-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DiAfitXA3ZpQ2QqSFXljdeqSMNNmKzKljABlm3fKLEM4CbmjTL/rurOB2N8kKysb vZAEEjbGZ7VYtvHgkySDHA== 0000950147-98-000299.txt : 19980424 0000950147-98-000299.hdr.sgml : 19980424 ACCESSION NUMBER: 0000950147-98-000299 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970731 FILED AS OF DATE: 19980422 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SKOLNIKS INC CENTRAL INDEX KEY: 0000821124 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 133074492 STATE OF INCORPORATION: DE FISCAL YEAR END: 0730 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 001-09703 FILM NUMBER: 98598642 BUSINESS ADDRESS: STREET 1: 7755 E GRAY RD STREET 2: STE 100 CITY: SCOTTSDALE STATE: AZ ZIP: 85260 BUSINESS PHONE: 6024439640 MAIL ADDRESS: STREET 1: 7755 E GRAY RD STREET 2: STE 100 CITY: SCOTSDALE STATE: AZ ZIP: 85240 10KSB 1 ANNUAL REPORT 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, 1997 Commission File Number 0-9703 ------ SKOLNIKS, INC. ---------------------------------------------- (Name of Small Business Issuer in Its Charter) DELAWARE 13-3074492 - ------------------------ ------------------------------------ (State of incorporation) (I.R.S. Employer Identification No.) 7755 E. Gray Road, Scottsdale, Arizona 85260 (602) 443-1415 ------------------------------------------------------------- (Address, including zip code, and telephone number, including area code, of issuer's executive offices) Securities registered pursuant to Section 12(b) of the Exchange Act: None Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock, par value $.001 per share Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No X --- --- Check if disclosure of delinquent filers pursuant to item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] Issuer's revenues for its most recent fiscal year: $1,457,063 Aggregate market value of the voting stock held by non-affiliates computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within the past 60 days: As of April 3, 1998 - $1,210,794. For purposes of this computation, all executive officers, directors and 10% beneficial owners of the registrant are deemed to be affiliates. Such determination should not be deemed an admission that such executive officers, directors, or 10% beneficial owners are, in fact, affiliates of the registrant. Check whether the issuer has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes No X --- --- Number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: As of January 31, 1998 - 9,072,489 shares of common stock, par value $.001 per share (the "Common Stock"). Documents incorporated by reference: None. SKOLNIKS, INC. ANNUAL REPORT ON FORM 10-KSB FOR THE FISCAL YEAR ENDED JULY 31, 1997 TABLE OF CONTENTS Page PART I ITEM 1. BUSINESS................................................ 1 ITEM 2. PROPERTIES.............................................. 5 ITEM 3. LEGAL PROCEEDINGS....................................... 6 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..... 6 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS......................... 7 ITEM 6. SELECTED FINANCIAL DATA; MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................................... 8 ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............. 11 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE..................... 11 PART III ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934.................................... 12 ITEM 10. EXECUTIVE COMPENSATION.................................. 13 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......................................... 17 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......... 18 PART IV ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K........................ 19 SIGNATURES ........................................................ 20 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................................ F-1 i PART I ------ ITEM I. BUSINESS -------- General Currently, the Company produces and markets frozen and partially baked bagel dough, thaw and serve bagels, bread sticks, and other baked goods. The Company markets and distributes its products to distributors, retailers, food service operations, and restaurants. The Company produces its products in a plant located in Scottsdale, Arizona. In January 1995 certain creditors filed an Involuntary Petition under Chapter 11 of the United States Bankruptcy Code against the Company in the United States Bankruptcy Court for the Western District of Oklahoma (Case No. 95-10206LN). The petition alleged that the Company had not paid its debts with respect to such creditors as they became due. The petitioning creditors claimed that the Company owed an aggregate of approximately $350,000. The Company engaged special bankruptcy counsel to handle this matter on its behalf. The Court signed an order requiring the Company to obtain court approval prior to the use, transfer, sale, acquisition, disposition, or relocation of any property outside of the ordinary course of business. A joint motion to dismiss the involuntary petition was filed on February 10, 1995, and a subsequent hearing to consider such issue was held on March 15, 1995. At that hearing, the Company was presented with objections to its motion to dismiss from various creditors with claims exceeding $2,000,000 in the aggregate. As a primary result of such claims, management believed it to be in the best interests of the Company to agree to an order for relief under Chapter 11 of the United States Bankruptcy Code and agreed to such an order in a hearing on March 20, 1995. The Company submitted a plan to the bankruptcy court, which was approved and mailed to the Company's creditors and shareholders May 2, 1996. The Court confirmed the plan of reorganization at a confirmation hearing held on July 10, 1996, in the United States Bankruptcy Court in the Western District of Oklahoma. The Company exited bankruptcy on December 18, 1996. Prior to entering into bankruptcy, the Company franchised restaurants under the name "Skolniks Bagel Bakery Restaurants." In addition to its franchise operations, the Company owned and operated restaurants and, during fiscal 1994, operated production plants in Westhampton, New Jersey and Morristown, New Jersey. Subsequent to fiscal 1994, the New Jersey plants were closed and their operations were consolidated into the Company's production plant in Scottsdale, Arizona. The Company filed its last annual report on Form 10-KSB for the year ended July 31, 1993 and its last quarterly report on Form 10-QSB for the quarter ended April 30, 1994, on November 12, 1993 and June 21, 1994 respectively. The Company has not filed annual reports for the years ended July 31, 1994, 1995 and 1996, or quarterly reports for the quarters ended after April 30, 1994 through January 31, 1998. Due to changes in personnel and poor record keeping and the lack of availability of records kept by such personnel prior to the Company's filing for reorganization in bankruptcy, the Company has determined that certain of its records for the fiscal years 1994 and 1995 are not available and therefore not able to be audited and the cost of preparing and auditing other of such records would be prohibitive and would not be justified in light of the age of the information and its relevancy to the Company's current operations. Therefore, the Company does not intend to prepare or file annual or quarterly reports for the periods set forth above through the quarter ended April 30, 1997. Marketing Operations The Company is in the process of implementing a strategy to develop a regional sales and marketing plan for the marketing and distribution of the Company's products from its plant in Scottsdale, Arizona. Subsequent to the Company's emergence from reorganization in bankruptcy, the Company hired a new Vice President-Sales and Marketing to design and implement this plan. 1 Manufacturing Operations The Company currently operates a manufacturing plant in Scottsdale, Arizona, that produces bagels, breadsticks, and other baked products for restaurants and retail and wholesale outlets. The Company's equipment is capable of producing 27,000 pounds of product per day. The Company currently produces 14,000 pounds of product per day. The Company is capable of increasing its production without investment in new equipment by increasing the number of shifts of operation. However, the Company's equipment is in need of repair. Should the equipment break down and need major repairs, the Company's results of operations will be negatively impacted. In addition, there can be no assurance that the Company will be able to obtain financing for any required repairs. Employees As of December 31, 1997, the Company employed approximately 30 people, of whom two are employed as executive personnel, three as sales/administrative personnel, and the remaining 25 are employed in manufacturing operations. The Company's employees are not covered by a collective bargaining agreement. The Company considers its employee relations to be good. Competition Sales of bagel products and other baked goods are subject to competition which is intense. There are several national, regional, and local manufacturers of bagel products with which the Company competes in marketing to restaurants and other retail and wholesale outlets. The Company attempts to compete with such competitors by providing consistent supplies of quality products at competitive prices. The Company also believes that product innovation is an important factor in competing in the wholesale business. Regulation The Company is subject to regulation by health, sanitation, safety, and fire agencies of the state and municipality in which the manufacturing plant is located. The Company is also subject to regulation by other local governmental bodies with respect to zoning, land use, and environmental factors. The Company is subject to the Fair Labor Standards Act which governs such matters as minimum wages, overtime, and other working conditions. Trademarks The Company owns certain trademarks and has been granted federal registration of the marks. The Company is not aware of any other person's use of or application for registration of the marks. SPECIAL CONSIDERATIONS The following factors, in addition to those discussed elsewhere in this Report, should be carefully considered in evaluating the Company and its business. Reorganization in Bankruptcy At a hearing held in bankruptcy court on March 20, 1995, the Company agreed to an order for relief under Chapter 11 of the United States Bankruptcy Code. The Company submitted a plan to the bankruptcy court, which was approved and mailed to the Company's creditors and shareholders May 2, 1996. The Court confirmed the plan of reorganization at the Confirmation Hearing held on July 10, 1996, at the United States Bankruptcy Court in the Western District of Oklahoma. The Company raised the monies required under the plan and exited bankruptcy on December 18, 1996. 2 Qualified Report Of Independent Certified Public Accountant The report by the Company's independent certified public accountants on the Company's financial statements for the year ended July 31, 1997, states that the Company has suffered recurring losses from operations and has a working capital deficit and deficit in equity that raise substantial doubt about the Company's ability to continue as a going concern. See "Selected Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations." Limited Authorized Share Capital, Liquidation Preference and Accumulated Dividends. The Company has authorized 10,000,000 shares of Common Stock. At January 31, 1998, 9,072,489 shares of Common Stock were outstanding. In addition, at January 31, 1998, warrants to purchase 6,579,918 shares of Common Stock and 532,271 shares of Preferred Stock convertible into Common Stock, were outstanding. At January 31, 1998, the holders of warrants to purchase 5,399,000 shares of Common Stock had agreed to refrain from exercising their warrants until the Company's authorized share capital is increased. In addition, the purchasers of 531,000 shares of Common Stock have agreed to waive the receipt of such shares until the Company's authorized share capital is increased. Unless the Company's shareholders increase the Company's authorized share capital, the Company would be unable to raise any additional funding through the issuance of Common Stock. The Company's Preferred Stock has a total liquidation preference of approximately $5,679,000 and accumulated dividends of approximately $596,000, payable in shares of Preferred Stock. The Company is unable to predict the effect that the liquidation preference and accumulated dividends may have on the Company's ability to raise capital in the future. Capital Requirements The Company is experiencing a shortfall in available cash. The Company's continued viability is dependent upon its ability to generate cash from operations or obtain additional financing sufficient to meet its current and future needs. The Company currently is incurring operating losses and does not have a bank line of credit. There can be no assurance that additional financing will be available to the Company on acceptable terms, if at all. Any inability by the Company to obtain additional financing, if required, may have a material adverse effect on the operations of the Company. Government Regulation The Company's operations are subject to federal, state, and local laws and regulations governing health, sanitation, environmental matters and safety, as well as wages, hiring, and employment practices. The Company believes it has all licenses and approvals necessary to the operation of the business, and that its operations are materially in compliance with applicable laws and regulations. Attraction and Retention of Key Personnel The Company's success will depend, in large part, upon its ability to attract and retain qualified personnel, of which there can be no assurance. Rights to Acquire Shares A total of 6,579,918 shares of the Company's Common Stock, including 5,295,918 shares issued prior to July 31, 1997, have been reserved for issuance upon exercise of warrants granted by the Company. During the terms of such warrants, the holders thereof will have the opportunity to profit from an increase in the market price of the Company's Common Stock should such increase occur. The existence of such warrants may adversely affect the terms on which the Company can obtain additional financing in the future, and the holders of such warrants can 3 be expected to exercise such warrants at a time when the Company, in all likelihood, would be able to obtain additional capital by offering shares of Common Stock on terms more favorable to it than those provided by the exercise of such warrants. Holders of warrants to purchase 5,399,000 shares of Common Stock have agreed to refrain from exercising their warrants until the Company's authorized share capital is increased. Penny Stock Rules The Company securities currently are quoted in the over-the-counter market. Unless an exclusion from the definition of a "penny stock" under the Exchange Act is available, any broker engaging in a transaction in the Company's Common Stock is required to provide any customer with a risk disclosure document, disclosure of market quotations, if any, disclosure of the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of the Company's securities held in the customer's accounts. The bid and offer quotation and compensation information must be provided prior to effecting the transaction and must be contained on the customer's confirmation. Brokers subject to the "penny stock" rules when engaging in transactions in the Company's securities are likely to be less willing to engage in such transactions, thereby making it more difficult for purchasers of the Company's Common Stock to dispose of their securities. Possible Volatility of Stock Price The trading price of the Company's Common Stock in the public securities market could be subject to wide fluctuations in response to quarterly variations in operating results of the Company or its competitors, actual or anticipated announcements of technological innovations or new product developments by the Company or its competitors, changes in analysts' estimates of the Company's financial performance, developments or disputes concerning proprietary rights, regulatory developments, general industry conditions, worldwide economic and financial conditions, and other events and factors. During certain periods, the stock markets have experienced extreme price and volume fluctuations. Prices for many stocks fluctuate widely, frequently for reasons unrelated to the operating performance of such issuing companies. These broad market fluctuations and other factors may adversely affect the market price of the Company's Common Stock. Shares Eligible for Future Sale Sales of substantial amounts of Common Stock in the public market could adversely affect prevailing market prices. Of the 9,072,489 shares of Common Stock currently outstanding, approximately 7,001,000 shares are eligible for resale in the public market without restriction or further registration unless held by an "affiliate" of the Company, as that term is defined under the Securities Act of 1933, as amended (the "Securities Act"). The approximately 2,071,000 remaining outstanding shares of Common Stock currently are eligible for sale in the public market, subject to compliance with the requirements of Rule 144 under the Securities Act. The Company also has the authority to issue additional shares of preferred stock. The issuance of such shares could result in the dilution of the voting power of outstanding shares of Common Stock and could have a dilutive effect on earnings per share. Lack of Dividends The Company has never paid any cash dividends on its Common Stock and does not anticipate that it will pay dividends in the foreseeable future. Instead, the Company intends to apply any earnings to the expansion and development of its business. Possible Issuance of Preferred Stock The Company is authorized to issue up to 2,000,000 shares of Serial Preferred Stock, par value $0.01 per share, of which 532,271 