Registration No.: 333-113925
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------------
FORM SB-2/A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO. 2
KAHIKI FOODS, INC.
(Name of Small Business Issuer in its charter)
Ohio 2038 31-1056793
---- ---- ----------
(State or jurisdiction (Primary Standard Industrial (I.R.S. Employer
of organization) Classification Code Number) incorporaton or
Identification Number)
3004 East 14th Avenue
1100 Morrison Road
Columbus, Ohio 43219 43230
(614) 253-3040
(Address and telephone number
of principal executive offices)
-----------------------------------
Michael C. Tsao
3004 East 14th Ave.
1100 Morrison Road.
Columbus, Ohio 43219 43230
(614) 253-3040
(Name, address and telephone number of agent for service)
------------------------------------
Copies of all communications, including copies of all communications
sent to agent for service, should be sent to
Andrew J. Federico, Esq.
Carlile Patchen & Murphy LLP
Columbus, Ohio 43215
(614) 628-0801
Approximate date of commencement of proposed sale to public: From time to time
commencing as soon as practicable after the effective date of this Registration
Statement
If this Form is filed to register additional securities for an offering
pursuant to rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. ?
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. ?
If this Form is a post-effective amendment filed pursuant to rule
462(d) under the securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. ?
If delivery of the prospectus is expected to be made pursuant to rule
434, check the following box.
CALCULATION OF REGISTRATION FEE
Proposed
Title of Each Class Proposed Maximum Maximum Amount of
of Securities to be Amount to be Offering Price Per Aggregate Registration
Registered Registered Share (a) Offering Price Fee
(a)
Common Shares,
no par value 602,940100,000 $1.70$3.75 $1,025,000$375, $129.87$47.5
000 1
Common Shares, 294,117 $2.25
no par value (b) 294,117 $3.00 $1,688,094 $214.39
80,000 $1.80
Common Share
Warrants (c) 588,234 $0 $0 $0
Common Share
Options (c) 80,000 $0 $0 $0
Total Amount of Registration Fees $344.2647.51
Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457 under the securities Act of 1933.
(b) Issuable upon exercise of 294,117 $3.00 Common Share Warrants,
294,117 $2.25 Common Share Warrants and
80,000 Common Share Options.
(c) No registration fee required pursuant to Rule 457 of
Securities Act of 1933.
----------------------------------
Pursuant to Rule 416, this registration statement also covers an
undetermined number of additional Common Shares that may be issuable to
prevent dilution resulting from stock splits, stock dividends or similar
transactions.
The Registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the registration
statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a) may determine.
TABLE OF CONTENTS
Summary..........................................................................................2
About Us.........................................................................................2
Terms of Offering................................................................................2
Summary Financial Information....................................................................2
Risk Factors.....................................................................................3
Dividend Policy..................................................................................5
Use of Proceeds..................................................................................5
Selling Shareholders.............................................................................5
Plan of Distribution.............................................................................6
Directors and Executive Officers.................................................................7
Indemnification of directors and Officers........................................................8
Security Ownership of certain Beneficial Owners and Management...................................9
Description of Securities........................................................................10
Common Shares....................................................................................10
Warrants.........................................................................................11
Options..........................................................................................11
Certain Statutory Provisions.....................................................................11
Legal Proceedings................................................................................12
Legal Matters....................................................................................12
Business.........................................................................................12
Products.........................................................................................13
Pricing..........................................................................................15
Distribution.....................................................................................15
Marketing........................................................................................15
Regulations......................................................................................15
Competition......................................................................................16
Suppliers........................................................................................16
Employees........................................................................................16
Trademarks.......................................................................................16
Research and Development.........................................................................16
Property.........................................................................................16
Management Discussion and Analysis or Plan of Operations.........................................17
Discussion of Significant Accounting Policies....................................................18
Result of Operations.............................................................................20
Revenues.........................................................................................20
Cost of Goods....................................................................................20
Operating Expenses...............................................................................21
Research and Development.........................................................................21
Net Income.......................................................................................21
Conclusions......................................................................................21
Years End March 31, 2003.........................................................................21
Revenues.........................................................................................22
Cost of Goods....................................................................................22
Operating Expenses...............................................................................22
Research and Development.........................................................................22
Net Income.......................................................................................22
Liquidity and Capital Resource...................................................................22
Bank Financing Matters...........................................................................22
Forward Looking Statements.......................................................................23
Certain Relationships and Related Transactions...................................................23
Market For Common Equity and Related Stockholders Matters........................................24
Executive Compensation...........................................................................25
Incentive Stock Option Plan......................................................................25
Reports to Shareholders..........................................................................26
Additional Information...........................................................................26
Financial Statements.............................................................................27
i
KAHIKI FOODS, INC.
602,940 100,000 Common Shares
294,117 $2.25 Common Share Purchase Warrants
294,117 $3.00 Common Share Purchase Warrants
80,000 Common Share Purchase Options
This Registration Statement relates to 602,940 Common Shares, 294,117
$2.25 Common Share Purchase Warrants ("2.25 Warrants"), 294,117 $3.00
Common Share Purchase Warrants ("3.00 Warrants") and 80,000 Common Share
Purchase Options of Kahiki Foods, Inc. Each $2.25 Warrant entitles the
holder to purchase one common share prior to February 27, 2009 at a
purchase price of $2.25 per share. Each $3.00 Warrant entitles the holder
to purchase one common share prior to February 27, 2009 at a purchase price
of $3.00 per share. The exercise prices of the $2.25 Warrants and $3.00
Warrants are subject to adjustment under certain circumstances. Each option
entitles the holder to purchase one common share prior to January 24, 2006,
at purchase price of $1.80 per share.
This registration statement relates to 100,000 common shares of
Kahiki Foods, Inc.
The common shares, the warrants and the options may be offered to
the public by the selling shareholdersshareholder and we will not receive
any proceeds from the sale of the common shares, the warrants or the options. We
will receive $2.25 per share upon the exercise of each $2.25 Warrant, $3.00 per
share upon the exercise of each $3.00 Warrant and $1.80 per share upon the
exercise of each option.
Neither the common shares, the warrants nor the optionsThe common
shares are not traded on any national securities exchange or on the NASDAQ stock
market. The common shares do tradeare quoted on the OTC Bulletin Board pink
sheets under the symbol "KSCI." The common shares, the warrants and the options
offered by the selling shareholders may be sold from time to time by the selling
shareholders or their transferees. No underwriting arrangements have been
entered by the selling shareholders. The potential distribution of common
shares, warrants and the options by the selling shareholders may be effected in
one or more transactions that may take place on the over-the-counter market,
including ordinary broker's transactions, or through sales to one or more
dealers for resale as principals, at market prices prevailing at the time of
sale, at prices related to such prevailing market prices or at negotiated
prices. Usual and customary or specifically negotiated brokerage fees or
commission may be paid by the selling shareholders in conjunction with such
sales of common shares, warrants or optionsselling shareholder will be required
to sell its common shares at $3.75 per share, until our common shares are quoted
on the Over-the-Counter Bulletin Board and thereafter at prevailing market
prices or privately negotiated prices. We will pay all expenses of registering
the securities.
The selling shareholders reserve the sole right to accept, and together
with their agents from time to time, to reject, in whole or in part, any
proposed purchase of common shares, warrants and options. The selling
shareholders and any brokers, dealers, agents or underwriters that participate
with the selling shareholders in the distribution of the common shares, the
warrants and options may be deemed "underwriters" within the meaning of the
Securities Act of 1933 (the "Securities Act"), and commissions received by them
may be deemed to be underwriting commissions or discounts under the Securities
Act. See the "Plan of Distribution."
THE SECURITIES OFFERED HEREBY INVOLVE A CERTAIN DEGREE OF RISK. SEE
'RISK FACTORS." on page 4
The securities offered hereby involve a certain degree of risk. See'RISK
FACTORS" beginning on page 4
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES
OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS OFFERING. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy and adequacy of this offering. Any representation to the contrary is a
criminal offense.
The date of this Registration Statement is June 7, August
___, 2004.
SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this registration statement. This offering
contains certain forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from the results
anticipated in those forward-looking statements as a result of certain of the
factors discussed in this registration statement, including those set forth
under "Risk Factors." Prospective investors should read the entire prospectus
before making an investment decision.
About Us
Kahiki Foods, Inc. was incorporated in Ohio in 1982. Our principal business is
to develop, manufacture and market frozen and other finished Asian food
products. In 1982, we acquired a Polynesian restaurant in Columbus, Ohio known
as the Kahiki Restaurant. We began a food processing operation in 1988 and in
1995 we opened a 7,000 square foot FDA approved processing facility. In 2000 we
sold the restaurant and focused solely on our food processing business. Today,
foods sold by us are packaged in bulk and/or frozen containers and include a
wide variety of products, including egg rolls, appetizers, fried rice, sauces,
meal kits, single serve entrees and family meal entrees. Our products are
distributed to foodservice companies and institutions, retail grocery store
chains and warehouse club stores. Our principal executive offices are located at
3004 East 14th Avenue1100 Morrison Road, Columbus, Ohio 4321943230 and our
telephone number is (614) 253-3040.
Terms of Offering
Securities Offered: Common shares, Common Share Purchase Warrants and
Common Share Purchase Options.
Offering Period: The common shares, warrants and
options are being offered on a "best
efforts" basis by the selling
shareholdersshareholder from time to time at
prices available in the marketa price of
$3.75 per share.
Common Shares
Outstanding 3,588,848 common shares.
Summary Financial Information
The following information has been derived from our financial statements
included elsewhere in this prospectus and should be read in conjunction with
such financial statements and the related notes thereto.
Year Ended March 31 Year Ended March 31 Three Months Ended June
INCOME 30
- ------
STATEMENT DATA 2004 2004 2003
- -------------- ----
2002 20042003
----
(unaudited)
- -------------------------- -------------------------------------- --------------------------------
Net Sales $14,989,840 $9,204,68 $14,761,923$9,128,858$9,374,91 $5,306,536$1,801,301
4 7
Net Income (loss) $698,113 (85,923) $698,113(85,923)77,451 $145,087(70,668)
Net Income Per $0.24 (.03) $0.24(.03).03 $0.04(0.02)
Share
- ----------------------- ---------------------------------- ----------------------------
BALANCE SHEET DATA March 31 2004 June 30, 2004
-------------
(unaudited)
Actual
Adju
sted
- ------------------------------------------- -------------------------- -------------------------
Total Assets $13,084,73713,028,7 $13,772,85113,789,9
37 62
Working Capital $722,828701,103 $1,410,942517,256
Long Term Debt $5,148,181 $4,148,1815,018,138
Total Liabilities $9,715,1459,680,870 $8,715,1459,706,055
Shareholders' Equity $3,369,5923,347,592 $5,057,7063,483,907
- ------------------------------------------- -------------------------- -------------------------
(1) Assumes that the warrants and options offered hereby are all
exercised.
RISK FACTORS
Prospective purchasers should carefully consider the following risk factors,
in addition to the other information contained in this prospectus, before
purchasing the securities being offered.
Key Personnel - - We depend on a few key employees and the loss of our
president should have a severe impact on us--The applied talent and experience
of our President, Michael C. Tsao, provides the critical management skills
necessary to guide and protect our financial and operational well being. Our
prospects would be severely affected if Mr. Tsao, for any reason, were unable to
continue to perform his duties. For example, it is an event of default under our
current bank financing if Mr. Tsao ceases to serve as our President.
Dividends - We have never paid any cash dividends and there is no assurance
that the Company will desire to pay dividends in the future or, if dividends are
paid, in what amount. We may decide not to pay dividends in the near future,
even if funds are legally available therefore, in order to provide us with more
funds for operations. See "DIVIDEND POLICY". .
Voting Control is held by our Current Management - Assuming no exercise of
warrants or options, current management owns approximately 57.50% of our
outstanding common shares. As a result, current management is in a position to
effectively elect all of our Directors and control our affairs and policies.
The Food Industry is Highly Competitive - We face substantial competition
in connection with the marketing and sale of our products. Among our competitors
are Tyson Foods, Nestle, ConAgra, Chung's, Schwan's, Pillsbury, Hormel, Windsor
Foods and Kikkoman. Each of these competitors is well established, has
substantially greater financial and other sources and has greater brand
recognition than our products. Because of the high cost of a national marketing
programs and limitations on shelf space, we may encounter difficulties in
achieving a wide distribution of our products.
Raw Material CostsCost Increases could Materially Impact our Business - We
purchase the raw materials (vegetables, rice and meats) which go into our
products from a variety of sources locally and regionally. We have not entered
into any long term supply contracts with our raw material suppliers. Increases
in the costs of raw materials could have a material adverse effect on our
business and our ability to compete with larger, integrated food manufacturers.
We May Be Exposed to Potential Product Liability Claims which could have an
Adverse Impact on our Business - While we endeavor to sell safe products, there
is a possibility that a vendor could
handle our products improperly or that someone could have an adverse reaction to
a product. We maintain commercial general liability insurance in the amount of
$1,000,000 per person and $2,000,000 per incident. Although we believe that the
amount of insurance coverage is sufficient for our operations, there is no
assurance that the coverage will be adequate. Any successful claims against us
in excess of our insurance coverage could have a material adverse effect on
Kahiki.
We are Subject to Substantial Governmental Regulations - We are subject to
extensive regulations by federal, state and local governmental authorities
regarding the quality, purity, manufacturing, distribution and labeling of food
products. Our manufacturing facility is subject to regulation and inspection by
the United States Department of Agriculture, the United States Food and Drug
Administration, and the State of Ohio Departments of Agriculture and Health. A
finding of a failure to comply with one or more regulatory requirements can
result in the imposition of sanctions including the closing of all or a portion
of our facility for a period of time. In addition to licensing requirements, a
regulatory agency could declare a food product hazardous or limit its use or
require a recall. We believe that we are in substantial compliance with all
material governmental regulations regarding our products and that we have all
government permits, licenses, qualifications and approvals required for our
operations. However, there can be no assurance that we will be able to continue
to comply with those regulations, or comply with future regulations, without
inordinate costs or interruption of our operations.
Dependence We Depend on a Limited Number of Principal Customers for a
Majority of Our Sales - Our ten largest accounts represented 64.4% of our sales
in the year ended March 31 2004 and 67.9% of our sales in the year ended March
31, 2003. For the year ended March 31, 2004, Costco represented approximately
26.75%, Meijer's represented approximately 7.12% and Wal-Mart represented
approximately 14.5% of our total sales. For the year ended March 31, 2003,
Costco represented approximately 11%, Wal-Mart represented approximately 11.3%
and Sam's Club represented approximately 20% of our total sales. We do not have
contractual arrangements with our principal customers. If these companies cease
ordering products from us, our business could be materially adversely affected.
Limitation on Liability - As permitted by Ohio law, we limit the liability
of our officers, directors, and employees from monetary damages from a breach of
a such persons' fiduciary duty except for liability in certain circumstances. As
a result of our charter provision and Ohio law, Shareholders may have limited
rights to recover against officers, directors and employees for breach of
fiduciary duty.
Our business could be adversely affected if we are unable to adequately
protect our proprietary technology - The proprietary technology we own or intend
to acquire or develop will be one of the keys to our performance and ability to
remain competitive. Our current intellectual property consists of recipes and
cooking processes for our products and four trademarks. We may rely on a
combination of patent, trademark, copyright and trade secret laws to establish
and protect our proprietary rights. We will also use technical measures,
confidentiality agreements and non-compete agreements to protect our proprietary
rights. We may however not be able to secure significant protection for service
marks or trademarks we obtain. Our competitors or others could adopt product
names similar to ours. Any of these actions by others might impede our ability
to build brand identity and could lead to consumer confusion. Our inability to
protect our brand name adequately could adversely affect our business and
financial condition.
The steps we take to protect our proprietary information may not prevent
misappropriation of our technology, and the agreements we enter into for that
purpose might not be enforceable. The laws of other countries may not provide us
with adequate or effective protection of our intellectual property.
We may infringe the proprietary rights of others - Although we believe that
our products and technology related to our business do not and will not infringe
upon the proprietary rights of any third parties, there can be no assurance that
third parties will not assert infringement claims against us. Similarly,
infringement claims could be asserted against products and technology that we
license, or have the right to use, from third parties. Although any of these
claims may ultimately prove to be without merit, the time our management spends
addressing those claims and the legal costs associated with those claims could
materially and adversely affect our business and results of operations. We may
license technology from third parties and it is possible that we could become a
party to infringement actions based upon the licenses from those third parties.
