SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 1997
Commission File Number 0-9703
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SKOLNIKS, INC.
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(Name of Small Business Issuer in Its Charter)
DELAWARE 13-3074492
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(State of incorporation) (I.R.S. Employer Identification No.)
7755 E. Gray Road, Scottsdale, Arizona 85260 (602) 443-1415
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(Address, including zip code, and telephone number, including area code, of
issuer's executive offices)
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, par value $.001 per share
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act 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
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Check if disclosure of delinquent filers pursuant to item 405 of Regulation S-B
is not contained in this form, and no disclosure will be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year: $1,457,063
Aggregate market value of the voting stock held by non-affiliates computed by
reference to the price at which the stock was sold, or the average bid and asked
prices of such stock, as of a specified date within the past 60 days: As of
April 3, 1998 - $1,210,794. For purposes of this computation, all executive
officers, directors and 10% beneficial owners of the registrant are deemed to be
affiliates. Such determination should not be deemed an admission that such
executive officers, directors, or 10% beneficial owners are, in fact, affiliates
of the registrant.
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes No X
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Number of shares outstanding of each of the issuer's classes of common equity,
as of the latest practicable date: As of January 31, 1998 - 9,072,489 shares of
common stock, par value $.001 per share (the "Common Stock").
Documents incorporated by reference: None.
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SKOLNIKS, INC.
ANNUAL REPORT ON FORM 10-KSB
FOR THE FISCAL YEAR ENDED JULY 31, 1997
TABLE OF CONTENTS
Page
PART I
ITEM 1. BUSINESS................................................ 1
ITEM 2. PROPERTIES.............................................. 5
ITEM 3. LEGAL PROCEEDINGS....................................... 6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..... 6
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS......................... 7
ITEM 6. SELECTED FINANCIAL DATA; MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS........................................... 8
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............. 11
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE..................... 11
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT;
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES
EXCHANGE ACT OF 1934.................................... 12
ITEM 10. EXECUTIVE COMPENSATION.................................. 13
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.......................................... 17
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......... 18
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K........................ 19
SIGNATURES ........................................................ 20
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................................ F-1
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PART I
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ITEM I. BUSINESS
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General
Currently, the Company produces and markets frozen and partially baked
bagel dough, thaw and serve bagels, bread sticks, and other baked goods. The
Company markets and distributes its products to distributors, retailers, food
service operations, and restaurants. The Company produces its products in a
plant located in Scottsdale, Arizona.
In January 1995 certain creditors filed an Involuntary Petition under
Chapter 11 of the United States Bankruptcy Code against the Company in the
United States Bankruptcy Court for the Western District of Oklahoma (Case No.
95-10206LN). The petition alleged that the Company had not paid its debts with
respect to such creditors as they became due. The petitioning creditors claimed
that the Company owed an aggregate of approximately $350,000. The Company
engaged special bankruptcy counsel to handle this matter on its behalf. The
Court signed an order requiring the Company to obtain court approval prior to
the use, transfer, sale, acquisition, disposition, or relocation of any property
outside of the ordinary course of business. A joint motion to dismiss the
involuntary petition was filed on February 10, 1995, and a subsequent hearing to
consider such issue was held on March 15, 1995. At that hearing, the Company was
presented with objections to its motion to dismiss from various creditors with
claims exceeding $2,000,000 in the aggregate. As a primary result of such
claims, management believed it to be in the best interests of the Company to
agree to an order for relief under Chapter 11 of the United States Bankruptcy
Code and agreed to such an order in a hearing on March 20, 1995. The Company
submitted a plan to the bankruptcy court, which was approved and mailed to the
Company's creditors and shareholders May 2, 1996. The Court confirmed the plan
of reorganization at a confirmation hearing held on July 10, 1996, in the United
States Bankruptcy Court in the Western District of Oklahoma. The Company exited
bankruptcy on December 18, 1996.
Prior to entering into bankruptcy, the Company franchised restaurants
under the name "Skolniks Bagel Bakery Restaurants." In addition to its franchise
operations, the Company owned and operated restaurants and, during fiscal 1994,
operated production plants in Westhampton, New Jersey and Morristown, New
Jersey. Subsequent to fiscal 1994, the New Jersey plants were closed and their
operations were consolidated into the Company's production plant in Scottsdale,
Arizona.
The Company filed its last annual report on Form 10-KSB for the year
ended July 31, 1993 and its last quarterly report on Form 10-QSB for the quarter
ended April 30, 1994, on November 12, 1993 and June 21, 1994 respectively. The
Company has not filed annual reports for the years ended July 31, 1994, 1995 and
1996, or quarterly reports for the quarters ended after April 30, 1994 through
January 31, 1998. Due to changes in personnel and poor record keeping and the
lack of availability of records kept by such personnel prior to the Company's
filing for reorganization in bankruptcy, the Company has determined that certain
of its records for the fiscal years 1994 and 1995 are not available and
therefore not able to be audited and the cost of preparing and auditing other of
such records would be prohibitive and would not be justified in light of the age
of the information and its relevancy to the Company's current operations.
Therefore, the Company does not intend to prepare or file annual or quarterly
reports for the periods set forth above through the quarter ended April 30,
1997.
Marketing Operations
The Company is in the process of implementing a strategy to develop a
regional sales and marketing plan for the marketing and distribution of the
Company's products from its plant in Scottsdale, Arizona. Subsequent to the
Company's emergence from reorganization in bankruptcy, the Company hired a new
Vice President-Sales and Marketing to design and implement this plan.
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Manufacturing Operations
The Company currently operates a manufacturing plant in Scottsdale,
Arizona, that produces bagels, breadsticks, and other baked products for
restaurants and retail and wholesale outlets. The Company's equipment is capable
of producing 27,000 pounds of product per day. The Company currently produces
14,000 pounds of product per day. The Company is capable of increasing its
production without investment in new equipment by increasing the number of
shifts of operation. However, the Company's equipment is in need of repair.
Should the equipment break down and need major repairs, the Company's results of
operations will be negatively impacted. In addition, there can be no assurance
that the Company will be able to obtain financing for any required repairs.
Employees
As of December 31, 1997, the Company employed approximately 30 people,
of whom two are employed as executive personnel, three as sales/administrative
personnel, and the remaining 25 are employed in manufacturing operations. The
Company's employees are not covered by a collective bargaining agreement. The
Company considers its employee relations to be good.
Competition
Sales of bagel products and other baked goods are subject to
competition which is intense. There are several national, regional, and local
manufacturers of bagel products with which the Company competes in marketing to
restaurants and other retail and wholesale outlets. The Company attempts to
compete with such competitors by providing consistent supplies of quality
products at competitive prices. The Company also believes that product
innovation is an important factor in competing in the wholesale business.
Regulation
The Company is subject to regulation by health, sanitation, safety, and
fire agencies of the state and municipality in which the manufacturing plant is
located. The Company is also subject to regulation by other local governmental
bodies with respect to zoning, land use, and environmental factors. The Company
is subject to the Fair Labor Standards Act which governs such matters as minimum
wages, overtime, and other working conditions.
Trademarks
The Company owns certain trademarks and has been granted federal
registration of the marks. The Company is not aware of any other person's use of
or application for registration of the marks.
SPECIAL CONSIDERATIONS
The following factors, in addition to those discussed elsewhere in this
Report, should be carefully considered in evaluating the Company and its
business.
Reorganization in Bankruptcy
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
and mailed to the Company's 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 the monies required under the plan and exited
bankruptcy on December 18, 1996.
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Qualified Report Of Independent Certified Public Accountant
The report by the Company's independent certified public accountants on
the Company's financial statements for the year ended July 31, 1997, states that
the Company has suffered recurring losses from operations and has a working
capital deficit and deficit in equity that raise substantial doubt about the
Company's ability to continue as a going concern. See "Selected Financial Data;
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Limited Authorized Share Capital, Liquidation Preference and Accumulated
Dividends.
The Company has authorized 10,000,000 shares of Common Stock. At
January 31, 1998, 9,072,489 shares of Common Stock were outstanding. In
addition, at January 31, 1998, warrants to purchase 6,579,918 shares of Common
Stock and 532,271 shares of Preferred Stock convertible into Common Stock, were
outstanding. At January 31, 1998, the holders of warrants to purchase 5,399,000
shares of Common Stock had agreed to refrain from exercising their warrants
until the Company's authorized share capital is increased. In addition, the
purchasers of 531,000 shares of Common Stock have agreed to waive the receipt of
such shares until the Company's authorized share capital is increased. Unless
the Company's shareholders increase the Company's authorized share capital, the
Company would be unable to raise any additional funding through the issuance of
Common Stock.
The Company's Preferred Stock has a total liquidation preference of
approximately $5,679,000 and accumulated dividends of approximately $596,000,
payable in shares of Preferred Stock. The Company is unable to predict the
effect that the liquidation preference and accumulated dividends may have on the
Company's ability to raise capital in the future.
Capital Requirements
The Company is experiencing a shortfall in available cash. The
Company's continued viability is dependent upon its ability to generate cash
from operations or obtain additional financing sufficient to meet its current
and future needs. The Company currently is incurring operating losses and does
not have a bank line of credit. 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, may have a
material adverse effect on the operations of the Company.
Government Regulation
The Company's operations are subject to federal, state, and local laws
and regulations governing health, sanitation, environmental matters and safety,
as well as wages, hiring, and employment practices. The Company believes it has
all licenses and approvals necessary to the operation of the business, and that
its operations are materially in compliance with applicable laws and
regulations.
Attraction and Retention of Key Personnel
The Company's success will depend, in large part, upon its ability to
attract and retain qualified personnel, of which there can be no assurance.
Rights to Acquire Shares
A total of 6,579,918 shares of the Company's Common Stock, including
5,295,918 shares issued prior to July 31, 1997, have been reserved for issuance
upon exercise of warrants granted by the Company. During the terms of such
warrants, the holders thereof will have the opportunity to profit from an
increase in the market price of the Company's Common Stock should such increase
occur. The existence of such warrants may adversely affect the terms on which
the Company can obtain additional financing in the future, and the holders of
such warrants can
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be expected to exercise such warrants at a time when the Company, in all
likelihood, would be able to obtain additional capital by offering shares of
Common Stock on terms more favorable to it than those provided by the exercise
of such warrants. Holders of warrants to purchase 5,399,000 shares of Common
Stock have agreed to refrain from exercising their warrants until the Company's
authorized share capital is increased.
Penny Stock Rules
The Company securities currently are quoted in the over-the-counter
market. Unless an exclusion from the definition of a "penny stock" under the
Exchange Act is available, any broker engaging in a transaction in the Company's
Common Stock is required to provide any customer with a risk disclosure
document, disclosure of market quotations, if any, disclosure of the
compensation of the broker-dealer and its salesperson in the transaction, and
monthly account statements showing the market value of the Company's securities
held in the customer's accounts. The bid and offer quotation and compensation
information must be provided prior to effecting the transaction and must be
contained on the customer's confirmation. Brokers subject to the "penny stock"
rules when engaging in transactions in the Company's securities are likely to be
less willing to engage in such transactions, thereby making it more difficult
for purchasers of the Company's Common Stock to dispose of their securities.
Possible Volatility of Stock Price
The trading price of the Company's Common Stock in the public
securities market could be subject to wide fluctuations in response to quarterly
variations in operating results of the Company or its competitors, actual or
anticipated announcements of technological innovations or new product
developments by the Company or its competitors, changes in analysts' estimates
of the Company's financial performance, developments or disputes concerning
proprietary rights, regulatory developments, general industry conditions,
worldwide economic and financial conditions, and other events and factors.
During certain periods, the stock markets have experienced extreme price and
volume fluctuations. Prices for many stocks fluctuate widely, frequently for
reasons unrelated to the operating performance of such issuing companies. These
broad market fluctuations and other factors may adversely affect the market
price of the Company's Common Stock.
Shares Eligible for Future Sale
Sales of substantial amounts of Common Stock in the public market could
adversely affect prevailing market prices. Of the 9,072,489 shares of Common
Stock currently outstanding, approximately 7,001,000 shares are eligible for
resale in the public market without restriction or further registration unless
held by an "affiliate" of the Company, as that term is defined under the
Securities Act of 1933, as amended (the "Securities Act"). The approximately
2,071,000 remaining outstanding shares of Common Stock currently are eligible
for sale in the public market, subject to compliance with the requirements of
Rule 144 under the Securities Act. The Company also has the authority to issue
additional shares of preferred stock. The issuance of such shares could result
in the dilution of the voting power of outstanding shares of Common Stock and
could have a dilutive effect on earnings per share.
Lack of Dividends
The Company has never paid any cash dividends on its Common Stock and
does not anticipate that it will pay dividends in the foreseeable future.
Instead, the Company intends to apply any earnings to the expansion and
development of its business.
Possible Issuance of Preferred Stock
The Company is authorized to issue up to 2,000,000 shares of Serial
Preferred Stock, par value $0.01 per share, of which 532,271 shares are
currently outstanding. The Serial Preferred Stock may be issued in one or more
series, the terms of which may be determined at the time of issuance by the
Board of Directors, without further action by the Company's shareholders, and
may include voting rights, preferences as to dividends and liquidation,
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conversion and redemption rights and sinking fund provisions as determined by
the Board of Directors. Although the Company has no present plans to issue any
shares of Serial Preferred Stock, the issuance of Serial Preferred Stock in the
future could adversely affect the rights of the holders of the Company's
securities, and therefore, reduce the value of the Company's securities. In
particular, specific rights granted to future holders of Serial Preferred Stock
could be used to restrict the Company's ability to merge with or sell its assets
to a third party, thereby preserving control of the Company by the present
owners.
