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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, 2002
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. $43,581,016
The aggregate market value of the voting stock held by non-affiliates as of June
27, 2002 was $31,844,573 based on the closing sales price of $4.80 per share on
such date.
The number of shares outstanding of Galaxy Nutritional Foods, Inc.'s Common
Stock as of June 27, 2002 was 11,541,043.
DOCUMENTS INCORPORATED BY REFERENCE: None
Transitional Small Business Disclosure Format. Yes No X
--- ---
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PART I
FORWARD LOOKING STATEMENTS
This Form 10-K contains forward-looking statements. These statements relate to
future events or our future financial performance. These forward-looking
statements are based on our current expectations, estimates and projections
about our industry, management's beliefs and certain assumptions made by us.
Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks,"
"estimates" and variations of these words or similar expressions are intended to
identify forward-looking statements. These statements are not guarantees of
future performance and are subject to certain risks, uncertainties and
assumptions that are difficult to predict. Therefore, actual results could
differ materially from those expressed or forecasted in any forward-looking
statements as a result of a variety of factors, including those set forth in
"Risk Factors" and elsewhere in, or incorporated by reference into, this Form
10-K. We undertake no obligation to update publicly any forward-looking
statements for any reason, even if new information becomes available or other
events occur in the future.
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. In
November 2000, the Company again changed its name 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 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 two principal markets--retail stores, such as supermarket chains
and health food stores; and food service operations, such as restaurant chains,
cafeterias, hospitals and schools.
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, no saturated fat, low and no
cholesterol and no lactose cheese and dairy-related products. These include
individually wrapped cheese slices, shredded cheeses, grated toppings, milk,
yogurt, smoothies, chunk cheeses, 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 eating more nutritious natural foods, which will help reduce 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
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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.
DEVELOPMENT OF BUSINESS
In the past seven years, the Company has developed several new product lines for
the retail and foodservice markets. In retail, the Company developed a unique
marketing strategy for its complete product line of plant-based dairy
alternatives, called Veggie(R) brand dairy alternatives. While most companies
sell dairy products through supermarket dairy cases, the Company adopted a
marketing strategy whereby its Veggie(R) plant-based dairy alternatives are sold
mostly in produce cases of supermarkets nationwide. In produce, they are sold
next to other nutritious natural products, which allows the target market to
locate the products much more easily instead of being sold in the dairy cases of
supermarkets where there are many full-fat cheese choices.
In health food stores, the Company significantly expanded its existing product
lines and introduced several new line extensions over the past few years. These
product line extensions also are plant-based dairy alternatives and are made
from either soy, almond, oat or rice. Its vegan (non-dairy) product line is the
most extensive in the world. With the addition of natural food sections to most
supermarkets, the Company also markets its products sold to the health food
industry to the mass market.
In the past few years, the Company began offering these plant-based dairy
alternatives to the foodservice market. Prior to doing this, the Company
primarily sold only conventional-type products to foodservice. Because of the
introduction of plant-based dairy alternatives to the foodservice industry, the
Company decided to consolidate its foodservice and retail businesses under one
sales director, to streamline the sales function and develop synergies between
both markets as well as the Company's brokers.
In order to expand product lines and introduce new ones, the Company purchased
several new manufacturing machines since introducing Veggie(R) brand dairy
alternatives in 1996. The plant is capable of producing approximately 129
million pounds of cheese slices, approximately 69 million pounds of shredded
cheese and approximately 70 million pounds of soft cheeses and smoothie products
on an annual basis.
The Company also expanded its warehousing facilities to accommodate the increase
in plant productivity and to operate more efficiently. This facility consists of
85,000 square feet of which approximately 50,000 square feet is refrigerated
space including freezers. The new facility gives the Company's shipping
department the ability to efficiently handle the shipping of over six million
pounds of product per week. The warehouse has eighteen loading docks and an
eight thousand square foot refrigerated staging area.
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(R), Lite Bakery(R), and Veggie Lite Bakery(R) brand names, are
low or no fat, low or no cholesterol, no saturated fat, 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, which
are marketed for their lower price points and not for their nutritious
components are not nutritionally equivalent or superior to conventional cheeses.
VEGGIE(R) NATURES ALTERNATIVE - Complete line of healthy dairy alternatives -
The Company's flagship brand has a complete line of nutritious dairy alternative
products made with soy. All Veggie(R) products are low in fat, contain less
calories, and are saturated fat, cholesterol and lactose free. The Veggie(R)
product line
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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 flavors and the
Rice product line also includes cream cheese, sour cream, butter and 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.
They are low fat or fat free, and are lactose, cholesterol and saturated fat
free. The Veggy(R) product line comes in several flavors and is available in
individual slices and chunks. 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.
WHOLESOME VALLEY ORGANIC(R) - 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 one of only two producers of organic milk and
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. They are marketed
as a lower cost alternative to conventional dairy cheeses.
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 - The Company's Veggie Cafe concept requires a few feet of space and
takes the form of kiosks, counters or carts. This concept was designed for
colleges, universities food courts, student unions and high school cafeterias.
The Veggie Cafe 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
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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 Community College.
The Company's only branded product line, which accounts for more than 10% of
sales for fiscal 2002, is the Veggie(R) line of products. Sales of this product
line for fiscal 2002 were approximately $27 million and 62% 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,
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.
MARKETS
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 (restaurants, cafeterias, hospitals and schools).
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 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 retail and food
service markets represented for the fiscal years ended March 31, 2002, 2001 and
2000:
PERCENTAGE OF SALES
FISCAL YEARS ENDED MARCH 31,
CATEGORY 2002 2001 2000
- --------------------------------------------------------------------------------
Retail sales 88% 91% 92%
Food service sales 12% 9% 8%
DISTRIBUTION CHANNELS AND METHODS
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.
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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, 2002, 2001 and 2000, the Company's
capital expenditures, including capitalized leases, were approximately
$1,704,632, $10,887,000 and $4,405,000, respectively. This included capitalized
interest of $826,725 and $490,442 during fiscal 2001 and 2000, respectively. The
substantial capital expenditures for fiscal 2001 were the result of the
Company's acquisition of manufacturing equipment and installation 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, the large capital expenditure
was primarily due to the installation of several large pieces of production
equipment. This 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. The Company sells directly to food
distributors and other customers
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in the food service market, as well as utilizing its in-house sales staff,
territory managers and a nationwide network of nonexclusive commission brokers
to sell the Company's products.
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, 2002, 2001 and 2000, expenditures for product development were
$261,972, $265,949 and $226,436, respectively. None of the research and
development costs are directly borne by the customer, instead they are
considered part of operating expenses.
The Company is currently authorized to manufacture, distribute and sell the
Veggie(R) Ultra Smoothie made with Tropicana juice. This product is currently
being tested regionally. The Company anticipates wide-scale rollouts in the 3rd
quarter of fiscal 2003.
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. Additionally, the casein comes from
cows which graze on organic farmland with no pesticides and which are not given
potentially harmful antibiotics and growth hormones. 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. The Company's increased
costs for casein in the third and fourth quarters of fiscal year 2001 and
throughout fiscal year 2002 had an adverse impact on the Company's results of
operations for such fiscal years. The cost of casein has now returned to more
normal levels.
For the fiscal years ended March 31, 2002, 2001 and 2000, the Company purchased
$8,975,345, $9,126,965 and $8,105,407, 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.
Percent of Casein Purchases
Fiscal Year Ended March 31,
Type of Raw Material Name of Supplier 2002 2001 2000
- -------------------------------------------------------------------------------------------
Casein Lactalis f/n/a Besnier-Scerma U.S.A. 36% 12% 34%
Glanbia f/n/a Avonmore Food Products 18% 30% 35%
Irish Dairy Board 20% 21% 10%
Eurial Poitouraine/Euro Proteins 10% 12% --
JLS Foods International 7% 6% --
Kerry Ingredients -- 10% 9%
Rely France International -- 3% 6%
New Zealand Milk Products -- -- 6%
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
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their initial registration, and may be renewed for successive ten-year periods
thereafter. The following table sets forth the registered and unregistered
trademarks of the Company, the country in which the mark is filed, and the
renewal date for such mark.
MARK COUNTRY RENEWAL DATE
- --------------------------------------------------------------------------------
Formagg(R) France June 6, 2004
Japan August 31, 2004
United States April 3, 2004
Ireland April 25, 2005
United Kingdom April 25, 2005
Israel December 16, 2007
Greece October 3, 2004
G(R)and Design United States February 1, 2010
Galaxy Nutritional Foods(R) United States April 9, 2012
Labella's(R)& Design United States October 9, 2004
Lite Bakery(R) United States October 7, 2007
The Lite Bakery(R)& Design United States October 21, 2007
Lite "n" Less(R)& Design United States April 18, 2010
Pizza and Dessert that Doesn't Hurt(R) United States September 15, 2008
Soy Singles(R) United States June 24, 2007
Soyco(R) United States January 12, 2003
Soyco(R)& Design United States August 17, 2003
Soymage(R) United States January 5, 2003
Veggie Nature's Alternative to Milk(TM) United States (1)
Veggy Singles(R) United States June 3, 2007
Wholesome Valley(R) United States February 1, 2010
(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. However, please see Item 3. "Legal Proceedings" of this Form
10-K regarding a suit alleging various acts of patent infringements by the
Company.
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.
However, in fiscal 2002, the Company reduced the number of items it manufactures
on a regular basis from 400 to 200. As a result of this change in production
policy and the desire to create more inventory turns during the year, the
Company has reduced its inventory levels from $10,774,540 at March 31, 2001 to
$5,748,652 at March 31, 2002.
CUSTOMERS
The Company sells to customers throughout the United States and in 31 other
countries. International sales are less than 5% of total sales.
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For the fiscal years ended March 31, 2002, 2001 and 2000, the Company had net
sales of $43,581,016, $45,421,863 and $42,115,672, 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, 2002, 2001, and 2000:
PERCENTAGE OF SALES
FISCAL YEAR ENDED MARCH 31,
CUSTOMER NAME 2002 2001 2000
- --------------------------------------------------------------------------------
DPI Food Products 7.6% * *
United Natural Foods 5.2% * *
*Less than 5% of sales for the stated fiscal year.
The majority of the Company's customers are required to make payment on goods
within 30 days of invoicing. The Company's credit department makes calls on
payments that are 10 to 15 days past due and then puts accounts on credit hold
if they have not made arrangement for payments that are 30 to 45 days past due.
The Company provides a guarantee of sale to many of its retail customers in
conventional grocery stores and mass merchandising industry. If the product is
not sold during its shelf life, the Company will allow a credit for the unsold
merchandise. Since the shelf life of the Company's products range from 6 months
to one year, the Company historically averages less than 2% in credits for
unsold product. The Company's allowance for doubtful accounts takes these
potential future credits into consideration.
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 are soy nutritious, 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 in its niche market is small
companies such as Tree of Life, White Wave, Tofutti Brands, Inc. ("Tofutti"),
Yves, a subsidiary of Hain Celestial Group, 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 Tofutti (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 nutritionally superior to
the healthy cheese items offered by larger cheese manufacturers.
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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
saturated fat, no lactose and no artificial colorings or flavorings. The Company
further believes that the most important competitive factors in its markets are
taste, nutritional value, 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 to merchandising. 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. For calendar 2001 (Jan-Dec), Galaxy's branded products held a
90.6% share of the alternative cheese sale market in mainstream supermarkets
according to Information Resources, Inc. Per SPINS, the Company holds a 54.8%
share of the packaged organic cheese alternative market in natural products
supermarkets.
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 enhances marketability and
results 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 2002.
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.
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 $12,000, $19,000 and $16,000 during the fiscal years ended March
31, 2002, 2001 and 2000 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.
10
EMPLOYEES
As of June 27, 2002, the Company had a total of 165 full-time employees and 5
temporary employees. All personnel are employed directly by the Company. The
Company is an Affirmative Action Employer providing Equal Employment Opportunity
to all applicants. 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 lease was renewed for a 5-year period in November 1996
and again in November 2001. The lease expires in November 2006, unless renewed
pursuant to terms mutually agreeable to the Company and the landlord. 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 monthly base rent
through the stated expiration of the lease is $28,173.
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. 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 $23,212 to $25,943 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.
On May 17, 2002, Schreiber Foods, Inc. of Green Bay Wisconsin filed a lawsuit
against the Company in the federal district court for the Eastern District of
Wisconsin, being Case No. 02-C-0498, alleging various acts of patent
infringement. The Complaint alleges that the Company's machines for wrapping of
individual cheese slices, manufactured by Kustner Industries, S.A. of
Switzerland, known as models KE and KD, and the Company's machines for producing
individually wrapped slices manufactured by Hart Design Mfg., Inc. of Green Bay,
Wisconsin, infringe unspecified claims of U.S. Patents Nos. 5,440,860, 5,701,724
and
11
6,085,680. Additionally, the Complaint refers to U.S. Patent No. 5,112,632, but
it does not explicitly allege infringement of that patent. Because the case is
in the earliest stages, there has not yet been an opportunity to determine
whether Schreiber Foods intends to pursue allegations of infringement of the
5,112,632 Patent against the Company. Schreiber Foods is seeking a preliminary
and permanent injunction prohibiting the Company from further infringing acts
and is also seeking damages in the nature of either lost profits or reasonable
royalties.
The '860 and '724 Patents--and the Kustner machines for producing individually
wrapped slices--were the subject of a lawsuit commenced by Schreiber in 1997
against Beatrice Foods and others in the Eastern District of Wisconsin, being
Case No. 97-CV-11. Schreiber alleges that the machines that were at issue in
that case are similar to the Kustner machines in use by the Company. In the 1997
lawsuit, the matter was tried to a jury, which found the Kustner machines to
infringe and awarded Schreiber $26 million in a verdict of August 25, 1998. On
March 30, 2000, however, the judge reversed that verdict, entered a finding of
no infringement on the part of Beatrice, and dismissed the case. Schreiber
appealed that order to the Court of Appeals for the Federal Circuit, which
entered its judgment on appeal on February 27, 2002. The appeals court reversed
the action of the trial court, found that substantial evidence supported the
jury's finding of infringement, and ordered the jury verdict reinstated. Kustner
Industries has informed the Company that it is currently investigating further
appeal options. Schreiber has also commenced a similar action against Borden,
Inc., and others, in March 2002, but no result has yet been reached in that
case. Schreiber Foods has not filed a claim against Hart Design Mfg., Inc.
Several years prior to the filing of the lawsuit against the Company, the
Company modified the seals on its Kustner machines to make them more
technologically safe and superior. The seals on the two Hart Design machines
were modified by the manufacturer from the standard Hart Design configuration at
Galaxy's request and were delivered to the Company as modified.
The Company believes that these modifications are such that the modified
machines do not literally infringe upon any of the identified patents, and the
Company will vigorously defend this position. However, a formal opinion from
patent counsel has not yet been obtained to that regard, given the recent filing
date of the lawsuit. Therefore, the Company is not in a position at this time to
express a view on the likelihood that it will succeed in its position, nor in
the amount of damages that might be awarded against it should it be unsuccessful
in that regard.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On December 14, 2001, 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 -
8,896,562, Joseph Juliano - 8,892,594, Marshall Luther - 8,890,291,
and Douglas Walsh - 8,896,678
2. To consider and vote upon an amendment to the Company's 1991 Employee
Stock Purchase Plan as amended, to increase the number of shares which
employees are eligible to purchase from 358 shares to 500 shares per
six month period. The vote tabulation for this proposal was as
follows: for - 8,866,905; against - 48,457; abstain - 6,725
12
3. To consider and vote upon an amendment to the Company's 1996 Stock
Plan to increase the number of Common Stock subject thereto. The vote
tabulation for this proposal was as follows: for - 8,434,752; against
- 478,111; abstain - 9,224
4. To ratify the retention of BDO Seidman, L.L.P. as the independent
auditors of the Company for the fiscal year ended March 31, 2002. The
vote tabulation for this proposal was as follows: for - 8,891,113,
against - 15,843, abstain - 15,131
13
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Market Information
- ------------------
Since August 1999, the Company's Common Stock, $.01 par value (the "Common
Stock"), has been traded on the American Stock Exchange (the "AMEX") under the
symbol "GXY". There is no established public trading market for the Company's
Series A Convertible Preferred Stock, $0.01 par value (the "Series A Preferred
Stock"). 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 System during the
fiscal years ended March 31, 2002 and 2001:
Period High Sales Price Low Sales Price
- --------------------------------------------------------------------------------
2002 Fiscal Year, quarter ended:
June 30, 2001 $5 3/4 $4 2/5
September 30, 2001 $6 3/4 $4 49/50
December 31, 2001 $6 1/10 $5 3/10
March 31, 2002 $6 $4 9/10
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
Holders
- -------
On June 27, 2002, there were 632 shareholders of Common Stock of record and 2
holders of Series A Preferred Stock of record.