We will generally obtain representations as to the origin and ownership of such
licensed technology and content; however, this may not adequately protect us.
Any of those
claims, with or without merit, could subject us to costly litigation and the
diversion of our management personnel.
Our initial public offering price may have little or no relationship to the
price that would be established using traditional valuation methods, and
therefore, the initial public offering price may not be sustainable once trading
begins. The selling shareholder determined the offering price for our common
shares. The offering price of our shares may have a little or no relationship to
the price that would be established using traditional indicators of value, such
as our future prospects and those of our industry in general; our sales,
earnings and other financial and operating information; multiples of earnings,
cash flows, and other operating metrics; market prices of securities and other
financial and operating information of companies engaged in activities similar
to ours; and the views of research analysts. As a result, our initial public
price may not be sustainable once trading begins, and the price of our common
shares may decline.
There may be Limited Liquidity in our Common Shares--Our common shares are
not listed for trading on any established market and trade infrequently. We will
endeavor to list our common shares on the OTC Bulletin Board and, eventually, on
NASAAQ. We cannot provide any assurance that our common shares will be quoted or
continue to be quoted on the OTC Bulletin Board or NASAAQ. If there is no market
for trading our common shares, the market price of our common shares will be
materially and adversely affected.
Note: In addition to the above risks, businesses are often subject to risks
not foreseen or fully appreciated by management. In reviewing this
statement, potential investors should keep in mind other possible risks
that could be important.
SEC rules governing sales of low-priced securities may hinder resales of
our common shares--Stocks selling for less than $5.00 per share, excluding any
broker or dealer commissions, may be designated as "penny stocks" and may be
subject to certain requirements imposed by Rule 15g-9 of the Securities Exchange
Act of 1934. Among other things, Rule 15g-9 requires broker/dealers to advise
potential purchasers of a penny stock of the lowest offer and highest bid
quotations for such stock and disclose to the potential purchaser its
compensation in connection with the transaction. The net effect of such
regulations may be to delay the sale of shares which are characterized as penny
stocks. Our common shares are being offered at an initial offer price of $3.75
per share. However, we believe that the penny stock restrictions will not be
applicable to our securities based on an exemption provided in Rule 3 (a) 51-1
of the Securities Exchange Act of 1934 which, among other things, provides an
exemption from the penny stock restrictions for securities of companies that
have had average revenues of at least $6,000,000 for the last three years.
Kahiki has had average revenues of approximately $11,190,000 for the last three
years.
We will incur increased costs as a result of being a public company--As a
public company, we will incur significant legal, accounting and other expenses
that we did not incur as a private company. We will incur costs associated with
our public company reporting requirements. We also anticipate that we will incur
costs associated with recently adopted corporate governance requirements,
including requirements under the Sarbanes-Oxley Act of 2002, as well as new
rules implemented by the Securities and Exchange Commission and the NYSE and
NASDAQ. We expect these rules and regulations to increase our legal and
financial compliance costs and to make some activities more time-consuming and
costly. As a result, it may be more difficult for us to attract and retain
qualified individuals to serve on our board of directors or as executive
officers. We are currently evaluating and monitoring developments with respect
to these new rules, and we cannot predict or estimate the amount of additional
costs we may incur or the timing of such costs.
DIVIDEND POLICY
We have never paid cash dividends on our common shares. Holders of common
shares are entitled to receive dividends when, as and if declared by our Board
of Directors out of funds legally available therefore. Our ability to pay
dividends will depend upon our future earnings and net worth. We are restricted
by Ohio law from paying dividends on any of our outstanding shares while
insolvent or if such payment would result in a reduction of our stated capital
below the required amount. It is the intention of our Board periodically to
consider the payment of dividends, based on future earnings, operating and
financial condition, capital requirements and other factors deemed relevant by
the Board. There is no assurance that we will be able or will desire to pay
dividends in the near future or, if dividends are paid, in what amount. Our
Board may decide not to pay dividends in the near future, even if funds are
legally available therefore, in order to provide us with more funds for
operations. See "DESCRIPTION OF SECURITIES - Common Shares".
USE OF PROCEEDS
We will not receive any proceeds from the sale of the common shares ,
warrants or options by the selling shareholders. We will receive up to
$1,688,114 if all of the warrants and options are exercised. Any proceeds to be
received by us upon the exercise of the warrants or the options will be added to
working capital and used to reduce indebtedness and for general corporate
purposes. However, there can be no assurance that any or all of the warrants
and/or options will be exercised by the selling shareholder.
SELLING SHAREHOLDERS SHAREHOLDER
The following table setsset forth the namesname of the selling
shareholders, their positions with shareholder, position with Kahiki Foods,
Inc., if any, and the number of common shares, warrants and options owned by
each of them. The number of common shares and warrants being registered are alla
portion of the common shares and warrants owned by such persons. The common
shares currently owned by Mr. Binsky are not being registered at this
timeperson. The number of common shares and warrants which may actually be sold
by the selling shareholdersshareholder will be determined from time to time by
them, and will depend upon a number of factors, including the price of our
common shares from time to time. Because the selling shareholdersshareholder may
offer all, some or none of the common shares, warrants or options that they
hold, and because any potential offering by the selling shareholdersshareholder
is not being underwritten, no estimate can be given as to the number of common
shares or warrants that will be held by the selling shareholdersshareholder upon
termination of such offering. See "Plan of Distribution." The table sets forth
such information as of June 1,August 12, 2004, concerning the beneficial
ownership of the common shares, and warrants and options by the selling
shareholdersshareholder. All information as to beneficial ownership has been
furnished by the respective selling shareholdersshareholder.
Name and Address Number of Number of Number of Number of NumberPerce Percentage of
of Shareholder Common $2.25 $3.00 Warrants OptionsComm ntage of Common
(Position with Shares Warrants Owned and on Shares Common Shares Owned
Kahiki) Owned and Owned and Available for Owned and Shares Owned subsequent to
-
Available for Available for sale prior to Available for subsequent to Offering(4)
--------
sale prior to sale prior to Offering sale Offering(46)
-- -------- --------
Offering Offering priorsubseque
-------- --------
nt to
Offering(3)
Barron Partners 588,235 294,117 294,117 None None13.6% None
LP(1) (2) 488,235
730 Fifth Avenue
9th Floor
New York, N.Y.
(None)
- ------------------------ ----------------- ------------------ -------------------- ------------------ -------------- --------------
William Velmer(2) 14,705 None None None None None
2274 Arbor Lane
#3
Salt Lake City,
Utah
(None)
Bob Binsky 299,792(3) None None 80,000 299,792 8.37%
20185 E. Country
Club Drive
North Miami
Beach, Fl
(Director)
- ---------------------- ----------------- ----------------- ------------------- ------------------ ------------- -------------
---------------------------
(1) Barron Partners LP is a Delaware limited partnership. The general
partner of Barron Partners LP is Barron Capital Advisors LLC, a
Delaware limited liability company. Andrew Barron Worden is the
managing member of the Barron Capital Advisors LLC.
(2) Neither Barren Partners LP nor William Velmer has not had a material
relationship with Kahiki in the past three years.
(3) These common shares are not being registered or offered pursuant to
this prospectus. (4)Assumes that all securities offered are sold
DETERMINATION OF OFFERING PRICE
The selling shareholder has determined the offering price for the
selling shareholder's shares. The offering price has been arbitrarily determined
and does not bear any relationship to our assets, results of operations, or book
value, or to any other generally accepted criteria of valuation. Prior to this
offering, there has been a very limited market for our common shares. The
selling shareholder will be required to sell their shares at a price of $3.75
per share until our shares are quoted on the Over-the-Counter Bulletin Board and
thereafter at prevailing market prices or privately negotiated prices.
PLAN OF DISTRIBUTION
We will receive no proceeds from the sale of 602,940 common shares, 294,117
$2.25 Warrants, 294,117 $3.00 Warrants or options by the selling shareholders
but will receive up to $1,688,114 upon the exercise of the warrants or options.
The common shares, the warrants and the options100,000 common shares by the
selling shareholder. The common shares, may be sold from time to time to
purchasers directly by any of the selling shareholders. None of the selling
shareholders haveshareholder. The selling shareholder has not indicated any
current plan to distribute the common shares, warrants or options and it is
anticipated that they will either offer the common shares, warrants and the
options for sale for their own account or retain them for investment.
Alternatively, the selling shareholders may from time to time offer the common
shares or the warrants through underwriters, dealers or agents, who may receive
compensation in the form of underwriting discounts, concessions, or commissions
from the selling shareholders and/or the purchasers of the common shares or the
warrants for whom they may act as agent. The selling shareholders and any
underwriters, dealers or agents that participate in a distribution of common
shares, warrants or options may be deemed underwriters, and any profit on the
sale of the common shares, warrants or options by them or any discounts,
commissions or concessions received by such underwriters, dealers or agents
might be deemed to be underwriting discounts and commissions under the
Securities Act. In the event the selling shareholders enter into an underwriting
agreement, we will amend this prospectus to disclose the terms of that
underwriting agreement.
The common shares, the warrants and the options may be sold from time to
time in one or more transactions at a fixed offering price or at varying prices
determined at the time of sale, or at negotiated prices.
The selling shareholder may, from time to time, sell any or all of their
common shares on any stock exchange, market or trading facility on which the
shares are then traded or in private transactions at the price listed on the
cover page of this prospectus until our shares are quoted on the
Over-the-Counter Bulletin Board and thereafter at prevailing market prices or
privately negotiated prices. The selling shareholder may use any one or more of
the following methods to sell their shares: ordinary brokerage transactions and
transactions in which the broker-dealer solicits purchasers; block trades in
which the broker-dealer will attempt to sell the shares as agent but may
position and resell a portion of the block of shares as principal to facilitate
the transaction; purchases by a broker-dealer as principal and resale by the
broker-dealer for its account; an exchange distribution in accordance with the
rules of the applicable exchange; privately negotiated transactions; a
combination of any such methods of sale; and any other method permitted pursuant
to applicable law.
The selling shareholder, acting alone or in concert with others, may be
considered statutory underwriters under the Securities Act of 1933 if they are
directly or indirectly conducting an illegal distribution of the securities on
behalf of our corporation. If the selling shareholder is determined to be an
underwriter, they may be liable for securities violations in connection with any
material misrepresentations or omissions made in this prospectus.
We intend to seek qualification for sale of the securities in those states
where the securities will be offered. That qualification is necessary to resell
the securities in the public market. The securities may only be resold if the
securities are qualified for sale or are exempt from qualification in the states
in which the selling shareholder or proposed purchasers reside. There is no
assurance that the states in which we seek qualification will approve of the
security resales.
In addition, the selling shareholder and any brokers and dealers through
whom sales of the securities are made may be deemed to be "underwriters" within
the meaning of the Securities Act of 1933, and the commissions or discounts and
other compensation paid to such persons may be regarded as underwriters'
compensation.
The selling shareholder may pledge all or a portion of their securities as
collateral for margin accounts or in loan transactions, and the securities may
be resold pursuant to the terms of such pledges, accounts or loan transactions.
Upon default by such selling shareholder, the pledgee in such loan transaction
would have the same rights of sale as the selling shareholder under this
prospectus. The selling shareholder may also enter into exchange traded listed
option transactions, which require the delivery of the securities listed under
this prospectus. The selling shareholder may also transfer securities owned in
other ways not involving market makers or established trading markets, including
directly by gift, distribution, or other transfer without consideration, and
upon any such transfer the transferee would have the same rights of sale as such
selling shareholder under this prospectus.
In addition to the above, the selling shareholder and any other person
participating in a distribution will be affected by the applicable provisions of
the Securities Exchange Act of 1934, including, without limitation, Regulation
M, which may limit the timing of purchases and sales of any of the securities by
the selling shareholder or any such other person.
There can be no assurances that the selling shareholder will sell any or
all of the securities. In order to comply with state securities laws, if
applicable, the securities will be sold in jurisdictions only through registered
or licensed brokers or dealers. In various states, the securities may not be
sold unless these securities have been registered or qualified for sale in such
state or an exemption from registration or qualification is available and is
complied with. Under applicable rules and regulations of the Securities Exchange
Act of 1934, as amended, any person engaged in a distribution of the securities
may not simultaneously engage in market-making activities in these securities
for a period of one (1) or five (5) business days prior to the commencement of
such distribution.
All of the foregoing may affect the marketability of the securities.
Pursuant to the various agreements we have with the selling shareholder, we will
pay all the fees and expenses incident to the registration of the securities,
other than underwriting discounts and commissions, if any, which are to be paid
by the selling shareholder.
Should any substantial change occur regarding the status or other matters
concerning the shareholder, we will file an amendment to this prospectus
disclosing such matters.
DIRECTORS AND EXECUTIVE OFFICERS
The names of, and certain information with respect to, each of our officers
and Directors are as follows:
Michael C. Tsao 53 Chairman of the Board, President and chief 1982
Executive Officer
Alice W. Tsao 53 Vice President, Secretary and Director 1982
Dr. Winston Bash 67 Director 1993
Alan Hoover 49 Senior Vice President-Sales and Marketing, 1999
Director
Bob Binsky 64 Director 1995
Bradford M. Sprague 53 Director 2004
Charles Dix 41 Director 2004
Allen J. Proctor 52 Director 2004
R.L. Richards 56 Director 2004
Julia A. Fratianne 41 Chief Financial Officer and Treasurer N/A
Kenneth H. Kisner 64 Treasurer Controller N/A
Alfred Cheung 49 Vice President, Operations N/A
- -------------------------- --------- -------------------------------------------------- ----------------
All Directors are elected at the Annual Meeting of the Shareholders to
serve for one year or until their successors are duly elected and qualified.
Officers serve at the pleasure of the Board of Directors.
The following is a brief summary of the business experience of each of our
Directors and executive officers:
Michael C. Tsao is our President and Chairman and has served in those
capacities since 1982. Mr. Tsao has over thirty years of experience in the
restaurant industry. He has served in an executive capacity for both full
service and fast food restaurants. Prior to 1982, he served as President and
General Manager of The Columbus Sheraton Plaza, a 400 room hotel. His experience
in the food processing industry includes finance, operations, marketing
analysis, purchasing, food preparation and facility management. Mr. Tsao managed
and operated the Kahiki Restaurant for more than twenty years. From 1995 to
2000, Mr. Tsao was a director of Cable Link, Inc. (nka A Novo Broadband ) a
major supplier of new and used cable tv equipment. Mr. Tsao is a graduate of
Pasadena City College (Business Administration).
Alice W. Tsao is our Vice-President, Secretary and a Director and has
served in those capacities since 1982. She has an Associates Degree from the Los
Angeles Business College, with a major in computer science. Mrs. Tsao has been
active in Kahiki's business with her husband Michael C. Tsao for the past twenty
years.
Dr. Winston Bash has been a member of our Board of Directors since 1993.
From 1983-2001 Dr. Bash held various positions with The Ohio State University
including being the Director of Food Industries Center (College of Agriculture)
and an instructor of several departments with most of the classes majoring in
Food Process and Technology. He received his Ph.D., M.S. and B.S., from The Ohio
State University. Dr. Bash's past experience prior to 1983 includes owning and
operating the Rockford Meat Processing Company in Rockford, Ohio. He also was
Vice-President and Production Manager of Friday Canning Corporation in New
Richmond, Wisconsin and the General Sales Manager of the FMC Corporation, in the
Eastern Operation Food Processing Machinery Division, located in Hoopeston,
Illinois. Dr. Bash is also the co- inventor on a patent issued in 1972 on Forced
Draft Evaporative Cooling for Hydroflex Sterilizers assigned to FMC Corporation.
Dr. Bash is also accredited for many publications on food processing procedures.
Alan L. Hoover became a Director in September, 1999. Mr. Hoover joined us
in May, 1999 as Senior Vice President, Sales and Marketing. Prior to joining us,
Mr. Hoover was Vice President, National Accounts for Tenneco Packaging/Pressware
, a manufacturer of packaging and labels, in Columbus, Ohio. Mr. Hoover received
his B.S. (Administrative Management) from Clemson University and his M.B.A.
(Financial Management) from Benedictine University.
