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`________________________________________________________________
1998
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended March 31, 1999
Commission File No. 0-16251
GALAXY FOODS COMPANY
(name of small business issuer as specified in its charter)
Delaware 25-1391475
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
2441 Viscount Row
Orlando, Florida 32809
(Address of principal
executive offices) (Zip Code)
Registrant's telephone number: (407) 855-5500
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant has (1) filed all
reports required to be filed by Section 13 or 15(d) of the
Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past
90 days. Yes X No _____
Check if a disclosure of delinquent filers in response to Item
405 of Regulation S-K 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-K or any
amendment to this Form 10-K. [ ]
State registrant's revenues for its most recent fiscal year. $
29,790,025
The aggregate market value of the voting stock held by non-
affiliates as of June 1, 1999 was $ 32,140,612 based on the closing
sales price of $ 3.50 per share on such date.
The number of shares outstanding of Galaxy Foods Company's Common
Stock as of June 1, 1999 was 9,183,032.
DOCUMENTS INCORPORATED BY REFERENCE: None
Transitional Small Business Disclosure Format. Yes ______ No X
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PART I
Item 1. Description of Business.
GENERAL
Galaxy Foods Company (the "Company") was originally organized in
Pennsylvania in 1980 under the name "Galaxy Cheese Company," and was
subsequently reincorporated in Delaware in 1987. After relocating to
Orlando, Florida, the Company formally changed its name to "Galaxy Foods
Company." The Company is principally engaged in developing, manufacturing
and marketing of a variety of healthy cheese and dairy related products, as
well as other cheese alternatives. The healthy cheese and dairy related
products, sold under the Company's Veggie Slices, Veggy Singles, formagg,
Soyco, and Soymage brand names, are low or no fat, low or no cholesterol
and lactose (milk sugar) free, vitamin and mineral enriched, and contain
one-third fewer calories and more calcium than conventional cheese. These
healthy cheese and dairy related products have the flavor, appearance and
texture of conventional cheeses and products that use conventional cheeses,
and are nutritionally equal or superior to such cheeses and products. Some
of the Company's cheese alternatives have either no or low cholesterol but
are not nutritionally equivalent or superior to conventional cheeses. The
Company also manufactures and markets non-branded and private label process
and blended cheese products, as well as branded soy-based, rice-based and
non-dairy cheese products. Most of these products are made using the
Company's formulas and processes, which are believed to be proprietary, and
the Company's state-of-the-art manufacturing equipment.
In June 1992, the Company relocated to Orlando, Florida and began
production and shipment of its products directly from its Orlando plant to
customers in each of the Company's three principal markets--retail stores,
such as supermarket chains and health food stores; food service operations,
such as restaurant chains, cafeterias, hospitals and schools; and
industrial food manufacturers of products such as frozen pizza and
desserts.
The Company's sales effort is primarily directed to retailers, to take
advantage of what it perceives to be an increased consumer emphasis on
nutrition, by offering a diverse line of low and no fat, low and no
cholesterol and no lactose cheese products. These include individually
wrapped cheese slices, shredded cheeses, grated toppings, deli cheeses, and
soft cheeses like sour cream, cream cheese and cheese sauces. The Company
also markets the Lite Bakery line of products which uses formagg , a
product described below, as a base ingredient. This line includes bakery
mixes for use by commercial and in-store bakeries to produce pies, icings,
and cheesecakes utilizing formagg. The mixes also substitute other healthy
ingredients to reduce or eliminate cholesterol, fat, lactose, sodium, and
excessive calories associated with traditional bakery products.
The Company's strategy for the future is to continue its primary marketing
efforts in the retail market to capitalize on the continuing interest among
consumers in reducing their cholesterol levels and saturated fat intake.
The Company believes that one of the leading contributors of cholesterol
and saturated fat in the American diet is cheese. By providing good
tasting cheese alternatives available in diverse forms and flavors, the
Company believes it will be able to attract an increasing number of
worldwide consumers interested in improving their health and eating habits.
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PRODUCTS
Veggie Natures Alternative - Complete line of healthy dairy alternatives -
The Company's flagship brand - a complete line of nutritious dairy
alternative products made with soy. All Veggie products are low in fat,
contain less calories and are cholesterol and lactose free. The Veggier
product line includes Veggier Slices, Veggie Chunks, Veggie Cream Cheese,
Veggie Sour Cream, Veggie Butter, Veggie Honey Butter, Veggie Grated
Toppings, Veggie Milk, Veggie Ice Cream, Veggie Yogurt and Sweetened
Condensed Milk.
Dairy Free - Soymage Vegan Dairy Alternatives - Soymage products were
developed for health food and specialty stores. These products are for
consumers who are allergic to dairy products, specifically milk protein and
/ or are practicing a vegan lifestyle. The Soymage Vegan line is
completely dairy free, contains no animal fats and has no casein ( skim
milk protein). The Soymage Vegan product line includes: vegan cheese
slices, vegan grated toppings, vegan chunk cheese and vegan sour cream and
cream cheese alternatives.
Soy Free - Soy Free Dairy Alternatives made with Rice, Oat and Almond --
The Company has developed three dairy free alternatives made with organic
brown rice, almonds and oats. All three lines are low fat, cholesterol
free, lactose free, soy free and are fortified with essential vitamins and
minerals. These products are formulated for people with soy allergy or
just looking for alternatives for conventional dairy products. The Soy
Free product line includes: Individual slices available in Rice, Oat and
Almond. Chunks available in Rice, Oat and Almond. Sour cream and butter
are available as well.
Veggy - Soy Nutritious - Soy Dairy Alternatives - These Veggy products
offer the taste of cheese, are available in many forms, and are made from
soy. These products are low fat or fat free, and are lactose and
cholesterol free. The Veggy product line are available in singles and
chunks, and several flavors are available.
Wholesome Valley Organic - Products made from organic milk - These
products are processed cheese foods made from organic milk, and contain 1/3
less fat than regular processed cheese food. The farmland, cows and feed
are free from pesticides, antibiotics, growth hormones and chemicals.
Ultimate Smoothie - Energy Boost Smoothie Mix - The Company's protein
smoothie mix is nutritionally complete and serves as an energy booster and
meal replacement. The Ultimate Smoothie comes in five flavors and each
contains Ginseng, Creatine, L-Carnitine, St. John's Wort, Chromium and soy
isoflavones. Each smoothie has 100% or more of the recommended daily
allowance of many major vitamin and mineral groups.
Processed Cheese Products - Conventional Cheese Alternatives - These
products are low in cholesterol and serve as an alternative to conventional
dairy cheeses. They are not nutritionally equivalent or superior to
conventional cheeses and may have more cholesterol than the Company's
substitute cheeses.
The only branded product line which accounts for more than 10% of sales for
fiscal 1999 is the Veggie line of products. Sales of this product line for
fiscal 1999 were $9,431,095, or 31.7% of net sales.
The characteristics of the Company's products vary according to the
specific requirements of individual customers within each market. In the
retail market today, the Company's products are formulated to meet the
health concerns of today's consumers. In the industrial food manufacturing
and food service markets, the Company's products are made according to the
customer's specifications as to color, texture, shred, melt, cohesiveness,
stretch, browning, fat retention, and protein, vitamin and mineral content.
The Company's products are manufactured in various forms, including
individual slices, grated, shredded, salad toppings, deli loaves, and multi-
pound blocks and are available in several flavors, including, but not
limited to mozzarella, pepper-jack, cheddar, American, parmesan and Swiss.
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DISTRIBUTION METHODS
The Company currently distributes all of its products by common carrier and
customer pick-up. The Company does not have any warehousing arrangements;
therefore, all products are shipped from the Company's manufacturing
facility in Orlando, Florida.
MANUFACTURING PROCESS
Most of the Company's products are made using the Company's formulas,
processes and manufacturing equipment, from four principal ingredients:
casein, a pure skim milk protein (instead of liquid milk which is used to
make conventional cheeses); soybean and canola oil; water; and natural
flavorings. The Company's Soymage products are also made using the
Company's formulas, processes and manufacturing equipment from these
principal ingredients, except that Soymage does not contain casein. All of
these products are produced at a temperature above that required for
pasteurization. The Company's formulas and processes were designed and
developed by the Company's Chief Executive Officer, Angelo S. Morini. The
rights to these formulas, processes and equipment have been assigned by Mr.
Morini to the Company. Unlike the conventional cheese process, the
production of the Company's products does not require the costly and time-
consuming use of bacteria to curdle milk, nor does it require removal of
whey or product curing.
QUALITY CONTROL
Throughout the production process, the Company subjects its products to
stringent quality control inspections in order to satisfy federal and state
regulations for good manufacturing procedures, meet customer
specifications, and assure consistent product quality. A sample of each
production run is tested for various characteristics including
microbiology, taste, color, acidity (Ph), surface tension, melt, stretch
and fat retention. Random samples are also regularly sent to an
independent laboratory to test for bacteria and other micro-organisms.
CAPITAL EXPENDITURES
During the fiscal years ended March 31, 1999, 1998 and 1997, the Company's
capital expenditures were approximately $2,168,027, $1,705,000 and
$3,355,000, respectively. This included capitalized interest of $395,963
and $234,772 during fiscal 1999 and 1998, respectively. The substantial
capital expenditures for fiscal 1999, 1998 and 1997 were primarily due to
the purchase and construction of several large pieces of production
equipment. This equipment includes packaging equipment, modifications to
the Pullman/loaf machinery, and industrial blenders for powdered products.
This equipment is expected to be placed in service during July 1999.
SALES AND MARKETING
In the retail market, the Company markets its healthy products to
supermarkets, club stores and health food stores. The Company believes its
healthy products appeal to a wide range of consumers interested in lower
fat, lower cholesterol, lactose free products and other nutraceutical
ingredients found in these products and that this market will continue to
expand. These products are sold through distributors and directly to
customers by in-house and territory sales managers and a nationwide network
of non-exclusive commission brokers. The Company uses conventional
marketing and public relations techniques for market introductions such as
promotional allowances and events, in-store consumer sampling, print
advertising and television.
5
In the food service market, the Company promotes its healthy formagg
cheese products as well as lower cost cheese alternatives. In marketing
its formagg line of products to food service customers, the Company
emphasizes that formagg tastes like conventional cheese and has no or low
fat, low or no cholesterol, no lactose and more calcium than conventional
cheeses. The Company also promotes its food service products on the basis
of their considerably longer shelf life and microbiologically safer profile
than conventional cheeses. In both the food service and industrial
markets, the Company sells directly to its customers. In the food service
market, the Company utilizes both its in-house sales staff, territory
managers and a nationwide network of nonexclusive commission brokers to
sell the Company's products.
SUPPLIERS
The Company purchases the ingredients used in its manufacturing operations,
i.e., casein, soybean and canola oil, enzymes and other ingredients, from
several sources, and it believes that all of these ingredients are readily
available from numerous suppliers. Due to more cost effective conditions
in other countries, suppliers from such countries are often able to supply
casein at prices lower than domestic suppliers. Accordingly, the Company
currently purchases its major ingredient, casein, from foreign suppliers.
Because casein purchased by the Company is imported, its availability is
subject to a variety of factors, including federal import regulations. The
Company believes that it could obtain casein at a higher cost from domestic
sources if the foreign supply of casein were reduced or terminated.
For the fiscal years ended March 31, 1999, 1998 and 1997, the Company
purchased $6,178,308, $4,757,744 and $3,614,421, respectively, of casein,
the principal raw material used to manufacture the Company's products. The
following table sets forth the name of each supplier along with the
percentage they supplied of this ingredient which either alone, or together
with their affiliates, provided 5% or more of such item to the Company,
based on dollar volume purchased.
Percentage of Raw Material Purchases
Fiscal Year Ended March 31,
Type of
Raw Material Name of Supplier 1999 1998 1997
Casein Besnier-Scerma U.S.A. 37% 48% 70%
Avonmore Food Products 28% 22% 18%
Rely France International 15% 17% --
Irish Dairy Board 12% 8% 9%
New Zealand Milk Products 8% -- --
PRODUCT DEVELOPMENT
The Company conducts ongoing research to develop new varieties of cheese,
dessert products and dairy related products, in addition to developing new
flavors and customized formulations for existing products. For the fiscal
years ended March 31, 1999, 1998 and 1997, expenditures for product
development were $198,398, $129,068 and $204,126, respectively. None of
the research and development costs are directly borne by the customer,
instead they are considered part of operating expenses.
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TRADEMARKS AND PATENTS
The Company owns several registered and unregistered trademarks which are
used in the marketing and sale of the Company's products. The registered
trademarks are generally in effect for ten years from the date of their
initial registration, and may be renewed for successive ten-year periods
thereafter. The following table sets forth the registered and unregistered
trademarks of the Company, the country in which the mark is filed, and the
renewal date for such mark.
Mark Country Renewal Date
formagg Canada March 1, 2000
France June 6, 2004
Japan August 31, 2004
United States October 9, 2004
Ireland April 25, 2005
United Kingdom April 25, 2005
Israel December 16, 2007
Greece October 3, 2004
Lite Bakery & Design United States September 19, 2009
Labella's & Design United States October 9, 2004
Soyco United States January 12, 2003
Soyco & Design United States August 17, 2003
Soymage United States January 5, 2003
Veggy Singles United States February 27, 2007
Lite "n" Less United States (1)
Health Value Foods United States (1)
Soy Singles United States (1)
Veggie Milk United States (1)
Wholesome Valley United States (1)
(1) Registration pending; however, the Company has received a Notice of
Allowance for this trademark.
Although the Company believes that its formulas and processes are
proprietary, the Company has not sought and does not intend to seek patent
protection for such technology. In not seeking patent protection, the
Company is instead relying on the complexity of its technology, on trade
secrecy laws, and on employee confidentiality agreements. The Company
believes that its technology has been independently developed and does not
infringe on the patents or trade secrets of others.
WORKING CAPITAL
Although not previously required due to the nature of the business, the
Company now maintains a supply of finished goods to meet the strict time
deadlines of selling product direct to retail supermarkets. In the past,
the Company has sold primarily through distributors and the required
turnaround time for orders was more lenient. With the conversion to direct
sales for many of the Company's customers, there is a need to keep a safety
stock of inventory to meet orders with potential time constraints.
MARKETS AND CUSTOMERS
The Company sells to customers in approximately 45 states and 20
international countries. International sales are less than 10% of total
sales.
For the fiscal years ended March 31, 1999, 1998 and 1997, the Company had
net sales of $29,790,025, $20,552,782 and $17,171,496, respectively. The
following table sets forth the name of each customer of the Company, which
either alone, or together with its affiliates, accounted for 5% or more of
the Company's sales for the fiscal years ended March 31, 1999,1998 or 1997:
7
Percentage of Sales
Fiscal Year Ended March 31,
Customer Name 1999 1998 1997
Foodservice Purchasing Co-op * 10.1% 34.0%
H.E. Butt Grocery * * 6.9%
Cacique, Inc. 5.1% * *
*Less than 5% of sales for the stated fiscal year.
The Company's products are sold primarily in three commercial markets:
retail, food service, and industrial.
In the retail market, where the Company believes nutrition generally
outweighs price considerations, the Company markets its formagg and Veggie
Slices products at prices comparable to conventional cheeses. In this
market, the Company sells directly to retail establishments, including
national and regional supermarket chains, and to distributors that sell and
deliver to retail establishments.