shares are currently outstanding. The Serial Preferred Stock may be issued in one or more series, the terms of which may be determined at the time of issuance by the Board of Directors, without further action by the Company's shareholders, and may include voting rights, preferences as to dividends and liquidation, 4 conversion and redemption rights and sinking fund provisions as determined by the Board of Directors. Although the Company has no present plans to issue any shares of Serial Preferred Stock, the issuance of Serial Preferred Stock in the future could adversely affect the rights of the holders of the Company's securities, and therefore, reduce the value of the Company's securities. In particular, specific rights granted to future holders of Serial Preferred Stock could be used to restrict the Company's ability to merge with or sell its assets to a third party, thereby preserving control of the Company by the present owners. Year 2000 Compliance Many currently installed computer systems and software products are coded to accept only two-digit entries to represent years in the date code field. Computer systems and products that do not accept four-digit year entries will need to be upgraded or replaced to accept four-digit entries to distinguish years beginning with 2000 from prior years. The Company has determined that certain of its software programs are not "Year 2000" compliant. The Company currently is evaluating the Year 2000 issue as it relates to its entire internal computer system as well as computer systems operated by third parties, including suppliers, credit card transaction processors, and financial institutions, with which the Company's systems interface. The Company anticipates that it may incur internal staff costs as well as consulting and other expenses related to making its computer systems Year 2000 compliant. The Company will expense these costs as incurred. The Company has not yet completed the evaluation of its Year 2000 compliance and therefore currently is not able to quantify the costs that may be incurred to bring its computer system into Year 2000 compliance. Because the appropriate course of action may include replacing or upgrading certain equipment or software, the Company may incur significant costs in resolving its Year 2000 issues. Furthermore, there can be no assurance that the Company will be able to make its computer system Year 2000 compliant in a timely manner. In addition, there can be no assurance that computer systems operated by third parties with which the Company systems interface will continue to properly interface with the Company systems and will otherwise be compliant on a timely basis with Year 2000 requirements. Any failure to the Company's computer system or the systems of third parties to timely achieve Year 2000 compliance could have a material adverse effect on the Company's business, financial condition, and operating results. Cautionary Statement Regarding Forward-Looking Statements Certain statements and information contained in this Report, particularly under the headings "Business," "Special Considerations," and "Management's Discussion and Analysis of Financial Condition and Results of Operations," concerning future, proposed, and anticipated activities of the Company, certain trends with respect to the Company's revenue, operating results, capital resources, and liquidity or with respect to the markets in which the Company competes or the bakery industry in general, and other statements contained in this Report regarding matters that are not historical facts are forward-looking statements, as such term is defined in the Securities Act. Forward-looking statements, by their very nature, include risks and uncertainties, many of which are beyond the Company's control. Accordingly, actual results may differ, perhaps materially, from those expressed in or implied by such forward-looking statements. Factors that could cause actual results to differ materially include those discussed elsewhere under Item 1, "Business - Special Considerations." ITEM 2. DESCRIPTION OF PROPERTY In February 1995, the Company relocated its executive offices and production facility to 16,800 square feet located at 7755 E. Gray Road, Scottsdale, Arizona 85260 under a lease that expires on March 31, 1999. Monthly rental for this property is $9,500. The Company believes that these facilities are adequate for its reasonably anticipated needs. 5 ITEM 3. LEGAL PROCEEDINGS A complaint has been filed in the Maricopa County Superior Court against the Company's wholly-owned subsidiary, R&B Quality Foods, Inc., for failure to pay a trade debt. The complaint seeks damages in the amount of $56,675 in trade debt and $32,169 in collection costs and attorney's fees. In addition, a member of the Company's Board has threatened litigation involving his termination of employment by the Company. The Board member has not alleged any specific damages and no estimate of damages can be made by the Company. The Company intends to vigorously defend any such allegations should a complaint be filed. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters brought to vote of security holders during Fiscal 1996 or Fiscal 1997. 6 PART II ------- ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS At July 31, 1996 and 1997, the Company had outstanding approximately 6,956,332 and approximately 9,072,489 shares of Common Stock respectively, 682,918 M Warrants, and 543,326 and 532,271 shares of Preferred Stock, respectively. The Common Stock and M Warrants were traded over-the-counter and quoted on the Nasdaq SmallCap Market System ("Nasdaq") under the symbols "SKNS" and "SKNSK" respectively, and were also listed on the Boston Stock Exchange. The Common Stock was delisted from Nasdaq on December 22, 1994 and the M Warrants were delisted on November 18, 1994. The Boston Stock Exchange suspended trading of the Common Stock and M Warrants on January 13, 1995, and such securities were subsequently delisted. The Company's Common Stock is currently quoted on the Nasdaq over-the-counter market. The following table sets forth the high and low closing bid prices for the Company's Common Stock for the periods indicated. Bid prices represent prices between dealers and do not include retail markups, markdowns, or commissions and do not necessarily reflect actual transactions. Common Stock ------------ High Low ---- --- Fiscal 1997 First Quarter ...... $ 0.625 $ 0.063 Second Quarter ..... 0.625 0.063 Third Quarter ...... 0.625 0.063 Fourth Quarter ..... 0.625 0.125 Fiscal 1996 First Quarter ...... $ 0.500 $ 0.125 Second Quarter ..... 0.625 0.030 Third Quarter ...... 0.500 0.125 Fourth Quarter ..... 0.500 0.060 As of April 3, 1998 there were approximately 250 holders of record of the Company's Common Stock. The Company believes that there are in excess of 2,000 holders of beneficial interest of its Common Stock. The Company has never declared a cash dividend on its Common Stock. The Board of Directors presently intends to retain all earnings for use in the Company's business, and therefore, does not anticipate paying any cash dividends in the foreseeable future. The Company does accrue a dividend payable in shares of Preferred Stock. At July 31, 1997, the accrued dividend was approximately $596,000. In addition, the Preferred Stock has a liquidation preference of $5,679,000. During fiscal 1996 and 1997 the Company issued approximately 51,300 shares of Common Stock upon conversion of shares of its Preferred Stock. The Company issued the Common Stock without registration under the Securities Act of 1933, as amended, (the "Securities Act"), in reliance on Section 3(a)(9) of the Securities Act. In December 1966, the Company issued 1,500,000 shares of Common Stock for $1,000,000 in cash and in settlement with creditors under a plan of reorganization in bankruptcy. The Company issued the Common Stock without registration under the Securities Act in reliance on Sections 3(a)(7), 4(2), and/or 4(6) of the Securities Act. 7 From February through June 1997 the Company issued 531,000 shares of Common Stock for $132,750 in cash to members of the Company's Board of Directors and an accredited shareholder of the Company. The Company issued the Common Stock without registration under the Securities Act in reliance on Sections 4(2) and/or 4(6) of the Securities Act. From March 1995 through December 1997 the Company issued notes in an aggregate amount of $1,126,000 and granted warrants in connection therewith, to purchase an aggregate of 3,114,000 shares of Common Stock in exchange for cash in the amount of $1,126,000 to member of the Company's Board of Directors and to nine shareholders of the Company. The Company issued the notes and warrants without registration under the Securities Act in reliance on Sections 4(2) and/or 4(6) of the Securities Act. In January 1997 and May 1998, the Company issued warrants to purchase 2,150,000 shares of Common Stock to officers and directors of the Company. The Company issued the warrants without registration under the Securities Act in reliance on Section 4(2) of the Securities Act. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA; MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data for the fiscal years ended July 31, 1996 and 1997 have been derived from the Company's audited consolidated financial statements. The selected consolidated financial data should be read in conjunction with, and are qualified by reference to, the Company's Consolidated Financial Statements and Notes thereto and "Management Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Report. Year Ended July 31, ----------------------- 1996 1997 ---- ---- (in thousands, except per share amounts) Statement of Operations Data: Product sales (net) ........................ 1,424 1,457 Plant operating Costs ...................... 1,448 1,504 Loss from operations ....................... (381) (480) Other income (expense) ..................... (89) (74) Income (loss) before extraordinary item .... (470) (554) Extraordinary item ......................... 3,527 Net income (loss) .......................... (470) 2,973 Net income (loss) per share of common stock: Before extraordinary item ............ (0.07) (0.07) After extraordinary item ............. (0.07) 0.37 Weighted average shares outstanding ........ 6,936,097 8,014,441 As of July 31, ----------------------- 1996 1997 ---- ---- (in thousands) Balance Sheet Data: Cash and cash equivalents .................. 14 0 Working capital (deficit) .................. (794) (1,023) Total assets ............................... 459 478 Total shareholders' equity (deficit) ....... (4,826) (721) 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS Statement Regarding Forward-Looking Statements The statements contained in this Report on Form 10-KSB that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding the Company's "expectations," "anticipation," "intentions," "beliefs," or "strategies" regarding the future. Forward-looking statements include statements regarding revenue, margins, expenses, and earnings analysis for fiscal 1998 and thereafter; future products or product development; the Company's product development strategy; and liquidity and anticipated cash needs and availability. All forward-looking statements included in this Report are based on information available to the Company on the date of this Report, and the Company assumes no obligation to update any such forward-looking statement. It is important to note that the Company's actual results could differ materially from those in such forward-looking statements. Among the factors that could cause actual results to differ materially are the factors discussed in Item 1, "Business Special Considerations." General The Company operates one production plant in Scottsdale, Arizona, where it produces bagels, breadsticks, and other baked products. Product sales consist of sales to distributors, retailers, food service operations, and restaurants. Costs and expenses include plant operating costs and general and administrative expense. Plant operating costs are the cost of plant sales and consist of the portion of overall costs of producing product in the Company's plant allocable to products sold to third parties. General and administrative expenses include management payroll, wholesale selling expenses, corporate administrative expense, rent, operating expenses, and depreciation of office furniture and equipment. The Company is currently focusing its business operations on the production, manufacture, and distribution of its bagels, breadsticks, and baked products to restaurants and retail and wholesale customers. Management believes that this strategy will generate sales without incurring additional significant expenditures. The Company is exploring third party sources of funding in order to facilitate the immediate implementation of its new business strategy. As part of the Company's management restructuring, Nicholas Fegen, Gary Mallery, and Louis Pignatelli were appointed to the Board of Directors. After exiting bankruptcy, the Board of Directors appointed Dennis DesLauriers, W. Sam Dennis, and Ronald Russell, Sr. to the Board of Directors. On July 18, 1997, Mr. Pignatelli was elected Chairman of the Board. Results of Operations Year Ended July 31, 1997 ("Fiscal 1997") Compared to Year Ended July 31, 1996 - -------------------------------------------------------------------------------- ("Fiscal 1996") - --------------- Product sales were $1,457,063 in Fiscal 1997 compared to $1,424,939 in Fiscal 1996, an increase of approximately 2%. Plant operating costs were $1,504,398 in Fiscal 1997 compared to $1,448,370 in Fiscal 1996, an increase of approximately 4%. This increase was due primarily to increased packaging costs, raw materials, and maintenance and repairs. 9 General and administrative expenses increased from $357,840 in Fiscal 1996 to $433,073 in Fiscal 1997. This increase was due primarily to increased commissions and legal and professional fees. Overall operating expenses increased from $1,806,210 in Fiscal 1996 to $1,937,471 in Fiscal 1997. This increase was due primarily to increased packaging costs, raw materials cost, commissions, and professional fees. The Company incurred a net loss before extraordinary item of $554,406 in Fiscal 1997 compared to a net loss of $470,049 in Fiscal 1996. When the Company emerged from bankruptcy approximately $3,500,000 of debt was forgiven. This has been reported as an extraordinary item. Year Ended July 31, 1996 ("Fiscal 1996") Compared to Year Ended July 31, 1995 - -------------------------------------------------------------------------------- (unaudited) ("Fiscal 1995") - --------------------------- Product sales were $1,424,939 in Fiscal 1996 compared to $3,059,543 in Fiscal 1995, a decrease of approximately 53%. This decrease was due primarily to the closing of the Company's plant in Westhampton, New Jersey in December 1994. Plant operating costs were $1,448,370 in Fiscal 1996 compared to $4,512,528 in Fiscal 1995, a decrease of approximately 68%. This decrease was a result of closing the plant in New Jersey. General and administrative expenses decreased from $2,162,711 in Fiscal 1995 to $357,840 in Fiscal 1996. This decrease was due primarily to the closing of the administrative offices in Oklahoma City, Oklahoma in December 1994. Overall operating expenses decreased from $8,587,131 in Fiscal 1995 to $1,806,210 in Fiscal 1996. This decrease was due primarily to the closing of the plant and administrative offices in New Jersey and Oklahoma and the consolidation of operations in Scottsdale, Arizona. The Company incurred a net loss of $5,691,272 for Fiscal 1995 compared to a net loss of $470,049 in Fiscal 1996. Liquidity and Capital Resources At July 31, 1997, the Company had a working capital deficit of $1,023,070 compared to $5,121,027 at July 31, 1996. The decrease in the deficit resulted primarily from the settlement of liabilities subject to compromise in the Bankruptcy Court. The Company's Plan of Reorganization was confirmed by the United States Bankruptcy Court for the Western District of Oklahoma and the Company exited bankruptcy on December 18, 1996. In accordance with the Plan, the Company raised $1 million through the sale of one million shares of Common Stock. The creditors trust was given $800,000 to pay the creditors. In addition, 500,000 shares of Common Stock were issued to the creditor's trust. As a result of this reorganization, approximately $4,300,000 of debts were relieved in bankruptcy. Net cash used in operating activities was $409,401 in Fiscal 1997 compared to $338,047 in Fiscal 1996. Such increase in the amount of cash used in operating activities in Fiscal 1997 resulted primarily from the net loss from operating activities in Fiscal 1997 compared to the net loss from operating activities in Fiscal 1996. In Fiscal 1997, net cash used in investing activities was $82,148 compared to net cash used by investing activities in Fiscal 1996 of $5,379. In Fiscal 1997, net cash provided by financing activities was $478,078 compared to net cash provided by financing activities of $342,452 in Fiscal 1996. The Company is experiencing difficulty in making timely payments to vendors and lenders. As of July 31, 1997, the Company was in default on all payments to most of its trade vendors, and lenders. All such obligations have been classified as current as of July 31, 1997. In 10 addition, the Company is in arrears on dividends on its Preferred Stock in the amount of $596,000, payable in shares of Preferred Stock. As of July 31, 1997, the Company's sources of external financing were limited. It is not expected that the internal sources of liquidity will improve until net cash is provided by operating activities, and, until such time, the Company will rely upon external sources for liquidity. The Company has not established any lines of credit or any other significant financing arrangements with any third party lenders. There can be no assurance that the Company will be able to obtain additional financing on reasonable terms, if at all. From March, 1995 through January 1998, members of the Company's Board of Directors have loaned an aggregate of $1,056,000 to the Company, including $805,005 loaned prior to July 1, 1997, in exchange for promissory notes and warrants to purchase shares of the Company's Common Stock. The Company's independent accountants have issued an opinion with an explanatory paragraph with respect to the Company's financial statements for the years ended July 31, 1997 and 1996 to reflect recurring losses from operations and a working capital deficit and deficit in equity that raise substantial doubt about the ability of the Company to continue as a going concern. ITEM 7. FINANCIAL STATEMENTS Reference is made to the financial statements, the report thereon, the notes thereto, and the supplemental data commencing on page F-1 of this Report, which financial statements, report notes and data are incorporated by reference. