U.S. SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter period ended April 30, 1998 File #: 001-09703
SKOLNIKS, INC.
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(Exact name of small business issuer as specified in its charter)
Delaware 13-3074492
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7755 E. Gray Road, Scottsdale, Arizona 85260
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(Address of principal executive office) (Zip code)
(602) 443-9640
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(Issuer's telephone number, including area code)
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $ 0.001 PAR VALUE
SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK, $.01 PAR VALUE
SKNS-M WARRANTS TO PURCHASE COMMON STOCK, $.001 PAR VALUE
(Title of Class)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. YES [ ] NO [X]
Check whether the issuer filed all documents and reports required to be filed by
Section 12, 13, 15(d) of the Exchange Act after the distribution of securities
under a plan confirmed by a court YES [ ] NO [ ]
The number of shares outstanding of issuer's Common Stock, $.001 par value per
share, as of July 31, 1998 was 9,328,176.
Transitional Small Business Disclosure Format (check one): YES [ ] NO [X]
SKOLNIKS, INC.
QUARTERLY REPORT ON FORM 10-QSB
FOR THE QUARTER ENDED APRIL 30, 1998
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - April 30, 1998
and July 31, 1997..............................................3
Condensed Consolidated Statements of Operations -
Three and Nine Month Periods Ended April 30, 1998 and 1997.....4
Condensed Consolidated Statements of Cash Flows -
Nine Month Periods Ended April 30, 1998 and 1997...............5
Notes to Consolidated Financial Statements.....................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...........................8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................11
Item 2. Changes in Securities.........................................11
Item 3. Defaults Upon Senior Securities...............................11
Item 4. Submission of Matters to a Vote of Securities Holders.........11
Item 5. Other Information.............................................11
Item 6. Exhibits and Reports of Form 8-K..............................12
SIGNATURES....................................................13
SKOLNIKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
APRIL 30, 1998
(unaudited)
April 30, 1998 July 31, 1997
(unaudited)
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ASSETS
CURRENT ASSETS
Cash $ 17,711 $ 68
Accounts Receivable, Net 168,695 104,234
Inventory, Net 47,541 41,397
Other Current Assets 49,453 30,365
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TOTAL CURRENT ASSETS 283,400 176,064
Property & Equipment 885,239 884,779
Less Accumulated Depreciation (641,592) (582,848)
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243,647 301,931
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TOTAL ASSETS $ 527,047 $ 477,995
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts Payable and
Accrued Liabilities $ 323,797 $ 394,129
Notes Payable - Related Parties 1,211,005 805,005
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TOTAL CURRENT LIABILITIES $ 1,534,802 $ 1,199,134
Commitments and Contingencies 0 0
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STOCKHOLDERS' DEFICIT:
Preferred Stock, $0.01 par value, 2,000,000
shares authorized; shares issued: April
1998 - 485,645 and July 1997 - 532,271 $ 4,856 $ 5,323
Common Stock, $0.001 par value, 10,000,000
shares authorized; shares issued: April
1998 - 9,269,855 and July 1997 - 9,072,489 9,270 9,072
Additional Paid in Capital 21,118,310 21,088,042
Accumulated Deficit (21,237,650) (20,921,035)
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(105,214) 181,402
Less Treasury Stock, at cost (902,541) (902,541)
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TOTAL STOCKHOLDERS' DEFICIT $ (1,007,755) $ (721,139)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 527,047 $ 477,995
============ ============
The accompanying notes are an integral part of
these financial statements.