Bob Binsky has been a member of our Board of Directors since 1995. He was a
Director and Executive Vice President of Cable Link Inc. (nka A Novo Broadband
Incorporated), a major supplier of new and used cable tv equipment, from 1994 to
August 2000. From August, 2000 to September, 2002, Mr. Binsky was a Director and
Manager of New Business Development of A Novo Broadband, Incorporated. Since
October 2002, Mr. Binsky has been a business consultant providing cost
containment, financial and marketing advice to various privately- held
companies.
Bradford M. Sprague became a member of our Board of Directors in 2004.
Since 2001, Mr. Sprague has been the Senior Vice President of First Capital
Financial Group (dba Prism Financial Solutions), a financial advisory firm
located in Columbus, Ohio. For ten years prior to forming Prism Financial
Solutions, Mr. Sprague was the manager of A.G. Edwards & Sons, Inc.'s Columbus,
Ohio public finance office. Mr. Sprague earned an undergraduate degree from
Miami University and a Masters of Public Administrative from the Ohio State
University.
Charles Dix became a member of our Board of Directors in 2004. Since 1989,
Mr. Dix has held various positions with Townsends, Inc., a Delaware based
family-owned poultry corporation, currently as the President and Chief Operating
Officer. Townsends, Inc, supplies chicken products to Kahiki at competitive
prices. Mr. Dix received his BSBA in Management degree from Shippensburg
University.
Allen J. Proctor became a member of our Board of Directors in 2004. Since
2001, Dr. Proctor has been the principal of Allen Proctor Consulting, LLC, a
Columbus Ohio based advisor to CEO's on strategic planning, financial reporting
and investment oversight. Prior to forming Allen Proctor Consulting, LLC, Dr.
Proctor was the Executive Director of the Ohio Police & Fire Pension Fund
(1997-2001) and Vice President of Finance of Harvard University (1994-1997). Dr.
Proctor's prior experience includes stints with the New York State Financial
Control Board; Columbia University Graduate School of Business; Office of
Management and Budget, City of New York; the Federal Reserve Bank of New York;
and the International Bank for Reconstruction and Development. Dr. Proctor is a
member of various non profit boards. He received his A.B. degree from Harvard
University and PhD in international trade and finance from the University of
Wisconsin-Madison.
R.L. Richards became a member of our Board of Directors in 2004. Since
1978, Mr. Richards has been Trustee of the R. David Thomas Trust, or its
affiliates, directing the private business activities of the Thomas Family. Mr.
Richards also serves on the boards of Acceptance Insurance Companies, Inc.,
Fifth Third Bank, Columbus, Ohio Division and Stanley Steemer International,
Inc. Mr. Richards received a B.A. Economics and Political Science from
Wittenberg University and J.D. from the Ohio State University - Michael Moritz
College of Law.
Julia A. Fratianne joined us in March, 2004 as our Chief Financial Officer.
and became Treasurer in August 2,004. From 1987 to 2003, Ms. Fratianne held
various finance positions with Metatec, Inc. (nka Inoveris, LLC), a Dublin, Ohio
manufacturer of CD-ROMs, most recently as Vice President, Finance. and Secretary
from May, 1997 to December, 2003. Mr. Fratianne received her B.S. (Accounting)
from Miami University and is a certified public accountant.
Kenneth H. Kisner is our Controller and was Treasurer anduntil August,
2004. He is a graduate of Griswold Business College, with a major in Accounting.
Mr. Kisner has been with us for the past fifteen years and prior to that he was
controller for the Columbus Sheraton for approximately five years. Mr. Kisner is
in charge of management support, payrolls, accounts receivable and payable, and
maintaining and updating of all our records.
Alfred Cheung joined us in 2003 as our Vice President, Operations. Mr.
Cheung has over 25 years of experience in the food industry in research and
development, quality management and food processing. From 1998 to 2003, Mr.
Cheung was a lecturer with the University of Hong Kong, Graduate School, Food
Industry Management and Marketing. Additionally, from 2001-2002, Mr. Cheung was
a consultant to Yum! Brands (the parent company of KFC, Pizza Hut and Taco
Bell), Hong Kong, and from 1998-2001, a consultant and director, Technical &
Engineering Services of Tung Chun Company, a food manufacturer located in Hong
Kong. Mr. Chung received his B.S. in food science degree from the University of
Minnesota and his masters degree in food science from the University of
Illinois.
The Board of Directors has one committee, therecently formed three
committees. The Compensation Committee, which is charged with setting the
compensation of our executive officers. The Compensation Committee consists of
Bob Binsky, Dr. Winston Bash and our counsel Andrew Federico. We are currently
conducting a search for additional Directors. We anticipate forming an audit
committee after the Board of Directors is increased, consists of Bradford
Sprague, Dr. Winston Bash and Charles Dix. The Audit committee, which will
select the firm of independent public accountants that audit our financial
statements, discuss the scope and results of the audit and discuss our financial
accounting and reporting principles and the adequacy of our financial controls
with the accountants and management, consists of Allen Proctor, Bradford Sprague
and R.L. Richards. The Strategy Committee, which will chart the direction of
Kahiki, consists of R.L. Richards, Allen Proctor, Bob Binsky, Charles Dix, and
Bradford Sprague.
All Directors are elected at the Annual Meeting of the Shareholder to serve
for one year or until their successors are duly elected and qualified. Officers
serve at the pleasure of the Board of Directors.
In January, 2004, we engaged Bob Binsky, a member of our Board of
Directors, as a consultant. Mr. Binsky's duties included advising Kahiki on cost
containment planning, assisting in raising capital and public relations. For his
services, Mr. Binsky was paid $25,000 and was issued options to purchase 80,000
common shares at $1.80 per share (the fair market value of the common shares on
the date of grant.)
Outside Directors of the Company are paid $5001,000 for each Board of
Director's meeting personally attended and $500 for each committee meeting. No
fees are paid to directors for participation in telephonic meetings of the board
or actions taken in writing.
Indemnification of Directors and Officers
Our Amended Articles of Incorporation provide that Kahiki shall indemnify
any Director or Officer (and may indemnify any other employee or agent of Kahiki
or of another entity) who was or is a party or is threatened to be made a party,
to any threatened, pending, or completed action, suit, or proceeding, whether
civil, criminal, administrative, or investigative, by reason of the fact that he
is or was a director, officer, employee, or agent of Kahiki or is or was serving
at the request of Kahiki as a director, officer, trustee, employee or agent of
another company, domestic or foreign, non-profit or for-profit, partnership
joint venture, trust or other enterprise, against expenses, including attorneys'
fees, judgments, fines, and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit, or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of Kahiki, and with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit, or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best interest
of Kahiki.
Determination of rights to indemnification shall be made by a majority vote
of a quorum of the directors, or by the court in which such action, suit or
proceeding was brought.
We may obtain and maintain liability insurance against liabilities of its
directors, officers, employees and agents, sufficient to cover its obligations
under these indemnification provisions, and may obtain such liability insurance
for liabilities of such persons not subject to any obligations of Kahiki under
these indemnification provisions.
The indemnification provided thereunder shall not be deemed exclusive of
any other rights to which those seeking indemnification may be entitled under
any agreement or vote of shareholders or disinterested directors. In addition,
if at any time the Ohio Revised Code ("Code") shall have been amended to
authorize further elimination or limitation of the liability of directors or
officers, then the liability of each director and officer of Kahiki shall be
eliminated or limited to the fullest extent permitted by sucyhsuch provisions,
as so amended, without further action by the shareholders, unless the provisions
of the Code require such action. The provision does not limit the right of
Kahiki or its shareholders to seek injunctive or other equitable relief not
involving payments in the nature of monetary damages.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, and controlling persons of Kahiki
pursuant to the Articles of Incorporation, or otherwise, Kahiki has been advised
that in the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of June 1,August 12, 2004, certain
information concerning stock ownership of all persons known by us to own
beneficially five percent (5%) or more of our outstanding common shares, and
each director or officer and all officers and directors as a group:
Name and Address of Number of Common Percent of
Beneficial Owner___ Shares Owned(1) Class
- ---------- -------- ------ ----- -----
Michael C. Tsao 1,735,600(2) 36.58%34.45%
3004 East 14th Ave.
1100 Morrison Road
Columbus, Ohio 4321943230
Alice W. Tsao 1,735,600(2) 36.58%34.45%
3004 East 14th Ave.
1100 Morrison Road
Columbus, Ohio 4321943230
Dr. Winston Bash 64,92266,922 1.371.33% 4093 Roselea Place
Columbus, Ohio 43214
Bob Binsky 498,392500,392 10.509.93%
20185 E. County Club Dr.
North Miami Beach, Fl 33180
Alan Hoover 296,666 6.255.89%
3004 E. 14th Ave.
1100 Morrison Road
Columbus, Ohio 4321943230
Bradford M. Sprague 5,400 .11%
1636 Sherbourne Lane
Powell, OH 43085
Charles Dix 2,000 .04%
30098 Southampton Bridge Road
Salisbury, Maryland 21804
Allen J. Proctor 4,000 .08%
471 Highgate Avenue
Worthington, Ohio 43085
R.L. Richards 3,000 .06%
5598 Preston Mill Way
Dublin, OH 43017
Julia A.. Fratianne 0 0%
1100 Morrison Road
Columbus, Ohio 43230
Alfred Cheung 0 0%
1100 Morrison Road
Columbus, Ohio 43230
Kenneth H. Kisner 38,250 .81%1.07%
3004 E. 14th Ave.
1100 Morrison Road
Columbus, Ohio 4321943230
Barron Partners LP
730 Fifth Ave., 9th Floor 1,176,469(3) 24.79%23.35%
New York, New York 10019
Officers and Directors as a Group 2,633,8802,654,280 55.5152.68%
(711 Persons)
- ----------------------------------------------- ------------------------------------- -----------------------
(1) Unless otherwise provided, the stated number of shares are owned
directly by the person named. Shares shown include the following
shares subject to options currently exercisable: Mr. Tsao, 12,000
shares; Ms. Tsao, 12,000 shares; Dr. Bash, 52,60054,600 shares;
Mr. Binsky, 198,600200,600 shares; Mr. Hoover, 270,666 shares;
Mr. Sprague, 3,000 shares; Mr. Dix, 2,000 shares; Mr. Richards,
3,000 shares; Mr. Proctor, 4,000 shares; and Mr. Kisner, 28,000
shares.
(2) Michael C. Tsao and Alice W. Tsao are husband and wife. The
listed shares include 700,600 shares owned directly by Alice W.
Tsao with respect to which Michael C. Tsao disclaims beneficial
ownership and 1,035,000 shares owned by Michael C. Tsao with
respect to which Alice W. Tsao disclaims beneficial ownership.
(3) Includes shares issuable upon the exercise of 294,117 $2.25
Warrants and 294,117 $3.00 Warrants.
DESCRIPTION OF SECURITIES
Common Shares
Our authorized capital consists of 10,000,000 common shares, without par
value. As of the date hereof, 3,588,848 common shares are outstanding. In
addition, 668,2341,472,700 common shares are reserved for issuance upon exercise
of the warrants and options.
Each holder of common shares is entitled to one vote for each share held on
any matter properly submitted to the shareholders for a vote but is not entitled
to vote cumulatively in the election of directors. The holders of common shares
do not have any preemptive, subscription or redemption rights. The holders of
common shares are entitled to receive dividends if, as and when declared by the
Board of Directors. See "DIVIDEND POLICY".
Warrants
We have authorized the issuance of 294,117324,117 $2.25 Warrants. Each
$2.25 Warrant is immediately exercisable and entitles the holder thereof to
purchase one common share at an exercise price of $2.25 per share until February
27, 2009. Additionally, we have authorized the issuance of 294,117 $3.00
Warrants. Each $3.00 Warrant is immediately exercisable and entitles the holder
thereof to purchase one common share at an exercise price of $3.00 per share
until February 27, 2009. The number of shares to be received upon exercise, and
the exercise price, are subject to adjustment in the event of a corporate
reorganization, restructuring, share dividend or other corporate action, to
maintain the rights of the warrant holders substantially as if such action had
not occurred
In addition, the exercise price of the warrants is subject to increase or
decrease based on Kahiki's earnings from recurring operations, before any
non-recurring income or loss, before income tax, depreciation and amortization
(EBITDA). The exercise price of unexercised $2.25 Warrants are subject to
adjustment based on Kahiki's nine month EBITDA for the period ended September
30, 2004, in a straight line from $2.75 at an EBITDA of $3.15 million or more to
$.25 at an EBITDA of $1.929 million or less. The exercise price of unexercised
$3.00 Warrants are subject to adjustment based on Kahiki's twelve month EBITDA
for the period ended March 31, 2005, in a straight line from $3.50 at an EBITDA
of $4.2 million or more to $.25 at an EBITDA of $2.572 million or less.
We have the right to require the exercise of the $2.25 Warrants at any time
until February 27, 2005 if the market price of our common shares equals or
exceeds $3.50 per share for 20 consecutive days. We have the right to require
the exercise of the $3.00 Warrants at any time until February 27, 2005 if the
market price of our common shares equals or exceeds $5.50 per share for 20
consecutive days. In both cases, the holder must either exercise or transfer the
warrant within 10 days (and such transferee exercise the warrant within 30 days)
or the warrant will expire. The common shares underlying the warrants are being
registered pursuant to this prospectus. We have reserved 588,234618,234 common
shares for issuance upon the exercise of the warrants.
Options
We have authorized the issuance of 80,000 Common Share Purchase Options,
each option entitling the holder thereof to purchase one common share at an
exercise price of $1.80 per share until January 24, 2006. The number of shares
to be received upon exercise, and the exercise price, are subject to adjustment
in the event of a corporate reorganization, restructuring, share dividend or
other corporate actions, to maintain the rights of the option holders
substantially as if such action had not occurred. We have reserved 80,000 common
shares for issuance upon the exercise of the options.
The common shares underlying the options are being registered pursuant
to this prospectus.
Certain Statutory Provisions
Section 1701.831 of the Ohio Revised Code generally provides that certain
"control share acquisitions" of shares of an "issuing public corporation" may be
made only with the prior authorization of the shareholders of the corporation,
unless the articles or code of regulations of the corporation otherwise provide.
In addition, Chapter 1704 of the Ohio Revised Code, known as the "merger
moratorium" chapter, generally prohibits a wide range of business combinations
and transactions between or involving an issuing public corporation that is a
reporting company under the Securities Exchange Act of 1934 and a person who,
alone or with others, beneficially owns 10% or more of the voting power of the
corporation (an "interested shareholder"). A corporation may provide in its
Articles of Incorporation that Chapter 1704 shall not apply to the corporation.
In addition, if the corporation's board of directors has approved the interested
shareholder's acquisition of his shares or has approved the specific business
combination or transaction in question, the general prohibitions of Chapter 1704
do not apply.
Our Amended Articles of Incorporation and Code of Regulations do not
contain any language excepting us from the provisions of Section 1701.831 or
Chapter 1704 of the Ohio Revised code, and therefore both are applicable to us.
LEGAL PROCEEDINGS
We are not currently engaged in any material legal proceedings.
LEGAL MATTERS
The validity of the common shares, warrants and options offered hereby will
be passed upon for us by Carlile Patchen & Murphy LLP, Columbus, Ohio. Andrew J.
Federico, of counsel to Carlile Patchen & Murphy LLP, holds options to purchase
52,600 of our common shares.
BUSINESS
This Registration Statement contains certain forward-looking statements
including without limitation, statements concerning our operations, economic
performance, financial condition and prospects, including in particular
statements relating to our growth strategy. The words "estimate," "project,"
"intent," "believe," "expect," "anticipate," and other similar expressions
generally identify forward-looking statements. Investors are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date of this statement. These forward-looking statements are based largely
on our current expectations and are subject to a number of risks and
uncertainties, including, without limitation, those risk factors identified
below and elsewhere in this statement. In addition, important factors to
consider in evaluating such forward- looking statements include changes in
external market factors, changes in our business or growth strategy or an
inability to execute our strategy due to changes in our industry or the economy
generally, the emergence of new or growing competitors and various competitive
factors. Our actual results could differ materially from the results anticipated
in these forward-looking statements as a result of the risk factors described
below and elsewhere in this statement. In light of these risks and
uncertainties, there can be no assurance that the matters referred to in the
forward-looking statements contained in this statement will in fact occur.
WeExcept as required by law, we disclaim any obligation to update or revise any
of these forward-looking statements.