Dividends
- ---------
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 Certificate of
Incorporation provides that before any dividend is declared or paid, the Company
must secure the consent of the holders of at least 60% of the then-outstanding
shares of the Company's Series A Preferred Stock. Additionally, 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 of
Financial Condition and Results of Operations for a discussion of the Company's
current capital position.
Securities Authorized for Issuance under Equity Compensation Plans
- ------------------------------------------------------------------
Please see the section titled "Equity Compensation Plan Information" in Item 12
of this Form 10K.
Recent Sales of Unregistered Securities
- ---------------------------------------
On December 20, 2000, FINOVA Mezzanine Capital, Inc. ("FMCI") exercised its
warrant to purchase 815,000 shares of the Company's common stock, $0.01 par
value, ("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
14
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 will not be exercisable in
full until 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 BH Capital Investments, L.P. and
Excalibur Limited Partnership, in accordance with an exemption from registration
under Regulation D promulgated under the Securities Act of 1933, as amended
("Regulation D"), (i) an aggregate of 72,646 shares of the Company's Series A
convertible preferred stock, $0.01 par value (the "Series A Preferred Stock"),
and (ii) warrants to purchase shares of the Common Stock, at an aggregate sales
price of approximately $3,082,000. The Series A Preferred Stock is subject to
certain designations, preferences and rights set forth in our Certificate of
Designations, Preferences and Rights of Series A Convertible Preferred Stock,
including the right to convert such shares into shares of Common Stock at any
time, at a current conversion rate (subject to appropriate adjustment for stock
splits, stock dividends, recapitalizations and other events) equal to the
quotient of:
o $48.18, plus all accrued dividends that are then unpaid for each share
of Series A Preferred Stock then held by the holder,
divided by,
o the lesser of (x) $4.08 or (y) 95% of the average of the two lowest
closing bid prices on the American Stock Exchange of the Common Stock
out of the fifteen trading days immediately prior to conversion;
provided that, in certain circumstances, such amount may not fall
below $3.10.
In no case, however, shall any holder of Series A Preferred Stock be permitted
to convert Series A Preferred Stock in an amount that would cause such holder to
beneficially own, in the aggregate, such number of shares of Common Stock which
would exceed 9.99% of the aggregate outstanding shares of Common Stock.
In connection with the issuance of the Series A Preferred Stock, the Company
also granted to BH Capital Investments, L.P. and Excalibur Limited Partnership
warrants to purchase an aggregate of 120,000 shares of Common Stock. The initial
warrants were exercisable for a period of five years from April 6, 2001, at a
per share exercise price of $5.30. Pursuant to a letter agreement dated October
5, 2001, the Company agreed to issue additional warrants to acquire 60,000
shares of its Common Stock at an exercise price of $5.86 per share to each of BH
Capital Investments, L.P. and Excalibur Limited Partnership. In exchange for the
warrants, BH Capital Investments, L.P. and Excalibur Limited Partnership agreed
to provide us certain consulting services, including the introduction of
potential customers in Canada. Subsequently, the Company agreed to reduce the
per share exercise price on all the warrants to $2.67 in order to induce BH
Capital Investments, L.P. and Excalibur Limited Partnership to exercise their
warrants and to gain their required approval for a private placement. On January
17, 2002, BH Capital Investments, L.P. and Excalibur Limited Partnership
exercised all 240,000 warrants for a total of $640,800.
In accordance with Regulation D and pursuant to a Securities Purchase Agreement
dated as of September 24, 2001, Hare & Co. f/b/o John Hancock Small Cap Value
Fund, an affiliate of John Hancock Advisors, Inc., purchased 522,648 shares of
Common Stock and warrants to purchase 140,000 shares of Common Stock, at an
aggregate sales price of $3,000,000. The warrants held by Hare & Co. f/b/o John
Hancock Small Cap Value Fund were exercisable at a price per share equal to
$6.74 until September 25, 2006. Subsequently, the Company agreed to reduce the
per share exercise price on all the warrants to $4.50 in order to induce Hare &
15
Co. f/b/o John Hancock Small Cap Value Fund to exercise their warrants. All of
the warrants were exercised in January 2002 at a price of $4.50 per share for a
total of $630,000.
In accordance with Regulation D and pursuant to a Common Stock Purchase Warrant,
dated as of October 8, 1998, Frederick A. DeLuca was granted warrants to
purchase 357,143 shares of Common Stock at an exercise price of $2.63 per share.
On November 8, 2001, Mr. DeLuca exercised the warrant for 214,286 shares of
Common Stock. On December 21, 2001, in order to allow Mr. DeLuca to exercise the
remaining 142,857 shares, the Company accelerated the vesting of those remaining
shares. On December 28, 2001, Mr. DeLuca exercised the warrant for the remaining
142,857 shares of Common Stock. Pursuant to a Consulting Agreement, the Company
agreed to accept $189,286 of strategic planning and marketing consulting
services to be provided to the Company and $750,000 cash for the $2.63 exercise
price for the shares underlying the warrants.
In accordance with Regulation D and pursuant to certain Securities Purchase
Agreements dated January 17, 2002 with FNY Millenium Partners, LP, Millenium
Global Offshore Ltd., Potomac Capital Partners, LP, and Potomac Capital
International Ltd., the Company sold 158,095 shares of Common Stock for $4.74
(95% of an average market price) and issued warrants to purchase 39,524 shares
of Common Stock at a price equal to $5.74 per share. Pursuant to the same
Securities Purchase Agreements dated January 17, 2002, the Company sold 12,270
shares of Common Stock for $4.74 (95% of an average market price) and issued
warrants to purchase 3,068 shares of Common Stock at a price equal to $5.74 per
share to its officers Angelo S. Morini, Christopher New, LeAnn Hitchcock and
Kulbir Sabharwal. All of the warrants are exercisable until January 17, 2007.
The Company received total proceeds of $808,212 related to the sale of these
shares of Common Stock.
In accordance with Regulation D and pursuant to a certain Common Stock and
Warrants Purchase Agreement dated June 28, 2002, the Company sold 367,647 shares
of its Common Stock for $4.08 (85% of an average market price) and issued
warrants to purchase 122,549 shares of Common Stock at a price equal to $5.52
per share to Stonestreet Limited Partnership. In connection with such sale, the
Company issued 7,812 shares of Common Stock to Stonestreet Corporation and 4,687
shares of Common Stock to H&H Securities Limited in exchange for their services
as finders. Registration of all of these shares, including the shares underlying
the warrants, is to be completed within 120 days of issuance. Per the terms of
the agreement, the Company received net proceeds of $930,000, after the
repayment of a $550,000 promissory note dated June 26, 2002 and payment of
$20,000 for Stonestreet Limited Partnership's costs and expenses related to the
purchase of these shares of Common Stock.
16
ITEM 6. SELECTED FINANCIAL DATA.
FISCAL YEAR ENDED MARCH 31,
2002 2001 2000 1999 1998
Net sales $ 43,581,016 $ 45,421,863 $ 42,115,672 $ 29,726,958 $ 20,428,068
Income (loss) before taxes (15,499,152) (5,939,334) 2,420,560 1,351,367 377,523
Income (loss) before cumulative
effect of change in accounting
policy (17,059,152) (5,699,334) 3,629,891 1,291,367 377,523
Net income (loss) available to
common shareholders (19,147,995) (6,485,763) 3,629,891 1,291,367 377,523
Net income (loss) per common
share before cumulative effect
of change in accounting policy
- basic (1.81) (0.61) 0.40 0.14 0.04
Net income (loss) per common
share - basic (1.81) (0.69) 0.40 0.14 0.04
Net income (loss) per common
share before cumulative effect
of change in accounting policy
- diluted (1.81) (0.61) 0.39 0.14 0.04
Net income (loss) per common
share - diluted (1.81) (0.69) 0.39 0.14 0.04
Total assets 35,917,550 48,083,126 36,450,393 24,476,912 16,449,052
Long-term debt 12,181,461 14,720,875 7,261,706 3,178,991 1,459,516
Redeemable Convertible Preferred
Stock 2,156,311 -- -- -- --
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
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.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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 reported amounts of revenues and expense during the
reporting period. The Company's significant estimates include the allowance for
doubtful accounts receivable and valuation of deferred taxes and warrants.
Actual results could differ from those estimates.
The Company records revenue upon shipment of products to its customers and there
is reasonable assurance of collection on the sale. We provide credit terms to
customers usually based on net 30 days. The Company performs ongoing credit
evaluations of its accounts receivable and makes reserves for anticipated future
credits that will be issued to its customers for promotions, discounts, spoils,
etc., based on historical experience. In addition, we evaluate the accounts for
potential uncollectible amounts. The reserve for accounts receivable is then
adjusted to reflect these estimates. At March 31, 2002, the Company had reserved
approximately $678,000 for known and anticipated future credits and bad debt.
During the fiscal year 2002, the Company expensed $3,348,406 related to customer
credits and expensed $925,836 as bad debt.
17
Inventories are valued at the lower of cost (weighted average, which
approximates FIFO) or market. The Company reviews its inventory valuation each
month and writes down the inventory for potential obsolete and damaged
inventory. In addition, the inventory value is reduced to market value when the
known sales price is less than the cost of the inventory. During the year ended
March 31, 2002, the Company expensed nearly $1,182,000 in non-saleable or lower
market valued inventory.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. Income tax expense is the tax
payable or refundable for the period plus or minus the change during the period
in deferred tax assets and liabilities.
Statement of Financial Accounting Standards No. 123 ("FAS 123"), Accounting for
Stock Based Compensation, requires the Company to report compensation expense on
warrants issued to non-employees for services rendered, in accordance with the
fair value based method prescribed in FAS 123. The Company estimates the fair
value of each warrant based on the expected vesting due to performance
requirements set forth in the warrant or service agreement and life of the
warrant by using a Black-Scholes option-pricing model with the following
assumptions used in the fiscal 2002 option-pricing model: no dividend yield, 38%
volatility, risk-free interest rate of 4.75%, and expected lives of ten years.
Assumptions used for grants in fiscal 2001: 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.
RESULTS OF OPERATIONS
FISCAL 2002 AS COMPARED TO FISCAL 2001
- --------------------------------------
During fiscal year 2000, the Company experienced increasing demand for its
products but was unable to fill all of the orders it received due, in part, to a
lack of production capacity. During the latter part of fiscal 2001 and the
beginning of fiscal 2002, the Company significantly increased its production
capacity by purchasing and installing additional production equipment for six
new production lines that included two slice lines, a chunk cheese line, a cup
line, a string cheese line, and a shred line. This equipment enables the Company
to produce new products, improve product quality, and increase the production
volume, of existing products. The installation of the equipment was delayed
significantly due to late shipments by manufacturers and problems configuring
the machines to meet the manufacturing needs of our unique line of products, but
was completed by September 2001. Because of the delays in the installation of
the equipment, the Company experienced excess overhead costs and downtime during
the first and second quarters of fiscal 2002, which resulted in increased costs
and reduced cash flows for those periods. Additionally, although a substantial
portion of the purchase price and installation costs incurred in connection with
the new equipment was financed through a loan obtained from SouthTrust Bank,
N.A., the Company used nearly all of the excess cash that the Company had at the
time to purchase and install the new equipment. As a result of the large cash
outlays related to this expansion along with the delays in new product shipment,
the Company experienced and are continuing to experience shortfalls in cash that
have affected nearly every aspect of our operations.
SALES for the fiscal year ended March 31, 2002 decreased by 4% over the same
period in 2001. This decrease in sales is attributed to unanticipated delays in
the installation of additional production equipment which
18
caused the Company to experience significant shortages in product shipments
against customer orders. Due to the significant reduction in cash flows in
fiscal 2002 as described above, the Company experienced an inability to purchase
raw materials, which resulted in an inability to fill orders and created short
shipments to customers. The short shipments to customers forced the Company to
temporarily reduce product prices to maintain its shelf space in supermarkets.
While demand for the Company's products continues to increase rapidly, sales
growth was maintained at lower levels until the Company obtained the cash
required to meet these demands. The Company believes that it would have shown an
increase in sales had the Company not experienced cash shortages, production
delays, and shipping shortages. The Company has every reason to believe that
customer demand for natural and nutritious products of its type will continue to
grow since industry market indicators strongly support solid growth trends in
the foreseeable future.
COST OF GOODS SOLD ("COGS")as a percentage of sales were 81% for the fiscal year
ended March 31, 2002 compared to 72% for the same period in fiscal 2001. The
increase was primarily the result of four key factors: (a) the additional costs
related to the operation of the new production lines, (b) an increase in raw
material costs, (c) an inability to negotiate beneficial vendor terms, and (d) a
change in production focus. First, since the construction on the six new
production lines was completed in early fiscal 2002, there are increased
overhead costs in the operation of the new machines including additional
utilities and depreciation. Depreciation expense in COGS increased by
approximately $625,000 in the fiscal year ended March 31, 2002 compared to the
same period in 2001. Second, due to a worldwide shortage of the Company's
primary raw ingredient, casein, resulting from the outbreak of "Mad Cow" and
"foot and mouth" disease epidemics in Europe, the price of casein increased by
approximately 19% in the twelve months ended March 31, 2002 compared to the same
period one year ago. In fiscal 2002, purchases of casein comprised 25.4% of the
total cost of goods sold and the Company paid approximately $1,438,000 more due
to the price increase. For fiscal 2001, purchases of casein comprised 27.8% of
total cost of goods sold. The price of casein dropped during the first quarter
of fiscal 2003, and the Company anticipates that this lower level pricing will
continue throughout fiscal 2003. Third, due to the Company's cash shortage
resulting from its use of cash to purchase and install new production equipment,
and delays in implementing the new equipment, the Company's purchasing
department was unable to purchase raw materials in sufficient quantities or to
take advantage of beneficial terms for cash payment that has, in the past,
created optimum pricing for raw materials and supplies and helped the Company
reduce costs. The Company is working to establish more favorable terms with new
and existing vendors for fiscal 2003. Finally, late in the second quarter of
fiscal 2002, the Company changed its production focus by scaling back our
product mix from 400 to 200 core items. These 200 core items make up nearly 98%
of our sales. As a result of the change in focus, the Company has written off
$1,181,000 in potential obsolete and slow moving inventory. In response to the
additional efficiencies that the new equipment is now providing, the Company
substantially decreased the number of production personnel late in fiscal 2002.
This change caused labor-related expenses to decrease approximately $284,000 in
fiscal 2002. Now that the equipment is fully operational and the labor crews are
trained, the Company is seeing improved run rates with more product produced per
hour. In addition, the Company is seeing raw material costs stabilize at more
normal levels.
SELLING expenses decreased by approximately $59,000 (1%) for the fiscal year
ended March 31, 2002 compared with the same period in fiscal 2001. The Company
decreased advertising expenses by $1,676,000 in fiscal 2002 compared to the same
period a year ago. During fiscal 2001, the Company was involved in an extensive
advertising campaign to promote the flagship Veggie product line. This campaign
included print, television, and radio advertising and focuses on key markets
throughout the country where distribution of our products is widespread. The
Company completed this extensive media campaign in 2001. In 2002, more effort
was directed to provide incentives to our direct customers for brand item
purchases, in addition to discounts offered to maintain current relationships
with brokers and customers. This can be seen in the $1.6 million increase in
promotional discounts and credits taken by our customers and charged to
19
expense during fiscal 2002. The Company expects that selling expenses will
decrease in fiscal 2003 based on the Company's current plan for advertising and
promotional allowances that are granted on volume purchases rather than on
individual item discounts.
DELIVERY expenses increased 1% for the fiscal year ended March 31, 2002 compared
with the same period in fiscal 2001. This increase is mainly attributable to the
Company's reallocation of wages related to shipping personnel. In fiscal 2002,
the shipping coordination was brought in-house and therefore, all wages related
to the shipping personnel were allocated to delivery expense as of October 1,
2001. In fiscal 2001, all shipping was coordinated by an outside service and all
in-house wages were allocated to cost of goods sold.
NON-CASH COMPENSATION RELATED TO STOCK OPTIONS increased nearly $1,257,000
(113%) for the fiscal year ended March 31, 2002 as compared to fiscal 2001. 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 Angelo S.
Morini, the Company's Chief Executive Officer and 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. The market value of the Company's stock increased from
$4.76 at March 31, 2001 to $5.43 at March 31, 2002 and the Company recorded a
$1,960,000 increase in the compensation related to this increase in value.