3
SKOLNIKS, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(unaudited)
Three-Months Ended Nine-Months Ended
April 30, April 30,
------------------------ -----------------------
1998 1997 1998 1997
---- ---- ---- ----
Product Sales (net) $ 487,431 $ 390,793 $1,281,698 $1,123,321
EXPENSES:
Plant Operating Costs 433,936 383,348 1,285,693 1,115,981
General & Administrative 74,224 93,358 230,552 362,349
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Loss from Operations $ (20,729) $ (85,913) $ (234,547) $ (355,009)
Interest Income (Expense) (29,800) (18,600) (82,068) (55,948)
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LOSS BEFORE EXTRAORDINARY
ITEM $ (50,529) $ (104,513) $ (316,615) $ (410,957)
EXTRAORDINARY ITEM - DEBT
FORGIVENESS 0 0 0 3,526,973
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ (50,529) $ (104,513) $ (316,615) $3,116,016
========== ========== ========== ==========
Income (Loss) before
Extraordinary Item $ (0.01) $ (0.02) $ (0.04) $ (0.07)
Extraordinary Item (0.00) (0.00) (0.00) 0.47
---------- ---------- ---------- ----------
Net Income (Loss) per Share $ (0.01) $ (0.02) $ (0.04) $ 0.40
========== ========== ========== ==========
Weighted Average Shares
Outstanding 9,210,306 7,986,332 9,171,172 7,471,220
The accompanying notes are an integral part of
these financial statements.
4
SKOLNIKS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
Nine-Months Ended
April 30,
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1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $(316,615) $ 3,116,016
Adjustments to reconcile net income to net
cash used in operating activities:
Extraordinary Gain - Debt Forgiveness 0 (3,526,973)
Depreciation and Amortization 58,743 53,243
Decrease (Increase) in Accounts Receivable (64,461) (34,096)
Decrease (Increase) in Inventory (6,144) (27,217)
Decrease (Increase) in Other Current Assets (19,088) (22,220)
Increase (Decrease) in Accounts Payable and
Accrued Liabilities (70,332) 116,072
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NET CASH USED IN OPERATING ACTIVITIES $(417,897) $ (325,175)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment $ (460) $ (78,135)
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NET CASH USED IN INVESTING ACTIVITIES $ (460) $ (78,135)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on Debt $ 0 $ (10,340)
Proceeds from Borrowing 436,000 175,000
Proceeds from Stock Issuance 0 1,030,000
Payments to Creditors' Trust $ 0 $ (800,000)
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NET CASH PROVIDED BY FINANCING ACTIVITIES $ 436,000 $ 394,660
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NET INCREASE IN CASH $ 17,643 $ (8,650)
CASH, BEGINNING OF PERIOD 68 13,539
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CASH, END OF PERIOD $ 17,711 $ 4,889
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NON-CASH INVESTMENT/FINANCING ACTIVITIES:
Notes Payable Converted to Common Stock $ 30,000 $ 0
Preferred Stock Converted to Common Stock 47
Common Stock Issued to Creditors' Trust 0 500
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TOTAL NON-CASH TRANSACTIONS $ 30,047 $ 500
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The accompanying notes are an integral part of
these financial statements.
5
SKOLNIKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED APRIL 30, 1998
(a) The accompanying unaudited consolidated financial statements have been
prepared by the Company without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. These financial statements
reflect all adjustments (consisting of normal recurring accruals and
adjustments) which are, in the opinion of management, necessary to fairly
state the financial position as of April 30, 1998 and the operating results
and cash flows for the periods presented. Operating results for the interim
periods presented are not necessarily indicative of the operating results
that may be expected for the entire year. These financial statements should
be read in conjunction with the Company's July 31, 1997 financial statements
and accompanying notes thereto.
(b) At a hearing held in bankruptcy court on March 20, 1995, the Company agreed
to an order for relief under Chapter 11 of the United States Bankruptcy
Code. The Company submitted a plan to the bankruptcy court, which was
approved. The plan was mailed to the creditors and shareholders May 2, 1996.