Kahiki Foods, Inc. was incorporated under the laws of the State of Ohio in
June 1982 for the primary purpose of acquiring a full-service restaurant in
Columbus, Ohio known as the Kahiki Restaurant. The restaurant was founded in
1961 as a theme based Polynesian restaurant. The exterior roof resembled a
massive Polynesian war canoe and the interior ceilings reached 60 feet in
height. The restaurant's decor included authentic Polynesian artifacts, stone
tiki gods and an authentic outrigger canoe. The restaurant was recognized as one
of the Top 10, Five Star Diamond restaurants in the Asian-Pacific category. It
won the Millennium Award as one of the Top 100 restaurants of the 20th Century
and was named the top Polynesian restaurant in America in the 20th Century.
From 1982 to 1988, our sole business was operation of the Kahiki
Restaurant. We began a food processing operation in December of 1988 to
manufacture and process frozen and other finished Chinese/Polynesian foods for
wholesale distribution. Initially, production facilities consisted of part of
the basement and food preparation areas of the Kahiki Restaurant. No automation
was used in the production process, meaning all of the products distributed were
processed completely by hand. In 1995, we opened an approximately 7,000 square
foot automated food processing facility that received FDA approval.
In the summer of 2000, we sold the land that the restaurant was located on,
closing the restaurant on August 26, 2000. In September 2000, a medium sized
(22,000 square feet) USDA approved food processing facility was opened.
In December 2002, we acquired an existing approximately 119,000 square foot
building on approximately 14.1 acres of land in Gahanna, Ohio a suburb of
Columbus. We are currently renovating and equipping this facility to meet FDA
regulations for the manufacture of food products. Upon completion, the facility
will be used to prepare, freeze, package, store and ship our products, and house
our administrative offices.
We manufacture and sell oriental foods packaged in bulk and frozen
containers. We have a wide variety of offerings which include: Egg Rolls,
Appetizers, Fried Rice, Sauces, Stir-fry Meal Kits, Single Serve Entrees, and
Family Meal Entrees. All of the foregoing products are marketed at the retail
and bulk institutional levels.
In March 2001, Kahiki was named "Best Asian Handheld Foods" by the American
Tasting Institute during their "Awards of the Americas" ceremony at Carnegie
Hall. Kahiki was awarded their prestigious "Best of Show" and "Gold Medal Taste"
awards for several entrees, including egg roll and potsticker frozen food
products.
Our products are produced and distributed to three broad market segments:
foodservice, retail and warehouse clubs. Product mix and packaging is directed
to each of those segments.
The Foodservice segment entails the distribution of bulk institutional
products to wholesale distributors, academic and governmental institutions and
restaurants. Products in this category may also be redistributed by wholesale
distributors to their own retail accounts. Our major customers in this segment
include Gordon Food Service, Best Express, Abbott Foods/Sysco, Magic Wok,
Orlando Foodservice, and U.S. Foodservice. The foodservice segment represented
approximately 9.27% of our revenues in fiscal year 2003 and approximately 9.25%
of our revenues in fiscal year 2004.
The Retail segment entails the distribution of both bulk institutional
products and individually packaged products to grocery store chains for sale to
consumers. These products are generally sold in the delicatessen or frozen food
sections of the grocery store. We may call directly on the grocery store chain
or utilize a food broker. Our major customers in this segment include The Kroger
Company, Albertson's, C&S Wholesale, H.E. Butt, Publix, Meijer, Smart & Final,
SuperValu, Wakefern and Wal-Mart Supercenters. The retail segment represented
approximately 51.28% of our revenues in fiscal year 2003 and approximately
70.73% of our revenues in fiscal year 2004.
The Warehouse Clubs segment entails the distribution of bulk retail
products to warehouse clubs for sale to consumers and small businesses. These
products are generally in larger servings and are sold in the delicatessen or
frozen food sections of the store. We may call directly on the chain or utilize
a food broker. Our major customers in this segment included Sam's Club and
Costco. The warehouse club segment represented approximately 28.90% of our
revenues in fiscal year 2003 and approximately 31.28% of our revenues in fiscal
year 2004.
Our ten largest accounts represented 64.4% of our sales in the year ended
March 31, 2004 and 67.9% of our sales in the year ended March 31, 2003. For the
year ended March 31, 2004, Costco represented approximately 26.75%, Meijer's
represented approximately 7.12% and Wal-Mart represented approximately 14.5% of
our total sales. For the year ended March 31, 2003, Costco represented
approximately 11%, Wal- Mart represented approximately 11.3% and Sam's Club
represented approximately 20% of our total sales.
Products
Our products are segmented into three main categories. They are as follows:
CONVENIENCE MEALS. Includes 11 oz. single serve entrees, 11 oz. "Deli
Entrees", 12 oz. "Bowl & Roll Combos", 24oz "Meals for Two" entrees, 32 oz.
"Twin Packs" 40 oz "Asian In Minutes" kits, and 48 oz. "Family Meals."
HAND-HELD PRODUCTS. Includes egg rolls, potstickers, and other
appetizers.
FOODSERVICE PRODUCTS. Includes meal components such as fried rice,
marinated meats, tempura meats, and Pacific Rim sauces.
Convenience meals currently account for 56.64% of sales, hand-held products
34.11%, and foodservice products 9.25%.
Our retail, deli and warehouse club product lines include:
ENTREES: 11 oz. single serve, 11 oz. "Deli Entrees," 12oz. Bowl & Roll
combos, 24 oz. "Meals for Two" entrees, 32 oz. "Twin Packs" 40 oz. "Asian
In Minutes" kits, and 48 oz. "Family Meals."
o EGG ROLLS: 3 oz. Egg rolls, 1 oz. Minis, and individually wrapped
3 oz. Egg rolls using a suscepter sleeve.
o APPETIZERS: POTSTICKERS, Tempura Chicken, and Tiki Bites.
PLATTERS: 28.5 oz. "Aloha Party Platters" and 37.5 oz. "PuPu Platter."
Our foodservice product lines include:
EGG ROLLS: Bulk packed 3 oz. Egg rolls, 1 oz. Minis and individually
wrapped 3 oz. Egg rolls "To-Go!" using a suscepter sleeve.
APPETIZERS: Bulk packed potstickers, Tempura Chicken and Tiki Bites
plus the "Appetizers To- Go Line" [for vending and C-Stores].
STIR-FRY MEAL KITS: 3-component system that can feed 9-12 people.
PACIFIC RIM SAUCES: Eight varieties of institutional size stir-fry
sauces packed frozen and five shelf stable bottled sauces.
MEATS: Bulk packed meat components (cooked, sliced and marinated, or
tempura style).
RICES: Premium fried rice and steamed white rice.
Key Product Attributes
CONVENIENCE. Ease of use through the microwave oven is a significant
factor for consumers and institutional foodservice operators. Our product
line requires simple preparation and heating steps. Virtually every product
is ready-to-serve within 20 minutes, providing quick and easy meal
solutions for our customers.
AUTHENTIC TASTE AND STRONG FLAVOR PROFILES: We employ recipes and
sauces used in the award-winning Kahiki restaurant to enhance the
authenticity of our products. This allows us to achieve the best aroma,
appearance, and flavor profile for our products.
HEALTH: Health conscious consumers generally recognize Pan Asian foods
as offering health benefits. Kahiki does not use preservatives such as MSG
and we only use the highest quality ingredients.
PACKAGING: Our products are enhanced through the use of modern
packaging innovations, techniques, and graphics designs. We also utilize
packaging that is environmentally responsible. Kahiki products incorporate
bold, colorful graphics that command shelf attention.
Pricing
Our pricing strategy focuses on avoiding price competition; this is
accomplished in three ways. First, since the products are positioned in the
gourmet and specialty food category, the shopper is conditioned not to make
direct price comparisons with ordinary Asian foods. Second, by providing
shoppers with a superior quality product, not only is the specialty status
reinforced but consumers expect to pay a premium price if they are convinced
that they are receiving far greater value than is available in the rest of the
market. Finally, we focused our efforts on non-price competition, such as
packaging and promotional activities, as a means of boosting sales revenue. Even
though retail outlets are free to choose their own policies, this non-price
competition is essential in encouraging them not to engage in price competition.
This pricing strategy also provides greater long term flexibility through
the growth curve of our products. As changes occur in customer demand, the
market supply pricing policies will require revision. There is usually less
customer resistance in starting with a premium price and revising it downward
than by starting with a low price and attempting to increase it.
Distribution.
We ship directly to customers or to their distribution facilities. Some
retail accounts employ a distributor because they do not own an in-house
distribution warehouse. We will ship to their chosen distributor in this case.
On the foodservice side of our business, we ship to various distributors who
stock our products and re-sell them to end-users such as small restaurant
operators, casinos, vending machine operators, etc.
Marketing.
We primarily advertise in trade journals such as Frozen Food Age, Deli
Business, and Refrigerated & Frozen Food Retailer. These advertisements are
generally a full page, in color, and focus on creating awareness of our products
to the buyers and category managers at retail supermarkets. We market our
products to various channels such as retain supermarkets (frozen food section,
meat department, and deli grab & go section), dollar stores, convenience stores,
membership warehouse clubs, and foodservice operators. We have a direct sales
force of four sales managers with specific areas of responsibility. They direct
the efforts of approximately 40 broker groups across the United States and
Mexico. Our sales force will meet with buyers and category managers in an effort
to sell our products to them.
Regulations
Our food processing facilities are subject to various federal, state and
local regulations and inspection, and to extensive regulations and inspections,
regarding sanitation, quality, packaging and labeling. Our manufacturing
facility is subject to regulation and inspection by the United States Department
of Agriculture, the United States Food and Drug Administration, and the State of
Ohio Departments of Agriculture and Health. A finding of a failure to comply
with one or more regulatory requirements can result in the imposition of
sanctions including the closing of all or a portion of our facility for a period
of time. In addition to licensing requirements, a regulatory agency could
declare a food product hazardous or limit its use or require a recall. We
believe that we are in substantial compliance with all material governmental
regulations regarding our products and that we have all government permits,
licenses, qualifications and approvals required for our operations.
Competition
We operate in a competitive environment and many of our competitors have
greater financial, distribution and marketing resources. The oriental frozen
food business is currently dominated by a select number of competitors of
considerable size and financial resources, including Tyson Foods, Nestle,
ConAgra Chung's, Schwan's Pillsbury, Hormel, Windsor Foods, and Kikkoman. Our
market share in the retail entree business is less than 1%. In the frozen egg
roll category, our market share is approximately 7%. All of these competitors
have strong brand name recognition in the markets they serve. We believe that
our quality products, pricing and niche marketing strategies will permit it to
maintain a strong competitive position in its market.
Suppliers
Perishable food items, including meat, sea food, dairy and produce, are
purchased locally or regionally by us. We have not experienced any material
shortages of food or other products necessary to our operations and do not
anticipate such shortages in the foreseeable future. We are not dependent upon
any particular supplier or suppliers as a source for ingredients used in our
products or for other items used in our operations.
Employees
As of March 31, 2004, we had approximately 121 full-time employees. Of
these, 101 were involved in food processing operations and 20 in management and
administrative capacities. We consider our employee relations to be good, and to
date we have not experienced a work stoppage due to a labor dispute. None of our
employees is represented by a labor union.
Trademarks
We currently have four active registered trademarks including our logo
"KAHIKI" in three different classifications and the phrase "ASIAN IN MINUTES"
with respect to prepared foods. We also have a pending active registrations for
"BOWL & ROLL" and "IT'S ASIAN TONIGHT", both of which we expect to have
finalized in the very near future.
Research and Development
We maintain a continuing research and development program to improve
existing products and to develop new products. At the present time, 2 of our
employees are directly involved in research and development. During fiscal years
2002, 2003, and 2004, we estimate that we spent $101,000, $82,000 and
$34,561,respectively, on research and development activities.
PROPERTY
We currently lease an approximately 22,000 square foot facility at 3004
East 14th Avenue, Columbus, Ohio. The lease requires monthly payments of $6,400
and runs through January 2005. We have the option to renew the lease for two
additional three year terms. The structure currently meets FDA regulations for
the manufacture of food products. The building houses equipment for preparing,
freezing, packaging and storing our products , and our administrative offices.
The current facilities are adequate for our present needs but will not be
sufficient for our long term plans. Upon moving to. As we recently moved into
the Gahanna, Ohio facility, described below, we will attempt to sub-lease
thethis Columbus, Ohio facility. There can be no assurance that we will be
successful in attracting a tenant for the remaining term of the lease.
In December 2002, we acquired an existing approximately 119,000 square foot
building on approximately 14.1 acres of land in Gahanna, Ohio at a cost of $2.25
million. We are currently renovatingrecently renovated and equippingequipped
this facility to meet FDA regulations for the manufacture of food products. We
expect to have spent approximately $5.36 million on this renovation and the
purchase of equipment when the facility opens. The State of Ohio holds a first
mortgage and security interest in the land and equipment of the facility.
Upon completion, theThe Gahanna facility will be used to prepare, freeze,
package, store and ship our products, and house our administrative offices. We
expect to commence operations in the new facility in June, 2004. Upon
completion, theThe facility is expected to meet our needs for the foreseeable
future. However,Since we moved into the Gahanna, Ohio facility in August, 2004,
to avoid any production lapses, we do intend to occupy both the Columbus and the
Gahanna facility until we are certain that the Gahanna facility is fully
functional.
Management believes that our properties are adequately covered by insurance.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Kahiki was founded in 1961 as a theme based Polynesian restaurant. It was
recognized as one of the top restaurants in Asian-Pacific category. In 1995, we
built a small (7,000 sq ft) USDA approved food- manufacturing facility on the
restaurant site and began to market frozen Polynesian/Asian foods for wholesale
distribution under the Kahiki(R) brand for retail and foodservice markets.
In 2000, the Kahiki was named "The Coolest Bar in the World" by Food & Wine
Magazine and "The Best Polynesian Restaurant in the World" by Restaurant &
Hospitality Rating Bureau. In June 2000, we sold the land that the restaurant
was located on to Walgreen's for $2,000,000, and we closed the restaurant on
August 26, 2000. Since September 2000, we have concentrated on manufacturing of
frozen foods and a medium sized (22,000 square foot) USDA approved facility was
opened.
For the year ended March 31, 2001, our highlights were disposing of assets
like equipment, land, and building where the restaurant and plant were located,
ceased our restaurant operation, declared stock dividends of 3 for 1 to all
shareholders, opened a new processing plant, established a new corporate office,
assembled a strong sales team, invested over $1,479,728 into leasehold
improvements, processing equipment, and research and development.
In December 2002, we arranged a state economic development bond with the
State of Ohio for 4.18 million dollars. The proceeds were used to purchase a
large production facility in the form of a 119,000 square foot food processing
plant for 2.25 million dollars. The balance of the bond was used for leasehold
improvements and equipment which sum had to be supplemented by additional funds
from us in order to continue the project to completion. We have, or will have
spent an additional $1.6 million on leasehold and expenses and expect to be
openopened the facility for operation in JuneAugust of this year. We believe
that this facility will meet our needs for the foreseeable future without having
to expand the facility. If necessary, the property has an additional 17 acres
for possible sale or expansion. The lease on our present 22,000 square foot
facility will terminate in January 2005. We expect we will run somewhat parallel
in operations until we are confident that all systems in the new facility are
operating properly.
In May of 2003, we delivered a two-for-one split for all shareholders.
In February of 2004, we arranged the sale of 588,235 units ($1,000,000),
consisting of 588,235 of our common shares and 588,234 of our warrants, to
Barron Partners LP of New York and 14,705 ($25,000) to Bill Velmer of Salt Lake
City, Utah at $1.70 per share.
The transaction also included 294,117 Warrants at exercise prices from
$2.25 to $2.75 depending on Kahiki EBITDA from January 1, 2004 to September 30,
2004 and for 294,117 Warrants at exercise prices from $3.25 to $3.75 depending
on our EBITDA from January 1, 2004 to December 31, 2004. In certain
circumstances, the warrants may be exchanged at $.25 if our EBITDA falls below
certain criteria. The expenses associated with this offering included $70,000 to
Laconia Capital and 30,000 Warrants to Laconia Capital for services as our
placement agent. We are required to keep the common shares and warrants
registered for a period of two years. We may require Barron Partners to exercise
the warrants or lose them if the market price of our common shares exceeds
$3.50, with regard to the $2.25 Warrants, and $5.50, with regard to the $3.00
warrants, for 20 consecutive days.
