SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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, 1999
Commission File Number 001-09703
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 (480) 443-9640
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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
Series A Cumulative Convertible Preferred Stock, par value $.01 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 [X] No [ ]
Check if there is no 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. [ ]
State issuer's revenue for its most recent fiscal year: $1,956,324
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked prices of such common equity, as of a
specified date within the past 60 days: As of October 27, 1999 - $134,384. 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]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of October 27, 1999 - 9,343,187
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, 1999
TABLE OF CONTENTS
Page
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PART I
ITEM 1. DESCRIPTION OF BUSINESS....................................... 1
ITEM 2. DESCRIPTION OF PROPERTY....................................... 6
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................... 12
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE........................... 12
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........................................ 14
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT................................................ 15
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................ 16
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.............................. 17
SIGNATURES ................................................................. 18
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.................................. F-1
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PART I
ITEM I. BUSINESS
GENERAL
Currently, the Company produces and markets fresh and frozen breadsticks,
bagels, sub rolls, and other specialty breads and rolls. The Company markets and
distributes its products to distributors, retailers, unrelated foodservice
operations, schools, and restaurants. The Company produces its products in a
commercial bakery 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 Court confirmed a Plan of Reorganization at the Confirmation
Hearing held on July 10, 1996, in the United States Bankruptcy Court in the
Western District of Oklahoma. The Company fulfilled all its obligations under
the Plan of Reorganization by funding the Creditors' Trust with a cash payment
of $800,000 and a Common Stock issuance of 500,000 shares on December 18, 1996.
The Court issued a Final Decree in connection with the Company's Reorganization
in Bankruptcy on October 8, 1998. On May 27, 1999, the Creditors' Trust issued
approximately $20,000 and 22,000 shares of reorganized Skolniks stock to the
wholly owned subsidiary of the Company to satisfy unsecured claims in accordance
with the Plan of Reorganization. These shares were placed in treasury at $.08,
the market price on the date of issuance.
MARKETING OPERATIONS
The Company is in the process of implementing an aggressive strategy to
secure incremental business from retail grocery chains, multi-unit restaurant
operations, distributors, schools, and club stores. The results to date have
yielded successful product introductions with major customers in each trade
channel noted. A program to expand nationally was tested in fiscal 1997 however
the transportation costs associated with this sales and marketing effort proved
prohibitive from a competitive pricing standpoint. Therefore, the Company has
focused its current new business efforts towards the larger metropolitan markets
in the southwest.
MANUFACTURING OPERATIONS
The Company currently operates a commercial bakery in Scottsdale, Arizona
that produces breadsticks, bagels, sub rolls, and other specialty breads and
rolls for restaurants, schools, retail and wholesale outlets. The Company's
facility is capable of producing product with a wholesale value of $15,000 per
day. The Company currently operates at approximately 36% of capacity. The
Company is capable of increasing its production without investment in new
equipment by increasing the number of shifts of operation.
Despite the relative age of most of the operating equipment, a preventive
maintenance program and periodic repairs by equipment professionals has kept
operational efficiency at an acceptable level. The breakdown of certain key
equipment components could negatively impact the Company's ability to meet
customer orders on a timely basis. In addition, there can be no assurance that
the Company will be able to obtain financing for any replacement machinery. In
fiscal 1999, the Company purchased new bakery equipment with a loan obtained
from a third party lender, personally guaranteed by certain Board Members. The
new bakery equipment consists of a proof box, ice maker, and automated packaging
line. This equipment was added to replace aged equipment and increase production
efficiencies.
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CUSTOMERS
The Company conducts a major portion of its business with certain
customers, two of which individually account for 49% of total revenue. For the
year ended July 31, 1999, revenue from these customers amounted to approximately
$965,000 or 49% of total revenue. Total accounts receivable from these customers
at July 31, 1999, amounts to approximately $85,000 or 59% of the total trade
accounts receivable balance.
EMPLOYEES
As of October 27, 1999, the Company employed approximately 27 people, of
whom two are employed as executive personnel, three as sales/administrative
personnel, one in bakery production management, five delivery personnel
including a driver supervisor and the remaining 16 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 bread and roll products and other baked goods are subject to
intense competition. There are several national, regional, and local
manufacturers of bread and roll 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 coupled with excellent customer service
and responsiveness. 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 bakery 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 that governs such matters as minimum wages,
overtime, and other working conditions.
TRADEMARKS
The Company utilizes two major brand names / marks for which trademark
applications have been filed (January 1999 and March 1999). The Company has
received and answered a response from the U.S. Patent and Trademark Office.
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
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). At a hearing held in Bankruptcy Court on March 20, 1995, the
Company agreed to an order for relief under Chapter 11 of the United States
Bankruptcy Code. The Court confirmed a Plan of Reorganization at the
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Confirmation Hearing held on July 10, 1996 in the United States Bankruptcy Court
in the Western District of Oklahoma. The Company fulfilled all its obligations
under the Plan of Reorganization by funding the Creditors' Trust with a cash
payment of $800,000 and a Common Stock issuance of 500,000 shares on December
18, 1996. The Court issued a Final Decree in connection with the Company's
Reorganization in Bankruptcy on October 8, 1998. On May 27, 1999, the Creditors'
Trust issued approximately $20,000 and 22,000 shares of reorganized Skolniks
stock to the wholly owned subsidiary of the Company to satisfy unsecured claims
in accordance with the Plan of Reorganization. These shares were placed in
treasury at $.08, the market price on the date of issuance.
UNQUALIFIED REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT AS TO THE
COMPANY'S ABILITY TO CONTINUE AS A GOING CONCERN
The unqualified report by the Company's independent certified public
accountants on the Company's financial statements for the year ended July 31,
1999 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. In addition, the
report notes that the Preferred Stock of the Company has a total liquidation
preference and accumulated dividends of approximately $2,128,000, which may
effect the Company's ability to raise funds. See "Item 6. 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. As of October
27, 1999, 9,343,187 shares of Common Stock were issued and 141,604 shares were
held in treasury for a total of 9,484,791 shares outstanding. In addition, as of
October 27, 1999, warrants to purchase an aggregate of 9,315,676 shares of
Common Stock, warrants to purchase an aggregate of 800,001 shares of Preferred
Stock, and 427,328 shares of Preferred Stock convertible into Common Stock were
outstanding. 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. As of October 27, 1999, the holders of warrants to purchase an
aggregate of 9,040,667 shares of Common Stock and an aggregate of 800,001 shares
of Preferred Stock had agreed to refrain from exercising their warrants 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 new Common
Stock or the exercise of the outstanding warrants.
The Company's Preferred Stock has a total liquidation preference of
approximately $1,423,002 and accumulated dividends of approximately $705,000,
payable in shares of Preferred Stock valued at the closing bid price on the last
trading day preceding the record date for dividends as declared by the Board of
Directors. 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.