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Subsequent to the Company's emergence from reorganization in bankruptcy, the Company retained Toback CPAs, P.C. as its independent public accountants. Coopers & Lybrand, was retained by the Company as its independent public accountants until September 7, 1995. The Company did not retain the services of an independent public accountant during the interim period. The change in independent public accountants was approved by the Board of Directors of the Company. The Company has authorized Coopers & Lybrand to respond fully to inquiries from Toback CPAs, P.C. 11 PART III -------- ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT The following table sets forth certain information with respect to the Company's Directors and Executive Officers: Name Age Position ---- --- -------- Louis F. Pignatelli 50 Chairman of the Board Russell K. Swartz 53 President and Chief Executive Officer Gary D. Mallery 58 Chief Financial Officer, Secretary and Director W. Sam Dennis 53 Director Dennis DesLauriers 53 Director Nicholas A. Fegen 38 Director Ronald Russell, Sr. 63 Director Louis F. Pignatelli has served as a director of the Company since February 1995. On July 18, 1997, Mr. Pignatelli was elected Chairman of the Board. For the past six years, Mr. Pignatelli has been a principle in the law firm of Pignatelli, Liston, and Mertes, P.C., Rock Falls, Illinois. Mr. Pignatelli is a graduate of the University of Notre Dame and received a Juris Doctorate degree from the University of Illinois in 1971. Russell K. Swartz has served as President of the Company since December 1997. Mr. Swartz joined the Company in May 1997 after a successful career in the packaged goods and food industries with The Dial Corp., Universal Foods, and General Host Corp.'s Cudahy Foods Division. Mr. Swartz is a faculty associate at Arizona State University-West Campus where he teaches in the College of Business. Mr. Swartz holds a Bachelor of Science degree in Food Science from University of Massachusetts and an MBA from Babson College. Gary D. Mallery has served as a director of the Company since March 1995, and as Chief Financial Officer since March 1995. From January through June 1997, Mr. Mallery served as acting Chairman of the Board. Prior thereto, from 1986 to 1993, Mr. Mallery served as the managing partner of the Deloitte & Touche LLP office located in Baltimore, Maryland. Mr. Mallery received a Bachelor of Science degree in Business Statistics and a Master of Science degree in Accounting from the University of Oregon in 1968. Mr. Mallery is a Certified Public Accountant. W. Sam Dennis has served as a director of the Company since January 1997. Dr. Dennis has been a Doctor of Radiology in Houston, Texas since 1980. Dr. Dennis received his M.D. from Baylor College of Medicine. Dennis DesLauriers has served as a director of the Company since January 1997. Mr. DesLauriers is Executive Vice President of Armour Swift-Eckrich, a Division of Con Agra, the largest food company in the United States. Mr. DesLauriers is responsible for all domestic operations in the United States as well as all International Sales of Armour Swift-Eckrich. Prior to this, Mr. DesLauriers served as President of the Butterball Turkey Company. Mr. DesLauriers has had over 20 years of experience with Armour Swift-Eckrich. In addition, for the 12 last five years, Mr. DesLauriers has participated privately in acquisitions and business turnarounds. Mr. DesLauriers is a graduate of the Culinary Institute of America and attended Southeastern Massachusetts University. Nicholas A. Fegen has served as a director of the Company since February 1995 and acted as Chairman of the Board and Chief Executive Officer from February 1995 through January 1997 during the Company's transition out of bankruptcy. In February 1997, the state of Iowa charged Mr. Fegen with 12 counts of securities fraud. In July 1997, the Iowa District Court for Dallas County entered an order deferring judgment and placing Mr. Fegen on probation for a period of two years. In addition, Mr. Fegen was ordered to pay a civil contribution of $2,000 to the Walnut Creek Little League. Ronald Russell, Sr. has served as a director of the Company since January 1997. Mr. Russell is a real estate developer in St. Charles, Illinois. Directors hold office until the next annual meeting of the Company's stockholders and the election and qualification of successors. Officers hold office at the discretion of the Board of Directors. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") requires the Company's directors and officers, and persons who own more than 10 percent of a registered class of the Company's equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission (the "SEC"). Officers, directors, and greater than 10 percent shareholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. Based solely upon the Company's review of the copies of such forms received by it during the fiscal year ended July 31, 1997, and representations that no other reports were required, the Company believes that each person who, at any time during such fiscal year, was a director, officer, or beneficial owner of more than 10 percent of the Company's Common Stock complied with all Section 16(a) filing requirements during such fiscal year except that (a) for Fiscal 1997 (i) Dennis DesLauriers filed a late report on Form 3; (ii) Louis F. Pignatelli filed two late reports on Form 4 covering December 1996 and January 1997 transactions; and (iii) W. Sam Dennis filed late reports on Form 4 covering October 1996 and December 1996 transactions, and (b) for Fiscal 1996 (i) W. Sam Dennis filed a late report on form 5 covering transactions occurring prior to Fiscal 1996 and June 1996 and July 1996 transactions; (ii) Nicholas A. Fegen filed a late report on Form 5 covering transactions occurring prior to Fiscal 1996; (iii) Gary D. Mallery filed a late report on Form 5 covering transactions occurring prior to Fiscal 1996 and October 1995 transactions; and (iv) Louis F. Pignatelli filed a late report on Form 5 covering transactions occurring prior to Fiscal 1996 and December 1995 transactions. ITEM 10. EXECUTIVE COMPENSATION Summary of Cash and Other Compensation The following table sets forth certain information concerning the compensation for the fiscal years ended July 31, 1996, and 1997 earned by the Company's prior Chief Executive Officers and by the Company's current Chief Executive Officer (the "Named Officers"). No other officer of the Company received compensation of $100,000 or more during Fiscal 1997. 13 SUMMARY COMPENSATION TABLE
Long Term Compensation ------------ Securities Underlying Annual Compensation Warrants(#)(2) ------------------- -------------- Name and Principal Position Year Salary($)(1) Bonus($) - --------------------------- ---- ------------ -------- Nicholas A. Fegen 1997 $ 96,923 $10,000 600,000 Prior President and Chief 1996 120,000 $30,000 -- Executive Officer Gary D. Mallery 1997 40,000 -- 300,000 Chief Financial Officer 1996 40,000 -- -- Russell K. Swartz 1997 47,596 -- 50,000 President and 1996 -- -- -- Chief Executive Officer
- --------------- (1) The Company offers its employees, including officers, medical insurance benefits. (2) The exercise price of all stock warrants granted were equal to or greater than the fair market value of the Company's Common Stock on the date of grant. 14 Warrant Grants The following table provides information on stock warrants granted to the Company's Named Officers during the fiscal year ended July 31, 1997. WARRANTS GRANTS IN LAST FISCAL YEAR
Individual Grants - ------------------------------------------------------------------------------------------------- Number of % of Total Securities Warrants Underlying Granted to Exercise Warrants Employees in Price Name Granted (#)(1) Fiscal Year ($/Sh) Expiration Date - ---- -------------- ----------- ------ --------------- Nicholas A. Fegen........... 600,000 63% $0.375 2002 Gary D. Mallery............. 300,000 32% $0.375 2002 Russell K. Swartz........... 50,000 5% $0.375 2002
- --------------- (1) The warrants were granted at or above the fair value of the shares on the date of grant and have a 5-year term. One half of the warrants vested at the date of award, January 10, 1997 and one half vests two years from such date if the recipient has continued to work for the benefit of Skolniks. Fiscal Year-end Warrant Values The following table provides information on the value of the Company's Named Officers unexercised warrants at July 31, 1997. WARRANT VALUES AS OF JULY 31, 1997
Number of Securities Value of Unexercised Underlying Unexercised In-the Money Warrants Warrants at Fiscal Year-End(#) at Fiscal Year-End ($)(1) ------------------------------ ----------------------------- Name Exercisable Unexercisable Exercisable Unexercisable - ---- ----------- ------------- ----------- ------------- Nicholas A. Fegen..................... -- 600,000 $ 0 $ 0 Gary D. Mallery....................... -- 300,000 $ 0 $ 0 Russell K. Swartz .................... -- 50,000 $ 0 $ 0
- -------------- (1) Calculated based upon the average bid and ask price as reported on the over the counter market on April 3, 1998 of $0.1875 per share. 15 Director Compensation Directors are compensated for their services by the grant of Common Stock Purchase Warrants. It is anticipated that Directors of the Company will continue to be compensated by the grant of Common Stock Purchase Warrants from time to time as authorized by the Board of Directors. The Company issued Messrs. Fegen, Mallery, and Pignatelli five-year Common Stock Purchase Warrants, exercisable at $0.375 per share to purchase 600,000 shares, 300,000 shares and 300,000 shares respectively, in consideration for services rendered through Fiscal 1997. The Common Stock Purchase Warrants were revised in January 1997 to vest 50% immediately and 50% in two years. The Company also issued five-year warrants to Messrs. DesLauriers, Dennis, and Russell exercisable at $0.375 per share to purchase 300,000 shares of Common Stock each, vesting 50% immediately and 50% in two years for services rendered. Each of the Company's directors has agreed not to exercise their Common Stock Purchase Warrants until the Company's shareholders have voted to increase the number of authorized shares of Common Stock. 16 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the shares of the Company's outstanding Common Stock beneficially owned as of January 31, 1998 by (i) each of the Company's directors and executive officers, (ii) all directors and executive officers as a group, and (iii) each other person who is known by the Company to own beneficially or exercise voting or dispositive control over more than 5% of the Company's Common Stock.
Number of Shares Approximate and Nature of Percentage of Name and Address of Beneficial Owner(1) Beneficial Ownership(2) Outstanding Shares(2) - --------------------------------------- ----------------------- --------------------- Directors and Executive Officers: Louis F. Pignatelli(3) 485,000 5.3% Gary D. Mallery(4) 2,500 * W. Sam Dennis(5) 852,998 9.4% Dennis DesLauriers(6) -- -- Nicholas A. Fegen(7) 24,000 * Ronald Russell, Sr.(8) 1,257,500 13.9% All directors and officers as a group (six persons) 2,621,998 28.9%
- -------------- * Less than 1% of outstanding shares of Common Stock (1) Each person named in the table has sole voting and investment power with respect to all Common Stock beneficially owned by him or her, subject to applicable community property law, except as otherwise indicated. Except as otherwise indicated, each of such persons may be reached through the Company at 7755 E. Gray Road, Scottsdale, Arizona 85260. (2) The percentages shown are calculated based upon 9,072,489 shares of Common Stock outstanding on January 31, 1998. The numbers and percentages shown include the shares of Common Stock actually owned as of January 31, 1998 and the shares of Common Stock that the identified person or group had the right to acquire within 60 days of such date. In calculating the percentage of ownership, all shares of Common Stock that the identified person or group had the right to acquire within 60 days of January 31, 1998 upon the exercise of options or warrants are deemed to be outstanding for the purpose of computing the percentage of the shares of Common Stock owned by such person or group, but are not deemed to be outstanding for the purpose of computing the percentage of the shares of Common Stock owned by any other person. Members of the Board of Directors have agreed not to exercise any Warrants until the Company's authorized share capital is increased. (3) Represents 485,000 shares of Common Stock and does not include 886,000 shares issuable upon exercise of Common Stock Purchase Warrants held by Mr. Pignatelli. (4) Represents 2,500 shares of Common Stock and does not include 300,000 shares issuable upon exercise of Common Stock Purchase Warrants held by Mr. Mallery. (5) Represents 852,998 shares of Common Stock and does not include 1,536,000 shares issuable upon exercise of Common Stock Purchase Warrants held by Dr. Dennis. (6) Does not include 316,000 shares issuable upon exercise of Common Stock Purchase Warrants held by Mr. DesLauriers. (7) Represents 24,000 shares of Common Stock and does not include 600,000 shares issuable upon exercise of Common Stock Purchase Warrants held by Mr. Fegen. (8) Represents 1,257,500 shares of Common Stock and does not include 1,336,000 shares issuable upon exercise of Common Stock Purchase Warrants held by Mr. Russell. 17 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS From March 1995 through January 1998, members of the Board of Directors have loaned the Company $1,056,000, including $805,005 loaned prior to July 31, 1997. In connection with these loans, the Board members have been issued warrants to purchase 1,350,000 shares at $0.50 and 1,524,000 shares at $0.25. Also, the Board members were issued warrants to purchase 2,100,000 shares at $0.375 upon joining the Board. During fiscal 1997, the Company issued warrants to purchase an aggregate of 2,100,000 shares of Common Stock to members of the Company's Board of Directors in recognition of their service on the Board. The members of the Company's Board have each agreed to refrain from exercise of any warrants until the Company's authorized share capital is increased. 18 PART IV ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. 2 Certificate of Ownership and Merger (1) 2.1 Second Amended Plan of Reorganization and Disclosure Statement 2.2 Modification of Second Amended Plan of Preorganization 3.1 Certificate of Incorporation, as amended (included as annex to Exhibit 2); Amendment to Certificate of Incorporation (1) 3.2 Bylaws, as amended (1) 4 Amended Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock (2) 4.1 Shelton Financial, Inc. Common Stock Purchase Warrant, dated September 22, 1992 (3) 4.2 Partridge Capital Corp. Common Stock Purchase Warrant, dated September 22, 1992 (3) 4.3 Ronald Wigington Common Stock Purchase Warrant, dated September 22, 1992 (3) 4.4 Nichols Exploration, Inc. Common Stock Purchase Warrant, dated September 22, 1992 (3) 4.6 Warrant Agreement covering 506,250 Common Stock Purchase Warrants (M Warrants) (3) 4.8 Warrant Agreement covering 475,000 Common Stock Purchase Warrants (Other Warrants) (3) 10.23 Letter Agreement between Registrant and Robert E. Galastro (4) 10.24 Promissory Note from Cantina Management, Inc. (4) 10.33 Shelton Financial, Inc. Common Stock Purchase Warrant (5) 10.41 Shelton Financial, Inc. Warrant Exercise Restriction Agreement, dated November 12, 1993 (5) - ------------- (1) Filed as exhibit to Registrant's Form S-18 Registration Statement (No. 33-16869) which is incorporated herein by reference. (2) Incorporated by reference to the Registration Statement on Form S-1 of the Registrant as filed with the SEC on March 8, 1993 (File No. 33-59116). (3) Incorporated by reference to the Registration Statement on Form S-1 of the Registrant as filed with the SEC on March 1, 1993 (File No. 33-58858). (4) Incorporated by reference to the Registration Statement on Form S-1 of the Registrant as filed with the SEC on September 3, 1991 (File No. 33-42610). (5) Incorporated by reference to the Form 10-KSB of the Registrant for the fiscal year ended July 31, 1993 (File No. 0-9703). (b) Reports on Form 8-K. The Company filed a Form 8-K on March 13, 1996. 19 SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SKOLNIKS, INC. Date: April 9, 1998 /s/ Russell K. Swartz ---------------- -------------------------------- Russell K. Swartz, President and Chief Executive Officer In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Signature Capacity Date - --------- -------- ---- /s/ Louis F. Pignatelli Chairman of the Board March 27, 1998 - ------------------------- Louis F. Pignatelli /s/ Russell K. Swartz President and April 9, 1998 - ------------------------- Chief Executive Officer Russell K. Swartz /s/ Gary D. Mallery Chief Financial Officer (Principal April 20, 1998 - ------------------------- Financial and Accounting Officer) Gary D. Mallery /s/ W. Sam Dennis Director March 10, 1998 - ------------------------- W. Sam Dennis /s/ Dennis DesLauriers Director March 10, 1998 - ------------------------- Dennis DesLauriers Director , 1998 - ------------------------- Nicholas A. Fegen /s/ Ronald Russell, Sr. Director March 27, 1998 - ------------------------- Ronald Russell, Sr.
