
errors.
3. In this Amendment, we amended and restated the balance sheet as of December
31, 2005 to show debt which had technical defaults at that date as current
liabilities and not as long-term debt.
4. In Amendment Number 1, we increased net sales and cost of sales by $123,000
for the three- and nine- month periods ended December 31, 2005 to reflect
invoiced freight discounts to a customer which were originally subtracted from
reported net sales. That was in error. In this Amendment, we restated net sales
and related cost of sales by $125,413 and $105,918 for the three-month periods
ended December 31, 2005 and 2004, and by $317,308 and $300,012 for the
nine-month periods ended December 31, 2005 and 2004, all respectively and all
from their original amounts, to reflect invoiced freight discounts to customers
as a reduction in sales rather than as freight costs included as part of cost of
sales. The freight discounts are more properly shown as a reduction in revenue
per the conclusions reached in Emerging Issues Task Force Issue No. 01-9. There
was no change in net income in any of the reported periods as a result of this
restatement.
5. In this Amendment, we corrected disclosure of new borrowings of debt and of
payments of debt in the accompanying statement of cash flows for the nine months
ended December 31, 2004. There was no change in total cash flows from financing
activities from this correction.
These adjustments and restatements also changed numerous subtotals and totals on
the balance sheets, statements of income, and in the statements of cash flows.
All of these are changes in disclosure. This table shows the original amount and
the restated amount for each such item. The changes are keyed to the numbers
identified in the paragraphs above.
17
Restated Original
Key Amount Amount
--- ----------- -----------
Balance sheet for March 31, 2005:
Cash 1 $ - $ (10,568)
TOTAL CURRENT ASSETS 1 3,573,520 3,562,952
PROPERTY AND EQUIPMENT, NET 2 10,883,292 10,883,293
TOTAL ASSETS 1 14,706,393 14,695,825
Accounts payable 1 2,231,781 2,221,213
TOTAL CURRENT LIABILITIES 1 3,666,938 3,656,370
TOTAL LIABILITIES 1 11,284,365 11,273,797
TOTAL LIABILITIES & STOCKHOLDERS'
EQUITY 1 14,706,393 14,695,825
Balance sheet (unaudited) for
December 31, 2005:
Current portion of long term debt 3 11,052,497 760,860
TOTAL CURRENT LIABILITIES 3 13,291,862 3,000,225
Long-term debt 3 292,671 8,584,308
Related party debt 3 - 2,000,000
Income statement (unaudited) for
three months ended December 31, 2005:
Net sales 4 6,038,049 6,163,462
Cost of sales 4 4,608,375 4,733,788
GROSS PROFIT 4 1,429,674 1,429,674
Income statement (unaudited) for
three months ended December 31, 2004:
Net sales 4 4,068,960 4,174,878
Cost of sales 4 3,161,575 3,267,493
GROSS PROFIT 4 907,385 907,385
Income statement (unaudited) for
nine months ended December 31, 2005:
Net sales 4 16,161,976 16,479,284
Cost of sales 4 12,995,057 13,312,365
GROSS PROFIT 4 3,166,919 3,166,919
Income statement (unaudited) for
nine months ended December 31, 2004:
Net sales 4 13,759,848 14,059,860
Cost of sales 4 10,631,165 10,931,177
GROSS PROFIT 4 3,128,683 3,128,683
Statement of cash flows (unaudited) for
nine months ended December 31, 2004:
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on line of credit 5 1,000,000 --
Payments on long-term debt 5 (1,521,610) (521,610)
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.
18
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
(restated) (restated) (restated) (restated)
------------- ------------- ------------- -------------
Percentages of net sales:
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 76.3 77.7 80.4 77.3
Gross profit 23.7 22.3 19.6 22.7
Selling, general, and
administrative expenses 17.7 20.4 19.9 20.3
Income (loss) from
operations 6.0 1.9 (0.3) 2.4
Interest expense (2.7) (0.9) (2.6) (1.3)
Life insurance proceeds 8.3 -- 7.8 .1
Other income (expense),net 0.2 -- 0.1 (0.2)
Income tax expense 2.6 0.4 0.5 0.4
Net income 9.2% 0.6% 4.5% 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 following paragraph was restated since Amendment Number 1.]