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 427,328 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,
conversion and redemption rights and sinking fund provisions as determined by
the Board of Directors. 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
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third party, thereby preserving control of the Company by the present owners. As
of October 27, 1999, warrants to purchase an aggregate of 800,001 shares of
Series A Cumulative Convertible Preferred Stock were outstanding. As of October
27, 1999, the holders of warrants to purchase an aggregate of 800,001 shares of
Series A Cumulative Convertible Preferred Stock had agreed to refrain from
exercising their warrants until the Company's authorized share capital is
increased.
RIGHTS TO ACQUIRE SHARES UPON EXERCISE OF WARRANTS
A total of 9,315,676 shares of the Company's Common Stock and a total of
800,001 shares of Preferred Stock 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 because the holders of such
warrants can 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 an aggregate of
9,040,667 shares of Common Stock and an aggregate of 800,001 shares of Preferred
Stock have agreed to refrain from exercising their warrants until the Company's
authorized share capital is increased.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market could
adversely affect prevailing market prices. Of the 9,343,187 shares of Common
Stock currently outstanding, approximately 7,752,187 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
1,591,000 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 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 cash dividends in the foreseeable future.
Instead, the Company intends to apply any earnings to the expansion and
development of its business. However, the Company accrues a dividend payable in
shares of Preferred Stock at a rate of $.165 semi-annually. At July 31, 1999,
the accrued dividend was approximately $709,000, payable in shares of Preferred
Stock at the closing bid price on the last trading day preceding the record date
for dividends as declared by the Board of Directors. Because of the limited
number of authorized shares, the Company is precluded from declaring and
distributing any of the accrued dividends.
CAPITAL REQUIREMENTS
The Company continues to experience 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
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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.
PENNY STOCK RULES
The National Quotation Bureau currently quotes the Company's securities 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.
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 comply with applicable laws and regulations in all material aspects.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept only two-digit entries to represent years in the date code field.
These programs and databases were designed and developed without considering the
impact of the upcoming millennium. Consequently, date sensitive computer
programs may interpret the date "00" as 1900 rather than 2000. If not corrected,
many computer systems could fail or create erroneous results in 2000.
The Company has completed an assessment of all of its internal systems and
processes with respect to the "Year 2000" issue. In response to this assessment,
the Company has created a Y2K Task Force to resolve any non-compliant Year 2000
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systems, processes, or other issues. As part of the process of evaluating the
Year 2000 issue, the task force has assessed the potential impact of Year 2000
failures from vendors and outside parties upon its business and has determined
that all third parties who have a potential material impact are adequately
prepared for the year 2000.
The Company has assessed its information technology systems and believes
that it is Year 2000 compliant because the Company operates personal computers
linked together with network package software, as opposed to mainframe computer
technology. All the personal computers have been purchased in the past two years
and run on a standard operating system that is Year 2000 compliant. In addition,
the software used by the Company is standard, off-the-shelf applications
purchased or upgraded in the past three years, all of which are Year 2000
compliant. As of July 31, 1999, the Year 2000 task force has completed all
necessary upgrades and testing to ensure that the Company will not incur any
data loss or computer downtime associated with the Year 2000 issue.
The Company has taken steps to assure that the computer systems of its
vendors, customers, and banks with which the Company utilize electronic data
interchange will be Year 2000 compliant. Such vendors, customers, and banks have
assured the Company that their computer operations will be Year 2000 compliant
before December 31, 1999. However, there can be no assurance that computer
systems operated by all third parties with which the Company systems' interface
will be compliant on a timely basis and in that event, the Company may be
adversely affected, although the magnitude of such effect cannot be estimated.
The Company has also determined that its bakery equipment processors are
Year 2000 compliant. Bakery equipment evaluated includes ovens, breadstick and
bagel equipment, compressors, and thermostats. None of the equipment was
determined to use date sensitive computer processors.
The cost of the Company's Year 2000 compliance program has not had, and is
not expected to have, a material impact on the Company's results of operations,
financial condition, or liquidity. The Company has not been required to
prematurely replace any equipment due to Year 2000 issue, nor has the Company
needed to hire Year 2000 solution providers. Further, the company does not
anticipate the necessity of such expenses in the future. Finally, the Company
anticipates that the cost of ensuring compliance of third parties will remain
minimal.
The Company anticipates, in its reasonably likely worst case Year 2000
scenario, that the failure of its customers, suppliers, and utility providers to
adequately address their own Year 2000 issues will cause the Company to
experience delays in receiving payments of invoices from customers, delays in
and/or improper postings of payments made to vendors, and loss of operating
capabilities related to the failure of the utility providers.
The failure of the Company's customers and vendors to be Year 2000
compliant can be minimized by using a supplemental source of communication such
as fax and mail to ensure that invoices and checks are properly processed and to
maintain hard copies of all invoices and checks. The Company plans to implement
such procedures, as they become necessary.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's executive offices and production facility are located in a
14,000 square feet located at 7755 E. Gray Road, Scottsdale, Arizona 85260 under
a lease that expires on March 31, 2004. Current monthly rental for this property
is $11,148 per month. The Company believes that these facilities are adequate
for its reasonably anticipated needs.
ITEM 3. LEGAL PROCEEDINGS
There are no pending legal matters.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters brought to vote of security holders during fiscal
1999 or 1998.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
At July 31, 1999 and 1998 the Company had 9,343,187 and 9,328,176 shares of
Common Stock issued and 427,328 and 427,328 shares of Preferred Stock issued and
outstanding. The Company's Common Stock is quoted on the over-the-counter (pink
sheets) 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
-----------------------------
High Low
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Fiscal 1999
First Quarter..................... unavailable unavailable
Second Quarter.................... unavailable unavailable
Third Quarter..................... unavailable unavailable
Fourth Quarter.................... unavailable unavailable
Fiscal 1998
First Quarter..................... $0.180 0.030
Second Quarter.................... 0.125 0.010
Third Quarter..................... 0.093 0.010
Fourth Quarter.................... 0.150 0.010
As Of October 27, 1999, there were approximately 295 holders of record of
the Company's Common Stock. The Company believes that there are in excess of
1,800 holders of beneficial interest of its Common Stock.
The Company has never declared or paid any cash dividends on its Common
Stock and does not anticipate that it will pay cash dividends in the foreseeable
future. Instead, the Company intends to apply any earnings to the expansion and
development of its business. The Company accrues a dividend payable in shares of
Preferred Stock at a rate of $.165 semi-annually. At July 31, 1999, the accrued
dividend was approximately $709,000, payable in shares of Preferred Stock at the
closing bid price on the last trading day preceding the record date for
dividends as declared by the Board of Directors. Because of the limited number
of authorized shares, the Company is precluded from declaring and distributing
any of the accrued dividends.