20 SKOLNIKS, INC. FINANCIAL STATEMENTS YEARS ENDED JULY 31, 1997 AND 1996 CONTENTS Page Independent auditor's report F-1 Consolidated financial statements: Statements of financial position F-2 Statements of operations F-3 Statements of stockholder's equity F-4 Statements of cash flows F-5 Notes to financial statements F-6 - F-12 To the Board of Directors Skolniks, Inc. Scottsdale, Arizona INDEPENDENT AUDITOR'S REPORT ---------------------------- We have audited the accompanying consolidated statements of financial position of Skolniks, Inc. and Subsidiary as of July 31, 1997, and 1996, the related statements of operations, stockholders' equity (deficit) and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Skolniks, Inc. and Subsidiary as of July 31, 1997 and 1996, and the results of its operation and its cash flows for the years then ended in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations and has a working capital deficit and deficit in equity that raise substantial doubt about its ability to continue as a going concern. In addition, the preferred stock of the Company has a total liquidation preference and accumulated dividends of approximately $6,275,000 (Note 10). Management's plans in regards to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ Toback CPAs, P.C. January 16, 1998 SKOLNIKS, INC. CONSOLIDATED STATEMENTS OF FINANCIAL POSITION JULY 31, 1997 AND 1996
1997 1996 ------------ ------------ ASSETS Current assets: Cash $ 68 $ 13,539 Trade accounts receivable (net of allowance for doubtful accounts of $15,000 in 1997 and 1996) 104,234 93,575 Inventories 41,397 22,897 Other 30,365 34,270 ------------ ------------ Total current assets 176,064 164,281 ------------ ------------ Property and equipment 884,779 804,105 Less accumulated depreciation and amortization (582,848) (509,535) ------------ ------------ 301,931 294,570 ------------ ------------ $ 477,995 $ 458,851 ============ ============ LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable and accrued liabilities $ 394,129 $ 313,329 Notes payable - related parties 805,005 645,005 ------------ ------------ Total current liabilities 1,199,134 958,334 ------------ ------------ Liabilities subject to compromise -- 4,326,974 ------------ ------------ Total liabilities 1,199,134 5,285,308 ------------ ------------ Commitments and contingent liabilities Stockholders' deficit: Preferred stock, $.01 par value, 2,000,000 shares authorized; shares issued and outstanding: July 1997, 532,271 and 1996, 543,326 5,323 5,433 Common stock, $.001 par value, 10,000,000 shares authorized; shares issued July 1997, 9,072,489, July 1996, 6,956,332 9,072 6,956 Additional paid-in capital 21,088,042 19,957,299 Accumulated deficit (20,921,035) (23,893,604) ------------ ------------ 181,402 (3,923,916) Less treasury stock, at cost (902,541) (902,541) ------------ ------------ Total stockholders' deficit (721,139) (4,826,457) ------------ ------------ $ 477,995 $ 458,851 ============ ============
The accompanying notes are an integral part of these financial statements. F - 2 SKOLNIKS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED JULY 31, 1997 AND 1996 1997 1996 ----------- ----------- Revenues: Product sales (net) $ 1,457,063 $ 1,424,939 ----------- ----------- Expenses: Plant operating costs 1,504,398 1,448,370 General and administrative expenses 433,073 357,840 ----------- ----------- 1,937,471 1,806,210 ----------- ----------- Loss from operations (480,408) (381,271) Other income (expenses): Interest expense (73,998) (49,228) Other (net) -- (39,550) ----------- ----------- Loss before extraordinary item (554,406) (470,049) Extraordinary item - debt forgiveness 3,526,973 -- ----------- ----------- Net income (loss) $ 2,972,567 $ (470,049) =========== =========== Net income (loss) per share of common stock: Loss before extraordinary item $ (0.07) $ (0.07) Extraordinary item 0.44 -- ----------- ----------- Net income (loss) per share of common stock $ 0.37 $ (0.07) =========== =========== Weighted average shares outstanding 8,014,411 6,936,097 =========== =========== The accompanying notes are an integral part of these financial statements. F-3 SKOLNIKS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) YEARS ENDED JULY 31, 1997 AND 1996 1997 1996 ------------ ------------ Preferred stock: Beginning of period $ 5,433 $ 5,836 Conversion to common stock (110) (403) ------------ ------------ End of period 5,323 5,433 ------------ ------------ Common stock: Beginning of period 6,956 6,916 Conversion from preferred stock 11 40 Issuance of common stock 2,105 ------------ ------------ End of period 9,072 6,956 ------------ ------------ Additional paid-in capital: Beginning of period 19,957,299 19,956,936 Issuance of common stock 1,130,644 -- Preferred converted to common 99 363 ------------ ------------ End of period 21,088,042 19,957,299 ------------ ------------ Accumulated (Deficit): Beginning of period (23,893,604) (23,423,555) Net income (loss) 2,972,567 (470,049) Other 2 -- ------------ ------------ End of period (20,921,035) (23,893,604) ------------ ------------ Treasury stock: Beginning and end of period (902,541) (902,541) ------------ ------------ Total stockholders' deficit $ (721,139) $ (4,826,457) ============ ============ Shares of treasury stock held at end of period 79,808 79,808 ============ ============ The accompanying notes are an integral part of these financial statements. F-4 SKOLNIKS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JULY 31, 1997 AND 1996
1997 1996 ----------- ----------- Cash flows from operating activities: Net income (loss) $ 2,972,567 $ (470,049) ----------- ----------- Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 74,731 73,191 Loss on disposition of property, equipment, and leasehold improvements 57 7,863 Increase in trade accounts receivable (10,659) (5,205) Decrease (increase) in inventories (18,500) 701 Decrease in other current assets 3,905 3,732 Increase in accounts payable and accrued liabilities 95,471 51,720 Debt forgiveness (3,526,973) -- ----------- ----------- Total adjustments (3,381,968) 132,002 ----------- ----------- Net cash used in operating activities (409,401) (338,047) ----------- ----------- Cash flows from investing activities: Acquisition of property and equipment (82,148) (5,379) ----------- ----------- Net cash used in investing activities (82,148) (5,379) ----------- ----------- Cash flows from financing activities: Payments on debt (14,671) (24,080) Payments to Creditors' Committee (800,000) -- Proceeds from borrowings of debt 160,000 366,532 Proceeds from issuance of common stock 1,132,749 -- ----------- ----------- Net cash provided by financing activities 478,078 342,452 ----------- ----------- Net decrease in cash and cash equivalents (13,471) (974) Cash, beginning of period 13,539 14,513 ----------- ----------- Cash, end of period $ 68 $ 13,539 =========== ===========
The accompanying notes are an integral part of these financial statements. F-5 SKOLNIKS, INC. NOTES TO FINANCIAL STATEMENTS 1. Basis of Presentation: The financial statements of the Company have been prepared on the basis of principles applicable to a continuing business. The basis presumes the realization of assets and the settlement of liabilities in the ordinary course of business. The Company's ability to operate as a continuing business is dependent upon the attainment of future profitable operations and/or the Company's ability to acquire additional capital or other forms of financing. The accompanying financial statements do not reflect any adjustments relating to the recoverability and classification of recorded asset amounts or amounts or classification of liabilities that might be necessary should the Company be unable to continue as a going concern. During 1997 and 1996 the Company incurred operating losses of $480,408 and $381,271 respectively. In addition, the Company has a deficit in working capital of $1,023,070 and $794,053 for 1997 and 1996, respectively, and a deficit in equity for both years. The significance of the combined losses with the deficits in working capital and equity raises substantial doubt about the Company's ability to continue as a going concern. Management is pursuing new business opportunities, primarily in the geographic Southwest, with customers in the retail grocery, convenience store, vending, military, food service and club store segments. In addition, new customers are being added for daily deliveries of fresh bread products within the Arizona market. While the product line presently includes bagels, breadsticks and Italian specialty breads, a line of upscale, European Artesian breads is being developed for introduction in mid-1998. Management is also considering the opportunity to acquire, merge or strategically align with other synergistic baked goods or food manufacturers for enhanced product offerings, geographic coverage, and customer leverage. At a hearing held in bankruptcy court on March 20, 1995, the Company agreed to an order for relief under Chapter 11 of the United States Bankruptcy Code. The Company submitted a plan to the bankruptcy court, which was approved. The plan was mailed to the creditors and shareholders May 2, 1996. The Court confirmed the plan of reorganization at the Confirmation Hearing held on July 10, 1996, at the United States Bankruptcy Court in the Western District of Oklahoma. The Company raised the monies required under the plan and exited bankruptcy on December 18, 1996. The Company raised $1,000,000 by selling 1 million shares of Common Stock to fund the Plan of Reorganization. The creditor's trust received $800,000 and 500,000 shares of Common Stock were issued to the Creditor's Trust. As part of the Company's management restructuring, the Board of Directors of the Company elected Nicholas Fegen, Gary Mallery, and Louis Pignatelli to the Board of Directors. After exiting bankruptcy, the Board of Directors elected Dennis DesLauriers, Sam Dennis and Ron Russell to the Board of Directors. On July 18, 1997, Louis Pignatelli was elected Chairman of the Board. F-6 SKOLNIKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. Summary of Significant Accounting Policies: Skolniks, Inc. (the "Company"), operates a manufacturing plant in Arizona. The more significant accounting policies of the Company are as follows: Principles of Consolidation: The accompanying consolidated financial statements include the accounts of Skolniks, Inc. and its wholly-owned subsidiary. All intercompany accounts and transactions have been eliminated in consolidation. Cash equivalents: Cash equivalents include liquid investments purchased with an original maturity of three months or less. Inventories: Inventories, consisting of raw materials, finished goods, paper and supplies are valued at the lower of cost (first-in, first-out method) or market. Property and equipment and depreciation: Property and equipment are recorded at cost and are depreciated and amortized using the straight-line method over their estimated useful lives as follows: Furniture and equipment 5 - 10 years Leasehold improvements 10 years, not to exceed the remaining life of the lease When properties are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts with any resulting gain or loss reflected in income. Maintenance and repairs are expensed in the year incurred. Product sales: The Company manufactures bagels, breadsticks and other bakery products for use by restaurants and unrelated food service operations, such as supermarkets and convenience stores. Sales are made directly to stores, restaurants and distributors. F-7 SKOLNIKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. Summary of Significant Accounting Policies, continued: Income taxes: Deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax benefit (expense) is the tax receivable (payable) for the period and the change during the period in deferred tax assets and liabilities. Income (loss) per share of Common Stock: Income (loss) per share of Common Stock is computed by dividing net income (loss) by the weighted average number of Common Stock shares outstanding during each period. Advertising: The Company expenses advertising costs at the first time that advertising takes place. For the year ended July 31, 1997, advertising expense was approximately $1,500. Fair value of financial instruments: The following methods and assumptions were used in estimating fair values: Cash: The carrying amount reported in the balance sheet approximates fair value. Notes payable - related parties: The carrying amounts of the Company's borrowings under its notes payable-related party, as well as short-term borrowings, approximate their fair values. Accounting estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-8 SKOLNIKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. Liabilities subject to compromise: Liabilities settled in bankruptcy consist of the following: Trade accounts payable $3,201,120 Unsecured notes payable 185,588 Leases payable 714,265 Subordinated debentures 226,000 ---------- 4,326,973 Payment to creditors trust 800,000 ---------- Debt forgiveness $3,526,973 ========== 4. Inventories: The components of inventory are as follows: 1997 1996 ------- ------- Raw materials $35,506 $21,236 Finished goods 5,891 1,661 ------- ------- $41,397 $22,897 ======= ======= 5. Other current assets: Other current assets consist of the following: 1997 1996 -------- ------- Prepaid expenses $ 30,365 $34,270 ======== ======= 6. Property and equipment: Property and equipment consist of the following: 1997 1996 -------- -------- Furniture and equipment $764,970 $684,248 Leasehold improvements 119,809 119,857 -------- -------- $884,779 $804,105 ======== ======== Depreciation and amortization expense for the years ended 1997 and 1996 amounted to approximately $75,000 and $73,000 respectively. F-9 SKOLNIKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 7. Notes payable - related parties: AMOUNT INTEREST DUE COLLATERAL ------ -------- --- ---------- Board Members: $ 525,000 10% Demand Equipment 100,000 10% Demand Accounts Receivable 50,000 10% Demand Office Equipment 60,000 12% July 2000 None Shareholders: 37,500 10% Demand Accounts Receivable 32,505 10% Demand Office Equipment ------------ $ 805,005 ============ 8. Income taxes: At July 31, 1997 the Company had available approximately $20 million of net operating loss carryforwards available for both financial statement and federal income tax purposes. These carryforwards, which expire through 2011, are subject to certain limitations due to change in ownership under Internal Revenue Code Section 382. No deferred tax asset has been recorded as the realization of the benefit is in substantial doubt. 