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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, 2001
COMMISSION FILE NO. 0-16251
GALAXY NUTRITIONAL FOODS, INC.
(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. $46,992,291
The aggregate market value of the voting stock held by non-affiliates as of JULY
6, 2001 was $35,175,961.10 based on the closing sales price of $5.35 per share
on such date.
The number of shares outstanding of Galaxy Nutritional Foods, Inc.'s Common
Stock as of JULY 9, 2001 was 10,017,612.
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 Nutritional Foods, Inc. (the "Company") is principally engaged in
developing, manufacturing and marketing a variety of healthy cheese and dairy
related products, as well as other cheese alternatives, and is a leading
producer of soy-based alternative dairy products. The Company was founded by
Angelo Morini in 1972. In 1980, the Company's original name of Fiesta Foods &
Galaxy Foods was changed to Galaxy Cheese Company with headquarters in New
Castle, Pennsylvania. The Company was subsequently reincorporated in Delaware in
1987. In June 1992, the Company changed its name to Galaxy Foods Company. On
November 16, 2000, the Company changed its name again to Galaxy Nutritional
Foods, Inc. to more clearly define itself in the healthy nutritional foods
market, one of the fastest growing sectors in the food industry.
In June of 1991, 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 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.
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 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 changing to more nutritious eating habits.
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PRODUCTS AND SERVICES
The Company's healthy cheese and dairy related products, sold under the
Company's Veggie Milk(TM), Veggie Slices(TM), formagg(R), Soyco(R), Soymage(R),
Wholesome Valley(TM), Lite Bakery(R), and Veggie Lite Bakery(R) 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.
VEGGIE(R) 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(R) products are low in fat, contain less
calories and are cholesterol and lactose free. The Veggie(R) product line
includes Veggie(R) Slices, Veggie(R) Chunks, Veggie(R) Shreds, Veggie(R) Cream
Cheese, Veggie(R) Sour Cream, Veggie(R) Butter, Veggie(R) Honey Butter,
Veggie(R) Grated Toppings, Veggie(R) Milk, Veggie(R) Milk Bars, Veggie(R) Ice
Cream, Veggie(R) Yogurt, Veggie(R) String Cheese, Veggie(R) Deli Products and
Veggie(R) Ultra Smoothie.
DAIRY FREE - SOYMAGE(R) VEGAN DAIRY ALTERNATIVES - Soymage(R) 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(R) Vegan line is completely dairy
free, contains no animal fats and has no casein (skim milk protein). The
Soymage(R) Vegan product line includes: cheese slices, grated toppings, chunk
cheese and sour cream and cream cheese alternatives. The Company's Soymage(R)
line is the largest and most comprehensive vegan line in the world.
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 Rice, Oat and Almond product
lines include cheese chunks and individual slices available in American, cheddar
and mozzarella flavors. The Company also manufactures Rice Cream Cheese, Rice
Sour Cream, Rice Butter and Rice Yogurt.
VEGGY(R) - SOY NUTRITIOUS - SOY DAIRY ALTERNATIVES - These Veggy(R) 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(R) product lines are available as singles and chunks and in several
flavors. These products are distributed to natural foods stores and produced
specifically to meet the discriminating taste and nutritional demands of the
specialized nutritional foods market.
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WHOLESOME VALLEY ORGANIC(TM) - PRODUCTS MADE FROM ORGANIC MILK - These products
are processed cheese foods made from organic milk, and contain up to 50% less
fat than regular processed cheese food, contain no artificial ingredients, no
rBST hormone or antibiotics and are an excellent source of calcium and protein.
The farmland, cows and feed are free from pesticides, antibiotics, growth
hormones and chemicals. Galaxy is the only producer of organic milk individually
wrapped slices in the United States.
PROCESSED CHEESE PRODUCTS - GALAXY SANDWICH SLICES AND TOPPINGS - 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.
These products include a variety of sandwich slices and shredded cheeses,
shredded taco and pizza toppings and a cheddar cheese sauce.
LITE BAKERY(R) - LITE BAKERY(R) BY GALAXY NUTRITIONAL FOODS MADE WITH VEGGIE(R)
BRAND DAIRY ALTERNATIVES - The Company has developed a collection of over 50
recipes using the company's soy based bakery ingredients. The Company's soy
based bakery powder can be used to develop finished products or can be sold as
an ingredient to be used in other foods. The Company's Lite Bakery(R) mix is fat
free, low or reduced fat, cholesterol free and lactose free.
VEGGIE CAFE(TM) - The Company's Veggie Cafe(TM) locations require a few feet of
space and take the form of kiosks, counters or carts. This concept has been
initially introduced to colleges, universities food courts, student unions and
high school cafeterias. The Veggie Cafe(TM) serves a full line of healthy
offerings such as pizzas, wraps, salads, baked goods, desserts and beverages
created from the Company's plant protein based products and ingredients.
VEGGIE(R) CULINARY SCHOOL - The Company's Veggie(R) Culinary School provides an
educational culinary resource for chefs, dietitians, nutritionists,
restaurateurs and the general public to incorporate innovative nutraceutical
food products into their entrees. Classes are designed to increase understanding
of the relationship between food and disease, benefits of incorporating
functional foods into a diet and nutritional basics. The school is recognized
and accredited by the American Dietetic Association, the American Culinary
Institute and Valencia College.
The Company's only branded product line, which accounts for more than 10% of
sales for fiscal 2001, is the Veggie(R) line of products. Sales of this product
line for fiscal 2001 were $26.2 million or 56% 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 CHANNELS AND METHODS
The Company's products are sold primarily to two commercial markets: retail
(conventional grocery stores, mass merchandisers, natural foods and club stores)
and food service.
The Company currently distributes all of its products by common carrier and
customer pick-up. The Company ships all its products from its shipping,
warehouse and cooler facilities 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(R) products are also made using the Company's formulas, processes and
manufacturing equipment from these principal ingredients, except that Soymage(R)
does not contain casein. All of these products are produced at a temperature
above that required for pasteurization. The Company's original 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
manufacturing 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, 2001, 2000 and 1999, the Company's
capital expenditures were approximately $10,887,000, $4,405,000 and $2,168,000,
respectively. This included capitalized interest of $826,725, $490,442 and
$395,963 during fiscal 2001, 2000 and 1999, respectively. The substantial
capital expenditures for fiscal 2001 were the result of the Company's on-going
construction of several new production lines at its Orlando, Florida
manufacturing facility. These new lines included two new slice lines, a new
chunk cheese line, a cup line, a string cheese line and a shred line. During
fiscal 2000 and 1999, the large capital expenditures were primarily due to the
purchase and construction of several large pieces of production equipment. This
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equipment includes packaging equipment, modifications to the Company's cheese
loaf machinery, and industrial blenders for powdered products.
SALES AND MARKETING
In the retail market, the Company markets its healthy products to supermarkets,
health food stores and club 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.
In the food service market, the Company promotes its healthy Veggie(R) and
formagg(R) cheese products as well as lower cost cheese alternatives. In
marketing its Veggie(R) and formagg(R) line of products to food service
customers, the Company emphasizes that its products taste 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 retail 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, vegetable proteins and oils, 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. During the later part of
fiscal 2001, casein prices significantly increased as a result of "Mad Cow" and
"foot and mouth" disease epidemics in Europe. In addition, some casein
suppliers, including some of the Company's suppliers, experienced casein
shortages. The Company's inability to obtain sufficient quantities of casein
resulted in the Company not being able to fill all of the orders the Company had
for its products in the third and fourth quarters of fiscal year 2001, which had
an adverse impact on the Company's results of operations for such fiscal year.
For the fiscal years ended March 31, 2001, 2000 and 1999, the Company purchased
$8,680,816, $8,105,407 and $6,178,308, 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.
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PERCENT OF CASEIN PURCHASES
FISCAL YEAR ENDED MARCH 31,
TYPE OF RAW MATERIAL NAME OF SUPPLIER 2001 2000 1999
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Casein Besnier-Scerma U.S.A. 12% 34% 37%
Avonmore Food Products Ltd. 30% 35% 28%
Rely France International 3% 6% 15%
Irish Dairy Board 17% 10% 12%
New Zealand Milk Products -- 6% 8%
Kerry Ingredients 10% 9% --
Eurial Poitouraine 23% -- --
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, 2001, 2000 and 1999, expenditures for product development were
$265,949, $226,436 and $198,398, respectively. None of the research and
development costs are directly borne by the customer, instead they are
considered part of operating expenses.
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
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Formagg(R) 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(R) & Design United States September 19, 2009
Labella's(R) & Design United States October 9, 2004
Soyco(R) United States January 12, 2003
Soyco(R) & Design United States August 17, 2003
Soymage(R) United States January 5, 2003
Veggy Singles(R) United States February 27, 2007
Lite "n" Less(TM) United States (1)
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Health Value Foods(TM) United States (1)
Soy Singles(TM) United States (1)
Veggie Milk(TM) United States (1)
Wholesome Valley(TM) United States (1)
Veggie Slices(TM) 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.
INVENTORY SUPPLY
Although not previously required due to the nature of the business, during
fiscal 2000, the Company began maintaining 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 throughout the United States and in 22 other
countries. International sales are less than 10% of total sales.
For the fiscal years ended March 31, 2001, 2000 and 1999, the Company had net
sales of $46,992,291, $42,234,984 and $29,790,025, 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, 2001, 2000 and 1999:
PERCENTAGE OF SALES
FISCAL YEAR ENDED MARCH 31,
CUSTOMER NAME 2001 2000 1999
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Cacique, Inc. * * 5.1%
* Less than 5% of sales for the stated fiscal year.
The Company's products are sold primarily in two commercial markets: retail and
food service. In the retail market, where the Company believes nutrition
generally outweighs price considerations, the Company markets its Veggie(R) and
Soyco(R) products at prices comparable to conventional
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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 the food service market, the Company markets its more expensive premium
products to customers who place importance on nutrition and its less expensive
branded, non-branded 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.
The following chart sets forth the percentage of sales that the food service and
retail markets represented for the fiscal years ended March 31, 2001, 2000 and
1999:
PERCENTAGE OF SALES
FISCAL YEARS ENDED MARCH 31,
CATEGORY 2001 2000 1999
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Retail sales 91% 92% 87%
Food service sales 9% 8% 13%
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.
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 2001.
The Company believes that it is in material compliance with all applicable
governmental regulations regarding its current products and has obtained the
necessary government permits, licenses, qualifications, and approvals which are
required for its operations.
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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 $19,000, $16,000 and $15,000 during the fiscal years ended March
31, 2001, 2000 and 1999 respectively, in environmental related compliance,
mainly in the disposal of corrugated packaging.
At the present time, the Company believes that it is in material compliance 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 the manufacturing, marketing and sale of its products. In the
retail cheese market, the Company competes with conventional cheeses, including
"Lite" and "low fat" products produced by manufacturers of conventional cheeses.
"Lite" cheese generally has lower fat content than regular cheese but still
contains cholesterol and lactose, unlike the Company's Veggie(R) and Soyco(R)
brand product lines, which contain no cholesterol and are lactose free. 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 that its primary competition is small companies such as
Tree of Life, White Wave, Toffutti Brans, Inc. ("Toffutti") and Melissa's. Tree
of Life is a wholly owned subsidiary of Koninklijke Wessanen, NV, a
multinational manufacturer of dairy, natural and specialty foods and cereals.
Like the Company's products, Tree of Life's Soya Kaas chunk, slices and cream
cheeses are sold in mainstream supermarkets. White Wave is a private company
that primarily markets soy milk and Toffuti (AMEX:TOF) is a public company that
offers a wide range of soy based products including alternative cheese slices,
sour creams, cream cheese and frozen pizza made with alternative cheeses.
The Company also competes with larger national and regional manufacturers of
conventional and imitation cheeses, such as Kraft (which produces products under
the Kraft Free(R) label), Borden's, and ConAgra (which produces products under
the Healthy Choice(R) label). Each of these competitors is well established and
has substantially greater marketing, financial and human resources than the
Company. However, management believes its products are superior to the healthy
cheese items offered by larger cheese manufacturers.
The Company believes that is has the most complete line of alternative dairy
products in the industry and that its competitors' current products do not have
all of the healthy characteristics that the Company's branded products possess
such as soy-based ingredients, low and no fat, low or no cholesterol, no lactose
and no artificial colorings or flavorings. The Company further believes that
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the most important competitive factors in its markets are taste, nutritional
value and product appearance and breadth and depth of product line.
The Company also believes its vertically integrated operations provide it with a
cost advantage over its smaller competitors because it has the ability to
maintain quality and efficiency at every level, from purchasing to manufacturing
to shipping. Furthermore, the Company believes the breadth and depth of its
product line has made it difficult for its smaller competitors to have a
significant impact on the Company's market share in the alternative cheese
category.
EMPLOYEES
As of July 9, 2001, the Company had a total of 267 employees, all of whom were
full-time employees. All personnel are employed through leasing companies and
temporary contract arrangements, with the exception of Company officers. The
Company considers its relations with employees to be satisfactory. No employee
is a member of a trade union.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company occupies two facilities close in proximity approximating 140,000
square feet of industrial property in Orlando, Florida. The Company's corporate
headquarters occupies approximately 55,000 square feet and is comprised of
approximately 8,500 square feet in office space, approximately 31,500 square
feet of dock-height, air-conditioned manufacturing space and coolers 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 for the
corporate headquarters 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 $29,319 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 and its
landlord are currently in negotiations with respect to the renewal of the lease.
If the Company and its landlord are unable to agree on terms for the renewal of
the lease, the Company will be required to relocate its executive offices and
manufacturing facility at substantial cost before November 13, 2001 or risk a
cessation of its business operations until a suitable facility can be located
and established.
The Company produces all of its products at its Orlando manufacturing facility.
The Company maintains production equipment for mixing, blending, cooking and
heating ingredients, and for production, shredding, dicing, slicing, chopping,
grating, packaging and labeling of its products.
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The Company also maintains cold storage areas for cooling finished products and
warehouse areas for storing supplies and finished goods.
The Company's second facility includes additional office space, shipping and
receiving, warehouse and cooler space totaling approximately 85,000 square feet.
The Company entered into a lease agreement with Cabot Industrial Properties, a
Florida limited partnership, on July 28, 1999 for this second facility. The term
of the lease is for five years and provides for escalating rental payments
ranging from $18,674 to $20,871 per month through the end of the lease period.
The lease is a "triple net lease", which means the Company is responsible for
all taxes, insurance, maintenance, and repair of the facility, in addition to
rental payments.