In both the food service and industrial markets, the Company markets its
more expensive premium products to customers who place importance on
nutrition and its less expensive branded, nonbranded and private label
substitute and conventional-type cheese products to customers whose primary
consideration is cost. The food service products are primarily sold to
distributors who supply food to restaurants, schools and hospitals. The
Company also markets its products directly to large national restaurant
chains.
In the industrial market, the Company sells its products to industrial
manufacturers whose food products, such as pizza, frozen foods, salad
dressings, cheese dips and spreads, potato and vegetable toppings, and
baked goods (such as crackers and croutons), ordinarily contain cheese as
an ingredient.
The following chart sets forth the percentage of sales that the industrial,
food service and retail markets represented for the fiscal years ended
March 31, 1999, 1998 and 1997:
Percentage of Sales
Fiscal Years Ended March 31,
Category 1999 1998 1997
Retail sales 87% 79% 52%
Food service sales 12% 20% 45%
Industrial sales 1% 1% 3%
GOVERNMENT REGULATION
As a manufacturer of food products for human consumption, the Company is
subject to extensive regulation by federal, state and local governmental
authorities regarding the quality, purity, manufacturing, distribution and
labeling of food products.
The Company's United States product labels are subject to regulation by the
United States Food and Drug Administration ("FDA"). Such regulation
includes standards for product descriptions, nutritional claims, label
format, minimum type sizes, content and location of nutritional information
panels, nutritional comparisons, and ingredient content panels. The
Company's labels, ingredients, and manufacturing techniques and facilities
are subject to inspection by the FDA. In May 1994, the United States
enacted a new labeling law which dramatically impacted the food industry as
a whole. The regulations require specific details of ingredients and their
components along with nutritional information on labels. The Company
believes this will enhance marketability and result in increased sales of
the Company's products because the new labels make it easier for consumers
to recognize the nutritional benefits of the Company's products compared to
other products.
8
The Company's facility and manufacturing processes are subject to
inspection by the Florida Department of Health. The Company received its
Annual Food Permit from that bureau for 1999.
The Company believes that it is in compliance in all material respects with
governmental regulations regarding its current products and has obtained
the necessary government permits, licenses, qualifications, and approvals
which are required for its operations.
ENVIRONMENTAL REGULATION
The Company is required to comply with environmental regulations in
connection with the development of its products and the operation of its
business. It spent approximately $15,000, $15,000 and $12,000 during the
fiscal years ended March 31, 1999, 1998 and 1997 respectively, in
environmental related compliance, mainly concerning the disposal of
corrugated packaging.
At the present time, the Company believes that it is in compliance in all
material aspects with the federal, state and local environmental laws and
regulations applicable to it. The Company believes that continued
compliance with any current or reasonably foreseeable future environmental
laws and regulations will not have a material adverse effect on the capital
expenditures, earnings, financial condition or competitive position of the
Company.
COMPETITION
The food industry is highly competitive, and the Company faces substantial
competition in connection with the manufacturing, marketing, and sale of
its products. In the retail cheese market, the Company competes with
conventional cheeses, including "light" products produced by manufacturers
of conventional cheeses. "Light" cheese generally has lower fat content
than regular cheese but still contains cholesterol and lactose, unlike the
Company's Veggie and formagg lines which contain low or no cholesterol and
are lactose free. Conventional cheeses are being promoted widely by the
American Dairy Association and other trade associations representing the
dairy industry. In the industrial and food service markets, the Company's
substitute and imitation cheese products compete with other substitute and
imitation cheese products, as well as with conventional cheeses.
The Company believes it has the most complete line of cheese products in
the industry having healthy characteristics such as low or no fat, low or
no cholesterol, no lactose and no artificial colorings or flavorings. The
Company further believes that the most important competitive factors in the
Company's markets are product appearance, taste, nutritional value and
price. The Company believes its products excel in these areas. Among the
Company's competitors in the cheese industry are national and regional
manufacturer of conventional and imitation cheeses, such as Kraft (which
produces products under the Kraft Free label), Borden's, and ConAgra (which
produces products under the Healthy Choice label). Each of these
competitors are well established and have substantially greater marketing,
financial and human resources than the Company. However, management
believes the competitors' current products do not have all of the healthy
characteristics that the Company's branded products possess (i.e. low and
no fat, low or no cholesterol, no lactose and no artificial colorings or
flavorings). Competitors may succeed in developing similar or enhanced
products, and because of greater resources, these competitors may prove
more successful in marketing and selling such products. There can be no
assurance that the Company will be able to compete successfully with any of
these companies or achieve a greater market share.
EMPLOYEES
As of June 1, 1999, the Company had a total of 190 employees, all of whom
were full-time employees. In addition, the Company also utilizes other
personnel through employee leasing companies and temporary contract
arrangements. The Company considers its relations with employees to be
satisfactory. No employee is a member of a trade union.
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Item 2. Description of Property.
The Company's headquarters, sales offices, manufacturing, warehouse, and
research and development facilities occupy approximately 56,000 square feet
situated in Orlando, Florida. The Company's facilities are comprised of
approximately 8,500 square feet in office space, approximately 31,897
square feet of dock-height, air-conditioned manufacturing space, and a
cooler of approximately 15,000 square feet, which are situated on 2.4 acres
of a 5.2 acre site in an industrial park. The Company entered into a lease
agreement with Anco Company, a Florida general partnership, on November 13,
1991. The initial term of the lease was for a five-year period which
expired on November 13, 1996. On November 13, 1996, the lease was renewed
for an additional five-year period expiring on November 12, 2001. The
lease, as renewed, provides for fixed rental payments of $23,919 per month
through the end of the renewal period. After the completion of the renewal
period, there are no limitations on the rent increase that may be charged
by the landlord in any further renewal periods. If the parties are unable
to agree upon a rental increase for any renewal period, then the lease
shall terminate as of the expiration of the current five year renewal term
on November 13, 2001. The Company has a right of first refusal to purchase
or lease the remaining 2.8 acres upon 20 days notice to the landlord in the
event that the landlord elects to sell or lease such remaining land. The
lease is a "triple net" lease which means that the Company is responsible
for all taxes, insurance, maintenance and repair of the facilities, in
addition to rental payments. The Company's manufacturing facility is
capable of producing approximately 350 million pounds of cheese and dairy
related products per year. The Company believes the capacity of production
at the plant should be more than adequate to cover the estimated growth of
the Company for the next three to five years. Management believes that the
Company's properties are adequately covered by casualty insurance.
The Company produces all of its products at this Orlando plant. Based on
the results for the fiscal years ended March 31, 1999, 1998 and 1997, the
Company's plant produced approximately 24.7, 11.6 and 7.3 million pounds of
cheese products, respectively, on an annualized basis, which is
approximately 7%, 3.3% and 4.7%, respectively, of plant capacity. The
Company has production equipment for mixing, blending, cooking and heating
ingredients, cold storage areas for cooling finished goods, and several
warehouse areas where ingredients are stored. The Company owns and leases
equipment for production, shredding, dicing, slicing, chopping, grating,
packaging and labeling of its products. The Company believes that its
facilities are adequate to meet current requirements, and that suitable
additional space is available as needed to accommodate any further physical
expansion of corporate operations.
Item 3. Legal Proceedings.
In the opinion of management, there are no material legal proceedings
pending or threatened against the Company as of March 31, 1999.
Item 4. Submission of Matters to a Vote of Security Holders.
On February 11, 1999, the Company held a Special Meeting of Shareholders to
consider and vote upon a proposal by the Board of Directors to effect a one-
for-seven reverse stock split of the Company's common stock, par value
$0.01 per share. Shareholders of record at the close of business on
January 7, 1999 were entitled to vote at the meeting. The motion passed
with the following vote tally: votes for - 8,072,519, votes against -
502,728, votes abstained - 28,147.
10
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
The Company's Common Stock, $.01 par value (the "Common Stock"), is traded
on the inter-dealer automated quotation system operated NASDAQ, Inc., a
subsidiary of the National Association of Securities Dealers, Inc. (the
"NASDAQ System") under the symbol "GALX" in the category of Small-Cap
Issues. The following table sets forth the high and low sales prices for
each quarter for the Company's Common Stock as reported on the NASDAQ
System during the fiscal years ended March 31, 1999, 1998 and 1997:
Period High Sales Price Low Sales Price
1999 Fiscal Year, quarter ended:
June 30, 1998 $6 9/16 $5 11/16
September 30, 1998 $6 9/16 $3 1/16
December 31, 1998 $7 $2 5/8
March 31, 1999 $6 1/4 $3 11/16
1998 Fiscal Year, quarter ended:
June 30, 1997 $6 9/16 $5 1/32
September 30, 1997 $9 27/32 $5 1/4
December 31, 1997 $9 5/8 $5 1/32
March 31, 1998 $8 31/32 $5 15/32
On February 11, 1999 the Company completed a one for seven reverse stock
split. All common share information has been adjusted to give effect to
this reverse stock split.
All of the above quotations were obtained from the monthly statistical
report provided to the Company by the National Association of Securities
Dealers, Inc.
On June 1, 1999, there were 672 shareholders of record.
The Company has not paid any dividends with respect to its Common Stock and
does not expect to pay dividends on the Common Stock in the foreseeable
future. It is the present policy of the Company's Board of Directors to
retain future earnings to finance the growth and development of the
Company's business. Any future dividends will be declared at the
discretion of the Board of Directors and will depend, among other things,
upon the financial condition, capital requirements, earnings and liquidity
of the Company. See Management's Discussion and Analysis or Plan of
Operation for a discussion of the Company's current capital position and
dividend payments with respect to certain preferred securities of the
Company.
11
Item 6. Selected Financial Data.
Fiscal Year Ended March 31,
1999 1998 1997 1996 1995
Net Sales $29,790,025 $20,552,782 $17,171,496 $3,950,455 $4,748,283
Net Income (Loss) 1,351,367 377,523 (2,736,660)(3,282,598)(5,013,578)
Net Income (Loss) 0.15 0.04 (0.84) (0.91) (3.77)
Per Common Share - Basic
And Diluted
Total Assets 24,476,912 16,449,052 12,492,446 8,031,972 5,949,961
Long Term Debt 3,178,991 1,459,516 57,064 92,714 161,465
Redeemable Preferred Stock -- -- 2,557 -- --
Item 7. Management's Discussion and Analysis or Plan of Operation.
Statements other than historical information contained in this report are
considered forward looking and involve a number of risks and uncertainties.
Factors that could cause such statements not to be accurate include, but
are not limited to, increased competition for the Company's products,
improvements in alternative technologies, a lack of market acceptance for
new products introduced by the Company and the failure of the Company to
successfully market its products.
RESULTS OF OPERATIONS
FISCAL 1999 AS COMPARED TO FISCAL 1998
Sales for the fiscal year ended March 31, 1999 increased by 44.9% over the
same period in 1998. This increase in sales is attributable to the
introduction of new and improved products to the retail market, as well as
the increased consumer awareness of the Company's branded products,
resulting from an increase in marketing activities promoting these product
lines, particularly the Company's Veggie brand of products. The Company
believes the increasing consumer awareness of the benefits of plant-based
foods has positively impacted sales. The Company expects this trend in
sales volume to continue throughout fiscal 2000.
Sales for the fourth quarter fiscal 1999 were $8,427,404 compared to
$5,068,934 for the same period in fiscal 1998. This 66.2% increase is the
result of increased production capacity, the escalation in sales of new and
existing product lines and marketing efforts, including coupon placements
and trade shows.
Cost of goods sold as a percentage of sales was 65.0% for the fiscal year
ended March 31, 1999 compared with 74.1% for the same period in fiscal
1998. The improvement in gross margin is primarily a result of new
production efficiencies, price increases and changes in the product mix to
focus on higher margin, branded products.
Selling expenses increased 101% for the fiscal year ended March 31, 1999
compared with the same period in fiscal 1998. Brokerage costs are a large
portion of selling expenses and these costs increased in direct proportion
to sales. In addition, the Company initiated an advertising program during
fiscal 1999 to promote the Veggie Slices product line and capitalized on
increasing consumer awareness of the benefits of plant-based foods. This
targeted advertising campaign has been launched in key markets throughout
the United States and Puerto Rico where distribution of the Company's
product is well established in a majority of the major supermarket chains.
Delivery expenses increased 70.7% for the fiscal year ended March 31, 1999
compared with the same period in fiscal 1998. A portion of the increase
in delivery expenses is a result of the increase in sales however, delivery
expenses as a percentage of sales have increased due to rising freight
costs.
General and Administrative expenses increased 61.8% for the fiscal year
ended March 31, 1999, as compared to fiscal 1998. The change is the result
of an increase in consulting fees and an increase in salary expense to
accommodate the growth of the Company. Consulting fees included costs to
convert the Company's systems to comply with Year 2000 constraints (see
Year 2000 Compliance section).
Research and development expenses increased 53.7% for the fiscal year ended
March 31, 1999 compared with the same period in fiscal 1998. This increase
in expense is the result of the expansion of the Company's branded lines of
product to include additional flavors and entirely new products, such as
Veggie Milk.
Interest expense increased 71.0% for the fiscal year ended March 31, 1999
as compared with the same period in fiscal 1998. The increase is the
result of additional borrowings on the Company's line of credit to finance
the increase in inventory.
12
FISCAL 1998 AS COMPARED TO FISCAL 1997
Sales for the fiscal year ended March 31, 1998 increased by 19.7% over the
same period in 1997. This increase in sales was attributable to the
introduction of new and improved products to the retail market, as well as
the increased consumer awareness of the Company's branded products. In
addition, there was a large increase in marketing activities promoting
these new products.
Sales for the fourth quarter fiscal 1998 were $5,068,934 compared to
$4,306,934 in the same period in fiscal 1997. This 17.6% increase is the
result of increased production capacity, the escalation in sales of new and
existing product lines and strategic marketing efforts.
Cost of goods sold as a percentage of sales was 74.1% for the fiscal year
ended March 31, 1998 compared with 90.6% for the same period in fiscal
1997. The improvement in gross margin was primarily a result of reaching
the breakeven level to cover fixed overhead costs of the manufacturing
facility. In addition, the Company elected to eliminate selected lower
margin foodservice business and focus its selling efforts on retail lines
for fiscal 1998.
Selling expenses increased 12.2% for the fiscal year ended March 31, 1998
compared with the same period ended March 31, 1997. This increase in
selling expenses over the prior fiscal year was mainly attributed to the
increase in sales. Brokerage costs are a large portion of this expense and
these costs increase in direct proportion to sales. In addition, the
Company initiated an advertising program in the fourth quarter of fiscal
1998 to promote the Veggie Slices product line and capitalize on increasing
consumer awareness of the benefits of plant-based foods.
Delivery expenses increased 37.6% for the fiscal year ended March 31, 1998
compared with the same period in 1997. The increase in delivery costs was
a direct result of the increase in sales shipments to customers
Research and development expenses decreased 36.7% for the fiscal year ended
March 31, 1998 compared with the same period in fiscal 1997. This decrease
in expense was largely the result of employee relocation allowances paid
during the first quarter of fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
On April 16, 1996, the Company completed a Regulation D private placement
of 191,075 shares of Common Stock at an aggregate price of $2,000,000 and
4,000 shares of convertible preferred stock at an aggregate price of
$4,000,000. Between July 1996 and March 31, 1997, 1,443 shares of
convertible preferred stock were converted into 1,965,824 shares of Common
Stock at an average conversion price of $0.73 per share.
