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 October 31, 1999 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, Suite 100, Scottsdale, Arizona 85260
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(Address of principal executive office) (Zip code)
(480) 443-9640
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(Issuer's telephone number, including area code)
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 October 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 OCTOBER 31, 1999
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - October 31, 1999
and July 31, 1999....................................................2
Condensed Consolidated Statements of Operations - Three
Month Periods Ended October 31, 1999 and 1998........................3
Condensed Consolidated Statements of Cash Flows - Three
Month Periods Ended October 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....................................................9
Item 2. Changes in Securities................................................9
Item 3. Defaults Upon Senior Securities......................................9
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
1
SKOLNIKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
October 31, July 31,
1999 1999
------------ ------------
(unaudited)
ASSETS
CURRENT ASSETS
Cash $ 8,672 $ 16,282
Accounts receivable, net of allowance for
doubtful accounts of $47 and $110,
respectively 140,868 144,061
Inventories 28,350 26,964
Other current assets 46,227 57,767
------------ ------------
TOTAL CURRENT ASSETS 224,117 245,074
Property and equipment, net of
accumulated depreciation 255,049 208,016
------------ ------------
$ 479,166 $ 453,090
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 139,434 $ 114,791
Accrued liabilities 464,469 442,325
Current maturities of notes payable,
related parties 818,982 804,358
------------ ------------
TOTAL CURRENT LIABILITIES $ 1,422,885 $ 1,361,474
Notes Payable, related parties, less
current maturities 561,162 536,162
------------ ------------
1,984,047 1,897,636
Commitments and contingencies
STOCKHOLDERS' DEFICIT:
Series A Convertible Preferred Stock, $0.01
par value, 2,000,000 shares authorized;
shares issued and outstanding: October
and July 1999 - 427,328 $ 4,273 $ 4,273
Common Stock, $0.001 par value, 10,000,000
shares authorized; shares issued: October
and July 1999 - 9,343,187 9,343 9,343
Additional paid-in capital 21,118,821 21,118,820
Accumulated deficit (21,733,018) (21,672,682)
------------ ------------
(600,581) (540,246)
Less Treasury Stock, at cost, October 1999
and July 1999 - 141,604 shares (904,300) (904,300)
------------ ------------
TOTAL SHAREHOLDERS' DEFICIT $ (1,504,881) $ (1,444,546)
$ 479,166 $ 453,090
============ ============
The accompanying notes are an integral part of these financial statements.
2
SKOLNIKS, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(unaudited)
Three-Months Ended
-----------------------------
October 31, October 31,
1999 1998
----------- -----------
REVENUE:
Product sales (net) $ 487,748 $ 479,382
EXPENSES:
Plant operating costs 434,807 415,708
General & administrative expenses 76,966 96,468
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Loss from Operations (24,025) (32,794)
OTHER INCOME (EXPENSE):
Interest expense (36,311) (35,154)
----------- -----------
NET LOSS $ (60,336) $ (67,948)
=========== ===========
Net loss per share $ (0.02) $ (0.02)
=========== ===========
Weighted average shares outstanding 9,343,187 9,328,176
=========== ===========
The accompanying notes are an integral part of these financial statements.
3
SKOLNIKS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
Three-Months Ended
------------------------
October 31, October 31,
1999 1998
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(60,336) $(67,948)
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 10,697 19,844
Decrease (increase) in accounts receivable 3,193 (16,062)
Decrease (increase) in inventories (1,386) 8,011
Decrease (increase) in other current assets 11,540 14,747
Increase (decrease) in accounts payable 24,643 31,663
Increase (decrease) in accrued liabilities 22,144 12,039
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NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 10,495 2,294
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (57,730) (31,466)
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NET CASH USED IN INVESTING ACTIVITIES (57,730) (31,466)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on debt (5,375) 0
Proceeds from borrowing 45,000 0
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NET CASH PROVIDED BY FINANCING ACTIVITIES 39,625 0
NET INCREASE (DECREASE) IN CASH (7,610) (29,172)
CASH, BEGINNING OF PERIOD 16,282 31,625
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CASH, END OF PERIOD $ 8,672 $ 2,453
======== ========
The accompanying notes are an integral part of these financial statements.
4
SKOLNIKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED OCTOBER 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 October 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, 1999 financial statements and accompanying notes thereto.
(b) During the first quarter of fiscal 2000 and fiscal year 1999, the Company
incurred operating losses of $24,025 and $144,625, respectively. In
addition, the Company had a deficit in working capital of $1,198,768 on
October 31, 1999 and $1,116,400 on July 31, 1999 and a deficit in equity
for both 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 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 daily deliveries of fresh bread
products within the Arizona and Las Vegas, Nevada market. The product line
presently includes breadsticks, bagels, and specialty breads. However, new
products are being added in response to specific customer needs. The
Company is developing a niche as a specialty bread supplier to upscale,
multi-unit restaurant operations throughout the Southwest. 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.