Management believes that the Company's properties are adequately covered by
casualty insurance. The Company believes that its facilities and production
equipment are adequate to meet current requirements and its anticipated growth
through the end of fiscal 2006. The Company further believes that suitable
additional space and equipment will be available as needed to accommodate any
further physical expansion of its 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, 2001.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On November 16, 2000, the Company held its annual meeting of shareholders in
Orlando, Florida. In addition to regular and annual agenda items, the
shareholders voted on and approved the following proposals:
1. To fix the number of directors at four and to elect a Board of
Directors for the ensuing year. The board members were voted in with
the following number of votes for their election: Angelo Morini -
4,584,109, Joseph Juliano - 4,585,351, Marshall Luther - 4,585,351,
and Douglas Walsh - 4,585,351.
2. To amend the Company's Certificate of Incorporation, as amended, to
change the name of the Company to "Galaxy Nutritional Foods, Inc.".
The vote tabulation for this proposal was as follows: for - 4,563,602,
against - 36,211, abstain - 1,233.
3. To ratify the retention of BDO Seidman, L.L.P. as the independent
auditors of the Company for the fiscal year ended March 31, 2001. The
vote tabulation for this proposal was as follows: for - 4,565,698,
against - 28,621, abstain - 6,727.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Since August 1999, the Company's Common Stock, $.01 par value (the "Common
Stock"), has been traded on the inter-dealer automated quotation system operated
American Stock Exchange. (The "AMEX System") under the symbol "GXY". Prior to
August 1999, the Company's Common Stock was traded on the inter-dealer 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
AMEX and NASDAQ Systems from quarter ending June 30, 1999:
Period High Sales Price Low Sales Price
- ------------------------------------------------------------------------------------
2002 Fiscal Year, quarter ended:
June 30, 2001 $5 3/4 $4 2/5
2001 Fiscal Year, quarter ended:
June 30, 2000 $4 11/16 $3 1/8
September 30, 2000 $5 1/8 $3 5/8
December 31, 2000 $4 1/2 $3 1/4
March 31, 2001 $5 3/4 $3 1/8
2000 Fiscal Year, quarter ended:
June 30, 1999 $4 $3 1/4
September 30, 1999 $4 7/8 $3 5/8
December 31, 1999 $4 5/8 $2 13/16
March 31, 2000 $4 1/2 $3 5/16
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.
On July 9, 2001, there were 647 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. The Company's borrowings with the banks
include loan covenants which require approval from the banks to declare
dividends. See Management's Discussion and Analysis or Plan of Operation for a
discussion of the Company's current capital position.
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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.
On December 20, 2000, FINOVA Mezzanine Capital, Inc. ("FMCI") exercised its
warrant to purchase 815,000 shares of the Company's Common Stock pursuant to a
Warrant Exercise and Placement Agent Agreement among the Company, FMCI and
Tucker Anthony Capital Markets ("Tucker Anthony"). Pursuant to the agreement,
the Company registered the 815,000 shares on behalf of FMCI on Form S-3 and
Tucker Anthony was engaged as the exclusive placement agent for the shares. In
consideration of its services, Tucker Anthony received, among other
compensation, a warrant to purchase 81,500 shares of the Company's Common Stock
at an exercise price of $3.90 per share. The warrant is fully vested, but will
not be exercisable in full under December 2002, unless there is a change of
control of the Company at which time the warrant may be exercised in full.
On April 6, 2001, the Company issued to two specified buyers, in accordance with
an exemption from registration under Regulation D promulgated under the
Securities Act of 1933, as amended, (i) an aggregate of 72,646 shares of the
Company's Series A convertible preferred stock, $0.01 par value, and (ii)
warrants to purchase shares of the Company's common stock, $0.01 par value, at
an aggregate sales price of approximately $3,082,000. The shares are subject to
certain designations, preferences and rights, including the right to convert
each preferred share into ten shares of common stock, the right to a ten percent
stock dividend after one year of issuance, and an eight percent stock dividend
for the subsequent three years thereafter. The Company has undertaken the
obligation to register the shares no later than October 1, 2001.
The warrants include an initial issuance to the buyers of warrants to purchase
an aggregate of 120,000 shares of common stock. The initial warrants are
exercisable for a period of five years from April 6, 2001, at a per share
exercise price equal to the lesser of (a) $5.30 or (b) a price equal to 110% of
the average of the closing bid price of the common stock for the thirty trading
days ending on January 1, 2002. The warrants also include the issuance to the
buyers of warrants to purchase an aggregate of 120,000 shares of common stock,
which are exercisable simultaneous with and as a condition to any redemption of
the shares. Finally, the warrants include the issuance to the buyers of warrants
to purchase shares of common stock in an amount determined by dividing (x) 30%
of the shares originally purchased by the buyers by (y) the average closing bid
price of the common stock during the five day period ending on February 15, 2002
(the "30% warrants"). The 30% warrants are exercisable for a period of five
years from February 15, 2002 at per share exercise price equal to 110% of the
average closing bid price of the common stock during the five day period ending
on February 15, 2002.
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ITEM 6. SELECTED FINANCIAL DATA.
FISCAL YEAR ENDED MARCH 31,
2001 2000 1999 1998 1997
------------------------------------------------------------------------------------
Net sales $ 46,992 291 $42,234,984 $29,790,025 $20,552,782 $17,171,496
Income (loss) before taxes (5,939,334) 2,420,560 1,351,367 377,523 (2,736,660)
Income (loss) before cumulative
effect of change in accounting
policy (5,699,334) 3,629,891 1,291,367 377,523 (2,736,660)
Net income (loss) (6,485,763) 3,629,891 1,291,367 377,523 (2,736,660)
Net income (loss) per common
share before cumulative effect
of change in accounting policy
- basic (0.61) 0.40 0.14 0.04 (0.84)
Net income (loss) per common
share - basic (0.69) 0.40 0.14 0.04 (0.84)
Net income (loss) per common
share before cumulative effect
of change in accounting policy
- diluted (0.61) 0.39 0.14 0.04 (0.84)
Net income (loss) per common
share - diluted (0.69) 0.39 0.14 0.04 (0.84)
Total assets 48,083,126 36,450,393 24,476,912 16,449,052 12,492,446
Long-term debt 14,720,875 7,261,706 3,178,991 1,459,516 57,064
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 2001 AS COMPARED TO FISCAL 2000
SALES for the fiscal year ended March 31, 2001 increased by 11% over the same
period in 2000. This increase in sales has been a trend for the Company for the
past four years, when the Company commenced targeted advertising campaigns
promoting its key product lines, particularly the Company's Veggie brand of
products. This has resulted in an upward trend in sales volume for the Veggie
line of products. Veggie sales increased to $26.2 million in fiscal 2001 as
compared to $19.3 million in fiscal 2000. The Company believes that increasing
consumer awareness of the benefits of plant-based foods has positively impacted
sales. While demand for the Company's products continues to increase rapidly,
sales growth was inhibited by shortages in the supply of the Company's primary
raw ingredient, casein, capacity constraints on certain of the Company's
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production lines, and delays in the installation of additional lines during the
later part of fiscal 2001. The Company believes sales growth would have been
stronger had it not experienced these delays and shortages.
COST OF GOODS SOLD as a percentage of sales were 70% for the fiscal year ended
March 31, 2001 compared with 64% for the same period in fiscal 2000. The
increase was the result of two key factors: problems associated with the
construction of new production lines and an increase in raw materials costs. The
Company began construction on six new production lines during fiscal 2001 which
included slice lines, a new chunk cheese line, a cup line, a string cheese line,
and a shred line. The construction of a majority of these lines was still in
process at March 31, 2001. The installation of the equipment was delayed
significantly due to late shipments by manufacturers and problems with
configuring the machines to meet the manufacturing needs of the Company's unique
line of products. These delays caused excess overhead costs and downtime during
the third and fourth quarters of fiscal 2001, and short shipments to customers
which forced the Company to reduce product prices to maintain its shelf space in
supermarkets. Additionally, the price of casein, the Company's primary raw
ingredient, increased by approximately 21% in fiscal 2001, due to a worldwide
shortage of this ingredient resulting from the outbreak of "Mad Cow" and "foot
and mouth" disease epidemics in Europe. For fiscal 2001, purchases of casein
comprised 26.4% of total cost of goods sold.
SELLING expenses increased 77% for the fiscal year ended March 31, 2001 compared
with the same period in fiscal 2000. The increase in expenses over the same
period a year ago is mainly attributed to a significant increase in slotting
fees, promotional allowances and other advertising costs in fiscal 2001 in order
to maintain current relationships with brokers and customers. The increase in
selling expenses also correlates to an increase in sales, as approximately 30%
of selling expenses, such as brokerage commissions, are variable in nature and
increase as sales increase. In addition, the Company changed its accounting
policy, as more fully described below, in the third quarter of fiscal 2001,
which was effective at the beginning of fiscal 2001 (April 1, 2000). The
cumulative effect of this change as of April 1, 2000 was $786,429.
DELIVERY expenses increased 11% for the fiscal year ended March 31, 2001
compared with the same period in fiscal 2000. This increase is mainly
attributable to the Company's increase in sales, as well as an increase in
shipping rates during the fourth quarter of fiscal 2001.
NON-CASH COMPENSATION RELATED TO STOCK OPTIONS increased $1,100,000 for the
fiscal year ended March 31, 2001, as compared to fiscal 2000. The change is the
result of the adoption of Interpretation No. 44 ("FIN 44"). The Financial
Accounting Standards Board issued FIN 44, which clarifies the application of
APB Opinion 25 relating to the accounting consequences of various modifications
to fixed stock options. FIN 44 covers specific events that occurred after
December 15, 1998 and was effective as of July 2, 2000. FIN 44 clarified that
when an option is repriced, it is treated as a variable option and is marked to
market each quarter. The adoption of FIN 44 required the Company to change its
accounting related to the note receivable from the president. The underlying
options were required to be treated as variable due to the exchange of interest
bearing recourse notes with a non-interest bearing non-recourse note.
Accordingly, any differences between the exercise price of the options and the
market price of the Company's common stock is recorded as compensation expense
at each reporting period. As of March 31, 2001, the Company recorded $1,100,000
of compensation expense to mark the options to market in accordance with
variable accounting.
GENERAL AND ADMINISTRATIVE expenses increased 3% for the fiscal year ended March
31, 2001, as compared to fiscal 2000. The change is primarily the result of an
increase in payroll expense related to the addition of a new Chief Financial
Officer during the last quarter of fiscal 2000.
RESEARCH AND DEVELOPMENT expenses increased 17% for the fiscal year ended March
31, 2001 compared with the same period in fiscal 2000. This increase in expense
is mainly the result of additional research associated with formulas for the new
production lines during fiscal 2001.
INTEREST expense increased from $744,498 in fiscal 2000 to $2,047,097 in fiscal
2001. The increase was attributable to additional borrowings under the Company's
term note and line of credit as well as a subordinated note issued on September
30, 1999. Interest capitalized to construction in progress was $826,725 and
$490,442 for the years ended March 31, 2001 and 2000, respectively.
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17
On September 30, 1999, the Company entered into a $4,000,000 subordinated note
payable with FMCI. This debt currently bears interest at a rate of 11.5% and
includes an original issue discount of $786,900, which is amortized as interest
expense over the term of the debt. During fiscal 2001, $220,407 was amortized to
interest expense as compared to $78,690 in fiscal 2000. In connection with
FMCI's warrant exercise and transfer of 815,000 shares of the Company's Common
Stock, the Company agreed to reimburse FMCI for brokerage commissions and other
expenses incurred by FMCI for the sale of the 815,000 shares to the public.
These costs and expenses were recorded as a reduction in the proceeds received
from the exercise of the warrants. In addition, the Company agreed to guarantee
the price at which the shares FMCI sold to the public at $4.41 per share. The
actual price received by FMCI was $3.25 per share and the difference of $945,400
was recorded as a debt discount and is being amortized over the remaining term
of the subordinated note. The payment for the difference between the exercise
price of $3.41 and the guaranteed price of $4.41 was $815,000 and was paid
through the issuance of an additional subordinated term note which is due
December 2001. During fiscal 2001 and 2000, $220,407 and $78,690 of the total
debt discount of $1,732,300 was amortized to interest expense, respectively. As
of March 31, 2001, the unamortized debt discount was $1,433,203 and the
principal balance on the note was $4,815,000. The increase is also the result of
additional borrowings on the Company's line of credit to finance the increase in
inventory. In March 2000, the Company signed a $10 million term note payable
with Southtrust Bank, N.A. This note was used to pay off the Company's prior
term note payable and to finance approximately $7.5 million in new equipment to
expand the Company's production capacity. In addition, during November 2000, the
Company executed a $1.5 million short-term bridge loan from Southtrust Bank,
N.A. which is still outstanding. Interest on this note is at the prime rate.
INCOME TAX BENEFIT for the year ended March 31, 2001 was $240,000 compared to
income tax benefit of $1,209,331 for the same period in the prior year. The
decrease in the income tax benefit was due to future income projected at March
31, 2000, that did not materialize in fiscal 2001. At March 31, 2001, the
Company has recorded a deferred tax asset of $1,560,000 derived mainly from tax
net operating losses incurred in prior years, which are expected to be realized
in the future. This represents approximately 21% of the tax net operating loss
carryforwards available at March 31, 2001 as compared to 30% at March 31, 2000.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING POLICY totaled $786,429 for the year
ended March 31, 2001. The Company changed its accounting policy in the third
quarter of fiscal 2001 in regards to slotting fees and certain advertising
costs. The effect of this accounting change is to adopt this policy as of the
beginning of fiscal 2001 (April 1, 2000). Previously, slotting fees and certain
advertising costs were capitalized and amortized over the shorter of the
expected period of benefit or one year. The Company changed this accounting
policy to expense these costs as incurred. This change was made because there
has been a change in the expected period of benefit related to these costs.
During fiscal 2001, the Company's slotting fees and advertising costs increased
significantly in order for the Company to maintain current relationships with
brokers and customers as opposed to generation and stimulation of future sales.
As a result, the Company believes these expenses are more appropriately period
expenses, rather than those that would benefit future periods, and should be
expensed as incurred.
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FISCAL 2000 AS COMPARED TO FISCAL 1999
SALES for the fiscal year ended March 31, 2000 increased by 42% over the same
period in 1999. This increase in sales is attributable to 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. In addition, the Company has focused on moving its
Veggie line of products from the dairy to the produce section of supermarkets to
target the health conscious consumer. 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 2001.
COST OF GOODS SOLD as a percentage of sales were 64% for the fiscal year ended
March 31, 2000 compared with 65% for the same period in fiscal 1999. The
moderate increase in gross margin is primarily a result of volume and production
efficiencies during fiscal 2000.
SELLING expenses increased 26% for the fiscal year ended March 31, 2000 compared
with the same period in fiscal 1999. 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 that
continued and expanded during fiscal 2000 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 42% for the fiscal year ended March 31, 2000
compared with the same period in fiscal 1999. This increase is mainly
attributable to the Company's 42% increase in sales.
