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 January 31, 1999 File #: 001-09703
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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
- ------------------ ------------------- ----------
(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 Convertible Preferred Stock, $.01 Par Value
SKNS-M Warrants to Purchase Common Stock, $.001 Par Value (Expired 6/7/98)
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(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 [X] NO [ ]
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 [X]
The number of shares outstanding of issuer's Common Stock, $.001 par value per
share, as of January 31, 1999 was 9,343,187.
Transitional Small Business Disclosure Format (check one): YES [ ] NO [X]
SKOLNIKS, INC.
QUARTERLY REPORT ON FORM 10-QSB
FOR THE QUARTER ENDED JANUARY 31, 1999
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - January 31, 1999
and July 31, 1998................................................. 2
Condensed Consolidated Statements of Operations - Three
and Six Month Periods Ended January 31, 1999 and 1998............. 3
Condensed Consolidated Statements of Cash Flows - Six Month
Periods Ended January 31, 1999 and 1998........................... 4
Notes to Consolidated Financial Statements........................ 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................. 10
Item 2. Changes in Securities............................................. 10
Item 3. Defaults Upon Senior Securities................................... 10
Item 4. Submission of Matters to a Vote of Securities Holders............. 10
Item 5. Other Information................................................. 10
Item 6. Exhibits and Reports of Form 8-K.................................. 10
SIGNATURES................................................................... 11
SKOLNIKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
JANUARY 31, 1999
(unaudited)
January 31, 1999 July 31, 1998
(unaudited)
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ASSETS
CURRENT ASSETS
Cash $ 12,736 $ 31,625
Accounts Receivable, Net 136,010 130,519
Inventory, Net 42,047 36,322
Other Current Assets 33,824 58,139
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TOTAL CURRENT ASSETS 224,617 256,605
Property & Equipment, Net 226,545 227,672
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TOTAL ASSETS $ 451,162 $ 484,277
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts Payable $ 109,204 $ 59,203
Accrued Liabilities 359,742 291,094
Notes Payable - Related Parties 20,005 20,005
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TOTAL CURRENT LIABILITIES 488,951 $ 370,302
Notes Payable - Related Parties 1,271,000 1,271,000
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1,759,951 1,641,302
Commitments and Contingencies
STOCKHOLDERS' DEFICIT:
Series A Convertible Preferred Stock,
$0.01 par value, 2,000,000 shares
authorized; shares outstanding: January
1999 and July 1998 - 427,328 $ 4,273 $ 4,273
Common Stock, $0.001 par value, 10,000,000
shares authorized; shares outstanding:
January 1999 and July 1998 - 9,343,187 and
9,328,176, respectively 9,343 9,328
Additional Paid in Capital 21,118,821 21,118,835
Accumulated Deficit (21,538,685) (21,386,920)
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(406,248) (254,484)
Less Treasury Stock, at cost (902,541) (902,541)
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TOTAL STOCKHOLDERS' DEFICIT $ (1,308,789) $ (1,157,025)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 451,162 $ 484,277
============ ============
The accompanying notes are an integral part of these financial statements.
2
SKOLNIKS, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(unaudited)
Three-Months Ended Six-Months Ended
January 31, January 31,
------------------ ----------------
1999 1998 1999 1998
---- ---- ---- ----
Revenue:
Product Sales (net) $ 455,000 $ 426,553 $ 934,381 $ 794,268
Expenses:
Plant Operating Costs 419,226 417,266 865,798 851,810
General and Administrative
Expenses 84,436 93,095 150,039 156,276
---------- ---------- ---------- ----------
Loss from Operations $ (48,662) $ (83,808) $ (81,456) $ (213,818)
Other Income (Expense):
Interest Expense (35,155) (32,168) (70,309) (52,268)
---------- ---------- ---------- ----------
Net Loss $ (83,817) $ (115,976) $ (151,765) $ (266,086)
========== ========== ========== ==========
Per Common Share Information:
Basic Loss per Share $ (0.01) $ (0.02) $ (0.02) $ (0.04)
Weighted Average Shares
Outstanding 9,330,319 9,116,116 9,328,176 9,111,623
The accompanying notes are an integral part of these financial statements.