In fiscal 1999, the Company issued a note to a third party lender in the
amount of $80,000 which is personally guaranteed by three Board Members. For the
risk associated with the personal guarantee, the Company granted warrants to
purchase an aggregate of 800,001 shares of Preferred Stock. 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.
During fiscal 1999, the Company issued warrants to purchase 75,000 shares
of Common Stock to a newly appointed director of the Company. The Company issued
the warrants without registration under the Securities Act in reliance on
Section 4(2) of the Securities Act.
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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, 1999 and 1998 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,
------------------------
1999 1998
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(in thousands, except
per share amounts)
STATEMENT OF OPERATIONS DATA:
Product sales (net) ........................ $ 1,956 $ 1,685
Plant operating Costs ...................... 1,716 1,649
Loss from operations ....................... (145) (356)
Other income (expense) ..................... (141) (110)
Net loss ................................... (286) (466)
Basic earnings (loss) per share ............ (0.05) (0.07)
Weighted average shares outstanding ........ 9,335,676 9,200,604
As of July 31,
------------------------
1999 1998
---- ----
(in thousands)
BALANCE SHEET DATA:
Cash and cash equivalents .................. 16 32
Working capital (deficit) .................. (1,120) (114)
Total assets ............................... 453 484
Total shareholders' deficit ................ (1,445) (1,157)
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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 Sections 21E of the Securities Act of 1934,
including statements regarding the Company's "expectations," "anticipation,"
"intentions," "beliefs," or "strategies" regarding the future. Forward-looking
statements include statements regarding revenue, margins, expenses, and earnings
analysis for fiscal 2000 and thereafter; future products or product development;
the Company's product development strategy; 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.
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 breadsticks, bagels, sub rolls, and other specialty breads and rolls.
Product sales consist of sales to distributors, retailers, unrelated foodservice
operations, schools, and restaurants.
Costs and expenses include plant operating costs and general and
administrative expenses. Plant operating costs are the cost of plant sales and
consist of the portion of overall costs associated with producing and
distributing products. General and administrative expenses include management
salaries, selling expenses, corporate administrative expenses, office operating
expenses, and depreciation of office furniture and equipment.
The Company is currently focusing its business operations on the production
and distribution of its breadsticks, bagels, sub rolls, and other specialty
breads to multi-unit restaurants, schools, distributors, and retail customers in
the Arizona and Las Vegas, Nevada market. Management believes this strategy will
generate sales without incurring additional substantial expenditures for bakery
equipment, distribution, or additional product expertise.
In addition, the Company secured loans in fiscal 1999 to purchase bakery
equipment. The new equipment purchases were necessary to replace certain aged
equipment and increase production efficiencies to establish a more competitive
cost for certain products.
YEAR ENDED JULY 31, 1999 ("FISCAL 1999") COMPARED TO YEAR ENDED JULY 31, 1998
("FISCAL 1998")
Product sales were $1,956,324 in fiscal 1999 compared to $1,685,378 in
fiscal 1998, an increase of approximately 16%. The continued efforts of a full
time salesperson and re-focused sales strategy plan are the main reasons for the
approximate $271,000 increase in product sales.
Plant operating costs of $1,715,729 in fiscal 1999 compared to $1,649,247
in fiscal 1998 provided for an increase of approximately 4%. This $66,482
increase was due to the 16% increase in sales balanced against the decrease in
expenses.
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General and administrative expenses decreased to $385,220 in fiscal 1999
from $392,075 in fiscal 1998, a decrease of $6,855. Management's commitment to
cost reduction in every area including insurance, computer, and other general
office expenses is responsible for the 2% decrease in general and administrative
expenses.
Overall operating expenses increased to $2,100,949 in fiscal 1999 from
$2,041,322 in fiscal 1998. This $59,627 or 3% overall expense increase was due
primarily to the 16% increase in sales balanced against the decrease in
expenses.
The Company's loss from operations experienced a 59% decrease. Increased
sales combined with effective cost controls directly attributed to the $211,319
savings. The loss from operations for fiscal 1999 was $144,625 compared to
$355,944 for fiscal 1998.
Interest expense for fiscal 1999 was $141,137 compared to $109,941 for
fiscal 1998. Increased borrowings caused the $31,196 or 28% increase in interest
expense.
The Company incurred a net loss of $285,762 in fiscal 1999 compared to a
net loss of $465,885 in fiscal 1998. The change is a decrease in loss of
$180,123 or a 63% improvement.
YEAR ENDED JULY 31, 1998 ("FISCAL 1998") COMPARED TO YEAR ENDED JULY 31, 1997
("FISCAL 1997")
Product sales were $1,685,378 in fiscal 1998 compared to $1,457,063 in
fiscal 1997, an increase of approximately 16%. The addition of a full time
salesperson and focused sales strategy plan are the main reasons for the
$228,000 increase.
Plant operating costs were $1,649,247 in fiscal 1998 compared to $1,504,398
in fiscal 1997, an increase of approximately 10%. A 16% increase in production
for fiscal 1998 is responsible for this 10% increase in plant operating costs.
General and administrative expenses decreased to $392,075 in fiscal 1998
from $433,073 in fiscal 1997. This 9% decrease was due primarily to an effective
cost reduction program.
Overall operating expenses increased to $2,041,322 in fiscal 1998 from
$1,937,471 in fiscal 1997. This increase was due primarily to increased
production, increased marketing expenses associated with the focused sales
strategy, and increased professional fees offset by an effective cost reduction
program.
The Company incurred a net loss before extraordinary item of $465,885 in
fiscal 1998 compared to a net loss of $554,406 in fiscal 1997.
The Company's net income after extraordinary item was $2,972,567 in fiscal
1997 due to the forgiveness of debt upon emerging from bankruptcy of
approximately $3,526,973.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 1999, the Company had a working capital deficit of $1,120,400
compared to $113,697 at July 31, 1998. The decrease in net cash used in
operations combined with the increase in the current maturites of the notes
payable, related parties account for the majority of the decrease in the working
capital ratio.
10
<PAGE>
The decrease of the Company's net loss combined with the effective use of
trade payables and receivables resulted in a decrease in the net cash used in
operating activities of $465,151 during fiscal 1999 as compared to fiscal 1998.
The net cash used in operating activities for fiscal 1999 and 1998 was $15,226
and $480,377, respectively.
In fiscal 1999, net cash used in investing activities was $49,632 compared
to net cash used in investing activities in fiscal 1998 of $4,066. Investing
activities for fiscal 1999 accounts for the purchase of a new proof box, ice
maker, and new automated packaging line. In fiscal 1998, the Company purchased
labeling equipment used to produce labels with substantial savings over other
available options.