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. Computer systems and products that do not accept four-digit year entries
will need to be upgraded or replaced to accept four-digit entries to distinguish
years beginning with 2000 from prior years. The Company has determined that
certain of its software programs are not "Year 2000" compliant. The Company
currently is evaluating the Year 2000 issue as it relates to its entire internal
computer system as well as computer systems operated by third parties, including
suppliers, credit card transaction processors, and financial institutions, with
which the Company's systems interface. The Company anticipates that it may incur
internal staff costs as well as consulting and other expenses related to making
its computer systems Year 2000 compliant. The Company will expense these costs
as incurred. The Company has not yet completed the evaluation of its Year 2000
compliance and therefore currently is not able to quantify the costs that may be
incurred to bring its computer system into Year 2000 compliance. Because the
appropriate course of action may include replacing or upgrading certain
equipment or software, the Company may incur significant costs in resolving its
Year 2000 issues. Furthermore, there can be no assurance that the Company will
be able to make its computer system Year 2000 compliant in a timely manner. In
addition, there can be no assurance that computer systems operated by third
parties with which the Company systems interface will continue to properly
interface with the Company systems and will otherwise be compliant on a timely
basis with Year 2000 requirements. Any failure to the Company's computer system
or the systems of third parties to timely achieve Year 2000 compliance could
have a material adverse effect on the Company's business, financial condition,
and operating results.
Cautionary Statement Regarding Forward-Looking Statements
Certain statements and information contained in this Report,
particularly under the headings "Business," "Special Considerations," and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," concerning future, proposed, and anticipated activities of the
Company, certain trends with respect to the Company's revenue, operating
results, capital resources, and liquidity or with respect to the markets in
which the Company competes or the bakery industry in general, and other
statements contained in this Report regarding matters that are not historical
facts are forward-looking statements, as such term is defined in the Securities
Act. Forward-looking statements, by their very nature, include risks and
uncertainties, many of which are beyond the Company's control. Accordingly,
actual results may differ, perhaps materially, from those expressed in or
implied by such forward-looking statements. Factors that could cause actual
results to differ materially include those discussed elsewhere under Item 1,
"Business - Special Considerations."
ITEM 2. DESCRIPTION OF PROPERTY
In February 1995, the Company relocated its executive offices and
production facility to 16,800 square feet located at 7755 E. Gray Road,
Scottsdale, Arizona 85260 under a lease that expires on March 31, 1999. Monthly
rental for this property is $9,500. The Company believes that these facilities
are adequate for its reasonably anticipated needs.
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ITEM 3. LEGAL PROCEEDINGS
A complaint has been filed in the Maricopa County Superior Court
against the Company's wholly-owned subsidiary, R&B Quality Foods, Inc., for
failure to pay a trade debt. The complaint seeks damages in the amount of
$56,675 in trade debt and $32,169 in collection costs and attorney's fees.
In addition, a member of the Company's Board has threatened litigation
involving his termination of employment by the Company. The Board member has not
alleged any specific damages and no estimate of damages can be made by the
Company. The Company intends to vigorously defend any such allegations should a
complaint be filed.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters brought to vote of security holders during Fiscal
1996 or Fiscal 1997.
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PART II
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ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
At July 31, 1996 and 1997, the Company had outstanding approximately
6,956,332 and approximately 9,072,489 shares of Common Stock respectively,
682,918 M Warrants, and 543,326 and 532,271 shares of Preferred Stock,
respectively. The Common Stock and M Warrants were traded over-the-counter and
quoted on the Nasdaq SmallCap Market System ("Nasdaq") under the symbols "SKNS"
and "SKNSK" respectively, and were also listed on the Boston Stock Exchange. The
Common Stock was delisted from Nasdaq on December 22, 1994 and the M Warrants
were delisted on November 18, 1994. The Boston Stock Exchange suspended trading
of the Common Stock and M Warrants on January 13, 1995, and such securities were
subsequently delisted. The Company's Common Stock is currently quoted on the
Nasdaq over-the-counter market. The following table sets forth the high and low
closing bid prices for the Company's Common Stock for the periods indicated. Bid
prices represent prices between dealers and do not include retail markups,
markdowns, or commissions and do not necessarily reflect actual transactions.
Common Stock
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High Low
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Fiscal 1997
First Quarter ...... $ 0.625 $ 0.063
Second Quarter ..... 0.625 0.063
Third Quarter ...... 0.625 0.063
Fourth Quarter ..... 0.625 0.125
Fiscal 1996
First Quarter ...... $ 0.500 $ 0.125
Second Quarter ..... 0.625 0.030
Third Quarter ...... 0.500 0.125
Fourth Quarter ..... 0.500 0.060
As of April 3, 1998 there were approximately 250 holders of record of
the Company's Common Stock. The Company believes that there are in excess of
2,000 holders of beneficial interest of its Common Stock.
The Company has never declared a cash dividend on its Common Stock. The
Board of Directors presently intends to retain all earnings for use in the
Company's business, and therefore, does not anticipate paying any cash dividends
in the foreseeable future. The Company does accrue a dividend payable in shares
of Preferred Stock. At July 31, 1997, the accrued dividend was approximately
$596,000. In addition, the Preferred Stock has a liquidation preference of
$5,679,000.
During fiscal 1996 and 1997 the Company issued approximately 51,300
shares of Common Stock upon conversion of shares of its Preferred Stock. The
Company issued the Common Stock without registration under the Securities Act of
1933, as amended, (the "Securities Act"), in reliance on Section 3(a)(9) of the
Securities Act.
In December 1966, the Company issued 1,500,000 shares of Common Stock
for $1,000,000 in cash and in settlement with creditors under a plan of
reorganization in bankruptcy. The Company issued the Common Stock without
registration under the Securities Act in reliance on Sections 3(a)(7), 4(2),
and/or 4(6) of the Securities Act.
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From February through June 1997 the Company issued 531,000 shares of
Common Stock for $132,750 in cash to members of the Company's Board of Directors
and an accredited shareholder of the Company. The Company issued the Common
Stock without registration under the Securities Act in reliance on Sections 4(2)
and/or 4(6) of the Securities Act.
From March 1995 through December 1997 the Company issued notes in an
aggregate amount of $1,126,000 and granted warrants in connection therewith, to
purchase an aggregate of 3,114,000 shares of Common Stock in exchange for cash
in the amount of $1,126,000 to member of the Company's Board of Directors and to
nine shareholders of the Company. 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.
In January 1997 and May 1998, the Company issued warrants to purchase
2,150,000 shares of Common Stock to officers and directors of the Company. The
Company issued the warrants without registration under the Securities Act in
reliance on Section 4(2) of the Securities Act.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA; MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for the fiscal years
ended July 31, 1996 and 1997 have been derived from the Company's audited
consolidated financial statements. The selected consolidated financial data
should be read in conjunction with, and are qualified by reference to, the
Company's Consolidated Financial Statements and Notes thereto and "Management
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Report.
Year Ended July 31,
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1996 1997
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(in thousands,
except per share amounts)
Statement of Operations Data:
Product sales (net) ........................ 1,424 1,457
Plant operating Costs ...................... 1,448 1,504
Loss from operations ....................... (381) (480)
Other income (expense) ..................... (89) (74)
Income (loss) before extraordinary item .... (470) (554)
Extraordinary item ......................... 3,527
Net income (loss) .......................... (470) 2,973
Net income (loss) per share of common stock:
Before extraordinary item ............ (0.07) (0.07)
After extraordinary item ............. (0.07) 0.37
Weighted average shares outstanding ........ 6,936,097 8,014,441
As of July 31,
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1996 1997
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(in thousands)
Balance Sheet Data:
Cash and cash equivalents .................. 14 0
Working capital (deficit) .................. (794) (1,023)
Total assets ............................... 459 478
Total shareholders' equity (deficit) ....... (4,826) (721)
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS
Statement Regarding Forward-Looking Statements
The statements contained in this Report on Form 10-KSB 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."
General
The Company operates one production plant in Scottsdale, Arizona, where
it produces bagels, breadsticks, and other baked products. Product sales consist
of sales to distributors, retailers, food service operations, and restaurants.
Costs and expenses include plant operating costs and general and
administrative expense. Plant operating costs are the cost of plant sales and
consist of the portion of overall costs of producing product in the Company's
plant allocable to products sold to third parties. General and administrative
expenses include management payroll, wholesale selling expenses, corporate
administrative expense, rent, operating expenses, and depreciation of office
furniture and equipment.
The Company is currently focusing its business operations on the
production, manufacture, and distribution of its bagels, breadsticks, and baked
products to restaurants and retail and wholesale customers. Management believes
that this strategy will generate sales without incurring additional significant
expenditures. The Company is exploring third party sources of funding in order
to facilitate the immediate implementation of its new business strategy.
As part of the Company's management restructuring, Nicholas Fegen, Gary
Mallery, and Louis Pignatelli were appointed to the Board of Directors. After
exiting bankruptcy, the Board of Directors appointed Dennis DesLauriers, W. Sam
Dennis, and Ronald Russell, Sr. to the Board of Directors. On July 18, 1997, Mr.
Pignatelli was elected Chairman of the Board.
Results of Operations
Year Ended July 31, 1997 ("Fiscal 1997") Compared to Year Ended July 31, 1996
- --------------------------------------------------------------------------------
("Fiscal 1996")
- ---------------
Product sales were $1,457,063 in Fiscal 1997 compared to $1,424,939 in
Fiscal 1996, an increase of approximately 2%.
Plant operating costs were $1,504,398 in Fiscal 1997 compared to
$1,448,370 in Fiscal 1996, an increase of approximately 4%. This increase was
due primarily to increased packaging costs, raw materials, and maintenance and
repairs.
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General and administrative expenses increased from $357,840 in Fiscal
1996 to $433,073 in Fiscal 1997. This increase was due primarily to increased
commissions and legal and professional fees.
Overall operating expenses increased from $1,806,210 in Fiscal 1996 to
$1,937,471 in Fiscal 1997. This increase was due primarily to increased
packaging costs, raw materials cost, commissions, and professional fees.
The Company incurred a net loss before extraordinary item of $554,406
in Fiscal 1997 compared to a net loss of $470,049 in Fiscal 1996.
When the Company emerged from bankruptcy approximately $3,500,000 of
debt was forgiven. This has been reported as an extraordinary item.
Year Ended July 31, 1996 ("Fiscal 1996") Compared to Year Ended July 31, 1995
- --------------------------------------------------------------------------------
(unaudited) ("Fiscal 1995")
- ---------------------------
Product sales were $1,424,939 in Fiscal 1996 compared to $3,059,543 in
Fiscal 1995, a decrease of approximately 53%. This decrease was due primarily to
the closing of the Company's plant in Westhampton, New Jersey in December 1994.
Plant operating costs were $1,448,370 in Fiscal 1996 compared to
$4,512,528 in Fiscal 1995, a decrease of approximately 68%. This decrease was a
result of closing the plant in New Jersey.
General and administrative expenses decreased from $2,162,711 in Fiscal
1995 to $357,840 in Fiscal 1996. This decrease was due primarily to the closing
of the administrative offices in Oklahoma City, Oklahoma in December 1994.
Overall operating expenses decreased from $8,587,131 in Fiscal 1995 to
$1,806,210 in Fiscal 1996. This decrease was due primarily to the closing of the
plant and administrative offices in New Jersey and Oklahoma and the
consolidation of operations in Scottsdale, Arizona.
The Company incurred a net loss of $5,691,272 for Fiscal 1995 compared
to a net loss of $470,049 in Fiscal 1996.
Liquidity and Capital Resources
At July 31, 1997, the Company had a working capital deficit of
$1,023,070 compared to $5,121,027 at July 31, 1996. The decrease in the deficit
resulted primarily from the settlement of liabilities subject to compromise in
the Bankruptcy Court. The Company's Plan of Reorganization was confirmed by the
United States Bankruptcy Court for the Western District of Oklahoma and the
Company exited bankruptcy on December 18, 1996. In accordance with the Plan, the
Company raised $1 million through the sale of one million shares of Common
Stock. The creditors trust was given $800,000 to pay the creditors. In addition,
500,000 shares of Common Stock were issued to the creditor's trust. As a result
of this reorganization, approximately $4,300,000 of debts were relieved in
bankruptcy.
Net cash used in operating activities was $409,401 in Fiscal 1997
compared to $338,047 in Fiscal 1996. Such increase in the amount of cash used in
operating activities in Fiscal 1997 resulted primarily from the net loss from
operating activities in Fiscal 1997 compared to the net loss from operating
activities in Fiscal 1996. In Fiscal 1997, net cash used in investing activities
was $82,148 compared to net cash used by investing activities in Fiscal 1996 of
$5,379. In Fiscal 1997, net cash provided by financing activities was $478,078
compared to net cash provided by financing activities of $342,452 in Fiscal
1996. The Company is experiencing difficulty in making timely payments to
vendors and lenders. As of July 31, 1997, the Company was in default on all
payments to most of its trade vendors, and lenders. All such obligations have
been classified as current as of July 31, 1997. In
10
<PAGE>
addition, the Company is in arrears on dividends on its Preferred Stock in the
amount of $596,000, payable in shares of Preferred Stock.
As of July 31, 1997, the Company's sources of external financing were
limited. It is not expected that the 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. The Company has not
established any lines of credit or any other significant financing arrangements
with any third party lenders. There can be no assurance that the Company will be
able to obtain additional financing on reasonable terms, if at all. From March,
1995 through January 1998, members of the Company's Board of Directors have
loaned an aggregate of $1,056,000 to the Company, including $805,005 loaned
prior to July 1, 1997, in exchange for promissory notes and warrants to purchase
shares of the Company's Common Stock.
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.
ITEM 7. FINANCIAL STATEMENTS
Reference is made to the financial statements, the report thereon, the
notes thereto, and the supplemental data commencing on page F-1 of this Report,
which financial statements, report notes and data are incorporated by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Subsequent to the Company's emergence from reorganization in
bankruptcy, the Company retained Toback CPAs, P.C. as its independent public
accountants. Coopers & Lybrand, was retained by the Company as its independent
public accountants until September 7, 1995. The Company did not retain the
services of an independent public accountant during the interim period. The
change in independent public accountants was approved by the Board of Directors
of the Company. The Company has authorized Coopers & Lybrand to respond fully to
inquiries from Toback CPAs, P.C.
11
<PAGE>
PART III
--------
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The following table sets forth certain information with respect to the
Company's Directors and Executive Officers:
Name Age Position
---- --- --------
Louis F. Pignatelli 50 Chairman of the Board
Russell K. Swartz 53 President and
Chief Executive Officer
Gary D. Mallery 58 Chief Financial Officer, Secretary
and Director
W. Sam Dennis 53 Director
Dennis DesLauriers 53 Director
Nicholas A. Fegen 38 Director
Ronald Russell, Sr. 63 Director
Louis F. Pignatelli has served as a director of the Company since
February 1995. On July 18, 1997, Mr. Pignatelli was elected Chairman of the
Board. For the past six years, Mr. Pignatelli has been a principle in the law
firm of Pignatelli, Liston, and Mertes, P.C., Rock Falls, Illinois. Mr.