9. Leases: The Company leases its manufacturing facility under an operating lease agreement expiring March 31, 1999, with an option to renew for five years. Rent expense under all operating leases was approximately $114,000 and $107,000 for 1997 and 1996, respectively. Minimum rental commitments payable in future years are as follows: Period ending, July 31: Operating Leases ---------------- 1998 $110,400 1999 73,600 -------- Total minimum lease payments $184,000 ======== F-10 SKOLNIKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 10. Stockholders' equity: Preferred stock: The Company is authorized to issue 2 million shares of Preferred Stock, $.01 par value. The Board of Directors of the Company is authorized, without action by the stockholders, to issue Preferred Stock from time to time in one or more series and to fix, for each series, the number of shares, designation, dividend rights, voting rights, redemption provisions, conversion rights, liquidation preferences, and any other rights and restrictions. Holders of Preferred Stock are entitled to cumulative semi-annual dividends at the semi-annual rate of $.16 per share. Such dividends must be paid before the payment of any dividends on Common Stock. Dividends on the Preferred Stock will be payable, when declared by the Board of Directors, on August 1 and February 1 of each year and will be payable in Preferred Stock of the same series for any six-month period in which net income before tax is less than 150 percent of the dividend due and otherwise will be payable in cash. Under Delaware law, the Company is permitted to pay dividends only out of surplus (net assets in excess of state capital), or in the event there is no surplus, then out of net profits for the year in which the dividends are declared. The total accumulated dividends through July 31, 1997 were approximately $596,000, payable in shares of preferred stock. In liquidation, holders of Preferred Stock will have a preference over the holders of Common Stock equal to the exchange price per share plus all accrued and unpaid dividends whether declared or undeclared. The Company may redeem the Preferred Stock, in whole or part, beginning one year after the date of issuance upon repayment of a redemption price of $10.67 per share, plus all accrued and unpaid dividends whether declared or undeclared. The preferred stock has a liquidation preference of approximately $5,679,000 at July 31, 1997 which was not relieved in bankruptcy. This preference will have a significant effect on the companies ability to raise any additional capital though common and preferred stock offerings. Commencing one year after the date of issuance, the holders of Preferred Stock will be entitled to convert each share of the Preferred Stock into one share of Common Stock subject to adjustment in certain specified circumstances. The Company is required to reserve from authorized but unissued Common Stock a sufficient number of shares to effect conversion of the Preferred Stock issued. Currently there is insufficient authorized share capital to reserve, therefore such reservation of common stock is subject to a vote of shareholders to increase the Company's authorized share capital. The Preferred Stock is non-voting. Therefore, unless otherwise specified under Delaware law, on all matters submitted to a vote of the shareholders, including the election of Directors, the matters will be decided by holders of Common Stock. F-11 SKOLNIKS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 10. Stockholders' equity, continued: Warrants: Warrants to purchase one share of Common Stock outstanding at July 31, 1997 are approximately as follows: Number of Exercise Expiration Warrants Price Date --------- -------- ---------- 682,918 6.67 1998 8,000 6.00 1999 450,000 1.00 2000 1,490,000 .50 2000 175,000 2.00 1999 2,250,000 0.375 2002 240,000 0.25 2002 As of July 31, 1997 holders of warrants to purchase 4,115,000 shares of common stock have agreed to refrain from exercising their warrants until the Company's authorized shares capital is increased. 11. Commitments and contingent liabilities: A complaint was filed in the Maricopa County Superior Court against the Company's wholly-owned subsidiary for failure to pay a trade debt. The complaint seeks damages in the amount of $56,675 in trade debt and $32,169 in collection costs and attorney's fees. A current member of the Board has threatened litigation involving his termination of employment by the Company. As of December 19, 1997 no estimate of damages can be made. 12. Related Parties: Since March 1995 through January 1998, members of the Board of Directors have loaned the Company $1,056,000, including $735,000 loaned through July 31, 1997. In connection with these loans, the Board members have been issued warrants to purchase 1,350,000 shares at $0.50 and 1,524,000 shares at $0.25. Also, the Board members were issued warrants to purchase 2,100,000 shares at $0.375 upon joining the Board. F-12 EX-2.1 2 2ND AMENDED PLAN OF REORGANIZATION EXHIBIT 2.1 ----------- IN THE UNITED STATES BANKRUPTCY COURT FOR THE WESTERN DISTRICT OF OKLAHOMA In Re: ) ) SKOLNIKS, INC. ) No. BK 95-10206-LN ) Chapter 11 Debtor. ) GENERAL INFORMATION AND DISCLAIMER ---------------------------------- REGARDING SECOND AMENDED PLAN OF REORGANIZATION ----------------------------------------------- AND DISCLOSURE STATEMENT ------------------------ Skolniks, Inc., and R & B Quality Foods, Inc. (a wholly owned subsidiary of Skolniks) are the sources of information in this Combined Plan and Disclosure Statement unless otherwise stated. THE COURT'S APPROVAL OF THE COMBINED PLAN AND DISCLOSURE STATEMENT DOES NOT MEAN THAT THE COURT HAS APPROVED THE PLAN, OR THAT THE ACCURACY AND COMPLETENESS OF THE INFORMATION IN THIS DISCLOSURE STATEMENT ARE GUARANTEED. THIS COMBINED DISCLOSURE STATEMENT HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THE STATEMENTS CONTAINED THEREIN. While the Debtor has made every effort to insure that the Disclosure Statement is accurate, it cannot warrant or represent that all of the information contained herein is accurate. This Disclosure Statement may not be relied upon for any purpose other than your determination of how to vote on the Plan. Nothing in this Disclosure Statement shall constitute an admission of any fact or liability of any matter. This Disclosure Statement may not be considered conclusive advice on the legal effect of the Plan of holders or claims or interest. Although the Disclosure Statement sets forth certain legal principals applicable to the Plan, other rules contained in the Bankruptcy Code and other sources of law may apply. YOU SHOULD READ CAREFULLY EXHIBIT "A" AND ITS APPENDICES A, B, C AND D TO THIS PLAN AND DISCLOSURE STATEMENT, WHICH SET OUT MORE INFORMATION ABOUT THE OFFERING OF THE NEW SHARES, POST CONFIRMATION OFFICERS AND DIRECTORS, AND RISK FACTORS TO BE CONSIDERED WHEN VOTING ON THIS PLAN OF REORGANIZATION. I. INTRODUCTION........................................................ 1 II. HISTORY OF THE COMPANY AND ANALYSIS OF OPERATIONS.......................................... 1 III. SIGNIFICANT EVENTS DURING CHAPTER 11................................ 3 IV. DEFINITIONS AND EXPLANATION OF CHAPTER 11........................... 5 V. CLASSIFICATION OF CLAIMS AND TREATMENT AFFORDED EACH......................................... 7 VI. CLAIMS NOT IMPAIRED UNDER THE PLAN.................................. 10 VII. ADMINISTRATIVE COSTS................................................ 10 VIII. CREDITORS' TRUST.................................................... 11 IX. MEANS OF EXECUTION OF THE PLAN...................................... 11 X. SECURITIES.......................................................... 12 XI. REJECTION OF EXECUTORY CONTRACTS.................................... 13 XII. MODIFICATION OF THE PLAN............................................ 13 XIII. PROVISIONS REGARDING PAYMENT FOR SERVICES........................... 14 XIV. RETENTION OF CLAIMS................................................. 14 XV. REVESTING........................................................... 14 XVI. RETENTION OF JURISDICTION........................................... 14 XVII. VOTING ON THE PLAN.................................................. 16 XVIII. CONFIRMATION HEARINGS............................................... 17 XIX. CONFIRMATION AND SEVERABILITY OF PLAN AND CRAMDOWN................................................ 17 XX. REVOCATION OF THIS PLAN............................................. 18 XXI. SUCCESSORS AND ASSIGNS.............................................. 18 XXII. INJUNCTION.......................................................... 18 XXIII. LIQUIDATION ANALYSIS................................................ 19 XXIV. OBJECTIONS TO CLAIMS................................................ 20 XV. SALE, CANCELLATION, OR RETENTION OF SECURITIES OF THE COMPANY........................................... 20 XXVI. FEDERAL INCOME TAX CONSEQUENCES..................................... 20 XXVII. AVOIDABLE TRANSFERS AND PREFERENCES................................. 20 XXVIII. RISK FACTORS........................................................ 21 XXIX. ACCEPTANCE AND CONFIRMATION OF THE PLAN............................. 21 XXX. PREPARATION OF MATERIALS............................................ 23 XXXI. CONCLUSION.......................................................... 23 IN THE UNITED STATES BANKRUPTCY COURT FOR THE WESTERN DISTRICT OF OKLAHOMA In Re: ) ) SKOLNIKS, INC. ) No. BK 95-10206-LN ) Chapter 11 Debtor. ) SECOND AMENDED PLAN OF REORGANIZATION AND ----------------------------------------- DISCLOSURE STATEMENT -------------------- I. INTRODUCTION ------------ Skolniks, Inc. ("Skolniks" or "Debtor") has prepared this Plan of Reorganization and Disclosure Statement ("Disclosure Statement") in connection with its solicitation of acceptances of its Plan of Reorganization ("Plan") filed with the United States Bankruptcy Court for the Western District of Oklahoma ("Bankruptcy Court"). The Plan describes Skolniks' proposal for the reorganization of its business and the payment of claims. This Disclosure Statement was approved by the Bankruptcy Court on the 16th day of April, 1996. It contains information which will assist you in making an informed judgment whether to accept the Plan. The Debtor urges you to read this Disclosure Statement and the Plan carefully, paying particular attention to those provisions that affect your rights, before deciding how to vote on the Plan. As explained below, Debtor believes this Plan is in the best interest of all creditors and urges each class entitled to vote to accept the Plan. II. HISTORY OF THE COMPANY ---------------------- AND ANALYSIS OF OPERATIONS -------------------------- Skolniks, Inc. is a publicly owned Delaware corporation formed several years ago. It has a record of registration statements and reports which are subject to review at the United States Securities and Exchange Commission, Washington D.C. 20549. Historically, in connection with its business operations, the company franchised restaurants under the name "Skolniks Bagel Bakery Restaurants" and supplied most of its products to such franchised restaurants. In addition, the company historically owned and operated restaurants, but primarily focused on supporting its franchised restaurants through training, marketing, equipment, construction and operational programs. During fiscal year 1994, the company also operated production plants located in Westampton, New Jersey, and Morristown, New Jersey; however, 1 subsequent to the end of fiscal year 1994, these plants were closed and their operations were consolidated to the company's production plant in Scottsdale, Arizona. As of July 30, 1994, the company operated 24 franchise restaurants in 6 different states. However, as a result of the company's financial position, as of March 10, 1995 the company no longer operates any franchised restaurants. During the fourth quarter of 1994, the company completed the sale of its 12 company-owned restaurants to Magnolia Foods, Inc. ("Magnolia"). References to the company-owned restaurants and restaurant operations relate to those operations prior to the sale to Magnolia during the fourth quarter. The company does not intend to operate company-owned restaurants. As the company has sold all of its company-owned restaurants and is not operating any franchised restaurants, all of the company's marketing, distribution and sales of its product are being conducted out of the manufacturing plant in Scottsdale, Arizona. Product sales consist of sales to distributors, unrelated food service operations and restaurants. The manufacturing plant in Scottsdale, Arizona is owned and operated by Skolniks' wholly owned subsidiary, R & B Quality Foods, Inc. ("R & B"). R & B, a bakery facility in Scottsdale, Arizona, was acquired in December of 1993. Approximately 220,200 shares of company common stock were issued in exchange for all of the outstanding common stock of R & B. Presently, R & B is the only operation of the Debtor. Debtor and R & B presently file consolidated statements and tax returns. During fiscal year 1994, the company disposed of all of its company-owned stores in order to focus its operations on manufacturing and distribution activities. The assets of the company's 12 bagel bakery restaurants located in Ohio, New Jersey, Pennsylvania and Illinois were sold to Magnolia for a total consideration of $534,500.00, consisting of $100,000.00 cash and a note receivable which was subsequently paid with $209,500.00 cash, warrants to purchase 2 million Magnolia shares at 50 cents per share and 2 million shares of Magnolia common stock, which was valued at $225,000.00 for sale purposes. Presently, the Magnolia common stock and warrants are unencumbered and owned by the Debtor corporation. Magnolia common stock presently has a bid price of 18 cents per share, however, 2 million shares in one block will not be expected to bring that price. The loss on the disposition of the company's stores has been accounted for as discontinued operations, and prior years' financial statements have been restated to reflect the discontinuation of the company's stores. As a result of the company's change in focus of operations, the company streamlined and downsized its operations by reducing its work force, relocating certain product lines, disposing of excess equipment and writing off other related assets. These costs are reflected in the company's consolidated statements of operations as a resizing and restructuring charge of $2,118,177.00. The company operates on a fiscal year ending on the last Saturday in July. Each fiscal year is divided into 4 quarters, with each quarter generally consisting of 13 weeks. 2 Debtor is presently the subject of investigations from the Arizona Corporation Commission and the Oklahoma Securities Commission. Presently, there are pending two class action lawsuits filed by shareholders of the debtor corporation against former officers and directors and the Debtor alleging violations of the Securities and Exchange Act of 1934 and the Oklahoma Securities Act, as well as alleging fraud, negligence and misrepresentation. (See Class G, page 16, for treatment of these claims.) On January 13, 1995, Bay State Milling Company, American Truck Lines, Inc., and Artkraft Container Corp. filed an Involuntary Chapter 11 bankruptcy proceeding, and on March 15, 1995, a Consent Order of Relief was entered in the proceedings. In March, 1995, the company restructured its management and commenced with restructuring of its business operations. As part of the company's management restructuring, the board of directors of the company elected Nicholas Fegen, Gary Mallery, and Louis Pignatelli to the Board of Directors. Furthermore, the Board of Directors appointed Mr. Fegen to serve as Chief Executive Officer of the company and appointed Mr. Mallery to serve as Chief Financial Officer of the company. Mr. Fegen has formed an advisory board, composed of individuals in the food industry, for the purpose of assisting him in carrying out his duties and responsibilities as Chief Executive Officer in connection with the business operations of the company. Presently, no member of the management team was involved in the company prior to the involuntary bankruptcy filed in January, 1995. Present management believes that during fiscal year 1994, the company had derived nominal benefits from its strategy of primarily operating company-owned restaurants and franchising restaurants under the name "Skolniks Bagel Bakery Restaurants," which strategy utilized a large number of personnel and required the expenditure of large sums of funds which were allocated for capital equipment, salaries, funding commitments and other working capital purposes. These activities contributed to the financial demise of the company. In connection with the implementation of the company's restructured business plan, the company reduced its employees from 207 persons at July 30, 1994 to 30 at March 10, 1995, reduced other operating expenses through the disposition of company-owned restaurants and the non-operation of franchise restaurants and consolidated its manufacturing and production operations via R & B. Furthermore, the company has focused its business operations on the production, manufacture and distributions of its baked products to restaurants and retail and wholesale customers. Management believes that such strategy will generate sales with minimum additional material expenditures. The company is in the process of obtaining external sources of funding in order to facilitate the immediate implementation of the Plan of Reorganization. III. SIGNIFICANT EVENTS DURING CHAPTER 11 ------------------------------------ Since the filing date, Skolniks has remained in operation only to the extent of the operations of R & B. The leases on production plants located in Westampton, New Jersey and Morristown, New Jersey, have been rejected and abandoned. Motions by secured creditors and landlords filed with the Court for the purposes of recovery of premises and/or collateral have 3 been followed by appropriate orders to the extent that such creditors have recovered possession and control of collateral, thus Skolniks will not have to deal with any secured creditors. An Unsecured Creditors Committee has been appointed and has retained counsel. The members of the Unsecured Creditors Committee and their addresses and the name of their counsel is as follows: Frank Lobosco Mason, Briody, Gallasher & Taylor 104 Carnegie Center, Ste. 201 Princeton, NJ 08540 David Nunn Crowe & Dunlevy 1800 Mid-America Tower 20 N. Broadway Oklahoma City, OK 73102 Don Kraus D. A. Kraus & Associates Rt. 1, Box 40A Washington, OK 73093 Gary Hammond Groom, Hammond & Harris, P.C. 100 N. Broadway, Ste. 1440 Oklahoma City, OK 73102 Skolniks has filed its Schedules, Statement of Financial Affairs, and other lists required by the bankruptcy rules, as well as the Initial Report and Monthly Operating Reports as required by the Office of the Assistant United States Trustee. All quarterly fees due to the Assistant United States Trustee under 28 U.S.C. ss. 1930(a)(6) have been paid. The company has developed a plan to raise additional capital through the sale of its securities and intends to use proceeds of such sale to satisfy and pay outstanding claims against it, to the extent possible, and to recapitalize R & B as the financial and operating arm of Skolniks. Since Skolniks operates solely as a holding corporation for R & B, it has had little, if any, income or expenditures since the filing of the Chapter 11 Petition. (For additional information, see Exhibit "A" attached hereto and made a part hereof.) This combined Disclosure Statement and Plan of Reorganization has been prepared pursuant to ss. 1125, Title 11 of the United States Code, on behalf of the above named debtor and describes and includes the terms and conditions of the Debtor's Plan of Reorganization ("Plan"), which is filed herewith in the above captioned case under Chapter 11 of the Bankruptcy Code of 1978 (11 U.S.C. ss. 101, et seq.), as amended ("Bankruptcy Code"). 