GENERAL AND ADMINISTRATIVE expenses increased 47% for the fiscal year ended
March 31, 2000, as compared to fiscal 1999. The change is the result of an
increase in expenses for consulting services for conversion to a new network
server to accommodate additional users and year 2000 compliance issues, as well
as additional employees hired to accommodate the Company's projected growth.
RESEARCH AND DEVELOPMENT expenses increased 14% for the fiscal year ended March
31, 2000 compared with the same period in fiscal 1999. This increase in expense
is mainly the result of the addition of an additional food scientist during the
first quarter of fiscal 2000.
INTEREST expense increased from $233,826 in fiscal 1999 to $744,498 in fiscal
2000. On September 30, 1999, the Company entered into a $4,000,000 subordinated
note payable with Finova Mezzanine Corporation. This debt originally bore
interest at a rate of 13.5% (and was amended to 11.5% in December 2000) and
includes an original issue discount of $786,900, which is amortized through
interest expense. During fiscal 2000, $78,690 was amortized to interest expense.
The increase is partially the result of additional borrowings on the Company's
line of credit to finance the increase in inventory. In March 2000, the Company
refinanced its term note payable; however, this has not effected interest
expense during fiscal 2000 due to the timing of the refinancing.
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INCOME TAX BENEFIT for fiscal 2000 was $1,209,331 compared to income tax expense
of $60,000 for fiscal 1999. Alternate minimum tax was $110,669 and $60,000 for
fiscal years 2000 and 1999, respectively. During fiscal 2000, the Company
recorded a deferred tax benefit of $1,320,000 derived from tax net operating
losses incurred in prior years, which are expected to be realized in the future.
This represents approximately 30% of the tax net operating loss carry forward
available at March 31,2000.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES - For the fiscal year ended March 31, 2001, the Company's
cash used in operating activities was $1,524,822, a decrease of $290,978 over
the same period in fiscal 2000. During fiscal 2001, the Company had a net loss
of $6,485,763, as compared to net income of $3,629,891 in fiscal 2000. During
fiscal 2000, the Company recorded a deferred tax benefit of $1,320,000 as
compared to a benefit of $240,000 for fiscal 2001. During fiscal 2000, there was
a significant increase in both trade receivables and inventory related to the
Company's growth and the need to maintain inventory to facilitate shorter lead
times for customers. The Company experienced a similar, but smaller growth in
these assets during fiscal 2001. Prepaid expenses decreased in fiscal 2001 as a
result of a change in accounting policy during the third quarter of this year.
Finally, accounts payable increased by $4,439,509 in fiscal 2001 as a result of
increased purchases for the new production lines during the later part of fiscal
2001.
INVESTING -- The Company spent $10,809,361 in investing activities for the
fiscal year ended March 31, 2001 compared with $4,508,133 for the same period in
fiscal 2000. Cash used for investing activities during fiscal 2001 resulted
primarily from purchases and construction of manufacturing equipment for eight
new production lines at the Company's main facility. Construction and testing is
expected to be completed by July 2001.
FINANCING -- The Company realized a net inflow of $12,334,300 from financing
activities for the fiscal year ended March 31, 2001 compared with $6,324,204
during the same period in fiscal 2000. The large inflows in fiscal 2001 are the
result of increased draws on the Company's line of credit as well as draws on
the equipment note payable. The increased draws were used to finance the build
up in inventories as well as the purchase and construction of manufacturing
equipment. In addition, the Company received net proceeds of $2.3 million in
connection with a warrant exercise and private placement with Finova Mezzanine
Corporation, as more fully disclosed below.
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, $3.5 million in June 1998, $5.5 million in December 1998, $7.5
million in April 2000 and $13 million in August 2000. The amount available under
the line of credit is based on a formula of 85% of eligible accounts receivable
plus 50% of eligible inventories not to exceed $6,000,000, 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.
Interest is payable on the outstanding draws on the line of credit at a rate of
prime minus .10% (8.4% at March 31, 2001). The line of credit expires
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20
on October 31, 2002. As of March 31, 2001, the Company had an outstanding
balance of $8,776,278 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. This note is payable at
the rate of $432,000 per year, with a balloon payment due on October 31, 2001.
This note was paid in full during March 2000 through a new financing agreement
with a different financial institution. The new term note payable has
availability to $10 million and bears interest at the prime rate (9% at March
31, 2001). This note is payable interest only through February 1, 2001, with
monthly payments of $93,000, plus interest payable beginning March 1, 2001. The
note will mature on March 10, 2005. Amounts under the new agreement are
collateralized by machinery and equipment owned by the Company. The new note is
being used to finance new production equipment purchased and constructed by the
Company throughout fiscal 2001. As of March 31, 2001, the balance outstanding
under this agreement was $9,780,499. The Company paid approximately $26,000 in
loan costs in connection with this new financing.
During November 2000, the Company's president guaranteed a $1.5 million
short-term bridge loan from Southtrust Bank, N.A. with shares of his common
stock pledged as collateral. Interest on this note is at the prime rate (9% at
March 31, 2001). Principal payments of $50,000 per month are payable, commencing
in May 2001. The note matures October 2003.
On September 30, 1999, the Company secured a $4 million subordinated note
payable less loan costs of $380,000 to finance working capital and capital
improvement needs of the Company. Amounts outstanding under the agreement are
collateralized by a subordinated lien on substantially all assets of the
Company. The subordinated note is payable in one lump sum upon maturity on
September 30, 2004 and bears interest payable monthly at a rate of 11.5%, which
was adjusted in December 2000 from 13.5%. The Company issued a warrant to
purchase 915,000 shares of common stock to the subordinated note holder at an
exercise price of $3.41 per share which represented 80% of the fair value of the
Company's stock on the date the warrant was issued. The warrant was valued at
$786,900 which was recorded as a debt discount and is being amortized to
interest expense from the date of issuance of the note to the maturity date of
the note of September 30, 2004.
On December 26, 2000, the subordinated note holder exercised their warrant to
purchase 815,000 shares of common stock at a price of $3.41 per share. The
Company received net proceeds of $2,452,329, after paying transaction costs of
$326,822. In connection with this transaction, the Company agreed to reimburse
the note holder for brokerage commission and other expenses incurred by the note
holder for the sale of the 815,000 shares to the public. These costs and
expenses were recorded as a reduction in the proceeds received from the exercise
of the warrants. In addition, the Company agreed to guarantee the price at which
the shares the note holder sold to the public at $4.41 per share. The difference
between the actual price received by the note holder ($3.25) and the guaranteed
price ($4.41) was $945,400 which was recorded as a debt discount and is being
amortized over the remaining term of the subordinated note. The consideration
for the difference between the exercise price of $3.41
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21
and the guaranteed price of $4.41 was $815,000 and was paid through the issuance
of an additional subordinated term note which is due December 2001. During
fiscal 2001 and 2000, $220,407 and $78,690 of the total debt discount of
$1,732,300 was amortized to interest expense, respectively. As of March 31,
2001, the unamortized debt discount was $1,433,203 and the principal balance on
the note was $4,815,000.
The line of credit, term note payable, and subordinated note payable contain
certain financial and operating covenants. The Company was in violation of
substantially all financial covenants at March 31, 2001. The lender of the
subordinated note payable waived the violation for the quarters ended March 31,
2001 and June 30, 2001 and amended the covenants for the quarters subsequent to
June 30, 2001. In connection with the amendment to the subordinated debt
covenants dated July 12, 2001, the interest on the subordinated note was
increased to 13.5% and the maturity date was changed to August 1, 2003. The
lender of the line of credit waived the violations for the year ended March 31,
2001 and quarter ended June 30, 2001 and amended the covenants for the quarters
subsequent to June 30, 2001. In connection with the amendment to the line of
credit covenants dated July 13, 2001, the interest on the line of credit was
increased to prime plus 2%. The lender of the term note payable waived the
violations for the year ended March 31, 2001 and on July 16, 2001 amended the
covenants for the periods subsequent to March 31, 2001. Total fees incurred
in connection with these waivers and amendments were $120,000 and are due by
December 31, 2001.
On April 6, 2001, the Company issued to two specified investors, in accordance
with an exemption from registration under Regulation D promulgated under the
Securities Act of 1933, as amended, (i) an aggregate of 72,646 shares of the
Company's Series A convertible preferred stock, $0.01 par value, and (ii)
warrants to purchase shares of the Company's common stock, $0.01 par value, at
an aggregate sales price of approximately $3,082,000. The shares are subject to
certain designations, preferences and rights, including the right to convert
each preferred share into ten shares of common stock, the right to a ten percent
stock dividend after one year of issuance, and an eight percent stock dividend
for the subsequent three years thereafter. The Company has undertaken the
obligation to register the shares no later than October 1, 2001.
The warrants include an initial issuance to the investors of warrants to
purchase an aggregate of 120,000 shares of common stock. The initial warrants
are exercisable for a period of five years from April 6, 2001, at a per share
exercise price equal to the lesser of (a) $5.30 or (b) a price equal to 110% of
the average of the closing bid price of the common stock for the thirty trading
days ending on January 1, 2002. The warrants also include the issuance to the
investors of warrants to purchase an aggregate of 120,000 shares of common
stock, which are exercisable simultaneous with and as a condition to any
redemption of the shares. Finally, the warrants include the issuance to the
investors of warrants to purchase shares of common stock in an amount determined
by dividing (x) 30% of the shares originally purchased by the investors by (y)
the average closing bid price of the common stock during the five day period
ending on February 15, 2002 (the "30% warrants"). The 30% warrants are
exercisable for a period of five years from February 15, 2002 at per share
exercise price equal to 110% of the average closing bid price of the common
stock during the five day period ending on February 15, 2002.
Management believes that proceeds received in connection with the preferred
stock issuance in April 2001 will allow the Company to meet its future liquidity
needs until the Company establishes a positive cash flow from operations.
RISK FACTORS
In addition to the other information in this Form 10-K, the following factors
should be considered carefully in evaluating our business and prospects:
WE HAVE PREVIOUSLY BEEN IN TECHNICAL DEFAULT OF OUR CREDIT FACILITIES.
We have a revolving credit line from FINOVA Capital Corporation, and term loans
from FMCI and Southtrust Bank, N.A. which have outstanding balances as of June
30, 2001 of $8,776,278, $3,381,796 and $11,280,499, respectively. Substantially
all of our assets are pledged as collateral to secure outstanding borrowings
under such loans. But for waivers obtained from all of the lenders for the year
ended March 31, 2001, we would be in default of substantially all of the
financial covenants under all of the loans.
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In the event we default under the loans in the future and cannot obtain wavers
for those defaults, such defaults could result in our indebtedness becoming
immediately due and payable and the foreclosure of our assets by our creditors.
In either event, it is unlikely that we would be able to continue the operation
of our business.
[DISCLOSURE TO BE ADDED BASED UPON OUTCOME OF NEGOTIATIONS WITH FINOVA]
WE MAY NEED ADDITIONAL FINANCING AND SUCH FINANCING MAY NOT BE AVAILABLE.
We have incurred substantial debt in connection with the financing of our
business. The aggregate amount outstanding of our borrowing under our various
credit facilities is approximately $23,438,573 as of June 30, 2001. In addition
to two term loan credit facilities that we have obtained, we have obtained a
revolving line of credit from FINOVA Capital Corporation in the maximum
principal amount of $13,000,000 through which we finance our day-to-day working
capital needs. The line of credit is secured in part by our accounts receivable
and inventory. The amounts that we can borrow under the line of credit fluctuate
based on our inventory and accounts receivable levels. Generally, we borrow the
maximum amount available to us under our line of credit and under other credit
facilities. At June 30, 2001, the maximum amount we could borrow under our
revolving credit line totaled approximately $9,000,000. If we are unable to
generate sufficient cash flow or borrow additional amounts to fund our working
capital needs and to pay our debts, we will be required to seek additional
financing in the near future. We do not know if we can obtain additional
financing or if the terms of any required financing will be acceptable to us. If
we are unable to fund our working capital needs and additional growth through
our existing credit facilities, cash flow or additional financing, or if
additional financing is not available under acceptable terms to us, our
business, prospects, results of operations, cash flows and future growth will be
negatively affected.
WE MAY ISSUE ADDITIONAL SECURITIES WITH RIGHTS SUPERIOR TO THOSE OF THE COMMON
STOCK, WHICH COULD MATERIALLY LIMIT THE OWNERSHIP RIGHTS OF EXISTING
SHAREHOLDERS.
We may offer additional debt or equity securities in private and/or public
offerings in order to raise working capital and to refinance our debt. The Board
of Directors has the right to determine the terms and rights of any debt
securities and preferred stock without obtaining the approval of the
shareholders. It is likely that any debt securities or preferred stock that we
sell would have terms and rights superior to those of the common stock and may
be convertible into common stock. Any sale of securities could adversely affect
the interests or voting rights of the holders of common stock, result in
substantial dilution to existing shareholders, or adversely affect the market
price of our common stock.
THE CHIEF EXECUTIVE OFFICER OWNS A LARGE PERCENTAGE OF THE OUTSTANDING SHARES,
WHICH COULD MATERIALLY LIMIT THE OWNERSHIP RIGHTS OF EXISTING SHAREHOLDERS.
As of June 30, 2001, Angelo S. Morini, our founder, President and Chief
Executive Officer, owned approximately 42.2% of our common stock and held
options which, if exercised and assuming the exercise of no other outstanding
options or warrants, would give him a majority of our issued and outstanding
common stock. Shareholders may be unable to elect any members of the Board of
Directors or exercise significant control over the Company or our business as a
result of Mr. Morini's ownership.
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SHAREHOLDERS MAY EXPERIENCE FURTHER DILUTION.
We have a substantial number of outstanding options and warrants to acquire
shares of common stock. A total of 1,694,433 shares have been reserved for
issuance upon exercise of options and warrants that we have granted or may grant
in the future. A total of 1,546,764 of these options and warrants are "in the
money" and are currently exercisable. "In the money" generally means that the
current market price of the common stock is above the exercise price of the
shares subject to the warrant or option. The issuance of common stock upon the
exercise of these options and warrants could adversely affect the market price
of the common stock or result in substantial dilution to our existing
shareholders.
WE DO NOT ANTICIPATE PAYING DIVIDENDS ON THE COMMON STOCK.
Our current policy is to retain any future earnings to finance current working
capital needs and our growth and development. We do not expect to pay dividends
on common stock any time soon.
IF WE LOSE KEY FOREIGN SUPPLIERS ON WHOM WE DEPEND, WE MAY BE UNABLE TO OBTAIN
ADEQUATE SUPPLIES TO MANUFACTURE OUR PRODUCTS.