Additionally, the Company recorded a $413,662 expense related to the fair value
of warrants issued for consulting services. For the fiscal year ended March 31,
2001, the Company recorded $1,100,000 of compensation expense to mark the
options to market in accordance with variable accounting and a $16,444 expense
related to the fair value of warrants issued for consulting services. Due to the
volatility of the market price of the Company's common stock, it is incapable of
predicting whether this expense will increase or decrease in the future. A $0.01
increase or decrease in the Company's common stock price results in an expense
or income, respectively, of $29,143.
GENERAL AND ADMINISTRATIVE expenses increased approximately $2,025,000 (61%) for
the fiscal year ended March 31, 2002, as compared to fiscal 2001. In the fourth
quarter of 2002, the Company wrote off $547,000 in unused advertising trade
credits that it believes will not be able to be used during the required use
period. These costs were in prepaid expenses in prior periods. In addition, the
Company began an intense credit and collection effort on significantly
outstanding deductions by customers in 2002. During fiscal 2002, the Company
identified and wrote off to G&A expense approximately $926,000 that is
uncollectible. In addition, the Company experienced an increase in legal and
auditing fees by nearly $500,000 in relation to the multiple stock transactions
and consulting services required during the 2002 fiscal year. The Company
anticipates a significant decrease in future G&A expenses as a result of fewer
uncollectible accounts due to faster collection efforts and improved credit hold
procedures, and the non-recurrence of one-time writeoffs related to unused trade
credits.
RESEARCH AND DEVELOPMENT expenses decreased 1% for the fiscal year ended March
31, 2002 compared with the same period in fiscal 2001. This decrease in expense
is mainly the result of the completion of all additional research associated
with formulas for the new production lines during fiscal 2001. The Company
anticipates minimal increases to research and development in future periods
mainly related to increasing personnel costs.
INTEREST expense increased 76% from $2,047,097 in fiscal 2001 to $3,594,091 in
fiscal 2002. Approximately $154,000 of the increase was attributable to higher
interest rates on the Company's line of credit as well as a subordinated note
issued on September 30, 1999. The Company also paid $315,000 in additional
waiver and extension fees in fiscal 2002. On September 30, 1999, the Company
entered into a $4,000,000 subordinated
20
note payable with FINOVA Mezzanine Capital, Inc. ("FINOVA Mezzanine"). This debt
currently bears interest at a rate of 15.5% and includes an original issuance
discount of $786,900, which is amortized as interest expense over the term of
the debt. In connection with FINOVA Mezzanine's warrant exercise and transfer of
815,000 shares of the Company's Common Stock, the Company agreed to guarantee
the price at which the shares were sold to the public at $4.41 per share. The
actual price received by FINOVA Mezzanine 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. During fiscal 2002 and 2001, $818,974
and $220,407, respectively, of the total debt discount of $1,732,300 was
amortized to interest expense. As of March 31, 2002, the unamortized debt
discount was $614,230 and the principal balance on the note was $4,000,000,
resulting in a net balance shown of $3,385,770. In March 2000, the Company
signed a $10 million term note payable with Southtrust Bank, N.A. The balance of
this note was $8,870,535 at March 31, 2002. In addition, during November 2000,
the Company executed a $1.5 million short-term bridge loan from Southtrust Bank,
N.A. The principal balance of this note was $1 million as of March 31, 2002.
Interest on these notes are at the prime rate. For the year ended March 31,
2001, the Company capitalized $826,725 of interest into the construction costs
of the new equipment.
INCOME TAX EXPENSE for the year ended March 31, 2002 was $1,560,000 compared to
income tax benefit of $240,000 for the same period in the prior year. At March
31, 2001, the Company had 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 asset was written off during the fiscal year
2002 due to the uncertainty of the Company's ability to take advantage of the
net operating loss carryforwards before they expire.
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 one-time 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. There is no cumulative effect of a change in accounting
policy in fiscal 2002.
SUMMARY OVERVIEW OF FISCAL 2002
- -------------------------------
The $19.1 million loss for fiscal year 2002 included approximately $5.4 million
in accounts receivable and inventory write-downs, a non-cash compensation charge
of approximately $2.4 million related to stock options, non-cash preferred stock
dividends of approximately $2.1 million, a non-cash deferred income tax expense
adjustment of $1.5 million, approximately $1 million in fixed asset disposals
and unused trade credit write-offs, approximately $3.6 million in interest
expense of which $818,974 was a non-cash charge related to debt discount, and
depreciation and amortization expense of approximately $2.4 million. The Company
is forecasting that sales, gross margin, operating profit, cash flow and EBITDA
will steadily improve during fiscal year 2003 as a result of more focused sales
and collection efforts, volume incentive programs, less product inventory and
lower costs to produce its products. The improved cost of goods sold will result
from improved relations with vendors, reduced raw material costs, the
implementation of several cost-cutting measures, increased production
efficiencies with the new equipment and trained workforce, as well as the
completion of the plant expansion.
21
FISCAL 2001 AS COMPARED TO FISCAL 2000
- --------------------------------------
SALES for the fiscal year ended March 31, 2001 increased by 8% 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
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 72% for the fiscal year ended
March 31, 2001 compared with 65% 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 54% 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 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 $1,097,861 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 Angelo S. Morini, the Company's
Chief Executive Officer and 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
22
mark the options to market in accordance with variable accounting. Additionally,
the Company recorded an expense of $16,444 and $18,583 in fiscal 2001 and 2000,
respectively, related to the fair value of warrants issued for consulting
services.
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. On September
30, 1999, the Company entered into a $4,000,000 subordinated note payable with
FINOVA Mezzanine. This debt currently bears interest at a rate of 11.5% and
includes an original issuance discount of $786,900, which is amortized as
interest expense over the term of the debt. In connection with FINOVA
Mezzanine's warrant exercise and transfer of 815,000 shares of the Company's
Common Stock, the Company agreed to guarantee the price at which the shares were
sold to the public at $4.41 per share. The actual price received by FINOVA
Mezzanine 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. During fiscal 2001, $220,407 of total debt discount was amortized to
interest expense as compared to $78,690 in fiscal 2000. 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 was 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 discounts were
$1,433,203 and the principal balance on the notes 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
23
believes these expenses are more appropriately period expenses, rather than
those that would benefit future periods, and should be expensed as incurred.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES - For the fiscal year ended March 31, 2002, the Company's
cash used in operating activities was $3,649,037 an increase of $2,124,215 over
the same period in fiscal 2001. During fiscal 2002, the Company had a net loss
of $17,059,152 (of which $2,902,000 related to non-cash activities), as compared
to a net loss of $6,485,763 (of which $2,902,000 related to non-cash activities)
in fiscal 2001. The increase in cash used for operations is also attributable to
a substantial decrease in accounts payable which was offset by a simultaneous
reduction in inventory as a result of the Company's change in production focus
and the Company's desire to improve inventory turnover.
INVESTING -- The Company received $87,072 from investing activities for the
fiscal year ended March 31, 2002 compared with cash spent of $10,809,361 for the
same period in fiscal 2001. Cash used for investing activities during fiscal
2001 resulted primarily from purchases and construction of manufacturing
equipment for six new production lines at the Company's main facility.
Construction was completed by July 2001, but not all of the machines were fully
operational until September 2002.
FINANCING -- The Company realized a net inflow of $3,561,633 from financing
activities for the fiscal year ended March 31, 2002 compared with $12,334,300
during the same period in fiscal 2001. During fiscal 2002, the Company received
net proceeds of $8,832,372 in relation to issuance of common and preferred
stock, as more fully discussed below. These proceeds were partially used for
reductions under the line of credit from FINOVA Capital Corporation, and
payments for the subordinated term loan to FINOVA Mezzanine Capital, Inc., and
the term loan to SouthTrust Bank, N.A. The remaining proceeds were used to
reduce the Company's accounts payable. 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 fiscal 2001. In addition, the Company received net proceeds of $2.3
million in connection with a warrant exercise and private placement with Finova
Mezzanine, as more fully discussed below.
Debt Financing
- --------------
In November 1996, the Company obtained a line of credit with a maximum principal
amount of $2 million from FINOVA Capital Corporation, the proceeds of which were
used for working capital and expansion purposes. Over the years, the Company
received several increases to the line to a level of $13 million and then
decreased the level in June 2002 to $7.5 million. The amount that the Company
can borrow under the line of credit is based on a formula of up to 80% of
eligible accounts receivable plus 50% of eligible inventories (decreasing by 1%
per month beginning July 1, 2002) not to exceed $3,000,000, as defined in the
agreement. The line of credit is secured by all accounts receivable, inventory,
machinery, equipment, trademarks and patents owned by the Company. Interest is
payable monthly on the outstanding draws on the line of credit at a rate of
prime plus four percent (8.75% at March 31, 2002). The line of credit expires on
July 1, 2003 at which time the entire outstanding principal amount of the line
of credit, and all accrued but unpaid interest thereon, is due and payable in
full. As of March 31, 2002, the Company had an outstanding balance of $5,523,875
under this line of credit agreement.
On September 30, 1999, the Company obtained a $4 million subordinated loan from
FINOVA Mezzanine to finance additional working capital and capital improvement
needs. The Company received loan proceeds in the amount of $3,620,000 after
paying loan costs of $380,000. Amounts outstanding under the loan are secured by
a subordinated lien on substantially all of the Company's assets. A balloon
payment of the entire principal amount of the loan, and all accrued but unpaid
interest
24
thereon, is due upon maturity in July 2003. The interest rate applicable to the
loan was increased from 11.5% to 13.5% in July 2001. In February 2002, the
interest rate increased to 15.5%. In consideration of the loan, the Company
issued to FINOVA Mezzanine a warrant to purchase 915,000 shares of the Company's
Common Stock at an exercise price of $3.41 per share which represented 80% of
the fair value of the Company's Common 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. As of March 31, 2002, the Company had an outstanding
balance of $4,000,000 under this loan.
On December 26, 2000, the FINOVA Mezzanine 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 from the exercise of the warrant net proceeds of $2,452,329,
after paying transaction costs of $326,822. In connection with this transaction,
the Company agreed to reimburse FINOVA Mezzanine for brokerage commission and
other expenses incurred by it, in connection with 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 FINOVA Mezzanine ($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. FINOVA Mezzanine agreed to finance such amount under an
additional subordinated term loan which was payable in full on December 29,
2001. However, the Company obtained an extension for a fee of $55,000 and made
payments of $30,000 per business day through February 28, 2002, at which time
the additional loan was paid in full. During fiscal 2002 and 2001, $818,974 and
$220,407, respectively, of the total debt discounts of $1,732,300 were amortized
to interest expense. The unamortized debt discounts totaled $614,230 and the
remaining principal balance due on the notes was $4,000,000, resulting in a net
balance of $3,385,770 as of March 31, 2002.
The line of credit and subordinated loans described above contain certain
financial and operating covenants. In July 2001, the Company notified FINOVA
Capital and FINOVA Mezzanine that it had failed to comply with the minimum
operational cash flow to contractual debt service ratio, the funded debt to
EBITDA ratio and the capital expenditure limitation. FINOVA Capital agreed to
amend such covenants and to waive those violations for the fiscal year ended
March 31, 2001 and the fiscal quarter ended June 30, 2001 pursuant to that
certain Amendment and Limited Waiver to Security Agreement dated July 13, 2001.
In consideration for this waiver and amendment, the Company accepted an increase
in the interest rate on the line of credit to prime plus 2% and paid a fee in
the amount of $100,000. FINOVA Mezzanine also agreed to waive the violations of
its covenants for the fiscal year ended March 31, 2001 and the fiscal quarter
ended June 30, 2001, and to amend those covenants for future fiscal quarters
pursuant to a letter agreement dated July 12, 2001 and amendments to the
subordinated notes. In consideration of the waiver, the Company accepted an
increase in the interest rate to from 11.5% to 13.5% per annum on the
subordinated loans, and agreed to pay an amendment/waiver fee in the amount of
$20,000, which was paid in January 2002.
For the fiscal quarters ended September 30 and December 31, 2001, the Company
was again in violation of the minimum operational cash flow to contractual debt
service ratio and the funded debt to EBITDA ratio.
As of November 14, 2001, the Company entered into an Amendment and Limited
Waiver to Security Agreement with FINOVA Capital pursuant to which FINOVA
Capital waived the Company's duty to comply with such financial covenants for
the fiscal quarter ended September 30, 2001. Additionally, the Amendment and
Limited Waiver to Security Agreement also provided for an acceleration of the
maturity date of the line of credit from August 1, 2003 to October 15, 2002, and
the paid an amendment/waiver fee in the amount of $50,000. In connection with
the aforementioned waivers and amendments, the Company
25
also entered into an Intellectual Property Security Agreement whereby the
Company granted FINOVA Capital a security interest in all of our intellectual
property and other proprietary property. FINOVA Mezzanine also agreed to waive
the violations to its covenants for the fiscal quarter ended September 30, 2001
pursuant to a letter agreement dated as of November 14, 2001 and certain
amendments to the subordinated notes. In consideration of the waiver, the
Company accepted an acceleration of the maturity date of the subordinated notes
from August 1, 2003 to October 15, 2002, and agreed to pay an amendment/waiver
fee in the amount of $10,000, which was paid in January 2002.
On February 13, 2002, the Company entered into an Amendment and Limited Waiver
to Security Agreement with FINOVA Capital pursuant to which FINOVA Capital
waived the Company's duty to comply with such financial covenants for the fiscal
quarter ended December 31, 2001. This Amendment and Limited Waiver to Security
Agreement required an increase in the interest rate from prime plus two percent
to prime plus four percent and a payment of an amendment/waiver fee in the
amount of $50,000 which was paid over six weeks. Additionally, FINOVA Mezzanine
also agreed to waive the violations to its covenants for the fiscal quarter
ended December 31, 2001. In consideration of the waiver, FINOVA Mezzanine
required an increase in the interest rate from 13.5% to 15.5% along with an
amendment/waiver fee in the amount of $10,000 that was paid over six weeks.
In June 2002, the Company notified FINOVA Capital and FINOVA Mezzanine that it
had failed to comply with the minimum operational cash flow to contractual debt
service ratio and the funded debt to EBITDA ratio. FINOVA Capital agreed to
waive those violations for the fiscal year ended March 31, 2002 and the fiscal
quarter ended June 30, 2002 and to amend such covenants for the fiscal quarters
beginning July 1, 2002, pursuant to a certain Amendment and Limited Waiver to
Security Agreement dated June 26, 2002. FINOVA Capital extended the maturity
date from October 15, 2002 to July 1, 2003, removed any prepayment penalties,
reduced the credit line from $13 million to $7.5 million, reduced the inventory
limit from $6 million to $3 million, and will reduce the inventory advance rate
by 1% per month beginning July 1, 2002 (from a current level of 50% to 37% by
the maturity date). FINOVA Mezzanine also agreed to waive the violations of its
covenants for the fiscal year ended March 31, 2002 and the fiscal quarter ended
June 30, 2002, and to amend those covenants for future fiscal quarters pursuant
to a letter agreement dated June 26, 2002 and amendments to the subordinated
notes. In consideration of the waivers and covenant amendments, the Company
accepted a facility fee of $413,500, which shall be deemed fully earned on June
26, 2002, $172,500 of which shall be due and payable on the earliest of (a) July
1, 2003, (b) the occurrence of an Event of Default under the loan, or (c) the
date on which Borrower repays either all of the Obligations to FINOVA Capital
under the Loan Agreement or any portion of the principal Obligations of the
Company to FINOVA Mezzanine under the FINOVA Mezzanine Loan Documents; and
$241,000 of which shall be due and payable upon FINOVA Mezzanine's exercise of
its warrants.
At no time has FINOVA Capital or FINOVA Mezzanine delivered to the Company a
notice of default of the line of credit or the subordinated loans as a result of
the above mentioned failures.
In March 2000, the Company obtained a $10 million term loan from SouthTrust
Bank, N.A. This note bears interest at prime rate and is due in monthly
principal installments of $93,000 plus interest. The note matures in March 2005.
The balance outstanding on this note as of March 31, 2002 was $8,870,535. This
note was used to pay off a prior term loan and to finance approximately $7.5
million in new equipment purchases to expand our production capacity, including
the new production equipment purchased and installed throughout fiscal 2001 and
the beginning of fiscal 2002. This term loan is secured by certain machinery and
equipment, including the Company's new production equipment.