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 $6,038,049
compared to $4,068,960 for the comparable quarter ended December 31, 2004, an
increase of over 48%. 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.
[The following paragraph was restated since Amendment Number 1.]
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 23.7% 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.
19
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.
20
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
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 loans. Kahiki received that amount of proceeds
from the life insurance policies, plus interest, in the quarter ended September
30, 2005 (all of which has been treated as restricted deposits). 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 in 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") indicating 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. On the accompanying unaudited statement of
cash flows, both restricted deposits have been excluded from the total of "Net
cash provided by (used in) operating activities" through an adjustment to "Other
assets".
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
21
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.
[The following paragraph was added since Amendment Number 1.]
Mr. Michael Tsao (former Chairman of Kahiki until his death) and Mrs. Alice Tsao
(currently Chairwoman of Kahiki) personally guaranteed several of Kahiki's
loans, including, for Mr. Tsao, the ODOD loan. At March 31, 2005, these
guarantees totaled $4,648,000 on ten loans. ODOD released the guarantee from Mr.
Tsao and from his estate in October 2005. At December 31, 2005, the remaining
guarantees by Mrs. Tsao, and Mr. Tsao's estate, total $467,000 on six loans. All
of these notes are cognovit notes, under which Kahiki (and Mrs. Tsao as
guarantor) has waived notice and empowered the lenders to confess judgment if
there is a default.
[The following paragraph was added since Amendment Number 1.]
Most of our debt instruments include financial and other covenants that we must
meet. Although we have made all required payments of principal and interest on
all our debt, we were not in technical compliance with all covenants in our
financial and debt instruments at December 31. 2005. Several loans have defaults
which arose from the death of Mr. Tsao, who had guaranteed the loans, and from
non-compliance with several reporting covenants. The Ohio loan has a
cross-default clause with other debt, as well as technical defaults in meeting
some of its financial reporting provisions. Kahiki's term and revolver loans
payable to KeyBank are in default because of cross-default clauses. The
defaulted instruments with KeyBank include Kahiki's interest rate swap agreement
and its agreement underlying the required letter of credit in favor of the State
of Ohio for the Ohio loan. We are actively trying to clear all of these
defaults, and obtain waivers of defaults and modifications of loan agreements to
avoid technical defaults in the future. The term and revolver notes with KeyBank
are cognovit notes, under which Kahiki has waived notice and empowered KeyBank
to confess judgment if there is a default. To the extent that Kahiki's lenders
have not waived the various defaults, we have reported $10,872,040 of debt in
default as a current liability on the accompanying unaudited balance sheet for
December 31, 2005. Our lenders have a variety of responses available to them,
including standing still, increases in some interest rates on the debt, and
withholding rights to operate the revolver loan. In addition, the lenders may
call the debt that is in default. No lender has exercised any such rights.
However, if they do, it will affect our liquidity. Further explanations of our
debt arrangements are included in the accompanying footnotes to the financial
statements, and such explanations are incorporated herein by reference.
[The following paragraph was added since Amendment Number 1.]
We expect capital additions to be considerably less over the next twelve months
than in the last twelve months. We also expect that we will have no additional
debt, other than capital leases on purchases of specific capital items.
[The following paragraph was restated since Amendment Number 1.]
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. If lenders exercise
their rights to accelerate our debt, we may not be able to fund our operations
with cash flow from operating activities. Future financing transactions may also
include the issuance of common stock from exercise of options or warrants.
22
CRITICAL ACCOUNTING POLICIES
We record revenue when rights and risk of ownership have passed to our
customers, the price and terms are finalized, and collection of the resulting
receivables is reasonably assured. This generally occurs when products are
delivered to the customer. Customers do not have the right to return products
unless the products are damaged. We sometimes offer promotions or co-operative
advertising, and pay slotting fees to customers to obtain shelf space in retail
locations. All of such amounts are recorded as a decrease in sales in the period
incurred.