In March 1997, the Securities and Exchange Commission Staff (the "Staff")
announced its position on accounting for preferred stock which is
convertible into common stock at a discount from the market rate at the
date of issuance. The Staff's position is that a preferred stock dividend
should be recorded for the difference between the conversion price and the
quoted market price of common stock at the date of issuance. To comply
with this position, the Company restated its prior year's financial
statements to reflect a dividend of $3,130,294 related to the fiscal 1996
sales of convertible preferred stock as discussed above. The Company also
restated the reported net loss per share of common stock from the
previously reported amount of $0.13. In compliance with the Staff's
position, the Company also recorded a preferred stock dividend in the
amount of $1,594,406 in fiscal 1997 for the April 1996 sale of convertible
preferred stock.
Operating Activities - For the fiscal year ended March 31, 1999, the
Company's cash used in operating activities was $1,716,002 an increase of
$12,368 for the same period in fiscal 1998. The increase in cash used for
operations is the result of a build-up of inventory and accounts receivable
associated with an increase in sales during fiscal 1999. In addition, in
an effort to increase response time to customer orders, the Company is
accumulating an inventory of finsihed goods of their most popular product
lines.
13
Investing -- The Company spent $2,105,501 in investing activities for the
fiscal year ended March 31, 1999 compared with $1,410,839 for the same
period in fiscal 1998. During fiscal 1999 and 1998, the Company invested
in production equipment to accommodate the demand for slice products in the
foodservice industry. The Company anticipates incurring approximately
$500,000 in additional costs during fiscal 2000 to complete the
construction in progress project. The Company also purchased automated
packaging equipment to enhance the efficiency of their current slice and
Pullman-loaf lines. In addition, marketable securities purchased in fiscal
1997 were sold in fiscal 1998.
Financing -- The Company realized a net inflow of $3,801,546 from financing
activities for the fiscal year ended March 31, 1999 compared with
$1,426,791 during the same period in fiscal 1998. The large cash flows
from financing activities resulted from borrowings on the line of credit in
both years to finance the increase in accounts receivable and inventory and
proceeds from the sale of common stock in fiscal 1999.
In addition, on November 1, 1996, the Company secured a $2 million line of
credit with Finova Capital Corporation with interest at the prime rate plus
two percent. The availability under this line of credit arrangement is
calculated on a borrowing base of eligible inventory and accounts
receivable. This line of credit was increased to $3 million during
February 1997. During June 1998, the Company signed an amendment to the
above contract which expanded the line of credit availability to $3.5
million. The amendment also reduced the interest on the line of credit to
term note to prime plus one half of a percent. During December 1998, the
Company signed a third amendment to the above contract which expanded the
line of credit availabilty to $5.5 milion. As of March 31, 1999, the
Company had an outstanding balance of $3,912,917.
On June 27, 1997, the Company secured a $1.5 million term note payable with
Finova Capital Corporation to finance the acquisition of certain production
equipment. The agreement calls for interest at the prime rate plus two
percent. During June 1998, the Company signed an amendment to the above
contract which expanded the term note payable to $3 million. The
amendment also reduced the interest on the term note to prime plus one
percent. As of March 31, 1999, the balance outstanding under this
agreement was $2,806,847.
On October 16, 1998, the Company sold 357,143 shares of its common stock to
a private investor at an aggregate price of $937,500.
Management believes that these actions will allow the Company to meet its
future liquidity needs until the Company establishes a positive cash flow.
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133"). FAS 133 requires
companies to recognize all derivative contracts as either assets or
liabilities in the balance sheet and to measure them at fair value. If
certain conditions are met, a derivative may specifically be designated as
a hedge, the objective of which is to match the timing of gain or loss
recognition of: (i) the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk; or (ii) the earnings
effect of the hedged transaction. For a derivative not designated as a
hedging instrument, the gain or loss is recognized as income in the period
of change. FAS 133 is effective for all fiscal year quarters of fiscal
years beginning after June 15, 1999. Historically, the Company has not
entered into any derivative contracts either to hedge existing risks or for
speculative purposes. Accordingly, the Company does not expect adoption of
the new standard on April 1, 2000 to affect its financial statements.
Year 2000 Compliance
The Year 2000 problem is the result of information technology systems and
embedded systems (products that are made with microprocessor (computer)
chips) using a two-digit format, as opposed to four digits, to indicate the
year. Such information technology and embedded systems may be unable to
properly recognize and process date-sensitive information beginning January
1, 2000.
The Company has undertaken an assessment of the potential impact of the
Year 2000 issue to its internal operations. Such assessment has included a
review of the impact primarily in the following areas: production and
manufacturing systems, business systems, including sales and marketing,
billing, and infrastructure. The Company's infrastructure consists of a
network of personal computers and servers that were obtained from major
suppliers. The Company also utilizes various business, administrative and
financial software applications on the infrastructure to perform the
business functions of the Company. The Company is in the process of
testing and upgrading its information technology systems and embedded
systems, which may be affected by the Year 2000 issue. Based on the
progress the Company has made in identifying and addressing the Company's
Year 2000 issues and the plan and timeline to complete the compliance
program, management does not foresee significant risks associated with the
Company's Year 2000 compliance at this time. Management estimates that the
testing, upgrading, and replacement of affected systems will be completed
by June 30, 1999. However, the inability of the Company to identify and
timely correct material Year 2000 deficiencies in the software and/or
infrastructure could result in an interruption in, or failure of, certain
of the Company's business activities or operations. During Fiscal 1999,
the Company replaced its accounting and manufacturing software packages to
systems which are Year 2000 compliant. The Company has also replaced any
existing hardware which was not Year 2000 compliant. These replacements
were a part of the normal upgrades to the Company's systems. To date, the
Company has incurred approximately $120,000 to upgrade its systems for
compliance with Year 2000 issues. These upgrades were also undertaken to
improve the functionality of the Company's production and accounting
systems. No material expenses are expected during fiscal 2000 in
connection with this project.
14
The Company has established a team dedicated to periodically reviewing not
only the internal information technology and embedded systems used in the
operation of the Company, but also the information technology and embedded
systems and the Year 2000 compliance plans of the Company's significant
customers and suppliers, shipper, utilities, financial institutions and
transfer agent. The Company has material third party relationships with
its customers, suppliers, shippers, utilities, financial institutions, and
transfer agent. If the operations of any of these third parties are
adversely impacted by Year 2000 deficiencies, it may have a material impact
on the Company. Accordingly, the Company has requested information and
documentation from the Company's significant customers and suppliers,
shippers, utilities, financial institutions, and transfer agent relating to
their Year 2000 compliance plans in the form of a survey. At this time,
the Company has received approximately 60% of its certifications from
vendors and customers. With respect to the responses received, no
customers or suppliers have indicated significant problems which could
result in a material loss. The Company will contact any customers and
suppliers who have not responded by September 30, 1999. Therefore,
management does not, at this time, know of the potential costs to the
Company of any adverse impact or effect of any Year 2000 deficiencies by
these third parties.
Because the Company has evaluated the status of the systems used in
business activities and operations of the Company and the systems of the
third parties with which the Company conducts its business, management is
developing a comprehensive contingency plan and identifying "the most
reasonably likely worst case scenario" at this time. This assessment
includes the Company's production equipment, computer systems, HVAC
systems, coolers and security systems. Management expects to have
completed and tested all contingency plans no later than September 30,
1999. As management identifies significant risks related to the Company's
Year 2000 compliance or if the Company's Year 2000 compliance program's
progress deviates substantially from the anticipated timeline, management
will develop appropriate contingency plans.
Item 7A.Quantitative and Qualitative Disclosures About Market Risk
The interest on the Company's debt is floating and based on the prevailing
market interest rates. For market based debt, interest rate changes
generally do not affect the market value of the debt but do impact future
interest expense and hence earnings and cash flows, assuming other factors
remain unchanged. A theoretical 1% change in market rates in effect on
March 31, 1999 with respect to the Company's anticipated debt as of such
date would increase interest expense and hence reduce the net income of the
Company by approximately $70,000 per year.
The Company's fiscal 1999 sales demoninated in a currency other than U.S.
dollars were less than 1% of total sales and no net assets were maintained
in a functional currency other than U. S. dollars at March 31, 1999. The
effects of changes in foreign currency exchange rates has not historically
been significant to the Company's operations or net assets.
15
Item 8. Financial Statements.
Report of Independent Certified Public Accountants
To the Board of Directors and Stockholders
Galaxy Foods Company
We have audited the accompanying balance sheets of Galaxy Foods Company
as of March 31, 1999 and 1998 and the related statements of operations,
stockholders' equity and cash flows for each of the three years in the
period ended March 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Galaxy
Foods Company as of March 31, 1999 and 1998 and the results of its
operations and its cash flows for each of the three years in the period
ended March 31, 1999 in conformity with generally accepted accounting
principles.
/s/BDO Seidman, LLP
Orlando, Florida
June 8, 1999
16
GALAXY FOODS COMPANY
Balance Sheets
MARCH 31, MARCH 31,
1999 1998
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 112 $ 20,069
Trade receivables, net of allowance of
$100,000 and $104,794 4,428,778 2,646,667
Other receivables 228,551 91,743
Inventories 6,235,737 2,458,743
Prepaid expenses 627,716 321,510
Total current assets 11,520,894 5,538,732
PROPERTY & EQUIPMENT, NET 12,503,830 10,668,155
OTHER ASSETS 452,188 242,165
TOTAL $24,476,912 $16,449,052
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Book overdrafts $ 502,942 $ 836,762
Line of credit 3,912,917 1,840,757
Accounts payable - trade 3,311,043 1,088,658
Accrued liabilities 468,513 453,663
Current portion of term note payable 432,000 150,000
Current portion of obligations under capital leases 82,433 21,517
Total current liabilities 8,709,848 4,391,357
TERM NOTE PAYABLE,less current portion 2,374,847 1,276,847
OBLIGATIONS UNDER CAPITAL LEASES,
less current portion 289,711 11,152
Total liabilities 11,374,406 5,679,356
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, authorized
85,000,000, issued and outstanding 9,183,032
and 8,816,699 91,830 88,167
Additional paid-in capital 47,497,322 46,459,542
Accumulated deficit (21,714,446) (23,005,813)
25,874,706 23,541,896
Less: Notes receivable arising from the exercise
of stock options and sale of common stock 12,772,200 12,772,200
Total stockholders' equity 13,102,506 10,769,696
TOTAL $24,476,912 $16,449,052
See accompanying notes to financial statements.
17
GALAXY FOODS COMPANY
Statements of Operations
Year ended March 31, 1999 1998 1997
NET SALES $29,790,025 $20,552,782 $17,171,496
COST OF GOODS SOLD 19,390,253 15,239,405 15,565,825
Gross margin 10,399,772 5,313,377 1,605,671
OPERATING EXPENSES:
Selling 4,861,703 2,407,992 2,145,530
Delivery 1,564,514 916,448 665,822
General and administrative 2,204,623 1,362,022 1,374,130
Research and development 198,398 129,068 204,126
Total operating expenses 8,829,238 4,815,530 4,389,608
INCOME (LOSS) FROM OPERATIONS 1,570,534 497,847 (2,783,937)
OTHER INCOME (EXPENSE):
Interest expense (233,826) (136,774) (46,984)
Interest income 6,023 10,593 107,679
Other income (expense) 8,636 5,857 (13,418)
Total (219,167) (120,324) 47,277
NET INCOME (LOSS) 1,351,367 377,523 (2,736,660)
PREFERRED STOCK DIVIDENDS - - (1,594,406)
NET INCOME (LOSS) APPLICABLE TO
COMMON STOCK BEFORE TAXES 1,351,367 377,523 (4,331,066)
INCOME TAX EXPENSE 60,000 - -
NET INCOME (LOSS) APPLICABLE TO
COMMON STOCK $ 1,291,367 $ 377,523 $(4,331,066)
BASIC NET EARNINGS (LOSS) PER
COMMON SHARE $ 0.14 $ 0.04 $ (0.87)
DILUTED NET EARNINGS (LOSS) PER
COMMON SHARE $ 0.14 $ 0.04 $ (0.87)
See accompanying notes to financial statements.
18
GALAXY FOODS COMPANY
CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
Convertible
Common Stock Preferred Stock Additional
Par Par Paid-In Accumulated Notes Rec. for
Shares Value Shares Value Capital Deficit Common Stock Total
Balance at March 31,
1996 7,633,167 $ 76,332 -- $ -- $ 39,040,822 $ (19,052,270) $(12,796,200) $ 7,268,684
Exercise of options 13,738 138 -- -- 48,146 -- -- 48,284
Exercise of warrants 30,715 307 -- -- 122,006 -- -- 122,313
Issuance of common stock
under employee stock
purchase plan 13,126 131 -- -- 87,469 -- -- 87,600
Collection of note
receivable -- -- -- -- -- -- 24,000 24,000
Issuance of common
stock through Reg D
offering 191,075 1,911 -- -- 1,857,560 -- -- 1,859,471
Issuance of convertible
preferred stock through
Reg D offering -- -- 4,000 40 3,733,901 -- -- 3,733,941
Conversion of
preferred stock into
common stock 280,832 2,808 (1,443) (14) (2,794) -- -- --
Issuance and revaluation
of warrants -- -- -- -- (211,400) -- -- (211,400)
Preferred stock
dividend -- -- -- -- 1,594,406 (1,594,406) -- --
Net loss -- -- -- -- -- (2,736,660) -- (2,736,660)
Balance at
March 31, 1997 8,162,653 $ 81,627 2,557 $ 26 $ 46,270,116 $ (23,383,336) $(12,772,200) $ 10,196,233
Exercise of options 16,300 163 -- -- 57,121 -- -- 57,284
Conversion of
preferred stock
into common stock 621,826 6,218 (2,557) (26) ( 6,192) -- -- --
Issuance of warrants -- -- -- -- 51,320 -- -- 51,320
Exercise of warrants 9,286 93 -- -- 45,245 -- -- 45,338
Refund of stock
issuance costs -- -- -- -- 8,750 -- -- 8,750
Issuance of common stock
under Employee stock
purchase plan 6,634 66 -- -- 33,182 -- -- 33,248
Net income -- -- -- -- -- 377,523 -- 377,523
Balance
March 31, 1998 8,816,699 $ 88,167 -- $ -- $ 46,459,542 $ (23,005,813) $ (12,772,200) $ 10,769,696
Exercise of options 1,144 11 -- -- 3,989 -- -- 4,000
Issuance of common
stock under private
placement 357,143 3,571 -- -- 933,929 -- -- 937,500
Issuance of common
stock under employee
stock purchase plan 8,046 81 -- -- 31,362 -- -- 31,443
Issuance of warrants -- -- -- -- 68,500 -- -- 68,500
Net income -- -- -- -- -- 1,291,367 -- 1,291,367
Balance at
March 31, 1999 9,183,032 $ 91,830 -- $ -- $ 47,497,322 $(21,714,446) $(12,772,200) $13,102,506
See accompanying notes to financial statements.
