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, 1998 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
- ------------------------------- ------------------
(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 October 31, 1998 was 9,328,176.
Transitional Small Business Disclosure Format (check one): YES [ ] NO [X]
<PAGE>
SKOLNIKS, INC.
QUARTERLY REPORT ON FORM 10-QSB
FOR THE QUARTER ENDED OCTOBER 31, 1998
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
October 31, 1998 and July 31, 1998............................. 2
Condensed Consolidated Statements of Operations -
Three Month Periods Ended October 31, 1998 and 1997............ 3
Condensed Consolidated Statements of Cash Flows -
Three Month Periods Ended October 31, 1998 and 1997............ 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.......... 9
Item 5. Other Information.............................................. 9
Item 6. Exhibits and Reports of Form 8-K............................... 10
SIGNATURES.................................................................. 11
2
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SKOLNIKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
OCTOBER 31, 1998
(unaudited)
October 31, 1998
(Unaudited) July 31, 1998
----------- -------------
ASSETS
CURRENT ASSETS
Cash $ 2,453 $ 31,625
Accounts Receivable, Net 146,581 130,519
Inventory, Net 28,311 36,322
Other Current Assets 43,392 58,139
------------ ------------
TOTAL CURRENT ASSETS 220,737 256,605
Property & Equipment, Net 239,295 227,672
------------ ------------
TOTAL ASSETS $ 460,032 $ 484,277
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts Payable and
Accrued Liabilities $ 393,999 $ 350,297
Notes Payable - Related Parties 20,005 20,005
------------ -----------
TOTAL CURRENT LIABILITIES $ 414,004 $ 370,302
Notes Payable - Related Parties 1,271,000 1,271,000
------------ ------------
1,685,004 1,641,302
Commitments and Contingencies
STOCKHOLDERS' DEFICIT:
Series A Convertible Preferred Stock,
$0.01 par value, 2,000,000 shares
authorized; shares issued: October
and July 1998 - 427,328 $ 4,273 $ 4,273
Common Stock, $0.001 par value,
10,000,000 shares authorized; shares
issued: October and July 1998 - 9,328,176 9,328 9,328
Additional Paid in Capital 21,118,836 21,118,835
Accumulated Deficit (21,454,868) (21,386,920)
------------ ------------
(322,431) (254,484)
Less Treasury Stock, at cost (902,541) (902,541)
------------ ------------
TOTAL STOCKHOLDERS' DEFICIT $ (1,224,972) $ (1,157,025)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 460,032 $ 484,277
============ ============
The accompanying notes are an integral part of
these financial statements.
3
<PAGE>
SKOLNIKS, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(unaudited)
THREE-MONTHS ENDED
-----------------------------------
OCTOBER 31, 1998 OCTOBER 31, 1997
---------------- ----------------
REVENUE:
Product sales (net) $ 479,382 $ 367,715
EXPENSES:
Plant operating costs 415,708 389,006
General & administrative expenses 96,468 108,719
----------- -----------
LOSS FROM OPERATIONS (32,794) (130,011)
OTHER INCOME (EXPENSE):
Interest Expense (35,154) (20,100)
----------- -----------
NET LOSS $ (67,948) $ (150,111)
=========== ===========
Net Loss per Share $ (0.01) $ (0.02)
=========== ===========
Weighted Average Shares Outstanding 9,328,176 9,076,983
=========== ===========
The accompanying notes are an integral part of
these financial statements.
4
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SKOLNIKS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
THREE-MONTHS ENDED
-----------------------------------
OCTOBER 31, 1998 OCTOBER 31, 1997
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(67,948) $(150,111)
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and Amortization 19,844 19,581
Increase in Accounts Receivable (16,062) (26,450)
Decrease (Increase) in Inventory 8,011 (11,345)
Decrease (Increase) in Other Current Assets 14,747 (6,396)
Increase (Decrease) in Accounts Payable
and Accrued Liabilities 43,702 (34,719)
-------- ---------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 2,294 (209,439)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (31,466) (560)
-------- ---------
NET CASH USED IN INVESTING ACTIVITIES (31,466) (560)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Borrowing 0 210,000
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NET CASH PROVIDED BY FINANCING ACTIVITIES 0 210,000
NET INCREASE (DECREASE) IN CASH (29,172) 1
CASH, BEGINNING OF PERIOD 31,625 68
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CASH, END OF PERIOD $ 2,453 $ 69
======== =========
The accompanying notes are an integral part of
these financial statements.