In October 2000, Angelo S. Morini, the Company's Chief Executive Officer and
President guaranteed a $1.5 million short-term bridge loan that the Company
obtained from SouthTrust Bank, N.A. by pledging one million of his shares of the
Company's Common Stock to secure the loan. Interest on
26
this note is at the prime rate (4.75% at March 31, 2002). The loan is being paid
down by monthly principal payments of $50,000 plus interest. The note matures in
October 2003. The balance outstanding on this note as of March 31, 2002 was
$1,000,000. In consideration of his guarantee and related pledge, the Company
granted Mr. Morini stock options to acquire 343,125 shares of Common Stock at an
exercise price of $3.88 per share. Such options shall expire on December 15,
2010.
The term loan and the short-term bridge loan from SouthTrust Bank, N.A. contain
certain financial and operating covenants. The Company was in violation of all
financial covenants at March 31, 2002. On June 27, 2002, the Company received a
waiver for the year ended March 31, 2002 and for all future periods through July
1, 2003.
Equity Financing
- ----------------
On April 6, 2001, the Company issued to BH Capital Investments, L.P. and
Excalibur Limited Partnership, in accordance with an exemption from registration
under Regulation D promulgated under the Securities Act of 1933, as amended
("Regulation D"), (i) an aggregate of 72,646 shares of the Company's Series A
convertible preferred stock, $0.01 par value (the "Series A Preferred Stock"),
and (ii) warrants to purchase shares of the Common Stock, at an aggregate sales
price of approximately $3,082,000. The Series A Preferred Stock is subject to
certain designations, preferences and rights set forth in our Certificate of
Designations, Preferences and Rights of Series A Convertible Preferred Stock,
including the right to convert such shares into shares of Common Stock at any
time, at a current conversion rate (subject to appropriate adjustment for stock
splits, stock dividends, recapitalizations and other events) equal to the
quotient of:
o $48.18, plus all accrued dividends that are then unpaid for each share
of Series A Preferred Stock then held by the holder,
divided by,
o the lesser of (x) $4.08 or (y) 95% of the average of the two lowest
closing bid prices on the American Stock Exchange of the Common Stock
out of the fifteen trading days immediately prior to conversion;
provided that, in certain circumstances, such amount may not fall
below $3.10.
In no case, however, shall any holder of Series A Preferred Stock be permitted
to convert Series A Preferred Stock in an amount that would cause such holder to
beneficially own, in the aggregate, such number of shares of Common Stock which
would exceed 9.99% of the aggregate outstanding shares of Common Stock.
In connection with the issuance of the Series A Preferred Stock, the Company
also granted to BH Capital Investments, L.P. and Excalibur Limited Partnership
warrants to purchase an aggregate of 120,000 shares of common stock. The initial
warrants were exercisable for a period of five years from April 6, 2001, at a
per share exercise price of $5.30. Pursuant to a letter agreement dated October
5, 2001, the Company agreed to issue additional warrants to acquire 60,000
shares of its Common Stock at an exercise price of $5.86 per share to each of BH
Capital Investments, L.P. and Excalibur Limited Partnership. In exchange for the
warrants, BH Capital Investments, L.P. and Excalibur Limited Partnership agreed
to provide us certain consulting services, including the introduction of
potential customers in Canada. Subsequently, the Company agreed to reduce the
per share exercise price on all the warrants to $2.67 in order to induce BH
Capital Investments, L.P. and Excalibur Limited Partnership to exercise their
warrants and to gain their required approval for a private placement. On January
17, 2002, BH Capital Investments, L.P. and Excalibur Limited Partnership
exercised all 240,000 for a total of $640,800.
27
In accordance with Regulation D and pursuant to a Securities Purchase Agreement
dated as of September 24, 2001, Hare & Co. f/b/o John Hancock Small Cap Value
Fund, an affiliate of John Hancock Advisors, Inc., purchased 522,648 shares of
Common Stock and warrants to purchase 140,000 shares of Common Stock, at an
aggregate sales price of $3,000,000. The warrants held by Hare & Co. f/b/o John
Hancock Small Cap Value Fund were exercisable at a price per share equal to
$6.74 until September 25, 2006. Subsequently, the Company agreed to reduce the
per share exercise price on all the warrants to $4.50 in order to induce Hare &
Co. f/b/o John Hancock Small Cap Value Fund to exercise their warrants. All of
the warrants were exercised in January 2002 at a price of $4.50 per share for a
total of $630,000.
In accordance with Regulation D and pursuant to certain Securities Purchase
Agreements dated January 17, 2002 with FNY Millenium Partners, LP, Millenium
Global Offshore Ltd., Potomac Capital Partners, LP, and Potomac Capital
International Ltd., the Company sold 158,095 shares of Common Stock for $4.74
(95% of an average market price) and issued warrants to purchase 39,524 shares
of Common Stock at a price equal to $5.74 per share. Pursuant to the same
Securities Purchase Agreements dated January 17, 2002, the Company sold 12,270
shares of Common Stock for $4.74 (95% of an average market price) and issued
warrants to purchase 3,068 shares of Common Stock at a price equal to $5.74 per
share to its officers Angelo S. Morini, Christopher New, LeAnn Hitchcock and
Kulbir Sabharwal. All of the warrants are exercisable until January 17, 2007.
The Company received total proceeds of $808,212 related to the sale of these
shares of Common Stock.
On June 26, 2002, the Company signed a $550,000 promissory note with Excalibur
Limited Partnership, one of the holders of the Company's Series A Preferred
Stock. In consideration of the note, the Company issued Excalibur Limited
Partnership a warrant to purchase 30,000 shares of Common Stock which are
exercisable until June 26, 2007 at a price equal to $5.50 per share. This note
was non-interest bearing assuming that it was repaid on or before July 26, 2002.
This note was secured by 250,000 shares of Common Stock owned by the Angelo S.
Morini, the Company's Chief Executive Officer and President. On June 26, 2002,
the Company received $500,000 in cash. The additional $50,000 is payment due for
consulting fees provided by Excalibur Limited Partnership in accordance with a
consulting agreement entered into on June 26, 2002, which expires December 31,
2002.
In accordance with Regulation D and pursuant to a certain Common Stock and
Warrants Purchase Agreement dated June 28, 2002, the Company sold 367,647 shares
of Common Stock for $4.08 (85% of an average market price) and issued warrants
to purchase 122,549 shares of Common Stock at a price equal to $5.52 per share
to Stonestreet Limited Partnership. In connection with such sale, the Company
issued 7,812 shares of Common Stock to Stonestreet Corporation and 4,687 shares
of Common Stock to H&H Securities Limited in exchange for their services as
finders. Registration of all of these shares, including the shares underlying
the warrants, is to be completed within 120 days of issuance. Per the terms of
the agreement, the Company received net proceeds of $930,000, after the
repayment of a $550,000 promissory note dated June 26, 2002 and payment of
$20,000 for Stonestreet Limited Partnership's costs and expenses related to the
purchase of these shares of Common Stock.
Management believes that with the proceeds received in connection with its
credit facilities and equity financings together with cash flow from current
operations, the Company will have enough cash to meet its current liquidity
needs based on current operation levels. However, substantial additional
financing is necessary to meet the demands of expected future higher sales
volumes and to refinance the FINOVA Capital and FINOVA Mezzanine loans that will
mature in July 2003. The Company is currently
28
conducting negotiations and undergoing a preliminary due diligence process with
a potential third party lender than would replace FINOVA Capital as our primary
asset-based lender. In the event that FINOVA is not replaced before the quarter
ended September 30, 2002, the Company believes that it will be in compliance
with the new FINOVA loan covenants established in the June 26, 2002 waiver and
amendment documents.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The Company leases its operating facilities and certain equipment under
operating and capital leases, expiring at various dates through fiscal year
2007. In addition, the Company has several loan obligations as described in
detail above. The table below summarizes our obligations for indebtedness and
lease obligations as of March 31, 2002:
Indebtedness & Lease Obligations 2003 2004 2005 2006 2007 Total
- ------------------------------------------------------------------------------------------------------------------------
FINOVA Capital credit facility $ $5,523,875 $ $ $ $5,523,875
FINOVA Mezzanine subordinated loan 4,000,000 4,000,000
SouthTrust N.A. term loan 1,209,000 1,116,000 6,545,535 8,870,535
SouthTrust N.A. bridge loan 600,000 400,000 1,000,000
Capital Lease Obligations 349,380 302,247 269,865 162,044 1,083,536
Operating Leases $ 857,000 $ 811,000 $ 573,000 $ 339,000 $ 211,000 $2,791,000
--------------------------------------------------------------------------------
Totals 3,015,380 12,153,122 7,388,400 501,044 211,000 23,268,946
================================================================================
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" which
addresses the financial accounting and reporting for business combinations and
supersedes APB Opinion No. 16, "Business Combinations," and SFAS No. 38,
"Accounting for Preacquisition Contingencies of Purchased Enterprises." SFAS No.
141 requires that all business combinations be accounted for by a single method,
the purchase method, modifies the criteria for recognizing intangible assets,
and expands disclosure requirements. The provisions of SFAS No. 141 apply to all
business combinations initiated after June 30, 2001. The adoption of SFAS No.
141 did not have a material effect on the Company's results of operations or
financial position for the year ended March 31, 2002.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets" which addresses financial accounting and reporting for acquired goodwill
and other intangible assets and supersedes APB Opinion No. 17, "Intangible
Assets." SFAS No. 142 addresses how intangible assets that are acquired
individually or with a group of other assets should be accounted for in
financial statements upon their acquisition and after they have been initially
recognized in the financial statements. SFAS No. 142 requires that goodwill and
intangible assets that have indefinite useful lives not be amortized but rather
tested at least annually for impairment, and intangible assets that have finite
useful lives be amortized over their useful lives. SFAS No. 142 provides
specific guidance for testing goodwill and intangible assets that will not be
amortized for impairment. In addition, SFAS No. 142 expands the disclosure
requirements about goodwill and other intangible assets in the years subsequent
to their acquisition. SFAS No. 142 is effective for our fiscal year 2003.
Impairment losses for goodwill and indefinite-life intangible assets that arise
due to the initial application of SFAS No. 142 are to be reported as resulting
from a change in accounting principle. However, goodwill and intangible assets
acquired after June 30, 2001 will be subject immediately to provisions of SFAS
142. Adoption of SFAS No. 142 will not have a material effect on the Company's
results of operations or financial position.
29
In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets," which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. While SFAS No.
144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of" and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," it
retains the fundamental provisions of those Statements. SFAS No. 144 becomes
effective for fiscal years beginning after December 15, 2001. The Company is
currently evaluating the impact of SFAS No. 144 on its financial statements.
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. If any
of the following risks actually occur, they could seriously harm our business,
financial condition, results of operations or cash flows. This could cause the
trading price of our common stock to decline and you could lose all or part of
your investment. For the purposes of this "RISK FACTORS" section, the terms
"we," "us," "our" and similar terms refer to the Company.
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 FINOVA Mezzanine Capital Inc. and SouthTrust Bank, N.A., which had
outstanding balances as of June 27, 2002 of $4,823,791, $4,000,000, and
$8,593,734, respectively. Substantially all of our assets are pledged as
collateral to secure outstanding borrowings under such loans. We were in
violation of the minimum operational cash flow to contractual debt service
ratio, the funded debt to EBITDA ratio, and the capital expenditure limitation
under our credit facilities for the fiscal year ended March 31, 2001, the fiscal
quarters ended June 30, September 30, and December 31, 2001, and for the fiscal
year ended March 31, 2002.
FINOVA Capital agreed to amend such covenants and to waive those violations for
the fiscal year ended March 31, 2001 and the fiscal quarter ended June 30, 2001
pursuant to that certain Amendment and Limited Waiver to Security Agreement
dated July 13, 2001. In consideration for this waiver and amendment, we accepted
an increase in the interest rate on the line of credit to prime plus 2% and paid
a fee in the amount of $100,000. FINOVA Mezzanine also agreed to waive the
violations of its covenants for the fiscal year ended March 31, 2001 and the
fiscal quarter ended June 30, 2001, and to amend those covenants for future
fiscal quarters pursuant to a letter agreement dated July 12, 2001 and
amendments to the subordinated notes. In consideration of the waiver, we
accepted an increase in the interest rate to from 11.5% to 13.5% per annum on
the subordinated loans, and agreed to pay an amendment/waiver fee in the amount
of $20,000, which was paid in January 2002.
As of November 14, 2001, we entered into an Amendment and Limited Waiver to
Security Agreement with FINOVA Capital pursuant to which FINOVA Capital waived
our duty to comply with such financial covenants for the fiscal quarter ended
September 30, 2001. Additionally, the Amendment and Limited Waiver to Security
Agreement also provided for an acceleration of the maturity date of the line of
credit from August 1, 2003 to October 15, 2002, and the paid an amendment/waiver
fee in the amount of $50,000. In connection with the aforementioned waivers and
amendments, we also entered into an Intellectual Property Security Agreement
whereby we granted FINOVA Capital a security interest in all of our intellectual
property and other proprietary property. FINOVA Mezzanine also agreed to waive
the violations to its covenants for the fiscal quarter ended September 30, 2001
pursuant to a letter agreement dated as of
30
November 14, 2001 and certain amendments to the subordinated notes. In
consideration of the waiver, we accepted an acceleration of the maturity date of
the subordinated notes from August 1, 2003 to October 15, 2002, and agreed to
pay an amendment/waiver fee in the amount of $10,000, which was paid in January
2002.
On February 13, 2002, we entered into an Amendment and Limited Waiver to
Security Agreement with FINOVA Capital pursuant to which FINOVA Capital waived
our duty to comply with such financial covenants for the fiscal quarter ended
December 31, 2001. This Amendment and Limited Waiver to Security Agreement
required an increase in the interest rate from prime plus two percent to prime
plus four percent and a payment of an amendment/waiver fee in the amount of
$50,000 which was paid over six weeks. Additionally, FINOVA Mezzanine also
agreed to waive the violations to its covenants for the fiscal quarter ended
December 31, 2001. In consideration of the waiver, FINOVA Mezzanine required an
increase in the interest rate from 13.5% to 15.5% along with an amendment/waiver
fee in the amount of $10,000 that was paid over six weeks.
In June 2002, we notified FINOVA Capital and FINOVA Mezzanine that we had failed
to comply with the minimum operational cash flow to contractual debt service
ratio and the funded debt to EBITDA ratio. FINOVA Capital agreed to waive those
violations for the fiscal year ended March 31, 2002 and the fiscal quarter ended
June 30, 2002 and to amend such covenants for the fiscal quarters beginning July
1, 2002, pursuant to a certain Amendment and Limited Waiver to Security
Agreement dated June 26, 2002. FINOVA Capital extended the maturity date from
October 15, 2002 to July 1, 2003, removed any prepayment penalties, reduced the
credit line from $13 million to $7.5 million, reduced the inventory limit from
$6 million to $3 million, and will reduce the inventory advance rate by 1% per
month beginning July 1, 2002 (from a current level of 50% to 37% by the maturity
date). FINOVA Mezzanine also agreed to waive the violations of its covenants for
the fiscal year ended March 31, 2002 and the fiscal quarter ended June 30, 2002,
and to amend those covenants for future fiscal quarters pursuant to a letter
agreement dated June 26, 2002 and amendments to the subordinated notes. In
consideration of the waivers and covenant amendments, we accepted a facility fee
of $413,500, which shall be deemed fully earned on June 26, 2002, $172,500 of
which shall be due and payable on the earliest of (a) July 1, 2003, (b) the
occurrence of an event of default under the loan, or (c) the date on which we
repay either all of the obligations to FINOVA Capital under the Loan Agreement
or any portion of our principal obligations to FINOVA Mezzanine under the FINOVA
Mezzanine Loan Documents; and $241,000 of which shall be due and payable upon
FINOVA Mezzanine's exercise of its warrants.
The term loan and the short-term bridge loan from SouthTrust Bank, N.A.contain
certain financial and operating covenants. We were in violation of all financial
covenants at March 31, 2002. On June 27, 2002, we received a waiver for the year
ended March 31, 2002 and for all future periods through July 1, 2003.
At no time has FINOVA Capital, FINOVA Mezzanine or SouthTrust N.A.. delivered to
us a notice of default of the line of credit or the subordinated loans as a
result of the above mentioned failures.
OUR PRIMARY LENDER HAS REDUCED THE LEVELS OF INVENTORY AND ACCOUNTS RECEIVABLE
UPON WHICH WE CAN BORROW.
Our revolving credit line from FINOVA Capital Corporation finances our working
capital needs and is secured by our inventory and accounts receivable. The
amounts we can borrow under our credit line fluctuates based upon our amounts of
eligible inventory and accounts receivable. FINOVA Capital has significant
discretion in determining what inventory and accounts receivable constitute
eligible inventory and accounts receivable. Recently, FINOVA Capital has
determined that certain of our inventory and accounts receivable do not meet
their eligibility standards. This determination has reduced, and may continue to
reduce, the amounts that we can borrow under our revolving line of credit. The
reduction in our borrowing availability under our line of credit has negatively
affected, and will continue to negatively affect, our ability
31
to meet customer orders, remain current with our creditors and, generally, to
operate our business. Further reductions in the amounts that we can borrow under
our revolving line of credit will significantly increase the negative effects on
the operation on our business and may prevent us from being able to continue to
operate our business.