Currently, we purchase our major ingredient, a milk protein called casein, from
a limited number of foreign suppliers. We purchase casein from foreign suppliers
because they have lower prices than domestic suppliers. However, their lower
prices are generally the result of governmental export supports or subsidies. We
do not have any contractual arrangements with our principal suppliers, except
for short-term agreements for periods of less than six months. Because we
purchase casein from foreign suppliers, its availability is subject to a variety
of factors, including federal import regulations. If the export supports or
subsidies are reduced or eliminated or the United States takes retaliatory
action or otherwise establishes trade barriers with any of the countries in
which our casein suppliers are located, our business and results of operations
would be negatively affected. Moreover, exchange rate fluctuations or the
imposition of import quotas or tariffs could have an adverse effect on our
business and our ability to compete with competitors that do not rely on foreign
suppliers. We cannot assure you that we could obtain casein from U.S. sources if
a foreign supply of casein were reduced or terminated. Even if we could obtain
casein from U.S. sources, our production may be reduced during the period that
it takes us to change suppliers and the prices for the casein would likely be
significantly higher than we are paying now. Either event would negatively
affect our business, results of operations and cash flows.
WE HAVE EXPERIENCED, AND MAY CONTINUE TO EXPERIENCE, SHORTAGES OF CASEIN, OUR
KEY COMPONENT.
During the later part of fiscal 2001, casein availability and prices
significantly increased as a result of "Mad Cow" and "foot and mouth" disease
epidemics in Europe. Some of the Company's suppliers experienced casein
shortages and were unable to provide all of the casein required by the Company
in the production of its products. The Company's inability to obtain sufficient
quantities of casein resulted in the Company not being able to fill all of the
orders the Company had for its products during the third and fourth quarters of
fiscal year 2001, which had an adverse impact on the Company's results of
operations for such fiscal year. It is likely that the casein shortage will
continue during fiscal year 2002. If the Company is unable to obtain sufficient
casein, the Company's business, results of operations and cash flows.
BECAUSE WE ARE DEPENDENT UPON A SINGLE MANUFACTURING FACILITY, THE LOSS OF THE
FACILITY WOULD RESULT IN A WORK STOPPAGE, WHICH WOULD NEGATIVELY IMPACT OUR
BUSINESS.
We manufacture all of our products at a single manufacturing facility in
Orlando, Florida, and our revenues are dependent upon the continued operation of
this facility. This facility is subject to a lease that expires in November
2001, unless renewed pursuant to terms mutually agreeable to us and
23
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our landlord. We do not have a backup facility or contractual arrangements with
any other manufacturers in the event of a casualty to or destruction of the
facility or if the facility ceases to be available to us for any other reason.
If we are required to rebuild or relocate our manufacturing facility, a
substantial investment in improvements and equipment would be necessary. Any
rebuilding or relocation also would likely result in a significant delay or
reduction in manufacturing and production capability which, in turn, could lead
to substantially reduced sales and loss of market share. Although we are in
negotiations with our landlord for the renewal of our lease, there is no
assurance that such negotiations will be successful or that the lease can be
renewed under favorable terms.
WE RELY ON THE EFFORTS OF OUR PRESIDENT AND CHIEF EXECUTIVE OFFICER, AND THE
LOSS OF HIS SERVICES COULD MATERIALLY ADVERSELY AFFECT OUR BUSINESS.
Our success will be largely dependent upon the personal efforts and abilities of
Angelo S. Morini, our President and Chief Executive Officer. If Mr. Morini ends
his relationship with the Company before a qualified replacement is found, then
our business, prospects and results of operations would be materially adversely
affected. Mr. Morini's employment agreement has a rolling five-year term but is
terminable by Mr. Morini upon a change of control of the Company. Although we
are the beneficiary of a life insurance policy on Mr. Morini, our insurance
would likely not be sufficient to compensate us for the loss of Mr. Morini's
services in the event of his death until a suitable replacement could be
engaged.
COMPETITION IN OUR INDUSTRY IS INTENSE.
Competition in our segment of the food industry is intense. We believe that as
consumers become more interested in healthy food alternatives the competition in
our markets will increase substantially. In particular, we compete with major
companies such as Kraft, which produces products under the Kraft Free(R) label,
Borden's, and ConAgra, which produces products under the Healthy Choice(R)
label. Each of these companies has substantially greater name recognition and
greater research and development, marketing, financial and human resources than
we do. These advantages have led to a substantially greater market penetration
and product acceptance than we have developed. In addition, our competitors may
succeed in developing new or enhanced products that are better than our
products. These companies may also prove to be more successful than us in
marketing and selling these products. We cannot assure you that we will be able
to compete successfully with any of these companies or achieve a greater market
share than it currently possesses. Increased competition as to any of our
products or services could result in price reductions, reduced margins, and loss
of market share, which could negatively affect our business, prospects, results
of operations and financial condition.
WE RELY ON THE PROTECTION OF OUR TRADEMARKS, AND THE LOSS OF A TRADEMARK WOULD
NEGATIVELY IMPACT THE PRODUCTS ASSOCIATED WITH THE TRADEMARK, WHICH COULD
MATERIALLY ADVERSELY AFFECT OUR BUSINESS.
We own several registered and unregistered trademarks, which are used in the
marketing and sale of our products. We have invested a substantial amount of
money in promoting our trademarked brands. However, the degree of protection
that these trademarks afford us is unknown. Further, we may not have the money
necessary to engage in actions to prevent infringement of our trademarks. A loss
of a trademark would negatively impact the products associated with it, and
could negatively affect our business, prospects, results of operations,
financial condition and cash flows.
We do not have patent protection for our formulas and processes, and a loss of
ownership of any of our formulas and processes would negatively impact our
business.
We believe that we own our formulas and processes. However, we have not sought,
and do not intend to seek, patent protection for our formulas and processes.
Instead, we rely on the complexity
24
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of our formulas and processes, trade secrecy laws, and employee confidentiality
agreements. However, we cannot assure you that other companies will not acquire
our confidential information or trade secrets or will not independently develop
equivalent or superior products or technology and obtain patent or similar
rights. Although we believe that our formulas and processes have been
independently developed and do not infringe the patents or rights of others, a
variety of components of our processes could infringe existing or future
patents, in which event we may be required to modify our processes or obtain a
license. We cannot assure you that we will be able to do so in a timely manner
or upon acceptable terms and conditions and the failure to do either of the
foregoing would negatively affect our business, results of operations, financial
condition and cash flows.
BECAUSE WE SELL FOOD PRODUCTS, WE FACE THE RISK OF EXPOSURE TO PRODUCT LIABILITY
CLAIMS.
We, like any other seller of food, face the risk of exposure to product
liability claims in the event that our quality control procedures fail and the
consumption of our products causes injury or illness. With respect to product
liability claims, our insurance may not continue to be available at a reasonable
cost, or, if available, may not be adequate to cover liabilities. We generally
seek contractual indemnification and insurance coverage from parties supplying
us products, but this indemnification or insurance coverage is limited, as a
practical matter, to the creditworthiness of the indemnifying party, and their
carriers, if any, as well as the insured limits of any insurance provided by
suppliers. If we do not have adequate insurance or contractual indemnification
available, product liability claims relating to defective products could have a
material adverse effect on our financial condition, results of operations and
cash flows.
GOVERNMENT REGULATION COULD INCREASE OUR COSTS OF PRODUCTION AND INCREASE OUR
LEGAL AND REGULATORY EXPENSES.
We are subject to extensive regulation by federal, state, and local governmental
authorities regarding the quality, purity, manufacturing, distribution, and
labeling of food products. We cannot assure that you that we will be able to
continue to comply with these regulations, or comply with future regulations,
without inordinate cost or interruption of our operations. Failure to comply
with applicable laws and regulations could subject us to civil remedies,
including fines, injunctions, recalls or seizures, as well as possible criminal
sanctions, which could have a material adverse effect on our business.
THE LIQUIDITY OF OUR SHARES MAY BE NEGATIVELY IMPACTED BY THE LOW VOLUME OF
TRADING OF OUR SHARES.
Although our shares are publicly traded on the American Stock Exchange, the
trading market for our shares is limited. During the last quarter of fiscal year
2001 and the first quarter of fiscal year 2002 the trading volume for our shares
averaged less than 23,000 and 15,000 shares, respectively, per trading day. We
do not anticipate any material increase in the trading volume for our shares.
The lack of an active trading market for our shares could negatively impact
shareholders' ability to sell their shares when they desire and the price that
could be obtained upon a sale of shares.
RISING INTEREST RATES COULD NEGATIVELY AFFECT OUR RESULTS OF OPERATIONS.
The interest rates of our revolving line of credit and our term loans fluctuate
based upon changes in our lenders' prime rate. Increases in the prime rate will
result in an increase in our cost of funds, and could negatively affect our
results of operations. We have not entered into any derivative instruments such
as interest rate swap or hedge agreements to manage our exposure to rising
interest rates.
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THE MARKET PRICE OF OUR STOCK COULD BE SUBJECT TO FLUCTUATION.
The market price of our common stock could be subject to fluctuations in
response to factors such as the following, some of which are beyond our control:
- quarterly variations in our operating results;
- operating results that vary from the expectations of securities
analysts and investors;
- changes in expectations as to our future financial performance,
including financial estimates by securities analysts and
investors;
- announcements by us or our competitors of major business
developments, such as new products, services or technologies or
significant contracts, acquisitions, strategic partnerships,
joint ventures or capital commitments;
- announcements by third parties of significant claims or
proceedings against us;
- future sales of our common stock; and
- general market conditions.
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, as amended by FAS 137 and 138, is effective
for all fiscal quarters of fiscal years beginning after June 15, 2000.
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 the new standard to affect its financial statements.
In March 2000, the Financial Accounting Standards Board issued Interpretation
No. 44 ("FIN 44"), Accounting for Certain Transactions Involving Stock
Compensation, an Interpretation of APB Opinion No. 25. FIN 44 clarifies the
application of Opinion No. 25 for (a) the definition of employee for purposes of
applying Opinion No. 25, (b) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (c) the accounting consequences of various
modifications to the previously fixed stock option or award, and (d) the
accounting for an exchange of stock compensation awards in a business
combination. FIN 44 was effective July 2, 2000, but certain conclusions cover
specific events that occur after either December 15, 1998 or January 12, 2000.
The impact to the Company related to the adoption of FIN 44 was to record
compensation expense of $1,100,000 for the year ended March 31, 2001 in
connection with notes receivable amended in June 1999 related to the exercise of
options of the Company's President. See Note 7 to the notes to the Company's
financial statements.
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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, 2001 with respect
to the Company's anticipated debt as of such date would increase interest
expense and hence increase the net loss of the Company by approximately $234,000
per year.
The Company's fiscal 2001, 2000 and 1999 sales denominated 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, 2001,
2000 and 1999. The effects of changes in foreign currency exchange rates has not
historically been significant to the Company's operations or net assets.
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ITEM 8. FINANCIAL STATEMENTS.
Report of Independent Certified Public Accountants
To the Board of Directors and Stockholders
Galaxy Nutritional Foods, Inc.
Orlando, Florida
We have audited the accompanying balance sheets of Galaxy Nutritional Foods,
Inc. as of March 31, 2001 and 2000 and the related statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended March 31, 2001. 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 auditing standards generally accepted
in the United States of America. 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 Nutritional Foods, Inc.
as of March 31, 2001 and 2000 and the results of its operations and its cash
flows for each of the three years in the period ended March 31, 2001 in
conformity with accounting principles generally accepted in the United States of
America.
As explained in Note 16 to the financial statements, effective April 1, 2000 the
Company changed its accounting policy with respect to slotting fees and certain
advertising costs.
/s/ BDO Seidman, LLP
New York, New York
June 20, 2001, except for
Note 5 as to which the
date is July 16, 2001
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GALAXY NUTRITIONAL FOODS, INC.