Pignatelli is a graduate of the University of Notre Dame and received a Juris
Doctorate degree from the University of Illinois in 1971.
Russell K. Swartz has served as President of the Company since December
1997. Mr. Swartz joined the Company in May 1997 after a successful career in the
packaged goods and food industries with The Dial Corp., Universal Foods, and
General Host Corp.'s Cudahy Foods Division. Mr. Swartz is a faculty associate at
Arizona State University-West Campus where he teaches in the College of
Business. Mr. Swartz holds a Bachelor of Science degree in Food Science from
University of Massachusetts and an MBA from Babson College.
Gary D. Mallery has served as a director of the Company since March
1995, and as Chief Financial Officer since March 1995. From January through June
1997, Mr. Mallery served as acting Chairman of the Board. Prior thereto, from
1986 to 1993, Mr. Mallery served as the managing partner of the Deloitte &
Touche LLP office located in Baltimore, Maryland. Mr. Mallery received a
Bachelor of Science degree in Business Statistics and a Master of Science degree
in Accounting from the University of Oregon in 1968. Mr. Mallery is a Certified
Public Accountant.
W. Sam Dennis has served as a director of the Company since January
1997. Dr. Dennis has been a Doctor of Radiology in Houston, Texas since 1980.
Dr. Dennis received his M.D. from Baylor College of Medicine.
Dennis DesLauriers has served as a director of the Company since
January 1997. Mr. DesLauriers is Executive Vice President of Armour
Swift-Eckrich, a Division of Con Agra, the largest food company in the United
States. Mr. DesLauriers is responsible for all domestic operations in the United
States as well as all International Sales of Armour Swift-Eckrich. Prior to
this, Mr. DesLauriers served as President of the Butterball Turkey Company. Mr.
DesLauriers has had over 20 years of experience with Armour Swift-Eckrich. In
addition, for the
12
<PAGE>
last five years, Mr. DesLauriers has participated privately in acquisitions and
business turnarounds. Mr. DesLauriers is a graduate of the Culinary Institute of
America and attended Southeastern Massachusetts University.
Nicholas A. Fegen has served as a director of the Company since
February 1995 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. In February 1997, the state of Iowa charged Mr. Fegen with 12 counts
of securities fraud. In July 1997, the Iowa District Court for Dallas County
entered an order deferring judgment and placing Mr. Fegen on probation for a
period of two years. In addition, Mr. Fegen was ordered to pay a civil
contribution of $2,000 to the Walnut Creek Little League.
Ronald Russell, Sr. has served as a director of the Company since
January 1997. Mr. Russell is a real estate developer in St. Charles, Illinois.
Directors hold office until the next annual meeting of the Company's
stockholders and the election and qualification of successors. Officers hold
office at the discretion of the Board of Directors.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires the Company's directors and officers, and persons who
own more than 10 percent of a registered class of the Company's equity
securities, to file reports of ownership and changes in ownership with the
Securities and Exchange Commission (the "SEC"). Officers, directors, and greater
than 10 percent shareholders are required by SEC regulations to furnish the
Company with copies of all Section 16(a) forms they file. Based solely upon the
Company's review of the copies of such forms received by it during the fiscal
year ended July 31, 1997, and representations that no other reports were
required, the Company believes that each person who, at any time during such
fiscal year, was a director, officer, or beneficial owner of more than 10
percent of the Company's Common Stock complied with all Section 16(a) filing
requirements during such fiscal year except that (a) for Fiscal 1997 (i) Dennis
DesLauriers filed a late report on Form 3; (ii) Louis F. Pignatelli filed two
late reports on Form 4 covering December 1996 and January 1997 transactions; and
(iii) W. Sam Dennis filed late reports on Form 4 covering October 1996 and
December 1996 transactions, and (b) for Fiscal 1996 (i) W. Sam Dennis filed a
late report on form 5 covering transactions occurring prior to Fiscal 1996 and
June 1996 and July 1996 transactions; (ii) Nicholas A. Fegen filed a late report
on Form 5 covering transactions occurring prior to Fiscal 1996; (iii) Gary D.
Mallery filed a late report on Form 5 covering transactions occurring prior to
Fiscal 1996 and October 1995 transactions; and (iv) Louis F. Pignatelli filed a
late report on Form 5 covering transactions occurring prior to Fiscal 1996 and
December 1995 transactions.
ITEM 10. EXECUTIVE COMPENSATION
Summary of Cash and Other Compensation
The following table sets forth certain information concerning the
compensation for the fiscal years ended July 31, 1996, and 1997 earned by the
Company's prior Chief Executive Officers and by the Company's current Chief
Executive Officer (the "Named Officers"). No other officer of the Company
received compensation of $100,000 or more during Fiscal 1997.
13
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
------------
Securities
Underlying
Annual Compensation Warrants(#)(2)
------------------- --------------
Name and Principal Position Year Salary($)(1) Bonus($)
- --------------------------- ---- ------------ --------
<S> <C> <C> <C> <C>
Nicholas A. Fegen 1997 $ 96,923 $10,000 600,000
Prior President and Chief 1996 120,000 $30,000 --
Executive Officer
Gary D. Mallery 1997 40,000 -- 300,000
Chief Financial Officer 1996 40,000 -- --
Russell K. Swartz 1997 47,596 -- 50,000
President and 1996 -- -- --
Chief Executive Officer
</TABLE>
- ---------------
(1) The Company offers its employees, including officers, medical insurance
benefits.
(2) The exercise price of all stock warrants granted were equal to or
greater than the fair market value of the Company's Common Stock on the
date of grant.
14
<PAGE>
Warrant Grants
The following table provides information on stock warrants granted to
the Company's Named Officers during the fiscal year ended July 31, 1997.
WARRANTS GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
- -------------------------------------------------------------------------------------------------
Number of % of Total
Securities Warrants
Underlying Granted to Exercise
Warrants Employees in Price
Name Granted (#)(1) Fiscal Year ($/Sh) Expiration Date
- ---- -------------- ----------- ------ ---------------
<S> <C> <C> <C> <C>
Nicholas A. Fegen........... 600,000 63% $0.375 2002
Gary D. Mallery............. 300,000 32% $0.375 2002
Russell K. Swartz........... 50,000 5% $0.375 2002
</TABLE>
- ---------------
(1) The warrants were granted at or above the fair value of the shares on
the date of grant and have a 5-year term. One half of the warrants
vested at the date of award, January 10, 1997 and one half vests two
years from such date if the recipient has continued to work for the
benefit of Skolniks.
Fiscal Year-end Warrant Values
The following table provides information on the value of the Company's
Named Officers unexercised warrants at July 31, 1997.
WARRANT VALUES AS OF JULY 31, 1997
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the Money Warrants
Warrants at Fiscal Year-End(#) at Fiscal Year-End ($)(1)
------------------------------ -----------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Nicholas A. Fegen..................... -- 600,000 $ 0 $ 0
Gary D. Mallery....................... -- 300,000 $ 0 $ 0
Russell K. Swartz .................... -- 50,000 $ 0 $ 0
</TABLE>
- --------------
(1) Calculated based upon the average bid and ask price as reported on the
over the counter market on April 3, 1998 of $0.1875 per share.
15
<PAGE>
Director Compensation
Directors are compensated for their services by the grant of Common
Stock Purchase Warrants. It is anticipated that Directors of the Company will
continue to be compensated by the grant of Common Stock Purchase Warrants from
time to time as authorized by the Board of Directors.
The Company issued Messrs. Fegen, Mallery, and Pignatelli five-year
Common Stock Purchase Warrants, exercisable at $0.375 per share to purchase
600,000 shares, 300,000 shares and 300,000 shares respectively, in consideration
for services rendered through Fiscal 1997. The Common Stock Purchase Warrants
were revised in January 1997 to vest 50% immediately and 50% in two years. The
Company also issued five-year warrants to Messrs. DesLauriers, Dennis, and
Russell exercisable at $0.375 per share to purchase 300,000 shares of Common
Stock each, vesting 50% immediately and 50% in two years for services rendered.
Each of the Company's directors has agreed not to exercise their Common Stock
Purchase Warrants until the Company's shareholders have voted to increase the
number of authorized shares of Common Stock.
16
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the shares
of the Company's outstanding Common Stock beneficially owned as of January 31,
1998 by (i) each of the Company's directors and executive officers, (ii) all
directors and executive officers as a group, and (iii) each other person who is
known by the Company to own beneficially or exercise voting or dispositive
control over more than 5% of the Company's Common Stock.
<TABLE>
<CAPTION>
Number of Shares Approximate
and Nature of Percentage of
Name and Address of Beneficial Owner(1) Beneficial Ownership(2) Outstanding Shares(2)
- --------------------------------------- ----------------------- ---------------------
<S> <C> <C>
Directors and Executive Officers:
Louis F. Pignatelli(3) 485,000 5.3%
Gary D. Mallery(4) 2,500 *
W. Sam Dennis(5) 852,998 9.4%
Dennis DesLauriers(6) -- --
Nicholas A. Fegen(7) 24,000 *
Ronald Russell, Sr.(8) 1,257,500 13.9%
All directors and officers
as a group (six persons) 2,621,998 28.9%
</TABLE>
- --------------
* Less than 1% of outstanding shares of Common Stock
(1) Each person named in the table has sole voting and investment power with
respect to all Common Stock beneficially owned by him or her, subject to
applicable community property law, except as otherwise indicated. Except
as otherwise indicated, each of such persons may be reached through the
Company at 7755 E. Gray Road, Scottsdale, Arizona 85260.
(2) The percentages shown are calculated based upon 9,072,489 shares of Common
Stock outstanding on January 31, 1998. The numbers and percentages shown
include the shares of Common Stock actually owned as of January 31, 1998
and the shares of Common Stock that the identified person or group had the
right to acquire within 60 days of such date. In calculating the
percentage of ownership, all shares of Common Stock that the identified
person or group had the right to acquire within 60 days of January 31,
1998 upon the exercise of options or warrants are deemed to be outstanding
for the purpose of computing the percentage of the shares of Common Stock
owned by such person or group, but are not deemed to be outstanding for
the purpose of computing the percentage of the shares of Common Stock
owned by any other person. Members of the Board of Directors have agreed
not to exercise any Warrants until the Company's authorized share capital
is increased.
(3) Represents 485,000 shares of Common Stock and does not include 886,000
shares issuable upon exercise of Common Stock Purchase Warrants held by
Mr. Pignatelli.
(4) Represents 2,500 shares of Common Stock and does not include 300,000
shares issuable upon exercise of Common Stock Purchase Warrants held by
Mr. Mallery.
(5) Represents 852,998 shares of Common Stock and does not include 1,536,000
shares issuable upon exercise of Common Stock Purchase Warrants held by
Dr. Dennis.
(6) Does not include 316,000 shares issuable upon exercise of Common Stock
Purchase Warrants held by Mr. DesLauriers.
(7) Represents 24,000 shares of Common Stock and does not include 600,000
shares issuable upon exercise of Common Stock Purchase Warrants held by
Mr. Fegen.
(8) Represents 1,257,500 shares of Common Stock and does not include 1,336,000
shares issuable upon exercise of Common Stock Purchase Warrants held by
Mr. Russell.
17
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
From March 1995 through January 1998, members of the Board of Directors
have loaned the Company $1,056,000, including $805,005 loaned prior to July 31,
1997. In connection with these loans, the Board members have been issued
warrants to purchase 1,350,000 shares at $0.50 and 1,524,000 shares at $0.25.
Also, the Board members were issued warrants to purchase 2,100,000 shares at
$0.375 upon joining the Board.
During fiscal 1997, the Company issued warrants to purchase an aggregate
of 2,100,000 shares of Common Stock to members of the Company's Board of
Directors in recognition of their service on the Board. The members of the
Company's Board have each agreed to refrain from exercise of any warrants until
the Company's authorized share capital is increased.
18
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
2 Certificate of Ownership 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)
3.2 Bylaws, as amended (1)
4 Amended Certificate of Designations, Preferences and Rights of
Series A Convertible Preferred Stock (2)
4.1 Shelton Financial, Inc. Common Stock Purchase Warrant, dated
September 22, 1992 (3)
4.2 Partridge Capital Corp. Common Stock Purchase Warrant, dated
September 22, 1992 (3)
4.3 Ronald Wigington Common Stock Purchase Warrant, dated
September 22, 1992 (3)
4.4 Nichols Exploration, Inc. Common Stock Purchase Warrant, dated
September 22, 1992 (3)
4.6 Warrant Agreement covering 506,250 Common Stock Purchase
Warrants (M Warrants) (3)
4.8 Warrant Agreement covering 475,000 Common Stock Purchase
Warrants (Other Warrants) (3)
10.23 Letter Agreement between Registrant and Robert E. Galastro (4)
10.24 Promissory Note from Cantina Management, Inc. (4)
10.33 Shelton Financial, Inc. Common Stock Purchase Warrant (5)
10.41 Shelton Financial, Inc. Warrant Exercise Restriction
Agreement, dated November 12, 1993 (5)
- -------------
(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 Registration Statement on Form S-1 of
the Registrant as filed with the SEC on September 3, 1991 (File No.
33-42610).
(5) Incorporated by reference to the Form 10-KSB of the Registrant for the
fiscal year ended July 31, 1993 (File No. 0-9703).
(b) Reports on Form 8-K.
The Company filed a Form 8-K on March 13, 1996.
19
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) 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.
Date: April 9, 1998 /s/ Russell K. Swartz
---------------- --------------------------------
Russell K. Swartz, President and
Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
- --------- -------- ----
<S> <C> <C>
/s/ Louis F. Pignatelli Chairman of the Board March 27, 1998
- -------------------------
Louis F. Pignatelli
/s/ Russell K. Swartz President and April 9, 1998
- ------------------------- Chief Executive Officer
Russell K. Swartz
/s/ Gary D. Mallery Chief Financial Officer (Principal April 20, 1998
- ------------------------- Financial and Accounting Officer)
Gary D. Mallery
/s/ W. Sam Dennis Director March 10, 1998
- -------------------------
W. Sam Dennis
/s/ Dennis DesLauriers Director March 10, 1998
- -------------------------
Dennis DesLauriers
Director , 1998
- -------------------------
Nicholas A. Fegen
/s/ Ronald Russell, Sr. Director March 27, 1998
- -------------------------
Ronald Russell, Sr.