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
23
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
[The following paragraph was restated since Amendment Number 1.]
Disclosure controls and procedures are designed to ensure that information
required to be disclosed in the reports filed or submitted under the Exchange
Act is recorded, processed, summarized and reported, within the time period
specified in the Commissions's rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed in the reports filed under the
Exchange Act is accumulated and communicated to management, as appropriate, to
allow timely decisions regarding required disclosure. Our President and Chief
Executive Officer, and our Chief Financial Officer evaluated the effectiveness
of our disclosure controls and procedures as of the end of the quarterly period
covered by this report pursuant to Rule 15d-15 under the Exchange Act. Based on
that evaluation, our principal executive and financial officers concluded that
our disclosure controls and procedures were effective in alerting management in
a timely fashion to all material information required to be included in our
periodic filings with the Commission.
[The following paragraph was restated since Amendment Number 1.]
There were no significant changes in our internal control over financial
reporting that occurred during the period covered by this report that have
materially affected, or are reasonably likely to materially affect our internal
controls over financial reporting.
24
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
[The following paragraph was added since Amendment Number 1.]
Most of our debt instruments include financial and other covenants that we must
meet. We were not in technical compliance with all covenants in our financial
and debt instruments at December 31, 2005. Our lenders have a variety of
responses available to them, including standing still, increases in some
interest rates on the debt, and withholding rights to operate the revolver loan.
In addition, the lenders may call the debt that is in default. No lender has
exercised any such rights.
[The following paragraph was added since Amendment Number 1.]
Kahiki is current in all required payments of principal and interest on all our
debt. The defaults are caused by the death of Mr. Tsao (which cannot be cured),
by a restriction on capital additions in one debt instrument (which cannot be
cured), by cross-default clauses in debt instruments (which cannot be cured
until all defaults are cured), and/or by our failure to submit in a timely
manner certain reports required by the loan documents. We are in the process of
complying with the requirements to file reports. We have requested waivers from
all lenders to remove the loans from default status. Total debt in default was
$10,872,040 at December 31, 2005.
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.
25
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: September 14, 2006
/s/ Alan L. Hoover
- -----------------------------
Alan L. Hoover, President and Chief Executive Officer
Date: September 14, 2006
/s/ Frederick A. Niebauer
- -----------------------------
Frederick A. Niebauer, Chief Financial Officer and Treasurer
26
[The following INDEX TO EXHIBITS was restated since Amendment Number 1.]
INDEX TO EXHIBITS
<Table>
<Caption>
EXHIBIT DESCRIPTION OF EXHIBIT LOCATION
- ------- ---------------------- --------
3.1 Amended and Restated Articles Incorporated herein by reference
of Incorporation of Registrant to Exhibit 3.1 of Registration
Statement on Form SB-2
(Registration No. 333-126268)
3.2 Code of Regulations of the Incorporated herein by reference
Registrant to Exhibit 3.2 of Registration
Statement on Form SB-2
(Registration No. 333-113925)
4.1 Specimen Common Share Incorporated herein by reference
Certificate to Exhibit 4.1 of Registration
Statement on Form SB-2
(Registration No. 333-113925)
4.2 $2.25 Common Share Purchase Incorporated herein by reference
Warrant to Exhibit 4.2 of Registration
Statement on Form SB-2
(Registration No. 333-113925)
