U.S. SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter period ended October 31, 1997 File #: 001-09703
SKOLNIKS, INC.
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(Exact name of small business issuer as specified in its charter)
Delaware 13-3074492
------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7755 E. Gray Road, Scottsdale, Arizona 85260
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(Address of principal executive office) (Zip code)
(602) 443-9640
----------------------------------------------
(Issuer's telephone number, including area code)
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $ 0.001 PAR VALUE
SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK, $.01 PAR VALUE
SKNS-M WARRANTS TO PURCHASE COMMON STOCK, $.001 PAR VALUE
(Title of Class)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. YES [ ] NO [X]
Check whether the issuer filed all documents and reports required to be filed by
Section 12, 13, 15(d) of the Exchange Act after the distribution of securities
under a plan confirmed by a court YES [ ] NO [ ]
The number of shares outstanding of issuer's Common Stock, $.001 par value per
share, as of July 31, 1998 was 9,328,176.
Transitional Small Business Disclosure Format (check one): YES [ ] NO [X]
<PAGE>
SKOLNIKS, INC.
QUARTERLY REPORT ON FORM 10-QSB
FOR THE QUARTER ENDED OCTOBER 31, 1997
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets - October 31, 1997
and July 31, 1997...........................................3
Condensed Consolidated Statements of Operations -
Three Month Periods Ended October 31, 1997 and 1996.........4
Condensed Consolidated Statements of Cash Flows -
Three Month Periods Ended October 31, 1997 and 1996.........5
Notes to Consolidated Financial Statements....................6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................8
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings............................................11
ITEM 2. Changes in Securities........................................11
ITEM 3. Defaults Upon Senior Securities..............................11
ITEM 4. Submission of Matters to a Vote of Securities Holders........11
ITEM 5. Other Information............................................11
ITEM 6. Exhibits and Reports of Form 8-K.............................12
SIGNATURES...................................................13
<PAGE>
SKOLNIKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
OCTOBER 31, 1997
(unaudited)
October 31, 1997 July 31, 1997
(unaudited)
---------------- -------------
ASSETS
CURRENT ASSETS
Cash $ 69 $ 68
Accounts Receivable, Net 130,684 104,234
Inventory, Net 52,742 41,397
Other Current Assets 36,761 30,365
------------ ------------
TOTAL CURRENT ASSETS 220,256 176,064
Property & Equipment, Net 282,160 301,931
------------ ------------
TOTAL ASSETS $ 502,416 $ 477,995
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts Payable and
Accrued Liabilities $ 358,660 $ 394,129
Notes Payable - Related Parties 1,015,005 805,005
------------ ------------
TOTAL CURRENT LIABILITIES $ 1,373,665 $ 1,199,134
Commitments and Contingencies 0 0
------------ ------------
STOCKHOLDERS' DEFICIT:
Preferred Stock, $0.01 par value,
2,000,000 shares authorized; shares
issued: October 1997 - 523,284 and
July 1997 - 532,271 $ 5,233 $ 5,323
Common Stock, $0.001 par value,
10,000,000 shares authorized; shares
issued: October 1997 - 9,081,476 and
July 1997 - 9,072,489 9,081 9,072
Additional Paid in Capital 21,088,123 21,088,042
Accumulated Deficit (21,071,145) (20,921,035)
------------ ------------
31,292 181,402
Less Treasury Stock, at cost (902,541) (902,541)
------------ ------------
TOTAL STOCKHOLDERS' DEFICIT $ (871,249) $ (721,139)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 502,416 $ 477,995
============ ============
The accompanying notes are an integral part of
these financial statements.
3
<PAGE>
SKOLNIKS, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(unaudited)
Three-Months Ended
-----------------------------------
October 31, 1997 October 31, 1996
---------------- ----------------
Net Sales $ 367,715 $ 348,992
EXPENSES:
Operating Expenses 434,544 385,024
General & Administrative 63,181 53,518
----------- -----------
Loss from Operations $ (130,011) $ (89,549)
Interest Income (Expense) (20,100) (18,625)
----------- -----------
LOSS BEFORE EXTRAORDINARY ITEM $ (150,111) $ (108,175)
EXTRAORDINARY ITEM - DEBT FORFIVENESS 0 0
----------- -----------
NET INCOME (LOSS) $ (150,111) $ (108,175)
=========== ===========
Net Income per Share (0.02) (0.02)
Weighted Average Shares Outstanding 9,076,983 6,956,107
The accompanying notes are an integral part of
these financial statements.