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 $17,417,525 as of June 27, 2002. In addition
to two term loan credit facilities, we have obtained a revolving line of credit
from FINOVA Capital Corporation in the maximum principal amount of $7,500,000
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. As of June 27,
2002, the maximum amount we could borrow under our revolving credit line totaled
approximately $4,974,863. 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
STOCKHOLDERS.
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
stockholders. 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 stockholders, or adversely affect the market
price of our common stock.
As of June 27, 2002, 72,646 shares of our Series A convertible preferred stock
were issued and outstanding. The Series A stock is subject to certain
designations, preferences and rights set forth in our Certificate of
Designations, Preferences and Rights of Series A Convertible Preferred Stock,
including the right to convert such shares into shares of common stock at any
time, at a current conversion rate (subject to appropriate adjustment for stock
splits, stock dividends, recapitalizations and other events) equal to the
quotient of:
o $48.18, plus all accrued dividends that are then unpaid for each share
of Series A stock then held by the holder,
divided by,
o the lesser of (x) $4.08 or (y) 95% of the average of the two lowest
closing bid prices on the American Stock Exchange of the common stock
out of the fifteen trading days immediately prior to conversion;
provided that, in certain circumstances, such amount may not fall
below $3.10.
In no case, however, shall any holder of Series A stock be permitted to convert
Series A stock in an amount that would cause such holder to beneficially own, in
the aggregate, such number of shares of common stock which would exceed 9.99% of
the aggregate outstanding shares of common stock.
32
Each holder of Series A stock is also entitled to receive a stock dividend equal
to 10% of the holder's shares of Series A stock for the first year after
issuance and a stock dividend equal to 8% of the holder's shares of Series A
stock for each of the subsequent three years thereafter. All accrued dividends
shall become payable upon the conversion of the shares of Series A stock. As of
June 27, 2002, each of the holders of the Series A Preferred Stock are also
entitled to an additional 3,632 shares of Series A stock due to accrued stock
dividends on their initial purchase of the Series A stock. The holders of the
Series A stock are entitled to a liquidation preference, prior to the payment of
any amounts payable to the holders of the common stock, in an amount per share
equal to the $48.18, plus all accrued dividends that are unpaid for each share
of Series A stock then held by the holder. Although we may authorize and issue
additional or other preferred stock which is junior in rank to the Series A
stock with respect to the preferences as to distributions and payments upon our
liquidation, dissolution or winding up, as long as at least 25% of the Series A
stock ever issued is outstanding, we may not authorize or issue capital stock
which is of equal or senior rank to the Series A stock with respect to such
rights and preferences without the prior written consent of the holders of no
less than 60% of the then-outstanding shares of the Series A stock. Each holder
of Series A stock has the right to require us to redeem all or any part of the
Series A stock at any time subsequent to the fourth anniversary of the date of
issuance of the Series A stock to such holder or upon the occurrence of certain
other events. If the conversion price falls below $3.10, then, upon delivery of
notice thereof from a holder of Series A Stock, we have the right to redeem all
or any part of the Series A stock, depending upon the length of time the
conversion price is less than $3.10.
We have no present plans to issue any additional shares of Series A stock or any
other preferred stock.
WE CANNOT CONTROL THE TIMING OR VOLUME OF SALES OF A SUBSTANTIAL NUMBER OF
SHARES OF OUR COMMON STOCK.
As of June 27, 2002, approximately 5,920,000 shares of the 11,541,043 shares of
our issued and outstanding common stock were freely tradable (unless acquired by
one of our "affiliates") under the Securities Act of 1933. All of the shares
which are not freely tradable are "restricted securities" within the meaning of
Rule 144 promulgated by the Securities and Exchange Commission under the
Securities Act, and may be sold in open market transactions after the holding
period under Rule 144 with respect to such transaction has been met. As to
shares subject to outstanding options and warrants, the one-year holding period
generally will not begin until the shares underlying such options or warrants
actually have been acquired. After the one-year holding period has been met,
each holder generally may sell, every three months in brokerage transactions, an
amount equal to the greater of one percent of our outstanding common stock or
the amount of the average weekly trading volume during the four weeks preceding
the sale. After two years, unless any such holder is one of our "affiliates,"
such sales can be made without restriction.
As of June 27, 2002, 72,646 shares of our Series A convertible preferred stock
were issued and outstanding. The Series A stock is subject to certain
designations, preferences and rights set forth in our Certificate of
Designations, Preferences and Rights of Series A Convertible Preferred Stock,
including the right to convert such shares into shares of common stock at any
time. We registered 1,557,895 shares of our common stock to cover the number of
shares required to be issued upon conversion of the Series A stock assuming the
conversion price were to fall 50% below the conversion price on April 6, 2001.
We have agreed with the holders of the Series A stock to maintain the
effectiveness of any registration of the common stock into which the Series A
stock is convertible until the earlier of (a) the date that all of such common
stock may be sold pursuant to Rule 144(k) under the Securities Act, or (b) the
date on which (i) all of such common stock have been sold and (ii) none of the
Series A stock is outstanding, or (c) April 6, 2003.
33
Because the sales of common stock underlying the Series A stock and the resale
of any additional shares which may be attempted under Rule 144 may not be
effected through an underwriter pursuant to a firm commitment agreement, there
will be a substantial number of additional shares which may be available for
sale on the market at one time without any control over the timing or volume of
sales thereof by us or any third party. We cannot foresee the impact of such
potential sales on the market, but it is possible that if a significant
percentage of such available shares are attempted to be sold within a short
period of time, the effect on the market may be negative. It is also unclear as
to whether or not the market for our common stock could absorb a large number of
attempted sales in a short period of time, regardless of the price at which the
same might be offered. It is noted that even if a substantial number of sales
are not effected within a short period of time, the mere existence of this
"market overhang" could have a negative effect on the market for our common
stock and our ability to raise additional capital or refinance our indebtedness.
THE CHIEF EXECUTIVE OFFICER OWNS A LARGE PERCENTAGE OF THE OUTSTANDING SHARES,
WHICH COULD MATERIALLY LIMIT THE OWNERSHIP RIGHTS OF EXISTING STOCKHOLDERS.
As of June 27, 2002, Angelo S. Morini, our founder, President and Chief
Executive Officer, beneficially owned approximately 30% of our current
outstanding common stock and held options which, if exercised and assuming the
exercise of no other outstanding options or warrants, would give him
approximately 46% 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 us or our business as a result of Mr. Morini's ownership.
SHAREHOLDERS MAY EXPERIENCE FURTHER DILUTION.
We have a substantial number of outstanding options and warrants to acquire
shares of common stock. A total of 4,504,821 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 2,863,076 of these options and warrants are "in the
money" and are currently exercisable as of June 27, 2002. "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 stockholders.
As of June 27, 2002, 72,646 shares of our Series A convertible preferred stock
were issued and outstanding, plus an additional 7,264 shares of Series A stock
in accrued stock dividends due to the holders of Series A stock upon conversion.
The Series A stock is subject to certain designations, preferences and rights
set forth in our Certificate of Designations, Preferences and Rights of Series A
Convertible Preferred Stock, including the right to convert such shares into
shares of common stock at any time. The issuance of common stock upon the
conversion of the Series A stock could negatively affect the market price of the
common stock or result in substantial dilution to our existing stockholders.
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
34
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.
BECAUSE THE MAJORITY OF OUR CUSTOMER ORDERS REQUIRE SHIPMENT OF INDIVIDUALLY
WRAPPED CHEESE SLICES, THE LOSS OF CERTAIN PRODUCTION MACHINES WOULD NEGATIVELY
IMPACT OUR BUSINESS.
On May 17, 2002, Schreiber Foods, Inc. of Green Bay Wisconsin filed a lawsuit
against the Company in the federal district court for the Eastern District of
Wisconsin, being Case No. 02-C-0498, alleging various acts of patent
infringement. The Complaint alleges that the Company's machines for wrapping of
individual cheese slices, manufactured by Kustner Industries, S.A. of
Switzerland, known as models KE and KD, and the Company's machines for producing
individually wrapped slices manufactured by Hart Design Mfg., Inc. of Green Bay,
Wisconsin, infringe unspecified claims of U.S. Patents Nos. 5,440,860, 5,701,724
and 6,085,680. Additionally, the Complaint refers to U.S. Patent No. 5,112,632,
but it does not explicitly allege infringement of that patent; because the case
is in the earliest stages, there has not yet been an opportunity to determine
whether Schreiber Foods intends to pursue allegations of infringement of the
5,112,632 Patent against the Company. Schreiber Foods is seeking a preliminary
and permanent injunction prohibiting the Company from further infringing acts
and is also seeking damages in the nature of either lost profits or reasonable
royalties.
Several years prior to the filing of the lawsuit against the Company, the
Company modified the seals on its Kustner machines to make them more
technologically safe and superior. The seals on the two Hart Design machines
were modified by the manufacturer from the standard Hart Design configuration at
Galaxy's request and were delivered to the Company as modified.
The Company believes that these modifications are such that the modified
machines do not literally infringe upon any of the identified patents, and the
Company will vigorously defend this position. However, a formal opinion from
patent counsel has not yet been obtained in that regard, given the recent filing
date of the lawsuit. Therefore, the Company is not in a position at this time to
express a view on the likelihood that it will succeed in its position, nor in
the amount of damages that might be awarded against it should it be unsuccessful
in that regard.
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
2006, unless renewed pursuant to terms mutually agreeable to us and 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.
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 Galaxy 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 Galaxy. Although we are the
beneficiary of a life insurance policy on
35
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. Our primary competition consists of
equally sized companies such as Tree of Life, White Wave, Yves and Tofutti
Brands, that manufacture soy-based products, such as alternative cheese slices,
sour creams, cream cheese and related products. In addition, 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 have. 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 which 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 we currently possess. 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 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
36
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 calendar quarter prior to
June 27, 2002, the trading volume for our shares averaged nearly 20,000 shares
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 stockholders' ability to sell their shares when they desire
and the price which 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 one of 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.
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:
o quarterly variations in our operating results;
o operating results that vary from the expectations of securities analysts
and investors;
o changes in expectations as to our future financial performance, including
financial estimates by securities analysts and investors;
o 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;
o announcements by third parties of significant claims or proceedings against
us;
o future sales of our common stock; and
o general market conditions.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The interest on the Company's debt to FINOVA Capital Corporation and SouthTrust
Bank N.A. 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, 2002 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 $194,000 per year.
37
The Company's fiscal 2002, 2001, and 2000 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, 2002,
2001 and 2000. The effects of changes in foreign currency exchange rates has not
historically been significant to the Company's operations or net assets.
38
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, 2002 and 2001 and the related statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended March 31, 2002. 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, 2002 and 2001 and the results of its operations and its cash
flows for each of the three years in the period ended March 31, 2002 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
Atlanta, Georgia
June 28, 2002
39
GALAXY NUTRITIONAL FOODS, INC.
Balance Sheets
MARCH 31, MARCH 31,
2002 2001
------------ ------------
ASSETS
CURRENT ASSETS:
Cash $ 168 $ 500
Trade receivables, net of allowance for doubtful
accounts of $678,000 and $375,000 5,283,187 8,053,561
Inventories 5,748,652 10,774,540
Other receivables -- 519,624
Deferred tax asset -- 532,000
Prepaid expenses 225,520 1,107,100
------------ ------------
Total current assets 11,257,527 20,987,325
PROPERTY AND EQUIPMENT, NET 24,180,636 25,303,094
DEFERRED TAX ASSET -- 1,028,000
OTHER ASSETS 479,387 764,707
------------ ------------
TOTAL $ 35,917,550 $ 48,083,126
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Book overdrafts $ 1,192,856 $ 446,829
Line of credit 5,523,875 8,776,278
Accounts payable 5,399,143 9,456,065
Accrued liabilities 994,341 143,782
Current portion of term notes payable 1,809,000 1,666,000
Current portion of subordinated notes payable -- 502,866
Current portion of obligations under capital leases 349,380 28,755
------------ ------------
Total current liabilities 15,268,595 21,020,575
TERM NOTES PAYABLE, less current portion 8,061,535 9,614,499
SUBORDINATED NOTES PAYABLE, less current portion 3,385,770 2,878,930
OBLIGATIONS UNDER CAPITAL LEASES, less current portion 734,156 29,825
------------ ------------
Total liabilities 27,450,056 33,543,829
------------ ------------
COMMITMENTS AND CONTINGENCIES -- --
REDEEMABLE CONVERTIBLE PREFERRED STOCK 2,156,311 --
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, authorized 85,000,000
shares; 11,540,041 and 10,017,612 shares issued 115,400 100,176
Additional paid-in capital 60,717,914 51,902,100
Accumulated deficit (41,629,470) (24,570,318)
------------ ------------
19,203,844 27,431,958
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) (120,461)
------------ ------------
Total stockholders' equity 6,311,183 14,539,297
------------ ------------
TOTAL $ 35,917,550 $ 48,083,126
============ ============
See accompanying notes to financial statements
40
GALAXY NUTRITIONAL FOODS, INC.
Statements of Operations
YEARS ENDED MARCH 31, 2002 2001 2000
------------ ------------ ------------
NET SALES $ 43,581,016 $ 45,421,863 $ 42,115,672
COST OF GOODS SOLD 35,276,362 32,841,748 27,233,736
------------ ------------ ------------
Gross margin 8,304,654 12,580,115 14,881,936
------------ ------------ ------------
OPERATING EXPENSES:
Selling 9,227,869 9,286,908 6,028,130
Delivery 2,475,989 2,454,616 2,215,903
Non-cash compensation related to options & warrants 2,373,662 1,116,444 18,583
General and administrative 5,348,513 3,323,435 3,221,436
Research and development 261,972 265,949 226,436
------------ ------------ ------------
Total operating expenses 19,688,005 16,447,352 11,710,488
------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS (11,383,351) (3,867,237) 3,171,448
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense (3,594,091) (2,047,097) (744,498)
Loss on disposal of assets (464,190) -- --
Other (57,520) (25,000) (6,390)
------------ ------------ ------------
Total (4,115,801) (2,072,097) (750,888)
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (15,499,152) (5,939,334) 2,420,560
INCOME TAX BENEFIT (EXPENSE) (1,560,000) 240,000 1,209,331
------------ ------------ ------------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING POLICY (17,059,152) (5,699,334) 3,629,891
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING POLICY -- (786,429) --
------------ ------------ ------------
NET INCOME (LOSS) $(17,059,152) $ (6,485,763) $ 3,629,891
PREFERRED STOCK DIVIDENDS 2,088,843 -- --
------------ ------------ ------------
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $(19,147,995) $ (6,485,763) $ 3,629,891
============ ============ ============
BASIC NET INCOME (LOSS) PER COMMON SHARE BEFORE
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING POLICY $ (1.81) $ (0.61) $ 0.40
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING POLICY -- (0.08) --
------------ ------------ ------------
NET INCOME (LOSS) PER COMMON SHARE $ (1.81) $ (0.69) $ 0.40
============ ============ ============
DILUTED NET INCOME (LOSS) PER COMMON SHARE BEFORE
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING POLICY $ (1.81) $ (0.61) $ 0.39
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING POLICY -- (0.08) --
------------ ------------ ------------
NET INCOME (LOSS) PER COMMON SHARE $ (1.81) $ (0.69) $ 0.39
============ ============ ============
See accompanying notes to financial statements
41
GALAXY NUTRITIONAL FOODS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock
----------------------
Additional Accumulated Receivable for Treasury
Shares Par Value Paid-In Capital Deficit Common Stock Stock Total
-------------------------------------------------------------------------------------------------------
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
Exercise of options 4,143 41 19,480 -- -- -- 19,521
Exercise of warrants 753,625 7,537 2,252,549 -- -- -- 2,260,086
Issuance of common
stock under
employee stock
purchase plan 11,648 116 32,163 -- -- -- 32,279
Issuance of common
stock 753,013 7,530 3,801,282 -- -- -- 3,808,812
Issuance of warrants 355,692 -- -- -- 355,692
Non-cash compensation
related to options
under non-recourse
note receivable -- -- 1,960,000 -- -- -- 1,960,000
Dividends on
preferred stock -- -- (350,000) -- -- -- (350,000)
Discount on preferred
stock -- -- 2,003,770 -- -- -- 2,003,770
Accretion of discount
on preferred stock (1,259,122) -- -- -- (1,259,122)
Net loss -- -- -- (17,059,152) -- -- (17,059,152)
-------------------------------------------------------------------------------------------------------
Balance at March 31, 2002 11,540,041 $115,400 $60,717,914 $ (41,629,470) $ (12,772,200) $ (120,461) $ 6,311,183
=======================================================================================================
See accompanying notes to financial statements
42
GALAXY NUTRITIONAL FOODS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2002 2001 2000
------------ ------------ ------------
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net Income (Loss) $(17,059,152) $ (6,485,763) $ 3,629,891
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization 2,362,900 1,605,149 1,149,729
Amortization of debt discount 818,974 220,407 78,690
Deferred tax expense (benefit) 1,560,000 (240,000) (1,320,000)
Provision for losses on trade receivables 925,836 200,000 75,000
Non-cash compensation related to options under non-recourse
note receivable 1,960,000 1,100,000 --
Amortization of consulting and director fee expense paid
through issuance of common stock warrants 413,662 16,444 18,583
Loss on disposal of assets 464,190 -- --
(Increase) decrease in:
Trade receivables 1,844,538 (796,625) (3,103,158)
Inventories 5,025,888 (1,751,592) (2,787,211)
Other receivables 519,624 (223,333) (67,740)
Prepaid expenses 1,070,866 414,534 (893,918)
Increase (decrease) in:
Accounts payable (4,056,922) 4,439,509 1,705,513
Accrued liabilities 500,559 (23,552) (301,179)
------------ ------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (3,649,037) (1,524,822) (1,815,800)
------------ ------------ ------------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Purchase of property and equipment (140,277) (10,887,497) (4,404,501)
(Increase) decrease in other assets 227,349 78,136 (103,632)
------------ ------------ ------------
NET CASH FROM (USED IN) INVESTING ACTIVITIES 87,072 (10,809,361) (4,508,133)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Book overdrafts 746,027 (1,247,924) 1,191,811
Net borrowings (payments) on line of credit (3,252,403) 6,313,207 872,082
Borrowings on term notes payable -- 7,380,593 3,992,906
Repayments on term note payable (1,409,964) (93,000) (2,806,847)
Borrowings on subordinated note payable -- 123,183 3,876,817
Repayments on subordinated note payable (815,000) -- --
Principal payments on capital lease obligations (539,399) (41,613) (366,816)
Financing costs for long term debt -- (47,832) (441,497)
Purchase of treasury stock -- (120,461) --
Proceeds from issuance of common stock, net of offering costs 3,841,091 68,147 1,033
Proceeds from exercise of common stock warrants, net of costs 2,070,801 -- --
Proceeds from issuance of preferred stock, net of costs 2,900,959 -- --
Proceeds from exercise of common stock options 19,521 -- 4,715
------------ ------------ ------------
NET CASH FROM FINANCING ACTIVITIES 3,561,633 12,334,300 6,324,204
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH (332) 117 271
CASH, BEGINNING OF YEAR 500 383 112
------------ ------------ ------------
CASH, END OF YEAR $ 168 $ 500 $ 383
============ ============ ============
See accompanying notes to financial statements.