4 IV. DEFINITIONS AND EXPLANATION OF CHAPTER 11 ----------------------------------------- Brief Explanation of Chapter 11 Reorganization - ---------------------------------------------- Chapter 11 is the principal reorganization vehicle of the Bankruptcy Code. Pursuant to Chapter 11, a debtor is authorized to reorganize its affairs for its benefit and the benefit of its creditors or to engage in an orderly liquidation of its assets. Formulation of a Plan of Reorganization is the principal purpose of a Chapter 11 reorganization case. The Plan of Reorganization is the method through which claims and interests are satisfied. Confirmation of a Plan of Reorganization requires, among other things, that either (i) all classes of claims and interests entitled to vote accept the Plan or (ii) that the Plan be accepted by the holders of at least one impaired class of claims, not including the votes of claims held by "insiders" as defined in ss. 101(31) of the Bankruptcy Code, and that certain other tests set forth in the Bankruptcy Code be met. Confirmation of the Plan under Chapter 11 will discharge the debtor and subsidiary from all of its pre-confirmation debts except as provided in the Plan, the order confirming the Plan or ss. 1141(d) of the Bankruptcy Code. Confirmation makes the Plan binding upon the debtor, the subsidiary and all creditors and interest holders, whether or not they voted to accept the Plan. The standards for confirmation are discussed in depth in Section XXVIII. Unless the context indicates otherwise, the terms used in this Plan and Disclosure Statement have their ordinary meanings as set out in the United States Bankruptcy Code unless hereinafter specifically set out: I. Allowed Claims -- shall mean a claim with respect to which a Proof of Claim has been filed with the Court within the applicable period of limitations fixed by Order of the Court, as to which no objection to the allowance thereof has been interposed within any applicable period of limitation fixed by an Order of the Court, or as to which any objection has been determined by order or judgment which is no longer the subject of appeal or certiorari proceedings, or which has been scheduled in these proceedings as undisputed, liquidated, and non-contingent. A. Allowed Unsecured Claims -- shall mean any claim against the Debtor Estate which is an allowed claim and for which there is no collateral pledged by the Debtor Estate. B. Bankruptcy Code -- Title 11 of the United States Code. C. Court -- United States Bankruptcy Court for the Western District of Oklahoma. D. Confirmation of Plan -- Entry by the Court of an order confirming the Plan in accordance with Chapter 11. 5 E. Confirmation Order -- Shall mean the Order entered by the Court approving the Plan of Reorganization. F(1) Confirmation Date -- Shall mean the date that the Court enters the Confirmation Order. F. Commencement Date -- January 13, 1995, the date upon which the Involuntary Petition in Bankruptcy under Chapter 11 was filed. G. Creditor Class -- Multiple claims which are substantially similar to all other claims within a class. H. Creditor's Trust -- A trust created at confirmation of this Plan of Reorganization formed for the purpose of receiving and disbursing certain assets as more particularly described in the Plan. I. Debtor -- Shall mean Skolniks, Inc. J. Effective Date of Plan -- Shall be the date the Order confirming Skolniks' Plan of Reorganization becomes final and non-appealable. K. Final order -- Shall mean an order of the Court which, not having been reversed, modified or amended and not having been stayed, and the time to appeal from which or seek review or rehearing of which having expired, has become conclusive of all matters adjudicated thereby in full force and effect. L. New common stock -- Shall mean new shares of stock issued by the Debtor pursuant to the Plan of Reorganization more particularly described in Exhibit "A" attached hereto and made a part hereof. M. New shareholders -- Shall mean those persons, firms, or corporations purchasing New Common Stock. N. Offering -- Shall mean the offering of New common stock pursuant to the terms and conditions of this Plan of Reorganization, and more particularly described in Exhibit "A" attached to this Combined Disclosure Statement and Plan of Reorganization and specifically incorporated herein by reference. O. Old common stock -- Shall mean stock issued prior to the Commencement Date. P. Old shareholders -- Shall mean those persons, firms or corporations owning stock on the Commencement Date, or who may have acquired stock issued by the Debtor prior to Commencement Date but purchased after the Commencement Date. 6 Q. Plan -- The Debtor's Plan of Reorganization as contained in this Amended Combined Disclosure Statement and Plan of Reorganization. R. Pool -- Shall mean a fund of money not less than $1,000,000.00 raised through the sale of New common stock which shall be used to recapitalize the Reorganized Debtor and to make payments provided for in this Plan of Reorganization. S. Post-petition -- Shall mean the period from and after the Commencement Date. T. Pre-petition -- Shall mean the period prior to the commencement date. U. Pro rata share -- Shall mean the amount which is the result of multiplying the monies available to a named class of creditors by that fraction in which the numerator is the allowed amount of a particular claim in a named class and the denominator is the total of the allowed amounts of all claims in the named class. V. Property of the Estate - Shall mean all tangible and intangible property belonging to the Debtor up to and including the confirmation date, including, but not necessarily limited to, all actions or causes of action belonging to the Debtor estate. W. R & B -- The organization incorporated under the laws of the state of Arizona, which is a wholly owned subsidiary of the Debtor, and the stock of which constitutes the material asset of the Debtor for reorganization purposes. X. Reorganized Debtor -- Shall mean the Debtor after the Effective Date. Y. Secured Claim -- Shall mean any claim allowed in these proceedings for which the Debtor has pledged collateral. Z. Trust -- Shall mean the Creditor's Trust as hereinafter set forth in Paragraph VII. V. CLASSIFICATION OF CLAIMS ------------------------ AND TREATMENT AFFORDED EACH --------------------------- For purposes of this Plan, the following classes of claims and interests are designated with treatment afforded each Class following a description of the Class: Class A: All claims of any kind, of a kind specified in ss. 503(b) ------- and ss. 507(a)(1) of the Bankruptcy Code, including claims for compensation of professionals pursuant to ss. 330 of the Bankruptcy Code as finally allowed and approved by the court, as well as any fees and charges assessed against the Debtor under Section 1930 of Title 28 with the exception as set forth in paragraph 7 VII hereinafter. Treatment: Said claims will be paid by the Reorganized Debtor out of --------- a fund established pursuant to the Confirmation Order. Class B: Allowed unsecured claims for wages, salaries, or ------- commissions, including vacation, severance and sick leave earned by an individual within 90 days before the Commencement Date, limited to $4,000.00 for each individual allowed claim. Treatment: Said claims will be paid in full from first monies --------- available to the pool after payment of Class A claims. Class C: Allowed unsecured claims for contributions to employee ------- benefit plans pursuant to ss. 507(a)(4). Treatment: Debtor does not believe there are any claims which fall --------- within this class, but should there be any, the same will be paid in full from the Pool by the Creditors' Trust after payment of Classes A and B above. Class D: Priority claims as defined in 11 U.S.C. ss. 507(7), ------- consisting of any unsecured claims of governmental units for taxes, including, but necessarily limited to, employment taxes, property taxes, sales taxes, fuel taxes, income taxes, and interest accrued on those taxes prior to the commencement date, but excluding any fines or penalties which do not constitute compensation for actual pecuniary loss. Treatment: To the extent there are any claims which fall into this --------- class, the same will be paid in full from the Pool by the Creditors' Trust after payment of Classes A, B and C above. Class E: Claims of L & S Investments, L.L.C., and Keith Sutterfield ------- d/b/a Sutterfield Marketing. 8 Treatment: In accordance with the Settlement Agreement heretofore --------- approved by this Court on June 1, 1995, after appropriate notice, this class will be treated as follows: All agreements between the Debtor and these parties are terminated, rescinded, and of no further force and effect, save and except there is allowed in these proceedings an aggregate claim due L & S and/or Sutterfield as an unsecured claim in the amount of $60,000.00 which shall be satisfied by a payment of not less than $12,000.00 from the Pool by the Creditors' Trust after payment of classes A, B, C and D above. In addition, the Debtor has granted to L & S the exclusive right to use the "Skolniks" trade name, service marks and trade marks in the state of Oklahoma for a period of 3 years from June 1, 1995. Class F: Shall consist of allowed unsecured claims in these ------- proceedings. Treatment: These claims, to the extent that they are allowed by the --------- Court, will receive pro rata distribution of funds remaining in the Pool after the Pool is established pursuant to terms set forth in paragraph IX hereinafter, and after payment of Classes A, B, C, D and E above. In addition, there will be appointed to the Board of Directors of Reorganized Debtor a person to be nominated by the Unsecured Creditors Committee and approved by the Court, who shall serve as a director of the Reorganized Debtor in addition to those persons named on page 9 of Appendix B to Exhibit "A" attached hereto. Class G: Shall consist of allowed claims of Old Shareholders (class ------- action claims). Treatment: Any such claims allowed by the Court shall be paid by the --------- Creditors' Trust on a pro rata basis within the class from any remaining funds in the Pool after payment of Classes A, B, C, D, E and F above. Class H: Shall consist of Old Common Stock Owners. ------- Treatment: Old Common Stock Owners shall retain their old common --------- stock and participate in Reorganized Debtor on a parity with New Common Stock holders. Class I: Shall consist of owners or holders of company's July 1989 ------- convertible subordinated debentures. Treatment: Inasmuch as the debt represented by the debentures --------- represents unsecured general obligations of the company, said debenture holders shall be treated as and on a parity with creditors in Class F above. 9 Class J: Shall consist of holders of company's Series A convertible ------- preferred stock. Treatment: Old Preferred Shareholders shall retain their old --------- preferred stock and shall participate in the new corporation in accordance with their rights and preferences presently held. Class K: Shall consist of all persons, firms, or corporations, ------- their heirs or assigns, who hold unexpired warrants or options to purchase stock of the Debtor from the Debtor except Class L hereafter. Treatment: Such holders shall retain their warrants or options and --------- shall participate in the new corporation in accordance with their rights and terms of warrants or options presently held. Class L: Shall consist of all persons, firms, or corporations, ------- their heirs or assigns, who were officers, directors, or employees of the Debtor who hold unexpired warrants or options to purchase stock of the Debtor from the Debtor. Treatment: All such warrants or options to purchase stock of the --------- Debtor are cancelled, and such rights void. VI. CLAIMS NOT IMPAIRED UNDER THE PLAN ---------------------------------- All classes of claims save and except Classes A, B, C, D, J and K are impaired under the terms of the Plan. VII. ADMINISTRATIVE COSTS -------------------- There will be costs of administration of the Debtor Estate which will be paid pursuant to Order of the Bankruptcy Court after Notice and hearing. It is not possible to estimate these costs. The Reorganized Debtor will assume the responsibility for payment of administrative expenses up to and including entry of the Order Confirming Plan. 10 VIII. CREDITORS' TRUST ---------------- Upon confirmation of the Plan a Creditors' Trust will be created. The Creditors' Trust shall act as the receiving and disbursing agent for assets dedicated to the treatment of Class A, B, C, D, E, F, G, and I claims. The trust is to be governed by a trust instrument approved by the Court at date of confirmation. The trustee of the trust will be nominated by the Unsecured Creditors Committee and appointed by the Court. On the Effective Date of this Plan, or as soon thereafter as is practical, all assets of the Debtor, except tax attributes, which shall remain the property of Debtor, will be transferred to the Creditors' Trust. The Creditors' Trust shall be responsible for the administration of the assets assigned to it and shall pursue other duties as set forth in the Trust Agreement. IX. MEANS OF EXECUTION OF THE PLAN ------------------------------ Debtor intends an offering of up to 1,000,000 shares of common stock at par value of $.001 per share (new common stock) to investors. Debtor will complete the new stock offering within 90 days from entry of the Order Confirming the Plan. All proceeds of the sale will be held in an interest bearing account with a financial institution selected by the Debtor's present management. In the event the Plan is confirmed, all funds will be used to form the Pool to be distributed in accordance with the Bankruptcy Code and this Plan of Reorganization. When the sale of new common stock is completed and the Pool is fully funded, the Pool will be divided within 5 days, after advice in writing is given to the Creditors' Trust of the fact of funding, in the following division: (A) $150,000.00 retained by the Reorganized Debtor to recapitalize the reorganized Debtor; (B) $850,000.00 to the Creditors' Trust. Contemporaneously with the division of funds hereinabove described, the Creditors' Trust shall assign or disclaim interest in stock owned by Debtor in R & B Quality Foods, Inc. ("R & B"), trademarks, trade names, so that Reorganized Debtor shall own the said assets. It is estimated that a dividend of 5% to 15 % will be paid pro rata to the allowed unsecured creditors' claims together with their pro rata share of 500,000 shares of new common stock and their pro rata share of any recoveries made on causes of action prosecuted by the Trust. 