BALANCE SHEETS
MARCH 31, MARCH 31,
2001 2000
------------ ------------
ASSETS
CURRENT ASSETS:
Cash $ 500 $ 383
Trade receivables, net of allowance for doubtful
accounts of $375,000 and $175,000 8,053,561 7,456,936
Inventories 10,774,540 9,022,948
Other receivables 519,624 296,291
Deferred tax asset 532,000 453,000
Prepaid expenses 1,107,100 1,521,634
------------ ------------
Total current assets 20,987,325 18,751,192
PROPERTY AND EQUIPMENT, NET 25,303,094 16,020,746
DEFERRED TAX ASSET 1,028,000 867,000
OTHER ASSETS 764,707 811,455
------------ ------------
TOTAL $ 48,083,126 $ 36,450,393
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Book overdrafts $ 446,829 $ 1,694,753
Line of credit 8,776,278 4,784,999
Accounts payable 9,456,065 5,016,556
Accrued liabilities 143,782 167,334
Current portion of term notes payable 1,666,000 78,705
Current portion of subordinated notes payable 502,866 --
Current portion of obligations under capital leases 28,755 30,364
------------ ------------
Total current liabilities 21,020,575 11,772,711
TERM NOTES PAYABLE, less current portion 9,614,499 3,914,201
SUBORDINATED NOTES PAYABLE, less current portion 2,878,930 3,168,607
OBLIGATIONS UNDER CAPITAL LEASES, less current portion 29,825 69,829
------------ ------------
Total liabilities 33,543,829 18,925,348
------------ ------------
COMMITMENTS
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, authorized 85,000,000 shares; 10,017,612 and
9,184,546 shares issued 100,176 91,845
Additional paid-in capital 51,902,100 48,289,955
Accumulated deficit (24,570,318) (18,084,555)
------------ ------------
27,431,958 30,297,245
Less: Notes receivable arising from the exercise of stock
options and sale of common stock (12,772,200) (12,772,200)
Treasury stock, 26,843 shares, at cost (120,461) --
------------ ------------
Total stockholders' equity 14,539,297 17,525,045
------------ ------------
TOTAL $ 48,083,126 $ 36,450,393
============ ============
See accompanying notes to financial statements
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GALAXY NUTRITIONAL FOODS, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 2001 2000 1999
------------ ------------ ------------
NET SALES $ 46,992,291 $ 42,234,984 $ 29,790,025
COST OF GOODS SOLD 32,841,748 27,233,736 19,390,253
------------ ------------ ------------
Gross margin 14,150,543 15,001,248 10,399,772
------------ ------------ ------------
OPERATING EXPENSES:
Selling 10,857,336 6,147,442 4,861,703
Delivery 2,454,616 2,215,903 1,564,514
Non-cash compensation related to options 1,100,000 -- --
General and administrative 3,339,879 3,240,019 2,204,623
Research and development 265,949 226,436 198,398
------------ ------------ ------------
Total operating expenses 18,017,780 11,829,800 8,829,238
------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS (3,867,237) 3,171,448 1,570,534
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense (2,047,097) (744,498) (233,826)
Interest income -- -- 6,023
Other (25,000) (6,390) 8,636
------------ ------------ ------------
Total (2,072,097) (750,888) (219,167)
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES $ (5,939,334) $ 2,420,560 $ 1,351,367
INCOME TAX BENEFIT (EXPENSE) 240,000 1,209,331 (60,000)
------------ ------------ ------------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING POLICY $ (5,699,334) $ 3,629,891 $ 1,291,367
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING POLICY (786,429) -- --
------------ ------------ ------------
NET INCOME (LOSS) $ (6,485,763) $ 3,629,891 $ 1,291,367
============ ============ ============
BASIC NET INCOME (LOSS) PER COMMON
SHARE BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING POLICY $ (0.61) $ 0.40 $ 0.14
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING POLICY (0.08) -- --
------------ ------------ ------------
NET INCOME (LOSS) $ (0.69) $ 0.40 $ 0.14
============ ============ ============
DILUTED NET INCOME (LOSS) PER
COMMON SHARE BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING POLICY $ (0.61) $ 0.39 $ 0.14
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING POLICY (0.08) -- --
------------ ------------ ------------
NET INCOME (LOSS) $ (0.69) $ 0.39 $ 0.14
============ ============ ============
See accompanying notes to financial statements
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GALAXY NUTRITIONAL FOODS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Notes
------------------------- Additional Accumulated Receivable for Treasury
Shares Par Value Paid-In Capital Deficit Common Stock Stock Total
--------------------------------------------------------------------------------------------------------------
Balance at April 1,
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
Exercise of options 1,000 10 4,705 - - 4,715
Issuance of common
stock under
employee stock
purchase plan 514 5 1,028 - - - 1,033
Issuance of warrants - - 786,900 - - - 786,900
Net income - - - 3,629,891 - - 3,629,891
--------------------------------------------------------------------------------------------------------------
Balance at March 31,
2000 9,184,546 $ 91,845 $ 48,289,955 $ (18,084,555) $ (12,772,200) $ - $ 17,525,045
Purchase of treasury
stock - - - - - (120,461) (120,461)
Exercise of warrants,
net of costs 815,000 8,150 2,444,179 - - - 2,452,329
Issuance of common
stock under
employee stock
purchase plan 18,066 181 67,966 - - - 68,147
Non-cash compensation
related to options
under non-recourse
note receivable - - 1,100,000 - - - 1,100,000
Net loss - - - (6,485,763) - - (6,485,763)
--------------------------------------------------------------------------------------------------------------
Balance at March 31,
2001 10,017,612 $ 100,176 $ 51,902,100 $ (24,570,318) $ (12,772,200) $ (120,461) $ 14,539,297
==============================================================================================================
See accompanying notes to financial statements
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GALAXY NUTRITIONAL FOODS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2001 2000 1999
------------ ----------- -----------
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net Income (Loss) $ (6,485,763) $ 3,629,891 $ 1,291,367
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization 1,605,149 1,149,729 735,220
Amortization of debt discount 220,407 78,690 --
Deferred tax benefit (240,000) (1,320,000) --
Provision for losses on trade receivables 200,000 75,000 (4,794)
Non-cash compensation related to options under non-recourse
note receivable 1,100,000 -
Amortization of consulting and director fee expense paid
through issuance of common stock warrants 16,444 18,583 22,293
(Increase) decrease in:
Trade receivables (796,625) (3,103,158) (1,777,317)
Inventories (1,751,592) (2,787,211) (3,776,994)
Other receivables (223,333) (67,740) (136,808)
Prepaid expenses 414,534 (893,918) (306,204)
Increase (decrease) in:
Accounts payable 4,439,509 1,705,513 2,222,385
Accrued liabilities (23,552) (301,179) 14,850
------------ ----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (1,524,822) (1,815,800) (1,716,002)
------------ ----------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property and equipment (10,887,497) (4,404,501) (2,168,027)
(Increase) decrease in other assets 78,136 (103,632) 62,526
------------ ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (10,809,361) (4,508,133) (2,105,501)
------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Book overdrafts (1,247,924) 1,191,811 (333,820)
Net borrowings on line of credit 6,313,207 872,082 2,072,160
Borrowings on term notes payable 7,380,593 3,992,906 1,624,000
Repayments on term note payable (93,000) (2,806,847) (244,000)
Borrowings on subordinated note payable 123,183 3,876,817 --
Principal payments on capital lease obligations (41,613) (366,816) (63,394)
Proceeds from issuance of common stock, net of offering costs 68,147 1,033 968,943
Financing costs for long term debt (47,832) (441,497) (226,343)
Purchase of treasury stock (120,461) -- --
Proceeds from exercise of common stock options -- 4,715 4,000
------------ ----------- -----------
NET CASH FROM FINANCING ACTIVITIES 12,334,300 6,324,204 3,801,546
------------ ----------- -----------
NET INCREASE (DECREASE) IN CASH 117 271 (19,957)
CASH, BEGINNING OF YEAR 383 112 20,069
------------ ----------- -----------
CASH, END OF YEAR $ 500 $ 383 $ 112
============ =========== ===========
See accompanying notes to financial statements.
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GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Galaxy Nutritional Foods, Inc. (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. During November
2000, the Company formally changed its name from Galaxy Foods Company to
Galaxy Nutritional Foods, Inc.
INVENTORIES
Inventories are valued at the lower of cost (weighted average) or market.
PROPERTY, EQUIPMENT AND DEPRECIATION AND AMORTIZATION
Property and equipment are stated at cost. Depreciation and amortization
are 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 amortized 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, 2001.
The respective carrying value of certain on-balance-sheet financial
instruments approximated their fair values. These financial instruments
include cash, trade receivables, book overdrafts, accounts payable and
accrued liabilities. 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 and
subordinated 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.
33
34
GALAXY NUTRITIONAL FOODS, INC.
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. There were no such
impairments at March 31, 2001.
INCOME TAXES
Deferred income taxes are recognized for the tax consequences of temporary
differences between the financial reporting bases and the tax bases of the
Company's assets and liabilities in accordance with SFAS No. 109. Valuation
allowances are established when necessary to reduce deferred tax assets to
the amount 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.
SEGMENT INFORMATION
The Company does not identify separate operating segments for management
reporting purposes. The results of operations are the basis on which
management evaluates operations and makes business decisions. The Company's
sales are generated primarily within the United States of America.
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, as
amended by FAS 137 and 138, is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. Historically, the Company has not
entered into any derivative contracts either to hedge existing risks or for
speculative purposes. Accordingly, the new standard did not have a material
effect on the Company's financial statements.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 ("FIN 44"), Accounting for Certain Transactions
Involving Stock Compensation, an Interpretation of APB Opinion No. 25. FIN
44 clarifies the application of Opinion No. 25 for (a) the definition of
employee for purposes of applying Opinion No. 25, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequences of various modifications to the previously fixed
stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a
34
35
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
business combination. FIN 44 was effective July 2, 2000, but certain
conclusions cover specific events that occur after either December 15, 1998
or January 12, 2000. The impact to the Company related to the adoption of
FIN 44 was to record compensation expense of $1,100,000 for the year ended
March 31, 2001 in connection with notes receivable amended in June 1999
related to the exercise of options by the Company's President (see Note 7).
(2) INVENTORIES
Inventories are summarized as follows:
March 31, 2001 March 31, 2000
-------------- --------------
Raw materials $ 4,314,685 $4,005,324
Finished goods 6,459,855 5,017,624
----------- ----------
Total $10,774,540 $9,022,948
=========== ==========
(3) PREPAID EXPENSES
Prepaid expenses are summarized as follows:
March 31, 2001 March 31, 2000
-------------- --------------
Prepaid advertising $ 587,764 $ 375,364
Prepaid slotting -- 457,162
Prepaid commissions 210,914 151,114
Other 308,422 537,994
---------- ----------
Total $1,107,100 $1,521,634
========== ==========
The Company expenses the production costs of advertising the first time the
advertising takes place. During fiscal 2001, the Company changed its
accounting policy with regards to slotting fees and direct response
advertising costs to expense these costs as incurred (see Note 16).
Advertising expense was approximately $2,438,000, $904,000 and $698,000
during fiscal 2001, 2000 and 1999, respectively.
35
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GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
(4) PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
Useful Lives March 31, 2001 March 31, 2000
------------ -------------- --------------
Leasehold improvements 10-25 years $ 3,185,490 $ 3,184,988
Machinery and equipment 5-15 years 16,993,002 14,935,169
Delivery equipment and autos 3-5 years 15,149 15,652
Equipment under capital leases 7-15 years 314,543 314,543
Parts and tooling 1-3 years 219,808 --
Construction in progress 10,104,846 1,525,905
----------- ------------
30,832,838 19,976,257
Less accumulated depreciation and
amortization 5,529,744 3,955,511
----------- -----------
Property and equipment, net $25,303,094 $16,020,746
=========== ===========
Interest in the amount of $826,725, $490,442 and $395,963 was capitalized
to construction in progress during the years ended March 31, 2001, 2000,
and 1999, respectively.
The Company estimates that approximately $500,000 of additional costs will
be incurred to complete the construction in progress projects.
(5) LINE OF CREDIT AND LONG-TERM DEBT
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, $3.5 million in June 1998, $5.5 million in
December 1998, $7.5 million in April 2000 and $13 million in August 2000.
The amount available under the line of credit is based on a formula of 85%
of eligible accounts receivable plus 50% of eligible inventories not to
exceed $6,000,000, 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. Interest is payable on the
outstanding draws on the line of credit at a rate of prime minus 0.10%
percent (8.4% at March 31, 2001). The line of credit expires on October 31,
2002. As of March 31, 2001, the Company had an outstanding balance of
$8,776,278 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. This note is payable at the rate of $432,000 per year,
with a balloon payment due on October 31, 2001. This note was paid in full
during March 2000 through a new financing agreement with a different
financial institution. The new term note payable has availability to $10
million and bears interest at the prime rate (8% at March 31, 2001).
36
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GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
This note is payable interest only through February 1, 2001, with monthly
payments of $93,000, plus interest payable beginning March 1, 2001. The
note will mature on March 10, 2005. Amounts under the new agreement are
collateralized by machinery and equipment owned by the Company. The new
note is being used to finance new production equipment purchased by the
Company throughout fiscal 2001. As of March 31, 2001, the balance
outstanding under this agreement was $9,780,499. The Company paid
approximately $26,000 in loan costs in connection with this new financing.
During November 2000, the Company's president guaranteed a $1.5 million
short term bridge loan from SouthTrust Bank, N.A. with shares of his common
stock pledged as collateral. Interest on this note is at the prime rate (8%
at March 31, 2001). Principal payments of $50,000 per month are payable,
commencing in May 2001. The note matures October 2003.
On September 30, 1999, the Company secured a $4 million subordinated note
payable less loan costs of $380,000 to finance working capital and capital
improvement needs of the Company. Amounts outstanding under the agreement
are collateralized by a subordinated lien on substantially all assets of
the Company. The subordinated note is payable interest only monthly with a
principal payment in one lump sum upon maturity on September 30, 2004 and
bears interest at a rate of 11.5% which was adjusted in December 2000 from
13.5%. The Company issued a warrant to purchase up to 915,000 shares of
common stock to the subordinated note holder at an exercise price of $3.41
per share which represented 80% of the fair value of the Company's stock on
the date the warrant was issued. The warrant was valued at $786,900 which
was recorded as a debt discount and is being amortized to interest expense
from the date of issuance of the note to the maturity date of the note of
September 30, 2004.
On December 26, 2000, the subordinated note holder exercised a portion of
the warrant to purchase 815,000 shares of common stock at a price of $3.41
per share. The Company received net proceeds of $2,452,329, after paying
transaction costs of $326,822. In connection with this transaction, the
Company agreed to reimburse the note holder for brokerage commission and
other expenses incurred by the note holder for the sale of the 815,000
shares to the public, which were sold at a price of $3.25 per share. These
costs and expenses were recorded as a reduction in the proceeds received
from the exercise of the warrants. In addition, the Company agreed to
guarantee the price ($4.41 per share) at which the shares would be sold to
the public. The difference between the actual price received by the note
holder ($3.25) and the guaranteed price ($4.41) was $945,400, which was
recorded as a debt discount and is being amortized over the remaining term
of the subordinated note. The consideration for the difference between the
exercise price of $3.41 and the guaranteed price of $4.41 was $815,000 and
was funded through the issuance of an additional subordinated term note
which is due in December 2001. During fiscal 2001 and 2000, $220,407 and
$78,690 of the total debt discount of $1,732,000 was amortized to interest
expense, respectively. As of March 31, 2001 and 2000, the unamortized debt
discount was $1,433,203 and $708,210, respectively, and the principal
balance on the notes was $4,815,000 and $3,876,817, respectively.
Aggregate maturities of the term notes and subordinated notes payable over
future years are as follows: 2002 - $2,168,866, 2003 - $1,302,430, 2004 -
$4,993,010 and 2005 - $6,197,989.
The line of credit, term note payable, and subordinated note payable
contain certain financial and operating covenants. The Company was in
violation of substantially all financial covenants at March 31, 2001. The
lender of the subordinated note payable waived the violation for the
quarters ended March 31, 2001 and June 30, 2001 and amended the covenants
for the quarters subsequent to June 30, 2001. In connection with the
amendment to the subordinated debt covenants dated July 12, 2001, the
interest on the subordinated note was increased to 13.5% and the maturity
date was changed to August 1, 2003. The lender of the line of credit waived
the violations for the year ended March 31, 2001 and quarter ended June 30,
2001 and amended the covenants for the quarters subsequent to June 30,
2001. In connection with the amendment to the line of credit covenants
dated July 13, 2001, the interest on the line of credit was increased to
prime plus 2%. The lender of the term note payable waived the violations
for the year ended March 31, 2001 and on July 16, 2001 amended the
covenants for the periods subsequent to March 31, 2001. Total fees
incurred in connection with these waivers and amendments were $120,000 and
are due by December 31, 2001.
37
38
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
(6) COMMITMENTS
LEASES
The Company leases its operating facilities and certain equipment under
operating and capital leases, expiring at various dates through fiscal year
2005. The following is a schedule by years as of March 31, 2001, 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
------- -----------
2002 $33,292 $ 665,000
2003 23,593 439,000
2004 5,164 403,000
2005 3,481 223,000
------- ----------
Total net minimum lease payments 65,530 $1,730,000
==========
Less amount representing interest 6,950
-------
Present value of the net minimum lease payments 58,580
Less current portion 28,755
-------
Long-term obligations under capital leases $29,825
=======
The total capitalized cost for equipment under capital lease is $314,543,
with accumulated depreciation of $255,038 as of March 31, 2001.