19
GALAXY FOODS COMPANY
Statements of Cash Flows
Year Ended March 31, 1999 1998 1997
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net Income (Loss) $ 1,291,367 $ 377,523 $ (2,736,660)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS)
TO NET CASH USED IN OPERATING ACTIVITIES:
Depreciation expense 735,220 649,334 435,608
Gain on sale of assets - (1,329) 23,236
Provision for losses on trade receivables (4,794) 14,794 94,531
Consulting and director fee expense paid through
issuance of common stock warrants 22,293 78,494 31,307
(Increase) decrease in:
Trade receivables (1,777,317) (1,030,192) (1,008,362)
Other receivables (136,808) (72,704) -
Inventories (3,776,994) (656,499) (613,570)
Prepaid expenses (306,204) (45,914) (56,765)
Increase in:
Accounts payable 2,222,385 639,431 165,700
Accrued liabilities 14,850 34,694 95,374
NET CASH USED IN OPERATING ACTIVITIES (1,716,002) (12,368) (3,569,601)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Proceeds from sale of property and equipment - - 22,500
Purchase of property and equipment (2,168,027) (1,704,633) (3,354,796)
(Increase) decrease in other assets 62,526 (6,206) (32,238)
Sale of marketable securities - 300,000 -
Purchase of marketable securities - - (298,671)
NET CASH USED IN INVESTING ACTIVITIES (2,105,501) (1,410,839) (3,663,205)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on note payable and
long-term debt - - (63,451)
Book overdrafts (333,820) 836,762 -
Borrowings on line of credit 29,017,000 19,518,445 7,943,417
Repayments on line of credit (26,944,840) (19,048,641) (6,572,464)
Borrowings on term note payable 1,624,000 - -
Repayments on term note payable (244,000) - -
Principal payments on capital lease
obligations (63,394) (24,395) (61,755)
Proceeds from issuance of common stock,
net of offering costs 968,943 33,248 1,947,071
Proceeds from issuance fo convertible
preferred stock, net of offering costs - - 3,733,941
Refund of stock issuance costs - 8,750 -
Financing costs for long term debt (226,343) - -
Proceeds from exercise of common
stock options 4,000 57,284 48,283
Proceeds from exercise of common
stock warrants - 45,338 122,313
Collection of note receivable for common stock - - 24,000
NET CASH FROM FINANCING ACTIVITIES 3,801,546 1,426,791 7,121,355
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (19,957) 3,584 (111,451)
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD 20,069 16,485 127,936
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 112 $ 20,069 $ 16,485
See accompanying notes to financial statements.
20
GALAXY FOODS COMPANY
NOTES TO FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
Business
Galaxy Foods Company (the "Company") is principally engaged in the
development, manufacturing and marketing of a variety of healthy
cheese and dairy related products, as well as other cheese
alternatives. These healthy cheese and dairy related products
include low or no fat, low or no cholesterol and lactose-free
varieties. These products are sold throughout the United States
and internationally to customers in the retail, food service and
industrial markets. The Company's headquarters and manufacturing
facilities are located in Orlando, Florida.
Inventories
Inventories are valued at the lower of cost (weighted average) or
market.
Property, Equipment and Depreciation
Property and equipment are stated at cost. Depreciation is
computed over the estimated useful lives of the assets by the
straight-line method for financial reporting and by accelerated
methods for income tax purposes.
Capital leases are recorded at the lower of fair market value or
the present value of future minimum lease payments. Assets under
capital leases are depreciated by the straight-line method over
their useful lives.
Revenue Recognition
Sales are recognized upon shipment of products to customers.
Book Overdrafts
Under the Company's cash management system, checks issued but not
presented to banks frequently result in overdraft balances for
accounting purposes and are classified as "book overdrafts" in the
balance sheet. In accordance with the Company's agreement with a
financial institution, all cash receipts are applied against a
revolving line of credit, and a daily draw is requested to cover
checks clearing the bank.
Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures
about Fair Value of Financial Instruments", requires disclosure of
fair value information about financial instruments. Fair value
estimates discussed herein are based upon certain market
assumptions and pertinent information available to management as
of March 31, 1999.
The respective carrying value of certain on-balance-sheet
financial instruments approximated their fair values. These
financial instruments include cash and cash equivalents, trade
receivables, book overdrafts, accounts payable and accrued
expenses. Fair values were assumed to approximate carrying values
for these financial instruments since they are short term in
nature and their carrying amounts approximate fair values or they
are receivable or payable on demand. The fair value of the
Company's long term debt is estimated based upon the quoted market
prices for the same or similar issues or on the current rates
offered to the Company for debt of the same remaining maturities.
21
GALAXY FOODS COMPANY
NOTES TO FINANCIAL STATEMENTS
(Continued)
Impairment of Long-Lived Assets
The Company evaluates impairment of long-lived assets in
accordance with Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" (SFAS 121). SFAS 121
requires impairment losses to be recorded on long-lived assets
used in operations when indicators of impairment are present and
the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount.
Income Taxes
The Company accounts for income taxes under the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" which requires recognition of estimated income
taxes payable or refundable on income tax returns for the current
year and for the estimated future tax effect attributable to
temporary differences and carryforwards. Measurement of deferred
income tax is based on enacted tax laws including tax rates, with
the measurement of deferred income tax assets being reduced by
available tax benefits not expected to be realized.
Use of 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 period
reported. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to the prior year
financial statements to conform with the current year
presentation.
Segment Information
The Company does not identify separate operating segments for
management reporting purposes. The results of operations are the
basis on which manaagement evaluates operations and makes business
decisions.
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("FAS 133"). FAS
133 requires companies to recognize all derivative contracts as
either assets or liabilities in the balance sheet and to measure
them at fair value. If certain conditions are met, a derivative
may specifically be designated as a hedge, the objective of which
is to match the timing of gain or loss recognition of: (i) the
changes in the fair value of the hedged asset or liability that
are attributable to the hedged risk; or (ii) the earnings effect
of the hedged transaction. For a derivative not designated as a
hedging instrument, the gain or loss is recognized as income in
the period of change. FAS 133 is effective for all fiscal year
quarters of fiscal years beginning after June 15, 1999.
Historically, the Company has not entered into any derivative
contracts either to hedge existing risks or for speculative
purposes. Accordingly, the Company does not expect adoption of
the new standard on April 1, 2000 to affect its financial
statements.
22
GALAXY FOODS COMPANY
NOTES TO FINANCIAL STATEMENTS
(Continued)
(2) Inventories
Inventories are summarized as follows:
March 31, 1999 March 31, 1998
Raw materials $ 2,750,781 $ 1,277,783
Finished goods 3,484,956 1,180,960
Total $ 6,235,737 $ 2,458,743
(3) Property and Equipment
Property and equipment are summarized as follows:
Useful Lives March 31, 1999 March 31, 1998
Leasehold improvements 10-25 years $ 2,838,475 $ 2,838,475
Machinery and equipment 5-15 years 6,513,084 5,880,797
Delivery equipment and autos 3- 5 years 15,652 15,652
Equip. under capital leases 7-15 years 717,391 314,522
Construction in progress 5,374,616 3,838,878
15,459,218 12,888,324
Less accumulated depreciation 2,955,388 2,220,169
Property and equipment, net $ 12,503,830 $ 10,668,155
Interest in the amount of $395,963 and $234,772 was capitalized to
construction in progress during the years ended March 31, 1999 and
1998, respectively.
The Company estimates that approximately $500,000 of additional
costs will be incurred to complete the construction in progress
project.
(4) Commitments and Contingencies
Leases
The Company leases its operating facilities and certain equipment
under operating and capital leases, expiring at various dates
through fiscal year 2003. The following is a schedule by years as
of March 31, 1999, of (1) future minimum lease payments under
capital leases, together with the present value of the net minimum
lease payments and (2) future minimum rental payments required
under operating leases that have initial or remaining terms in
excess of one year:
Capital Operating
Leases Leases
1999 $ 132,826 $ 414,000
2000 122,687 367,000
2001 117,224 227,000
2002 125,867 5,000
2003 9,809 --
Total net minimum lease payments 508,413 $1,013,000
Less amount representing interest 136,269
Present value of the net minimum
lease payments 372,144
Less current portion 82,433
Long-term obligations under
capital leases $ 289,711
23
GALAXY FOODS COMPANY
NOTES TO FINANCIAL STATEMENTS
(Continued)
Rental expense was approximately $520,000, $480,000 and $393,000
for the fiscal years ended March 31, 1999, 1998 and 1997,
respectively.
Employment Agreement
In October 1995, the Company entered into an employment agreement
with the Company's President. The agreement provides for base
compensation of $250,000 annually through October 2000. In
addition to the base compensation, the President will receive an
annual bonus equal to five percent of the Company's pre-tax net
income. The employment agreement also provides for the grant of
common stock options upon the Company's achievement of certain net
income levels as follows:
Net Income Level Option Shares
Reaching break-even for one quarter 142,858
Annual net operating income of $1 million or more 142,858
Each increment of $1 million of annual net operating
income in excess of $1 million 142,858
The exercise price of the options granted will be equal to the
market value of the Company's common stock on the last trading day
preceding the date of the Company's achievement of the required
net income level. During the fiscal year ended March 31, 1998,
the Company granted common stock options to purchase 142,858
shares at an exercise price of $5.25 per share under the
employment agreement. During the year ended March 31, 1999, there
were no stock options granted or bonuses paid under the existing
employment agreement due to the rescision of the agreement as
discussed below.
On June 17, 1999, the Company's Board of Directors approved to
rescind the above employment agreement and issue a new agreement
for the Company's President. The new agreement eliminates the
performance based option arrangement and allows for a one time
grant of a stock option which , if exercised, would bring the
President's ownership interest in the Company to 45%. The new
agreement also forgives the unaccrued interest on the existing
note, provides for a salary increase to $300,000 and decreases the
annual bonus to a sliding scale of pre-tax income, beginning with
the fiscal year ending March 31, 2000. This new agreement has a
rolling five year term.
24
GALAXY FOODS COMPANY
NOTES TO FINANCIAL STATEMENTS
(Continued)
(5) Capital Stock
Reverse Stock Split
On February 11, 1999, the Company completed a one for seven
reverse stock split with respect to its common stock. All common
share information, included in the accompanying financial
statements, has been retroactively adjusted to give effect to the
reverse stock split.
Employee Stock Purchase Plan
In January 1992, the Company's stockholders approved the 1991
Employee Stock Purchase Plan (the "1991 Purchase Plan"). The 1991
Purchase Plan provides for the sale of up to an aggregate of
35,715 shares of common stock to eligible employees. Up to 358
shares may be purchased by each eligible employee at the lesser of
85% of the fair market value of the shares on the first or last
business day of the six-month purchase periods ending August 31
and February 28. Substantially all full-time employees are
eligible to participate in the plan. During the year ended March
31, 1999, 8,046 shares were purchased under this plan at prices
ranging from $3.77 to $3.94 per share. During the year ended
March 31, 1998, 6,634 shares were purchased under this plan at
prices ranging from $4.76 to $5.18 per share. During the fiscal
year ended March 31, 1997, 13,126 shares were purchased at prices
ranging from $4.83 to $7.42 per share. The weighted average fair
value of the shares issued were $3.91, $4.97 and $3.15 per share
for the fiscal years ended March 31, 1999, 1998 and 1997,
respectively.
Common Stock Options and Warrants Issued for Consulting Services
During the fiscal years ended March 31, 1999, 1998 and 1997,
consulting expense of $22,293, $78,494 and $31,307, respectively,
was recognized on common stock options and warrants granted to
officers, directors and consultants. During fiscal 1997, the
vesting provisions of certain warrants issued for consulting
services were re-evaluated. In accordance with Statement of
Financial Accounting Standards No. 123 governing options and
warrants issued to non-employees, $211,400 of prepaid consulting
services were reversed to additional paid-in capital in fiscal
1997 for warrants that are not expected to vest.
Stock Warrants
At March 31, 1999, the Company had common stock warrants
outstanding which were issued in connection with sales consulting,
financial consulting, and financing arrangements. Information
relating to these warrants is summarized as follows:
Number of Exercise
Expiration date Warrants Price
December 1999 7,143 3.71
March 2000 225,066 5.18 - 6.93
April 2000 7,143 5.46
May 2001 4,286 8.53
August 2000 14,286 10.46
December 2000 285,715 3.94
July 2002 1,071 5.67
September 2002 143 6.79
December 2002 10,714 5.04
August 2005 7,143 4.48
January 2006 33,571 4.81
August 2008 15,714 4.83
January 2009 1,430 3.92
613,424
25
GALAXY FOODS COMPANY
NOTES TO FINANCIAL STATEMENTS
(Continued)
Stock Options
At March 31, 1999, the Company has three employee stock option
plans which were adopted in 1987, 1991, and 1996 and has granted
additional non-plan stock options. The Company applies APB
Opinion 25, Accounting for Stock Issued to Employees, and related
interpretations in accounting for these plans. Under the
provisions of APB Opinion 25, if options are granted or extended
at exercise prices less than fair market value, compensation
expense is recorded for the difference between the grant price and
the fair market value at the date of grant.
Under the Company's stock option plans, qualified and nonqualified
stock options to purchase up to 178,572 shares of the Company's
common stock may be granted to employees and members of the Board
of Directors. The maximum term of options granted under the plans
is ten years.
Statement of Financial Accounting Standards No. 123 ("FAS 123"),
Accounting for Stock Based Compensation, requires the Company to
provide pro forma information regarding net income and earnings
per share as if compensation cost for the Company's stock options
had been determined in accordance with the fair value based method
prescribed in FAS 123. The Company estimates the fair value of
each stock option at the grant date by using a Black-Scholes
option-pricing model with the following assumptions used for
grants in 1999: no dividend yield, volatility of 80%, risk-free
interest rates ranging from 4.64% to 5.25% and expected lives of
ten years. Assumptions used in the fiscal 1998 option-pricing
model are as follows: no dividend yield, volatility from 116% to
129%, risk-free interest rate of 6.3% and expected lives ranging
from two to five years. Assumptions used in the fiscal 1997
option-pricing model are as follows: no dividend yield,
volatility from 87% to 112%, risk-free interest rates ranging from
5.3% to 6.5%, and expected lives ranging from three to five years.
Had compensation cost been determined based on the fair value of
options at their grant dates in accordance with FAS 123, the
Company would have reduced net income by $73,808 for fiscal 1999
and would have had a net loss of $317,887 for fiscal 1998 and a
net loss applicable to common stock of $4,456,413 for fiscal
1997. The effect on earnings per share is less than $.01 per
share for fiscal 1999, 1998 and 1997.
The following table summarizes information about plan stock option
activity for the years ended March 31, 1999, 1998 and 1997:
Weighted-Average Weighted-Average
Exercise Price Fair Value of
Shares Per Share Options Granted
Balance, March 31, 1996 76,229 $ 9.31 $ --
Granted - at market 12,834 9.80 6.86
Exercised (13,738) 4.83 --
Canceled (286) 10.29 --
Balance, March 31, 1997 75,039 10.01 --
Granted - at market 29,785 5.46 3.92
Exercised (16,300) 3.50 --
Canceled (18,500) 11.13 --
Balance, March 31, 1998 70,024 8.96 --
Granted - at market 28,572 2.84 2.59
Exercised (1,143) 3.50 --
Canceled (10,834) 8.81 --
Balance, March 31, 1999 86,619 $ 4.73 $ --
At March 31, 1999, 1998 and 1997, a total of 56,430, 52,988, and
62,251 of the outstanding plan options were exercisable with a
weighted-average exercise price of $5.28, $9.45 and $10.36 per
share, respectively.