The Court confirmed the plan of reorganization at the Confirmation Hearing
held on July 10, 1996, at the United States Bankruptcy Court in the Western
District of Oklahoma. The Company raised $1,000,000 by selling 1 million
shares of Common Stock to fund the Plan of Reorganization. The creditor's
trust received a cash payment of $800,000 and 500,000 shares of Common
Stock. The Company completed all requirements under the Plan of
Reorganization on December 18, 1996. The Court issued a Final Decree in
connection with the Company's Reorganization in Bankruptcy on October 8,
1998.
(c) During 1997 and the first three quarters of fiscal year 1998, the Company
incurred operating losses of $480,408 and $234,547 respectively. In
addition, the Company has a deficit in working capital of $1,023,070 at July
31, 1997 and $1,251,402 at April 30, 1998 and a deficit in equity for both
time periods. The significance of the combined losses with the deficits in
working capital and equity raises substantial doubt about the Company's
ability to continue as a going concern
(d) The financial statements of the Company have been prepared on the basis of
principles applicable to a continuing business. The basis presumes the
realization of assets and the settlement of liabilities in the ordinary
course of business. The Company's ability to operate as a continuing
business is dependent upon the attainment of future profitable operations
and/or the Company's ability to acquire additional capital or other forms of
financing. The accompanying financial statements do not reflect any
adjustments relating to the recoverability and classification of recorded
asset amounts or amounts or classification of liabilities that might be
necessary should the Company be unable to continue as a going concern.
(e) Management is pursuing new business opportunities, primarily in the
geographic Southwest, with customers in the retail grocery, convenience
store, vending, military, food service, and club store segments. In
addition, new customers are being added for daily deliveries of fresh bread
products within the Arizona market. While the product line presently
includes bagels, breadsticks, and Italian specialty breads, a line of
upscale, European Artesan breads has been developed and is being introduced.
Management is also considering the opportunity to acquire, merge, or
strategically align with other synergistic baked goods or food manufacturers
for enhanced product offerings, geographic coverage, and customer leverage.
6
(f) At April 30, 1998, the Company had approximately $20 million of net
operating loss carryforwards available for both financial statement and
federal income tax purposes. These carryforwards expire through 2018. No
deferred tax asset has been recorded as the realization of the benefit is in
substantial doubt.
(g) Since March 1995 through August 1998, certain members of the Board of
Directors and three shareholders have loaned the Company $1,291,005,
including $1,211,005 total loaned through April 30, 1998. In connection with
these loans, the Board members have been issued warrants to purchase a total
of 4,674,009 shares of Common Stock.
Number of Shares Exercise Price
1,430,009............$0.500
1,524,000............$0.250
920,000............$0.125
800,000............$0.100
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4,674,009
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The Board members were issued warrants (50% vest immediately and 50% vest in
two years) to purchase 2,100,000 shares at $0.375 and 300,000 shares at
$0.10 upon joining the Board. Also, 350,000 warrants have been granted to
certain members of management: 200,000 shares at $1.00 and 150,000 shares
$0.375.
Holders of warrants to purchase 7,409,009 shares of common stock have agreed
to refrain from exercising their warrants until the Company's authorized
shares capital is increased.
(h) Net Income per share for the periods ended April 30, 1998 and 1997 was
determined by dividing net income available to common shareholders by the
weighted-average number of common and common equivalent shares outstanding.
Common stock equivalents recognize the potential dilutive effects of the
future exercise of common stock option. The weighted-average number of
common equivalent shares assumes the exercise of all outstanding options and
the corresponding repurchase of shares using the treasury stock method as of
the beginning of each period presented. The common stock warrants for the
periods presented do not quality as common equivalents.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The statements contained in this Report on Form 10-QSB that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including statements regarding the Company's "expectations",
"anticipation", "intentions", "beliefs", or "strategies" regarding the future.