In fiscal 1999, net cash provided by financing activities was $49,515
compared to net cash provided by financing activities of $516,000 in fiscal
1998. In fiscal 1998, the net cash provided by financing activities accounted
for the proceeds from borrowings of debt in an aggregate amount of $516,000. The
net cash provided by financing activities in fiscal 1999 was composed of
proceeds from borrowings of debt in an aggregate amount of $50,000 and payments
on debt principal of $485.
The Company maintained good relations with its trade vendors and as of
October 27, 1999, all major trade vendors have extended credit terms. As of July
31, 1999, the Company was not in default on payments to trade vendors. However,
there were several accounts to non-trade service providers which were in
delinquent status. As of October 27, 1999, the Company has arranged for the
repayment of most of these delinquent accounts. In addition, the Company is in
arrears on dividends on its Preferred Stock in the amount of $705,000, payable
in shares of Preferred Stock at the closing bid price on the last trading day
preceding the record date for dividends as declared by the Board of Directors.
Because of the limited number of authorized shares, the Company is precluded
from declaring and distributing any of the accrued dividends.
The Company made one principal payment on a certain senior note payable in
the amount of $485. However, as of October 27, 1999, the Company is in default
on notes payable, related parties in an aggregate amount of $719,005, all of
which is classified as current on the balance sheet as of July 31, 1999.
Substantially all of the delinquent notes payable, related parties are secured
by the assets of the Company's wholly owned subsidiary; $475,000 secured by
machinery and equipment, $207,505 secured by furniture and fixtures, and $32,500
secured by accounts receivable. The holders of the delinquent notes payable pose
a serious threat to the viability of the continuing business because they may
demand payment or seize the secured assets. There can be no assurance that
additional financing will be available to the Company on acceptable terms, if at
all. Any inability by the Company to obtain additional financing, if required,
or the loss of any of the Company's assets would have a material adverse effect
on the operations of the Company.
As of July 31, 1999, 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 on external sources for operating capital. 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 1999, certain
members of the Company's Board of Directors, four shareholders, and one third
party entity have loaned an aggregate of $1,341,005 in exchange for promissory
notes and warrants to purchase an aggregate amount of 4,674,009 shares of Common
Stock and an aggregate amount of 800,001 shares of Preferred Stock. There can be
no assurance that the Company will be able to obtain additional financing on
reasonable terms, it at all. Furthermore, there can be no assurance that the
11
<PAGE>
Company will be able to raise additional capital through a stock issuance given
the current constraints. The constraints that may impede the Company's ability
to raise additional funds via stock issuance are the number of unexercised and
outstanding warrants, the limited number of authorized shares of Common Stock,
and the Preferred Stock preferences now in place.
The report by the Company's independent certified public accountants on the
Company's financial statements for the fiscal year ended July 31, 1999, 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. In addition, the report notes
that the Preferred Stock of the Company has a total liquidation preference and
accumulated dividends of approximately $2,128,000 which may effect the Company's
ability to raise funds.
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
None
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 52 Chairman of the Board
Russell K. Swartz 54 President, Chief Executive Officer,
and Director
Gary D. Mallery 60 Secretary and Director
Anga L. Allen 27 Chief Financial Officer
W. Sam Dennis 55 Director
Dennis DesLauriers 55 Director
Nicholas A. Fegen 40 Director
Ronald Russell, Sr. 65 Director
12
<PAGE>
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 principal 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 and as a director since August 1998. 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 a Master of Science
degree in Business Administration from Babson College.
ANGA L. ALLEN has served as Chief Financial Officer since February 1999.
Ms. Allen previously served as Controller since May 1998. Ms. Allen holds a
Bachelor of Science degree in Accountancy from Arizona State University - West
Campus and recently passed the CPA Exam with the highest score in the State of
Arizona.
GARY D. MALLERY, CPA has served as secretary and director of the Company
since March 1995. From March 1995 through February 1999, Mr. Mallery served as
Chief Financial Officer. In addition, 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.
W. SAM DENNIS has served as a director of the Company since January 1997.
Dr. Dennis has been a physician practicing radiology in Houston, Texas since
1980. Dr. Dennis received his M.D. from Baylor College of Medicine in 1976.
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 last six 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.
13
<PAGE>
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, 1999 and inquiry of related parties, 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 (i) Louis
F. Pignatelli has informed the Company that he will be filing a late report on
Form 5 covering one late Form 4 transaction; (ii) W. Sam Dennis has informed the
Company that he will be filing a late report on Form 5 covering one late Form 4
transaction; (iii) Ronald Russell, Sr. has informed the Company that he will be
filing a late report on Form 5 covering one late Form 3 transaction and eleven
late Form 4 transactions; and (iv) Gary D. Mallery has informed the Company that
he will be filing a late report on Form 5 covering one late Form 4 transaction.
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, 1999 and 1998 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 $100,000 or more during fiscal 1999.
SUMMARY COMPENSATION TABLE
Long Term
Compensation
Securities
Annual Compensation Underlying
Name and Principal Position Year Salary($)(1) Bonus($) Warrants(#)(2)
- --------------------------- ---- ------------ -------- --------------
Russell K. Swartz
President and 1999 85,000 -- 50,000
Chief Executive Officer 1998 75,000 -- 50,000
- ----------
(1) The Company offers its employees, including officers, medical insurance
benefits.
(2) The exercise price of all stock warrants granted were equal to or greater
than the fair market value of the Company's Common Stock on the date of
grant.
FISCAL YEAR-END WARRANT VALUES
The following table provides information on the value of the Company's
Named Officers unexercised warrants at July 31, 1999.
14
<PAGE>
WARRANT VALUES AS OF JULY 31, 1999
Number of Securities Underlying Value of Unexercised
Unexercised Warrants at In-the Money Warrants at Fiscal
Fiscal Year End (#) Year-End ($)(1)
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
Russell K. Swartz 225,000 0 $ 0 $ 0
- ----------
(1) Calculated based upon the average bid and ask price as reported on the over
the counter market on October 27, 1999 of $0.02 per share.
DIRECTOR COMPENSATION
The Company compensates its Directors for their services on the Board of
Directors by the grant of warrants to purchase shares of Common Stock at the
prevailing market price on the date of grant. The Company anticipates 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.
During fiscal year 1999, Mr. Swartz was granted 75,000 Common Stock
warrants exercisable at $.375 expiring August 14, 2003, one half of these
warrants vest immediately and one half in January, 1999 assuming continual
service on the Board. Mr. Swartz has agreed not to exercise his Common Stock
Purchase Warrants until the Company's shareholders vote to increase the number
of authorized shares of Common Stock.
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 October 27, 1999
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.