26
GALAXY FOODS COMPANY
NOTES TO FINANCIAL STATEMENTS
(Continued)
The following table summarizes information about non-plan stock
option activity for the years ended March 31, 1999, 1998 and 1997:
Weighted-Average Weighted-Average
Exercise Price Fair Value of
Shares Per Share Options Granted
Balance, March 31, 1996 16,072 $ 13.51 $ --
Granted - at market 35,715 8.47 6.93
Balance, March 31, 1997 51,787 10.50 --
Granted - at market 142,857 5.25 4.41
Canceled (6,429) 12.74 --
Balance, March 31, 1998 188,215 6.86 --
Canceled (2,834) 14.00 --
Balance, March 31, 1999 185,381 $ 6.10 $ --
At March 31, 1999, 1998 and 1997, a total of 171,095, 166,072 and
21,786 of the outstanding non-plan options were exercisable with a
weighted-average exercise price of $5.90, $6.58 and $10.57 per
share, respectively.
The following table summarizes information about plan and non-plan
stock options outstanding and exercisable at March 31, 1999:
Options Outstanding Weighted- Number Weighted
Range of Number Weighted-Average Average Exer- Avg. Exer.
Exercise Prices Outstanding Remaining Life Exer. Price cisable Price
$2.84 -5.25 199,500 7.8 years $ 4.66 176,642 $ 4.90
5.46 - 7.00 21,571 7.3 years 6.40 14,500 6.45
8.31 -10.28 45,976 7.2 years 8.73 31,430 8.83
14.00 -19.25 4,953 3.3 years 14.30 4,953 14.30
272,000 227,525
Shares Reserved
At March 31, 1999, the Company has reserved common stock for
future issuance under all of the above arrangements totaling
1,514,311 shares.
(6) Sale of Securities
On April 16, 1996, the Company completed a private placement of
191,075 shares of the Company's common stock at an aggregate price
of $2,000,000, and 4,000 shares of the Company's convertible
preferred stock at an aggregate price of $4,000,000. Of the total
proceeds of $6,000,000, $406,588 was used to pay brokerage fees
and various expenses related to the offering. The holders of the
convertible preferred stock have the right to convert such shares
into shares of the Company's common stock at any time after June
30, 1996 at a conversion price equal to 71.5% of the average
market price of the common stock for the five consecutive trading
days ending one trading day prior to the date of the Company's
receipt of a notice of conversion from the holder; provided that
none of the buyers' aggregate shares of the Company's common stock
exceed 4.9% of the then outstanding shares of common stock.
Between July 1996 and March 31, 1998, all 4,000 shares of
Convertible Preferred Stock were converted into 902,658 shares of
Common Stock at an average conversion rate of $4.41 per share.
On October 16, 1998, the Company sold 357,143 shares of its common
stock to a private investor at an aggregate price of $937,500.
27
GALAXY FOODS COMPANY
NOTES TO FINANCIAL STATEMENTS
(Continued)
(7) Income Taxes
The components of the net deferred assets consist of the
following:
Year Ended March 31, 1999 1998 1997
Deferred tax assets:
Net operating loss carryforwards $5,605,000 $7,504,000 $7,536,000
Investment, alternative minimum and
general business tax credits 173,000 115,000 106,000
Nondeductible expenses from stock
warrants 122,000 112,000 189,000
Nondeductible compensation from
stock options 39,000 39,000 39,000
Bad debts 38,000 39,000 52,000
Inventory overhead allocation 58,000 49,000 16,000
Gross deferred income tax assets 6,035,000 7,858,000 7,938,000
Valuation allowance (4,800,000)(7,412,000)(7,664,000)
Total deferred income tax assets 1,235,000 446,000 274,000
Deferred income tax liabilities:
Prepaid advertising (85,000) -- --
Depreciation (1,150,000) (446,000) (274,000)
Net deferred income tax assets -- -- --
The change in the valuation allowance for deferred tax assets was
a decrease of $2,612,000 during fiscal 1999, a decrease of
$252,000 during fiscal 1998 and an increase of $996,000 during
fiscal 1997.
Income tax expense for the year ended March 31, 1999 was comprised
of $60,000 in current federal income tax expense. There was no
income tax expense for the years ended March 31, 1998 or 1997.
The current tax expense represents the Company's liability for
alternative minimum tax. The alternative minimum tax system
limits the amount of alternative minimum NOL carryforward that can
be applied against current year alternative minimum income, thus
creating alternative minimum taxable income. Alternative minimum
tax paid is carried forward as a tax credit to offset federal tax
if incurred in the future. This credit does not expire.
The following summary reconciles differences from taxes at the
federal statutory rate with the effective rate:
Year ended March 31, 1999 1998 1997
Federal income taxes at statutory rates 34.0% 34.0% (34.0%)
Losses without tax benefits -- -- 34.0%
Alternative minimum tax 4.4% -- --
Utilization of net operating
loss carryforward (34.0%) (34.0%) --
Income taxes at effective rates 4.4% 0% 0%
28
GALAXY FOODS COMPANY
NOTES TO FINANCIAL STATEMENTS
(Continued)
(7) Income Taxes (Continued)
Unused net operating losses for income tax purposes, expiring in
various amounts from 2007 through 2012, of approximately $14,900,000
are available at March 31, 1999 for carryforward against future years'
taxable income. Under Section 382 of the Internal Revenue Code, the
annual utilization of this loss may be limited due to changes in
ownership. The tax benefit of these losses of approximately $5,605,000
has been offset by a valuation allowance due to it being more likely
than not that the deferred tax assets will not be realized.
(8) Related Party Transactions
Under the provisions of his employment agreement, which was
rescinded on June 17, 1999 (see Note 4) the Company's President
was granted the right to purchase up to 2,571,429 shares of the
Company's common stock. In October 1995, the President elected to
purchase all 2,571,429 shares. As consideration for the purchase
and as stipulated for in his employment agreement, the President
executed an $11,572,200 note payable to the Company. The note
bears interest at 7% per annum and is secured by the common shares
purchased. The principal balance, along with any accrued
interest, is payable in full in October 2000. If certain
conditions are met, the note may be extended up to five additional
years. No interest receivable related to the note has been
accrued.
Under this employment agreement, the Company also extended the
maturity date of a $1,200,000 non-interest bearing promissory note
due from the President from November 4, 1999 to November 4, 2001.
The promissory note was executed during the fiscal year ended
March 31, 1995 in connection with the exercise of options
previously granted by the Company.
Included in Other receivables on the Balance Sheet is $130,729 in
advances to the Company's President.
(9) Economic Dependence
For the fiscal years ended March 31, 1998 and 1997, the Company
had one customer which comprised sales approximating,
$2,074,901and $5,831,000, or 10% and 34% of net sales,
respectively. For the fiscal year ended March 31, 1999, the
Company did not have any customers which comprised sales more than
10% of net sales.
For the fiscal year ended March 31, 1999, the Company had one
major supplier which comprised more than 10% of purchases.
Purchases from this supplier totaled approximately $2,285,974 or
11.8% of purchases. For the fiscal year ended March 31, 1998, the
Company had one major supplier which comprised more than 10% of
total purchases. Purchases from this supplier totaled
approximately $2,202,000 or 16.6% of total purchases. For the
fiscal year ended March 31, 1997, the Company had three major
suppliers which each comprised more than 10% of purchases.
Purchases from these suppliers totaled approximately $7,420,000 or
56.4% of total purchases.
29
GALAXY FOODS COMPANY
NOTES TO FINANCIAL STATEMENTS
(Continued)
(10) Line of Credit and Term Note Payable
During November 1996, the Company entered into a two year
agreement which provided a $2 million line of credit for working
capital and expansion purposes. The availability under this line
of credit was increased to $3 million in February 1997. The
amount available under the line of credit is based on a formula of
80% of eligible accounts receivable plus 35% of eligible
inventories, as defined in the agreement. Amounts outstanding
under the agreement are collateralized by all accounts receivable,
inventory and machinery and equipment owned by the Company.
During June 1998, the Company signed an amendment to the above
contract which expanded the line of credit availability to $3.5
million. The amendment also reduced the interest on the line of
credit to term note to prime plus one half of a percent. During
December 1998, the Company signed a third amendment to the above
contract which expanded the line of credit availabilty to $5.5
milion. Interest is payable on the outstanding draws on the line
of credit at a rate of prime plus one half percent (8 % at March
31, 1999). As of March 31, 1999, the Company had an outstanding
balance of $3,912,917 under this line of credit agreement.
On June 27, 1997, the Company secured a $1.5 million term note
payable to finance the acquisition of certain production
equipment. Amounts outstanding under the agreement are
collateralized by machinery and equipment owned by the Company.
During June 1998, the Company signed an amendment to the above
contract which expanded the term note payable to $3 million. The
amendment also reduced the interest on the term note to prime plus
one percent (8.5% at March 31, 1999). This note is payable at the
rate of $432,000 per year, with a balloon payment due on October
31, 2001. As of March 31, 1999, the balance outstanding under
this agreement was $2,806,847.
The Company paid approximately $70,000 and $55,000 in loan costs
in connection with the June 1998 and December 1998 amendments,
respectively.
(11) Employee Benefit Plan
The Company established a 401(k) defined contribution plan
covering substantially all employees meeting certain minimum age
and service requirements. The Company's contributions to the plan
are determined by the Board of Directors and are limited to a
maximum of 25% of the employee's contribution and 6% of the
employee's compensation. Contributions to the plan amounted to
$15,180, $12,004, and $11,946 for the fiscal years ended March 31,
1999, 1998 and 1997, respectively.
(12) Supplemental Cash Flow Information
For purposes of the statement of cash flows, all highly liquid
investments with a maturity date of three months or less are
considered to be cash equivalents. Cash and cash equivalents
include checking accounts and money market funds.
Year ended March 31, 1999 1998 1997
Noncash financing and investing activities:
Purchase of equipment through capital lease
obligations and term note payable $ 402,869 $1,426,847 $26,105
Consulting and directors fees paid through
issuance of common stock warrants 68,500 51,320 --
Reversal of prepaid consulting fees
for revaluation of warrants -- -- 211,400
Cash paid for:
Interest 663,831 350,407 53,963
30
GALAXY FOODS COMPANY
NOTES TO FINANCIAL STATEMENTS
(Continued)
(13) Earnings Per Share
The following is a reconciliation of basic net earnings per share
to diluted net earnings per share for the years ended March 31,
1999 and 1998:
Year ended March 31, 1999 1998
Basic net earnings per common share $ .14 $ .04
Average shares outstanding - basic 9,005,843 8,638,225
Potential shares exercisable under
stock option plans 185,786 224,359
Potential shares exercisable under
stock warrant agreements 514,545 1,102,756
Potential shares assumed converted
from preferred stock -- 162,504
Less: Shares assumed repurchased under
treasury stock method (593,964) (988,098)
Average shares outstanding - diluted 9,112,210 9,139,746
Diluted earnings per common share $ .14 $ .04
Basic and diluted loss per common share for the year ended March
31, 1997 was $(.87) based upon 5,005,623 weighted average common
shares outstanding. Potential common shares for the year ended
March 31, 1997 were not included since the effects of potential
dilution would be antidilutive.
31
Item 9. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure.
Not Applicable.
32
PART III
Item 10. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
The following table sets forth the current directors and executive
officers of the Company as of June 1, 1999, as well as their respective
ages and positions with the Company:
Name Age Positions
Angelo S. Morini (1)(2) 56 Chairman of the Board of Directors,
President, and Chief Executive Officer
Cynthia L. Hunter 29 Chief Financial Officer and Corporate
Secretary
Earl G. Tyree (1) 78 Director
Douglas A. Walsh (1)(2) 54 Director
Marshall K. Luther(2) 46 Director
(1) Compensation and Benefits Committee
(2) Audit Committee
Each director is elected to hold office until the next annual meeting
of shareholders and until his successor is chosen and qualified. The
officers of the Company are elected annually at the first Board of
Directors meeting following the annual meeting of shareholders, and
hold office until their respective successors are duly elected and
qualified, unless sooner displaced. There are no family relationships
among the Company's executive officers.
Angelo S. Morini has been President of the Company since its inception
in 1980 and is the inventor of formagg. He was elected Chairman of the
Board of Directors, President, and Chief Executive Officer in 1987.
Between 1974 and 1980, Mr. Morini was the general manager of Galaxy
Cheese Company, which operated as a sole proprietorship until its
incorporation in May 1980. Prior to 1974, he was associated with the
Food Service Division of Pillsbury Company and the Post Division of
General Foods Company. In addition, he worked in Morini Markets, his
family-owned and operated chain of retail grocery stores in the New
Castle, Pennsylvania area. Mr. Morini received a B.S. degree in
Business Administration from Youngstown State University in 1968.
Cynthia L. Hunter, CPA was elected Chief Financial Officer and
Corporate Secretary as of June 18, 1998. Prior to joining the Company,
Ms. Hunter worked as a senior auditor for Coopers and Lybrand LLP in
Orlando, Florida from 1993 to 1997. From 1992 to 1993, she worked for
United Technologies as a cost accountant. During her years in public
accounting, Ms. Hunter was responsible for coordinating and overseeing
audits on a variety of clients including companies in the
manufacturing, high-tech and financial institution industries. Ms.
Hunter earned a BS in Accounting from Florida State University in 1991
and a Masters in Accounting Information Systems from Florida State
University in 1992.
Earl G. Tyree has been a director of the Company since September 1992.
From 1980 to 1987, Mr. Tyree was President of Bruce Novograd
Advertising Agency, a company he co-founded. From 1975 to 1979, Mr.
Tyree was with American Home Products Corporation, as President - John
F. Murray Division. From 1961 to 1975, Mr. Tyree served in various
positions, including President and Chief Executive Officer, for the
Bayer Company (Bayer Aspirin), the Charles H. Philips Company (Milk of
Magnesia), and Glenbrook Laboratories, all divisions of Sterling Drug,
Inc. Mr. Tyree attended the University of Richmond where he majored in
accounting.
Douglas A. Walsh, D.O. has been a director of the Company since January
1992. Dr. Walsh has been a practicing physician since 1970,
specializing in Family Practice and Sports Medicine. From 1984 to
present, he has been affiliated with Family Doctors, a four-physician
group located in Tampa, Florida. From 1985 to 1988, he was a flight
surgeon at Patrick Air Force Base, Cocoa Beach, Florida and from 1971
to 1984, he was the Health Commissioner for Mahoning County, Ohio.
From 1983 to 1985, he was the Clinic Commander for the U.S. Air Force
911 Tac Clinic in Pittsburgh, Pennsylvania. Dr. Walsh's teaching
appointments include Associate Professor of Family Practice (Clinical)
at Ohio University and Clinical Preceptor at the University of Health
Sciences, Kansas City, Missouri. Dr. Walsh received a B.S. degree in
Microbiology from the University of Houston, Houston, Texas in 1965,
and a D.O. degree from the University of Health Sciences, Kansas City,
Missouri in 1970. Dr. Walsh also serves as a team physician for the
Pittsburgh Pirates and as a consultant for the Atlanta Braves.