Forward-looking statements include statements regarding revenue, margins,
expenses, and earnings analysis for fiscal 1998 and thereafter; future products
or product development; the Company's product development strategy; and
liquidity and anticipated cash needs and availability. All forward-looking
statements included in this Report are based on information available to the
Company on the date of this Report, and the Company assumes no obligation to
update any such forward-looking statement. It is important to note that the
Company's actual results could differ materially from those in such
forward-looking statements. Among the factors that could cause actual results to
differ materially are the factors discussed in Item 1, "Business - Special
Considerations" of the Company's Form 10-KSB for the year ended July 31, 1997.
BASIS OF PRESENTATION
The following discussion should be read in conjunction with the condensed
consolidated financial statements included elsewhere within this quarterly
report. Fluctuations in annual and quarterly operating results may occur as a
result of certain factors such as the size and timing of customer orders,
competition, and general economic conditions. The customer base is located
primarily in Arizona, which experiences an economic downturn in the hospitality
industry during the hot summer months due to decreased tourism. Because of such
fluctuations, historical results and percentage relationships are not
necessarily indicative of the results for any future period.
RESULTS OF OPERATIONS
Three Months Ended April 30, 1998 and 1997
The following table summarizes the operating results of the Company as a
percentage of revenue for the periods indicated.
Three Months Ended
April 30,
1998 1997
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Revenue 100% 100%
Operating Expenses 89% 98%
General and Administrative 15% 24%
--- ---
Operating Income (Loss) (4%) (22%)
Interest Expense 6% 5%
--- ---
Income (Loss) before Extraordinary Item (10%) (27%)
Extraordinary Item - Debt Forgiveness 0% 0%
--- ---
Net Income (Loss) (10%) (27%)
=== ===
8
REVENUE
Revenue was $487,431 for the third quarter of 1998 and $390,793 for the third
quarter of 1997. The increase of $96,638 or 25% can be attributed to the
addition of a full-time sales representative and a more focused sales plan
directed at multiple-unit locations. Also, a national sales broker organization
has been retained to present the breadstick and bagel product lines to major
retail grocery and foodservice accounts.
OPERATING EXPENSES
Operating Expenses were 89% of sales on April 30, 1998 and 98% on April 30,
1997. As a percentage of sales this category's expenditures decreased 9%. The
decrease is attributable to a cost reduction program and increased operating
efficiency.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $74,224 for the quarter ended April 30,
1998 and $93,358 for the quarter ended April 30, 1997, a decrease of $19,134 or
20%. An effective cost reduction program is the most significant reason for this
decrease.
INTEREST EXPENSE
Interest expense was $29,800 in the third quarter of 1998, an increase of
$11,200 over the third quarter of 1997. The increase is attributable to the
increased borrowings.
LIQUIDITY AND CAPITAL RESOURCES
At April 31, 1998, the Company had a working capital deficit of $1,251,402
compared to 1,023,070 at July 31, 1997. The decrease of $228,332 in the deficit
resulted from increased borrowings of $406,000 offset by an increase in accounts
receivable, inventory, and other assets of $89,693 and decrease accounts payable
and accrued liabilities of $70,332.
Net cash used in operating activities was $417,897 in the first nine months of
1998 compared to $325,175 in the first nine months of 1997. The increase in net
cash used in operating activities for the nine month period ended April 30,
1998, resulted from decreased operating losses of approximately $94,342 in 1998
compared to the first nine months of 1997, increases in accounts receivable,
inventories, and prepaid expenses of approximately $6,160, and a decrease in
accounts payable and accrued liabilities of $186,404. Net cash used in investing
activities was $460 in the first three quarters of 1998 compared to $78,135 for
the first three quarters of 1997. Net cash provided by financing activities for
the first three quarters of fiscal 1998 was $436,000 compared to $175,000 in the
first three quarters of fiscal 1997. The difference resulted primarily from
increase borrowings.
As of July 31, 1997, the Company was in default on all payments to most of its
trade vendors and lenders. As of April 30, 1998, the Company has made progress
towards eliminating the past due accounts payable and as a result some trade
vendors began offering favorable payment terms. All past due and current
obligations have been classified as current as of July 31, 1997 and April 30,
1998. Furthermore April 30, 1998, the Company was in arrears on dividends on its
Preferred Stock in the amount of $560,645 payable in shares of Preferred Stock.