In March of 2004, we sold a small warehouse for $110,000 and realized a
gain of $75,271 on the sale.
Currently, we have three marketing segments throughout the country; retail,
foodservices, and warehouse clubs. Key customers in retail supermarket segments
are: Wal-Mart Supercenters, The Kroger Co., Albertson's , C & S Wholesale, H.E.
Butt, Publix, Meijer, Smart & Final, SuperValu, and Wakefern; in foodservice
segments are: Gordon Food Service, Best Express, Abbott Foods/Sysco, Magic Wok,
Orlando Food Service, and U.S. Food Service; and in warehouse clubs segments
are: Sam's Club and Costco.
Our current activities include:
Product research and development
Development of markets and distribution
Market search of strategic alliances
Development of corporate infrastructure
Production of high quality Asian products under USDA guidelines
DISCUSSION OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Revenues are recognized when the goods are delivered.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from these
estimates.
Cash
For purposes of the statements of cash flows, cash includes cash on hand
and demand deposits held by banks.
We maintain our cash in three accounts with one financial institution. The
carrying value is a reasonable estimate of the fair value.
Marketable Trading Securities
Management determines the appropriate classification of marketable
securities at the time they are acquired and evaluates the appropriateness of
such classification at each balance sheet date. Our marketable securities are
classified as trading. Trading securities are held for resale in anticipation of
short-term fluctuations in market prices and are held at market value. Realized
and unrealized gains and losses on the marketable securities are included in
income.
Marketable securities consist of an equity mutual fund with a cost basis of
$555,032 as of March 31, 2004. The unrealized loss as of March 31, 2004 was
$19,553.
Accounts Receivable - Trade
Accounts receivable are uncollateralized customer obligations due under
normal trade terms requiring payment within 15 days of the invoice date.
Accounts receivable are stated at the amount billed to the customer. Customer
account balances 60 days past the invoice date are considered delinquent.
Payments received for accounts receivable are allocated to the specific invoices
identified on the customer remittance advice or, if unspecified, are applied to
the earliest unpaid invoices. We do not charge interest on past due account
balances.
The carrying amount of accounts receivable is reduced when necessary, by a
valuation allowance that reflects management's best estimate of the amount that
will not be collected. Management individually reviews all customer account
balances on a monthly basis, and based on an assessment of current credit
worthiness, estimates the portion, if any, of the balance that will not be
collected. After management's review of all accounts receivable balances,
management believes all amounts are collectible and a valuation allowance is not
necessary.
Inventories
Inventories consist of perishable food products and paper supplies. The
inventories are valued at the lower of cost (first-in, first-out method) or
market. Impairment and changes in market value are evaluated on a per item
basis.
If the cost of the inventory exceeds the market value evaluation based on
total inventory, provisions are made for the difference between the cost and the
market value. Provision for potential obsolete or slow moving inventory is made
based on analysis of inventory levels, age of inventory and future sales
forecasts.
Property and Equipment
Property and equipment is carried at cost, less accumulated depreciation
computed using the straight-line method. Major renewals and betterments are
capitalized and depreciated; maintenance and repairs that do not extend the life
of the respective assets are charged to expense as incurred. Upon disposal of
assets, the cost and related accumulated depreciation are removed from the
accounts and any gain or loss is included in income. Property and equipment are
depreciated over their estimated useful lives of 5 to 39 years.
Earnings Per Share
Earnings per share are computed on the weighted average number of common
shares outstanding including any dilutive options.
Long-Term Debt
Long-term debt is subject to certain covenants and restrictions including
maintenance of certain financial requirements. Rates currently available from
the bank for debt with similar terms and remaining maturities are used to
estimate the fair value of the debt. Our carrying value approximates the fair
value of the debt.
Stock Options
We apply Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for our stock option plan for employees ,
consultants and the outside directors. The vesting period of the options granted
range from immediately exercisable to four years. Accordingly, no compensation
cost has been recognized in the accompanying financial statements for options
issued under the plan since the exercise price of the options was equal to the
market value of the shares at the date of grant.
Lease Commitments
We lease a facility used for our wholesaling operations under an agreement
that is accounted for as an operating lease. This lease requires monthly
payments of $6,400 through January 2005. We have the option to renew for two
additional three-year terms.
We also lease manufacturing equipment under operating lease agreements.
These leases expire at various dates through 2008 and require total monthly
payments of $18,621.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 30, 2004
The following table contains certain amounts, expressed as a percentage of
net revenues, reflected in our statements of income for the quarters ended June
30, 2004 and 2003:
QUARTERS ENDED JUNE 30
(in %)
2004 2003
Revenues 100 100
Cost of Revenues 71 72
Gross profit 29 28
Operating Expenses 23 35
Income from operations 6 (7)
Interest expense (1) (2)
Interest and dividend income 0 2
Net Gain (loss) on marketable securities 0 1
Income from continuing operations before
Income tax 5 (6)
Income tax 2 (2)
Net Income 3 (4)
Revenues
Revenues for the quarter ended June 30, 2004 were $5,215,735 compared to
$1,801,301 revenues for the comparable quarter ended June 30, 2003. The increase
is primarily due to food manufacturing sales efforts with the increase of new
accounts, both retail and club stores, and due to the introduction of new items.
Cost of Goods
The gross margin on sales of products was $1,535,780 for the quarter ended
June 30, 2004 compared to $505,883 for the quarter ending June 30, 2003. Gross
margins vary widely depending on factors such as the product commodity prices
and labor costs for the item produced. The mass production of product line to
club markets resulted in high efficiency, the higher volume of business also
resulted in greater efficiencies, offset partially by higher raw materials
prices in the quarter ended June 30, 2004.
Cost of sales include cost of food, freight, packaging, labor, and other
expenses related to the manufacturing and distribution of the products produced.
Depreciation related to manufacturing and distribution is expensed to cost of
goods sold, and depreciation and amortization related to sales, general, and
administration is expensed as an operating expense.
Operating Expenses
Operating expenses for the quarter ended June 30, 2004 were $1,224,242
compared to $638,472 for the comparable period in 2003, which is an increase of
$585,770 or 92%. Most of the increase was attributable to marketing and
advertising expenses, which increased to $780,183 for the quarter ended June 30,
2004, from $327,154 for the quarter ended June 30, 2003.
Research and Development
Expenditures on research and development were $14,026 for the quarter
ended June 30, 2004 compared
to $8,657 for the quarter ended June 30, 2003, an increase of 62%. The increase
was due to increased development activities.
Income
Our net income for the quarter ended June 30, 2004 was $145,007, as
compared to a loss of $70,668 for the quarter ended June 30, 2003.
RESULTS OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 2004
The following table contains certain amounts, expressed as a percentage of
net revenues, reflected in our statements of income for the years ended March
31, 2004 and 2003.:
YEARS ENDED MARCH 31 (in %)
2004 2003
Revenues....................................... 100 100
Cost of revenues................................ 69 72
----- --------
Gross profit.................................... 31 28
Operating Expenses........................... 23 29
----- ------
Income from operations..................... 8 (1)
Interest expense................................ (1) (1)
Interest and dividend income................. 0 1
Net Gain (less) on marketable securities...... 0 0
----- -----
Income from continuing operations before
Income tax..................................... 7 (2)
Income tax...................................... 2 (1)
------ ------
Net income 5 (1)
==== ====
Revenues
Revenues for the year ended March 31, 2004 were $ 14,989,84014,761,923
compared to $9,204,6849,128,858 revenues for the comparable year ended March 31,
2003. The increase is primarily due to food manufacturing sales efforts with the
increase of new accounts, both retail and club stores, and due to the
introduction of new items.
Cost of Goods
The gross margin on sales of products was $ 4,647,8204,487,049 for the year
ended March 31, 2004 compared to $2,570,6462,494,820 for the year ending March
31, 2003. Gross margins vary widely depending on factors such as the product
commodity prices and labor costs for the item produced. The mass production of
product line to club markets resulted in high efficiency, the higher volume of
business also we experienced in the year ended March 31, 2004, resulted in
greater efficiencies, consequently a higher gross margin was achieved in 2004.
We expect that the gross margins of the last twelve months reflect fairly our
present volume and could improve as revenues continue to grow.
Cost of sales include cost of food, freight, packaging, labor, and other
expenses related to the manufacturing and distribution of the products produced.
Depreciation related to manufacturing and distribution is expensed to cost of
goods sold, and depreciation and amortization related to sales, general, and
administration is expensed as an operating expense.
Operating Expenses
Operating expenses for the year ended March 31, 2004 were $
3,481,1493,320,378 compared to $2,648,6162,572,790 for the comparable period in
2003,which is an increase of $832,533747,588 or 3129%. Most of the increase was
attributable to marketing and advertising expenses, which increased to
$2,134,0001,904,049 in 2004 from $1,486,0001,409,725 in 2004,2003, or 4435%.
Research and Development
Expenditures of $34,561 for the year ended March 31, 2004 compared to
$82,000 for the year ended March 31, 2003, a decrease of 58%. The decrease was
due to our concentration on the construction of our new facility and the
introduction of fewer new products during the year. We expect research and
development activities to increase once we are in the new facility.
Net Income
Our net income for the year ended March 31, 2004 was $698,113, as compared
to a loss of $85,923 for the year ended March 31, 2003.
Conclusions
Our management believes that the year ended March 31, 2004 show our trend
is up and we expect this to continue with our recent introduction of new items;
and the improved results from our expanded marketing team.
YEARS ENDED MARCH 31, 2003
The following table contains certain amounts, expressed as a percentage of
net revenues, reflected in our statements of income for the years ended March
31, 2003 and 2002:
YEARS ENDED MARCH 31 (in %)
2003 2002
------------- ------------
Revenues...................... 100 100
Cost of revenues.............. 72 68
-------------- ------------
Gross profit.................. 28 32
Operating expenses............ 29 30
------------- -----------
Income (loss) from operations. (1) 2
Interest expense.............. (1) (1)
Other Income.................. 0 0
-------------- ------------
Income before income tax...... (2) (1)
Income tax.................... 1 0
-------------- ------------
Net income (1) 1
Revenues
Revenues for the year ended March 31, 2003 were $ 9,204,684,9,128,858, a
23% decrease from the previous year when revenues totaled $9,374,914. We stopped
selling to one of our major club stores, but generated enough new business among
many smaller accounts to keep our sales almost level.
Cost of Goods
The gross margin on sales of products was 28% for the year ended March 31,
2003 compared to 32% for the same period in 2002. Gross margins on our various
products vary widely and are affected by both commodity prices and labor supply
for the period. Gross margins decreased for the year ended March 31, 2003 due to
lower sales and accelerated depreciation expense on assets to be abandoned.
Operating Expenses
Operating expenses for the year ended March 31, 2003 were $
2,679,3622,572,790 compared to $2,834,939 for the same period ended March 31,
2002 and decreased by 59% due to product concentration.
Research and Development
Expenditures for research and development of $82,000 for the year ended
March 31, 2003 were down 19% compared to 101,000 for the year ended March 31,
2002. The decrease was due to the introduction of fewer new products during the
year.
Net Income
Our net loss for the year ended March 31, 2003 was $(85,923) compared to
net income of $77,541 for the year ended March 31, 2002. Lower sales and
accelerated depreciation on assets to be abandoned contributed to the net loss
for the year ended March 31, 2003.
LIQUIDITY AND CAPITAL RESOURCE
Bank Financing Matters
We had two lines of credit from various banks totaling $1,200,000. As of
March 31, 2004, $1,000,000 was outstanding, compared to $1,037,396 at March 31,
2003. A $100,000 line of credit was paid off in March, 2004. The $1,100,000 line
of credit accrues interest at a rate equal to the prime rate of the bank, and
was scheduled to matured on May 19, 2004. On May 18, 2004 the $1,100,000 line of
credit was extended for three months. On June 2, 2004, the $1,100,000 line of
credit was paid off.
On June 1, 2004, we entered into a two year agreement with a bank for a
revolving loan facility. The borrowing base of the revolving loan facility is
limited to the lesser of (i) $2,500,000 or (ii) the sum of (A) 85% of eligible
accounts receivable, plus (B) 50% of eligible inventory. The line will be used
to pay off the existing $1,100,000 line, and provide working capital. The
revolving loan matures on May 31, 2006.
Our receivables as of March 31, 2004 were $1,964,941 compared to $607,248
for the period ended March 31, 2003. Our payables for March 31, 2004 were
$1,905,171 compared to $785,198 for the period ended March 31, 2003. The
increases were the result of increased sales.increase in accounts receivable was
attributed to higher year end sales of $2,392,000 for the month ended March 31,
2004 compared to $612,000 for the month ended March 31, 2003. Accounts payable
increased due to higher year end sales, as well as increased accounts payable
related to the construction of the new facility.
In December 2002, we arranged a state economic development bond with the
State of Ohio for 4.18 million dollars. The bond matures December 1, 2022, and
with interest rates and maturity dates as follows: $1,100,000 matures December
1, 2010 at an interest rate of 4.55%; $1,040,000 matures December 1, 2015, at an
interest rate of 5.25%; and $2,040,000 matures December 1, 2022, at an interest
rate of 5.85%. The proceeds were used to purchase a large production facility in
the form of a 117,000 square foot food processing plant for 2.25 million
dollars. The balance of the bond was used for building improvements and
equipment, which sum had to be supplemented by additional funds in order to
continue the project to completion.
During the fiscal year ended March 31, 2004, we spent $3,108,168 in
building improvements and equipment and anticipate an additional $1,100,000 to
complete the new plant for occupancy. We anticipate funding the additional
$1,000,000 through cash on hand, and cash flow generated from operations. During
the year ended March 31, 2004, $1,815,000 was drawn on the bond, completing the
$4.18 million financing.
During the year ended March 31, 2004, we sold a marketable security,
providing $536,000 in cash.
We have raised approximately $862,000 in equity in February of 2004.
FORWARD LOOKING STATEMENTS
This prospectus contains forward-looking statements. Such statements are
not based on historical facts and are based on current expectations, including,
but not limited to statements regarding our plan for future development and the
operation of our business. Words such as "anticipates," "expects," "intends,"
"plans," "believes," "seeks," "estimates," and similar expressions identify such
forward-looking statements. These statements are not guarantees of future
performance and are subject to certain risks and uncertainties that could cause
actual results to differ materially from those expressed or forecasted. Among
the factors that could cause actual results to differ materially are the
following: a lack of sufficient capital to finance our business plan on
commercially acceptable terms; changes in labor, equipment and capital costs;
our inability to attract strategic partners; general business and economic
conditions; and the other risk factors described from time to time in our
reports filed with the Securities and Exchange Commission. You should not rely
on these forward-looking statements, which reflect only Kahiki Food's opinion as
of the date of this prospectus. We do not assume any obligation to revise
forward-looking statements.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On August 9, 2004, our Board of Directors authorized the issuance of
options to purchase 2000 common shares each at an exercise price of $3.40 per
share (the then current market price) to Dr. Winston Bash, Bob Binsky, and
Charles Dix (each a director) 3,000 common shares each at an exercise price of
$3.40 per share to Bradford Sprague and R.L. Richards (each a director and the
chairman of the Compensation Committee and Strategy Committee, respectively);
and 4000 common shares at an exercise price of $3.40 per share to Allen Proctor
(a director and chairman of the Audit Committee). Each option is exercisable
through August 8, 2009.
On January 24, 2004, our Board of Directors authorized the issuance of
options to purchase 80,000 common shares at an exercise price of $1.80 per share
(the then-current market price) to Bob Binsky (a Director) for consulting
services rendered to us. Mr. Binsky is consulting with Kahiki on cost
containment, financing options, financial matters and public relations. Each
option is exercisable through January 23, 2006.
On August 18, 2003, Alice Tsao, an officer and Director, loaned Kahiki
$150,000 pursuant to a Subordinated Promissory Note bearing interest at the
prime rate announced from time to time by Bank One, N.A., plus two percent. The
promissory note matures on February 1, 2005, and is subordinated to all
indebtedness of Kahiki to financial institutions.
On April 18, 2003, our Board of Directors authorized the issuance of
options to purchase 3000 common shares each at an exercise price of $1.30 per
share (the then-current market price) to Dr. Winston Bash and Bob Binsky (each a
Director) and Andrew J. Federico (our counsel). Each option is exercisable
through April 18, 2008.
On April 18, 2003, our Board of Directors declared a share dividend of one
share for every share outstanding to shareholders of record as of May 1, 2003.