33
Marshall K. Luther was elected to the Board of Directors on January 31,
1996. From 1993 to 1995, Mr. Luther served as Senior Vice President,
Marketing of Tropicana Products, Inc. and from 1975 to 1992, he served
in various marketing positions for General Mills International
Restaurants. Mr. Luther received his BS in Engineering from Brown
University in 1974 and his M.B.A. in Marketing from the Wharton
Graduate School of Business in 1976.
Based upon the Company's review of a Form4 which was not filed on a
timely basis, and a Form 5 which was filed timely, each of which was
furnished by Angelo Morini to the Company with respect to its fiscal
year ended March 31, 1999, Mr. Morini reported a transfer of certain
Common Stock owned of record by him to Morini Investment, Ltd., a
limited partnership in which he is the sole limited partner and the
sole owner of the general partner, Morini Investments, LLC.
Item 11. Executive Compensation.
All figures set forth in this Item 11 related to the nubmer of shares
of the Company's common stock or prices or values thereof are adjusted
to reflect the one-for-seven reverse stock split which was effected on
February 11, 1999.
The following table sets forth the compensation of the Company's Chief
Executive Officer and any executive officer of the Company, other than
the Chief Executive Officer, whose aggregate compensation exceeded
$100,000 for the fiscal years ended March 31, 1999, 1998, and 1997.
SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Securities All
Annual Rest. Under- Other
Name and Compen- Stock lying LTIP Compen-
Principal Fiscal Salary Bonus sation Award(s) Options Payouts sation
Position Year ($) ($) ($) ($) SARs(#) ($) ($)
Angelo S. Morini(1) 1999 250,000 -- 20,128(2) -- -- -- --
Chairman of the 1998 250,000 -- 19,132(3) -- -- -- --
Board of Directors, 1997 250,000 -- 16,262(4) -- -- -- --
President, and Chief
Executive Officer
(1) On October 10, 1995, the Company entered into an employment
agreement with Mr. Morini upon terms and conditions approved by the
Board of Directors. In accordance with the terms of such employment
agreement, Mr. Morini was granted the right to purchase up to 2,571,429
shares of the Company's Common Stock at a per share price of 110% of
the average closing bid price as reported on the NASDAQ System for the
ten trading days preceding the receipt by the Company of written notice
of Mr. Morini's election to purchase shares. Mr. Morini exercised this
option on October 11, 1995, for a price per share of $4.50 which
exercise price was evidenced by a promissory note executed in favor of the
Company in the principal amount of $11,572,200. On August 11, 1993, the
Board of Directors approved the issuance to Angelo S. Morini of an option
to purchase 342,857 shares of the Company's Common Stock for a purchase
price of $3.50 per share in consideration for Mr. Morini's past services to
the Company, the pledge by Mr. Morini of all of then-current shares owned
by Mr. Morini to the Company's principal lender, J&C Resources, Inc.
("J&C"), to secure loans made to the Company, and the subordination of all
loans made by Mr. Morini to the Company to payment of the sums due J&C.
Mr. Morini exercised this option on November 4, 1994. The option exercise
price was evidenced by a promissory note in the amount of $1,200,000 executed
by Mr. Morini. See "Management - Certain Relationships and Related Party
Transactions." On June 17, 1999, the Company's Board of Directors
approved an amendment and restatement of Mr. Morini's employment
agreement. The employment agreement, as amended, has a rolling five
year term and provides for an increased annual base salary of $300,000
and a reduced, sliding scale percentage profit sharing bonus based on
the Company's annual pre-tax net income. The amended agreement includes
the grant of stock options to acquire shares of Common Stock
which, if exercised, would bring Mr. Morini's ownership interest in the
Company to 45% (on a fully diluted basis, including the exercise of all
outstanding options and warrants), and eliminates the ongoing performance
based option arrangement of the prior employment agreement. The exercise
price of the stock options granted in the amended agreement is $3.31, the
[closing bid price on the NASDAQ System as of June 15, 1999]. The
amended employment agreement further provides for a consolidation of
the two promissory notes executed by Mr. Morini in favor of the Company
in the principal amounts of $1,200,000 and $11,572,000 in connection with
prior stock option exercises. The consolidated promissory note, which has
a principal balance of $12,772,000, is non-interest bearing, non-recourse
to Mr. Morini and secured by the Common Stock acquired by Mr. Morini in
connection with the option exercises for which he executed the original
promissory notes. The approximately $3,000,000 in unpaid interest
payable under the original promissory notes was forgiven.
34
(2) For the fiscal year ended March 31, 1999, the Company paid
$11,860 in lease payments for Mr. Morini's automobile and $8,268 in
club dues for Mr. Morini.
(3) For the fiscal year ended March 31, 1998, the Company paid
$11,500 in lease payments for Mr. Morini's automobile and $7,632 in
club dues for Mr. Morini.
(4) For the fiscal year ended March 31, 1997, the Company paid
$9,107 in lease payments for Mr. Morini's automobile and $7,155 in club
dues for Mr. Morini.
Each non-employee director who served on the Board of Directors during
the last fiscal year received a fee of $500 plus expenses for his
services.
The following table sets forth information concerning each exercise of
stock options and freestanding stock appreciation rights during the
fiscal year ended March 31, 1999 by each of the executive officers
named in the Summary of Compensation Table above, and the fiscal year-
end value of unexercised options and SARs.
OPTION/SAR EXERCISES
For the Fiscal Year Ended March 31, 1999
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End
Option/SAR Values
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Options/SARs Options/SARs
at FY-End (#) at FY-End ($)
Shares Value
Acquired Realized Exer- Unexer- Exer- Unexer-
Name on Exercise(#) ($) cisable cisable cisable cisable
Angelo S. Morini -- -- 163,072 0 $203,396(1) 0
(1) The value of the unexercised shares at March 31, 1999 is based on
the difference between the closing sales price of the Company's Common
Stock of $3.88 on March 31, 1999 and exercise prices from $3.50 to
$5.25.
35
EMPLOYMENT AGREEMENT OF CHIEF EXECUTIVE OFFICER
As of October 10, 1995, the Company entered into an Employment
Agreement (the "Agreement") with Angelo S. Morini, the Company's
President and Chief Executive Officer. The Agreement has a term of
five years and provides for an annual base salary of $250,000
and an annual bonus in an amount equal to five percent of the Company's
pre-tax net income for book purposes, as determined by the Company's
independent certified public accounting firm. Other material provisions
of the Agreement are as follows:
1. Mr. Morini was granted the right to purchase (the "Purchase Rights")
2,571,429 shares of Common Stock, at a per share price of 110%
of the average closing bid price as reported on the NASDAQ System
for the ten trading days preceding the receipt by the Company of
written notice of Mr. Morini's election to purchase the shares.
As of October 11, 1995, Mr. Morini exercised the Purchase Rights
with respect to all 2,571,429 shares and, in accordance with the
terms of the Agreement, Mr. Morini executed in favor of the Company
a balloon promissory note (the "Note") in the principal amount
of $11,572,200.00, bearing interest at the rate of seven percent
per annum. The Note was due and payable in full on October 11,
2000, subject to Mr. Morini's option to extend the Note for up to
five additional years provided that he pays at least one-third of
the then accrued but unpaid interest, with any remaining unpaid
interest to be added to principal. In order to secure the Note,
Mr. Morini executed in favor of the Company a stock pledge and
security agreement pursuant to which Mr. Morini granted the Company
a first priority security interest in all of the Common Stock
which he acquired upon exercise of the Purchase Rights.
2.Mr. Morini shall be granted certain options to purchase Common
Stock upon the Company's achievement of each of the following milestone
events:
Milestone Event Number of Options Granted
Reaching break-even for a 142,858
calendar quarter
Annual net operating income 142,858
of $1,000,000 or more
Each increment of $1,000,000 142,858
of annual net operating income
in excess of $1,000,000
Each of the options granted as aforesaid shall have a term of five
years from the date granted and shall be exercisable in whole or in
part upon the delivery by Mr. Morini to the Company of written notice
of exercise. The exercise price for each of the options shall be the
closing bid price of the Company's Common Stock on the trading day
immediately preceding the Company's achievement of the related
milestone event as established by the NASDAQ System. The exercise
price for any such option shares may be evidenced by a promissory note
executed by Mr. Morini in favor of the Company and bearing interest at
a rate at least equal to the applicable federal rate established by the
United States Internal Revenue Service. The promissory note shall have
a term of five years. Mr. Morini shall have the option to extend the
note for up to five additional years provided that he pays at least one-
third of the then accrued but unpaid interest, with any remaining
unpaid interest to be added to principal. Any such promissory note
shall be secured by a first priority security interest in all shares
purchased by Mr. Morini in conjunction with the exercise of the options
as evidenced by a stock pledge and security agreement executed by Mr.
Morini in favor of the Company.
3.The Agreement is terminable by Mr. Morini upon the delivery of
written notice of termination in the event that a majority of the
Company's Board of Directors is at any time comprised of persons for
whom Mr. Morini did not vote in his capacity as a director or a
shareholder of the Company (a "Change of Control"). If Mr. Morini
abstains from voting for any person as a director, such abstention
shall be deemed to be an affirmative vote by Mr. Morini for such person
as a director.
4.If the Agreement is terminated, regardless of the reason for such
termination, Mr. Morini shall be entitled to retain all unexercised
Purchase Rights and options granted under the Agreement and all shares
of Common Stock issued in connection with the exercise of such Purchase
Rights and options, and shall receive all earned but unpaid base salary
through the effective date of termination and all accrued but unpaid
bonuses for the fiscal year(s) ending prior to the effective date of
termination. Additionally, in the event that Mr. Morini's employment
is terminated without cause or due to his death, total disability or
legal incompetence, or if Mr. Morini terminates his employment upon a
Change of Control, the Company shall pay to Mr. Morini or his estate
severance pay equal to three times the amount of Mr. Morini's annual
base salary (before deductions for withholding, employment and
unemployment taxes), and a bonus for the year of termination and the
following two years equal to the average of the two bonuses paid to Mr.
Morini under the Agreement.
36
5.In the event of a Change of Control, Mr. Morini may, at any time
thereafter, require that the Company purchase up to 234,081 shares of
his Common Stock at a purchase price of $3.50 per share, subject to
adjustment for any increase or decrease in the number of outstanding
shares of the Company's Common Stock or in the event that the Common
Stock is changed into or exchanged for a different number or class or
kind of shares or securities of the Company, by reason of merger,
consolidation, reorganization, recapitalization, reclassification,
stock dividend, stock split, combination of shares, exchange of shares,
change in corporate structure or the like.
6.The Company extended the maturity date of that certain Promissory
Note dated as of November 4, 1994, executed by Mr. Morini in favor of
the Company in the principal amount of $1,200,000 in conjunction with
his exercise of options previously granted by the Company for two
additional years until November 4, 2001.
7.In the event Mr. Morini voluntarily terminates
his employment with the Company or if he is terminated for "cause" (as
defined in the Agreement), he will not compete with the Company for a
period of one year following the date of termination of his employment
with the Company, whether as an employee, officer, director, partner,
shareholder, consultant or independent contractor in any business
substantially similar to that conducted by the Company within those
areas in the United States in which the Company is doing business as of
the date of termination.
On June 17, 1999, the Company's Board of Directors approved an
amendment and restatement of Mr. Morini's employment agreement.
The employment agreement, as amended, has a rolling five year term
and provides for an increased annual base salary of $300,000 and
a reduced, sliding scale percentage profit sharing bonus based on
the Company's annual pre-tax net income. The amended agreement
includes the grant of stock options to acquire shares of Common Stock
which, if exercised, would bring Mr. Morini's ownership interest in
the Company to 45% (on a fully diluted basis, including the exercise
of all outstanding options and warrants), and eliminates the ongoing
performance based option arrangement of the prior employment agreement.
The exercise price of the stock options granted in the amended
agreement is $3.31, the [closing bid price on the NASDAQ System as of
June 15, 1999]. The amended employment agreement further provides for
a consolidation of the two promissory notes executed by Mr. Morini in
favor of the Company in the principal amounts of $1,200,000 and
$11,572,000 in connection with prior stock option exercises. The
consolidated promissory note, which has a principal balance of $12,772,000,
is non-interest bearing, non-recourse to Mr. Morini and secured by the
Common Stock acquired by Mr. Morini in connection with the option exercises
for which he executed the original promissory notes. The approximately
$3,000,000 in unpaid interest payable under the original promissory notes
was forgiven. In the event Mr. Morini's employment is terminated by the
Company without cause or in the event that a majority of the Company's
Board of Directors is at any time comprised of persons for whom Mr.
Morini did not vote in his capacity as a director or a shareholder
of the Company (a "Change of Control"), Mr. Morini shall be
entitled to receive his then current base salary for a period of five
years or the end of the term of the Agreement, whichever is longer,
and all indebtedness under the consolidated promissory note shall be
forgiven. The amended employment agreement also eliminates Mr. Morini's
put rights described in paragraph 5 above which became effective upon
a Change of Control.
37
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
All figures set forth in this Item 12 related to the number of shares
of the Company's common stock or prices or values thereof are adjusted
to reflect the one-for-seven reverse stock split which was effected on
February 11, 1999.
BENEFICIAL OWNERS OF MORE THAN 5% OF THE COMPANY'S COMMON STOCK
The following table sets forth, to the knowledge of management, each
person or entity who is the beneficial owner of more than 5% of the
outstanding shares of the Company's Common Stock outstanding as of June
1, 1999 (assuming all of the outstanding rights, options, and warrants
of the Company's Common Stock currently outstanding and exercisable
are, in fact, exercised), the number of shares owned by each such
person and the percentage of the outstanding shares represented
thereby.
Amount and
Name and Address Nature of Percent of
of Beneficial Owner Beneficial Ownership (1) Class (2)
Angelo S. Morini
2441 Viscount Row
Orlando, Florida 32809 3,595,743(3) 38.4%
Cede & Co.
Box #20
Bowling Green Station
New York, New York 5,200,267(4) 56.6%
(1) The inclusion herein of any shares deemed beneficially owned does
not constitute an admission of beneficial ownership of these shares.
(2) The total number of shares outstanding assuming the exercise of
all currently exercisable and vested options and warrants held by all
executive officers, current directors, and holders of 5% or more of the
Company's issued and outstanding Common Stock is 9,364,250 shares.
Does not assume the exercise of any other options or warrants.
(3) Includes options to acquire 163,072 shares of the Company's Common
Stock. All of Mr. Morini's options currently are exercisable at $3.50
to $5.75 per share. The original exercise prices of 20,215 of the
options ranged from $17.50 per share to $25.03 per share. The exercise
prices of these options were reduced by the Board of Directors to $3.50
per share on August 31, 1993. Options expire as to 7,143 shares on
December 4, 1997, as to 13,072 shares on October 1, 2001 and as to
142,858 on July 1, 2007. Also includes 715 shares owned by Mr. Morini
that are held in a nominee name and 286 shares held in joint tenancy.