Number of Shares Approximate
Name and Address of and Nature of Percentage of
Beneficial Owner(1) Beneficial Ownership(2) Outstanding Shares(2)
------------------- ----------------------- ---------------------
Directors and Executive Officers:
Louis F. Pignatelli (3) 485,000 5.2%
Russell Swartz (4) -- --
Gary D. Mallery (5) 2,500 *
W. Sam Dennis (6) 852,998 9.1%
Dennis DesLauriers (7) -- --
Nicholas A. Fegen (8) 24,000 *
Ronald Russell, Sr. (9) 1,257,500 13.5%
Anga L. Allen 2,000 *
All directors and officers
as a group (eight persons) 2,623,998 28.1%
- ----------
* 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, Suite 100, Scottsdale, Arizona 85260.
(2) The percentages shown are calculated based upon 9,343,187 shares of Common
Stock outstanding on October 27, 1999. The numbers and percentages shown
include the shares of Common Stock actually owned as of October 27, 1999
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
15
<PAGE>
group had the right to acquire within 60 days of October 27, 1999 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.
Therefore, these warrants were not deemed to be outstanding for the purpose
of calculating the percentage of shares of Common Stock owned.
(3) Represents 485,000 shares of Common Stock and does not include 1,866,000
shares issuable upon exercise of Common Stock Purchase Warrants and 266,667
shares issuable upon exercise of Preferred Stock Warrants held by Mr.
Pignatelli.
(4) Does not include 225,000 shares issuable upon exercise of Common Stock
Purchase Warrants held by Mr. Swartz.
(5) Represents 2,500 shares of Common Stock and does not include 500,000 shares
issuable upon exercise of Common Stock Purchase Warrants held by Mr.
Mallery.
(6) Represents 852,998 shares of Common Stock and does not include 2,802,667
shares issuable upon exercise of Common Stock Purchase Warrants and 266,667
shares issuable upon exercise of Preferred Stock Warrants held by Dr.
Dennis.
(7) Does not include 316,000 shares issuable upon exercise of Common Stock
Purchase Warrants held by Mr. DesLauriers.
(8) 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.
(9) Represents 1,257,500 shares of Common Stock and does not include 2,276,000
shares issuable upon exercise of Common Stock Purchase Warrants and 266,667
shares issuable upon exercise of Preferred Stock Warrants held by Mr.
Russell.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
From March 1995 through October 1999, certain members of the Board of
Directors have loaned the Company $1,266,000. In connection with these loans,
the Board members have been issued warrants to purchase shares of Common Stock
in aggregate amounts of 1,350,000 shares at $0.50, 1,524,000 shares at $0.25,
920,000 shares at $0.125, 600,000 shares at $0.10, and 1,666,667 shares at
$0.03. Furthermore, certain members of the Board of Directors have personally
guaranteed a note signed by the Company in the amount of $80,000 payable to a
certain third party entity. For the risk associated with the personal guarantee,
the Company granted warrants to purchase an aggregate of 800,001 shares of
Preferred Stock.
The Board members were issued warrants to purchase 2,175,000 shares at
$.375 as compensation for their services on the Board from January, 1997 through
January, 1999 . The members of the Company's Board have each agreed to refrain
from the exercise of any warrants until the Company's authorized share capital
is increased.
16
<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 Reorganization
3.1 Certificate of Incorporation, as amended (included as annex to
Exhibit 2); Amendment to Certificate of Incorporation (1)
3.2 Bylaws, as amended (1)
4 Amended Certificate of Designations, Preferences and Rights of
Series A Convertible Preferred Stock (2)
4.6 Warrant Agreement covering 506,250 Common Stock Purchase Warrants
(M Warrants) (3)
27 Financial Data Schedule *
- ----------
* Filed Herewith
(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) REPORTS ON FORM 8-K.
None
17
<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: 11/23/99 /s/ Russell K. Swartz
-------------------------------------
Russell K. Swartz, President,
Chief Executive Officer, and Director
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.
Signature Capacity Date
--------- -------- ----
/s/ Louis F. Pignatelli
- -------------------------- Chairman of the Board November 23, 1999
Louis F. Pignatelli
/s/ Russell K. Swartz
- -------------------------- President, Chief Executive November 23, 1999
Russell K. Swartz Officer and Director
/s/ Anga L. Allen
- -------------------------- Chief Financial Officer November 23, 1999
Anga L. Allen (Principal Financial and
Accounting Officer)
/s/ Gary D. Mallery
- -------------------------- Secretary and Director November 23, 1999
Gary D. Mallery
/s/ W. Sam Dennis
- -------------------------- Director November 23, 1999
W. Sam Dennis
/s/ Dennis DesLauriers
- -------------------------- Director November 23, 1999
Dennis DesLauriers
/s/ Nicholas A. Fegen
- -------------------------- Director November 23, 1999
Nicholas A. Fegen
/s/ Ronald Russell, Sr.
- -------------------------- Director November 23, 1999
Ronald Russell, Sr.
18
<PAGE>
SKOLNIKS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1999 AND 1998
CONTENTS
Page
----
Independent auditor's report F-2
Consolidated Financial Statements:
Balance sheets F-3
Statements of operations F-4
Statements of shareholders' deficit F-5
Statements of cash flows F-6
Notes to financial statements F-6 - F-17
F-1
<PAGE>
To the Board of Directors
Skolniks, Inc.
Scottsdale, Arizona
INDEPENDENT AUDITOR'S REPORT
We have audited the accompanying consolidated balance sheets of Skolniks,
Inc. and subsidiary as of July 31, 1999 and 1998, and the related consolidated
statements of operations, shareholders' deficit and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
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 provide 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, 1999 and 1998, and the results of their
operations, shareholders' deficit, and their 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. Management's
plans in regard to these matters are described in Note 1. In addition, the
preferred stock of the Company has a total liquidation preference and
accumulated dividends of approximately $ 2,128,000 which may effect the
Company's ability to raise funds (see Note 9). The financial statements do not
include any adjustments that might result from the outcome of these
uncertainties.
TOBACK CPAs, P.C.
Phoenix, Arizona
October 27, 1999
F-2
<PAGE>
SKOLNIKS, INC.