Rental expense was approximately $987,000, $750,000 and $520,000 for the
fiscal years ended March 31, 2001, 2000 and 1999, respectively.
EMPLOYMENT AGREEMENT
On June 17, 1999, the Company's Board of Directors issued a new employment
agreement for the Company's President. The new agreement allows for a one
time grant of a stock option to purchase a maximum of 1,357,000 shares of
common stock. The option was granted in June 1999 and is exercisable
immediately at $3.31 per share and expires June 2009. The new agreement
also forgives the unaccrued interest on the existing note, provides for a
salary of $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.
(7) 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.
NOTES RECEIVABLE FOR COMMON STOCK
The Company entered into a $1,200,000 full recourse note receivable in
November 1994 and a $11,572,200 full recourse note receivable in October
1995 in connection with the exercise of stock options by the Company's
President. The notes were interest bearing and were secured by 2,914,286
shares of the Company's common stock. In June 1999, in connection with an
amendment to the President's employment agreement (see Note 9), the notes
were consolidated into a single note receivable in the amount of
$12,772,200, which is the current outstanding obligation as of March 31,
2001. This new note is non-interest bearing and non-recourse and is secured
by 2,914,286 shares of common stock. All accumulated and future interest on
the old notes was forgiven and the term of the note was extended to June
15, 2006. Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB 25) indicates that the exercise of options with a
non-recourse note should be treated as the grant of a stock option.
The Financial Accounting Standards Board issued Interpretation No. 44 ("FIN
44"), which clarifies the application of APB Opinion 25 relating to the
accounting consequences of various modifications to fixed stock options.
FIN 44 covers specific events that occurred after December 15, 1998 and was
effective as of July 2, 2000. FIN 44 clarified that when an option is
repriced, it is treated as a variable option and is marked to market each
quarter. The adoption of FIN 44 required the Company to change its
accounting related to the above note receivable. The underlying options
were required to be treated as variable due to the exchange of interest
bearing recourse notes with a non-interest bearing non-recourse note.
Accordingly, any differences between the exercise price of the options and
the market price of the Company's common stock is recorded as compensation
expense at each reporting period. As of March 31, 2001, the Company
recorded $1,100,000 of compensation expense to mark the options to market
in accordance with variable accounting.
38
39
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
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, 2001,
10,264 shares were accrued and 18,066 shares were issued under this plan at
prices ranging from $3.63 to $4.09 per share. During the year ended March
31, 2000, 7,802 shares were accrued and 514 shares were issued under this
plan at prices ranging from $3.24 to $3.78 per share. 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. The weighted average fair value of
the shares issued were $3.77, $3.52 and $3.91 per share for the fiscal
years ended March 31, 2001, 2000 and 1999, respectively.
COMMON STOCK OPTIONS AND WARRANTS ISSUED FOR CONSULTING SERVICES
During the fiscal years ended March 31, 2001, 2000 and 1999, consulting
expense of $16,444, $18,583 and $22,293, respectively, was recognized on
common stock options and warrants granted to officers, directors and
consultants.
STOCK WARRANTS
At March 31, 2001, 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:
Expiration Date Number of Warrants Exercise Price
--------------- ------------------ --------------
May 2001 4,286 $8.53
April 2002 7,143 5.46
July 2002 1,071 5.67
September 2002 143 6.79
December 2002 10,714 5.04
September 2004 100,000 3.41
August 2005 7,143 4.48
December 2005 81,500 3.90
January 2006 33,571 4.81
August 2008 15,715 4.81
January 2009 1,430 3.94
-------
262,716
=======
STOCK OPTIONS
At March 31, 2001 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
39
40
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
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 in
the fiscal 2001 option-pricing model as follows: no dividend yield, 46%
volatility, risk-free interest rate ranging from 4.42% to 5.69%, and
expected lives of ten years. Assumptions used for grants in 2000: no
dividend yield, 43% volatility, risk-free interest rate of 4.64%, and
expected lives of ten years. 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. 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 increased their net loss by
$26,774 for fiscal 2001 and reduced net income by $2,755,910 and $73,808
for fiscal 2000 and 1999, respectively. This would not have any effect on
loss per share for fiscal 2001. Basic and diluted pro forma earnings per
share would have been $0.10 and $0.09, respectively for fiscal 2000. The
effect on earnings per share is less than $0.01 per share for fiscal 1999.
The following table summarizes information about plan stock option activity
for the years ended March 31, 2001, 2000 and 1999:
Weighted-Average Weighted-Average
Exercise Price Fair Value of
Shares per Share Options Granted
------ ---------------- ----------------
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 --
Granted - at market 5,000 3.91 2.40
Exercised (1,000) 4.71 --
Canceled (2,643) 10.55 --
------- ------ -----
Balance, March 31, 2000 87,976 4.51 --
Canceled (7,286) 4.68 --
------- ------ -----
Balance, March 31, 2001 80,690 $ 4.50 $ --
====== ====== =====
40
41
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
At March 31, 2001, 2000 and 1999, a total of 66,263, 61,261 and 56,430 of
the outstanding plan options were exercisable with a weighted-average
exercise price of $4.81, $4.90 and $5.28 per share, respectively.
The following table summarizes information about non-plan stock option
activity for the years ended March 31, 2001, 2000, and 1999:
Weighted-Average Weighted-Average
Exercise Price Fair Value of
Shares per Share Options Granted
--------- ---------------- ----------------
Balance, March 31, 1998 188,215 6.86 $ --
Canceled (2,834) 14.00 --
--------- ------ -----
Balance, March 31, 1999 185,381 6.10 --
Granted - at market 1,357,000 3.31
Canceled (2,286) 14.00 --
--------- ------ -----
Balance, March 31, 2000 1,540,095 3.63 --
Granted - at market 11,216 3.74 2.39
Canceled (7,308) 8.59 --
--------- ------ -----
Balance, March 31, 2001 1,544,003 $ 3.61 $ --
========= ====== =====
At March 31, 2001, 2000 and 1999, a total of 1,537,336, 1,532,956 and
171,095 of the outstanding non-plan options were exercisable with a
weighted-average exercise price of $3.61, $3.61 and $5.90, respectively.
The following table summarizes information about plan and non-plan stock
options outstanding and exercisable at March 31, 2001:
Options Outstanding
-------------------------------------------------------------------------------------------
Weighted-Average Weighted-Average
Range of Exercise Remaining Exercise Number Weighted-Average
Prices Number Outstanding Life Price Exercisable Exercise Price
-----------------------------------------------------------------------------------------------------------------
$ 2.84 - 5.25 1,567,858 7.8 years $3.49 1,546,764 $3.49
5.46 - 7.00 18,286 4.9 years 6.45 18,286 6.45
8.31 -10.28 36,190 5.2 years 8.68 36,190 8.68
14.00 -19.25 2,359 1.0 year 14.32 2,359 14.43
--------- ---------
1,624,693 1,603,599
========= =========
SHARES RESERVED
At March 31, 2001, the Company has reserved common stock for future
issuance under all of the above arrangements totaling 1,694,433 shares.
41
42
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
(8) INCOME TAXES
The components of the net deferred tax assets consist of the following:
March 31, 2001 2000
-----------------------------------------------------------------------------------------------------------
Deferred tax assets:
Net operating loss carry forwards $6,474,000 $4,184,000
Investment, alternative minimum and general business tax credits 144,000 140,000
Other 291,000 261,000
-----------------------------------------------------------------------------------------------------------
Gross deferred income tax assets 6,909,000 4,585,000
Valuation allowance (3,541,000) (2,014,000)
-----------------------------------------------------------------------------------------------------------
Total deferred income tax assets 3,368,000 2,571,000
Deferred income tax liabilities:
Depreciation and amortization (1,808,000) (1,251,000)
-----------------------------------------------------------------------------------------------------------
Net deferred income tax assets 1,560,000 1,320,000
Less current portion 532,000 453,000
-----------------------------------------------------------------------------------------------------------
Long-term deferred income tax asset $1,028,000 $ 867,000
===========================================================================================================
The valuation allowance increased by $1,527,000 for the year ended March
31, 2001 and decreased by $2,786,000 and $2,612,000 for the years ended
March 31, 2000 and 1999, respectively. The Company has recorded a valuation
allowance to state its deferred tax assets at estimated net realizable
value due to the uncertainty related to realization of these assets through
future taxable income.
Significant components of income tax (expense) benefit are as follows:
Years ended March 31, 2001 2000 1999
--------------------------------------------------------------------------------------
Current:
Federal $ -- $(110,669) $(60,000)
State -- -- --
--------------------------------------------------------------------------------------
-- (110,669) (60,000)
--------------------------------------------------------------------------------------
Deferred:
Federal 226,800 1,127,100 --
State 13,200 192,900 --
--------------------------------------------------------------------------------------
240,000 1,320,000 --
--------------------------------------------------------------------------------------
$240,000 $1,209,331 $(60,000)
======================================================================================
42
43
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Tax expense for the years ended March 31, 2000 and 1999 for the Company's
liability for alternative minimum tax was $110,669 and $60,000,
respectively. The alternative minimum tax system limits the amount of
alternative minimum NOL carry forward 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:
Years ended March 31, 2001 2000 1999
-------------------------------------------------------------------------------------------
Federal income taxes at statutory rates (34.0%) 34.0% 34.0%
Change in deferred tax asset valuation allowance 19.2% (72.1%) (24.0%)
Alternative minimum tax -- 4.6% 4.4%
Non deductible expenses
Non deductible compensation 5.6% -- --
Imputed interest on note receivable 4.4% 12.5% 22.0%
Other 1.4% 5.0% 2.0%
Utilization of net operating loss carry forward -- (34.0%) (34.0%)
-------------------------------------------------------------------------------------------
Income taxes (benefit) at effective rates (3.4%) (50.0%) 4.4%
===================================
Unused net operating losses for income tax purposes, expiring in various
amounts from 2007 through 2021, of approximately $17,205,000 are available
at March 31, 2001 for carry forward against future years' taxable income.
Under Section 382 of the Internal Revenue Code, the annual utilization of
this loss may be limited in the event there are changes in ownership.
(9) RELATED PARTY TRANSACTIONS
Under the provisions of his former employment agreement, which was
rescinded on June 17, 1999 (see Note 6) 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 bore interest at 7% per annum and is secured by the
common shares purchased. The principal balance, was payable in full in
October 2000. In connection with his new employment agreement, all
accumulated and future interest on the note was forgiven and the term of
the note extended to June 15, 2006.
Included in other receivables on the Balance Sheet is $255,286 in advances
to the Company's President.
A director of the Company was paid consulting fees totaling $27,000,
$36,000 and $36,000 for introductions into several large foodservice
companies during the fiscal years ended March 31, 2001, 2000 and 1999,
respectively.
(10) ECONOMIC DEPENDENCE
For the fiscal years ended March 31, 2001, 2000 and 1999, the Company did
not have any single customer which comprised more than 10% of net sales.
43
44
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
For the fiscal years ended March 31, 2001 and 2000, the Company did not
have any single supplier which comprised more than 10% of purchases. During
fiscal 1999, purchases from one supplier of $2,285,974 were 11.8% of total
purchases for the year.
(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. Company contributions
to the plan amounted to $30,062, $17,025 and $15,180 for the fiscal years
ended March 31, 2001, 2000 and 1999, respectively.
(12) SUPPLEMENTAL CASH FLOW INFORMATION
Years ended March 31, 2001 2000 1999
----------------------------------------------------------------------------------------------------------------
Non-cash financing and investing activities:
Purchase of equipment through capital lease obligations and term
note payable $ -- $ 94,865 $402,869
Consulting and directors fees paid through issuance of common
stock warrants 16,444 18,583 68,500
Issuance of warrants in connection with Subordinated note payable -- 786,900 --
Original issue discount related to price guarantee on Finova
transaction 945,400 -- --
Issuance of subordinated note payable related to price guarantee
on Finova transaction 815,000 -- --
Exercise of warrants through reduction in line of credit 2,321,929 -- --
Cash paid for:
Interest (expensed and capitalized) 2,873,822 988,970 663,831
Income taxes -- 95,401 --
44
45
GALAXY NUTRITIONAL FOODS, INC.
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, 2000 and 1999:
Years ended March 31, 2000 1999
----------------------------------------------------------------------------------------------------
Basic net earnings per common share $.40 $.14
---------- ---------
Average shares outstanding - basic 9,183,814 9,005,843
Potential shares exercisable under stock option plans 1,128,506 185,786
Potential shares exercisable under stock warrant agreements 457,500 514,545
Less: Shares assumed repurchased under treasury stock method (1,360,005) (593,964)
---------- ---------
Average shares outstanding - diluted 9,409,815 9,112,210
---------- ---------
Diluted earnings per common share $.39 $.14
========== =========
The above reconciliation excludes 215,575 options and 95,501 warrants for
fiscal 2000 because they were anti-dilutive.
Potential common shares for the year ended March 31, 2001 were not
presented as their effects were antidilutive. These shares include
1,624,693 stock options and 262,716 warrants. Weighted average shares for
basic and diluted loss per share for the year ended March 31, 2001 were
9,396,002.