With the exception of the options and the share held in a nominee name,
all of Mr. Morini's shares have been transferred to Morini Investments
Limited Partnership, a Delaware limited liability partnership, of which
Angelo Morini is the sole limited partner and Morini Investments LLC is
the sole general partner. Mr. Morini is the sole member of Morini
Investments LLC.
(4) Cede & Co. is a share depository used by shareholders to hold
stock in street name. Does not include 715 shares beneficially owned
by Angelo S. Morini and held by Cede & Co. in street name.
39
SHARE OWNERSHIP OF OFFICERS AND DIRECTORS
The following table sets forth, as of June 1, 1999, the number of
shares owned directly, indirectly and beneficially of each executive
officer and director of the Company, and by all executive officers and
directors as a group.
Amount and
Name and Address Nature of Percent of
of Beneficial Owner Beneficial Ownership (1) Class (2)
Angelo S. Morini
Galaxy Foods Company
2441 Viscount Row
Orlando, Florida 32809 3,595,743(3) 38.4%
Earl G. Tyree
240 North Line Drive
Apopka, Florida 32703 3,144(4) *
Douglas A. Walsh
607 Tamiami Trail
Ruskin, Florida 33570 3,239(5) *
Marshall K. Luther
Galaxy Foods Company
2441 Viscount Row
Orlando, Florida 32809 9,190(6) *
Cynthia L. Hunter
Galaxy Foods Company
2441 Viscount Row
Orlando, Florida 32809 5,286(7) *
All executive officers and directors
as a group 3,616,602
* Less than 1%.
(1) The inclusion herein of any shares deemed beneficially owned does
not constitute an admission of beneficial ownership of these shares.
(2) The total number of shares outstanding assuming the exercise of
all currently exercisable and vested options and warrants held by all
executive officers, directors, and holders of 5% or more of the
Company's issued and outstanding Common Stock is 9,364,250 shares.
Does not assume the exercise of any other options or warrants.
(3) Includes options to acquire 163,072 shares of the Company's Common
Stock. All of Mr. Morini's options currently are exercisable at $3.50
to $5.75 per share. The original exercise prices of 20,215 of the
options ranged from $17.50 per share to $25.03 per share. The exercise
prices of these options were reduced by the Board of Directors to $3.50
per share on August 31, 1993. Options expire as to 7,143 shares on
December 14, 1997, as to 13,072 shares on October 1, 2001, and 142,858
as to July 1, 2007. Also includes 2,143 shares owned by Mr. Morini
that are held in a nominee name and 286 shares held in joint tenancy.
With the exception of the options and the share held in a nominee name,
all of Mr. Morini's shares have been transferred to Morini Investments
Limited Partnership, a Delaware limited liability partnership, of which
Angelo Morini is the sole limited partner and Morini Investments LLC is
the sole general partner. Mr. Morini is the sole member of Morini
Investments LLC.
39
(4) Mr. Tyree, a current member of the Board of Directors, was granted
an option to acquire 2,143 shares of Common Stock on September 11, 1992
for an exercise price of $20.16 per share. This option expires on
September 11, 2002. The closing bid price of the Company's Common
Stock as quoted on the NASDAQ System on September 10, 1992 was $20.13
per share. Mr. Tyree was granted an additional option on October 1,
1993 to acquire 143 shares of Common Stock at an exercise price of
$14.88 per share. This option expires on October 1, 2003. The closing
bid price of the Company's Common Stock as quoted on the NASDAQ System
on September 30, 1993 was $14.00 per share. The exercise price of all
of Mr. Tyree's then existing options was reduced to $14.00 per share on
January 31, 1994. The closing bid price of the Company's Common Stock
as quoted on the NASDAQ System on January 28, 1994 was $32.38 per
share. On October 1, 1994, Mr. Tyree was granted an option to acquire
143 shares at an exercise price of $19.25 per share. The closing bid
price of the Company's Common Stock as quoted on the NASDAQ System on
September 30, 1994, was $20.13 per share. This option expires on
October 1, 2004. On October 1, 1995, Mr. Tyree was granted an option
to acquire 143 shares at an exercise price of $4.13 per share. The
closing bid price of the Company's Common Stock as quoted on the NASDAQ
System on September 29, 1995, was $4.16 per share. This option expires
on October 1, 2005. This option expires on October 1, 2005. On October
1, 1996, Mr. Tyree was granted an option to acquire 286 shares at an
exercise price of $10.29 per share which expire on October 1, 2006.
The closing bid price of the Company's Common Stock as quoted on the
NASDAQ System on September 30, 1996 was $10.50 per share. On October
1, 1997, he was granted an option to acquire 286 shares at an exercise
price of $8.3125 per share which expire on October 1, 2007. The
closing bid price of the Company's Common Stock as quoted on the NASDAQ
system on September 30, 1997 was $8.31 per share. All of Mr. Tyree's
options currently are exercisable.
(5) Dr. Walsh, a current member of the Board of Directors, was granted
an option to acquire 2143 shares of Common Stock on January 31, 1992
for an exercise price of $21.00 per share. This option expires on
January 31, 2002. The closing bid price of the Company's Common Stock
as quoted on the NASDAQ System on January 30, 1992 was $17.50 per
share. Dr. Walsh was granted an additional option on October 1, 1992
to acquire 96 shares of Common Stock at an exercise price of $20.13 per
share. This option expires on October 1, 2002. The closing bid price
of the Company's Common Stock as quoted on the NASDAQ System on
September 30, 1992 was $18.38 per share. The exercise price of all of
Dr. Walsh's then existing options was reduced to $14.00 per share on
January 31, 1994. The closing bid price of the Company's Common Stock
as quoted on the NASDAQ System on January 28, 1994 was $32.38 per
share. On October 1, 1994, Dr. Walsh was granted an option to acquire
143 shares at an exercise price of $19.25 per share. The closing bid
price of the Company's Common Stock as quoted on the NASDAQ System on
September 30, 1994, was $20.13 per share. This option expires on
October 1, 2004. On October 1, 1995, Dr. Walsh was granted an option
to acquire 143 shares at an exercise price of $4.13 per share. The
closing bid price of the Company's Common Stock as quoted on the NASDAQ
System on September 29, 1995, was $4.16 per share. This option expires
on October 1, 2005. On October 1, 1996, Dr. Walsh was granted an
option to acquire 286 shares at an exercise price of $10.29 per share
which expire on October 1, 2006. The closing bid price of the
Company's Common Stock as quoted on the NASDAQ System on September 30,
1996 was $10.50 per share. On October 1, 1997, he was granted an option
to acquire 286 shares at an exercise price of $8.31 per share which
expire on October 1, 2007. The closing bid price of the Company's
Common Stock as quoted on the NASDAQ system on September 30, 1997 was
$8.31 per share. All of Dr. Walsh's options currently are exercisable.
(6) Mr. Luther, a current member of the Company's Board of Directors,
holds warrants to acquire 7143 shares of Common Stock at a price of
$4.48 per share. These warrants were granted as compensation for work
per the terms of Mr. Luther's former agreement with the Company to
serve as Senior Vice President of Marketing for a term of one year. In
addition, Mr. Luther was granted options to acquire 2,143 shares of the
Company's Common Stock on January 31, 1996, for an exercise price of
$5.69 per share, which option expires on January 31, 2006. On October
1, 1996, Mr. Luther was granted an option to acquire 190 shares at an
exercise price of $10.29 per share which expire on October 1, 2006.
The closing bid price of the Company's Common Stock as quoted on the
NASDAQ System on September 30, 1996 was $10.50 per share. On October 1,
1997, he was granted an option to acquire 286 shares at an exercise
price of $8.31 per share which expire on October 1, 2007. The closing
bid price of the Company's Common Stock as quoted on the NASDAQ system
on September 30, 1997 was $8.31 per share. All of Mr. Luther's options
currently are exercisable.
40
(7) Includes options to acquire 4,286 shares of the Company's Common
Stock which were granted to Ms. Hunter in fiscal 1998 pursuant to the
Company's 1996 Stock Option Plan. Such options are exercisable at
$5.47 to $7.00 per share and expire as to 2,143 on June 18, 2007 and as
to 2,143 on October 23, 1997. Of these options, 2,143 are currently
exercisable.
Item 13. Certain Relationships and Related Transactions.
All figures set forth in this Item 13 related to the number of shares
of the Company's common stock or prices or values thereof are adjusted
to reflect the one-for-seven reverse stock split which was effected on
February 11, 1999.
As of October 10, 1995, the Company entered into an Employment
Agreement (the "Agreement") with Angelo S. Morini, the Company's
President and Chief Executive Officer. The Agreement has a term of
five years and provides for an annual base salary of $250,000
and an annual bonus in an amount
equal to five percent of the Company's pre-tax net income for book
purposes, as determined by the Company's independent certified public
accounting firm. Other material provisions of the Agreement are as
follows:
1. Mr. Morini was granted the right to purchase (the "Purchase Rights")
2,571,429 shares of Common Stock, at a per share price of 110% of the average
closing bid price as reported on the NASDAQ System for the ten trading days
preceding the receipt by the Company of written notice of Mr. Morini's election
to purchase the shares. As of October 11, 1995, Mr. Morini exercised the
Purchase Rights with respect to all 2,571,429 shares and, in accordance with
the terms of the Agreement, Mr. Morini executed in favor of the Company a
balloon promissory note (the "Note") in the principal amount of $11,572,200,
bearing interest at the rate of seven percent per annum. The Note was due and
payable in full on October 11, 2000, subject to Mr. Morini's option to extend
the Note for up to five additional years provided that he pays at least one-
third of the then accrued but unpaid interest, with any remaining unpaid
interest to be added to principal. In order to secure the Note, Mr. Morini
executed in favor of the Company a stock pledge and security agreement pursuant
to which Mr. Morini granted the Company a first priority security interest
in all of the Common Stock which he acquired upon exercise of the Purchase
Rights.
2.Mr. Morini shall be granted certain options to purchase Common
Stock upon the Company's achievement of each of the following milestone
events:
Milestone Event Number of Options Granted
Reaching break-even for a 142,858
calendar quarter
Annual net operating income 142,858
of $1,000,000 or more
Each increment of $1,000,000 142,858
of annual net operating income
in excess of $1,000,000
Each of the options granted as aforesaid shall have a term of five
years from the date granted and shall be exercisable in whole or in
part upon the delivery by Mr. Morini to the Company of written notice
of exercise. The exercise price for each of the options shall be the
closing bid price of the Company's Common Stock on the trading day
immediately preceding the Company's achievement of the related
milestone event as established by the NASDAQ System. The exercise
price for any such option shares may be evidenced by a promissory note
executed by Mr. Morini in favor of the Company and bearing interest at
a rate at least equal to the applicable federal rate established by the
United States Internal Revenue Service. The promissory note shall have
a term of five years. Mr. Morini shall have the option to extend the
note for up to five additional years provided that he pays at least one-
third of the then accrued but unpaid interest, with any remaining
unpaid interest to be added to principal. Any such promissory note
shall be secured by a first priority security interest in all shares
purchased by Mr. Morini in conjunction with the exercise of the options
as evidenced by a stock pledge and security agreement executed by Mr.
Morini in favor of the Company.
3.The Agreement is terminable by Mr. Morini upon the delivery of
written notice of termination in the event that a majority of the
Company's Board of Directors is at any time comprised of persons for
whom Mr. Morini did not vote in his capacity as a director or a
shareholder of the Company (a "Change of Control"). If Mr. Morini
abstains from voting for any person as a director, such abstention
shall be deemed to be an affirmative vote by Mr. Morini for such person
as a director.
4.If the Agreement is terminated, regardless of the reason for such
termination, Mr. Morini shall be entitled to retain all unexercised
Purchase Rights and options granted under the Agreement and all shares
of Common Stock issued in connection with the exercise of such Purchase
Rights and options, and shall receive all earned but unpaid base salary
through the effective date of termination and all accrued but unpaid
bonuses for the fiscal year(s) ending prior to the effective date of
termination. Additionally, in the event that Mr. Morini's employment
is terminated without cause or due to his death, total disability or
legal incompetence, or if Mr. Morini terminates his employment upon a
Change of Control, the Company shall pay to Mr. Morini or his estate
severance pay equal to three times the amount of Mr. Morini's annual
base salary (before deductions for withholding, employment and
unemployment taxes), and a bonus for the year of termination and the
following two years equal to the average of the two bonuses paid to Mr.
Morini under the Agreement.
41
5.In the event of a Change of Control, Mr. Morini may, at any time
thereafter, require that the Company purchase up to 234,081 shares of
his Common Stock at a purchase price of $3.50 per share, subject to
adjustment for any increase or decrease in the number of outstanding
shares of the Company's Common Stock or in the event that the Common
Stock is changed into or exchanged for a different number or class or
kind of shares or securities of the Company, by reason of merger,
consolidation, reorganization, recapitalization, reclassification,
stock dividend, stock split, combination of shares, exchange of shares,
change in corporate structure or the like.
6.The Company extended the maturity date of that certain Promissory
Note dated as of November 4, 1994, executed by Mr. Morini in favor of
the Company in the principal amount of $1,200,000 in conjunction with
his exercise of options previously granted by the Company for two
additional years until November 4, 2001.
7.In the event Mr. Morini voluntarily terminates
his employment with the Company or if he is terminated for "cause" (as
defined in the Agreement), he will not compete with the Company for a
period of one year following the date of termination of his employment
with the Company, whether as an employee, officer, director, partner,
shareholder, consultant or independent contractor in any business
substantially similar to that conducted by the Company within those
areas in the United States in which the Company is doing business as of
the date of termination.
On June 17, 1999, the Company's Board of Directors approved an
amendment and restatement of Mr. Morini's employment agreement.
The employment agreement, as amended, has a rolling five year term
and provides for an increased annual base salary of $300,000 and
a reduced, sliding scale percentage profit sharing bonus based on
the Company's annual pre-tax net income. The amended agreement
includes the grant of stock options to acquire shares of Common Stock
which, if exercised, would bring Mr. Morini's ownership interest in
the Company to 45% (on a fully diluted basis, including the exercise
of all outstanding options and warrants), and eliminates the ongoing
performance based option arrangement of the prior employment agreement.
The exercise price of the stock options granted in the amended
agreement is $3.31, the [closing bid price on the NASDAQ System as of
June 15, 1999]. The amended employment agreement further provides for
a consolidation of the two promissory notes executed by Mr. Morini in
favor of the Company in the principal amounts of $1,200,000 and
$11,572,000 in connection with prior stock option exercises. The
consolidated promissory note, which has a principal balance of $12,772,000,
is non-interest bearing, non-recourse to Mr. Morini and secured by the
Common Stock acquired by Mr. Morini in connection with the option exercises
for which he executed the original promissory notes. The approximately
$3,000,000 in unpaid interest payable under the original promissory notes
was forgiven. In the event Mr. Morini's employment is terminated by the
Company without cause or in the event that a majority of the Company's
Board of Directors is at any time comprised of persons for whom Mr.
Morini did not vote in his capacity as a director or a shareholder
of the Company (a "Change of Control"), Mr. Morini shall be
entitled to receive his then current base salary for a period of five
years or the end of the term of the Agreement, whichever is longer,
and all indebtedness under the consolidated promissory note shall be
forgiven. The amended employment agreement also eliminates Mr. Morini's
put rights described in paragraph 5 above which became effective upon
a Change of Control.