11 In the event of failure of the creditors to accept the Plan, and thus failure to obtain confirmation from the Bankruptcy Court, then and in that event the funds will be returned with interest to investors, which shall be the sole responsibility of Debtor. IN ADDITION TO THIS PLAN, CREDITORS AND INTEREST HOLDERS SHOULD READ CAREFULLY EXHIBIT "A" ATTACHED HERETO AND THE APPENDIX TO THAT EXHIBIT, WHICH ARE HEREBY SPECIFICALLY INCORPORATED BY REFERENCE IN THIS PLAN AND DISCLOSURE STATEMENT. The reorganized company will issue 500,000 shares of common stock of a similar kind and nature and on a parity with other new common stock issues pursuant to this Plan. Said 500,000 shares shall be issued to the Creditors' Trust to be distributed pro rata to members of the unsecured creditor class. Within fourteen (14) days after Effective Date, the Debtor will cause to be transferred to the Creditors' Trust all assets of the Debtor with the exception of tax attributes and any or all of the proceeds of the new stock offering. In the event the Reorganized Debtor is unable to raise $1,000,000.00 within 90 days succeeding the Effective Date, the Creditors' Trust shall retain all assets, and same shall be administered pursuant to the terms of the Creditors' Trust. In the event Debtor is unable to complete the sale of $1,000,000.00 in new common stock, then, in that event, all subscriptions will be cancelled and funds returned to subscribers with accrued interest, which shall be the sole responsibility of the Debtor. During the period of time between the confirmation date and its Effective Date, no assets of either Debtor or Reorganized Debtor shall be sold, transferred or encumbered. X. SECURITIES ---------- Debtor intends a new stock offering of one million shares of new common stock (see Exhibit "A" attached) and the issuance of 500,000 shares of new common stock to the Creditors' Trust. The 500,000 shares shall be issued pursuant to ss. 1145 of the Bankruptcy Code. Section 1145 provides for a limited exemption from the securities laws for securities issued under a Plan of Reorganization in exchange for a claim against or interest in the Debtor. The Company intends to rely on an exemption from the registration requirements of ss. 5 of the Securities Act of 1933 as set forth in Regulation D promulgated under the Securities Act of 1933 and/or ss. 4(2) of the Securities Act of 1933, whichever may be applicable. Debtor contemplates filing such documents as may be required to comply with the chosen exemption above named. Subscriptions for new common stock will be available on or after date of Order Approving Disclosure Statement, and there will be no limitation on the number of shares for which a Class H stockholder may subscribe. 12 Appropriate amendments to the corporate charter and by-laws shall be made to insure that the new common stock is authorized and is on a parity with Class H stockholders. Officers and directors presently serving own stock and warrants as follows: Name Shares Owned Warrants Nick Fegen 24,000 600,000 Louis Pignatelli 300,000 350,000 Gary Mallery 5,000 300,000 Presently, Debtor has approximately 6,950,000 common shares outstanding. There are 3,074,000 warrants outstanding, of which Debtor intends, under the terms of this Plan, to cancel 864,663. There are 682,918 M warrants outstanding with an exercise price of $6.67 expiring June 7, 1998. If all the shares are issued and outstanding warrants are exercised, including the M warrants, there will be approximately 11,300,000 common shares outstanding. Therefore, the Creditors' Trust will own approximately 4.4% of Skolniks common stock. Debtor intends at some future time, if its present Plan is confirmed, to attempt to relist its stock on an appropriate exchange. In order to accomplish this relisting, Debtor will be required to comply with all rules and regulations of the Securities Exchange Commission, which are voluminous and complex. Previously Debtor was delisted from NASDAQ and the Boston Stock Exchange for failure to file appropriate reports. Debtor intends to cure these filings and to file all necessary reports and documents required to become current with the S.E.C. Debtor believes it presently has in hand sufficient commitments for sale of 1,000,000 shares of new common stock at $1 per share. XI. REJECTION OF EXECUTORY CONTRACTS -------------------------------- In accordance with the provisions of 1123(b)(2) and ss. 365 of the Bankruptcy Code, the Debtor rejects all executory contracts and unexpired leases to which it is a party which were in existence on or before the commencement date of these proceedings. XII. MODIFICATION OF THE PLAN ------------------------ This Plan may be modified only in accordance with ss. 1127 of the Bankruptcy Code. If modification of the Plan is determined to materially affect a particular class, a resolicitation of that class is required. Material modifications may occur when the rights of a creditor or equity holder are altered. 13 XIII. PROVISIONS REGARDING PAYMENT FOR SERVICES ----------------------------------------- No payments have been made or promised by the Debtor to any person, firm or corporation for services or for costs and expenses in connection with this reorganization case, or in connection with the Plan or incident to the reorganization case, except those payments which have been disclosed to and approved by the Court. XIV. RETENTION OF CLAIMS ------------------- Pursuant to ss. 1123(b) of the Bankruptcy Code, any claims or causes of action belonging to the Debtor in existence at the effective date after confirmation will be transferred to the Creditors' Trust, and all proceeds of such litigation shall be administered by the Creditors' Trust and distributed pro rata to its trust beneficiaries. In the event there are causes of action which are not pursued by the Creditors' Trust, then such claims may be pursued by the reorganized company. All title 11 avoidance powers and causes of action, both bankruptcy and non-bankruptcy, of any kind and all kinds whatsoever, are transferred to the Creditor's Trust upon the effective date after confirmation (the "pre-confirmation rights"). All pre-confirmation rights are hereby forever reserved for the exclusive use and benefit of the Creditors' Trust and its beneficiaries once this Plan has been confirmed, and become effective on the effective date. The Order of Confirmation shall be sufficient for purposes of accomplishing transfer to the Creditors' Trust. XV. REVESTING --------- On the Effective Date, the Reorganized Debtor will be entitled to operate its business and to use, acquire and dispose of any property free of any claims, encumbrances or restrictions of the Bankruptcy Code and the Bankruptcy Court, except as set forth in this Plan. XVI. RETENTION OF JURISDICTION ------------------------- Until this Plan has been fully consummated through the entry of a final decree completely closing the reorganization case, the Bankruptcy Court shall retain jurisdiction over all matters necessary to insure that the purposes and intent of this Plan are carried out, as well as the Creditor's Trust created by this Plan of Reorganization. Nothing contained herein shall be construed as restricting Debtor or Reorganized Debtor in the conduct of their businesses and operations. Until final consummation of this Plan the Bankruptcy Court shall retain jurisdiction of all such matters, including, but not limited to, the following: 14 a. To allow, disallow, determine, liquidate, classify, estimate or establish the priority or secured or unsecured status of any claim, including the resolution of any request for payment of any claim for administrative expenses and the resolution of any and all objections to the allowance or priority of claims; b. To grant or deny any applications for allowance of compensation or reimbursement of expenses authorized pursuant to the Bankruptcy Code or this Plan, for periods ending on or before the Effective Date; c. To resolve any motions pending on the Effective Date to assume, assume and assign or reject any executory contract or unexpired lease to which Debtor is a party or with respect to which Debtor may be liable and to hear, determine and, if necessary, liquidate, any claims arising therefrom; d. To insure that distributions to holders of Allowed Claims are accomplished pursuant to the provisions of this Plan; e. To decide or resolve any motions, adversary proceedings, contested or litigated matters and any other matters and grant or deny any applications involving Debtor that may be pending on the Effective Date; f. To enter such orders as may be necessary or appropriate to implement or consummate the provisions of this Plan and all contracts, instruments, releases, indentures and other agreements or documents created in connection with this Plan or Disclosure Statement; g. To resolve any cases, controversies, suits or disputes that may arise in connection with the consummation, interpretation or enforcement of this Plan or any entity's obligations incurred in connection with this Plan; h. To modify this Plan before or after the Effective Date pursuant to ss. 1127 of the Bankruptcy Code or modify the Disclosure Statement or any contract, instrument, release, indenture or other agreement or document created in connection with this Plan and Disclosure Statement; or remedy any defect or omission or reconcile any inconsistency in any Bankruptcy Court order, this Plan, the Disclosure Statement or any contract, instrument, release, indenture or other agreement or document created in connection with this Plan or Disclosure Statement, in such manner as may be necessary or appropriate to consummate this Plan, to the extent authorized by the Bankruptcy Code; i. To issue injunctions, enter and implement other orders or take such other actions as may be necessary or appropriate to restrain interference by any entity with consummation or enforcement of this Plan; j. To enter and implement such orders are necessary or appropriate if the 15 confirmation order is for any reason modified, stayed, reversed, revoked or vacated; k. To determine any other matters that may arise in connection with or relate to this Plan, the Disclosure Statement, the confirmation order or any contract, instrument, release, indenture or other agreement or document created in connection with this Plan or Disclosure Statement; and l. To enter an order concluding the captioned Chapter 11 case. XVII. VOTING ON THE PLAN ------------------ Section 1126(a) of the Bankruptcy Code provides that holders of an impaired class may accept or reject the Plan of Reorganization. Section 1126(f) further provides that a class which is not impaired under the Plan of Reorganization is deemed to have accepted the Plan, and solicitation with respect to such class is not being made. In addition, ss. 1126(g) provides that a class which is not entitled to payment under the Plan of Reorganization is deemed to have rejected the Plan. Each creditor in the class of claims who is entitled to vote will receive a ballot. All classes of creditors and creditors within the class will be mailed, postage prepaid, a copy of the Plan and Disclosure Statement or a Court-approved Summary thereof, along with a ballot with instructions for voting. In the case of securities holders, mailings will be made to the record owner of the securities according to the company's books and records. Debtor will utilize its books and records listing the names of creditors and shareholders, along with its schedules filed in these proceedings and the claims docket for purposes of mailing and solicitation of votes. A class of claims is impaired if the Plan modifies the legal, equitable or contractual rights of persons with claims in the class (other than modifying them by curing defaults or reinstating the maturity dates of debts or providing for full cash payment of the claim.) Each creditor in an "impaired" class is entitled to vote if either: (1) Its claim has been listed on the Debtor's Bankruptcy Schedules (and is not listed as disputed, contingent or unliquidated); or (2) It has filed a Proof of Claim on or before the last date for filing such Proofs of Claim pursuant to the Bankruptcy Court's bar date of August 1, 1995. However, any creditor holding a claim to which an objection has been filed and is unresolved by the deadline for voting is not entitled to vote unless, upon motion of the Creditor, the Bankruptcy Court temporarily allows the claim in an amount which is deemed proper for the purpose of accepting or rejecting the Plan. Ballots should be returned to: Skolniks, Inc. c/o McClelland, Collins, Bailey, Bailey & Bellingham 15 N. Robinson, 1100 Colcord Bldg. Oklahoma City, OK 73102 16 YOUR BALLOT MUST BE POSTMARKED BY 5:00 P.M. ON THE 1ST DAY OF JULY, 1996 IN ORDER TO BE COUNTED. Any ballots or changes of votes marked after that date will not be counted. If you believe you are entitled to vote, but you have not received a ballot, or if your ballot is damaged or lost, you should write Skolniks' legal counsel at the address stated above, or call Skolniks' legal counsel at (405) 235-9371 for another ballot. XVIII. CONFIRMATION HEARINGS --------------------- A hearing on confirmation of the Plan will be held on the 10th day of July, 1996, beginning at 2:30 o'clock P.M. before the Hon. Judge Paul Lindsey, Courtroom No. 6, Old Post Office Building, 215 Dean A. McGee Avenue, Oklahoma City, Oklahoma. In addition to voting on the Plan, all parties in interest have the right to object to confirmation. Objections must be in writing and filed with the Bankruptcy Court at the address hereinabove set forth. A copy of any objection must be served upon McClelland, Collins, Bailey, Bailey & Bellingham, counsel for the debtor, by mailing a copy of the objection to 15 N. Robinson, 1100 Colcord Building, Oklahoma City, Oklahoma 73102. The Bankruptcy Court has set the 3rd day of July, 1996 as the last date for filing objections to confirmation of the Plan. Such objections will be dealt with at a hearing on confirmation. XIX. CONFIRMATION AND SEVERABILITY OF PLAN AND CRAMDOWN -------------------------------------------------- The Debtor requests confirmation under ss. 1129(b) of the Bankruptcy Code if any impaired Class does not accept this Plan on which it has a right to vote pursuant to ss. 1126 of the Bankruptcy Code. In that event, Debtor reserves the right to modify the Plan to the extent, if any, that confirmation pursuant to ss. 1129(b) of the Bankruptcy Code requires modification. A. Cramdown. The court may confirm a plan, even if it is not accepted by all impaired classes, if the plan has been accepted by at least one impaired class of claims and the plan meets the "cramdown" provisions contained in ss. 1129(b) of the Bankruptcy Code. The "cramdown" provisions require that the court find that a plan "does not discriminate unfairly" and that the plan is "fair and equitable" with respect to each non-accepting impaired class. A court may find that the plan is "fair and equitable" with respect to a class of non-accepting, impaired secured claims only if the plan provides (1) that the secured creditor retains its liens under the plan and receives deferred cash payments totaling at least the allowed amount of its secured claim, (2) for the sale of the property securing the claim pursuant to ss. 363(k) of the Bankruptcy Code, with the secured creditor's liens attached to the proceeds of such sale and with such liens treated as in clause (1) above, or (3) for the realization by the secured creditor 17 of the "indubitable equivalent" of its claim. Debtor believes the Plan my be confirmed notwithstanding the dissent of holders of impaired claims. The Plan reserves the right of Debtor to request that the Plan be