As of April 30, 1998, the Company's sources of external financing remain
limited. The Company does not expect that internal sources of liquidity will
improve until net cash is provided by operating activities, and, until such
time, the Company will rely upon external sources for liquidity.
9
The Company has not established any lines of credit or any other significant
financing arrangements with any third party lenders. From March 1995 through
October 1998, certain members of the Company's Board of Directors and three
shareholders have provided operating capital in exchange for interest bearing
notes totaling an aggregate amount of $1,291,005 and stock warrants in the
aggregate of 4,674,009 warrants. The Company has been unable to identify other
sources regarding securing working capital, a function of the involuntary
bankruptcy experienced in 1994 and continuing business losses.
The Company's independent accountants have issued an opinion with an explanatory
paragraph with respect to the Company's financial statements for the years ended
July 31, 1997 and 1996 to reflect recurring losses from operations and a working
capital deficit and deficit in equity that raise substantial doubt about the
ability of the Company to continue as a going concern. See "Part I, Item 1,
Notes to Consolidated Financial Statements, Note (e)."
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PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDING
A complaint was filed in the Maricopa County Superior Court (Civil
Action No. CV98-03169) against the Company's wholly owned subsidiary R &
B Quality Foods for non-payment of trade debt. On April 13, 1998, a
settlement agreement was reached whereby R & B Quality Foods paid a lump
sum of $50,000.00.
ITEM 2 CHANGES IN SECURITIES
From March 1995 through August 1998, the Company issued notes in an
aggregate amount of $1,291,005 and granted warrants in connection
therewith, to purchase an aggregate of 4,674,009 shares of Common Stock
in exchange for cash in the amount of $1,291,005 to members of the
Company's Board of Directors and to three shareholders of the Company.
In January 1997 through August 1998, the Company issued warrants to
purchase an aggregate of 2,550,000 shares of Common Stock to officers
and directors of the Company as compensation.
The Company issued the notes and warrants without registration under the
Securities Act in reliance on Sections 4(2) and/or 4(6) of the
Securities Act.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES Not applicable.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable.
ITEM 5 OTHER INFORMATION Not applicable.
11
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2 Certificate of Owner and Merger (1)
2.1 Second Amended Plan of Reorganization and Disclosure Statement
2.2 Modification of Second Amended Plan of Preorganization
3.1 Certificate of Incorporation, as amended, (included as annex
to Exhibit 2); Amendment to Certificate of Incorporation (1)
Bylaws, as amended (1)
3.2 Bylaws, as amended (1)
4 Amended Certificate of Designations, Preferences, and Rights
of Series A Convertible Preferred Stock (2)
4.6 Warrant Agreement covering 506,250 Common Stock Purchase
Warrants (M Warrants) (3)
27.1 Financial Data Schedule
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(1) Filed as exhibit to Registrant's Form S-18 Registration Statement (No.
33-16869) which is incorporated herein by reference.
(2) Incorporated by reference to the Registration Statement on Form S-1 of the
Registrant as filed with the SEC on March 8, 1993 (File No. 33-59116)
(3) Incorporated by reference to the Registration Statement on Form S-1 of the
Registrant as filed with the SEC on March 1, 1993 (File No. 33-58858).
(b) Exhibits Reports on Form 8-K
The Company filed a Form 8-K on March 13, 1996.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Skolniks, Inc.
Dated: 10/28/98 /s/ Russell K. Swartz
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Russell K. Swartz
President and Chief Executive Officer
(Principle Executive Officer)
Dated: 10/28/98 /s/ Gary D. Mallery
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Gary D. Mallery
Chief Financial Officer
(Principle Financial and Accounting Officer)
13