43
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,
which approximates FIFO) or market.
PROPERTY AND EQUIPMENT
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. The Company
offers a right of return policy to certain retail customers in the
conventional grocery stores and mass merchandising industry. If the product
is not sold during its shelf life, the Company will allow a credit for the
unsold merchandise. Since the shelf life of the Company's products range
from 6 months to one year, the Company historically averages less than 2%
in credits for unsold product. The Company's reserve on accounts receivable
takes these potential future credits into consideration.
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, 2002.
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,
subordinated debt, and capital leases 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.
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, 2002.
44
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
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. Income tax expense is the tax payable
or refundable for the period plus or minus the change during the period in
deferred tax assets and liabilities.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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 reported amounts of
revenues and expense during the reporting period. The Company's significant
estimates include the allowance for doubtful accounts receivable and
valuation of deferred taxes and warrants. 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 July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" which addresses the financial accounting and reporting for
business combinations and supersedes APB Opinion No. 16, "Business
Combinations," and SFAS No. 38, "Accounting for Preacquisition
Contingencies of Purchased Enterprises." SFAS No. 141 requires that all
business combinations be accounted for by a single method, the purchase
method, modifies the criteria for recognizing intangible assets, and
expands disclosure requirements. The provisions of SFAS No. 141 apply to
all business combinations initiated after June 30, 2001. The adoption of
SFAS No. 141 did not have a material effect on our results of operations or
financial position for the year ended March 31, 2002.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets" which addresses financial accounting and reporting for acquired
goodwill and other intangible assets and supersedes APB Opinion No. 17,
"Intangible Assets." SFAS No. 142 addresses how intangible assets that are
acquired individually or with a group of other assets should be accounted
for in financial statements upon their acquisition and after they have been
initially recognized in the financial statements. SFAS No. 142 requires
that goodwill and intangible assets that have indefinite useful lives not
be amortized but rather tested at least annually for impairment, and
intangible assets that have finite useful lives be amortized over their
useful lives. SFAS No. 142 provides specific guidance for testing goodwill
and intangible assets that will not be amortized for impairment. In
addition, SFAS No. 142 expands the disclosure requirements about goodwill
and other intangible assets in the years subsequent to their acquisition.
SFAS No. 142 is effective for our fiscal year 2003. Impairment losses for
goodwill and indefinite-life intangible assets that arise due to the
initial application of SFAS No. 142 are to be reported as resulting from a
change in accounting principle. However, goodwill and intangible assets
acquired after June 30, 2001 will be subject immediately to provisions of
SFAS 142. Adoption of SFAS No. 142 will not have a material effect on our
results of operations or financial position.
In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment
or Disposal of Long-Lived Assets," which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. While SFAS
No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations--Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," it retains the fundamental provisions of those Statements.
SFAS No. 144 becomes effective for fiscal years beginning after December
15, 2001. We are currently evaluating the impact of SFAS No. 144 on our
financial statements.
45
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
RECLASSIFICATIONS
Certain items in the financial statements of prior periods have been
reclassified to conform to current period presentation.
(2) INVENTORIES
Inventories are summarized as follows:
March 31, 2002 March 31, 2001
-------------- --------------
Raw materials $ 2,482,458 $ 4,314,685
Finished goods 3,266,194 6,459,855
-------------- --------------
Total $ 5,748,652 $ 10,774,540
============== ==============
(3) PREPAID EXPENSES
----------------
Prepaid expenses are summarized as follows:
March 31, 2002 March 31, 2001
-------------- --------------
Prepaid advertising $ -- $ 587,764
Prepaid commissions 173,512 210,914
Other 52,008 308,422
-------------- --------------
Total $ 225,520 $ 1,107,100
============== ==============
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 $762,000, $2,438,000, and $904,000
during fiscal 2002, 2001, and 2000, respectively.
(4) PROPERTY AND EQUIPMENT
----------------------
Property and equipment are summarized as follows:
Useful Lives March 31, 2002 March 31, 2001
------------ -------------- --------------
Leasehold improvements 10-25 years $ 3,185,490 $ 3,185,490
Machinery and equipment 5-20 years 26,934,763 17,227,959
Equipment under capital
leases 7-15 years 1,658,375 314,543
Construction in progress -- 10,104,846
-------------- --------------
31,778,628 30,832,838
Less accumulated depreciation
and amortization 7,597,992 5,529,744
-------------- --------------
Property and equipment, net $24,180,636 $25,303,094
============== ==============
46
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Interest in the amount of $826,725 and $490,442 was capitalized to
construction in progress during the years ended March 31, 2001 and 2000,
respectively.
(5) LINE OF CREDIT AND LONG-TERM DEBT
---------------------------------
As of March 31, 2002, the Company had a line of credit with a maximum
principal amount of $13 million from FINOVA Capital Corporation, the
proceeds of which were are for working capital purposes. The amount that we
can borrow under the line of credit is based on a formula of up to 85% of
eligible accounts receivable plus 50% of eligible inventories not to exceed
$6,000,000, as defined in the agreement. The line of credit is secured by
all accounts receivable, inventory, machinery, equipment, trademarks and
patents owned by us. Interest is payable monthly on the outstanding draws
on the line of credit at a rate of prime plus four percent (8.75% at March
31, 2002). The line of credit expires on October 15, 2002 at which time the
entire outstanding principal amount of the line of credit, and all accrued
but unpaid interest thereon, is due and payable in full. As of March 31,
2002, the Company had an outstanding balance of $5,523,875.
On September 30, 1999, the Company obtained a $4 million subordinated loan
from FINOVA Mezzanine Capital, Inc. to finance additional working capital
and capital improvement needs. The Company received loan proceeds in the
amount of $3,620,000 after paying loan costs of $380,000. Amounts
outstanding under the loan are secured by a subordinated lien on
substantially all of our assets. A balloon payment of the entire principal
amount of the loan, and all accrued but unpaid interest thereon, is due
upon maturity in October 2002. The interest rate applicable to the loan was
increased in July 2001 from 11.5% to 13.5%. In February 2002, the interest
rate increased to 15.5%. In consideration of the loan, the Company issued
to FINOVA Mezzanine a warrant to purchase 915,000 shares of our common
stock at an exercise price of $3.41 per share which represented 80% of the
fair value of our 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. As of March 31, 2002, the Company had an
outstanding balance of $3,385,770 under this loan, which includes principal
of $4,000,000 less $614,230 of debt discount remaining to be amortized.
On December 26, 2000, the FINOVA Mezzanine 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 from the exercise of the warrant net proceeds
of $2,452,329, after paying transaction costs of $326,822. In connection
with this transaction, the Company agreed to reimburse FINOVA Mezzanine for
brokerage commission and other expenses incurred by it, in connection with
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 FINOVA Mezzanine ($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. FINOVA Mezzanine agreed to finance such amount under an
additional subordinated term loan, which bore interest at an annual rate of
13.5% and was paid in full in February 2002.
The line of credit and subordinated loans described above contain certain
financial and operating covenants. In June 2002, the Company notified
FINOVA Capital and FINOVA Mezzanine that it had failed to comply with the
minimum operational cash flow to contractual debt service ratio and the
funded debt to EBITDA ratio. FINOVA Capital agreed to waive those
violations for the fiscal year ended March 31, 2002 and the fiscal quarter
ended June 30, 2002 and to amend such covenants for the fiscal quarters
beginning July 1, 2002, pursuant to a certain Amendment and Limited Waiver
to Security Agreement dated June 26, 2002. In this waiver and amendment,
FINOVA Capital extended the maturity date from October 15, 2002 to July 1,
2003, removed any prepayment penalties, reduced the credit line from $13
million to $7.5 million, reduced the inventory limit from $6 million to $3
million, and will reduce the inventory advance rate by 1% per month
beginning July 1, 2002 (from a current level of 50% to 37% by the maturity
date). FINOVA Mezzanine also agreed to waive the violations of its
covenants for the fiscal year ended March 31, 2002 and the fiscal quarter
ended June 30, 2002, and to amend those covenants for future fiscal
quarters pursuant to a letter agreement dated June 26, 2002 and amendments
to the subordinated notes. In consideration of the waivers and
47
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
covenant amendments, the company agreed to pay a facility fee of $413,500,
which shall be deemed fully earned on June 26, 2002, $172,500 of which
shall be due and payable on the earliest of (a) July 1, 2003, (b) the
occurrence of an Event of Default, or (c) the date on which Borrower repays
either all of the Obligations to FINOVA under the Loan Agreement or any
portion of the principal Obligations of Borrower to FMC under the FINOVA
Mezzanine Loan Documents; and $241,000 of which shall be due and payable
upon FMC's exercise of its warrants.
In March 2000, the Company obtained a $10 million term loan from SouthTrust
Bank, N.A. This note bears interest at prime rate and is due in monthly
principal installments of $93,000 plus interest. The note matures in March
2005. The balance outstanding on this note as of March 31, 2002 was
$8,870,535. This note was used to pay off a prior term loan and to finance
approximately $7.5 million in new equipment purchases to expand the
Company's production capacity, including the new production equipment
purchased and installed throughout fiscal 2001 and the beginning of fiscal
2002. This term loan is secured by certain machinery and equipment,
including the new production equipment.
In October 2000, the Company's president guaranteed a $1.5 million
short-term bridge loan that it obtained from SouthTrust Bank, N.A. by
pledging one million of his shares of the Company's common stock to secure
the loan. Interest on this note is at the prime rate (4.75% at March 31,
2002). The loan is being paid down by monthly principal payments of $50,000
plus interest. The note matures in October 2003. The balance outstanding on
this note as of March 31, 2002 was $1,000,000. In consideration of his
guarantee and related pledge, the Company granted its president stock
options to acquire 343,125 shares of common stock at an exercise price of
$3.88 per share which was equal to the fair value of common stock at the
date of the grant. Such options shall expire on December 15, 2010.
The term loan and the short-term bridge loan from SouthTrust Bank, N.A.
contain certain financial and operating covenants. The Company was in
violation of all financial covenants at March 31, 2002. On June 27, 2002,
the Company received a waiver for the year ended March 31, 2002 and for all
future periods through July 1, 2003.
Aggregate maturities of the term notes and subordinated notes payable over
future years are as follows: 2003 - $1,809,000; 2004 - $5,516,000; and 2005
- $6,545,535.
(6) COMMITMENTS AND CONTINGENCIES
-----------------------------
LEASES
The Company leases its operating facilities and certain equipment under
operating and capital leases, expiring at various dates through its fiscal
year 2007. The following is a schedule by years as of March 31, 2002, 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
-------------- --------------
2003 $ 396,486 $ 857,000
2004 328,271 811,000
2005 279,053 573,000
2006 163,509 339,000
2007 -- 211,000
-------------- --------------
Total net minimum lease payments 1,167,319 $ 2,791,000
==============
Less amount representing interest 83,783
--------------
Present value of the net minimum
lease payments 1,083,536
Less current portion 349,380
--------------
Long-term obligations under capital leases $ 734,156
==============
48
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
The total capitalized cost for equipment under capital lease is $1,658,375
with accumulated depreciation of $289,342 as of March 31, 2002.
Rental expense was approximately $1,009,000, $987,000, and $750,000 for the
fiscal years ended March 31, 2002, 2001, 2000, respectively.
EMPLOYMENT AGREEMENTS
The Company currently has an employment agreement with its President, which
granted a stock option to purchase a maximum of 1,357,000 shares of common
stock at an exercise price of $3.31 per share. This option is currently
exercisable and expires in June 2009. The agreement also provides for a
salary of $300,000 and annual bonuses based on a sliding scale of pre-tax
income. Additionally, if the President is terminated without cause, he will
receive his annual base salary for a period of sixty months. This agreement
has a rolling five-year term, which began in June 1999.
The Company currently has employment agreements with several of its key
employees that provide for a three year severance in the event they are
terminated without cause.
LITIGATION
On May 17, 2002, Schreiber Foods, Inc. of Green Bay Wisconsin filed a
lawsuit against the Company in the federal district court for the Eastern
District of Wisconsin, being Case No. 02-C-0498, alleging various acts of
patent infringement. The Complaint alleges that the Company's machines for
wrapping of individual cheese slices, manufactured by Kustner Industries,
S.A. of Switzerland, known as models KE and KD, and the Company's machines
for producing individually wrapped slices manufactured by Hart Design Mfg.,
Inc. of Green Bay, Wisconsin, infringe unspecified claims of U.S. Patents
Nos. 5,440,860, 5,701,724 and 6,085,680. Additionally, the Complaint refers
to U.S. Patent No. 5,112,632, but it does not explicitly allege
infringement of that patent; because the case is in the earliest stages,
there has not yet been an opportunity to determine whether Schreiber Foods
intends to pursue allegations of infringement of the 5,112,632 Patent
against the Company. Schreiber Foods is seeking a preliminary and permanent
injunction prohibiting the Company from further infringing acts and is also
seeking damages in the nature of either lost profits or reasonable
royalties.
Several years prior to the filing of the lawsuit against the Company, the
Company modified the seals on its Kustner machines to make them more
technologically safe and superior. The seals on the two Hart Design
machines were modified by the manufacturer from the standard Hart Design
configuration at Galaxy's request and were delivered to the Company as
modified.
The Company believes that these modifications are such that the modified
machines do not literally infringe upon any of the identified patents and
the Company will vigorously defend this position. However, given the recent
filing date of the lawsuit, the Company is not in a position at this time
to express a view on the likelihood that it will succeed in its position,
nor in the amount of damages that might be awarded against it should it be
unsuccessful in that regard.