(14) FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of fiscal 2001, the Company recorded the
following adjustments:
Decrease overhead capitalized to finished goods $504,028
Decrease costs capitalized to construction in progress 216,065
45
46
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
The effect of the above fourth quarter adjustments on the previous quarter
is as follows:
Three Months Ended
December 31, 2000
------------------
Net Loss:
As reported (2,486,808)
As restated (3,206,901)
Basic and Diluted Loss Per Share:
As reported $(0.27)
As restated (0.35)
During the fourth quarter of fiscal 2000, the Company recorded the
following adjustments:
Capitalize labor, overhead and interest to construction in progress $720,927
Record debt discount related to warrants issued in connection with
subordinated note payable 786,900
The effect of the above fourth quarter adjustments on previous quarters is
as follows:
Three Months Ended
---------------------------------------------
December 31, 1999 September 30, 1999
----------------- ------------------
Net income:
As reported $ 727,960 $ 784,720
As restated 1,074,006 1,120,256
Basic earnings per share:
As reported $ 0.08 $ 0.09
As restated 0.12 0.12
Diluted earnings per share:
As reported $ 0.08 $ 0.08
As restated 0.11 0.12
46
47
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
(15) SCHEDULE OF VALUATION ACCOUNT
Balance at Charged to Write-Offs,
Beginning of Costs and Retirements and Balance at End
Year Expenses Collections of Year
------------------------------------------------------------------------------------------------------------------
Year Ended March 31, 1999:
Allowance for doubtful trade receivables $104,794 $138,595 $143,389 $100,000
Year Ended March 31, 2000:
Allowance for doubtful trade receivables $100,000 $ 90,132 $ 15,132 $175,000
Year Ended March 31, 2001:
Allowance for doubtful trade receivables $175,000 $250,212 $ 50,212 $375,000
(16) CHANGE IN ACCOUNTING POLICY
The Company changed its accounting policy in the third quarter of fiscal
2001 with regards to slotting fees and certain advertising costs. The
effect of this accounting change was to adopt this policy as of the
beginning of fiscal 2001 (April 1, 2000). Previously, slotting fees and
certain advertising costs were capitalized and amortized over the shorter
of the expected period of benefit or one year. The Company changed this
accounting policy to expense these costs as incurred. This change was made
because there has been a change in the expected period of benefit related
to these costs. During fiscal 2001, the Company's slotting fees and
advertising costs increased significantly in order for the Company to
maintain current relationships with brokers and customers as opposed to
generation and stimulation of future sales. As a result, the Company
believes these expenses are more appropriately period expenses, rather than
those that would benefit future periods, and should be expensed as
incurred. The cumulative effect of this change in accounting policy was
$786,429. Pro forma earnings per share amounts on previous quarters,
assuming the new accounting policy was applied retroactively, are as
follows:
47
48
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Three Months Ended
---------------------------------------------
December 31, 2000 September 30, 2000
----------------- ------------------
Basic earnings per share:
Net income - as reported $0.08 $0.08
Net income - pro forma $0.02 $0.06
Diluted earnings per share:
Net income - as reported $0.07 $0.07
Net income - pro forma $0.02 $0.06
(17) SUBSEQUENT EVENTS
On April 6, 2001, in accordance with an exemption from registration under
Regulation D promulgated under the Securities Act of 1933, as amended, the
Company received proceeds of approximately $3,082,000 for the issuance of
72,646 shares of the Company's Series A convertible preferred stock and
warrants to purchase shares of the Company's common stock. The shares are
subject to certain designations, preferences and rights, including the
right to convert each preferred share into ten shares of common stock, the
right to a ten percent stock dividend after one year of issuance, and an
eight percent stock dividend for the subsequent three years thereafter. The
per share conversion price is the lower of (x) $5.10, (y) the market price
on the original issue date or (z) 95% of the average of the two lowest
closing bid prices on the principal market of the common stock out of the
fifteen trading days prior to conversion. The warrants include initial
warrants of 120,000 shares, redemption warrants of 120,000 shares, and 30%
warrants. The number of shares underlying the 30% warrants is determined by
dividing (x) 30% of the preferred shares originally purchased by the
investor by (y) the average closing bid price of the Company's common stock
during the five day period ending on February 15, 2002. The warrants are
exercisable over various terms and at various exercise prices, as defined
in the purchase agreement. The Company is required to register the shares
no later than October 1, 2001. Upon default, the Company shall pay each
investor an amount equaling 3% of the average closing sales price of the
common stock for each 30-day default period multiplied by the number of
common shares the investor may acquire upon conversion.
48
49
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
In May 2001, the Company signed a four year licensing agreement with
Tropicana Product Sales, Inc., a division of PepsiCo, Inc.. The agreement
permits the Company to use Tropicana's logo on the packaging of its new
Ultra Smoothie product which will be distributed in both the foodservice
and retail markets. This product is expected to begin shipment during
August 2001.
(18) QUARTERLY OPERATING RESULTS (UNAUDITED)
Unaudited quarterly operating results are summarized as follows:
Three Months Ended (Unaudited)
---------------------------------------------------------------------
2000 March 31 December 31 September 30 June 30
---- ----------- ----------- ------------ -----------
Net sales $11,213,686 $10,118,593 $10,521,630 $10,381,075
Gross margin 3,443,313 3,967,956 3,799,566 3,790,413
Income before cumulative effect of change in
accounting policy 1,501,527 727,960 784,720 615,684
Net income 1,501,527 727,960 784,720 615,684
Basic net income per common share 0.16 0.08 0.09 0.07
Diluted net income per common share 0.16 0.08 0.08 0.07
Stockholders' equity 17,525,045 15,234,398 14,506,438 13,718,190
Three Months Ended (Unaudited)
---------------------------------------------------------------------
2001 March 31 December 31 September 30 June 30
---- ----------- ----------- ------------ -----------
Net sales $12,262,998 $11,258,310 $12,214,562 $11,256,421
Gross margin 1,823,852 3,796,569 4,481,614 4,048,508
Income (loss) before cumulative effect of
change in accounting policy (5,400,509) (1,700,379) 712,230 689,324
Net income (loss) (5,400,509) (2,486,808) 712,230 689,324
Basic net income (loss) per common share (0.57) (0.27) 0.08 0.08
Diluted net income (loss) per common share (0.57) (0.27) 0.07 0.07
Stockholders' equity 14,539,297 18,100,884 18,872,550 18,160,320
49
50
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
50
51
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
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 March 31, 2001, as well as their respective ages and positions
with the Company:
NAME AGE POSITIONS
- -------------------------------------------------------------------------------------------
Angelo S. Morini 58 Chairman of the Board of Directors, President,
and Chief Executive Officer
Keith A. Ewing 40 Chief Financial Officer
Christopher Morini 46 Vice President of Marketing
John Jackson 43 Vice President of Sales
Joseph Juliano(1) 50 Director
Douglas A. Walsh(1) 56 Director
Marshall K. Luther(1) 48 Director
(1) Audit Committee Member
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.
Angelo S. Morini has been President of the Company since its inception and is
the inventor of formagg(R). He was elected Chairman of the Board of Directors,
President, and Chief Executive Officer in 1987. Between 1972 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. Angelo S. Morini's brother,
Christopher Morini, works for the Company as Vice President of Marketing. Angelo
S. Morini's wife, Julie Morini, is employed by the Company in the marketing and
public relations departments. Also, Mr. Morini's brother-in-law, Robert
Peterson, is employed by the Company as a sales representative.
Keith A. Ewing was the Chief Financial Officer of the Company from February 2000
until April 2001. From 1998 through January 2000, Mr. Ewing was the Vice
President of
51
52
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Finance for CNL Corporate Properties, Inc. His main focus has been
completing large financing transactions for both public and privately held
companies. From 1994 through 1998, Mr. Ewing was Chief Financial Officer of
Premier Property Group, Inc., a privately held London based investment company.
Mr. Ewing's public company experience includes serving as controller of
Mid-State Homes, Inc., a $3 billion finance division of Walter Industries, Inc.,
and general manager of accounting for Nutmeg Mills, Inc. Mr. Ewing received a
B.S. in Accounting from Florida State University in 1982 and is currently a
Florida Certified Public Accountant. See Item 13 for discussion regarding Mr.
Ewing's termination with the Company.
Christopher Morini, has been Vice President of Marketing and International Sales
for the Company since 1996. Mr. Morini started with the Company as an area
salesman in 1983. In 1984, Mr. Morini served as a sales manager. From 1986
through 1996, Mr. Morini has been a Vice President of the Company, where he has
been responsible for various sales and marketing divisions of the Company,
including the Food Service, International Sales and Retail Sales divisions. Mr.
Morini received a B.S. in Economics from Slippery Rock University in 1978.
Christopher Morini's brother, Angelo S. Morini, is the Chairman of the Board,
Chief Executive Officer and President of the Company.
John Jackson, has been Vice President of Sales for the Company since 1993. From
1985 through 1992, Mr. Jackson was Director of Sales for H.J. Heinz Company. Mr.
Jackson received his B.S. in Business Administration and Accounting from Mars
Hill College in 1980.
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 1971 to
1984, he was the Health Commissioner for Mahoning County, Ohio, and from 1983 to
1985, he was the Clinic Commander for the U.S. Air Force 911 Tac Clinic in
Pittsburgh, Pennsylvania. From 1985 to 1988, he was a flight surgeon at Patrick
Air Force Base, Cocoa Beach, Florida. 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 organization.
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
B.S. in Engineering
52
53
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
from Brown University in 1974 and his M.B.A. in Marketing from the Wharton
Graduate School of Business in 1976.
Joseph Juliano was elected to the Board of Directors on June 16, 1999. From 1973
to 1988, Mr. Juliano served in various management positions for Pepsi-Cola
Company. In 1988, Mr. Juliano managed Pepsi Cola Company Bottling Operations
where he achieved record sales and profits during his three-year tenure in this
position. From 1991 to 1998, he served as Vice President of Prestige, Sports and
Gaming for Pepsi Cola North America. In 1998, he was promoted to Vice President
of Entertainment Sales, with expanded domestic and international account
responsibilities encompassing movie theaters, theme parks, sports venues, theme
restaurants, hotels, and casinos. Mr. Juliano received his Masters in Business
Administration from St. John's University in New York City.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
To the best knowledge of the Company, there are no delinquent Form 4 filings
with respect to the fiscal year ended March 31, 2001.
ITEM 11. EXECUTIVE COMPENSATION.
All figures set forth in this Item 11 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 effective on February 11, 1999.
The following table sets forth the compensation of the Company's Chief Executive
Officer, Chief Financial Officer and two Vice Presidents of the Company for the
fiscal years ended March 31, 2001, 2000 and 1999 (no other executive officers
over a principal business unit of the Company was compensated in an amount in
excess of $100,000 for any such other fiscal years):
53
54
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
SUMMARY COMPENSATION TABLE
Long-Term Compensation
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other All
Annual Restricted Securities Other
Compen- Stock Underlying LTIP Compen-
Names and Fiscal Salary Bonus sation Award(s) Options/SARs Payouts sation
Principal Position Year ($) ($) ($) ($) (#) ($) ($) (15)
- ---------------------------------------------------------------------------------------------------------------
Angelo S. Morini 2001 300,000 - 28,656(2) - - - 2,700
Chairman of the Board 2000 300,000 125,000 20,526(3) - 1,357,000 - 2,700
President, and Chief 1999 250,000 - 20,128(4) - - - 2,700
Executive Officer(1)
Keith A. Ewing 2001 125,000 - 9,716(6) - - - 3,000
Chief Financial Officer(5)
Christopher Morini 2001 153,000 - 29,372(8) - - - 16,944
Vice President of 2000 126,250 25,000 7,753(9) - - - 3,000
Marketing(7) 1999 125,000 10,000 7,753(10) - 14,286 - 3,000
John Jackson 2001 128,000 - 10,390(12) - - - 2,700
Vice President of 2000 113,750 45,838 10,117(13) - - - 2,700
Sales(11) 1999 110,000 - 10,117(14) - 14,286 - 2,700
(1) On June 17, 1999, the Company's Board of Directors approved to rescind the
existing employment agreement with the Company's President and Chief Executive
Officer, Mr. Angelo S. Morini, and to enter into new employment agreement with
him. The new agreement includes a one-time grant of stock options to acquire
1,357,000 shares of Common Stock at an exercise price of $3.31 per share. Under
the new agreement, the Company forgave all outstanding interest, approximately
$3,000,000, on two promissory notes executed by Mr. Morini in favor of the
Company in connection with the exercise of certain purchase rights and options
previously granted by the Company to Mr. Morini. The new agreement also 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,
and has a rolling five-year term. In conjunction with the entry into the new
agreement, the Company agreed to a consolidation of Mr. Morini's two existing
promissory notes in favor of the Company into a single note payable in the
amount of $12,772,200, which is the current outstanding balance of the
obligation. This new note is non-interest bearing, non-recourse to Mr. Morini,
and is secured by 2,914,286 shares of the Company's Common Stock beneficially
owned by Mr. Morini.
(2) For the fiscal year ended March 31, 2001, the Company paid $18,552 in lease
payments for Mr. Morini's automobile lease, approximately $100 per month for
automobile insurance and $8,904 in club dues for Mr. Morini.
(3) For the fiscal year ended March 31, 2000, the Company paid $11,860 in lease
payments for Mr. Morini's automobile and $8,666 in club dues for Mr. Morini.
54
55
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
(4) 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.
(5) In February of 2000, Keith A. Ewing was appointed as Chief Financial
Officer. The base salary provided for Keith Ewing was $125,000. On April 12,
2001, the Company terminated Mr. Ewing.
(6) For the fiscal year ended March 31, 2001, the Company paid $6,684 in lease
payments for Mr. Ewing's automobile, and approximately $100 per month for
automobile insurance and $2,131 in club dues for Mr. Ewing.
(7) Angelo S. Morini's brother, Christopher Morini, works for the Company as
Vice President of Marketing. In February of 1983, Christopher Morini was
appointed as Vice President of Marketing. Mr. Morini's employment agreement
provides for $126,250 base salary with annual increases to be determined by the
compensation committee. The agreement also provides for an automobile lease with
insurance, which together shall not exceed $1,100 per month. Mr. Morini will
also be entitled to a bonus that shall not exceed 40% of his base salary based
on certain personal and Company goals as established by the Company's Chief
Executive Officer.
(8) For the fiscal year ended March 31, 2001, the Company paid $11,228 in lease
payments for Mr. C. Morini's automobile, and approximately $100 per month for
automobile insurance and $16,944 in club dues for Mr. C. Morini.
(9) For the fiscal year ended March 31, 2000, the Company paid $6,553 in lease
payments for Mr. C. Morini's automobile, plus $100 per month for automobile
insurance.
(10) For the fiscal year ended March 31, 1999, the Company paid $6,553 in lease
payments for Mr. C. Morini's automobile, plus $100 per month for automobile
insurance.
(11) In August of 1993, John Jackson was appointed as Vice President of Sales.
Mr. Jackson's employment agreement provides for $113,750 base salary with annual
increases to be determined by the compensation committee. The agreement also
provides for an automobile lease with insurance, which together shall not exceed
$850 per month. Mr. Jackson will also be entitled to a bonus that shall not
exceed 40% of his base salary based on certain personal and Company goals as
established by the Company's Chief Executive Officer.
(12) For the fiscal year ended March 31, 2001, the Company paid $9,190 in lease
payments for Mr. Jackson's automobile and approximately $100 per month for
automobile insurance.
55
56
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
(13) For the fiscal year ended March 31, 2000, the Company paid $8,917 in lease
payments for Mr. Jackson's automobile, plus $100 per month for automobile
insurance.
(14) For the fiscal year ended March 31, 1999, the Company paid $8,917 in lease
payments for Mr. Jackson's automobile, plus $100 per month for automobile
insurance.
(15) "All Other Compensation" represents the health insurance premiums paid on
behalf of the indicated employees by the Company.
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. One director
received consulting fees totaling $27,000, $36,000 and $36,000 during the 2001,
2000 and 1999 fiscal years.