</TABLE>
20
<PAGE>
SKOLNIKS, INC.
FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1997 AND 1996
CONTENTS
Page
Independent auditor's report F-1
Consolidated financial statements:
Statements of financial position F-2
Statements of operations F-3
Statements of stockholder's equity F-4
Statements of cash flows F-5
Notes to financial statements F-6 - F-12
<PAGE>
To the Board of Directors
Skolniks, Inc.
Scottsdale, Arizona
INDEPENDENT AUDITOR'S REPORT
----------------------------
We have audited the accompanying consolidated statements of financial
position of Skolniks, Inc. and Subsidiary as of July 31, 1997, and 1996, the
related statements of operations, stockholders' equity (deficit) and cash flows
for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Skolniks,
Inc. and Subsidiary as of July 31, 1997 and 1996, and the results of its
operation and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the financial statements, the Company has suffered recurring losses from
operations and has a working capital deficit and deficit in equity that raise
substantial doubt about its ability to continue as a going concern. In addition,
the preferred stock of the Company has a total liquidation preference and
accumulated dividends of approximately $6,275,000 (Note 10). Management's plans
in regards to these matters are also described in Note 1. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ Toback CPAs, P.C.
January 16, 1998
<PAGE>
SKOLNIKS, INC.
CONSOLIDATED
STATEMENTS OF FINANCIAL POSITION
JULY 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 68 $ 13,539
Trade accounts receivable (net of allowance for doubtful
accounts of $15,000 in 1997 and 1996) 104,234 93,575
Inventories 41,397 22,897
Other 30,365 34,270
------------ ------------
Total current assets 176,064 164,281
------------ ------------
Property and equipment 884,779 804,105
Less accumulated depreciation and amortization (582,848) (509,535)
------------ ------------
301,931 294,570
------------ ------------
$ 477,995 $ 458,851
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued liabilities $ 394,129 $ 313,329
Notes payable - related parties 805,005 645,005
------------ ------------
Total current liabilities 1,199,134 958,334
------------ ------------
Liabilities subject to compromise -- 4,326,974
------------ ------------
Total liabilities 1,199,134 5,285,308
------------ ------------
Commitments and contingent liabilities
Stockholders' deficit:
Preferred stock, $.01 par value, 2,000,000 shares authorized;
shares issued and outstanding: July 1997, 532,271
and 1996, 543,326 5,323 5,433
Common stock, $.001 par value, 10,000,000 shares
authorized; shares issued July 1997, 9,072,489, July 1996,
6,956,332 9,072 6,956
Additional paid-in capital 21,088,042 19,957,299
Accumulated deficit (20,921,035) (23,893,604)
------------ ------------
181,402 (3,923,916)
Less treasury stock, at cost (902,541) (902,541)
------------ ------------
Total stockholders' deficit (721,139) (4,826,457)
------------ ------------
$ 477,995 $ 458,851
============ ============
</TABLE>
The accompanying notes are an
integral part of these financial statements.
F - 2
<PAGE>
SKOLNIKS, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
YEARS ENDED JULY 31, 1997 AND 1996
1997 1996
----------- -----------
Revenues:
Product sales (net) $ 1,457,063 $ 1,424,939
----------- -----------
Expenses:
Plant operating costs 1,504,398 1,448,370
General and administrative expenses 433,073 357,840
----------- -----------
1,937,471 1,806,210
----------- -----------
Loss from operations (480,408) (381,271)
Other income (expenses):
Interest expense (73,998) (49,228)
Other (net) -- (39,550)
----------- -----------
Loss before extraordinary item (554,406) (470,049)
Extraordinary item - debt forgiveness 3,526,973 --
----------- -----------
Net income (loss) $ 2,972,567 $ (470,049)
=========== ===========
Net income (loss) per share of common stock:
Loss before extraordinary item $ (0.07) $ (0.07)
Extraordinary item 0.44 --
----------- -----------
Net income (loss) per share of common stock $ 0.37 $ (0.07)
=========== ===========
Weighted average shares outstanding 8,014,411 6,936,097
=========== ===========
The accompanying notes are an
integral part of these financial statements.
F-3
<PAGE>
SKOLNIKS, INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED JULY 31, 1997 AND 1996
1997 1996
------------ ------------
Preferred stock:
Beginning of period $ 5,433 $ 5,836
Conversion to common stock (110) (403)
------------ ------------
End of period 5,323 5,433
------------ ------------
Common stock:
Beginning of period 6,956 6,916
Conversion from preferred stock 11 40
Issuance of common stock 2,105
------------ ------------
End of period 9,072 6,956
------------ ------------
Additional paid-in capital:
Beginning of period 19,957,299 19,956,936
Issuance of common stock 1,130,644 --
Preferred converted to common 99 363
------------ ------------
End of period 21,088,042 19,957,299
------------ ------------
Accumulated (Deficit):
Beginning of period (23,893,604) (23,423,555)
Net income (loss) 2,972,567 (470,049)
Other 2 --
------------ ------------
End of period (20,921,035) (23,893,604)
------------ ------------
Treasury stock:
Beginning and end of period (902,541) (902,541)
------------ ------------
Total stockholders' deficit $ (721,139) $ (4,826,457)
============ ============
Shares of treasury stock held at end of period 79,808 79,808
============ ============
The accompanying notes are an
integral part of these financial statements.
F-4
<PAGE>
SKOLNIKS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
YEARS ENDED JULY 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 2,972,567 $ (470,049)
----------- -----------
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization 74,731 73,191
Loss on disposition of property, equipment, and
leasehold improvements 57 7,863
Increase in trade accounts receivable (10,659) (5,205)
Decrease (increase) in inventories (18,500) 701
Decrease in other current assets 3,905 3,732
Increase in accounts payable and accrued liabilities 95,471 51,720
Debt forgiveness (3,526,973) --
----------- -----------
Total adjustments (3,381,968) 132,002
----------- -----------
Net cash used in operating activities (409,401) (338,047)
----------- -----------
Cash flows from investing activities:
Acquisition of property and equipment (82,148) (5,379)
----------- -----------
Net cash used in investing activities (82,148) (5,379)
----------- -----------
Cash flows from financing activities:
Payments on debt (14,671) (24,080)
Payments to Creditors' Committee (800,000) --
Proceeds from borrowings of debt 160,000 366,532
Proceeds from issuance of common stock 1,132,749 --
----------- -----------
Net cash provided by financing activities 478,078 342,452
----------- -----------
Net decrease in cash and cash equivalents (13,471) (974)
Cash, beginning of period 13,539 14,513
----------- -----------
Cash, end of period $ 68 $ 13,539
=========== ===========
</TABLE>
The accompanying notes are an
integral part of these financial statements.
F-5
<PAGE>
SKOLNIKS, INC.
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation:
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.
During 1997 and 1996 the Company incurred operating losses of $480,408 and
$381,271 respectively. In addition, the Company has a deficit in working
capital of $1,023,070 and $794,053 for 1997 and 1996, respectively, and a
deficit in equity for both years. 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.
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 Artesian breads is being developed for introduction in
mid-1998. 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.
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 the monies required
under the plan and exited bankruptcy on December 18, 1996.
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 $800,000
and 500,000 shares of Common Stock were issued to the Creditor's Trust.
As part of the Company's management restructuring, the Board of Directors of
the Company elected Nicholas Fegen, Gary Mallery, and Louis Pignatelli to
the Board of Directors. After exiting bankruptcy, the Board of Directors
elected Dennis DesLauriers, Sam Dennis and Ron Russell to the Board of
Directors. On July 18, 1997, Louis Pignatelli was elected Chairman of the
Board.
F-6
<PAGE>
SKOLNIKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. Summary of Significant Accounting Policies:
Skolniks, Inc. (the "Company"), operates a manufacturing plant in Arizona.
The more significant accounting policies of the Company are as follows:
Principles of Consolidation:
The accompanying consolidated financial statements include the accounts of
Skolniks, Inc. and its wholly-owned subsidiary. All intercompany accounts
and transactions have been eliminated in consolidation.
Cash equivalents:
Cash equivalents include liquid investments purchased with an original
maturity of three months or less.
Inventories:
Inventories, consisting of raw materials, finished goods, paper and
supplies are valued at the lower of cost (first-in, first-out method)
or market.
Property and equipment and depreciation:
Property and equipment are recorded at cost and are depreciated and
amortized using the straight-line method over their estimated useful
lives as follows:
Furniture and equipment 5 - 10 years
Leasehold improvements 10 years, not to exceed the remaining life
of the lease
When properties are retired or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts with any
resulting gain or loss reflected in income. Maintenance and repairs are
expensed in the year incurred.
Product sales:
The Company manufactures bagels, breadsticks and other bakery products for
use by restaurants and unrelated food service operations, such as
supermarkets and convenience stores. Sales are made directly to stores,
restaurants and distributors.
F-7
<PAGE>
SKOLNIKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. Summary of Significant Accounting Policies, continued:
Income taxes:
Deferred income taxes are recognized for the tax consequences in future years
of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established
when necessary to reduce deferred tax assets to the amount expected to be
realized. Income tax benefit (expense) is the tax receivable (payable) for
the period and the change during the period in deferred tax assets and
liabilities.
Income (loss) per share of Common Stock:
Income (loss) per share of Common Stock is computed by dividing net income
(loss) by the weighted average number of Common Stock shares outstanding
during each period.
Advertising:
The Company expenses advertising costs at the first time that advertising
takes place. For the year ended July 31, 1997, advertising expense was
approximately $1,500.
Fair value of financial instruments:
The following methods and assumptions were used in estimating fair values:
Cash:
The carrying amount reported in the balance sheet approximates fair
value.
Notes payable - related parties:
The carrying amounts of the Company's borrowings under its notes
payable-related party, as well as short-term borrowings, approximate
their fair values.
Accounting estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
F-8
<PAGE>
SKOLNIKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. Liabilities subject to compromise:
Liabilities settled in bankruptcy consist of the following:
Trade accounts payable $3,201,120
Unsecured notes payable 185,588
Leases payable 714,265
Subordinated debentures 226,000
----------
4,326,973
Payment to creditors trust 800,000
----------
Debt forgiveness $3,526,973
==========
4. Inventories:
The components of inventory are as follows:
1997 1996
------- -------
Raw materials $35,506 $21,236
Finished goods 5,891 1,661
------- -------
$41,397 $22,897
======= =======
5. Other current assets:
Other current assets consist of the following:
1997 1996
-------- -------
Prepaid expenses $ 30,365 $34,270
======== =======
6. Property and equipment:
Property and equipment consist of the following:
1997 1996
-------- --------
Furniture and equipment $764,970 $684,248
Leasehold improvements 119,809 119,857
-------- --------
$884,779 $804,105
======== ========
Depreciation and amortization expense for the years ended 1997 and 1996
amounted to approximately $75,000 and $73,000 respectively.
F-9
<PAGE>
SKOLNIKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. Notes payable - related parties:
AMOUNT INTEREST DUE COLLATERAL
------ -------- --- ----------
Board Members: $ 525,000 10% Demand Equipment
100,000 10% Demand Accounts
Receivable
50,000 10% Demand Office
Equipment
60,000 12% July 2000 None
Shareholders: 37,500 10% Demand Accounts
Receivable
32,505 10% Demand Office Equipment
------------
$ 805,005
============
8. Income taxes:
At July 31, 1997 the Company had available approximately $20 million of net
operating loss carryforwards available for both financial statement and
federal income tax purposes. These carryforwards, which expire through
2011, are subject to certain limitations due to change in ownership under
Internal Revenue Code Section 382. No deferred tax asset has been recorded
as the realization of the benefit is in substantial doubt.
9. Leases:
The Company leases its manufacturing facility under an operating lease
agreement expiring March 31, 1999, with an option to renew for five years.
Rent expense under all operating leases was approximately $114,000 and
$107,000 for 1997 and 1996, respectively.
Minimum rental commitments payable in future years are as follows:
Period ending, July 31: Operating Leases
----------------
1998 $110,400
1999 73,600
--------
Total minimum lease payments $184,000
========
F-10
<PAGE>
SKOLNIKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. Stockholders' equity:
Preferred stock:
The Company is authorized to issue 2 million shares of Preferred Stock, $.01
par value. The Board of Directors of the Company is authorized, without
action by the stockholders, to issue Preferred Stock from time to time in
one or more series and to fix, for each series, the number of shares,
designation, dividend rights, voting rights, redemption provisions,
conversion rights, liquidation preferences, and any other rights and
restrictions.
Holders of Preferred Stock are entitled to cumulative semi-annual dividends
at the semi-annual rate of $.16 per share. Such dividends must be paid
before the payment of any dividends on Common Stock. Dividends on the
Preferred Stock will be payable, when declared by the Board of Directors,
on August 1 and February 1 of each year and will be payable in Preferred
Stock of the same series for any six-month period in which net income
before tax is less than 150 percent of the dividend due and otherwise
will be payable in cash. Under Delaware law, the Company is permitted to
pay dividends only out of surplus (net assets in excess of state
capital), or in the event there is no surplus, then out of net profits
for the year in which the dividends are declared. The total accumulated
dividends through July 31, 1997 were approximately $596,000, payable in
shares of preferred stock.
In liquidation, holders of Preferred Stock will have a preference over the
holders of Common Stock equal to the exchange price per share plus all
accrued and unpaid dividends whether declared or undeclared. The Company
may redeem the Preferred Stock, in whole or part, beginning one year
after the date of issuance upon repayment of a redemption price of $10.67
per share, plus all accrued and unpaid dividends whether declared or
undeclared. The preferred stock has a liquidation preference of
approximately $5,679,000 at July 31, 1997 which was not relieved in
bankruptcy. This preference will have a significant effect on the
companies ability to raise any additional capital though common and
preferred stock offerings.
Commencing one year after the date of issuance, the holders of Preferred
Stock will be entitled to convert each share of the Preferred Stock into
one share of Common Stock subject to adjustment in certain specified
circumstances. The Company is required to reserve from authorized but
unissued Common Stock a sufficient number of shares to effect conversion
of the Preferred Stock issued. Currently there is insufficient authorized
share capital to reserve, therefore such reservation of common stock is
subject to a vote of shareholders to increase the Company's authorized
share capital.