(7) CAPITAL STOCK
-------------
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,
2002. 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
49
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
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. The Company recorded $1,960,000 and
$1,100,000 of non-cash compensation expense for the years ended March 31,
2002 and 2001, respectively, to mark the options to market in accordance
with variable accounting.
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 85,714 shares of common
stock to eligible employees. Up to 500 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, 2002,
11,648 shares were issued under this plan at prices ranging from $4.63 to
$4.80 per share. During the year ended March 31, 2001, 10,264 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. The weighted average fair value of the shares issued were $4.78,
$3.77 and $3.52 per share for the fiscal years ended March 31, 2002, 2001
and 2000, respectively. As of March 31, 2002, there were 56,014 shares
available for purchase under the Plan.
COMMON STOCK OPTIONS AND WARRANTS ISSUED FOR SERVICES
During the fiscal years ended March 31, 2002, 2001, and 2000, consulting
expense of $413,662, $16,444 and $18,583, respectively, was recognized on
common stock options and warrants granted to officers, directors and
consultants. This expense is included in non-cash compensation in the
Company's Statements of Operations.
STOCK WARRANTS
At March 31, 2002, 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:
50
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Expiration Date Number of Warrants Exercise Price
--------------------------- ------------------ --------------
December 2002 10,714 5.04
January 2003 2,000 3.31
September 2004 100,000 3.41
September 2004 7,500 4.25
August 2005 7,143 4.48
December 2005 81,500 3.90
January 2006 33,571 4.81
July 2006 10,000 5.00
January 2007 42,592 5.74
April 2008 50,000 4.40
August 2008 1,429 4.82
January 2009 1,429 3.94
June 2009 143,000 3.31
------------------
490,878
==================
STOCK OPTIONS
At March 31, 2002, the Company has three employee stock option plans, which
were adopted in 1987, 1991, and 1996 and has granted additional non-plan
stock options. Under the Company's stock option plans, qualified and
nonqualified stock options to purchase up to 200,500 shares of the
Company's common stock may be granted to employees and members of the Board
of Directors. The maximum and typical term of options granted under the
plans is ten years. Generally, options vest from zero to three years. The
Company applies APB Opinion 25, Accounting for Stock Issued to Employees,
and related interpretations in accounting for these plans. Under the
provisions of APB Opinion 25, if options are granted or extended at
exercise prices less than fair market value, compensation expense is
recorded for the difference between the grant price and the fair market
value at the date of grant.
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 2002 option-pricing model as follows: no dividend yield, 38%
volatility, risk-free interest rate of 4.75%, and expected lives of ten
years. Assumptions used for grants in fiscal 2001: 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. 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 its net loss by $545,140 and $120,318 for
fiscal 2002 and 2001, respectively, and reduced net income by $2,755,910
fiscal 2000. This would not have any effect on loss per share for fiscal
2002 and 2001. Basic and diluted pro forma earnings per share would have
been $0.10 and $0.09, respectively for fiscal 2000.
The following table summarizes information about plan stock option
activity:
Weighted-Average Weighted-Average
Exercise Price Fair Value of
Shares per Share Options Granted
-------- ---------------- ----------------
Balance, March 31, 1999 108,218 $ 4.73 --
Granted - at market 930 4.13 $ 2.40
Exercised (1,000) 4.71 --
Canceled (2,142) 9.94 --
-------- ----------------
51
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Balance, March 31, 2000 106,006 4.51 --
Granted - at market 34,608 4.25 $ 2.70
Canceled (6,930) 4.68 --
-------- ----------------
Balance, March 31, 2001 133,684 4.60 --
Granted - at market 6,858 5.52 $ 3.19
Exercised (4,143) 4.71 --
Canceled (32,855) 5.00 --
-------- ----------------
Balance, March 31, 2002 103,544 $ 4.54 --
======== ================
At March 31, 2002, 2001 and 2000, a total of 84,955, 88,508, and 61,261 of
the outstanding plan options were exercisable with a weighted-average
exercise price of $4.69, $4.97, and $4.90 per share, respectively.
The following table summarizes information about non-plan stock option
activity:
Weighted-Average Weighted-Average
Exercise Price Fair Value of
Shares per Share Options Granted
-------- ---------------- ----------------
Balance, March 31, 1999 182,858 6.86 --
Granted - at market 1,369,143 3.31 $ 2.10
--------- ----------------
Balance, March 31, 2000 1,552,001 3.63 --
Granted - at market 343,125 3.91 $ 2.39
Canceled (7,143) 8.47 --
--------- ----------------
Balance, March 31, 2001 1,887,983 3.66 --
Granted, at market 830,000 4.54 $ 2.63
Canceled (12,143) 6.59 --
--------- ----------------
Balance, at
March 31, 2002 2,705,840 3.93 --
========= ================
At March 31, 2002, 2001, and 2000, a total of 2,068,340, 1,881,283, and
1,532,956 of the outstanding non-plan options were exercisable with a
weighted-average exercise price of $3.73, $3.67,and $3.61, respectively.
The following table summarizes information about plan and non-plan stock
options outstanding and exercisable at March 31, 2002:
Weighted- Weighted- Weighted-
Average Average Average Weighted-
Range of Options Remaining Exercise Options Remaining Average
Exercise Prices Outstanding Life Price Exercisable Life Exercise Price
- ------------------------------------------------------------------------------------------------------
$ 2.84 - 3.99 1,754,055 7.4 years $ 3.42 1,748,341 7.4 years $ 3.42
4.00 - 4.99 817,824 9.0 years 4.47 194,949 9.0 years 4.39
5.00 - 5.99 185,286 2.3 years 5.38 157,786 1.0 years 5.30
6.00 - 6.99 4,858 6.5 years 6.10 4,858 6.5 years 6.10
7.00 - 7.99 7,571 2.2 years 7.00 7,571 2.2 years 7.00
8.00 - 8.99 32,287 4.2 years 8.47 32,287 4.2 years 8.47
10.28 -19.25 7,503 3.0 years 12.17 7,503 3.0 years 12.17
----------- -----------
2,809,384 2,153,295
=========== ===========
52
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
PREFERRED AND COMMON STOCK ISSUANCES
On April 6, 2001, we 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
Series A convertible preferred stock, $0.01 par value, and (ii) warrants to
purchase shares 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 Series A buyers received initial warrants to purchase an aggregate of
120,000 shares of common stock. The initial warrants were exercisable for a
period of five years from April 6, 2001, at a per share exercise price of
$5.30. Pursuant to a letter agreement dated October 5, 2001, the Company
agreed to issue additional warrants to acquire 60,000 shares of its common
stock at an exercise price of $5.86 per share to each of BH Capital
Investments, L.P. and Excalibur Limited Partnership. In exchange for the
warrants, BH Capital Investments, L.P. and Excalibur Limited Partnership
agreed to provide us certain consulting services, including the
introduction of potential customers in Canada. Subsequently, we agreed to
reduce the per share exercise price on all the warrants to $2.67 in order
to induce BH Capital Investments, L.P. and Excalibur Limited Partnership to
exercise their warrants and to gain their required approval for the private
placement described below. On January 17, 2002, BH Capital Investments,
L.P. and Excalibur Limited Partnership exercised all 240,000 for a total of
$640,800.
The holders of the preferred stock have the right to require the Company to
redeem their shares of preferred stock on April 6, 2005 or upon occurrence
of other events, as defined. The redemption price shall be paid in cash at
a price per preferred share equal to the greater of (a) 100% of the
preference amount ($48.18 plus accrued dividends) or (b) an amount equal to
the product of (1) the number of shares of common stock then issuable to
the holders upon conversion of the preferred stock being redeemed and (2)
the market price on the date of redemption.
In connection with the issuance of the preferred stock and warrants, the
Company has recorded accrued dividends of $350,000 for the 10% preferred
stock dividend and $120,321 of dividends related to the beneficial
conversion feature on the accrued dividends to be paid with preferred
stock. The Company recorded a discount on preferred stock of $2,003,770
related to the beneficial conversion feature ($1,449,370), the fair value
of the initial warrants ($277,200) and redemption warrants ($277,200) and
the fair value of the mandatory redemption price. The excess of the
redemption value of $4,391,861 over the initial carrying value of $523,830
was $3,868,031 and is being accreted and recorded as dividends over the
redemption period (48 months) using the straight line method, which
approximates the effective interest method. For the twelve months ended
March 31, 2002, the Company recorded $1,259,122 of dividends related to the
accretion of preferred stock.
On September 25, 2001, the Company issued an investor, in accordance with
an exemption from registration under Regulation D promulgated under the
Securities Act of 1933, as amended, (i) an aggregate of 522,648 shares of
common stock, $0.01 par value, and (ii) warrants to purchase 140,000 shares
of common stock, $0.01 par value, at an aggregate sales price of
approximately $3,000,000. Registration of the shares was completed by
October 25, 2001. All 140,000 warrants were exercised in January 2002 at
$4.50 per share for total proceeds of $630,000.
In conjunction with the Series A Purchase Agreement, the Company agreed
that it would not sell or enter into any agreement to sell any of its
securities or incur any indebtedness outside the ordinary course of
business for the time period beginning April 6, 2001 and continuing until
three months after the date the investors' shares are effectively
registered ("Anti-Financing Right"). To induce the investors to waive their
Anti-Financing Right to allow the Company to proceed with transactions
contemplated by the September 25, 2001 common stock issuance, the
53
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Company issued 30,000 shares of common stock to each of the two investors
at a per share purchase price of par value ($.01). The difference between
the total purchase price ($600) and the market price of the stock on the
closing date of ($360,000) is considered preferred stock dividends. This
dividend amount of $359,400 is included in the computation of earnings per
common share.
Pursuant to certain Securities Purchase Agreements dated January 17, 2002,
the Company sold 170,365 shares of its common stock for $4.74 (95% of an
average market price) and issued warrants of 42,592 shares exercisable at
$5.74 per share. The Company received proceeds of $808,212 related to the
sale of these common shares.
RESERVED
At March 31, 2002, the Company has reserved common stock for future
issuance under all of the above arrangements totaling 2,000,013 shares.
(8) INCOME TAXES
------------
The components of the net deferred tax assets consist of the following:
March 31, 2002 2001
- -------------------------------------------------------------------------------------------------
Deferred tax assets:
Net operating loss carry forwards $ 10,218,000 $ 6,474,000
Nondeductible reserves 1,241,000 141,000
Investment, alternative minimum and general business tax credits 148,000 144,000
Other 452,000 150,000
- -------------------------------------------------------------------------------------------------
Gross deferred income tax assets 12,059,000 6,909,000
Valuation allowance (9,992,000) (3,541,000)
- -------------------------------------------------------------------------------------------------
Total deferred income tax assets 2,067,000 3,368,000
Deferred income tax liabilities:
Depreciation and amortization (2,067,000) (1,808,000)
- -------------------------------------------------------------------------------------------------
Net deferred income tax assets -- 1,560,000
Less current portion -- 532,000
- -------------------------------------------------------------------------------------------------
Long-term deferred income tax asset -- $ 1,028,000
=================================================================================================
The valuation allowance increased by $6,451,000 and $1,527,000 for the
years ended March 31, 2002 and 2001, respectively, and decreased by
$2,786,000 for the year ended March 31, 2000. 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, 2002 2001 2000
- --------------------------------------------------------------------------------
Current:
Federal $ -- $ -- $ (110,669)
State -- -- --
- --------------------------------------------------------------------------------
-- -- (110,669)
- --------------------------------------------------------------------------------
54
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Deferred:
Federal (1,353,900) 226,800 1,127,100
State (206,100) 13,200 192,900
- --------------------------------------------------------------------------------
(1,560,000) 240,000 1,320,000
- --------------------------------------------------------------------------------
$(1,560,000) $ 240,000 $1,209,331
================================================================================
Tax expense for the year ended March 31, 2000 for the Company's liability
for alternative minimum tax was $110,669. 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, 2002 2001 2000
- --------------------------------------------------------------------------------------
Federal income taxes at statutory rates (34.0%) (34.0%) 34.0%
Change in deferred tax asset valuation allowance 41.8% 19.2% (72.1%)
Alternative minimum tax -- -- 4.6%
Non deductible expenses:
Non deductible compensation 4.3% 5.6% --
Imputed interest on note receivable 1.5% 4.4% 12.5%
Other (3.5%) 1.4% 5.0%
Utilization of net operating loss carry forward -- -- (34.0%)
----- ----- -----
Income taxes (benefit) at effective rates 10.1% (3.4%) (50.0%)
===== ===== =====
Unused net operating losses for income tax purposes, expiring in various
amounts from 2008 through 2021, of approximately $27,155,000 are available
at March 31, 2002 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 June 1999 employment agreement, the Company
entered into a $12,772,200 non-interest bearing, non-recourse loan with a
maturity date of June 2006 with the Company's President. The loan
consolidated two prior notes payable of $11,572,200 and $1,200,000 that
resulted as a result of his exercise of 2,571,429 and 342,857 shares,
respectively in prior years. At the same time, the employment agreement
forgave all accumulated interest on the prior notes, waived any future
interest, and set the maturity date on the consolidated note to June 15,
2006.
Included in other receivables at March 31, 2001 on the Balance Sheet is
$255,286 in advances to the Company's President. All of these advances were
repaid during fiscal 2002.
A director of the Company was paid consulting fees totaling $79,600,
$27,000, and $36,000 for introductions into several large foodservice
companies during the fiscal years ended March 31, 2002, 2001, and 2000,
respectively.
(10) ECONOMIC DEPENDENCE
-------------------
For the fiscal years ended March 31, 2002, 2001 and 2000, the Company did
not have any single customer that comprised more than 10% of net sales.
55
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
During fiscal 2002, the Company purchased approximately $3,522,000 from one
supplier totaling approximately 12% of purchases for the fiscal year. For
the fiscal years ended March 31, 2001 and 2000, the Company did not have
any single supplier that comprised more than 10% of purchases.
(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 $38,911, $30,062, and $17,025 for the fiscal years
ended March 31, 2002, 2001 and 2000, respectively.
(12) SUPPLEMENTAL CASH FLOW INFORMATION
----------------------------------
During the year ended March 31, 2002, the Company expensed $3,348,406
through its accounts receivable reserve account that related to valid
deductions taken by the customers in relation to promotions, special
programs, spoils, etc. In addition, the Company recorded $189,286 related
to the exercise of warrants in exchange for consulting services.
Years ended March 31, 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------
Non-cash financing and investing activities:
Purchase of equipment through capital lease obligations and term
notes payable $1,564,355 $ -- $ 94,865
Consulting and directors fees paid through issuance of common
stock warrants 413,662 16,444 18,583
Original issuance discount related to issuance of warrants in
connection with subordinated note payable -- -- 786,900
Original issuance 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 --
Preferred dividends recorded for preferred
shareholder waiver received in exchange for
issuance of common stock 359,400 -- --
Accrued preferred stock dividends and related
beneficial conversion feature 470,321 -- --
Discount related to preferred stock 2,003,770 -- --
Accretion of discount on preferred stock 1,259,122 -- --
Cash paid for:
Interest (expensed and capitalized) 3,579,953 2,873,822 988,970
Income taxes -- -- 95,401
56
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
(13) EARNINGS PER SHARE
------------------
The following is a reconciliation of basic net earnings (loss) per share to
diluted net earnings (loss) per share:
Years ended March 31, 2002 2001 2000
- --------------------------------------------------------------------------------------------------------
Net income (loss) per common share $(19,147,995) $ (6,485,763) $ 3,629,891
Basic net income (loss) per common share $ (1.81) $ (0.69) $ 0.40
----------------------------------------------
Average shares outstanding - basic 10,556,203 9,396,002 9,183,814
Potential shares exercisable under stock option plans -- -- 1,128,506
Potential shares exercisable under stock warrant
agreements -- -- 457,500
Less: Shares assumed repurchased under treasury stock
method -- -- (1,360,005)
----------------------------------------------
Average shares outstanding - diluted 10,556,203 9,396,002 9,409,815
----------------------------------------------
Diluted income (loss) per common share $ (1.81) $ (0.69) $ 0.39
==============================================
Potential common shares for the year ended March 31, 2002 and 2001 were not
presented as their effects were antidilutive. These shares include
2,714,736 stock options and 448,286 warrants for fiscal 2002, and 1,624,693
stock options and 262,716 warrants for fiscal 2001. The above
reconciliation excludes 215,575 options and 95,501 warrants for fiscal 2000
because they were anti-dilutive.