Included under the heading Other Receivables on the Balance Sheet is
$130,729 in advances to Angelo Morini.
Angelo S. Morini's brother, Christopher Morini, works for the Company
as Vice President of Marketing. On May 16, 1996, Christopher Morini
was issued an option to purchase 7,143 shares of the Company's Common
Stock at a price of $8.47 per share. This option expires on May 16,
2006. This option is currently exercisable for 4,286 of the 7,143
shares under option. On September 24, 1998, Christopher Morini was
issued an option to purchase 14,286 shares of the Company's Common
Stock at a price of $2.87 per share. This option expires on September
24, 2008. This option is currently fully exercisable.
42
Part IV
Item 14. Exhibits and Reports on Form 8-K.
The following Exhibits are filed as part of this Form 10-K.
Exhibit No Exhibit Description
*3.1 Certificate of Incorporation of the Company, as amended
(Filed as Exhibit 3.1 to the Company's Registration Statement
on Form S-18, No. 33-15893-NY, incorporated herein by
reference.)
*3.2 Amendment to Certificate of Incorporation of the
Company, filed on February 24, 1992 (Filed as Exhibit 4(b) to
the Company's Registration Statement on Form S-8, No. 33-
46167, incorporated herein by reference.)
*3.3 By-laws of the Company, as amended (Filed as Exhibit 3.2
to the Company's Registration Statement on Form S-18, No. 33-
15893-NY, incorporated herein by reference.)
*3.4 Amendment to Certificate of Incorporation of the
Company, filed on January 19, 1994 (Filed as Exhibit 3.4 to
the Company's Registration Statement on Form SB-2, No. 33-
80418, and incorporated herein by reference.)
*3.5 Amendment to Certificate of Incorporation of the
Company, filed on July 11, 1995 (Filed as Exhibit 3.5 on Form
10-KSB for fiscal year ended March 31, 1996, and incorporated
herein by reference.)
*3.6 Amendment to Certificate of Incorporation of the
Company, filed on January 31, 1996 (Filed as Exhibit 3.6 on
Form 10-KSB for fiscal year ended March 31, 1996, and
incorporated herein by reference.)
10.1 Second Amendment to the Security Agreement with Finova
Financial Services dated June 1998 (Filed herewith.)
10.2 Third Amendment to the Security Agreement with
Finova Financial Services dated December 1998 (Filed
herewith.)
27 Financial Data Schedule (Filed herewith.)
Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of
the period covered by this report.
* Previously filed
43
SIGNATURES
Pursuant to the requirements of 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.
GALAXY FOODS COMPANY
Date: June 25, 1999 /s/Angelo S. Morini
Angelo S. Morini
Chairman and President
(Principal Executive Officer)
Date: June 25, 1999 /s/Cynthia L. Hunter
Cynthia L. Hunter, CPA
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: June 25, 1999 /s/Douglas Walsh
Douglas Walsh, M.D.
Director
Date: June 25, 1999 /s/Marshall Luther
Marshall Luther
Director
Date: June 25, 1999 /s/Earl Tyree
Earl Tyree
Director
44
"Exhibits"
Exhibit No Exhibit Description Page No.
*3.1 Certificate of Incorporation of the
Company, as amended (Filed as Exhibit
3.1 to the Company's Registration
Statement on Form S-18, No. 33-15893-NY,
incorporated herein by reference.)
*3.2 Amendment to Certificate of
Incorporation of the Company, filed on
February 24, 1992 (Filed as Exhibit 4(b)
to the Company's Registration Statement
on Form S-8, No. 33-46167, incorporated
herein by reference.)
*3.3 By-laws of the Company, as amended
(Filed as Exhibit 3.2 to the Company's
Registration Statement on Form S-18, No.
33-15893-NY, incorporated herein by
reference.)
*3.4 Amendment to Certificate of
Incorporation of the Company, filed on
January 19, 1994 (Filed as Exhibit 3.4
to the Company's Registration Statement
on Form SB-2, No. 33-80418, and
incorporated herein by reference.)
*3.5 Amendment to Certificate of Incorporation
of the Company, filed on July 11, 1995 (Filed
as Exhibit 3.5 on Form 10-KSB for fiscal year
ended March 31, 1996, and incorporated herein
by reference.)
*3.6 Amendment to Certificate of Incorporation
of the Company, filed on January 31, 1996 (Filed
as Exhibit 3.6 on Form 10-KSB for fiscal year
ended March 31, 1996, and incorporated herein
by reference.)
10.1 Second Amendment to the Security Agreement
with Finova Financial Services (Filed herewith.) 45
10.2 Third Amendment to the Security Agreement
with Finova Financial Services (Filed herewith.) 47
27 Financial Data Schedule (Filed herewith.)
* Previously filed
45
Second Amendment to Security Agreement with Finova
As of June 3, 1998
RE: FINOVA Capital Corporation ("FINOVA") with Galaxy Foods
Company ("Borrower")
Gentlemen:
Reference is made to that certain Security Agreement
(Accounts Receivable, Inventory and Equipment) dated
November 1, 1996, by and between FINOVA and Borrower, and
reference is also made to those certain Amendments to the
Security Agreement dated June 27, 1997, and February 8,
1998, each by and between FINOVA and Borrower (collectively,
the "Security Agreement"), Borrower has requested and FINOVA
has agreed to amend the terms of the Security Agreement as
follows:
1.The line of credit defined in paragraph 1.10 of the
Security Agreement is hereby increased from $4,500,000 to
$6,500,000;
2.Section 1 of the Security Agreement is hereby amended by
inserting the following defined term as paragraph 1.16:
"Operating Cash Flow/Actual" means for any period,
Borrower's new income or loss (excluding the effect of any
extraordinary gains or losses), determined in accordance
with GAAP, plus or minus each of the following items, to the
extent deducted from or added to the revenues of Borrower in
the calculation of net income or loss: (I) depreciation;
(ii) amortization and other non-cash charges; (iii) interest
expense paid or accrued; (iv) total amortization and other
non-cash charges; (iii) interest expense paid or accrued
(iv) total federal and state income tax expense determined
as the accrued liability of Borrower in respect of such
period, regardless of what portion of such expense has
actually been paid by Borrower during such period; and (v)
Management Fees paid, to the extent permitted hereunder, and
after deduction for each of (a) federal and state income
taxes, to the extent actually paid during such period; (b)
any non-cash income; and (c) all actual Capital Expenditures
made during such period and not financed.
3.Paragraph 2.1 (a) shall be amended by increasing the
maximum sublimit for advances made against Eligible
Receivables from $3,000,000 to $3,500,000, and Paragraph 2.1
(b) of the Security Agreement shall be amended by increasing
the maximum sublimit for advances made against Eligible
Inventory from $750,000 to $1,500,000 (collectively the
"Revolving Line of Credit");
4.Paragraph 2.1(c) of the Security Agreement shall be
modified by increasing the prior Purchase Money M&E Advance
(now, the "Term Loan") from $1,500,000 to $3,000,000 and
advancing such additional amounts so as to increase the
existing Term Loan to the amount of $3,000,000 which shall
now be repaid in arrears to FINOVA in Thirty Nine (39)
successive monthly installments of principal in the amount
of Thirty Six Thousand Dollars ($36,000) together with
accrued interest thereon payable on the first day of each
month, beginning July 1, 1998, and continuing through and
including September 1, 2001; and the final installment shall
now be payable on October 1, 2001 in the amount of the
principal balance together with accrued interest thereon
form time to time remaining unpaid. Interest shall be
computed on the basis of a 360-day year for the actual
number of days elapsed, and shall be at the rate of 1point
above the Prime Rate (as defined in the Security Agreement)
computed on the basis of a 360-day year; provided, however,
upon the occurrence and during the continuance of an event
of default ( as defined in the Security Agreement), interest
shall accrue on the outstanding principal balance at the
Default Rate, as set forth in the Security Agreement.
Notwithstanding the foregoing, FINOVA shall have the right
at any time to demand and receive the immediate repayment of
the entire balance of the Term Loan in the event (a) of any
default or termination under this Agreement; (b) of any
reduction in the value of the Borrower's machinery and
equipment; or (c) that FINOVA, in its sole and absolute
discretion, shall consider the Term Loan insecure;
5.Paragraph 3.1 of the Security Agreement shall be amended
by deleting the first sentence of such paragraph and
replacing it with the following sentence: 3.1 FINOVA is
authorized to charge the Borrower's loan account as an
advance on the first day of each month as follows: (a) all
costs and expenses; (b) interest on Borrower's monthly
average loan balance (inclusive of all advances made
pursuant to paragraph 2.1 of this Agreement, together with
all costs and expenses charged to paragraph 2.1 of this
Agreement, together will all costs and expenses charged to
Borrower's account) which shall be payable by Borrower to
FINOVA (I) on the Borrower's monthly average Revolving Line
of Credit at the per annum Prime Rate (as defined in the
Security Agreement) plus one half of one (.5) point (the
"Revolver Interest Rate"), and (ii) on any Term Loan
advanced to Borrower pursuant to Paragraph 2.1 of the
Security Agreement, at the per annum Prime Rate plus One (1)
point (the "Term Interest Rate") (c) Letter of Credit Fees
("LC Fee") in the amount of two percent of the face amount
of any such Letters of Credit issued for the account of
Borrower, the aggregate face amount of which shall not
exceed $500,000, which amount shall be fully reserved by
FINOVA from Borrower's Revolving Line of Credit
availability;
46
6.Paragraph 3.5 of the Security Agreement is hereby amended
reducing the monthly Service Fee payable by Borrower to
FINOVA from $1,000 to $750;
7.Section 3 of the Security Agreement is hereby amended
with the addition of paragraph 3.7 as follows: 3.7 Borrower
shall unconditionally pay to FINOVA a fee equal to one-half
of one percent (.5%) per annum of the difference between the
Revolving Line of Credit and the average daily outstanding
balance of the Revolving Line of Credit loans during such
quarter, or portion thereof ("Unused Line Fee"), which fee
shall be calculated and payable quarterly, in arrears, and
shall be due and payable, the commencing on the first
Business Day of the Borrower's first fiscal quarter
following the Closing Date continuing on the first Business
Day of each fiscal quarter thereafter.
8.Paragraph 9.1 of the Security Agreement shall be amended
extending the term of the Security Agreement to October 31,
2001;
9.Paragraph 9.2 of the Security Agreement shall be amended
by deleting subparagraphs (a) and (b) and replacing them
with the following language: "(a) one (1%) percent of the
Line of Credit if the Security Agreement is terminated prior
to October 30, 1999; and (b) one-half of one percent of the
Line of Credit if the Security Agreement is terminated
during the period from October 31, 1999 to October 30, 2000;
10. Section 6 of the Security Agreement shall be amended to
include a new paragraph 6.18 the following language: Total
Debt Service Coverage Ration. As of the last day of each
calendar quarter ended March 31, June 30, September 30, and
December 31, Borrower's Operating Cash Flow/Actual for the
consecutive 12-month period ending as of such last day must
be at least 1.25 times the amount necessary to meet
Borrower's Total Contractual Debt Service for such 12 month
period; provided however, that, with respect to the
calculations set forth herein form the period from the
Closing Date through December 31, 1998, Borrower's Operating
Cash Flow/Actual and Total Contractual Debt Service shall be
determined beginning as of March 31, 998 (the "Start Date")
and be measured as follows: (I) the time period from the
Start Date through September 30, 1998 shall be for such
amounts for such period, (ii) the time period from the Start
Date through December 31, 1998 shall be for such amounts for
such period; and, provided further, that all such
determinations shall be made on a consolidated basis.
In consideration of this Amendment to the Security
Agreement, Borrower shall pay FINOVA a fee in the amount of
$45,000 which amount shall be deemed earned and payable to
FINOVA immediately upon the execution and delivery of this
Agreement.
Except as provided for herein, all other terms and
conditions contained in the Security Agreement shall remain
in full force and effect and in all respects unchanged.
FINOVA CAPITAL CORPORATION
/s/ Frank Madonna
Frank Madonna, Assistant Vice President
Accepted and Agreed to as of the 3rd Day of June 1998
Galaxy Foods Company
/s/ Cynthia Hunter
Cynthia Hunter, Authorized Signatory
47
Third Amendment to Security Agreement with Finova
As of December 8, 1998
RE: FINOVA Capital Corporation ("FINOVA") with Galaxy Foods
Company ("Borrower")
Gentlemen:
Reference is made to that certain Security Agreement
(Accounts Receivable, Inventory and Equipment) dated
November 1, 1996, by and between FINOVA and Borrower, and
reference is also made to those certain Amendments to the
Security Agreement dated June 27, 1997, February 8, 1998 and
June 3, 1998, each by and between FINOVA and Borrower
(collectively, the "Security Agreement"), Borrower has
requested and FINOVA has agreed to amend the terms of the
Security Agreement as follows:
1.The line of credit defined in paragraph 1.10 of the
Security Agreement is hereby increased from $6,500,000 to
$8,500,000;
2.Paragraph 2.1 shall be amended by deleting the entire
Paragraph and replacing it with the following: "2.1 FINOVA
shall from time to time, in its sole and absolute
discretion, make loans, advances and other financial
accommodations to or for the benefit of the Borrower of the
lesser of (a) up to $5,500,000 (the "Revolving Line of
Credit"); or (b) the sum of (I) 80% of the Net Amount of
Eligible accounts (or such greater of lesser percentage
thereof as FINOVA shall, in its sole discretion determine);
and (ii) 35% of eligible inventory (as determined by FINOVA
in its sole and absolute discretion and priced at the lower
of cost or market) in an amount not to exceed $2,350,000;
3.Paragraph 3.1 of the Security Agreement shall be amended
by increasing the maximum aggregate face amount of Letters
of Credit issued for the account of Borrower from $500,000
to $1,000,000
4.Paragraph 9.2 of the Security Agreement shall be amended
by deleting subparagraph (b) and replacing it with the
following: (b) one (1%) percent of the Line of Credit if
the Security Agreement is terminated during the period from
October 30, 1999 to October 30, 2000; (c) one half of one
(.5%) percent of the Line of Credit if the Security
Agreement is terminated during the period from October 31,
12000 to October 30, 2001.
In consideration of this Amendment to the Security
Agreement, Borrower shall pay FINOVA a fee in the amount of
$65,000 ("Closing Fee") which amount shall be deemed earned
and payable to FINOVA immediately upon the execution and
delivery of this Agreement. Notwithstanding the foregoing,
Borrower has requested, and FINOVA has agreed to accept
payment of the closing fee in six equal installments, each
in the amount of $10,833.33 payable in arrears on November
30, 1998, December 31, 1998, January 31, 1999, February 28,
1999, March 31, 1999 and April 30, 1999.
Except as provided for herein, all other terms and
conditions contained in the Security Agreement shall remain
in full force and effect and in all respects unchanged.
FINOVA CAPITAL CORPORATION
/s/ James J. Bradley
James J. Bradley, Assistant Vice President
Accepted and Agreed to as of the 8th Day of December 1998
Galaxy Foods Company
/s/ Cynthia Hunter
Cynthia Hunter, Authorized Signatory