The Preferred Stock is non-voting. Therefore, unless otherwise specified
under Delaware law, on all matters submitted to a vote of the
shareholders, including the election of Directors, the matters will be
decided by holders of Common Stock.
F-11
<PAGE>
SKOLNIKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. Stockholders' equity, continued:
Warrants:
Warrants to purchase one share of Common Stock outstanding at July 31, 1997
are approximately as follows:
Number of Exercise Expiration
Warrants Price Date
--------- -------- ----------
682,918 6.67 1998
8,000 6.00 1999
450,000 1.00 2000
1,490,000 .50 2000
175,000 2.00 1999
2,250,000 0.375 2002
240,000 0.25 2002
As of July 31, 1997 holders of warrants to purchase 4,115,000 shares of
common stock have agreed to refrain from exercising their warrants until
the Company's authorized shares capital is increased.
11. Commitments and contingent liabilities:
A complaint was filed in the Maricopa County Superior Court against the
Company's wholly-owned subsidiary for failure to pay a trade debt. The
complaint seeks damages in the amount of $56,675 in trade debt and
$32,169 in collection costs and attorney's fees.
A current member of the Board has threatened litigation involving his
termination of employment by the Company. As of December 19, 1997 no
estimate of damages can be made.
12. Related Parties:
Since March 1995 through January 1998, members of the Board of Directors
have loaned the Company $1,056,000, including $735,000 loaned through
July 31, 1997. In connection with these loans, the Board members have
been issued warrants to purchase 1,350,000 shares at $0.50 and 1,524,000
shares at $0.25. Also, the Board members were issued warrants to purchase
2,100,000 shares at $0.375 upon joining the Board.
F-12
EXHIBIT 2.1
-----------
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE WESTERN DISTRICT OF OKLAHOMA
In Re: )
)
SKOLNIKS, INC. ) No. BK 95-10206-LN
) Chapter 11
Debtor. )
GENERAL INFORMATION AND DISCLAIMER
----------------------------------
REGARDING SECOND AMENDED PLAN OF REORGANIZATION
-----------------------------------------------
AND DISCLOSURE STATEMENT
------------------------
Skolniks, Inc., and R & B Quality Foods, Inc. (a wholly owned
subsidiary of Skolniks) are the sources of information in this Combined Plan and
Disclosure Statement unless otherwise stated.
THE COURT'S APPROVAL OF THE COMBINED PLAN AND DISCLOSURE STATEMENT DOES
NOT MEAN THAT THE COURT HAS APPROVED THE PLAN, OR THAT THE ACCURACY AND
COMPLETENESS OF THE INFORMATION IN THIS DISCLOSURE STATEMENT ARE GUARANTEED.
THIS COMBINED DISCLOSURE STATEMENT HAS NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THE STATEMENTS CONTAINED THEREIN.
While the Debtor has made every effort to insure that the Disclosure
Statement is accurate, it cannot warrant or represent that all of the
information contained herein is accurate. This Disclosure Statement may not be
relied upon for any purpose other than your determination of how to vote on the
Plan. Nothing in this Disclosure Statement shall constitute an admission of any
fact or liability of any matter. This Disclosure Statement may not be considered
conclusive advice on the legal effect of the Plan of holders or claims or
interest. Although the Disclosure Statement sets forth certain legal principals
applicable to the Plan, other rules contained in the Bankruptcy Code and other
sources of law may apply. YOU SHOULD READ CAREFULLY EXHIBIT "A" AND ITS
APPENDICES A, B, C AND D TO THIS PLAN AND DISCLOSURE STATEMENT, WHICH SET OUT
MORE INFORMATION ABOUT THE OFFERING OF THE NEW SHARES, POST CONFIRMATION
OFFICERS AND DIRECTORS, AND RISK FACTORS TO BE CONSIDERED WHEN VOTING ON THIS
PLAN OF REORGANIZATION.
<PAGE>
I. INTRODUCTION........................................................ 1
II. HISTORY OF THE COMPANY
AND ANALYSIS OF OPERATIONS.......................................... 1
III. SIGNIFICANT EVENTS DURING CHAPTER 11................................ 3
IV. DEFINITIONS AND EXPLANATION OF CHAPTER 11........................... 5
V. CLASSIFICATION OF CLAIMS
AND TREATMENT AFFORDED EACH......................................... 7
VI. CLAIMS NOT IMPAIRED UNDER THE PLAN.................................. 10
VII. ADMINISTRATIVE COSTS................................................ 10
VIII. CREDITORS' TRUST.................................................... 11
IX. MEANS OF EXECUTION OF THE PLAN...................................... 11
X. SECURITIES.......................................................... 12
XI. REJECTION OF EXECUTORY CONTRACTS.................................... 13
XII. MODIFICATION OF THE PLAN............................................ 13
XIII. PROVISIONS REGARDING PAYMENT FOR SERVICES........................... 14
XIV. RETENTION OF CLAIMS................................................. 14
XV. REVESTING........................................................... 14
XVI. RETENTION OF JURISDICTION........................................... 14
XVII. VOTING ON THE PLAN.................................................. 16
XVIII. CONFIRMATION HEARINGS............................................... 17
XIX. CONFIRMATION AND SEVERABILITY
OF PLAN AND CRAMDOWN................................................ 17
XX. REVOCATION OF THIS PLAN............................................. 18
<PAGE>
XXI. SUCCESSORS AND ASSIGNS.............................................. 18
XXII. INJUNCTION.......................................................... 18
XXIII. LIQUIDATION ANALYSIS................................................ 19
XXIV. OBJECTIONS TO CLAIMS................................................ 20
XV. SALE, CANCELLATION, OR RETENTION OF
SECURITIES OF THE COMPANY........................................... 20
XXVI. FEDERAL INCOME TAX CONSEQUENCES..................................... 20
XXVII. AVOIDABLE TRANSFERS AND PREFERENCES................................. 20
XXVIII. RISK FACTORS........................................................ 21
XXIX. ACCEPTANCE AND CONFIRMATION OF THE PLAN............................. 21
XXX. PREPARATION OF MATERIALS............................................ 23
XXXI. CONCLUSION.......................................................... 23
<PAGE>
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE WESTERN DISTRICT OF OKLAHOMA
In Re: )
)
SKOLNIKS, INC. ) No. BK 95-10206-LN
) Chapter 11
Debtor. )
SECOND AMENDED PLAN OF REORGANIZATION AND
-----------------------------------------
DISCLOSURE STATEMENT
--------------------
I. INTRODUCTION
------------
Skolniks, Inc. ("Skolniks" or "Debtor") has prepared this Plan of
Reorganization and Disclosure Statement ("Disclosure Statement") in connection
with its solicitation of acceptances of its Plan of Reorganization ("Plan")
filed with the United States Bankruptcy Court for the Western District of
Oklahoma ("Bankruptcy Court"). The Plan describes Skolniks' proposal for the
reorganization of its business and the payment of claims. This Disclosure
Statement was approved by the Bankruptcy Court on the 16th day of April, 1996.
It contains information which will assist you in making an informed judgment
whether to accept the Plan. The Debtor urges you to read this Disclosure
Statement and the Plan carefully, paying particular attention to those
provisions that affect your rights, before deciding how to vote on the Plan.
As explained below, Debtor believes this Plan is in the best interest
of all creditors and urges each class entitled to vote to accept the Plan.
II. HISTORY OF THE COMPANY
----------------------
AND ANALYSIS OF OPERATIONS
--------------------------
Skolniks, Inc. is a publicly owned Delaware corporation formed several
years ago. It has a record of registration statements and reports which are
subject to review at the United States Securities and Exchange Commission,
Washington D.C. 20549. Historically, in connection with its business operations,
the company franchised restaurants under the name "Skolniks Bagel Bakery
Restaurants" and supplied most of its products to such franchised restaurants.
In addition, the company historically owned and operated restaurants, but
primarily focused on supporting its franchised restaurants through training,
marketing, equipment, construction and operational programs. During fiscal year
1994, the company also operated production plants located in Westampton, New
Jersey, and Morristown, New Jersey; however,
1
<PAGE>
subsequent to the end of fiscal year 1994, these plants were closed and their
operations were consolidated to the company's production plant in Scottsdale,
Arizona.
As of July 30, 1994, the company operated 24 franchise restaurants in 6
different states. However, as a result of the company's financial position, as
of March 10, 1995 the company no longer operates any franchised restaurants.
During the fourth quarter of 1994, the company completed the sale of
its 12 company-owned restaurants to Magnolia Foods, Inc. ("Magnolia").
References to the company-owned restaurants and restaurant operations relate to
those operations prior to the sale to Magnolia during the fourth quarter. The
company does not intend to operate company-owned restaurants. As the company has
sold all of its company-owned restaurants and is not operating any franchised
restaurants, all of the company's marketing, distribution and sales of its
product are being conducted out of the manufacturing plant in Scottsdale,
Arizona.
Product sales consist of sales to distributors, unrelated food service
operations and restaurants. The manufacturing plant in Scottsdale, Arizona is
owned and operated by Skolniks' wholly owned subsidiary, R & B Quality Foods,
Inc. ("R & B").
R & B, a bakery facility in Scottsdale, Arizona, was acquired in
December of 1993. Approximately 220,200 shares of company common stock were
issued in exchange for all of the outstanding common stock of R & B. Presently,
R & B is the only operation of the Debtor. Debtor and R & B presently file
consolidated statements and tax returns.
During fiscal year 1994, the company disposed of all of its
company-owned stores in order to focus its operations on manufacturing and
distribution activities. The assets of the company's 12 bagel bakery restaurants
located in Ohio, New Jersey, Pennsylvania and Illinois were sold to Magnolia for
a total consideration of $534,500.00, consisting of $100,000.00 cash and a note
receivable which was subsequently paid with $209,500.00 cash, warrants to
purchase 2 million Magnolia shares at 50 cents per share and 2 million shares of
Magnolia common stock, which was valued at $225,000.00 for sale purposes.
Presently, the Magnolia common stock and warrants are unencumbered and owned by
the Debtor corporation. Magnolia common stock presently has a bid price of 18
cents per share, however, 2 million shares in one block will not be expected to
bring that price. The loss on the disposition of the company's stores has been
accounted for as discontinued operations, and prior years' financial statements
have been restated to reflect the discontinuation of the company's stores. As a
result of the company's change in focus of operations, the company streamlined
and downsized its operations by reducing its work force, relocating certain
product lines, disposing of excess equipment and writing off other related
assets. These costs are reflected in the company's consolidated statements of
operations as a resizing and restructuring charge of $2,118,177.00.
The company operates on a fiscal year ending on the last Saturday in
July. Each fiscal year is divided into 4 quarters, with each quarter generally
consisting of 13 weeks.
2
<PAGE>
Debtor is presently the subject of investigations from the Arizona
Corporation Commission and the Oklahoma Securities Commission.
Presently, there are pending two class action lawsuits filed by
shareholders of the debtor corporation against former officers and directors and
the Debtor alleging violations of the Securities and Exchange Act of 1934 and
the Oklahoma Securities Act, as well as alleging fraud, negligence and
misrepresentation. (See Class G, page 16, for treatment of these claims.)
On January 13, 1995, Bay State Milling Company, American Truck Lines,
Inc., and Artkraft Container Corp. filed an Involuntary Chapter 11 bankruptcy
proceeding, and on March 15, 1995, a Consent Order of Relief was entered in the
proceedings. In March, 1995, the company restructured its management and
commenced with restructuring of its business operations. As part of the
company's management restructuring, the board of directors of the company
elected Nicholas Fegen, Gary Mallery, and Louis Pignatelli to the Board of
Directors. Furthermore, the Board of Directors appointed Mr. Fegen to serve as
Chief Executive Officer of the company and appointed Mr. Mallery to serve as
Chief Financial Officer of the company. Mr. Fegen has formed an advisory board,
composed of individuals in the food industry, for the purpose of assisting him
in carrying out his duties and responsibilities as Chief Executive Officer in
connection with the business operations of the company. Presently, no member of
the management team was involved in the company prior to the involuntary
bankruptcy filed in January, 1995. Present management believes that during
fiscal year 1994, the company had derived nominal benefits from its strategy of
primarily operating company-owned restaurants and franchising restaurants under
the name "Skolniks Bagel Bakery Restaurants," which strategy utilized a large
number of personnel and required the expenditure of large sums of funds which
were allocated for capital equipment, salaries, funding commitments and other
working capital purposes. These activities contributed to the financial demise
of the company. In connection with the implementation of the company's
restructured business plan, the company reduced its employees from 207 persons
at July 30, 1994 to 30 at March 10, 1995, reduced other operating expenses
through the disposition of company-owned restaurants and the non-operation of
franchise restaurants and consolidated its manufacturing and production
operations via R & B. Furthermore, the company has focused its business
operations on the production, manufacture and distributions of its baked
products to restaurants and retail and wholesale customers. Management believes
that such strategy will generate sales with minimum additional material
expenditures. The company is in the process of obtaining external sources of
funding in order to facilitate the immediate implementation of the Plan of
Reorganization.
III. SIGNIFICANT EVENTS DURING CHAPTER 11
------------------------------------
Since the filing date, Skolniks has remained in operation only to the
extent of the operations of R & B. The leases on production plants located in
Westampton, New Jersey and Morristown, New Jersey, have been rejected and
abandoned. Motions by secured creditors and landlords filed with the Court for
the purposes of recovery of premises and/or collateral have
3
<PAGE>
been followed by appropriate orders to the extent that such creditors have
recovered possession and control of collateral, thus Skolniks will not have to
deal with any secured creditors. An Unsecured Creditors Committee has been
appointed and has retained counsel. The members of the Unsecured Creditors
Committee and their addresses and the name of their counsel is as follows:
Frank Lobosco
Mason, Briody, Gallasher & Taylor
104 Carnegie Center, Ste. 201
Princeton, NJ 08540
David Nunn
Crowe & Dunlevy
1800 Mid-America Tower
20 N. Broadway
Oklahoma City, OK 73102
Don Kraus
D. A. Kraus & Associates
Rt. 1, Box 40A
Washington, OK 73093
Gary Hammond
Groom, Hammond & Harris, P.C.