CONSOLIDATED BALANCE SHEETS
JULY 31, 1999 AND 1998
ASSETS
1999 1998
------------ ------------
Current assets:
Cash $ 16,282 $ 31,625
Accounts receivable, net of allowance for
doubtful accounts of $110 and $4,000,
respectively (Note 6) 144,061 130,519
Inventories (Note 3) 26,964 36,322
Other current assets (Note 4) 57,767 58,139
------------ ------------
Total current assets 245,074 256,605
Property and equipment, net (Notes 5 and 6) 208,016 227,672
------------ ------------
$ 453,090 $ 484,277
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 114,791 $ 59,203
Accrued liabilities 442,325 291,094
Current maturities of notes payable,
related parties (Note 6) 804,358 20,005
------------ ------------
Total current liabilities 1,361,474 370,302
Notes payable, related parties, less
Current maturities (Note 6) 536,162 1,271,000
------------ ------------
Total liabilities 1,897,636 1,641,302
------------ ------------
Commitments and contingencies (Notes 8 and 9)
Shareholders' deficit:
Series A Convertible Preferred Stock, $.01 par
value, 2,000,000 shares authorized; shares
issued and outstanding: July 1999 and 1998,
427,328 (Note 9) 4,273 4,273
Common Stock, $.001 par value, 10,000,000 shares
authorized; shares issued, July 1999, 9,343,187
and July 1998, 9,328,176 (Note 9) 9,343 9,328
Additional paid-in capital 21,118,820 21,118,835
Accumulated deficit (21,672,682) (21,386,920)
------------ ------------
(540,246) (254,484)
Less: Treasury stock, at cost (July 1999,
141,604 shares and July 1998, 119,712 shares) (904,300) (902,541)
------------ ------------
Total shareholders' deficit (1,444,546) (1,157,025)
------------ ------------
$ 453,090 $ 484,277
============ ============
F-3
<PAGE>
SKOLNIKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JULY 31, 1999 AND 1998
1999 1998
----------- -----------
Revenue:
Product sales (net) $ 1,956,324 $ 1,685,378
Expenses:
Plant operating costs 1,715,729 1,649,247
General and administrative expenses 385,220 392,075
----------- -----------
2,100,949 2,041,322
----------- -----------
Loss from operations (144,625) (355,944)
Other income (expense):
Interest expense (141,137) (109,941)
----------- -----------
Net loss $ (285,762) $ (465,885)
=========== ===========
Per common share information:
Basic earnings (loss) per share $ (0.05) $ (0.07)
=========== ===========
Weighted average shares outstanding 9,335,676 9,200,604
=========== ===========
F-4
<PAGE>
SKOLNIKS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
YEARS ENDED JULY 31, 1999 AND 1998
1999 1998
------------ ------------
Preferred Stock:
Beginning of period $ 4,273 $ 5,323
Conversion to common stock -- (1,050)
------------ ------------
End of period 4,273 4,273
------------ ------------
Common stock:
Beginning of period 9,328 9,072
Conversion from preferred stock -- 105
Other adjustments 15 151
------------ ------------
End of period 9,343 9,328
------------ ------------
Additional paid-in capital:
Beginning of period 21,118,835 21,088,042
Preferred stock converted to common stock -- 945
Other adjustments (15) 29,848
------------ ------------
End of period 21,118,820 21,118,835
------------ ------------
Accumulated deficit:
Beginning of period (21,386,920) (20,921,035)
Net loss (285,762) (465,885)
------------ ------------
End of period (21,672,682) (21,386,920)
------------ ------------
Treasury stock:
Beginning of period (902,541) (902,541)
Shares received from Creditors' Trust (1,759) --
------------ ------------
End of period (904,300) (902,541)
------------ ------------
Total shareholders' deficit $ (1,444,546) $ (1,157,025)
============ ============
F-5
<PAGE>
SKOLNIKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JULY 31, 1999 AND 1998
1999 1998
--------- ---------
Cash flows from operating activities:
Net loss $(285,762) $(465,885)
--------- ---------
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 64,673 78,324
Loss on disposition of property and equipment 4,615 --
Gain on shares returned from Creditors' Trust (1,759) --
Increase in accounts receivables, net (13,542) (26,285)
Decrease in inventories 9,358 5,075
Decrease (increase) in other current assets 372 (27,774)
Increase (decrease) in accounts payable 55,588 (141,994)
Increase in accrued liabilities 151,231 98,162
--------- ---------
Total adjustments 270,536 (14,492)
--------- ---------
Net cash used in operating activities (15,226) (480,377)
--------- ---------
Cash flows from investing activities:
Acquisition of property and equipment (49,632) (4,066)
--------- ---------
Net cash used in investing activities (49,632) (4,066)
--------- ---------
Cash flows from financing activities:
Payments on debt (485) --
Proceeds from borrowings of debt 50,000 516,000
--------- ---------
Net cash provided by financing activities 49,515 516,000
--------- ---------
Net increase (decrease) in cash and
cash equivalents (15,343) 31,557
Cash, beginning of period 31,625 68
--------- ---------
Cash, end of period $ 16,282 $ 31,625
========= =========
Supplemental Disclosure for Cash Flow Information
Cash paid for interest was approximately $517 and $500 for 1999 and 1998,
respectively.
F-6
<PAGE>
SKOLNIKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
Skolniks, Inc. (the "Company") operates a commercial bakery in Scottsdale,
Arizona. The Company manufactures breadsticks, bagels, and other bakery
products for use by restaurants and unrelated food service operations. Sales
are made directly to retail stores, restaurants, schools, and distributors.
The financial statements of the Company have been prepared on the basis of
principles applicable to a continuing business. The basic principles presume
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 fiscal years 1999 and 1998, the Company incurred operating losses of
$144,625 and $355,944, respectively. In addition, the Company has a working
capital deficit of $1,116,400 and $113,697 and a deficit in equity of
$1,444,546 and $1,157,025 as of July 31, 1999 and 1998, respectively. 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, food service and club store segments. In addition, new
customers are being added for daily deliveries of fresh bread products
within the Arizona and Las Vegas, Nevada market. The product line presently
includes breadsticks, bagels, and specialty breads. However, new products
are being added in response to specific customer needs. The Company is
developing a niche as a specialty bread supplier to upscale, multi-unit
restaurant operations throughout the Southwest. Management is also
considering the opportunity to acquire, merge, or strategically align with
other synergistic baked goods or food manufacturers for enhanced product
offerings, geographic coverage, and customer leverage.
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 mailed the court-approved plan of reorganization on May 2,
1996, which was subsequently confirmed at the confirmation hearing, held on
July 10, 1996 at the United States Bankruptcy Court in the Western District
of Oklahoma. The Company completed all requirements under the plan of
reorganization on December 18, 1996, by making a cash payment of $800,000
and issuing 500,000 shares of Common Stock to the Creditors' Trust. The
Court issued a final decree in connection with the Company's reorganization
in bankruptcy on October 8, 1998.
F-7
<PAGE>
SKOLNIKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION, CONTINUED:
On May 27, 1999 the Creditor's Trust issued approximately 22,000 shares of
reorganized Skolnicks' stock and approximately $20,000 to the wholly owned
subsidiary of the Company to satisfy unsecured claims in accordance with the
plan of reorganization. These shares were put into treasury at the trading
price as of the date of issuance, $.08.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
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 inter-company 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 life 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.
F-8
<PAGE>
SKOLNIKS, INC.
NOTES TO CONSOLIDATED 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.