4
<PAGE>
SKOLNIKS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
Three-Months Ended
-----------------------------------
October 31, 1997 October 31, 1996
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $(150,111) $(108,175)
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and Amortization 19,581 17,748
Increase in Accounts Receivable (26,450) (5,453)
Increase in Inventory (11,345) (3,400)
Increase in Other Current Assets (6,396)
Decrease in Other Current Assets 1,086
Decrease in Accounts Payable and Accrued
Liabilities (34,719)
Increase in Accounts Payable and Accrued
Liabilities 4,848
--------- ---------
NET CASH USED IN OPERATING ACTIVITIES $(209,439) $ (93,346)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment $ (560) $ (1,850)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES $ (560) $ (1,850)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on Debt $ 0 $ (3,661)
Proceeds from Borrowing 210,000 100,000
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 210,000 $ 96,339
NET INCREASE (DECREASE) IN CASH $ 1 $ 1,143
CASH, BEGINNING OF PERIOD 68 13,539
--------- ---------
CASH, END OF PERIOD $ 69 $ 14,682
========= =========
NON-CASH INVESTMENT/FINANCING ACTIVITIES:
Preferred Stock Converted to Common Stock $ 90 $ 0
The accompanying notes are an integral part of
these financial statements.
5
<PAGE>
SKOLNIKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED OCTOBER 31, 1997
(a) The accompanying unaudited consolidated financial statements have been
prepared by the Company without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. These financial
statements reflect all adjustments (consisting of normal recurring accruals
and adjustments) which are, in the opinion of management, necessary to
fairly state the financial position as of October 31, 1997 and the
operating results and cash flows for the periods presented. Operating
results for the interim periods presented are not necessarily indicative of
the operating results that may be expected for the entire year. These
financial statements should be read in conjunction with the Company's July
31, 1997 financial statements and accompanying notes thereto.
(b) At a hearing held in bankruptcy court on March 20, 1995, the Company agreed
to an order for relief under Chapter 11 of the United States Bankruptcy
Code. The Company submitted a plan to the bankruptcy court, which was
approved. The plan was mailed to the creditors and shareholders May 2,
1996. The Court confirmed the plan of reorganization at the Confirmation
Hearing held on July 10, 1996, at the United States Bankruptcy Court in the
Western District of Oklahoma. The Company raised the monies required under
the plan. 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. The Company completed all requirements under the Plan of
Reorganization on December 18, 1996. The Court issued a Final Decree in
connection with the Company's Reorganization in Bankruptcy on October 8,
1998.
(c) During 1997 and the first quarter of fiscal year 1998, the Company incurred
operating losses of $480,408 and $130,111 respectively. In addition, the
Company has a deficit in working capital of $1,023,070 at July 31, 1997 and
$883,409 at October 31, 1997 and a deficit in equity for both time periods.
The significance of the combined losses with the deficits in working
capital and equity raises substantial doubt about the Company's ability to
continue as a going concern
(d) The financial statements of the Company have been prepared on the basis of
principles applicable to a continuing business. The basis presumes the
realization of assets and the settlement of liabilities in the ordinary
course of business. The Company's ability to operate as a continuing
business is dependent upon the attainment of future profitable operations
and/or the Company's ability to acquire additional capital or other forms
of financing. The accompanying financial statements do not reflect any
adjustments relating to the recoverability and classification of recorded
asset amounts or amounts or classification of liabilities that might be
necessary should the Company be unable to continue as a going concern.
(e) Management is pursuing new business opportunities, primarily in the
geographic Southwest, with customers in the retail grocery, convenience
store, vending, military, food service, and club store segments. In
addition, new customers are being added for daily deliveries of fresh bread
products within the Arizona market. While the product line presently
includes bagels, breadsticks, sub rolls, and Italian specialty breads, a
line of upscale, European Artesan breads has been developed and is being
introduced. Management is also considering the opportunity to acquire,
merge, or strategically align with other synergistic baked goods or
6
<PAGE>
food manufacturers for enhanced product offerings, geographic coverage, and
customer leverage.
(f) At October 31, 1997, the Company had approximately $20 million of net
operating loss carryforwards available for both financial statement and
federal income tax purposes. These carryforwards expire through the year
2018. No deferred tax asset has been recorded as the realization of the
benefit is in substantial doubt.
(g) Since March 1995 through July 1998, certain members of the Board of
Directors and three shareholders have loaned the Company $1,291,005,
including $1,015,005 total loaned through October 31, 1997. In connection
with these loans, the Board members have been issued warrants to purchase a
total of 4,674,009 shares of Common Stock.