100 N. Broadway, Ste. 1440
Oklahoma City, OK 73102
Skolniks has filed its Schedules, Statement of Financial Affairs, and
other lists required by the bankruptcy rules, as well as the Initial Report and
Monthly Operating Reports as required by the Office of the Assistant United
States Trustee. All quarterly fees due to the Assistant United States Trustee
under 28 U.S.C. ss. 1930(a)(6) have been paid. The company has developed a plan
to raise additional capital through the sale of its securities and intends to
use proceeds of such sale to satisfy and pay outstanding claims against it, to
the extent possible, and to recapitalize R & B as the financial and operating
arm of Skolniks. Since Skolniks operates solely as a holding corporation for R &
B, it has had little, if any, income or expenditures since the filing of the
Chapter 11 Petition. (For additional information, see Exhibit "A" attached
hereto and made a part hereof.)
This combined Disclosure Statement and Plan of Reorganization has been
prepared pursuant to ss. 1125, Title 11 of the United States Code, on behalf of
the above named debtor and describes and includes the terms and conditions of
the Debtor's Plan of Reorganization ("Plan"), which is filed herewith in the
above captioned case under Chapter 11 of the Bankruptcy Code of 1978 (11 U.S.C.
ss. 101, et seq.), as amended ("Bankruptcy Code").
4
<PAGE>
IV. DEFINITIONS AND EXPLANATION OF CHAPTER 11
-----------------------------------------
Brief Explanation of Chapter 11 Reorganization
- ----------------------------------------------
Chapter 11 is the principal reorganization vehicle of the Bankruptcy
Code. Pursuant to Chapter 11, a debtor is authorized to reorganize its affairs
for its benefit and the benefit of its creditors or to engage in an orderly
liquidation of its assets. Formulation of a Plan of Reorganization is the
principal purpose of a Chapter 11 reorganization case.
The Plan of Reorganization is the method through which claims and
interests are satisfied. Confirmation of a Plan of Reorganization requires,
among other things, that either (i) all classes of claims and interests entitled
to vote accept the Plan or (ii) that the Plan be accepted by the holders of at
least one impaired class of claims, not including the votes of claims held by
"insiders" as defined in ss. 101(31) of the Bankruptcy Code, and that certain
other tests set forth in the Bankruptcy Code be met.
Confirmation of the Plan under Chapter 11 will discharge the debtor and
subsidiary from all of its pre-confirmation debts except as provided in the
Plan, the order confirming the Plan or ss. 1141(d) of the Bankruptcy Code.
Confirmation makes the Plan binding upon the debtor, the subsidiary and all
creditors and interest holders, whether or not they voted to accept the Plan.
The standards for confirmation are discussed in depth in Section XXVIII.
Unless the context indicates otherwise, the terms used in this Plan and
Disclosure Statement have their ordinary meanings as set out in the United
States Bankruptcy Code unless hereinafter specifically set out:
I. Allowed Claims -- shall mean a claim with respect to which a Proof of Claim
has been filed with the Court within the applicable period of limitations fixed
by Order of the Court, as to which no objection to the allowance thereof has
been interposed within any applicable period of limitation fixed by an Order of
the Court, or as to which any objection has been determined by order or judgment
which is no longer the subject of appeal or certiorari proceedings, or which has
been scheduled in these proceedings as undisputed, liquidated, and
non-contingent.
A. Allowed Unsecured Claims -- shall mean any claim against the Debtor
Estate which is an allowed claim and for which there is no collateral pledged by
the Debtor Estate.
B. Bankruptcy Code -- Title 11 of the United States Code.
C. Court -- United States Bankruptcy Court for the Western District of
Oklahoma.
D. Confirmation of Plan -- Entry by the Court of an order confirming
the Plan in accordance with Chapter 11.
5
<PAGE>
E. Confirmation Order -- Shall mean the Order entered by the Court
approving the Plan of Reorganization.
F(1) Confirmation Date -- Shall mean the date that the Court enters the
Confirmation Order.
F. Commencement Date -- January 13, 1995, the date upon which the
Involuntary Petition in Bankruptcy under Chapter 11 was filed.
G. Creditor Class -- Multiple claims which are substantially similar to
all other claims within a class.
H. Creditor's Trust -- A trust created at confirmation of this Plan of
Reorganization formed for the purpose of receiving and disbursing certain assets
as more particularly described in the Plan.
I. Debtor -- Shall mean Skolniks, Inc.
J. Effective Date of Plan -- Shall be the date the Order confirming
Skolniks' Plan of Reorganization becomes final and non-appealable.
K. Final order -- Shall mean an order of the Court which, not having
been reversed, modified or amended and not having been stayed, and the time to
appeal from which or seek review or rehearing of which having expired, has
become conclusive of all matters adjudicated thereby in full force and effect.
L. New common stock -- Shall mean new shares of stock issued by the
Debtor pursuant to the Plan of Reorganization more particularly described in
Exhibit "A" attached hereto and made a part hereof.
M. New shareholders -- Shall mean those persons, firms, or corporations
purchasing New Common Stock.
N. Offering -- Shall mean the offering of New common stock pursuant to
the terms and conditions of this Plan of Reorganization, and more particularly
described in Exhibit "A" attached to this Combined Disclosure Statement and Plan
of Reorganization and specifically incorporated herein by reference.
O. Old common stock -- Shall mean stock issued prior to the
Commencement Date.
P. Old shareholders -- Shall mean those persons, firms or corporations
owning stock on the Commencement Date, or who may have acquired stock issued by
the Debtor prior to Commencement Date but purchased after the Commencement Date.
6
<PAGE>
Q. Plan -- The Debtor's Plan of Reorganization as contained in this
Amended Combined Disclosure Statement and Plan of Reorganization.
R. Pool -- Shall mean a fund of money not less than $1,000,000.00
raised through the sale of New common stock which shall be used to recapitalize
the Reorganized Debtor and to make payments provided for in this Plan of
Reorganization.
S. Post-petition -- Shall mean the period from and after the
Commencement Date.
T. Pre-petition -- Shall mean the period prior to the commencement
date.
U. Pro rata share -- Shall mean the amount which is the result of
multiplying the monies available to a named class of creditors by that fraction
in which the numerator is the allowed amount of a particular claim in a named
class and the denominator is the total of the allowed amounts of all claims in
the named class.
V. Property of the Estate - Shall mean all tangible and intangible
property belonging to the Debtor up to and including the confirmation date,
including, but not necessarily limited to, all actions or causes of action
belonging to the Debtor estate.
W. R & B -- The organization incorporated under the laws of the state
of Arizona, which is a wholly owned subsidiary of the Debtor, and the stock of
which constitutes the material asset of the Debtor for reorganization purposes.
X. Reorganized Debtor -- Shall mean the Debtor after the Effective
Date.
Y. Secured Claim -- Shall mean any claim allowed in these proceedings
for which the Debtor has pledged collateral.
Z. Trust -- Shall mean the Creditor's Trust as hereinafter set forth in
Paragraph VII.
V. CLASSIFICATION OF CLAIMS
------------------------
AND TREATMENT AFFORDED EACH
---------------------------
For purposes of this Plan, the following classes of claims and
interests are designated with treatment afforded each Class following a
description of the Class:
Class A: All claims of any kind, of a kind specified in ss. 503(b)
------- and ss. 507(a)(1) of the Bankruptcy Code, including claims
for compensation of professionals pursuant to ss. 330 of
the Bankruptcy Code as finally allowed and approved by the
court, as well as any fees and charges assessed against
the Debtor under Section 1930 of Title 28 with the
exception as set forth in paragraph
7
<PAGE>
VII hereinafter.
Treatment: Said claims will be paid by the Reorganized Debtor out of
--------- a fund established pursuant to the Confirmation Order.
Class B: Allowed unsecured claims for wages, salaries, or
------- commissions, including vacation, severance and sick leave
earned by an individual within 90 days before the
Commencement Date, limited to $4,000.00 for each
individual allowed claim.
Treatment: Said claims will be paid in full from first monies
--------- available to the pool after payment of Class A claims.
Class C: Allowed unsecured claims for contributions to employee
------- benefit plans pursuant to ss. 507(a)(4).
Treatment: Debtor does not believe there are any claims which fall
--------- within this class, but should there be any, the same will
be paid in full from the Pool by the Creditors' Trust
after payment of Classes A and B above.
Class D: Priority claims as defined in 11 U.S.C. ss. 507(7),
------- consisting of any unsecured claims of governmental units
for taxes, including, but necessarily limited to,
employment taxes, property taxes, sales taxes, fuel taxes,
income taxes, and interest accrued on those taxes prior to
the commencement date, but excluding any fines or
penalties which do not constitute compensation for actual
pecuniary loss.
Treatment: To the extent there are any claims which fall into this
--------- class, the same will be paid in full from the Pool by the
Creditors' Trust after payment of Classes A, B and C
above.
Class E: Claims of L & S Investments, L.L.C., and Keith Sutterfield
------- d/b/a Sutterfield Marketing.
8
<PAGE>
Treatment: In accordance with the Settlement Agreement heretofore
--------- approved by this Court on June 1, 1995, after appropriate
notice, this class will be treated as follows: All
agreements between the Debtor and these parties are
terminated, rescinded, and of no further force and effect,
save and except there is allowed in these proceedings an
aggregate claim due L & S and/or Sutterfield as an
unsecured claim in the amount of $60,000.00 which shall be
satisfied by a payment of not less than $12,000.00 from
the Pool by the Creditors' Trust after payment of classes
A, B, C and D above. In addition, the Debtor has granted
to L & S the exclusive right to use the "Skolniks" trade
name, service marks and trade marks in the state of
Oklahoma for a period of 3 years from June 1, 1995.
Class F: Shall consist of allowed unsecured claims in these
------- proceedings.
Treatment: These claims, to the extent that they are allowed by the
--------- Court, will receive pro rata distribution of funds
remaining in the Pool after the Pool is established
pursuant to terms set forth in paragraph IX hereinafter,
and after payment of Classes A, B, C, D and E above. In
addition, there will be appointed to the Board of
Directors of Reorganized Debtor a person to be nominated
by the Unsecured Creditors Committee and approved by the
Court, who shall serve as a director of the Reorganized
Debtor in addition to those persons named on page 9 of
Appendix B to Exhibit "A" attached hereto.
Class G: Shall consist of allowed claims of Old Shareholders (class
------- action claims).
Treatment: Any such claims allowed by the Court shall be paid by the
--------- Creditors' Trust on a pro rata basis within the class from
any remaining funds in the Pool after payment of Classes
A, B, C, D, E and F above.
Class H: Shall consist of Old Common Stock Owners.
-------
Treatment: Old Common Stock Owners shall retain their old common
--------- stock and participate in Reorganized Debtor on a parity
with New Common Stock holders.
Class I: Shall consist of owners or holders of company's July 1989
------- convertible subordinated debentures.
Treatment: Inasmuch as the debt represented by the debentures
--------- represents unsecured general obligations of the company,
said debenture holders shall be treated as and on a parity
with creditors in Class F above.
9
<PAGE>
Class J: Shall consist of holders of company's Series A convertible
------- preferred stock.
Treatment: Old Preferred Shareholders shall retain their old
--------- preferred stock and shall participate in the new
corporation in accordance with their rights and
preferences presently held.
Class K: Shall consist of all persons, firms, or corporations,
------- their heirs or assigns, who hold unexpired warrants or
options to purchase stock of the Debtor from the Debtor
except Class L hereafter.
Treatment: Such holders shall retain their warrants or options and
--------- shall participate in the new corporation in accordance
with their rights and terms of warrants or options
presently held.
Class L: Shall consist of all persons, firms, or corporations,
------- their heirs or assigns, who were officers, directors, or
employees of the Debtor who hold unexpired warrants or
options to purchase stock of the Debtor from the Debtor.
Treatment: All such warrants or options to purchase stock of the
--------- Debtor are cancelled, and such rights void.
VI. CLAIMS NOT IMPAIRED UNDER THE PLAN
----------------------------------
All classes of claims save and except Classes A, B, C, D, J and K are
impaired under the terms of the Plan.
VII. ADMINISTRATIVE COSTS
--------------------
There will be costs of administration of the Debtor Estate which will
be paid pursuant to Order of the Bankruptcy Court after Notice and hearing. It
is not possible to estimate these costs. The Reorganized Debtor will assume the
responsibility for payment of administrative expenses up to and including entry
of the Order Confirming Plan.
10
<PAGE>
VIII. CREDITORS' TRUST
----------------
Upon confirmation of the Plan a Creditors' Trust will be created. The
Creditors' Trust shall act as the receiving and disbursing agent for assets
dedicated to the treatment of Class A, B, C, D, E, F, G, and I claims. The trust
is to be governed by a trust instrument approved by the Court at date of
confirmation.
The trustee of the trust will be nominated by the Unsecured Creditors
Committee and appointed by the Court.
On the Effective Date of this Plan, or as soon thereafter as is
practical, all assets of the Debtor, except tax attributes, which shall remain
the property of Debtor, will be transferred to the Creditors' Trust.
The Creditors' Trust shall be responsible for the administration of the
assets assigned to it and shall pursue other duties as set forth in the Trust
Agreement.
IX. MEANS OF EXECUTION OF THE PLAN
------------------------------
Debtor intends an offering of up to 1,000,000 shares of common stock at
par value of $.001 per share (new common stock) to investors.
Debtor will complete the new stock offering within 90 days from entry
of the Order Confirming the Plan. All proceeds of the sale will be held in an
interest bearing account with a financial institution selected by the Debtor's
present management.
In the event the Plan is confirmed, all funds will be used to form the
Pool to be distributed in accordance with the Bankruptcy Code and this Plan of
Reorganization.
When the sale of new common stock is completed and the Pool is fully
funded, the Pool will be divided within 5 days, after advice in writing is given
to the Creditors' Trust of the fact of funding, in the following division: (A)
$150,000.00 retained by the Reorganized Debtor to recapitalize the reorganized
Debtor; (B) $850,000.00 to the Creditors' Trust. Contemporaneously with the
division of funds hereinabove described, the Creditors' Trust shall assign or
disclaim interest in stock owned by Debtor in R & B Quality Foods, Inc. ("R &
B"), trademarks, trade names, so that Reorganized Debtor shall own the said
assets.