5
<PAGE>
SKOLNIKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED OCTOBER 31, 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 October 31, 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, 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 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 1998 and the first quarter of fiscal 1999, the Company incurred
operating losses of $355,944 and $32,794 respectively. In addition, the
Company has a deficit in working capital of $113,697 at July 31, 1998 and
$193,267 at October 31, 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
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 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.
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(d) At October 31, 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.
(e) Since March 1995 through October 1998, certain members of the Board of
Directors and three shareholders have loaned the Company $1,291,005. 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
=========
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.
(f) Net Income per share for the periods ended October 31, 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 options. 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 stock equivalents.
7
<PAGE>
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 in Item 1, "Business - Special
Considerations" of the Company's Form 10-KSB for the year ended July 31, 1998.
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 October 31, 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
October 31,
1998 1997
---- ----
Revenue 100% 100%
Plant operating costs 87% 106%
General and administrative expenses 20% 30%
--- ---
Operating Loss (7%) (36%)
Interest Expense 7% 5%
--- ---
Net Loss (14%) (41%)
=== ===
REVENUE
Revenue was $479,382 for the first quarter of fiscal 1999 and $367,715 for the
first quarter of fiscal 1998. The increase of $111,667or 30% 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.
OPERATING EXPENSES
Operating Expenses were 87% of sales on October 31, 1998 and 106% on October 31,
1997. As a percentage of sales this category's expenditures decreased 19%. The
decrease is attributable to an on-going cost reduction program, changes in
administrative processes, and the discontinuance of non-profitable products.
8
<PAGE>
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $96,468 for the quarter ended October
31, 1998 and $108,719 for the quarter ended October 31, 1997, an decrease of
$12,251 or 11%. The most significant reason for the decrease was a cost control
program.
INTEREST EXPENSE
Interest expense was $35,154 in the first quarter of 1998, an increase of
$15,054 over the first quarter of 1997. The increase is attributable to the
increased borrowings and higher interest rate.
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 1998, the Company had a working capital deficit of
$193,267compared to $113,697 at July 31, 1998. The decrease of $79,570 in the
deficit resulted from an increase in the net cash provided by operating
activities and improved operating results.
Net cash provided by operating activities was $2,294 in the first three months
of 1998 compared to net cash used in operating activities of $209,439 in the
first three months of 1997. The most significant reason for this change is the
difference in net loss. A secondary reason is 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 quarter of 1998
compared to $560 for the first quarter of 1997. The Company purchased an
additional proof box in September 1998.
The Company did not have any cash provided by or used in financing activities
for the quarter ended October 31, 1998. Due to the deficit in operating cash
flows, the Company relied on proceeds from borrowings in an amount of $210,000
for the quarter ended October 31, 1997.
As of July 31, 1998, the Company was in default on all payments to the notes
payable that are 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 October 31, 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 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
October 1998, 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 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, 1998 and 1997 to reflect recurring losses from operations and a working
9
<PAGE>
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 (c)." In addition, the report
notes that the Preferred Stock of the Company has a total liquidation preference
and accumulated dividends of approximately $1,987,000, which may effect the
Company's ability to raise funds.
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
Not applicable
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 (4)
2.2 Modification of Second Amended Plan of Preorganization (4)
3.1 Certificate of Incorporation, as amended, (included as annex
to Exhibit 2); Amendment to Certificate of Incorporation (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 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).
(4) Incorporated by reference to the Form 10-KSB of the Registrant for the
fiscal year ended July 31, 1997 as filed with the SEC on April 22, 1998
(File No. 0-9703).
(b) EXHIBITS REPORTS ON FORM 8-K
None
10
<PAGE>
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.
/s/ Russell K. Swartz
Dated: December 11, 1998 -------------------------------------
Russell K. Swartz
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Gary D. Mallery
Dated: December 11, 1998 -------------------------------------
Gary D. Mallery
Chief Financial Officer
(Principal Financial and Accounting
Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> OCT-31-1998
<CASH> 2,453
<SECURITIES> 0
<RECEIVABLES> 149,605
<ALLOWANCES> 3,024
<INVENTORY> 28,311
<CURRENT-ASSETS> 220,737
<PP&E> 920,311
<DEPRECIATION> 681,016
<TOTAL-ASSETS> 460,032
<CURRENT-LIABILITIES> 414,004
<BONDS> 0
0
4,273
<COMMON> 9,328
<OTHER-SE> (1,238,573)
<TOTAL-LIABILITY-AND-EQUITY> 460,032
<SALES> 478,170
<TOTAL-REVENUES> 479,382
<CGS> 415,708
<TOTAL-COSTS> 512,176
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<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35,154
<INCOME-PRETAX> (67,948)
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<NET-INCOME> (67,948)
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