confirmed notwithstanding such dissent. Debtor requests confirmation under ss. 1129(b) of the Bankruptcy Code if any impaired Class does not accept this Plan on which it has a right to vote pursuant to ss. 1126 of the Bankruptcy Code. In that event, Debtor reserves the right to modify this Plan to the extent, if any, that confirmation pursuant to ss. 1129(b) of the Bankruptcy Code requires modification. XX. REVOCATION OF THIS PLAN ----------------------- Debtor reserves the right to revoke or withdraw this Plan prior to Confirmation Date. If Debtor revokes or withdraws this Plan, or if the confirmation as to the Debtor does not occur, then this Plan shall be null and void in all respects, nothing contained in the Plan shall (a) constitute a waiver or release of any claim by or against, or any interest in, Debtor; or (b) prejudice in any manner the rights of the Debtor. XXI. SUCCESSORS AND ASSIGNS ---------------------- The rights, benefits and obligations of any entity named or referred to in this Plan shall be binding on and shall inure to the benefit of any heir, executor, administrator, successor, assign of such entity. XXII. INJUNCTION ---------- Except as provided in this Plan or the confirmation order, as of the confirmation date, all entities that have held, currently hold or may hold a claim or other debt or liability that is discharged or an interest or other right of an equity security holder that is terminated pursuant to the terms of this Plan are permanently enjoined from taking any of the following actions on account of any such discharged claims, debts or liabilities or terminated interests or rights: (a) commencing or continuing in any manner any action or other proceeding against Debtor, reorganized Debtor or their respective property; (b) enforcing, attaching, collecting or recovering in any manner any judgment, award, decree or order against Debtor, reorganized Debtor or their respective property; (c) creating, perfecting or enforcing any lien or encumbrance against Debtor, reorganized Debtor or their respective property; (d) asserting a setoff, right of subrogation or recoupment of any kind against any debt, liability, or obligation due to Debtor, reorganized Debtor or their respective property; and (e) commencing or continuing any action, in any manner, in any place that does not comply with or is inconsistent with the provisions of this Plan. 18 XXIII. LIQUIDATION ANALYSIS -------------------- The assets of the Debtor Corporation consists of all of the common stock of R & B Quality Foods, Inc.; 2,000,000 shares of Magnolia Foods, Inc.; 2,000,000 warrants of Magnolia, exercisable at 50 cents per share; trademarks, causes of action and accounts receivable. Since R & B is not a party in this bankruptcy proceeding, its creditors are not included as creditors scheduled herein. Inasmuch as all creditors of R & B, both secured and unsecured, must be satisfied before there would be a distribution to the Debtor as the sole stockholder, any value attached to R & B would have to develop as a going business. That value would be highly speculative. Magnolia common stock presently has a bid price of 18 cents per share, however, 2,000,000 shares in one block will not be expected to bring that price, and a more speculative price would be imaginable. It is doubtful the warrants have any value. The trademarks, causes of action and accounts receivable are of little value. The latest available consolidated financial statements and projected income of the Debtor and its wholly owned subsidiary, R & B, are attached to Exhibit "A" as Appendices C and D. Debtor estimates that the number and amounts of impaired creditor claims are as follows: CREDITOR CLASS NO. OF CLAIMS AMOUNT - -------------- ------------- ------ E 1 $ 60,000.00 F (Est.) 650 6,900,000.00 G 323 (Est.) n/a H 323 (Est.) n/a I 7 226,000.00 L 9 n/a Note: (Final numbers and amounts may be subject to change by reason of duplication of claims and/or objections to claims. Number of equity owners may vary because of street name accounts.) Debtor estimates priority claims are approximately $300,000.00. There are no secured claims, and there are no administrative claims by reason of the assumption of administrative expenses by Reorganized debtor. Previously, the Debtor has given notice to all unscheduled, disputed, unliquidated or contingent creditors to file claims. The bar date was set by the Court as August 1, 1995. Skolniks is not aware of any general unsecured claims which are disputed, unliquidated, contingent or nonscheduled other than those of creditors which have filed their claims in these proceedings. Skolniks intends to prosecute objections to such claims as are disputed (see paragraph XXIV hereafter). The Creditors' Trust may participate in the objections to claims or 19 may file separate objections as it may decide. As a result, liquidation value of the debtor estate is estimated at less than $250,000.00. XXIV. OBJECTIONS TO CLAIMS -------------------- The Reorganized Debtor agrees that it will, at its own expense, assume the responsibility for examination of and objections to any claims in these proceedings which are disputed, unliquidated, contingent or nonscheduled. The Reorganized Debtor will complete the claims objections process by the 360th day following 90 days from the Effective Date. The claims objection process will be completed to the satisfaction of the Creditors' Trust, which satisfaction will not be unreasonably withheld. In the event the Reorganized Debtor completes the aforesaid claims procedure timely, the Creditors' Trust shall pay to the Reorganized Debtor the sum of $50,000.00. If not timely completed, the Reorganized Debtor shall still be responsible for completing the claims process and will forfeit any claim to $50,000. XV. SALE, CANCELLATION, OR RETENTION OF ----------------------------------- SECURITIES OF THE COMPANY ------------------------- Existing holders of common stock issued by the Company shall retain said stock and will be treated on a parity with new common stock to be issued pursuant to this Plan. More particular information with regard to the method to be used in the offering of new common stock is contained in Exhibit "A" attached hereto. All holders of warrants or options to purchase stock of the corporation except Class K will retain their interests as evidenced by said warrants or options and will be entitled to exercise them in accordance with the contractual terms and conditions contained in said warrants and options. XXVI. FEDERAL INCOME TAX CONSEQUENCES ------------------------------- Federal income tax consequences of creditors and shareholders are peculiar to each creditor or shareholder's position. You should consult your own attorneys or accountants for an opinion of the tax consequences of this Plan to you. XXVII. AVOIDABLE TRANSFERS AND PREFERENCES ----------------------------------- Skolniks is aware of certain actions in its favor for avoidance of transfers and/or preferences under the Bankruptcy Code. These actions will be transferred to the Creditors' Trust and may be prosecuted by the Trustee of the Creditors' Trust. 20 XXVIII. RISK FACTORS ------------ Because the Plan provides for payment in cash in full to Classes A and B, risks normally associated with Chapter 11 reorganizations are not present insofar as these classes are concerned. In order for the Plan to be consummated, it will be necessary that the creditors accept the Plan, the subscribed stock issue, and the escrow funds paid for distribution collected, thus the conditions set forth in the Plan are material conditions which must be satisfied before consummation of the Plan. There is an additional risk factor that management will not be able to obtain funding of subscriptions necessary to fund the minimum requirement under the Plan. (See Exhibits "A" and its appendices for additional risk factors to be considered in conjunction with this Plan.) The alternative to acceptance of this Plan (Chapter 7 liquidation) is readily apparent. XXIX. ACCEPTANCE AND CONFIRMATION OF THE PLAN --------------------------------------- The Bankruptcy Code, as interpreted by the courts, provides the rules for how votes of creditors will be counted and whether a Plan of Reorganization will be confirmed by the Court. A. How the votes are counted: (1) Votes of each class: Each creditor's vote will be counted in the class it is provided for under the Plan. A class of claims will have accepted the Plan if creditors that hold at least two-third in dollar amount and more than one-half in number of allowed claims in that class which cast a ballot have voted for the Plan. Classes of creditors which are not Impaired are deemed to have accepted the Plan and are not entitled to vote. If a creditor comprising a single Impaired class does not vote on the Plan, that class of claims will be deemed to have accepted the Plan. B. Ballots: Ballots will be returned to Skolniks, Inc. c/o McClelland, Collins, Bailey, Bailey & Bellingham, 15 N. Robinson, 1100 Colcord Building, Oklahoma City, Oklahoma 73102 where they will be counted and tabulated by class, and a summary of the ballots with ballots attached is to be submitted to the Court on date of confirmation. In the event a ballot is received which has been otherwise properly executed but does not indicate whether the creditor or shareholder accepts or rejects the plan, that ballot will be disregarded. (1) Tabulation of classes: Once each class' vote has been determined, the votes of all classes are compared to determine whether the Plan can be confirmed. In order for the 21 Plan to be confirmed, it must be accepted by at least one class of claims that is Impaired under the Plan, without counting any acceptance of any insider. Further, the Bankruptcy Code ordinarily requires that all classes of claims either accept the Plan or that they not be Impaired by the Plan. Should an Impaired class reject the Plan, upon request of the Debtor, the Bankruptcy Court will still confirm the Plan so long as it meets the standards set forth in ss. 1129(b) of the Bankruptcy Code. The Debtor hereby requests the Court to confirm the Plan pursuant to ss. 1129(b) in the event an Impaired class rejects the Plan. Reference is made to a complete discussion of "cramdown" at ss. XIXA on page 30. In order for the Bankruptcy Court to confirm the Plan under such circumstances, it must find that the Plan does not discriminate unfairly and is fair and equitable with respect to each class of claims or interests that it is Impaired under, and has not accepted the Plan. For classes of secured claims, the Plan must provide either (a) that the creditors retain their liens and receive payment of a value, as of the Plan's effective date, equal to the value of their interest in their collateral; (b) that the property be sold, that the creditors retain liens in the proceeds of sale, and that they receive payments as of the Plan's effective date equal to the value of their interest in their collateral; or (c) that they otherwise receive "indubitable equivalent" of their claims. Since there are not secured claims treated under the Plan as a class, the Court will not consider a secured class for voting purposes. For classes of unsecured claims, the Plan must provide either (a) that each holder receive or retain property of a value, as of the effective date, equal to the allowed amount of its claim; or (b) that no junior claim or interest receive or retain any property under the Plan. Skolniks believes that should fewer than all impaired classes vote Plan, the Plan, nevertheless, meets these standards and will be confirmed under ss. 1129(b) of the Bankruptcy Code. C. Other Requirements for Confirmation: (1) General Requirements: In addition to obtaining the requisite number of votes, the Plan must satisfy a number of other requirements of the Bankruptcy Code, including appropriate classification of creditors and stockholders, compliance with the technical requirements of Chapter 11 of the Bankruptcy Code, and the proposal of the Plan in good faith and by legal means. The Debtor believes the Plan complies with these provisions and will seek rulings to this effect at the confirmation hearing. 22 (2) Feasibility: The Plan must also meet a test known as the "feasibility" test. Under ss. 1129 of the Bankruptcy Code, a Plan is feasible if the Court finds that confirmation of the Plan is not likely to be followed by the liquidation, or the need for further financial reorganization, or the Debtor or any successor under the Plan, unless such liquidation or reorganization is proposed under the Plan. The Debtor believes this Plan is feasible. The Plan calls for the subscription and issuance of a class of common stock to present shareholders and the continued operation of the companies as consolidated. (3) Liquidation Analysis: The Bankruptcy Court must also independently determine that the Plan is in the best interest of all creditors and equity security holders Impaired by the Plan. The "best interest" test found in ss. 1129(a)(7) requires that each Impaired class either accept the Plan, or that it receive or retain at least as much under the Plan as it would in a liquidation under Chapter 7 of the Bankruptcy Code. XXX. PREPARATION OF MATERIALS ------------------------ Exhibit "A" and its appendices were prepared by the following persons, firms or corporations: Skolniks, Inc.; Mr. Gary Mallery; Mr. Nick Fegen; and Mr. Tom Pritchard. XXXI. CONCLUSION ---------- This Disclosure Statement and Plan of Reorganization, together with Exhibits attached hereto, has been prepared by the present management of the Debtor, together with its counsel. Financial data is unaudited and certain information contained in the Exhibits or the Disclosure Statement may change depending upon ongoing negotiations or further court decisions. Neither the Debtor nor its attorney has rendered an opinion with respect to the foregoing Disclosure Statement materials and makes no representation relative to accuracy or completeness of the analysis made herein. The Debtor believes that acceptance of this Plan of Reorganization is the only way in which creditors may realize any recovery of their claim, and therefore respectfully request that you as a creditor or shareholder vote "Yes" ballot which is furnished to you with this Plan and Disclosure Statement. Respectfully submitted, __________________________________ NICHOLAS A. FEGEN Chairman of the Board of Directors and Chief Executive Officer of SKOLNIKS, INC. 23 EX-2.2 3 MODIFICATION OF 2ND AMENDED PLAN EXHIBIT 2.2 IN THE UNITED STATES BANKRUPTCY COURT FOR THE WESTERN DISTRICT OF OKLAHOMA In Re: ) ) SKOLNIKS, INC. ) No. BK 95-10206-LN ) Chapter 11 Debtor. ) MODIFICATION OF SECOND AMENDED PLAN OF REORGANIZATION ----------------------------------------------------- TO ALL CREDITORS OF SKOLNIKS, INC.: COMES NOW the Debtor-in-Possession and modified the heretofore filed Second Amended Plan of Reorganization by inserting, following the first paragraph of Treatment of Class G Claims located on page 16 of the Second Amended Plan of Reorganization, the following language: "Provided, however, that should the claims of this Class be allowed and the Court, after hearing on objections to such claims, determine that such allowed claims are on a parity with other unsecured claims, then and in that event, such allowed claims shall be reclassified as Class F claims and be satisfied by distributions made pro rata with other unsecured claims included in said Class F. Any and all other references to treatment of Class F claims in this Plan should be considered modified to the extent effected by the foregoing language." The Plan is further modified by deleting Class L and treatment of the same. Done on this _____ day of June, 1996. SKOLNIKS, INC. By:____________________________________ RICHARD R. BAILEY #000426 of the firm of MCCLELLAND, COLLINS, BAILEY, BAILEY & BELLINGHAM Colcord Building - 11th Floor 15 North Robinson Oklahoma City, Oklahoma 73102 405-235-9371 ATTORNEY FOR DEBTOR IN POSSESSION EX-27 4 FDS --
5 1 U.S. DOLLARS YEAR JUL-31-1997 AUG-01-1996 JUL-31-1997 1 68 0 119,234 (15,000) 41,397 30,365 884,779 582,848 477,995 1,199,134 0 0 5,323 9,072 (735,534) 477,995 1,457,063 1,457,063 1,504,398 1,937,471 0 0 73,998 (554,406) 0 0 0 3,526,973 0 2,972,567 0.37 0.37
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