3
SKOLNIKS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
Six-Months Ended
-----------------------------------
January 31, 1999 January 31, 1998
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(151,765) $(266,086)
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and Amortization 32,594 39,162
Increase in Accounts Receivable (5,491) (59,321)
Increase in Inventory (5,725) (12,455)
Decrease (Increase) in Other Current Assets 24,315 (20,986)
Increase (Decrease) in Accounts Payable 50,001 (39,642)
Increase in Accrued Liabilities 68,648 36,109
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NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 12,577 (323,219)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (31,466) (460)
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NET CASH USED IN INVESTING ACTIVITIES (31,466) (460)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Borrowing 0 321,000
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NET CASH PROVIDED BY FINANCING ACTIVITIES 0 321,000
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NET INCREASE (DECREASE) IN CASH $ (18,889) $ (2,679)
CASH, BEGINNING OF PERIOD 31,625 68
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CASH, END OF PERIOD $ 12,736 $ (2,611)
========= =========
NON-CASH INVESTMENT/FINANCING ACTIVITIES:
Notes Payable Converted to Common Stock $ 0 $ 20,000
Preferred Stock Converted to Common Stock 0 293
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TOTAL NON-CASH TRANSACTIONS $ 0 $ 20,293
========= =========
The accompanying notes are an integral part of these financial statements.
4
SKOLNIKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED JANUARY 31, 1999
(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 January 31, 1999
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, 1998 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 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 fiscal 1998 and the first two quarters of fiscal 1999, the Company
incurred operating losses of $355,944 and $151,765, respectively. In
addition, the Company has a deficit in working capital of $113,697 at July
31, 1998 and $264,334 at January 31, 1999 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.
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 classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.
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 delivery of fresh bread
products within the Arizona and Las Vegas, NV market. While the product
line presently includes bagels, breadsticks, and Italian specialty breads,
a line of upscale, European Artisan 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.
5
(d) At January 31, 1999, 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.
(e) Since March 1995 through January 1999, certain members of the Board of
Directors and four shareholders have loaned the Company $1,291,005. In
connection with these loans, the lenders 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
=========
Members of the Board of Directors were issued warrants to purchase
2,100,000 shares at $0.375 and 300,000 shares at $0.10 upon joining the
Board (50% vest immediately and 50% vest in two years). 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 share capital is increased.
6
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 1999 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 below under "Basis of Presentation".
BASIS OF PRESENTATION
The following discussion should be read in conjunction with the condensed
consolidated financial statements included elsewhere within this 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 January 31, 1999 and 1998
The following table summarizes the operating results of the Company as a
percentage of revenue for the periods indicated.
Three Months Ended
January 31,
------------------
1999 1998
---- ----
Revenue 100% 100%
Plant operating costs 92% 98%
General and administrative expenses 19% 22%
---- ----
Operating Loss (11%) (20%)
Interest Expense 7% 7%
---- ----
Net Loss (18%) (27%)
==== ====
REVENUE
Revenue was $455,000 for the second quarter of fiscal 1999 and $426,553 for the
second quarter of fiscal 1998. The increase of $28,447or 7% can be attributed to
the continued success of an aggressive sales plan focused on multiple-unit
restaurant locations, retail grocery chain accounts, and club stores.
7
OPERATING EXPENSES
Operating Expenses were 92% of sales for the quarter ended January 31, 1999 and
98% for the quarter ended January 31, 1998. As a percentage of sales operating
expenses decreased 7%. The decrease is attributable to an on-going cost
awareness program, changes in administrative processes, and the discontinuance
of non-profitable products.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $84,436 for the quarter ended January
31, 1999 and $93,095 for the quarter ended January 31, 1998, a decrease of
$8,659 or 9%. The most significant reason for the decrease was the Company's
cost control program.
INTEREST EXPENSE
Interest expense was $35,155 in the second quarter of 1999, an increase of
$2,987 over the second quarter of 1998. The increase is attributable to
increased borrowings and higher interest rates.
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 1999, the Company had a working capital deficit of $264,334
compared to $113,697 at July 31, 1998. The increase of $150,637 in the deficit
resulted from an increase in accounts payable and accrued liabilities and the
cash purchase of capital equipment.
Net cash provided by operating activities in the first six months of fiscal 1999
was $12,577 compared to net cash used in operating activities in the first six
months of fiscal 1998 of $323,2198. The most significant reason for this
difference was the reduction in net loss. A secondary reason was the extension
of credit terms to the Company by its trade vendors, which provided operating
capital thereby increasing net cash provided by operations.
Net cash used in investing activities was $31,466 in the first two quarters of
1998 compared to $560 for the first quarter of 1997. This difference represents
the purchase by the Company of an additional proof box in September 1998.
The Company did not have any cash provided by or used in financing activities
for the six-month period ended January 31, 1999. Due to the deficit in operating
cash flows, the Company relied on proceeds from borrowings in an amount of
$321,000 for the six-month period ended January 31, 1998.
As of January 31, 1999, the Company was in default on all payments on the notes
payable that had matured in an aggregate amount of $20,005. These obligations
have been classified as current on the balance sheet. Furthermore, the Company
was in arrears on dividends on its Preferred Stock in the amount of $564,073
payable in shares of Preferred Stock.