4.3 $3.00 Common Share Purchase Incorporated herein by reference
Warrant to Exhibit 4.3 of Registration
Statement on Form SB-2
(Registration No. 333-113925)
4.4* 2001 Non-Qualified and Incorporated herein by reference
Incentive Stock Option Plan to Exhibit 4.5 of Registration
of Registrant Statement on Form SB-2
(Registration No. 333-113925)
10.1 Loan Agreement between Incorporated herein by reference
Registrant and The Director to Exhibit 10.2 of Registration
of Development of Ohio dated Statement on Form SB-2
as of December 1, 2002 (Registration No. 333-113925)
10.2 Convertible Note Purchase Incorporated herein by reference
Agreement between Registrant to Exhibit 10.1 of Report on
and Townsends, Inc. dated Form 8-K filed on December 28,
December 21, 2004 2004
10.3 Convertible Promissory Note of Incorporated herein by reference
Registrant to Townsends, Inc. to Exhibit 10.2 of Report on
dated December 21, 2004 Form 8-K filed on December 28,
2004
</Table>
27
<Table>
<Caption>
EXHIBIT DESCRIPTION OF EXHIBIT LOCATION
- ------- ---------------------- --------
10.4 Convertible Promissory Note of Incorporated herein by reference
Registrant to Townsends, Inc. to Exhibit 10.2 of Report on
dated June 3, 2005 Form 8-K filed on June 9, 2005
10.5 Registration Rights Agreement Incorporated herein by reference
between Registrant and to Exhibit 10.3 of Report on Form
Townsends, Inc. dated 8-K filed on December 28, 2004
December 21, 2004
10.6 Supply Agreement between Incorporated herein by reference
Registrant and Townsends, Inc. to Exhibit 10.4 of Report on Form
dated December 21, 2004 8-K filed on December 28, 2004
10.7 Co-Pack and Storage Agreement Incorporated herein by reference
between Registrant and to Exhibit 10.5 of Report on Form
Townsends, Inc. dated 8-K filed on December 28, 2004
December 21, 2004
10.8 Term Promissory Note of Incorporated herein by reference
Registrant to KeyBank to Exhibit 10.6 of Report on Form
National Association dated 8-K filed on December 28, 2004
December 17, 2004
10.9 Subordinated Promissory Note Incorporated herein by reference
to Alice Tsao dated to Exhibit 10.9 of Report on Form
August 19, 2003 10-KSB/A for the fiscal year
ended March 31, 2005 filed on
March 30, 2006
10.11 Registration Rights Agreement Incorporated herein by reference
between Registrant and to Exhibit 10.11 of Report on
Barron Partners LP, dated Form 10-KSB for the fiscal year
February 27, 2004 ended March 31, 2006 filed on
July 14, 2006
10.12 Promissory Note of Incorporated herein by reference
Registrant to KeyBank to Exhibit 10.12 of Report on
National Association dated Form 10-KSB for the fiscal year
June 1, 2004 (revolver) ended March 31, 2006 filed on
July 14, 2006
10.13 Business Loan Agreement Incorporated herein by reference
(Asset Based) between to Exhibit 10.13 of Report on
Registrant and KeyBank Form 10-KSB for the fiscal year
National Association dated ended March 31, 2006 filed on
June 1, 2004 (revolver) July 14, 2006
10.14 Addendum to Business Loan Incorporated herein by reference
Agreement (Asset Based) to Exhibit 10.12 of Report on
between Registrant and KeyBank Form 10-KSB for the fiscal year
National Association dated ended March 31, 2006 filed on
June 1, 2004 (revolver) July 14, 2006
14.1 Code of Ethics Incorporated herein by reference
to Exhibit 14.1 of Report on Form
10-KSB for the fiscal year ended
March 31, 2005 filed on June 21,
2005.
</Table>
28
<Table>
<Caption>
EXHIBIT DESCRIPTION OF EXHIBIT LOCATION
- ------- ---------------------- --------
16.1 Letter on change in accountant Incorporated herein by reference
to Exhibit 16.1 of Report on Form
8-K filed on December 28, 2004
31.1 Certification of the Chief Included herein
Executive Officer Pursuant to
Section 302 of the Sarbanes-
Oxley Act of 2002
31.2 Certification of the Chief Included herein
Financial Officer Pursuant to
Section 302 of the Sarbanes-
Oxley Act of 2002
32 Certification of the Chief Included herein
Executive Officer and Chief
Financial Officer pursuant to
Rule 15d-14(b) and 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
</Table>
* Represents compensation arrangement.
29