(c) As of December 10, 1999, certain members of the Board of Directors, four
shareholders, and one third-party lender have loaned the Company's
wholly-owned subsidiary an aggregate of $1,408,983. On December 10, 1999,
$796,004 of the notes payable have matured and remain in delinquent status.
All of the delinquent notes payable are secured by the assets of the
Company's wholly-owned subsidiary: $475,000 secured by machinery and
equipment, $207,505 secured by furniture and fixtures, $32,500 secured by
accounts receivable, and $50,000 secured by all personal property owned by
the Company's wholly-owned subsidiary. The holders of the delinquent notes
payable pose a serious threat to the viability of the continuing business
because they may demand payment or seize the secured assets. There can be
no assurance that additional financing will be available to the Company on
acceptable terms, if at all. Any inability by the Company to obtain
additional financing, if required, or the loss of any the Company's assets
would have a material adverse effect on the operations of the Company.
Management is actively identifying and pursuing any options for additional
or alternative financing and repayment of its subsidiary's debt in default.
5
(d) In connection with the loan mentioned above, the Company issued warrants to
purchase a total of 6,340,667 shares of Common Stock and 800,000 shares of
Preferred Stock. In addition, Board members were issued warrants to
purchase 2,175,000 shares at $0.375 as compensation for their services on
the Board. Also, 800,000 warrants have been granted to certain past members
of management: 450,000 shares at $1.00 and 350,000 shares $0.375. A
comprehensive listing of all outstanding warrants is below.
Aggregate Outstanding
Common Stock Warrants Exercise Price Expiration Date
--------------------- -------------- ---------------
450,000 $ 1.000 2000
805,000 0.500 2000
625,000 0.500 2001
2,450,000 0.375 2002
1,524,000 0.250 2002
75,000 0.375 2003
920,000 0.125 2003
800,000 0.100 2003
1,666,667 0.030 2004
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9,315,667
Aggregate Outstanding
Preferred Stock Warrants Exercise Price Expiration Date
------------------------ -------------- ---------------
800,000 $ 0.050 2004
Holders of warrants to purchase 9,090,658 shares of Common Stock and
800,000 shares of Preferred Stock have agreed to refrain from exercising
their warrants until the Company's authorized shares 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 2000 and thereafter; future products
or product development; the Company's product development strategy; any debt
conversion or repayment negotiations including but not limited to the conversion
of the Company's wholly-owned subsidiary's debt to the subsidiary's equity; 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, 1999.
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 and Las Vegas, Nevada, 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 OCTOBER 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
October 31,
------------------
1998 1998
----- -----
Revenue 100% 100%
Plant operating costs 90% 87%
General and administrative expenses 15% 20%
----- -----
Operating Loss (5%) (7%)
Interest Expense 7% 7%
----- -----
Net Loss (12%) (14%)
===== =====
REVENUE
Revenue was $479,382 for the first quarter of fiscal 1999 and $487,748 for the
first quarter of fiscal 2000. The increase of $8,367 or 1.8% is fractional when
compared to the 30% sales growth in the first quarter of fiscal 1999 over the
first quarter of fiscal 1998. The primary reason for the decrease in the sales
growth is a vacancy in the sales representative position. The Company did not
have available resources to fill the sales representative position until the
seasonal summer market contraction ended.
7
OPERATING EXPENSES
Operating Expenses were 87% of sales as of October 31, 1998 and 90% as of
October 31, 1999. As a percentage of sales this category's expenditures
increased 3%. The increase is attributable to an increase in the monthly
building lease rate, increased repairs and maintenance costs, and increased
bakery labor costs offset by savings in packaging and ingredient costs. The
Company also contracted with a consulting firm to advise on baking and equipment
efficiency issues during the first quarter of fiscal 2000.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $96,468 for the quarter ended October
31, 1998 and $76,966 for the quarter ended October 31, 1999, a decrease of
$19,502 or 20%. The vacancy in the sales representative position and the related
decrease in selling expenses accounted for a substantial amount of the decrease
in general and administrative expenses. However, a decrease in both insurance
expense and professional fees also offered significant savings.
INTEREST EXPENSE
Interest expense was $36,311 in the first quarter of 1999, an increase of $1,157
over the first quarter of 1998. The increase is attributable to the increased
borrowings and higher interest rates.
LIQUIDITY AND CAPITAL RESOURCES
On October 31, 1999, the Company had a working capital deficit of $1,198,768
compared to $1,116,400 on July 31, 1999. The $82,368 increase in the working
capital deficit resulted from increases in accounts payable and accrued
liabilities coupled with decreases in accounts receivable and other current
assets. The Company had a positive operating cash flow, however, available cash
was used to purchase bakery equipment.