Number of Shares Exercise Price
1,430,009............$0.500
1,524,000............$0.250
920,000............$0.125
800,000............$0.100
---------
4,674,009
=========
The Board members were issued warrants to purchase 2,100,000 shares at
$0.375 upon joining the Board. Also, 350,000 warrants have been granted to
certain members of management: 200,000 shares at $1.00 and 150,000 shares
$0.375.
Holders of warrants to purchase 7,409,000 shares of common stock have
agreed to refrain from exercising their warrants until the Company's
authorized shares capital is increased.
(h) Net Income per share for the periods ended October 31, 1997 and 1996 was
determined by dividing net income available to common shareholders by the
weighted-average number of common and common equivalent shares outstanding.
Common stock equivalents recognize the potential dilutive effects of the
future exercise of common stock option. The weighted-average number of
common equivalent shares assumes the exercise of all outstanding options
and the corresponding repurchase of shares using the treasury stock method
as of the beginning of each period presented. The common stock warrants for
the periods presented do not quality as common equivalents.
7
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The statements contained in this Report on Form 10-QSB that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including statements regarding the Company's "expectations",
"anticipation", "intentions", "beliefs", or "strategies" regarding the future.
Forward-looking statements include statements regarding revenue, margins,
expenses, and earnings analysis for fiscal 1998 and thereafter; future products
or product development; the Company's product development strategy; and
liquidity and anticipated cash needs and availability. All forward-looking
statements included in this Report are based on information available to the
Company on the date of this Report, and the Company assumes no obligation to
update any such forward-looking statement. It is important to note that the
Company's actual results could differ materially from those in such
forward-looking statements. Among the factors that could cause actual results to
differ materially are the factors discussed in ITEM 1, "Business - Special
Considerations" of the Company's Form 10-KSB for the year ended July 31, 1997.
BASIS OF PRESENTATION
The following discussion should be read in conjunction with the condensed
consolidated financial statements included elsewhere within this quarterly
report. Fluctuations in annual and quarterly operating results may occur as a
result of certain factors such as the size and timing of customer orders,
competition, and general economic conditions. The customer base is located
primarily in Arizona, which experiences an economic downturn in the hospitality
industry during the hot summer months due to decreased tourism. Because of such
fluctuations, historical results and percentage relationships are not
necessarily indicative of the results for any future period.
RESULTS OF OPERATIONS
Three Months Ended October 31, 1997 and 1996
The following table summarizes the operating results of the Company as a
percentage of revenue for the periods indicated.
Three Months Ended
October 31,
1997 1996
---- ----
Revenue 100% 100%
Operating Expenses 118% 109%
General and Administrative 17% 15%
---- ----
Operating Income (Loss) (35%) (25%)
Interest Expense 6% 6%
---- ----
Pre-Tax Income (Loss) (41%) (31%)
Income Taxes 0% 0%
---- ----
Net Income (Loss) (41%) (31%)
8
<PAGE>
REVENUE
Revenue was $367,715 for the first three months of 1997 and $348,992 for the
first three months of 1996. The increase of $18,723 or 5% can be attributed to
the addition of a full-time sales representative and a more focused sales plan
directed at multiple-unit locations. Also, a national sales broker organization
has been retained to present the breadstick and bagel product lines to major
retail grocery and foodservice accounts.
OPERATING EXPENSES
Cost of Goods Sold was 118% of sales on October 31, 1997, an 8% increase from
October 31, 1996. An increase in repairs and maintenance on equipment,
additional sales resources, and out of state distribution relating to both
warehouse club and pizza chain business are the major components of the
increase.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $63,181 for the quarter ended October
31, 1997 and $52,877 for the quarter ended October 31, 1996, or a 19% increase.
Increased payroll due to increased staffing needs and accounting audit fees are
the major components of the general and administrative variance.
INTEREST EXPENSE
Interest expense was $20,100 in the first quarter of 1998, an increase of $1,475
over the first quarter of 1997. The increase is attributable to the increased
borrowings.
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 1997, the Company had a working capital deficit of $1,153,409
compared to 1,023,070 at July 31, 1997. The decrease of $130,339 in the deficit
resulted from increased borrowings of $210,000 offset by an increase in accounts
receivable, inventory, and other assets of $44,191 and decrease accounts payable
and accrued liabilities of $35,469.