EARNINGS (LOSS) PER SHARE OF COMMON STOCK:
Basic earnings per share excludes dilution and is computed by dividing net
income (loss) available to common shareholders by the weighted-average
number of common shares outstanding for the period. Diluted earnings per
share reflects the potential dilution that could occur if securities or
other contracts to issue common shares were exercised or converted into
common shares or resulted in the issuance of common shares that then shared
in the earnings of the Company. The calculation of diluted earnings per
share assumes the dilutive effect of the Company's Convertible Preferred
Stock converted into Common Stock at the later of the beginning of the year
or issue date. During a loss period, the conversion of this Preferred Stock
to Common Stock has an anti-dilutive effect and therefore is not presented.
ADVERTISING:
The Company expenses advertising costs at the first time that advertising
takes place. For the year ended July 31, 1999 and 1998, advertising expense
was approximately $36,360 and $22,000, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used in estimating fair values:
Notes payable, related party: The carrying amounts of the Company's
borrowings under its notes payable - related party, as well as short-term
borrowings, are presented at present value, which approximates fair value.
F-9
<PAGE>
SKOLNIKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
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 their reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
3. INVENTORIES:
The components of inventory are as follows:
1999 1998
------- -------
Raw Materials $21,758 $29,458
Finished Goods 5,206 6,864
------- -------
$26,964 $36,322
======= =======
4. OTHER CURRENT ASSETS:
Other current assets consist of the following:
1999 1998
------- -------
Prepaid Expenses $57,542 $55,954
Employee Advances 225 2,185
------- -------
$57,767 $58,139
======= =======
5. PROPERTY AND EQUIPMENT:
The components of property and equipment are as follows:
1999 1998
--------- ---------
Furniture and equipment $ 507,199 $ 769,036
Leasehold improvements 119,809 119,809
--------- ---------
627,008 888,845
Less: accumulated depreciation (418,992) (661,173)
--------- ---------
$ 208,016 $ 227,672
========= =========
F-10
<PAGE>
SKOLNIKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. PROPERTY AND EQUIPMENT, CONTINUED:
Depreciation and amortization expense for the years ended July 31, 1999 and
1998 amounted to approximately $65,000 and $78,000, respectively.
6. NOTES PAYABLE, RELATED PARTIES:
CURRENT LONG-TERM MATURITY COLLATERAL
------- --------- -------- ----------
Board Members: $515,000 $ -- Demand Machinery & Equipment
175,000 -- Demand Furniture & Fixtures
25,000 -- Demand Accounts Receivable
30,000 -- Demand Unsecured
-- 486,000 2001 Unsecured
Shareholders: 19,353 -- Demand* Machinery & Equipment
-- 30,162 2001* Machinery & Equipment
7,500 -- Demand Accounts Receivable
32,505 -- Demand Furniture & Fixtures
-- 20,000 2001 Unsecured
-------- --------
$804,358 $536,162
======== ========
* These amounts have been personally guaranteed by certain Board Members of
the Company.
Interest rates on outstanding note payables range between 8% and 12% for
current and non-current amounts.
The current maturities of notes payable, related parties, have either
already reached their maturity dates or reach the maturity date on or before
the end of the next operating cycle. On November 1, 1999, $719,005 of the
notes payable, related parties will become delinquent by reaching their
maturity date. Substantially all of the delinquent notes payable are secured
by the assets of the Company; $475,000 secured by machinery and equipment,
$207,505 secured by furniture and fixtures, and $32,500 secured by accounts
receivable.
F-11
<PAGE>
SKOLNIKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. NOTES PAYABLE, RELATED PARTIES, CONTINUED:
Subsequent to year end on October 15, 1999, the Company signed a demand note
payable to certain related parties in the aggregate sum of $50,000 plus
annual interest of 12%. In connection with the demand note payable, the
Company issued warrants to purchase an aggregate of 1,666,667 shares of
Common Stock at an exercise price of $.03 per share. However, the holders of
the warrants have agreed to refrain from exercising these warrants until the
Company's shareholders vote to increase the authorized share capital. The
proceeds of this loan were necessary to compensate for the negative cash
flows from operations during fiscal year 1999 and the first quarter of
fiscal year 2000.
7. INCOME TAXES:
At July 31, 1999 the Company had available approximately $20 million of net
operating loss carry-forwards available for both financial statement and
federal income tax purposes. These carryforwards, which expire through 2019,
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.
8. LEASES:
The Company leases its manufacturing facility under an operating lease
agreement expiring March 31, 2004. Rent expense under the operating lease
was approximately $117,000 and $112,000 for the years ended July 31, 1999
and 1998, respectively.
Minimum rental commitments payable in future years are as follows:
Year ending, July 31: Operating Leases
----------------
2000 $133,776
2001 133,776
2002 133,776
2003 133,776
2004 89,184
--------
Total minimum lease payments $624,288
========
F-12
<PAGE>
SKOLNIKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SHAREHOLDERS' DEFICIT:
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 shareholders, to issue Preferred Stock 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.
The Board of Directors authorized the issuance of Series A Convertible
Preferred Stock in 1992. Holders of Series A Convertible Preferred Stock are
entitled to cumulative, semi-annual dividends at the semi-annual rate of
$.165 per share. Such dividends must be paid before the payment of any
dividends on Common Stock. Dividends on the Preferred Stock are payable,
when declared by the Board of Directors, on August 1 and February 1 of each
year and are 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 stated capital), or in the event there is no surplus, then out of
net profits for the year in which the dividends are declared. The
accumulated dividends through July 31, 1999 were approximately $705,000,
payable in shares of the same series of Preferred Stock, valued at the
closing bid price on the day preceding the record date as declared by the
Board of Directors of the Company. However, the Company is precluded from
declaring the Preferred Stock dividend because of the limited authorized
share capital.
In liquidation, holders of Preferred Stock will have a preference over the
holders of Common Stock equal to the highest Exchange Price per share, but
not less than $3.33 per share, plus all accrued and unpaid dividends,
whether declared or undeclared. The Preferred Stock has a liquidation
preference of approximately $2,128,000 at July 31, 1999, which was not
relieved in bankruptcy. This preference, together with other factors, may
have a significant effect on the Company's ability to raise any additional
capital through Common and Preferred Stock offerings.
The Company may redeem the Preferred Stock, in whole or part, beginning one
year after the date of issuance upon payment of a redemption price of $3.67
per share, plus all accrued and unpaid dividends, whether declared or
undeclared.
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.
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, holders of Common Stock will decide the
matters.