As of January 31, 1999, 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 consistently provided by operating activities, and,
until such time, the Company will rely upon external sources for liquidity. The
Company has not established any lines of credit or any other significant
financing arrangements with any third party lenders. From March 1995 through
January 1999, certain members of the Company's Board of Directors and four
shareholders have provided operating capital in exchange for interest bearing
notes totaling an aggregate amount of $1,291,005 and warrants to purchase an
aggregate amount of 4,674,009 shares of Common Stock. The Company has been able
to secure a high interest capital lease arrangement with an outside lender to
acquire automated packaging equipment. However, due to the high interest rate
and terms combined with tight cash flow, the Company is unwilling to commit to
such a financing arrangement. The Company is investigating other financing
opportunities.
8
To date, the Company has been unable to secure other viable 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 unqualified opinion with an
explanatory paragraph with respect to the Company's financial statements for the
years ended July 31, 1998 and 1997 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 the
Company's "Form 10KSB for the year ended July 31, 1998, Part I, Item 1, Notes to
Consolidated Financial Statements, Note (c)."
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept only two-digit entries to represent years in the date code field. These
programs and databases were designed and developed without considering the
impact of the upcoming millennium. Consequently, date sensitive computer
programs may interpret the date "00" as 1900 rather than 2000. If not corrected,
many computer systems could fail or create erroneous results in 2000.
The Company has completed an assessment of all of its internal and external
systems and processes with respect to the "Year 2000" issue. In response to this
assessment, the Company has created a Y2K Task Force to resolve any
non-compliant Year 2000 systems, processes, or other issues. As part of the
process of evaluating the Year 2000 issue, the task force has assessed the
potential impact of Year 2000 failures from vendors and outside parties upon its
business and is currently surveying outside parties with whom they interact as
to their state of readiness.
The Company has assessed its information technology systems and believes that it
will be Year 2000 compliant because the Company operates personal computers
linked together with network package software and a server, as opposed to
mainframe computer technology. With the exception of the server, new personal
computers have been purchased in the past year and run on a standard operating
system that is Year 2000 compliant. In addition, the software used by the
Company is standard, off-the-shelf applications purchased or upgraded in the
past three years, which also are Year 2000 compliant. The Year 2000 task force
has concluded that it is in the Company's best interest to remove the server
from the network setting and link the remaining personal computers with a
standard network operating system. This final phase of the internal computer
technology systems remediation program is expected to be completed prior to July
31, 1999.
The Company has taken steps to assure that the computer systems of its vendors,
customers, and banks with which the Company utilize electronic data interchange
will be Year 2000 compliant. Such vendors, customers, and banks have assured the
Company that their computer operations will be Year 2000 compliant prior to
December 31, 1999. However, there can be no assurance that computer systems
operated by all third parties with which the Company systems' interface will be
compliant on a timely basis and in that event, the Company may be adversely
affected, although the magnitude of such effect cannot be estimated.
The Company has also determined that its bakery equipment processors are Year
2000 compliant. Bakery equipment evaluated includes ovens, breadstick and bagel
equipment, compressors, and thermostats. None of the equipment was determined to
use date sensitive computer processors.
The cost of the Company's Year 2000 compliance program has not had, and is not
expected to have, a material impact on the Company's results of operations,
financial condition, or liquidity. The Company has not been required to
prematurely replace equipment due to Year 2000 issue, nor has the Company needed
to hire Year 2000 solution providers. Further, the company does not anticipate
the necessity of such expenses in the future. Finally, the Company anticipates
that the cost of ensuring compliance of third parties will be minimal.
The Company anticipates, in its reasonably likely worst case Year 2000 scenario,
that the failure of its customers, suppliers, and utility providers to
adequately address their own Year 2000 issues is the most probable Year 2000
risk.
9
The failure of the Company's customers' and vendors' to be Year 2000 compliant
can be minimized by using a supplemental source of communication such as fax and
mail to ensure the invoices and checks are processed accordingly. The Company
plans to implement such procedures, as they become necessary.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDING
None
ITEM 2. CHANGES IN SECURITIES
None
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
None
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 Reorganization
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
(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
None
10
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: March 16, 1999 /s/ Russell K. Swartz
--------------- -------------------------------------------
Russell K. Swartz
President and Chief Executive Officer
(Principal Executive Officer)
Dated: March 16, 1999 /s/ Anga L. Allen
--------------- -------------------------------------------
Anga L. Allen
Chief Financial Officer
(Principal Financial and Accounting Officer)
11