It is estimated that a dividend of 5% to 15 % will be paid pro rata to
the allowed unsecured creditors' claims together with their pro rata share of
500,000 shares of new common stock and their pro rata share of any recoveries
made on causes of action prosecuted by the Trust.
11
<PAGE>
In the event of failure of the creditors to accept the Plan, and thus
failure to obtain confirmation from the Bankruptcy Court, then and in that event
the funds will be returned with interest to investors, which shall be the sole
responsibility of Debtor.
IN ADDITION TO THIS PLAN, CREDITORS AND INTEREST HOLDERS SHOULD READ
CAREFULLY EXHIBIT "A" ATTACHED HERETO AND THE APPENDIX TO THAT EXHIBIT, WHICH
ARE HEREBY SPECIFICALLY INCORPORATED BY REFERENCE IN THIS PLAN AND DISCLOSURE
STATEMENT.
The reorganized company will issue 500,000 shares of common stock of a
similar kind and nature and on a parity with other new common stock issues
pursuant to this Plan. Said 500,000 shares shall be issued to the Creditors'
Trust to be distributed pro rata to members of the unsecured creditor class.
Within fourteen (14) days after Effective Date, the Debtor will cause
to be transferred to the Creditors' Trust all assets of the Debtor with the
exception of tax attributes and any or all of the proceeds of the new stock
offering. In the event the Reorganized Debtor is unable to raise $1,000,000.00
within 90 days succeeding the Effective Date, the Creditors' Trust shall retain
all assets, and same shall be administered pursuant to the terms of the
Creditors' Trust.
In the event Debtor is unable to complete the sale of $1,000,000.00 in
new common stock, then, in that event, all subscriptions will be cancelled and
funds returned to subscribers with accrued interest, which shall be the sole
responsibility of the Debtor.
During the period of time between the confirmation date and its
Effective Date, no assets of either Debtor or Reorganized Debtor shall be sold,
transferred or encumbered.
X. SECURITIES
----------
Debtor intends a new stock offering of one million shares of new
common stock (see Exhibit "A" attached) and the issuance of 500,000 shares of
new common stock to the Creditors' Trust. The 500,000 shares shall be issued
pursuant to ss. 1145 of the Bankruptcy Code. Section 1145 provides for a limited
exemption from the securities laws for securities issued under a Plan of
Reorganization in exchange for a claim against or interest in the Debtor. The
Company intends to rely on an exemption from the registration requirements of
ss. 5 of the Securities Act of 1933 as set forth in Regulation D promulgated
under the Securities Act of 1933 and/or ss. 4(2) of the Securities Act of 1933,
whichever may be applicable. Debtor contemplates filing such documents as may be
required to comply with the chosen exemption above named. Subscriptions for new
common stock will be available on or after date of Order Approving Disclosure
Statement, and there will be no limitation on the number of shares for which a
Class H stockholder may subscribe.
12
<PAGE>
Appropriate amendments to the corporate charter and by-laws shall
be made to insure that the new common stock is authorized and is on a parity
with Class H stockholders.
Officers and directors presently serving own stock and warrants as
follows:
Name Shares Owned Warrants
Nick Fegen 24,000 600,000
Louis Pignatelli 300,000 350,000
Gary Mallery 5,000 300,000
Presently, Debtor has approximately 6,950,000 common shares
outstanding. There are 3,074,000 warrants outstanding, of which Debtor intends,
under the terms of this Plan, to cancel 864,663. There are 682,918 M warrants
outstanding with an exercise price of $6.67 expiring June 7, 1998. If all the
shares are issued and outstanding warrants are exercised, including the M
warrants, there will be approximately 11,300,000 common shares outstanding.
Therefore, the Creditors' Trust will own approximately 4.4% of Skolniks common
stock.
Debtor intends at some future time, if its present Plan is
confirmed, to attempt to relist its stock on an appropriate exchange. In order
to accomplish this relisting, Debtor will be required to comply with all rules
and regulations of the Securities Exchange Commission, which are voluminous and
complex. Previously Debtor was delisted from NASDAQ and the Boston Stock
Exchange for failure to file appropriate reports. Debtor intends to cure these
filings and to file all necessary reports and documents required to become
current with the S.E.C.
Debtor believes it presently has in hand sufficient commitments for
sale of 1,000,000 shares of new common stock at $1 per share.
XI. REJECTION OF EXECUTORY CONTRACTS
--------------------------------
In accordance with the provisions of 1123(b)(2) and ss. 365 of the
Bankruptcy Code, the Debtor rejects all executory contracts and unexpired leases
to which it is a party which were in existence on or before the commencement
date of these proceedings.
XII. MODIFICATION OF THE PLAN
------------------------
This Plan may be modified only in accordance with ss. 1127 of the
Bankruptcy Code. If modification of the Plan is determined to materially affect
a particular class, a resolicitation of that class is required. Material
modifications may occur when the rights of a creditor or equity holder are
altered.
13
<PAGE>
XIII. PROVISIONS REGARDING PAYMENT FOR SERVICES
-----------------------------------------
No payments have been made or promised by the Debtor to any person,
firm or corporation for services or for costs and expenses in connection with
this reorganization case, or in connection with the Plan or incident to the
reorganization case, except those payments which have been disclosed to and
approved by the Court.
XIV. RETENTION OF CLAIMS
-------------------
Pursuant to ss. 1123(b) of the Bankruptcy Code, any claims or
causes of action belonging to the Debtor in existence at the effective date
after confirmation will be transferred to the Creditors' Trust, and all proceeds
of such litigation shall be administered by the Creditors' Trust and distributed
pro rata to its trust beneficiaries.
In the event there are causes of action which are not pursued by
the Creditors' Trust, then such claims may be pursued by the reorganized
company.
All title 11 avoidance powers and causes of action, both bankruptcy
and non-bankruptcy, of any kind and all kinds whatsoever, are transferred to the
Creditor's Trust upon the effective date after confirmation (the
"pre-confirmation rights"). All pre-confirmation rights are hereby forever
reserved for the exclusive use and benefit of the Creditors' Trust and its
beneficiaries once this Plan has been confirmed, and become effective on the
effective date. The Order of Confirmation shall be sufficient for purposes of
accomplishing transfer to the Creditors' Trust.
XV. REVESTING
---------
On the Effective Date, the Reorganized Debtor will be entitled to
operate its business and to use, acquire and dispose of any property free of any
claims, encumbrances or restrictions of the Bankruptcy Code and the Bankruptcy
Court, except as set forth in this Plan.
XVI. RETENTION OF JURISDICTION
-------------------------
Until this Plan has been fully consummated through the entry of a
final decree completely closing the reorganization case, the Bankruptcy Court
shall retain jurisdiction over all matters necessary to insure that the purposes
and intent of this Plan are carried out, as well as the Creditor's Trust created
by this Plan of Reorganization. Nothing contained herein shall be construed as
restricting Debtor or Reorganized Debtor in the conduct of their businesses and
operations. Until final consummation of this Plan the Bankruptcy Court shall
retain jurisdiction of all such matters, including, but not limited to, the
following:
14
<PAGE>
a. To allow, disallow, determine, liquidate, classify,
estimate or establish the priority or secured or unsecured status of any claim,
including the resolution of any request for payment of any claim for
administrative expenses and the resolution of any and all objections to the
allowance or priority of claims;
b. To grant or deny any applications for allowance of
compensation or reimbursement of expenses authorized pursuant to the Bankruptcy
Code or this Plan, for periods ending on or before the Effective Date;
c. To resolve any motions pending on the Effective Date to
assume, assume and assign or reject any executory contract or unexpired lease to
which Debtor is a party or with respect to which Debtor may be liable and to
hear, determine and, if necessary, liquidate, any claims arising therefrom;
d. To insure that distributions to holders of Allowed Claims
are accomplished pursuant to the provisions of this Plan;
e. To decide or resolve any motions, adversary proceedings,
contested or litigated matters and any other matters and grant or deny any
applications involving Debtor that may be pending on the Effective Date;
f. To enter such orders as may be necessary or appropriate to
implement or consummate the provisions of this Plan and all contracts,
instruments, releases, indentures and other agreements or documents created in
connection with this Plan or Disclosure Statement;
g. To resolve any cases, controversies, suits or disputes that
may arise in connection with the consummation, interpretation or enforcement of
this Plan or any entity's obligations incurred in connection with this Plan;
h. To modify this Plan before or after the Effective Date
pursuant to ss. 1127 of the Bankruptcy Code or modify the Disclosure Statement
or any contract, instrument, release, indenture or other agreement or document
created in connection with this Plan and Disclosure Statement; or remedy any
defect or omission or reconcile any inconsistency in any Bankruptcy Court order,
this Plan, the Disclosure Statement or any contract, instrument, release,
indenture or other agreement or document created in connection with this Plan or
Disclosure Statement, in such manner as may be necessary or appropriate to
consummate this Plan, to the extent authorized by the Bankruptcy Code;
i. To issue injunctions, enter and implement other orders or
take such other actions as may be necessary or appropriate to restrain
interference by any entity with consummation or enforcement of this Plan;
j. To enter and implement such orders are necessary or
appropriate if the
15
<PAGE>
confirmation order is for any reason modified, stayed, reversed, revoked or
vacated;
k. To determine any other matters that may arise in connection
with or relate to this Plan, the Disclosure Statement, the confirmation order or
any contract, instrument, release, indenture or other agreement or document
created in connection with this Plan or Disclosure Statement; and
l. To enter an order concluding the captioned Chapter 11 case.
XVII. VOTING ON THE PLAN
------------------
Section 1126(a) of the Bankruptcy Code provides that holders of an
impaired class may accept or reject the Plan of Reorganization. Section 1126(f)
further provides that a class which is not impaired under the Plan of
Reorganization is deemed to have accepted the Plan, and solicitation with
respect to such class is not being made. In addition, ss. 1126(g) provides that
a class which is not entitled to payment under the Plan of Reorganization is
deemed to have rejected the Plan. Each creditor in the class of claims who is
entitled to vote will receive a ballot. All classes of creditors and creditors
within the class will be mailed, postage prepaid, a copy of the Plan and
Disclosure Statement or a Court-approved Summary thereof, along with a ballot
with instructions for voting. In the case of securities holders, mailings will
be made to the record owner of the securities according to the company's books
and records. Debtor will utilize its books and records listing the names of
creditors and shareholders, along with its schedules filed in these proceedings
and the claims docket for purposes of mailing and solicitation of votes.
A class of claims is impaired if the Plan modifies the legal,
equitable or contractual rights of persons with claims in the class (other than
modifying them by curing defaults or reinstating the maturity dates of debts or
providing for full cash payment of the claim.) Each creditor in an "impaired"
class is entitled to vote if either: (1) Its claim has been listed on the
Debtor's Bankruptcy Schedules (and is not listed as disputed, contingent or
unliquidated); or (2) It has filed a Proof of Claim on or before the last date
for filing such Proofs of Claim pursuant to the Bankruptcy Court's bar date of
August 1, 1995. However, any creditor holding a claim to which an objection has
been filed and is unresolved by the deadline for voting is not entitled to vote
unless, upon motion of the Creditor, the Bankruptcy Court temporarily allows the
claim in an amount which is deemed proper for the purpose of accepting or
rejecting the Plan.
Ballots should be returned to:
Skolniks, Inc.
c/o McClelland, Collins, Bailey, Bailey & Bellingham
15 N. Robinson, 1100 Colcord Bldg.
Oklahoma City, OK 73102
16
<PAGE>
YOUR BALLOT MUST BE POSTMARKED BY 5:00 P.M. ON THE 1ST DAY
OF JULY, 1996 IN ORDER TO BE COUNTED.
Any ballots or changes of votes marked after that date will not be
counted. If you believe you are entitled to vote, but you have not received a
ballot, or if your ballot is damaged or lost, you should write Skolniks' legal
counsel at the address stated above, or call Skolniks' legal counsel at (405)
235-9371 for another ballot.
XVIII. CONFIRMATION HEARINGS
---------------------
A hearing on confirmation of the Plan will be held on the 10th day
of July, 1996, beginning at 2:30 o'clock P.M. before the Hon. Judge Paul
Lindsey, Courtroom No. 6, Old Post Office Building, 215 Dean A. McGee Avenue,
Oklahoma City, Oklahoma. In addition to voting on the Plan, all parties in
interest have the right to object to confirmation. Objections must be in writing
and filed with the Bankruptcy Court at the address hereinabove set forth. A copy
of any objection must be served upon McClelland, Collins, Bailey, Bailey &
Bellingham, counsel for the debtor, by mailing a copy of the objection to 15 N.
Robinson, 1100 Colcord Building, Oklahoma City, Oklahoma 73102. The Bankruptcy
Court has set the 3rd day of July, 1996 as the last date for filing objections
to confirmation of the Plan. Such objections will be dealt with at a hearing on
confirmation.
XIX. CONFIRMATION AND SEVERABILITY OF PLAN AND CRAMDOWN
--------------------------------------------------
The Debtor requests confirmation under ss. 1129(b) of the
Bankruptcy Code if any impaired Class does not accept this Plan on which it has
a right to vote pursuant to ss. 1126 of the Bankruptcy Code. In that event,
Debtor reserves the right to modify the Plan to the extent, if any, that
confirmation pursuant to ss. 1129(b) of the Bankruptcy Code requires
modification.
A. Cramdown.
The court may confirm a plan, even if it is not accepted by all
impaired classes, if the plan has been accepted by at least one impaired class
of claims and the plan meets the "cramdown" provisions contained in ss. 1129(b)
of the Bankruptcy Code. The "cramdown" provisions require that the court find
that a plan "does not discriminate unfairly" and that the plan is "fair and
equitable" with respect to each non-accepting impaired class.
A court may find that the plan is "fair and equitable" with respect
to a class of non-accepting, impaired secured claims only if the plan provides
(1) that the secured creditor retains its liens under the plan and receives
deferred cash payments totaling at least the allowed amount of its secured
claim, (2) for the sale of the property securing the claim pursuant to ss.
363(k) of the Bankruptcy Code, with the secured creditor's liens attached to the
proceeds of such sale and with such liens treated as in clause (1) above, or (3)
for the realization by the secured creditor
17
<PAGE>
of the "indubitable equivalent" of its claim.
Debtor believes the Plan my be confirmed notwithstanding the
dissent of holders of impaired claims. The Plan reserves the right of Debtor to
request that the Plan be confirmed notwithstanding such dissent.