F-13
<PAGE>
SKOLNIKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SHAREHOLDERS' DEFICIT, CONTINUED:
WARRANTS:
Warrants to purchase one share of Common Stock outstanding at July 31, 1999
are approximately as follows:
Number of Warrants Exercise Price Expiration Date
------------------ -------------- ---------------
450,000 1.000 2000
805,000 0.500 2000
625,000 0.500 2001
2,450,000 0.375 2002
1,524,000 0.250 2002
75,000 0.375 2003
920,000 0.125 2003
800,000 0.100 2003
Warrants to purchase one share of Preferred Stock outstanding at July 31,
1999 are approximately as follows:
Number of Warrants Exercise Price Expiration Date
------------------ -------------- ---------------
800,000 0.005 2004
As of July 31, 1999, holders of warrants to purchase approximately 8,199,000
shares of Common Stock and Preferred Stock have agreed to refrain from
exercising their warrants until the Company's authorized shares capital is
increased.
On October 15, 1999, subsequent to the fiscal year end, the Company granted
warrants to purchase an aggregate of 1,666,667 shares of Common Stock at an
exercise price of $.03 which expire in 2004. The holders of these warrants
have agreed to refrain from exercising these warrants until the Company's
shareholders vote to increase the authorized share capital.
10. RELATED PARTIES:
Since March 1995 through October 1999, certain members of the Board of
Directors have loaned the Company $1,266,000. In connection with these
loans, these Board members have been issued warrants to purchase a total of
6,061,000 shares of Common Stock: 1,350,000 at $.50, 1,524,000 at $.25,
920,000 at $.125, 600,000 at $.10 and 1,667,000 at $.03 (issued on October
15, 1999, subsequent to year end, and the holders of these warrants have
agreed not to exercise these warrants until the Company's shareholders vote
to increase the authorized share capital). Also, Board members were issued
warrants to purchase 2,175,000 shares at an exercise price of $.375 as
compensation for their services on the Board from January, 1997 through
January, 1999.
F-14
<PAGE>
SKOLNIKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. RELATED PARTIES, CONTINUED:
Included in accrued liabilities is approximately $366,000 of interest
payable on notes payable, related parties.
11. MAJORITY CUSTOMERS:
FY 1999:
The Company conducts a major portion of its business with two certain
customers, which account for 49% of total revenue. For the year ended July
31, 1999, revenue from these customers amounted to approximately $965,000.
Total accounts receivable from these customers at July 31, 1999, amounts to
approximately $85,000 or 59%, of the total accounts receivable balance.
FY 1998:
The Company conducts a major portion of its business with three certain
customers, which account for 62% of total revenue. For the year ended July
31, 1998, revenue from these customers amounted to approximately $1,040,000.
Total accounts receivable from these customers at July 31, 1998, amounts to
approximately $87,000, or 76%, of the total accounts receivable balance.
12. YEAR 2000 (UNAUDITED):
Many currently installed computer systems and software products are coded to
accept only two-digit entries to represent years in the date code field.
These programs and databases were designed and developed without considering
the impact of the upcoming millennium. Consequently, date sensitive computer
programs may interpret the date "00" as 1900 rather than 2000. If not
corrected, many computer systems could fail or create erroneous results in
2000.
The Company has completed an assessment of all of its internal systems and
processes with respect to the "Year 2000" issue. In response to this
assessment, the Company has created a Y2K Task Force to resolve any
non-compliant Year 2000 systems, processes, or other issues. As part of the
process of evaluating the Year 2000 issue, the task force has assessed the
potential impact of Year 2000 failures from vendors and outside parties upon
its business and has determined that all third parties who have a potential
material impact are adequately prepared for the year 2000.
F-15
<PAGE>
SKOLNIKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. YEAR 2000 (UNAUDITED), CONTINUED:
The Company has assessed its information technology systems and believes
that it is Year 2000 compliant because the Company operates personal
computers linked together with network package software, as opposed to
mainframe computer technology. All the personal computers have been
purchased in the past two years and run on a standard operating system that
is Year 2000 compliant. In addition, the software used by the Company is
standard, off-the-shelf applications purchased or upgraded in the past three
years, all of which are Year 2000 compliant. As of July 31, 1999, the Year
2000 task force has completed all necessary upgrades and testing to ensure
that the Company will not incur any data loss or computer downtime
associated with the Year 2000 issue.
The Company has taken steps to assure that the computer systems of its
vendors, customers, and banks with which the Company utilize electronic data
interchange will be Year 2000 compliant. Such vendors, customers, and banks
have assured the Company that their computer operations will be Year 2000
compliant before December 31, 1999. However, there can be no assurance that
computer systems operated by all third parties with which the Company
systems' interface will be compliant on a timely basis and in that event,
the Company may be adversely affected, although the magnitude of such effect
cannot be estimated.
The Company has also determined that its bakery equipment processors are
Year 2000 compliant. Bakery equipment evaluated includes ovens, breadstick
and bagel equipment, compressors, and thermostats. None of the equipment was
determined to use date sensitive computer processors.
The cost of the Company's Year 2000 compliance program has not had, and is
not expected to have, a material impact on the Company's results of
operations, financial condition, or liquidity. The Company has not been
required to prematurely replace any equipment due to Year 2000 issue, nor
has the Company needed to hire Year 2000 solution providers. Further, the
company does not anticipate the necessity of such expenses in the future.
Finally, the Company anticipates that the cost of ensuring compliance of
third parties will remain minimal.
The Company anticipates, in its reasonably likely worst case Year 2000
scenario, that the failure of its customers, suppliers, and utility
providers to adequately address their own Year 2000 issues will cause the
Company to experience delays in receiving payments of invoices from
customers, delays in and/or improper postings of payments made to vendors,
and loss of operating capabilities related to the failure of the utility
providers.
The failure of the Company's customers and vendors to be Year 2000 compliant
can be minimized by using a supplemental source of communication such as fax
and mail to ensure that invoices and checks are properly processed and to
maintain hard copies of all invoices and checks. The Company plans to
implement such procedures, as they become necessary.
F-16
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> JUL-31-1999
<CASH> 16,282
<SECURITIES> 0
<RECEIVABLES> 144,171
<ALLOWANCES> (110)
<INVENTORY> 26,964
<CURRENT-ASSETS> 245,074
<PP&E> 627,008
<DEPRECIATION> (418,992)
<TOTAL-ASSETS> 453,090
<CURRENT-LIABILITIES> 1,361,474
<BONDS> 0
0
4,273
<COMMON> 9,343
<OTHER-SE> (1,458,162)
<TOTAL-LIABILITY-AND-EQUITY> 453,090
<SALES> 1,956,324
<TOTAL-REVENUES> 1,956,324
<CGS> 1,715,729
<TOTAL-COSTS> 1,715,729
<OTHER-EXPENSES> 385,220
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 141,137
<INCOME-PRETAX> (285,762)
<INCOME-TAX> 0
<INCOME-CONTINUING> (285,762)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (285,762)
<EPS-BASIC> (.05)
<EPS-DILUTED> 0
</TABLE>