On August 12, 2002, our Board of Directors authorized the issuance of
options to purchase 3000 common shares each at an exercise price of $1.25 per
share (the then-current market price) to Dr. Winston Bash and Bob Binsky (each a
Director) and Andrew J. Federico (our counsel). Each option is exercisable
through August 12, 2007.
Options granted to Messrs. Binsky, Bash and Federico in 2003 and 2002 (as
noted above) were in recognition of their service to the Board of Directors and
on the Board's compensation committee. Each of the options were issued at market
price, and no compensation was recorded.
MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDERSSTOCKHOLDER MATTERS
Our common shares are currently traded on the OTC Bulletin Board. The range
of high and low bids for our common shares for each quarter of the last two
fiscal years is as follows:
Bid(1)(2)
- -------------------------- ------ -------------
Quarter Ending High Low
- --------------
March 31,2004 $3.60 $0.55
December 31,2003 $1.01 $0.40
September 30, 2003 $0.60 $0.40
June 30, 2003 $1.00 $0.50
March 31, 2003 $0.65 $0.63
December 31, 2002 $0.68 $0.63
September 30, 2002 $0.83 $0.63
June 30, 2002 $1.25 $0.80
March 31, 2002 $1.25 $0.63
December 31, 2001 $1.07 $0.63
September 30, 2001 $1.00 $0.57
June 30, 2001 $0.56 $0.50
March 31, 2001 $1.50 $0.50
- -------------------------- ------ -------------
(1) As adjusted for a share dividend issued on May 1, 2003.
(2) Source, Reuters.data
The high and low bids listed above reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not represent actual
transactions.
We currently have 3,588,848 common shares, 618,234 warrants and 854,465
options issued and outstanding. The common shares sold in this offering will be
fully tradeable without restrictions or further registration under the
Securities Act.
At present, approximately 2,206,567 of our 3,588,848 common shares issued
and outstanding are "restricted" securities as that term is defined in Rule 144
under the Securities Act, and substantially all of these shares have been held
for over one year. In general, under Rule 144, as currently in effect, subject
to the satisfaction of certain other conditions, a person, including an
affiliate, who has owned restricted common shares beneficially for at least one
year is entitled to sell, within any three month period, a number of shares that
does not exceed the greater of 1% of the total number of outstanding shares of
the same class or the average weekly trading volume during the four calendar
months preceding the sale. A person who has not been an affiliate of ours for at
least three months immediately preceding the sale and who has beneficially owned
common shares for at least two years is entitled to sell such shares under Rule
144 without regard to any of the limitations described above.
Prior to this offering, there has been only a limited market for our common
shares. The effect, if any, of public sales of our restricted common shares or
the availability of such shares for future sale at prevailing market prices
cannot be predicted. Nevertheless, the possibility that substantial amounts of
restricted shares may be resold in the public market may adversely affect
prevailing market prices for our common shares and could impair our ability to
raise capital through the sale of equity securities.
We have agreed with Barron Partners LP to keep the registration statement
of which this prospectus is a part effective until the shares being offered
hereby may be sold without registration or restriction pursuant to Rule 144(k),
or if earlier, until the distribution contemplated in this prospectus has been
completed. We have also agreed to indemnify, in certain circumstances, Barron
Partners LP, any underwriters that participate in the distribution of the shares
and certain control and other persons related to the foregoing persons against
certain liabilities, including liabilities under the Securities Act. Barron
Partners has agreed to indemnify us, as well as certain related persons, in
certain circumstances against certain liabilities, including liabilities under
the Securities Act. We will pay all the fees and expenses incident to the
registration of the securities, other than underwriting discounts and
commissions, if any, which are to be paid by the selling shareholder.
At June 1,August 12, 2004, there were approximately 220 holders of record
of our common shares. No cash dividends have been declared or paid on our common
shares during the last two fiscal years.
EXECUTIVE COMPENSATION
The following table sets forth the amount accrued by us during Fiscal Years
2002, 2003 and 2004 for services rendered by our officers. This includes all
compensation awarded to, earned by or accrued for the executive officers listed
below during the periods in question:
Compensation
Name and Awards
Position Year Salary Bonus(2) Other(3) Stock Options(1) Total
-------- ---- ------ -------- -------- ------------- -----
- ------------------------- ----------- ------------- ---------------- --------------- --------------------------- ---------------
Michael C. Tsao 2004 $135,000 $28,884 $9,318 0 0 $175,026
Chairman, President 2003 $135,000 $0 $0 0 0 $135,000
and CEO 2002 $136,792 $5,000 $0 0 0 $141,792
Alice W. Tsao 2004 $55,000 $14,600 $12,381 0 0 $83,985
Vice President and 2003 $55,000 $0 $0 0 0 $55,000
Secretary 2002 $49,537 $3,000 $0 0 0 $52,537
Alan Hoover 2004 $135,000 $28,884 $11,696 0 0 $177,584
Senior Vice 2003 $135,000 $5,000 $0 0 1,000 $140,000
President 2002 $140,144 $5,000 $0 0 0 $145,144
Kenneth H. Kisner 2004 $51,000 $14,600 $3,218 0 0 $70,822
Treasurer 2003 $51,000 $3,000 $1,000 0 1,000 $54,000
2002 $48,577 $3,000 $0 0 0 $51,577
- ------------------------- ----------- ------------- ---------------- --------------- -------------- ------------- --------------
(1) Number of shares issuable upon exercise of options granted during the
fiscal year, adjusted for share dividends.
(2) 2004 bonus paid in 2005
(3) Includes car allowance and 401k match
Name Shares Acquired Value Realized Number of Securities Value of Unexercised in
on Exercise Underlying Unexercised the money options at FY-
Option at FY-End End
Exercisable/Unexercisable Exercisable/Unexercisable
Michael C. 0 $0 $12,000/$0 $35,640/$0
Tsao
Alan Hoover 0 $0 $270,666/$0 $928,389/$0
Alice Tsao 0 $0 $12,000/0 $35,640/$0
Incentive Stock Option Plan
In July, 2001, the Shareholders adopted and approved Kahiki's 2001 Non
Qualified and Incentive Stock Option Plan ("Plan"). Pursuant to the Plan,
600,000 common shares have been reserved for issuance upon the exercise of
options. Options granted under the Plan may be either (1) options intended to
constitute incentive stock options ("ISO's") under the Internal Revenue Code of
1986 or (2) non qualified options. ISO's may be granted under the Plan to
employees and officers of Kahiki. Non qualified options may be granted to
consultants, directors (whether or not they are employees), employees or
officers of Kahiki. The Plan is administered by the Board of Directors. The
Board, within the limitation of the plan, determines the persons to whom options
and awards may be granted, the number of shares to be covered by each option,
whether the options granted are intended to be ISO's, the duration and rate of
exercise of each option, the option purchase price per share and the manner of
exercise.
ISO's granted under the Plan may not be granted at a price less than the fair
market value of the common shares on the date of grant (or 110% of fair market
value in the case of persons holding 10% or more of the voting stock of Kahiki).
The aggregate fair market value of shares for which ISO's granted to any
employee are exercisable for the first time by such employee during any calendar
year may not exceed $100,000. Non qualified options granted under the plan may
not be granted at a price less than the lesser of (1) the book value of share of
common stock as of the end of the fiscal year immediately preceding the date of
such grant, or (2) 80% of the fair market value of the common shares on the date
of grant. Options granted under the Plan will expire not more than 10 years from
the date of grant (5 years in the case of ISO's granted to persons holding 10%
or more of the voting securities of Kahiki).
All options granted under the Plan are not transferable during an optionee's
lifetime but are transferable at death by will or by the laws of descent and
distribution. Options granted terminate within a specified period of time
following termination of an optionee's employment or position as a director or
consultant.
We will not grant options and warrants in excess of 15% of the outstanding
shares to officers, directors, employees, 5% shareholders or affiliates for a
one year period following the conclusion of this offering.
REPORTS TO SHAREHOLDERS
Kahiki Foods, Inc. is not a reporting company as defined by the Securities
and Exchange Commission (the "SEC")Exchange Act. If the Securities and Exchange
Commission declares this registration statement effective, we will become
subject to the information and reporting requirements of that act and we will
file periodic reports, proxy statements and other information with the
Securities and Exchange Commission.. Following completion of this offering, we
will furnish our shareholders with annual reports containing audited financial
information for each fiscal year and will distributefile quarterly reports for
the first three quarters of each fiscal year containing unaudited summary
financial information with the Securities and Exchange Commission. Our fiscal
year ends on March 31.
ADDITIONAL INFORMATION
We have filed a registration statement under the Securities Act of 1933 with the
SEC with respect to the common shares, warrants and options offered hereby. This
prospectus does not contain all of the information set forth in the registration
statement, its amendments, schedules, and exhibits, certain portions of which
are entitled as permitted by the rules and regulations of the Commission. For
further information with respect to Kahiki Foods, Inc. and the common shares,
warrants and options, please see the registration statement and the exhibits
thereto. The Registration Statement registration statement may be examined at,
and copies of the Registration Statement may be obtained at prescribed rates
from, the Public Reference Section of the Commission, Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549. The SEC also maintains a Web site
(http://www.sec.gov) that contains reports, proxy and information statements and
other information the public companies file electronically with the Commission.
Additional information regarding the operations of the public reference room may
be obtained by calling the SEC at 1-800-SEC-0330.
KAHIKI FOODS, INC.
BALANCE SHEETS
- --------------------------------------------------------------------------------
June 30, 2004
(unaudited) March 31, 2004
ASSETS
Cash $ 295,215 $ 1,073,901
Marketable Securities $ 30,000 $ 585,032
Accounts Receivable $ 1,509,592 $ 1,964,941
Inventories $ 2,207,153 $ 1,565,863
Prepaid Expenses $ 133,657 $ 16,055
Refundable income taxes $ - $ -
Deferred Income Taxes $ 28,000 $ 28,000
---------------------- ----------------------
Total current assets $ 4,203,617 $ 5,233,792
Land $ 114,485 $ 114,485
Building & Improvements $ 2,499,262 $ 2,499,262
Machinery & equipment $ 2,076,900 $ 2,052,144
Furniture & fixtures $ 68,533 $ 67,146
Vehicles $ 146,269 $ 146,269
CIP $ 5,090,680 $ 3,776,366
---------------------- ----------------------
$ 9,996,128 $ 8,655,672
less: accum depreciation $ (1,623,304) $ (1,475,370)
---------------------- ----------------------
Net property & equipment $ 8,372,824 $ 7,180,302
Deferred bond fees $ 146,107 $ 147,988
Deferred Taxes $ 27,000 $ 27,000
Other $ 440,414 $ 439,655
---------------------- ----------------------
Total other assets $ 613,521 $ 614,643
---------------------- ----------------------
TOTAL ASSETS $ 13,189,962 $ 13,028,737
LIABILITIES & EQUITY
Current debt $ 529,491 $ 529,491
Current portion of bond $ 140,000 $ 140,000
Line of credit $ - $ 1,000,000
Accounts Payable $ 2,453,535 $ 1,905,171
Accrued expenses $ 413,664 $ 545,027
Income taxes payable $ 149,671 $ 413,000
---------------------- ----------------------
Total current liabilities $ 3,686,361 $ 4,532,689
Bond Obligation $ 3,967,545 $ 4,002,546
Line of credit $ 1,001,556 $ -
Long-term debt $ 1,050,593 $ 1,145,635
---------------------- ----------------------
Total Liabilities $ 9,706,055 $ 9,680,870
Stockholders' Equity
Common stock, no par value, 10,000,000
shares authorized; 3,588,848 and 3,588,848 $ 2,761,156 $ 2,770,123
issued
Retained earnings $ 722,751 $ 577,744
---------------------- ----------------------
Total stockholders' equity $ 3,483,907 $ 3,347,867
---------------------- ----------------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 13,189,962 $ 13,028,737
See notes to the consolidated financial statements.
- ---------------------------------------------------------------- ---------------------- -- ----------------------
KAHIKI FOODS, INC.
STATEMENT OF OPERATIONS (unaudited)
- --------------------------------------------------------------------------------------------------------
Three months ended June 30,
- ----------------------------------------------------------- --------------------------------------------
2004 2003
Sales $ 5,215,735 $ 1,801,301
Cost of sales:
Cost of sales 3,548,807 1,169,688
Depreciation 131,148 125,730
--------------------- ---------------------
Total cost of sales 3,679,955 1,295,418
Gross margin 1,535,780 505,883
Operating expenses:
Depreciation & amortization 18,666 15,864
General and administrative expenses 1,205,576 622,608
--------------------- ---------------------
Total operating expenses 1,224,242 638,472
Income (loss) from operations 311,538 (132,589)
Other income (expense):
Interest expense (54,187) (33,246)
Interest and dividend income 6,747 36,982
Net gain (loss) on marketable securities (22,420) 21,780
--------------------- ---------------------
Total other income (expense) (69,860) 25,516
Income (loss) before income taxes 241,678 (107,073)
Income tax expense (benefit) 96,671 (36,405)
Net income (loss) 145,007 (70,668)
Weighted average shares outstanding:
Basic 3,588,848 2,964,888
Diluted 4,292,430 2,964,888
Net income (loss) per common share:
Basic $ 0.04 $ (0.02)
Diluted $ 0.03 $ (0.02)
See notes to the consolidated financial statements.
- ----------------------------------------------------------- --------------------- --- ---------------------
KAHIKI FOODS, INC.
STATEMENTS OF CASH FLOWS (Unaudited)
- -------------------------------------------------------------------------------------------------------------------
Three months ended June 30,
- ------------------------------------------------------------------- -------------------------------------------------
2004 2003
CASH FLOWS FROM OPERATING ACTIVITES:
Net income (loss) $ 145,007 $ (70,668)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities
Depreciation and amortization 149,814 125,730
Unrealized (gain) loss on marketable securities 14,980 (23,092)
(Increase) decrease in operating assets:
Accounts Receivable 455,349 54,323
Inventories (641,290) (234,435)
Refundable income taxes - 56,000
Other assets (118,361) (52,697)
Increase (decrease) in operating liabilities:
Accounts Payable 548,364 481,787
Accrued Expenses (131,363) (1,639)
Income taxes payable (263,329) (91,414)
Net cash provided by operating activities 159,171 243,895
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment (26,143) (32,969)
Purchase of new facility improvements (1,314,312) (831,745)
Proceeds from the sale of marketable securities 540,052 287,314
----------------------- -----------------------
Net cash used in investing activities (800,403) (577,400)
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings on line of credit 1,556 (6,000)
Proceeds from long-term debt - 73,908
Proceeds from the issuance of bond obligation - 339,351
Payments on long-term debt (95,042) -
Costs from stock issuance (8,967) -
Payment of bond obligation (35,001) -
----------------------- -----------------------
Net cash provided by financing activities (137,454) 407,259
Net increase (decrease) in cash (778,686) 73,754
Cash - beginning of period 1,073,901 182,672
Cash - end of period $ 295,215 $ 256,426
- ------------------------------------------------------------------- ----------------------- --- -----------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
- ------------------------------------------------------------------------------------------ --- ----------------------
Cash paid during the year for:
Interest $ 54,186 $ 33,246
Income taxes $ 360,000 $ -
See notes to the consolidated financial statements.
- ------------------------------------------------------------------- ----------------------- --- -----------------------
KAHIKI FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
Mrach 31, 2004
NOTE 1 Basis of Presentation
The accopanying unaudited financial statements of Kahiki Foods, Inc. ("Company")
have been prepared in accordance with Securities and Exchange Commission
requirements for interim financial statements. Therefore, they do not include
all of the informaition and footnotes required by accounting principles
generally accepted in the United States for complete financial statements. The
financial statements should be read in conjuction with the Form 10-KSB of the
Company for the year ended March 31, 2004.
The interim financial information is unaudited. In the opinion of management,
all adjustments necessary to present fairly the financial position as of June
30, 2004, the results of operations and cash flows for the three month periods
ended June 30, 2004 and 2003, have been included in the financial statements.
Interim results are not necessarily indicative of results of operations for the
full year.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States rquires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Kahiki Foods, Inc.
Columbus, Ohio
We have audited the accompanying balance sheet of Kahiki Foods, Inc. (an Ohio
corporation) as of March 31, 2004, and the related statements of operations,
changes in stockholders' equity, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The 2003 financial statements were audited by other auditors who
issued an unqualified opinion dated May 6, 2003.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States of America). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Kahiki Foods, Inc. as of March
31, 2004 and the results of its operations, changes in stockholders' equity, and
its cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America.