Debtor requests confirmation under ss. 1129(b) of the Bankruptcy
Code if any impaired Class does not accept this Plan on which it has a right to
vote pursuant to ss. 1126 of the Bankruptcy Code. In that event, Debtor reserves
the right to modify this Plan to the extent, if any, that confirmation pursuant
to ss. 1129(b) of the Bankruptcy Code requires modification.
XX. REVOCATION OF THIS PLAN
-----------------------
Debtor reserves the right to revoke or withdraw this Plan prior to
Confirmation Date. If Debtor revokes or withdraws this Plan, or if the
confirmation as to the Debtor does not occur, then this Plan shall be null and
void in all respects, nothing contained in the Plan shall (a) constitute a
waiver or release of any claim by or against, or any interest in, Debtor; or (b)
prejudice in any manner the rights of the Debtor.
XXI. SUCCESSORS AND ASSIGNS
----------------------
The rights, benefits and obligations of any entity named or
referred to in this Plan shall be binding on and shall inure to the benefit of
any heir, executor, administrator, successor, assign of such entity.
XXII. INJUNCTION
----------
Except as provided in this Plan or the confirmation order, as of
the confirmation date, all entities that have held, currently hold or may hold a
claim or other debt or liability that is discharged or an interest or other
right of an equity security holder that is terminated pursuant to the terms of
this Plan are permanently enjoined from taking any of the following actions on
account of any such discharged claims, debts or liabilities or terminated
interests or rights: (a) commencing or continuing in any manner any action or
other proceeding against Debtor, reorganized Debtor or their respective
property; (b) enforcing, attaching, collecting or recovering in any manner any
judgment, award, decree or order against Debtor, reorganized Debtor or their
respective property; (c) creating, perfecting or enforcing any lien or
encumbrance against Debtor, reorganized Debtor or their respective property; (d)
asserting a setoff, right of subrogation or recoupment of any kind against any
debt, liability, or obligation due to Debtor, reorganized Debtor or their
respective property; and (e) commencing or continuing any action, in any manner,
in any place that does not comply with or is inconsistent with the provisions of
this Plan.
18
<PAGE>
XXIII. LIQUIDATION ANALYSIS
--------------------
The assets of the Debtor Corporation consists of all of the common
stock of R & B Quality Foods, Inc.; 2,000,000 shares of Magnolia Foods, Inc.;
2,000,000 warrants of Magnolia, exercisable at 50 cents per share; trademarks,
causes of action and accounts receivable. Since R & B is not a party in this
bankruptcy proceeding, its creditors are not included as creditors scheduled
herein. Inasmuch as all creditors of R & B, both secured and unsecured, must be
satisfied before there would be a distribution to the Debtor as the sole
stockholder, any value attached to R & B would have to develop as a going
business. That value would be highly speculative. Magnolia common stock
presently has a bid price of 18 cents per share, however, 2,000,000 shares in
one block will not be expected to bring that price, and a more speculative price
would be imaginable. It is doubtful the warrants have any value. The trademarks,
causes of action and accounts receivable are of little value.
The latest available consolidated financial statements and
projected income of the Debtor and its wholly owned subsidiary, R & B, are
attached to Exhibit "A" as Appendices C and D.
Debtor estimates that the number and amounts of impaired creditor
claims are as follows:
CREDITOR CLASS NO. OF CLAIMS AMOUNT
- -------------- ------------- ------
E 1 $ 60,000.00
F (Est.) 650 6,900,000.00
G 323 (Est.) n/a
H 323 (Est.) n/a
I 7 226,000.00
L 9 n/a
Note: (Final numbers and amounts may be subject to change by reason
of duplication of claims and/or objections to claims. Number of equity owners
may vary because of street name accounts.)
Debtor estimates priority claims are approximately $300,000.00.
There are no secured claims, and there are no administrative claims by reason of
the assumption of administrative expenses by Reorganized debtor.
Previously, the Debtor has given notice to all unscheduled,
disputed, unliquidated or contingent creditors to file claims. The bar date was
set by the Court as August 1, 1995. Skolniks is not aware of any general
unsecured claims which are disputed, unliquidated, contingent or nonscheduled
other than those of creditors which have filed their claims in these
proceedings. Skolniks intends to prosecute objections to such claims as are
disputed (see paragraph XXIV hereafter). The Creditors' Trust may participate in
the objections to claims or
19
<PAGE>
may file separate objections as it may decide. As a result, liquidation value of
the debtor estate is estimated at less than $250,000.00.
XXIV. OBJECTIONS TO CLAIMS
--------------------
The Reorganized Debtor agrees that it will, at its own expense,
assume the responsibility for examination of and objections to any claims in
these proceedings which are disputed, unliquidated, contingent or nonscheduled.
The Reorganized Debtor will complete the claims objections process by the 360th
day following 90 days from the Effective Date. The claims objection process will
be completed to the satisfaction of the Creditors' Trust, which satisfaction
will not be unreasonably withheld. In the event the Reorganized Debtor completes
the aforesaid claims procedure timely, the Creditors' Trust shall pay to the
Reorganized Debtor the sum of $50,000.00. If not timely completed, the
Reorganized Debtor shall still be responsible for completing the claims process
and will forfeit any claim to $50,000.
XV. SALE, CANCELLATION, OR RETENTION OF
-----------------------------------
SECURITIES OF THE COMPANY
-------------------------
Existing holders of common stock issued by the Company shall retain
said stock and will be treated on a parity with new common stock to be issued
pursuant to this Plan. More particular information with regard to the method to
be used in the offering of new common stock is contained in Exhibit "A" attached
hereto.
All holders of warrants or options to purchase stock of the
corporation except Class K will retain their interests as evidenced by said
warrants or options and will be entitled to exercise them in accordance with the
contractual terms and conditions contained in said warrants and options.
XXVI. FEDERAL INCOME TAX CONSEQUENCES
-------------------------------
Federal income tax consequences of creditors and shareholders are
peculiar to each creditor or shareholder's position. You should consult your own
attorneys or accountants for an opinion of the tax consequences of this Plan to
you.
XXVII. AVOIDABLE TRANSFERS AND PREFERENCES
-----------------------------------
Skolniks is aware of certain actions in its favor for avoidance of
transfers and/or preferences under the Bankruptcy Code. These actions will be
transferred to the Creditors' Trust and may be prosecuted by the Trustee of the
Creditors' Trust.
20
<PAGE>
XXVIII. RISK FACTORS
------------
Because the Plan provides for payment in cash in full to Classes A
and B, risks normally associated with Chapter 11 reorganizations are not present
insofar as these classes are concerned.
In order for the Plan to be consummated, it will be necessary that
the creditors accept the Plan, the subscribed stock issue, and the escrow funds
paid for distribution collected, thus the conditions set forth in the Plan are
material conditions which must be satisfied before consummation of the Plan.
There is an additional risk factor that management will not be able to obtain
funding of subscriptions necessary to fund the minimum requirement under the
Plan. (See Exhibits "A" and its appendices for additional risk factors to be
considered in conjunction with this Plan.)
The alternative to acceptance of this Plan (Chapter 7 liquidation)
is readily apparent.
XXIX. ACCEPTANCE AND CONFIRMATION OF THE PLAN
---------------------------------------
The Bankruptcy Code, as interpreted by the courts, provides the
rules for how votes of creditors will be counted and whether a Plan of
Reorganization will be confirmed by the Court.
A. How the votes are counted:
(1) Votes of each class: Each creditor's vote will be counted in
the class it is provided for under the Plan. A class of claims will have
accepted the Plan if creditors that hold at least two-third in dollar amount and
more than one-half in number of allowed claims in that class which cast a ballot
have voted for the Plan. Classes of creditors which are not Impaired are deemed
to have accepted the Plan and are not entitled to vote. If a creditor comprising
a single Impaired class does not vote on the Plan, that class of claims will be
deemed to have accepted the Plan.
B. Ballots: Ballots will be returned to Skolniks, Inc. c/o McClelland, Collins,
Bailey, Bailey & Bellingham, 15 N. Robinson, 1100 Colcord Building, Oklahoma
City, Oklahoma 73102 where they will be counted and tabulated by class, and a
summary of the ballots with ballots attached is to be submitted to the Court on
date of confirmation. In the event a ballot is received which has been otherwise
properly executed but does not indicate whether the creditor or shareholder
accepts or rejects the plan, that ballot will be disregarded.
(1) Tabulation of classes: Once each class' vote has been
determined, the votes of all classes are compared to determine whether the Plan
can be confirmed. In order for the
21
<PAGE>
Plan to be confirmed, it must be accepted by at least one class of claims that
is Impaired under the Plan, without counting any acceptance of any insider.
Further, the Bankruptcy Code ordinarily requires that all classes of claims
either accept the Plan or that they not be Impaired by the Plan. Should an
Impaired class reject the Plan, upon request of the Debtor, the Bankruptcy Court
will still confirm the Plan so long as it meets the standards set forth in ss.
1129(b) of the Bankruptcy Code. The Debtor hereby requests the Court to confirm
the Plan pursuant to ss. 1129(b) in the event an Impaired class rejects the
Plan. Reference is made to a complete discussion of "cramdown" at ss. XIXA on
page 30.
In order for the Bankruptcy Court to confirm the Plan under such
circumstances, it must find that the Plan does not discriminate unfairly and is
fair and equitable with respect to each class of claims or interests that it is
Impaired under, and has not accepted the Plan. For classes of secured claims,
the Plan must provide either (a) that the creditors retain their liens and
receive payment of a value, as of the Plan's effective date, equal to the value
of their interest in their collateral; (b) that the property be sold, that the
creditors retain liens in the proceeds of sale, and that they receive payments
as of the Plan's effective date equal to the value of their interest in their
collateral; or (c) that they otherwise receive "indubitable equivalent" of their
claims. Since there are not secured claims treated under the Plan as a class,
the Court will not consider a secured class for voting purposes. For classes of
unsecured claims, the Plan must provide either (a) that each holder receive or
retain property of a value, as of the effective date, equal to the allowed
amount of its claim; or (b) that no junior claim or interest receive or retain
any property under the Plan. Skolniks believes that should fewer than all
impaired classes vote
Plan, the Plan, nevertheless, meets these standards and will be confirmed under
ss. 1129(b) of the Bankruptcy Code.
C. Other Requirements for Confirmation:
(1) General Requirements: In addition to obtaining the requisite
number of votes, the Plan must satisfy a number of other requirements of the
Bankruptcy Code, including appropriate classification of creditors and
stockholders, compliance with the technical requirements of Chapter 11 of the
Bankruptcy Code, and the proposal of the Plan in good faith and by legal means.
The Debtor believes the Plan complies with these provisions and will seek
rulings to this effect at the confirmation hearing.
22
<PAGE>
(2) Feasibility: The Plan must also meet a test known as the
"feasibility" test. Under ss. 1129 of the Bankruptcy Code, a Plan is feasible if
the Court finds that confirmation of the Plan is not likely to be followed by
the liquidation, or the need for further financial reorganization, or the Debtor
or any successor under the Plan, unless such liquidation or reorganization is
proposed under the Plan. The Debtor believes this Plan is feasible. The Plan
calls for the subscription and issuance of a class of common stock to present
shareholders and the continued operation of the companies as consolidated.
(3) Liquidation Analysis: The Bankruptcy Court must also
independently determine that the Plan is in the best interest of all creditors
and equity security holders Impaired by the Plan. The "best interest" test found
in ss. 1129(a)(7) requires that each Impaired class either accept the Plan, or
that it receive or retain at least as much under the Plan as it would in a
liquidation under Chapter 7 of the Bankruptcy Code.
XXX. PREPARATION OF MATERIALS
------------------------
Exhibit "A" and its appendices were prepared by the following
persons, firms or corporations: Skolniks, Inc.; Mr. Gary Mallery; Mr. Nick
Fegen; and Mr. Tom Pritchard.
XXXI. CONCLUSION
----------
This Disclosure Statement and Plan of Reorganization, together with
Exhibits attached hereto, has been prepared by the present management of the
Debtor, together with its counsel. Financial data is unaudited and certain
information contained in the Exhibits or the Disclosure Statement may change
depending upon ongoing negotiations or further court decisions.
Neither the Debtor nor its attorney has rendered an opinion with
respect to the foregoing Disclosure Statement materials and makes no
representation relative to accuracy or completeness of the analysis made herein.
The Debtor believes that acceptance of this Plan of Reorganization is the only
way in which creditors may realize any recovery of their claim, and therefore
respectfully request that you as a creditor or shareholder vote "Yes" ballot
which is furnished to you with this Plan and Disclosure Statement.
Respectfully submitted,
__________________________________
NICHOLAS A. FEGEN
Chairman of the Board of Directors
and Chief Executive Officer of
SKOLNIKS, INC.
23
EXHIBIT 2.2
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE WESTERN DISTRICT OF OKLAHOMA
In Re: )
)
SKOLNIKS, INC. ) No. BK 95-10206-LN
) Chapter 11
Debtor. )
MODIFICATION OF SECOND AMENDED PLAN OF REORGANIZATION
-----------------------------------------------------
TO ALL CREDITORS OF SKOLNIKS, INC.:
COMES NOW the Debtor-in-Possession and modified the heretofore filed
Second Amended Plan of Reorganization by inserting, following the first
paragraph of Treatment of Class G Claims located on page 16 of the Second
Amended Plan of Reorganization, the following language:
"Provided, however, that should the claims of this Class be
allowed and the Court, after hearing on objections to such
claims, determine that such allowed claims are on a parity
with other unsecured claims, then and in that event, such
allowed claims shall be reclassified as Class F claims and be
satisfied by distributions made pro rata with other unsecured
claims included in said Class F. Any and all other references
to treatment of Class F claims in this Plan should be
considered modified to the extent effected by the foregoing
language."
The Plan is further modified by deleting Class L and treatment
of the same.
Done on this _____ day of June, 1996.
SKOLNIKS, INC.
By:____________________________________
RICHARD R. BAILEY #000426
of the firm of
MCCLELLAND, COLLINS, BAILEY,
BAILEY & BELLINGHAM
Colcord Building - 11th Floor
15 North Robinson
Oklahoma City, Oklahoma 73102
405-235-9371
ATTORNEY FOR DEBTOR IN POSSESSION
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