Net cash used in operating activities was $209,439 in the first quarter of 1998
compared to $93,346 in the first quarter of 1997. The increase in net cash used
in operating activities for the three month period ended October 31, 1997
resulted from increased operating losses of approximately $42,000 in the first
quarter of 1998 compared to the first quarter of 1997, increases in accounts
receivable, inventories, and prepaid expenses of approximately $44,000, and a
decrease in accounts payable and accrued liabilities of $35,000. Net cash
provided by financing activities for the first quarter of fiscal 1998 was
$210,000 compared to $96,339 in the first quarter of fiscal 1997. The difference
resulted primarily from increase borrowings. As of July 31, 1997, the Company
was in default on all payments to most of its trade vendors and lenders. As of
October 31, 1997, the Company has made progress towards eliminating the past due
accounts payable. However, most trade vendors placed the Company on COD payment
terms in addition to requiring payment of past amounts. All such obligations
have been classified as current as of July 31, 1997 and October 31, 1997.
Furthermore as of October 31, 1997, the Company was in arrears on dividends on
its Preferred Stock in the amount of $518,051 payable in shares of Preferred
Stock.
As of October 31, 1997, the Company's sources of external financing remain
limited. The Company does not expect that internal sources of liquidity will
improve until net cash is provided by operating activities, and, until such
time, the Company will rely upon external sources for
9
<PAGE>
liquidity. The Company has not established any lines of credit or any other
significant financing arrangements with any third party lenders. From March 1995
through October 1998, certain members of the Company's Board of Directors and
three shareholders have provided operating capital in exchange for interest
bearing notes totaling an aggregate amount of $1,291,005 and stock warrants in
the aggregate of 4,674,009 warrants. The Company has been unable to identify
other sources regarding securing working capital, a function of the involuntary
bankruptcy experienced in 1994 and continuing business losses.
The Company's independent accountants have issued an opinion with an explanatory
paragraph with respect to the Company's financial statements for the years ended
July 31, 1997 and 1996 to reflect recurring losses from operations and a working
capital deficit and deficit in equity that raise substantial doubt about the
ability of the Company to continue as a going concern. See "Part I, ITEM 1,
Notes to Consolidated Financial Statements, Note (e)."
10
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDING
A complaint was filed in the Maricopa County Superior Court
(Civil Action No. CV98-03169) against the Company's wholly owned
subsidiary R & B Quality Foods for non-payment of trade debt. On April
13, 1998, a settlement agreement was reached whereby R & B Quality
Foods paid a lump sum of $50,000.00.
ITEM 2 CHANGES IN SECURITIES
From March 1995 through July 1998, the Company issued notes in
an aggregate amount of $1,291,005 and granted warrants in connection
therewith, to purchase an aggregate of 4,674,009 shares of Common Stock
in exchange for cash in the amount of $1,291,005 to members of the
Company's Board of Directors and to three shareholders of the Company.
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 through August 1998, the Company issued warrants
to purchase 2,550,000 shares of Common Stock to officers and directors
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.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5 OTHER INFORMATION
Not applicable.
11
<PAGE>
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2 Certificate of Owner and Merger (1)
2.1 Second Amended Plan of Reorganization and Disclosure
Statement
2.2 Modification of Second Amended Plan of Reorganization
3.1 Certificate of Incorporation, as amended, (included as annex
to Exhibit 2); Amendment to Certificate of Incorporation (1)
Bylaws, as amended (1)
3.2 Bylaws, as amended (1)
4 Amended Certificate of Designations, Preferences, and Rights
of Series A Convertible Preferred Stock (2)
4.6 Warrant Agreement covering 506,250 Common Stock Purchase
Warrants (M Warrants) (3)
27.1 Financial Data Schedule
- ----------
(1) Filed as exhibit to Registrant's Form S-18 Registration Statement (No.
33-16869) which is incorporated herein by reference.
(2) Incorporated by reference to the Registration Statement on Form S-1 of the
Registrant as filed with the SEC on March 8, 1993 (File No. 33-59116)
(3) Incorporated by reference to the Registration Statement on Form S-1 of the
Registrant as filed with the SEC on March 1, 1993 (File No. 33-58858).
(b) Exhibits Reports on Form 8-K
The Company filed a Form 8-K on March 13, 1996.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Skolniks, Inc.
Dated: 10/28/98 /s/ Russell K. Swartz
--------------------------------------------
Russell K. Swartz
President and Chief Executive Officer
(Principle Executive Officer)
Dated: 10/28/98 /s/ Gary D. Mallery
--------------------------------------------
Gary D. Mallery
Chief Financial Officer
(Principle Financial and Accounting Officer)
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET, INCOME STATEMENT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
10QSB.
</LEGEND>
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