Certified Public Accountants
Salt Lake City, Utah
June 3, 2004
BALANCE SHEET
March 31, 2004
ASSETS
CURRENT ASSETS
Cash $ 1,073,901
Marketable trading securities 585,032
Accounts receivable - trade 1,964,941
Inventories 1,565,863
Prepaid expenses 16,055
Deferred income taxes 28,000
------------------
Total Current Assets 5,233,792
PROPERTY AND EQUIPMENT
Land 114,485
Building and improvements 2,499,262
Machinery and equipment 2,052,144
Furniture and fixtures 67,146
Vehicles 146,269
Construction in progress - new facility (Note 10) 3,776,366
------------------
8,655,672
Accumulated depreciation (1,475,370)
------------------
Net Property and Equipment 7,180,302
OTHER ASSETS
Deposits 439,655
Deferred bond fees (Net of amortization of 1998) 147,988
Deferred income taxes 27,000
------------------
Total Other Assets 614,643
TOTAL ASSETS $ 13,028,737
==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt (Note 5) $ 529,491
Current portion of bond obligation (Note 5) 140,000
Lines of credit (Note 4) 1,000,000
Accounts payable - trade 1,905,171
Accrued expenses 545,027
Accrued income taxes (Note 6) 413,000
------------------
Total Current Liabilities 4,532,689
OTHER LIABILITIES
Bond obligation (Note 5) 4,002,546
Long-term debt (Note 5) 1,145,635
------------------
Total Liabilities 9,680,870
STOCKHOLDERS' EQUITY
Common stock, no par value, 10,000,000 shares
authorized; 3,588,848 shares issued and outstanding 2,770,123
Retained earnings 577,744
------------------
3,347,867
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 13,028,737
==================
See Notes to Financial Statements.
STATEMENTS OF OPERATIONS
For the Years Ended March 31, 2004 and 2003
2004 2003
---------------- ---------------
Net sales (Note 2) $4,989,840 $ 14,761,923 $9,204,684 $ 9,128,858
Cost of sales:
Cost of sales 9,810,784 6,096,808
Depreciation and amortization 464,090 537,230
---------------- ---------------
Gross profit 4,714,966 4,487,049 2,570,646 2,494,820
Operating expenses:
Depreciation and amortization expense 67,146 0
General and administrative expenses (Note 2) 3,481,149 3,253,232 2,591,468 2,515,642
New facility expenses 0 57,148
---------------- ---------------
Income from operations 1,166,671 (77,970)
Other income (expenses):
Interest expense (137,834) (120,854)
Interest and dividend income 34,779 61,951
Net gain (loss) on marketable securities 17,874 (30,662)
---------------- ---------------
Income before income taxes 1,081,490 (167,535)
Income tax expense (benefit) 405,102 (81,612)
---------------- ---------------
Net income $ 676,388 $ (85,923)
================ ===============
Basic earnings per share:
Net income (loss) per share - weighted average shares
outstanding 2,968,171 (2,964,888 in 2003) $ .23 (0.03)
================ ===============
Diluted earnings per share:
Net income (loss) per share - weighted average shares
outstanding 3,506,186 (2,964,888 in 2003) $ .19 (0.03)
================ ===============
See Notes to Financial Statements.
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
For the Years Ended March 31, 2004 and 2003
Additional Retained
Common Stock Paid-in Earnings Treasury
Shares Amount Capital (Deficit) Stock Total
---------- ----------- ----------- ---------- ---------- -----------
Balance at March 31, 2002 2,966,328 $ 1,479,868 $ 485,565 $ (12,721) $ (86,000) $ 1,866,712
Purchase of 16,500
treasury shares at cost (16,500) (16,500)
Reissue 16,500
treasury shares at cost 16,500 16,500
Retirement of 1,440
treasury shares (1,440) (86,000) 86,000 0
Net Income (Loss) (85,923) (85,923)
---------- ----------- ----------- ---------- ---------- -----------
Balance at March 31, 2003 2,964,888 1,393,868 485,565 (98,644) 0 1,780,789
Reclassify additional
paid-in capital 485,565 (485,565) 0
Stock options exercised 21,000 3,530 3,530
Issuance of common stock 602,960 887,160 887,160
Net Income (Loss) 676,388 676,388
---------- ----------- ----------- ---------- ---------- -----------
Balance at March 31, 2004 3,588,848 $ 2,770,123 $ 0 $ 577,744 $ 0 $ 3,347,867
========== =========== =========== ========== ========== ===========
See Notes to Financial Statements.
STATEMENTS OF CASH FLOWS
For the Years Ended March 31, 2004 and 2003
2004 2003
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 676,388 $ (85,923)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 531,236 537,230
Unrealized (gain) loss on marketable securities (36,832) (111,457)
Realized (gain) loss on sale of marketable securities (9,383) 142,119
Treasury stock issued for compensation 0 10,000
Net (gain) loss on disposal of property and equipment (45,230) 0
Deferred income tax (benefit) expense (49,000) (16,000)
(Increase) decrease in operating assets:
Accounts receivable - trade (1,357,696) 349,782
Inventories (743,108) (47,420)
Refundable income taxes 56,000 (23,000)
Prepaid expenses and deposits (419,625) 279
Increase (decrease) in operating liabilities:
Accounts payable - trade 1,119,975 21,822
Accrued expenses 431,523 355
Income taxes payable 413,000 (16,000)
------------ -------------
Net cash provided by operating activities 567,248 761,787
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the disposal of property and equipment 102,455 0
Purchase of equipment (102,624) (670,303)
Purchase of new facility 0 (2,254,999)
Purchase of new facility improvements (3,108,168) (668,200)
Proceeds from sales of marketable securities 536,404 0
Purchases of marketable securities 0 (57,572)
------------ -------------
Net cash used in investing activities (2,571,933) (3,651,074)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (payments) on lines of credit (37,394) 541,745
Proceeds from long-term debt 433,236 498,273
Proceeds from stockholder note 150,000 0
Proceeds from issuance of bond obligation 1,815,282 2,327,264
Payments on long-term debt (355,900) (234,180)
Proceeds from stock issuance 890,690 0
Payment of bond fees 0 (149,996)
Payment for repurchase of treasury stock 0 (16,500)
Proceeds from sale of treasury stock 0 6,500
------------ -------------
Net cash provided by financing activities 2,895,914 2,973,106
------------ -------------
Net increase in cash 891,229 83,819
Cash - beginning of year 182,672 98,853
------------ -------------
Cash - end of year $ 1,073,901 $ 182,672
============ =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS
Cash paid during the year for:
Interest $ 373,596 $ 120,854
Income taxes $ 35,000 $ 0
See Notes to Financial Statements.
KAHIKI FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 2004
NOTE 1 Nature and Scope of Business
Kahiki Foods, Inc. was formed in 1982 to acquire a landmark restaurant in
Columbus, Ohio. (The restaurant was closed in 2000.) In 1988, the Company began
the manufacture and processing of frozen and other finished Chinese and
Polynesian foods for wholesale distribution.
NOTE 2 Summary of Significant Accounting Policies
In the opinion of management, all adjustments considered necessary for a fair
presentation of the results of operations and financial position have been
included and all such adjustments are of a normal recurring nature.
Revenue Recognition
Revenues are recognized when the goods are shipped. The Company's products are
perishable frozen foods with a limited life. Claims for damage during shipment
must be made immediately upon receipt of the products. There are no other
post-delivery obligations related to the Company's products. Any credits for
damaged goods are netted against sales in the current period. During the year
ended March 31, 2004, sales returns were $64,863 ($44,029 in 2003).
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from these estimates.
Cash
For purposes of the statements of cash flows, cash and cash equivalents includes
cash on hand and demand deposits held by banks.
The Company maintains its cash in three accounts with one financial institution.
The carrying value is a reasonable estimate of the fair value.
Deposits
In accordance with a Loan Agreement dated December 1, 2002, with the State of
Ohio, the Company maintains a Primary Reserve Account of $418,500 on deposit
with a trustee. The Company also maintains $21,155 in deposits with various
other vendors
Marketable Trading Securities
Management determines the appropriate classification of marketable securities at
the time they are acquired and evaluates the appropriateness of such
classification at each balance sheet date. The Company's marketable securities
are classified as trading. Trading securities are held for resale in
anticipation of short-term fluctuations in market prices and are held at market
value. Realized and unrealized gains and losses on the marketable securities are
included in income.
Marketable securities consist of a $30,000 certificate of deposit with a bank
and an equity mutual fund with a cost basis of $529,236 as of March 31, 2004
($1,083,389 in 2003). The cumulative unrealized gain (loss) as of March 31, 2004
was $25,796 ($(8,168) in 2003).
Accounts Receivable - Trade
Accounts receivable are un-collateralized customer obligations due under normal
trade terms requiring payment within 15 days of the invoice date. Accounts
receivable are stated at the amount billed to the customer. Customer account
balances 60 days past the invoice date are considered delinquent. Payments
received for accounts receivable are allocated to the specific invoices
identified on the customer remittance advice or, if unspecified, are applied to
the earliest unpaid invoices. The Company does not charge interest on past due
account balances.
NOTE 2 Summary of Significant Accounting Policies (continued)
Accounts Receivable - Trade (continued)
The carrying amount of accounts receivable is reduced, when necessary, by a
valuation allowance that reflects management's best estimate of the amount that
will not be collected. Management individually reviews all customer account
balances on a monthly basis, and based on an assessment of current credit
worthiness, estimates the portion, if any, of the balance that will not be
collected. After management's review of all accounts receivable balances,
management believes all amounts outstanding at March 31, 2004 are collectible
and a valuation allowance is not necessary.
Inventories
Inventories consist of perishable food products and packaging supplies. The
inventories are valued at the lower of cost (first-in, first-out method) or
market. Impairment and changes in market value are evaluated on a per item
basis.
If the cost of the inventory exceeds the market value evaluation based on total
inventory, provisions are made for the difference between the cost and the
market value. Provision for potential obsolete or slow moving inventory is made
based on analysis of inventory levels, age of inventory and future sales
forecasts.
Inventories consisted of the following at March 31, 2004;
Raw Food Products $ 367,262
Finished good 923,231
Supplies 275,370
---------------
$ 1,565,863
===============
Property and Equipment
Property and equipment is carried at cost less accumulated depreciation computed
using the straight-line method. Major renewals and betterments are capitalized
and depreciated; maintenance and repairs that do not extend the life of the
respective assets are charged to expense as incurred. Upon disposal of assets,
the cost and related accumulated depreciation are removed from the accounts and
any gain or loss is included in income. Depreciation related to property and
equipment used in production is reported in cost of sales. Property and
equipment are depreciated over their estimated useful lives as follows:
Building and improvements 5 - 39 years
Machinery and equipment 5 - 9 years
Furniture and fixtures 5 - 7 years
Vehicles 5 years
During the year ended March 31, 2004, the Company capitalized interest related
to the acquisition and renovation of the new facility totaling approximately
$236,000 ($65,000 in 2003). The capitalized interest is included in construction
in progress on the balance sheet.
Deferred Bond Costs
Included in other assets are deferred bond costs of $147,988 (149,996 in 2003),
which have no residual value. The deferred bond costs will be amortized on a
straight-line basis over 22 years, the life of the bond obligation.
Advertising Expense
Advertising costs are expensed as incurred. Advertising expense amounted to
$534,6701,904,049 for the year ended March 31, 2004 ($342,4891,409,725 in 2003).
General and Administrative Expenses
General and administrative expenses for the years ended March 31, 2004 and 2003
were as follows:
2004 2003
----------- -----------
Advertising $ 1,904,049 $ 1,409,725
Salaries and wages 1,009,602 1,143,680
Taxes 152,470 44,592
Other 187,111 82,355
----------- -----------
Total $ 3,253,232 $ 2,515,642
=========== ===========
Customer Incentives
The Company routinely offers discounts, rebates, slotting fees, or other
customer incentives, determined on a case-by-case basis by management at the
senior level. During the year ended March 31, 2004, slotting fees of $227,917
were included in cost of sales ($75,826 in 2003) were netted against revenues.
Offering Costs
The Company's policy with respect to direct costs incurred in selling its
securities is to net them against the proceeds from those sales. Cash offering
costs in the amount of $137,840 associated with the sale of 602,940 shares of
common stock during the year ended March 31, 2004 were netted against the
proceeds from those stock sales. Additional offering costs of $140,613,
representing the estimated fair value (using the Black- Scholes model) of stock
options granted to consultants were netted against the proceeds.
Stock-Based Compensation
In accordance with Accounting Principles Board Opinion No. 25 and related
interpretations, the Company accounts for stock-based compensation under the
intrinsic value method of accounting. See Note 7 for information regarding the
alternative fair value method described in Statement of Financial Accounting
Standards No.123.
Research and Development
The Company expenses research and development costs as incurred. Research and
development expenses were $34,561 during the year ended March 31, 2004 ($81,652
in 2003).
NOTE 3 Earnings Per Share (EPS)
March 31, 2004 March 31, 2003
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ---------- ------------- ----------
Basic EPS
Income from continuing
operations available to
common stockholders' $ 676,388 2,968,171 $ .023 $ (85,923) 2,964,888 $ (0.03)
Effect of dilutive
options 0 538,015 (0.04) 0 0 0
----------- ------------- --------- ---------- ------------- ----------
Diluted EPS
(Loss) income from
continuing operations
available to common
stockholders' $ 676,388 3,506,186 $ 0.19 $ (85,923) 2,964,888 $ (.03)
=========== ============= ========= ========== ============= ==========
Earnings per share are computed on the weighted average number of common shares
outstanding including any dilutive options.
NOTE 4 Lines of Credit
The Company had available a $100,000 line of credit with a bank. The line of
credit is due on demand and is secured by receivables, inventories and property
and equipment. Interest is payable monthly at the prime rate plus 1 1/2%. The
balance due on the line of credit was $0 at March 31, 2004 ($29,000 in 2003).
The Company had available a line of credit with another bank for $1,100,000. The
credit line is due on demand and is secured by all assets of the Company.
Principal payments of $1,980 plus interest are payable monthly at the prime
rate. The balance due on the line of credit was $1,000,000 at March 31, 2004
($1,008,396 in 2003). The line of credit was scheduled to mature May 19, 2004.
On May 18, 2004, it was extended for three months. It was paid off June 2, 2004.
On June 1, 2004, the Company entered into a two-year agreement with a bank for a
revolving loan facility not to exceed $2,500,000, to be used for retirement of
the $1,100,000 credit line and additional working capital.
NOTE 5 Long-Term Debt
Long-term debt consisted of the following at March 31, 2004:
Terms
Interest % Per Month Current Long-Term
------------ ---------------- ---------- ----------
025 Shareholder Note Prime + 2.00 Due 2/2005 $ 150,000 $ 0
001 Mortgage Note 8.00 $ 4,853 44,802 143,352
Equipment Notes
010 Bank 6.24 6,102 59,664 184,585
289 Bank 7.00 to 10.50 9,343 101,352 43,925
013 Bank 7.63 4,606 38,712 119,947
016 Financing Company 5.25 2,682 19,959 222,029
015 Financing Company 3.00 1,982 20,450 100,001
035 Bank 7.26 854 8,683 16,799
005 Financing Company 0.00 549 6,594 21,429
011 Community Capital
Development Corp. 5.00 2,711 28,732 56,747
007 City of Columbus 7.00 1,393 10,779 78,958
014 Community Capital
Development Corp. 2.83 2,161 23,076 80,079
060 Capital Lease - Land 4.25 1,698 16,688 77,784
---------- ----------
529,491 1,145,635
Bond Obligation 4.55 to 5.85 19,519 to 31,239 140,000 4,002,546
---------- ----------
$ 669,491 $5,148,181
========== ==========
NOTE 5 Long-Term Debt (continued)
Long-term debt for the years ended March 31 matures as follows:
2005 $ 669,491
2006 491,915
2007 450,649
2008 355,024
2009 230,762
Thereafter 3,619,831
---------------
$ 5,817,672
===============
The above long-term debt is subject to certain covenants and restrictions
including maintenance of certain financial requirements. The Company was in
compliance with all material covenants and restrictions at March 31, 2004. Rates
currently available from the bank for debt with similar terms and remaining
maturities are used to estimate the fair value of the debt. The Company's
carrying value approximates the fair value of the debt.