EMPLOYMENT AGREEMENT OF CHIEF EXECUTIVE OFFICER
As of June 17, 1999, the Company entered into a new Employment Agreement (the
"Agreement") with Angelo S. Morini, the Company's President and Chief Executive
Officer. The Agreement has a rolling term of five years and provides for an
annual base salary of $300,000. Additionally, Mr. Morini will receive an annual
bonus in an amount equal to or between three and five percent of the Company's
pre-tax net income for book purposes, depending on the level of pre-tax income
achieved, as determined by the Company's independent certified public accounting
firm. Other material provisions of the Agreement are as follows:
1. Mr. Morini shall be granted an option to purchase a maximum of
1,357,000 shares of the Company's Common Stock at a per share price of
$3.31 per share. The options granted as aforesaid shall have a term of
ten 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.
2. 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.
3. If the Agreement is terminated by the Company without cause, Mr.
Morini shall be come fully vested in any stock 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
56
57
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
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 Mr. Morini's annual base salary (before
deductions for withholding, employment and unemployment taxes) for a
period of sixty months.
4. Mr. Morini has agreed that in the event he 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.
5. The Company will obtain, and maintain in effect during the term of
this Agreement, for the benefit of (i) a Two Million Dollar
(2,000,000) term life insurance policy insuring his life, the
beneficiaries of which shall be designated by Mr. Morini, and (ii) a
disability insurance policy providing for payment of at least
two-thirds (2/3) of Mr. Morini's base salary.
6. In connection with Mr. Morini's exercise of certain rights to purchase
Company common stock, Mr. Morini has previously delivered two interest
bearing promissory notes to the Company in the amounts of $11,572,200
and $1,200,000, representing the purchase price for such common stock
purchases. The $11,572,200 Note is secured by certain shares of the
Company's common stock owned by Mr. Morini. The parties hereby agree
that the $11,572,200 Note and the $1,200,000 Note shall be canceled
(with the Company forgiving any accrued interest thereunder) and that
the parties entered into a new Loan Agreement. The Loan Agreement
provides that Mr. Morini and the Company execute a new promissory note
in the amount of $12,772,200 and a stock pledge agreement.
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 effective on February 11, 1999.
57
58
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
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 March 31, 2001 (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 Nature of
Name and Address of Beneficial Owner Beneficial Ownership(1) Percent of Class(2)
- ------------------------------------------------------------------------------------------------
Angelo S. Morini
2441 Viscount Row
Orlando, Florida 32809 4,952,743(3) 42.2%
Cede & Co.
Box #20
Bowling Green Station
New York, New York 5,250,692(4) .7%
Fred DeLuca
325 Bic Drive
Milford, Connecticut 06460 357,143(5) 4.2%
(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 11,413,184 shares. Does not assume the exercise
of any other options or warrants.
(3) Includes options to acquire 1,520,072 shares of the Company's Common Stock.
All of Mr. Morini's options currently are exercisable at $3.31 to $5.25 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 and 13,072 shares on December 4, 2002, as to 142,857 on July
1, 2007, and as to 1,357,000 shares on June 15, 2009. 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 shares
58
59
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
held in a nominee name, all of Mr. Morini's shares are held by Morini
Investments Limited Partnership, a Delaware limited liability partnership, of
which Angelo Morini is the Limited Partner and Morini Investments LLC is the
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.
(5) Mr. Fred DeLuca acquired 357,143 shares from the Company on October 8, 1998
at a price of $2.625 per share.
59
60
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
SHARE OWNERSHIP OF OFFICERS AND DIRECTORS
The following table sets forth, as of March 31, 2001 the number of shares owned
directly, indirectly and beneficially by each executive officer and each
director and director-nominee of the Company, and by all executive officers and
directors as a group:
Amount and Nature of
Name and Address of Beneficial Owner Beneficial Ownership(1) Percent of Class(2)
- --------------------------------------------------------------------------------------------------------
Angelo S. Morini
Galaxy Foods Company
2441 Viscount Row
Orlando, Florida 32809 4,952,743(3) 42.2%
Douglas A. Walsh
607 Tamiami Trail
Ruskin, Florida 33570 4,097(4) *
Marshall K. Luther
Galaxy Foods Company
2441 Viscount Row
Orlando, Florida 32809 12,715(5) *
Joseph Juliano
Galaxy Foods Company
2441 Viscount Row
Orlando, Florida 32809 40,500(6) *
Keith A. Ewing
Galaxy Foods Company
2441 Viscount Row
Orlando, Florida 32809 4,533(7) *
Christopher Morini
Galaxy Foods Company
2441 Viscount Row
Orlando, Florida 32809 24,757(8) *
John Jackson
Galaxy Foods Company
2441 Viscount Row
Orlando, Florida 32809 26,229(9) *
All executive officers and directors as a group 5,070,002 43.2%
========= =====
60
61
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
* 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 11,736,266 shares. Does not assume the exercise of
any other options or warrants.
(3) Includes options to acquire 1,520,072 shares of the Company's Common Stock.
All of Mr. Morini's options currently are exercisable at $3.31 to $5.25 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 and 13,072 shares on December 4, 2002, as to 142,857 on July
1, 2007, and as to 1,357,000 shares on June 15, 2009. 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 shares held in a nominee
name, all of Mr. Morini's shares are held by Morini Investments Limited
Partnership, a Delaware limited liability partnership, of which Angelo Morini is
the Limited Partner and Morini Investments LLC is the General Partner. Mr.
Morini is the sole member of Morini Investments LLC.
(4) Dr. Walsh, a current member of the Board of Directors, was granted an option
to acquire 2,143 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 238 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
61
62
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
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. On October 1, 1998, he was granted an option to
acquire 286 shares at an exercise price of $3.06 per share which expire on
October 1, 2008. The closing bid price of the Company's Common Stock as quoted
on the NASDAQ system on September 30, 1998 was $3.06 per share. On October 1,
1999, he was granted an option to acquire 286 shares at an exercise price of
$4.13 per share which expire on October 1, 2009. The closing bid price of the
Company's Common Stock as quoted on the NASDAQ system on September 30, 1999 was
$4.13 per share. On October 1, 2000, he was granted an option to acquire 286
shares at an exercise price of $4.44 per share which expire on October 1, 2010.
The closing bid price of the Company's Common Stock as quoted on the American
Stock Exchange on September 30, 2000 was $4.44. All of Dr. Walsh's options
currently are exercisable.
(5) 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
which expire on August 28, 2005. 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. On October 1, 1998, he was granted an option to
acquire 286 shares at an exercise price of $3.06 per share which expire on
October 1, 2008. The closing bid price of the Company's Common Stock as quoted
on the NASDAQ system on September 30, 1998 was $3.06 per share. On October 1,
1999, he was granted an option to acquire 286 shares at an exercise price of
$4.13 per share which expire on October 1, 2009. The closing bid price of the
Company's Common Stock as quoted on the NASDAQ system on September 30, 1999 was
$4.13 per share. On October 1, 2000, he was granted an option to acquire 286
shares at an exercise price of $4.44 per share which expire on October 1, 2010.
The closing bid price of the Company's Common Stock as quoted on the American
Stock Exchange on September 30, 2000 was $4.44. All of Mr. Luther's options
currently are exercisable.
62
63
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
(6) Mr. Juliano, a current member of the Company's Board of Directors, is the
beneficial owner of 33,571 shares of Common Stock issuable upon the exercise of
warrants held by JCII Corporation, of which Catherine Juliano, Mr. Juliano's
wife, is the sole shareholder. The exercise price of the warrants is $4.81 per
share and they expire on January 31, 2006. These warrants were granted as
compensation for JCII Corporation's introductions of key accounts to the
Company. Mr. Juliano also beneficially owns 6,571 shares of Common Stock, held
of record by JCII Corporation. Mr. Juliano was granted on October 1, 1999,
options to acquire 72 shares at an exercise price of $4.13 per share which
expire on October 1, 2009. The closing bid price of the Company's Common Stock
as quoted on the NASDAQ system on September 30, 1999 was $4.13 per share. On
October 1, 2000, he was granted an option to acquire 286 shares at an exercise
price of $4.44 per share which expire on October 1, 2010. The closing bid price
of the Company's Common Stock as quoted on the American Stock Exchange on
September 30, 2000 was $4.44. All of JCII Corporation's and Mr. Juliano's
options and warrants currently are exercisable.
(7) Includes options to acquire 10,000 shares of the Company's Common Stock
which were granted to Mr. Ewing in fiscal 2000 pursuant to his employment
agreement. Such options are exercisable at $3.75 per share and expire on
February 10, 2010. One third of the options are exercisable as of February 8,
2001, one third of the options are exercisable on February 8, 2002, and the
final one-third of the options are exercisable on February 8, 2003.
(8) Includes options to acquire 22,857 shares of the Company's Common Stock. All
of Mr. Morini's options currently are exercisable at $2.87 to $8.47 per share.
Options expire as to 7,143 shares on May 16, 2006, as to 714 on October 1, 2001,
as to 714 on August 31, 2003 and as to 14,286 shares on September 24, 2008.
(9) Includes options to acquire 21,429 shares of the Company's Common Stock. All
of Mr. Jackson's options currently are exercisable at $2.87 to $8.47 per share.
Options expire as to 7,143 shares on May 16, 2006 and as to 14,286 shares on
September 24, 2008.
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 effective on February 11, 1999.
On June 17, 1999, the Company's Board of Directors approved to rescind the
existing employment agreement with the Company's President and Chief Executive
Officer, Mr. Angelo S. Morini, and to enter into new employment agreement with
him. The new agreement eliminates the performance based option arrangement and
allows for a one-
63
64
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
time grant of stock options to acquire 1,357,000 shares of Common Stock at an
exercise price of $3.31 per share. The new agreement also 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, and has a
rolling five-year term.
In conjunction with the entry into the new agreement, the Company forgave
interest of approximately $3,000,000, on two existing notes executed by Mr.
Morini in favor of the Company. The two notes were consolidated into a single
note payable in the amount of $12,772,200, which is the current outstanding
balance of the obligation. This new note is non-interest bearing and
non-recourse to Mr. Morini, and is secured by 2,914,286 shares of the Company's
Common Stock beneficially owned by Mr. Morini. Additionally, since October 2000,
Mr. Morini has drawn an aggregate of $255,286 in advances which will be charged
against future bonuses under the new employment agreement.
Angelo S. Morini's brother, Christopher Morini, works for the Company as Vice
President of Marketing. Angelo S. Morini's wife, Julie Morini, is employed by
the Company in the marketing and public relations departments. Mr. Morini's
brother-in-law, Robert Peterson, is employed by the Company as a sales
representative.
During each of the fiscal years ended March 31, 2001, 2000 and 1999, Joseph
Juliano, a director of the Company, was paid $27,000, $36,000, and $36,000,
respectively, in return for developing and maintaining business relationships
with prospective and existing customers and suppliers on behalf of the Company.
In February 2000, Keith A. Ewing was appointed Chief Financial Officer of the
Company. Mr. Ewing's employment agreement provides for a $125,000 base salary.
The agreement also provides for an automobile lease with insurance, which
together shall not exceed $800 per month. In addition, the Company provides a
club membership at a cost not to exceed $200 per month. The agreement grants Mr.
Ewing stock options to acquire 10,000 shares of Common Stock at an exercise
price of $3.75. One third of such options shall vest on the first anniversary of
the date of grant, and one third of such options shall vest on the second
anniversary of the date of grant, and the final one third of such options shall
vest on the third anniversary of the date of grant, subject to Mr. Ewing's
continued employment with the Company through the vesting period. The options
shall vest immediately in the event the Company is sold. On April 12, 2001, the
Company terminated Mr. Ewing in an effort to cut operating costs by eliminating
and consolidating positions. The Company's controller, Cynthia L. Hunter, has
been appointed as the acting Chief Financial Officer of the Company. Ms. Hunter
served as the Chief Financial Officer for the three years preceding Mr. Ewing's
appointment in February 2000.
Angelo S. Morini's brother, Christopher Morini, works for the Company as Vice
President of Marketing. In February of 1983, Christopher Morini was appointed as
Vice
64
65
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
President of Marketing. Mr. Morini's employment agreement provides for a
$126,250 base salary with annual increases to be determined by the compensation
committee. The agreement also provides for an automobile lease with insurance,
which together shall not exceed $1100 per month. Mr. Morini will also be
entitled to a bonus that shall not exceed 40% of his base salary based on
certain personal and Company goals as established by the Company's Chief
Executive Officer.
In August of 1993, John Jackson was appointed as Vice President of Sales. Mr.
Jackson's employment agreement provides for a $113,750 base salary with annual
increases to be determined by the compensation committee. The agreement also
provides for an automobile lease with insurance, which together shall not exceed
$850 per month. Mr. Jackson will also be entitled to a bonus that shall not
exceed 40% of his base salary based on certain personal and Company goals as
established by the Company's Chief Executive Officer.
65
66
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
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.)
*3.7 Amendment to Certificate of Incorporation of the Company, filed on
November 16, 2000, effective November 17, 2000 (Filed as Exhibit
3.1 to Registration Statement on Form S-3 filed November 28, 2000,
and incorporated herein by reference.)
*10.1 Second Amendment to the Security Agreement with Finova Capital
Corporation dated June 1998 (Filed as Exhibit 10.1 on Form 10-K
for fiscal year ended March 31, 1999, and incorporated herein by
reference.)
*10.2 Third Amendment to the Security Agreement with Finova Capital
Corporation dated December 1998 (Filed as Exhibit 10.2 on Form
10-K for fiscal year ended March 31, 1999, and incorporated
herein by reference.)
66
67
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
*10.3 Term Loan Agreement with SouthTrust Bank dated March 2000 (Filed
as Exhibit 10.3 on Form 10-K/A for fiscal year ended March 31,
2000, and incorporated herein by reference.)
*10.4 Cabot Industrial Properties L.P. Lease dated July 1999 (Filed
as Exhibit 10.4 on Form 10-K/A for fiscal year ended March 31,
2000, and incorporated herein by reference.)
*10.5 Preferability letter from BDO Seidman, L.L.P. (Filed as Exhibit
10.3 on Form 10-Q for quarter ended December 31, 2000, and
incorporated herein by reference.)
* Previously filed
REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the last quarter of the
period covered by this report.
67
68
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
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: July 9, 2001 /s/ Angelo S. Morini
Angelo S. Morini
Chairman and President
(Principal Executive Officer)
Date: July 9, 2001 /s/ Cindy Hunter
Cindy Hunter
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: July 9, 2001 /s/ Douglas Walsh
Douglas Walsh, M.D.
Director
Date: July 9, 2001 /s/ Marshall Luther
Marshall Luther
Director
Date: July 9, 2001 /s/ Joseph Juliano
Joseph Juliano
Director
68