Net cash provided by operating activities was $2,294 for the first three months
of fiscal 1999 compared to net cash provided by operating activities of $10,495
for the first three months of fiscal 2000. The most significant reason for this
change was the ability of the Company to shorten the collection time of its
accounts receivables and extend trade payables. Another contributing factor for
the increase in operating cash flow is the increase in accrued liabilities, due
to the accrued and unpaid interest.
Net cash used in investing activities was $31,466 in the first quarter of 1999
compared to $57,730 for the first quarter of 2000. In fiscal year 1999, the
Company purchased an additional proof box to supplement the existing proof box.
In fiscal year 2000, the Company purchased an automated packaging line which
decreased the costs of packaging materials and labor, increased product safety
with an on-line metal detection component, and streamlined the packaging process
with incline and decline conveyors. The Company also purchased additional
production equipment necessary to automate a certain product line, which
significantly decreased the costs of dividing and forming these previously
hand-made products. These equipment purchases are expected to increase
efficiency and decrease production costs.
Net cash provided by financing activities was $39,625 for the first quarter of
fiscal 2000. There were not any financing activities for the first quarter of
fiscal 1999. The fiscal 2000 activity consisted of $45,000 in new loans and
$5,375 of payments on existing debt.
As of December 15, 1999, certain members of the Board of Directors, four
shareholders, and one third-party lender have loaned the Company's wholly-owned
subsidiary an aggregate of $1,408,983. On December 15, 1999, $765,005 of the
notes payable have matured and remain in delinquent status. All of the
delinquent notes payable are secured by the assets of the Company's wholly-owned
subsidiary; $475,000 secured by machinery and equipment, $207,505 secured by
8
furniture and fixtures, $32,500 secured by accounts receivable, and $50,000
secured by all personal property owned by the Company's wholly-owned subsidiary.
The holders of the delinquent notes payable pose a serious threat to the
viability of the continuing business because they may demand payment or seize
the secured assets. There can be no assurance that additional financing will be
available to the Company or its subsidiary on acceptable terms, if at all. Any
inability by the Company to obtain additional financing, if required, or the
loss of any of the Company's assets would have a material adverse effect on the
operations of the Company.
Management is actively identifying and pursuing any options for additional or
alternative financing and repayment of its subsidiary's debt in default. As of
December 15, 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. 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.
Because the Company has been unsuccessful in identifying a new source of
financing, the Company is considering renegotiating its subsidiary's debt that
is in default by conversion of that debt into equity of its subsidiary. However,
should the Company be successful in this negotiation, it will result in a
significant dilution of the Company's interest in its subsidiary and therefore
the Company's shareholder's ownership position.
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, 1999 and 1998 to reflect that the Company has suffered recurring losses
from operations and has a working capital deficit and deficit in equity for both
years that raise substantial doubt about the ability of the Company to continue
as a going concern. In addition, the report notes that the Preferred Stock of
the Company has a total liquidation preference and accumulated dividends of
approximately $2,128,000 which may effect the Company's ability to raise funds.
See "Part I, Item 1, Notes to Consolidated Financial Statements, Note (b)" of
this Report.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDING
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As of December 15, 1999, the total amount of arrearage of the Company's
wholly-owned subsidiary's debt which had matured was $1,204,473. The
$1,204,473 is 251% of the total assets of the Company. The Company failed
to repay the principal on the notes as they mature in an aggregate amount
of $765,005. Additionally, the Company has failed to make periodic interest
payments on all of the notes payable, delinquent or current, in an
aggregate amount of $439,468. All of the delinquent notes payable are
secured by the assets of the Company's wholly-owned subsidiary; $475,000
secured by machinery and equipment, $207,505 secured by furniture and
fixtures, $32,500 secured by accounts receivable, and $50,000 secured by
all personal property of the Company's wholly-owned subsidiary.
9
The Company is in arrears on the accumulated dividends on its Series A
Convertible Preferred Stock in the amount of $705,000, payable only in
shares of Preferred Stock at the current market price. The Company has been
unable to declare and distribute any Preferred Stock dividends since
February 1995 due to the limited authorized share capital of its Common
Stock and the distribution costs.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
On December 17, 1999, Director Nicolas Fegen resigned his position on the
Company's Board of Directors. Mr. Fegen had served on the Board of
Directors from February 1995 through December 1999 and acted as Chairman of
the Board and Chief Executive Officer from February 1995 through January
1997 during the Company's transition out of bankruptcy.
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
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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
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: December 20, 1999 /s/ Russell K. Swartz
------------------ --------------------------------------------
Russell K. Swartz
President and Chief Executive Officer
(Principal Executive Officer)
Dated: December 20, 1999 /s/ Anga Allen
------------------ --------------------------------------------
Anga Allen
Chief Financial Officer
(Principal Financial and Accounting Officer)
11