NOTE 6 Income Taxes
The provision (benefit) for income taxes consists of the following:
2004 2003
--------- ----------
Current (benefit) expense:
Federal $ 381,000 $ (67,894)
State 73,102 2,282
Deferred (benefit) expense (49,000) 16,000
--------- ----------
$ 405,102 $ (81,612)
========= ==========
The components of the net deferred tax asset is as follows:
2004 2003
--------- ----------
Assets:
Inventories $ 9,000 $ 3,000
Accrued vacation 20,000 20,000
Unrealized loss on marketable
securities 0 3,000
Capital loss carry forward 58,000 57,000
Other 3,000 20,000
--------- ----------
Gross Deferred Tax Assets 90,000 103,000
--------- ----------
Liabilities:
Unrealized gains on marketable
securities 4,000 0
Depreciation on property and
equipment 31,000 97,000
--------- ----------
Gross Deferred Tax Liability 35,000 97,000
--------- ----------
Total Net Deferred Tax Asset (Liability) $ 55,000 $ 6,000
========= ==========
A reconciliation of the Company's effective tax (benefit) provision is as
follows:
2004 2003
---------- ----------
Income (benefit) tax at statutory rates $ 367,000 $ (56,962)
State and Local (benefit) taxes, net of
federal benefit 47,861 8,935
Permanent differences (5,245) 13,217
Surtax and other rate differences (4,514) 2,498
---------- ----------
Total (Benefit) Provision $ 405,102 $ (81,612)
========== ==========
NOTE 7 Stockholders' Equity and Stock Options
The Company adopted the 2001 Non Qualified and Incentive Stock Option Plan
effective July 16, 2001. The Plan authorizes the Company to grant options to
purchase shares of common stock to directors, employees and consultants of the
Company. The maximum number of common shares that may be issued under the Plan
is 600,000. The Company also has outstanding 270,666 options for common shares
under a contractual agreement with an employee. These shares are considered to
be outside of the plan, but have been included in the disclosures for employee
options.
As of March 31, 2004, four outside consultants held options to purchase a total
of 237,800323,800 shares of common stock, with exercise prices ranging from $.22
to $1.80. The options were issued at fair market value of the Company's stock on
the date of issue. Compensation of $140,613 has been recognized as offering cost
in the current year based on Black-Scholes methodology. The Company records
compensation based on the estimated fair value (Black-Scholes) of these options
to non-employees. During the year ended March 31, 2004 a non-cash offering cost
of $140,316 was netted against the proceeds of a stock offering, as the fair
value of options granted during the year.
At March 31, 2004, a total of 520,966 qualified and non-qualified options were
vested and the remaining options vest at various times over the next four years.
These options expire at various dates through 2008.
The Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its stock option plan for employees,
consultants and the outside directors. The vesting period of the options granted
range from immediately exercisable to four years. Accordingly, no compensation
cost has been recognized in the accompanying financial statements for options
issued under the plan since the exercise price of the options was equal to the
market value of the shares at the date of grant. Had compensation costs for the
Company's stock option plan been determined based on the fair value at the grant
dates for awards under the plan consistent with the methodology of Financial
Accounting Standards Board Statement No. 123, Accounting For Stock - Based
Compensation, the Company's net income and net income per share would change as
indicated below.
2004 2003
----------- ----------
Net (Loss) Income:
As reported $ 676,388 $ (85,923)
Total stock-based employee compensation
expense determined under fair value
based method for all awards, net of
related tax effects 44,234 (21,983)
----------- ----------
Pro Forma $ 632,154 $ (107,906)
=========== ==========
Basic (Loss) Earnings Per Share:
As reported $ 0.23 $ (0.03)
Pro Forma $ 0.21 $ (0.04)
Diluted (Loss) Earnings Per Share:
As reported $ 0.19 $ (0.03)
Pro Forma $ 0.18 $ (0.04)
TheIn order to determine compensation on options issued to consultants, as well
as fair value disclosures for employee options, the fair value of each option
grant is estimated on the date of grant using the Black- Scholes option-pricing
model with the following weighted-average assumptions.
2004 2003
---------- ----------------
Dividend yield 0.00% 0.00%
Expected volatility 200.00% 200.10%
Risk-free interest rates 3.00% 3.25% & 3.00%
Expected lives 5 years 5 years
NOTE 7 Stockholders' Equity and Stock Options (continued)
A summary of the changes in the Company's employee stock option planoptions as
of March 31, 2004 and 2003 is presented below:
2004 2003
Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
--------- -------- ----------- ----------
April 1 606,466 $ 0.34 534,466 $ 0.38
Granted 139,333 1.26 174,000 0.63
Exercised (21,000) 0.17 0 0.00
Cancelled 0 0.00 (102,000) 1.08
--------- -------- ----------- ----------
March 31 724,799 $ 0.52 606,466 $ 0.34
========= ======== =========== ==========
2004 2003
-------- --------
Options exerciseable at year-end 520,966 206,683
Weighted-average fair value of options
granted during the year $ 1.26 $ 0.62
Weighted
Average
Number Remaining Weighted Number Weighted
Range of Outstanding Contractual Average Outstanding Average
Exercise March 31, Life Exercise March 31, Exercise
Price 2004 (In Years) Price 2003 Price
-------------- ------------- ------------- ---------- ------------- ----------
$0.1235 - 1.80 724,799 4.07 $ 0.52 606,466 $ 0.34
NOTE 8 Lease Commitments
The Company leases a facility used for its wholesaling operations under an
agreement that is accounted for as an operating lease. This lease requires
monthly payments of $6,400 through January 2005. The Company has the option to
renew for two additional three-year terms.
During 2003, the Company entered into a capital lease arrangement with the City
of Gahanna, Ohio to acquire land valued at $114,485. Lease payments of $1,698
per month through May 2009 will be allocated between principal and interest at
4.3%, with a final buyout of $100 due June 1, 2009.
The Company also leases manufacturing equipment under operating lease
agreements. These leases expire at various dates through 2008 and require total
monthly payments of $18,621.
Future annual minimum lease commitments as of March 31 are as follows:
2005 $ 80,688
2006 17,412
2007 18,166
2008 18,954
2009 19,774
Thereafter 3,578
---------------
$ 158,572
===============
The Company's lease expense for the year ended March 31, 2004 was $317,766.
NOTE 9 Concentrations
Sales to three customers amounted to approximately 48% of total revenue in the
year ended March 31, 2004 (43% in 2003). Accounts receivable from five customers
accounted for approximately 74% of total accounts receivable as of March 31,
2004 (One customer accounted for approximately 15% in 2003).
NOTE 10 Commitments
In December 2002, the Company purchased a new operating facility for $2,254,999.
As of March 31, 2004, the Company has spent an additional $3,776,366, which is
reflected as construction in progress.
In March 2004, the Company filed a Form SB-2 Registration Statement with the
SEC. Management expects to incur an unknown amount of additional professional
fees in the process of completing that filing.
Changes in Registrant's Certifying Accountant
GBQ's report on the financial statements for the past two years contained no
adverse opinion or disclaimer of opinion and was not qualified as to
undertainty, audit scope or accounting principles. Kahiki has requested that GBQ
furnish it with a letter addressed to the SEC stating whether it agrees with the
above statements. A copy of GBQ's letter to the SEC, dated March 22, 2004, is
filed as Exhibit 14.1 to this Form SB-2.
On March 4, 2004, Kahiki Foods, Inc. (Kahiki) engaged the accounting firm of
Child, Sullivan & Company (Child) as the independent public accountants to audit
Kahiki's financial statements for the fiscal year ended March 31, 2004, to
replace the firm of GBQ Partners, LLC (GBQ), which was the principal independent
public accountant forKahiki for Kahiki's most recent certified financial
statements.
During the two fiscal years ended March 31, 2003, and the subsequent interim
period preceding the engagement of Child, there were no disagreements with GBQ
on any matter of accounting principles or practices, financial statements
disclosure or auditing scope or procedures. However, GBQ advised Kahiki it would
be unable to accept the appointment to audit Kahiki's financial statements for
the fiscal year ended March 31, 2004, because GBQ has elected not to perform
audits of public companies. Kahiki's Board of Directors selected Child as the
auditor for its financial statements for the fiscal year ended March 31,
2004.
PART II
Indemnification of Directors and Officers
The Company's Amended Articles of Incorporation provides that the Company
shall indemnify any Director or Officer (and may indemnify any other employee or
agent of the Company or of another entity) who was or is a party or is
threatened to be made a party, to any threatened, pending, or completed action,
suit, or proceeding, whether civil, criminal, administrative, or investigative,
by reason of the fact that he is or was a director, officer, employee, or agent
of the Company or is or was serving at the request of the Company as a director,
officer, trustee, employee or agent of another Company, domestic or foreign,
non-profit or for-profit, partnership joint venture, trust or other enterprise,
against expenses, including attorneys' fees, judgments, fines, and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit, or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Company, and with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit, or proceeding by judgment, order, settlement, conviction, or upon
a plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interest of the Company.
Determination of rights to indemnification shall be made by a majority vote
of a quorum of the directors, or by the court in which such action, suit or
proceeding was brought.
The Company may obtain and maintain liability insurance against liabilities
of its directors, officers, employees and agents, sufficient to cover its
obligations under these indemnification provisions, and may obtain such
liability insurance for liabilities of such persons not subject to any
obligations of the Company under these indemnification provisions.
The indemnification provided hereunder shall not be deemed exclusive of any
other rights to which those seeking indemnification may be entitled under any
agreement or vote of shareholders or disinterested directors. In addition, if at
any time the Ohio Revise Code ("Code") shall have been amended to authorize
further elimination or limitation of the liability of directors or officers,
then the liability of each director and officer of the Company shall be
eliminated or limited to the fullest extent permitted by such provisions, as so
amended, without further action by the shareholders, unless the provisions of
the Code require such action. The provision does not limit the right of the
Company or its shareholders to seek injunctive or other equitable relief not
involving payments in the nature of monetary damages.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers, and controlling persons of the Company
pursuant to the Articles of Incorporation, or otherwise, the Company has been
advised that in the opinion of the SEC such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable.
Other Expenses of Issuance and Distribution.
Filing Fee - Securities and Exchange Commission $ 275
Accounting Fees and expenses $ 5,000
Legal Fees and Expenses $ 15,000 $ 50,000
Blue Sky Fees and expenses $ 10,000
Transfer Agent Fees and Expenses $ 0
Printing and Engraving $ 0
Miscellaneous Expenses $ 10,000
---------
TOTAL $ 40,275 $ 75,275
======== =========
Expenses other than filing fees are estimated. The Company will pay all
fees, disbursements and expenses in connection with the proposed offering.
Recent Sales of Unregistered Securities.
InOn February, 27, 2004, the Company closed a private offering of
588,235 Units at a price of $1.70 per Unit for a total of $1,000,000. Each Unit
consisted of one Common Share, one-half $2.25 Warrant and one-half $3.00
Warrant. The entire offering was purchased by Barron Partners, LP. Laconia
Capital acted as placement agent in the transaction and was paid $70,000 and
received warrants to purchase 30,000 common shares at $2.25 per share for such
services. As the warrants issued to Laconia Capital are exercisable at the
market value of the underlying common shares at the date of grant, we have not
assigned a value to the warrants. The Company utilized the proceeds to reduce
current accounts payable. The Company also sold 14,705 Common Shares at a price
of $1.70 per share to Mr. William Velmer. on February 27, 2004. The proceeds of
this offering were used for working capital.
InOn January, 20, 2004, the Company issued 80,000 Options to Bob
Binsky, a Director of the Company, in exchange for connection with continuing
consulting services provided by Mr. Binsky. As the options issued to Mr. Binsky
are exercisable at the market value of the underlying common shares at the date
of grant, we have not assigned a value to the options.
The Company believes that the foregoing transactions were exempt from
registration under Sections 4(2) and 4(6) of the Securities Act of 1933. All
purchasers received written information about the Company and the Company
believes that all such purchasers were qualified investors. All such purchasers
have executed and delivered to the Company investment representations and
appropriate restrictive legends have been placed on the stock and warrant
certificates issued.
Additionally, based on representations made by Barron Partners LP and
Mr. Velmer, and the fact that Mr. Binsky is a director of Kahiki, we believe
that each of them is an accredited investor as defined in the Securities Act of
1933.
Index to Exhibits
3.1 Amended and Restated Articles of Incorporation of the Registrant
3.2 Code of Regulations of the Registrant
4.1 Specimen Common Share certificate
4.2 $2.25 Common Share Purchase Warrant
4.3 $3.00 Common Share Purchase Warrant
4.4 Common Share Purchase Option
4.5 2001 Non-Qualified and Incentive Stock Option Plan
5.1 Opinion re: legality
10.1 Lease between Kahiki Foods, Inc. and Simon Group Limited Partnership
dated December 27, 1999 relating to property located at 3004 East 14th
Avenue, Columbus, Ohio.
10.2 Loan Agreement between Kahiki Foods, Inc. and The Director of Development
of the State of Ohio dated as of December 1, 2002.
16.1 Letter on change in certifying accountant.
23.1 Consent of GBQ Partners LLP
23.2 Consent of Child, Sullivan & Company
23.3 Consent of Carlile Patchen & Murphy LLP (contained in Opinion of counsel
filed as Exhibit 5.1 hereto).
24.1 Power of Attorney
Undertakings.
The undersigned Registrant hereby untertakes (1) to file, during any
period in which offers or sales are being made, a post-effective
amendment to the Registration Statement (i) to include any prospectus
required by Section 10(a)(3) of the Securities Act of 1933 (the "Act");
(ii) to reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the Registration Statement; and (iii) to include any material information
with respect to the plan of distribution not previously disclosed in the
Registration Statement or any material change to such information in the
Registration Statement; (2) that, for the purpose of determining any
liability under the act, each post-effective amendment shall be deemed to
be a new Registration Statement relating to the securities offered
therein, and the offering of such securities of that time shall be deemed
to be the initial bona fide offering thereof; and (3) to remove from
registration by means of a post-effective amendment any of the securities
being registered which remain unsold at the termination of the offering.
The undersigned Registrant hereby undertakes that: (1) for purposes of
determining any liability under the Act, the information omitted from the
form of prospectus filed as part of a Registration Statement in reliance
upon Rule 430A and contained in the form of prospectus filed by the
Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act
shall be deemed to be a part of the Registration Statement as of the time
it was declared effective, and (2) for the purpose of determining any
liability under the Act, each post-effective amendment that contains a
form or prospectus shall be deemed to be a new Registration Statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the
foregoing provisions, or otherwise, the small business issuer has been
advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and
is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities,
other than the payment by the small business issuer of expenses
incurred and paid by a director, officer or controlling person of the
small business issuer in the successful defense of any action, suit or
proceeding, is asserted by such director, officer or controlling person
in connection with the securities being registered hereby, the small
business issuer will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act of 1933
and will be governed by the final adjudication of such issue.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable knowledge to believe that
it meets the requirements of filing Form SB-2 and authorized this
registration statement to be signed on its behalf by the undersigned,
in the City of Columbus, State of Ohio on June 7, August___, 2004.
KAHIKI FOODS, INC.
By: _/s/ Michael C. Tsao
-------------------------
Michael C. Tsao, President
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the
capacities and on the dates stated.
SIGNATURE: TITLE DATE
/s/Michael C. Tsao President, Director and June 7, August 12, 2004
Michael C. Tsao Chief Executive Officer
/s/Alice W. Tsao Vice President, Secretary June 7, August 12, 2004
Alice W. Tsao and Director
/s/Kenneth H. Kisner Treasurer June 7, 2004
Kenneth H. Kisner
/s/Alan Hoover Director June 7, August 12, 2004
Alan Hoover
/s/Winston Bash Director June 7, August 12, 2004
Winston Bash
/s/Bob Binsky Director June 7, August 12, 2004
Bob Binsky
/s/Bradford M. Sprague Director August 12, 2004
Bradford M. Sprague
/s/ Charles Dix Director August
12, 2004
Charles Dix
/s/Allen J. Proctor Director August 12, 2004
Allen J. Proctor
R.L. Richards Director August 12, 2004
R.L. Richards
/s/Julia A. Fratianne Chief Financial Officer June 7, 2004
Julia A. Fratianne and Treasurer August 12, 2004