(14) FOURTH QUARTER ADJUSTMENTS
--------------------------
During the fourth quarter of fiscal 2002, the Company recorded the
following adjustments:
Credits and reserves issued on accounts receivable $3,474,242
Deferred tax valuation reserve 1,560,000
Inventory write-offs 581,201
Write-off of unused advertising credits 547,386
Disposal of fixed assets 464,190
Due to the nature of the above adjustments, it is impractical to apply
their effects to prior quarters.
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
The effect of the above fourth quarter adjustments on the previous quarter
is as follows:
57
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
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
(15) SCHEDULE OF VALUATION ACCOUNT
-----------------------------
Balance at Charged to Write-Offs,
Beginning Costs and Retirements and Balance at
of Year Expenses Collections End of Year
- ----------------------------------------------------------------------------------------------------------
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
Year Ended March 31, 2002:
Allowance for doubtful trade receivables $ 375,000 $ 4,274,242 $ 3,971,242 $ 678,000
During the fiscal year ended March 31, 2002, the Company expensed through
its allowance account $3,348,406 for anticipated customer promotions,
spoils, etc. and expensed $925,836 related to bad debt.
58
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
(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:
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 June 26, 2002, the Company signed a $550,000 promissory note with
Excalibur Limited Partnership, one of the holders of the Company's Series A
Preferred Stock. In consideration of the note, the Company issued Excalibur
Limited Partnership a warrant to purchase 30,000 shares of Common Stock,
which are exercisable until June 26, 2007 at a price equal to $5.50 per
share. This note was non-interest bearing assuming that it was repaid on or
before July 26, 2002. This note was secured by 250,000 shares of Common
Stock owned by the Angelo S. Morini, the Company's Chief Executive Officer
and President. On June 26, 2002, the Company received $500,000 in cash. The
additional $50,000 is payment due for consulting fees provided by Excalibur
Limited Partnership in accordance with a consulting agreement entered into
on June 26, 2002, which expires December 31, 2002.
In accordance with Regulation D and pursuant to a certain Common Stock and
Warrants Purchase Agreement dated June 28, 2002, the Company sold 367,647
shares of Common Stock for $4.08 (85% of an average market price) and
issued warrants to purchase 122,549 shares of Common Stock at a price equal
to $5.52 per share to Stonestreet Limited Partnership. In connection with
such sale, the Company issued 7,812 shares of Common Stock to Stonestreet
Corporation and 4,687 shares of Common Stock to H&H Securities Limited in
exchange for their services as finders. Registration of all of these
shares, including the shares underlying the warrants, is to be completed
within 120 days of issuance. Per the terms of the agreement, the Company
received net proceeds of $930,000, after the repayment of a $550,000
promissory note dated June 26, 2002 and payment of $20,000 for Stonestreet
Limited Partnership's costs and expenses related to the purchase of these
shares of Common Stock.
59
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
(18) QUARTERLY OPERATING RESULTS (UNAUDITED)
---------------------------------------
Unaudited quarterly operating results are summarized as follows:
Three Months Ended (Unaudited)
---------------------------------------------------------------
2002 March 31 December 31 September 30 June 30
- ---- ------------ ------------ ------------ ------------
Net sales** $ 10,080,884 $ 10,325,699 $ 11,372,764 $ 11,801,669
Gross margin** 332,662 2,967,193 1,825,066 3,179,733
Net income (loss) (9,950,452) 149,994 (5,016,923) (2,241,771)
Net income (loss) for common shareholders (10,505,757) (181,653) (5,893,800) (2,566,785)
Basic and diluted net income (loss) per
common share (0.92) (0.02) (0.59) (0.26)
Stockholders' equity 6,311,183 14,429,688 15,162,548 15,481,093
Three Months Ended (Unaudited)
---------------------------------------------------------------
2002 March 31 December 31 September 30 June 30
- ---- ------------ ------------ ------------ ------------
Net sales** $ 11,771,863 $ 10,429,295 $ 12,021,093 $ 11,199,612
Gross margin** 1,332,717 2,967,554 4,288,145 3,991,699
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
** In accordance with Emerging Issues Task Force ("EITF") 01-09,
"Accounting for Consideration Given by a Vendor to a Customer (Including a
Reseller of the Vendor's Products)", net sales and gross margin were
restated for all quarters due to the reclassification of slotting fees from
selling expenses to sales. Net sales, gross margin and selling expenses
were all reduced by slotting fees expenses of $164,768, $1,570,427, and
$119,312 for the fiscal years ended March 31, 2002, 2001 and 2000.
60
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
61
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The following table sets forth the current directors and executive officers of
the Company as of June 27, 2002, as well as their respective ages and positions
with the Company:
NAME AGE POSITIONS
- --------------------------------------------------------------------------------
Angelo S. Morini 59 Chairman of the Board of Directors, President,
and Chief Executive Officer
Douglas A. Walsh (1) 57 Director
Marshall K. Luther (1) 49 Director
Joseph Juliano (1) 51 Director
LeAnn Hitchcock 32 Chief Financial Officer
Christopher New 41 Chief Operating Officer, Chief Marketing Officer
and Vice President of Strategy
Christopher Morini 47 Vice President of International Sales and
Specialty Accounts
John Jackson 44 Vice President of Sales
Kulbir Sabharwal 59 Vice President of Technical Services
(1) Audit Committee Member
The Board of Directors is currently comprised of the Chairman of the Board and
three non-employee directors. The Chairman of the Board and the directors hold
office until the next annual meeting of stockholders and until their successors
have been duly elected and qualified. The Company's executive officers are
elected by the Board and service until their successors are duly elected and
qualified.
Committees of the Board of Directors.
- -------------------------------------
Audit Committee. The Audit Committee consists of three directors, all of which
are non-employee directors. The Board of Directors established the Audit
Committee at a meeting of the Board of Directors during the fiscal year ending
March 31, 2001, and at the meeting the Audit Committee adopted a written charter
under which the Audit Committee operates. The Audit Committee currently consists
of Messrs. Walsh, Luther and Juliano. Each of the members of the Audit Committee
is independent pursuant to Section 121(B)(b)(ii) of the AMEX listing standards.
Other Committees. The Board of Directors does not currently have a standing
compensation or nominating committee or any other committees, other than the
Audit Committee.
62
Directors
- ---------
Angelo S. Morini has been President of the Company since its inception and is
the inventor of a new way to make cheese, which he once called 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 International Sales and Specialty Accounts.
Angelo S. Morini's wife, Julie Morini, is employed by the Company in the
marketing and public relations departments and serves as the Company's Corporate
Secretary. Also, Mr. Morini's brother-in-law, Robert Peterson, is employed by
the Company as a sales representative.
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 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.
Executive Officers
- ------------------
LeAnn Hitchcock, CPA was appointed the Company's Chief Financial Officer (CFO)
on October 29, 2001. Prior to this, Ms. Hitchcock was the CFO for Developed
Technology Resources (DTR) and its subsidiary, FoodMaster International since
July 1997. Together these companies acquired and managed dairy operations in the
former Soviet Union. Ms. Hitchcock was also the CFO of Galaxy Foods Company from
December 1995 to June 1997. From 1994 to 1995, she was a senior auditor for
Coopers and Lybrand LLP in Orlando, FL. From 1992 to 1994, she worked for a
local public accounting firm of Pricher and Company in Orlando as a senior
auditor and tax accountant. Prior to 1992, Ms. Hitchcock worked for Arthur
Andersen LLP as a staff auditor. Ms. Hitchcock obtained a BS in Business
Administration and a BS in Accounting from Palm Beach Atlantic College in West
Palm Beach, Florida in May 1990, and a Masters in Accounting Information Systems
from Florida State University, Tallahassee, Florida in August 1991.
63
Christopher New was appointed the Company's Chief Marketing Officer and Vice
President of Strategy on September 4, 2001. On December 14, 2001, the Board
appointed Mr. New as Chief Operating Officer. From 1993 through 2001, Mr. New
was the Vice President of Commercial Strategies & Services for Tropicana
Products of Bradenton, Florida. At Tropicana, Mr. New's responsibilities
included the direction and leadership of strategic planning, marketing, business
development, sales planning, e-commerce, customer service and category
management. Prior to his employment at Tropicana, Mr. New served as Senior
Marketing Manager of Mott's USA, a division of Cadbury Schweppes, for four
years. Mr. New received his M.S. in Marketing and Economics from Cornell
University in 1986.
Christopher Morini has been the Vice President of International Sales and
Specialty Accounts since September 2001, having formerly served as 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.
Kulbir Sabharwal has been Vice President of Technical Services for the Company
since 1991. Dr. Sabharwal worked as the Director of Research and Quality Control
for Gilardies Frozen Foods from 1987 to 1990 and for Fisher Cheese Company from
1972 to 1986. Dr. Sabharwal received his Ph.D. from Ohio State University in
1972.
Former Executive Officers
- -------------------------
On April 1, 2001, Keith A. Ewing was terminated as Chief Financial Officer
(CFO), Vice President and Assistant Secretary. Cynthia L. Hunter, the Company's
Controller, was then appointed as the acting CFO and Corporate Secretary of the
Company. On July 13, 2001, Ms. Hunter resigned as the Company's acting CFO and
Corporate Secretary. On August 13, 2001, the Board of Directors appointed Jack
Gallagher as the Company's CFO pursuant to an agreement with Tatum CFO Partners
LLP, a partnership of career CFO's of which Mr. Gallagher is a partner. On
September 10, 2001, the Company terminated the agreement with Tatum CFO
Partners, LLP and removed Mr. Gallagher as CFO. On October 29, 2001, LeAnn
Hitchcock was appointed as CFO.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
- -------------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's executive officers and directors, and persons who own more than 10% of
a registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and the American Stock Exchange. Officers, directors and stockholders owning
more than 10% of the Company's common stock are required by SEC regulations to
provide the Company with copies of all the reports they file pursuant to Section
16(a).
Based solely upon the Company's review of those reports required by Section
16(a) and filed by or on behalf of the Company's officers and directors or
written representations that no such reports were required the Company believes
that during the fiscal year ended March 31, 2002 all of the officers and
directors and stockholders owning greater than 10% of the Company's common stock
complied with all applicable Section 16(a) filing requirements.
64
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
- --------------------------
The following table sets forth the compensation of the Company's Chief Executive
Officer and its four other most highly compensated executive officers (the
"Named Executive Officer"), as well as a former Executive Officer, during the
fiscal years ended March 31, 2002, 2001 and 2000:
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 ($) ($) ($) ($) (#) ($) ($) (23)
- ----------------------------------------------------------------------------------------------------------------------
Angelo S. Morini 2002 300,000 - 31,417 (1) - 375,000(4) - - 3,450
Chairman of the Board 2001 300,000 - 28,656 (2) - 343,125(5) - 2,700
President, and Chief 2000 300,000 125,000 20,526 (3) - 1,357,000(6) - 2,700
Executive Officer
Keith A. Ewing 2001 125,000 - 9,716 (8) - - - 3,000
Chief Financial Officer (7)
Christopher Morini 2002 155,000 - 13,904 (9) - 75,000(12) - 3,450
Vice President of 2001 153,000 - 29,372 (10) - - - 3,000
Int'l Sales 2000 126,250 25,000 7,753 (11) - - - 3,000
John Jackson 2002 138,000 - 10,296 (13) - 75,000(16) - 1,200
Vice President of 2001 128,000 - 10,390 (14) - - - 2,700
Sales 2000 113,750 45,838 10,117 (15) - - - 2,700
Christopher New 2002 89,693 - 7,583 (18) - 100,000(19) - -
Chief Operating Officer (17)
LeAnn Hitchcock 2002 62,487 - (21) - 30,000(22) - 2,100
Chief Financial Officer (20)
(1) For the fiscal year ended March 31, 2002, the Company paid $20,833 in lease
payments for Mr. Morini's automobile lease, approximately $140 per month
for automobile insurance and $8,904 in club dues for Mr. Morini.
(2) For the fiscal year ended March 31, 2001, the Company paid $18,552 in lease
payments for Mr. Morini's automobile, 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.
(4) In April 2001, Angelo S. Morini was granted incentive stock options to
acquire 375,000 shares of Common Stock at an exercise price of $4.40.
One-fifth of such options shall become exercisable on each anniversary of
the grant date until all such options are exercisable. Such options shall
expire on April 19, 2011.
(5) In November of 2000, Angelo S. Morini guaranteed a $1.5 million short-term
bridge loan to the Company from SouthTrust Bank, N.A., with one million
shares of his Common Stock pledged as collateral. In consideration of his
guarantee and related pledge, the Company granted stock options to acquire
343,125 shares of Common Stock at an exercise price of $3.88 per share.
Such options shall expire on December 15, 2010.
65
(6) 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 was non-interest bearing,
non-recourse to Mr. Morini, and was secured by 2,571,429 shares of the
Company's Common Stock beneficially owned by Mr. Morini. The Company's
security interest in the shares pledged by Mr. Morini has not been
perfected. The current outstanding balance of the obligation is
$12,772,200.
(7) In February of 2000, Keith A. Ewing was appointed as Chief Financial
Officer. The base salary provided for Mr. Ewing was $125,000. On April 12,
2001, the Company terminated Mr. Ewing.
(8) For the fiscal year ended March 31, 2001, the Company paid $6,684 in lease
payments for Mr. Ewing's automobile, and approximately $75 per month for
automobile insurance and $2,131 in club dues for Mr. Ewing.
(9) For the fiscal year ended March 31, 2002, the Company paid $12,536 in lease
payments for Mr. C. Morini's automobile, and approximately $114 per month
for automobile insurance.
(10) For the fiscal year ended March 31, 2001, the Company paid $11,228 in lease
payments for Mr. C. Morini's automobile, plus $100 per month for automobile
insurance and $16,944 in club dues for Mr. C. Morini.
(11) 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.
(12) In April 2001, Mr. C. Morini was granted an incentive stock option to
purchase up to 75,000 shares of Common Stock at an exercise price of $4.40.
One-third of such options shall become exercisable on each anniversary of
the grant date until all such options are exercisable. Such options expire
April 19, 2011.
(13) For the fiscal year ended March 31, 2002, the Company paid $8,917 in lease
payments for Mr. Jackson's automobile and approximately $115 per month for
automobile insurance.
(14) For the fiscal year ended March 31, 2001, the Company paid $8,917 in lease
payments for Mr. Jackson's automobile, plus $123 per month for automobile
insurance.
(15) 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.
(16) In April 2001, Mr. Jackson was granted an incentive stock option to
purchase up to 75,000 shares of Common Stock at an exercise price of $4.40.
One-third of such options shall become exercisable on each anniversary of
the grant date until all such options are exercisable. Such options expire
April 19, 2011.
66
(17) On September 4, 2001, Christopher J. New was appointed Chief Marketing
Officer and Vice President of Strategy. In December 2001, the Board
appointed Mr. New as Chief Operating Officer. As such, he did not earn any
compensation from the Company during the fiscal years ended March 2000 and
2001. Mr. New's employment agreement provides for an annual base salary of
$150,000.
(18) For the fiscal year ended March 31, 2002, the Company paid $7,583 to Mr.
New for a car allowance.
(19) Under the terms of his employment contract, Mr. New received an option to
purchase up to 100,000 shares of the Company's stock at an exercise price
of $4.98. One-third of such options shall become exercisable in September
each year until all such options are exercisable. In the event of a change
in control, all such options shall immediately become exercisable. Such
options expire July 16, 2011.
(20) In October 2001, LeAnn Hitchcock was appointed Chief Financial Officer of
the Company. As such, she did not earn any compensation from the Company
during the fiscal years ended March 31, 2000 and 2001. Ms. Hitchcock's
employment agreement provides for an annual base salary of $130,000.
(21) Other than the options described in footnote 22 below, there was no other
annual compensation, perquisites and other personal benefits, securities or
property equal to the lesser of $50,000 or 10% of the total annual salary
and bonus reported for such Named Executive Officer.
(22) Under the terms of her employment contract, Ms. Hitchcock received an
option to purchase up to 30,000 shares of the Company's stock at an
exercise price of $5.90, with one-third of the options vesting immediately
and one-third on each of the following two anniversary dates of the date of
grant. Such options expire on October 29, 2011.
(23) "All Other Compensation" represents the health insurance premiums paid on
behalf of the indicated employees by the Company.
Option Grants in Last Fiscal Year Table
- ---------------------------------------
The following table summarizes for each Named Executive Officer each grant of
stock options during the fiscal year ended March 31, 2002:
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
Percent of
Number of Total
Securities Options
Underlying Granted to Grant Date
Options Employees in Exercise or Fair
Name Granted Fiscal Year (1) Base Price Expiration Date Value (2)
---- ---------- --------------- ---------- --------------- ----------
Angelo S. Morini 375,000 44.8% $4.40 April 19, 2011 $952,500
LeAnn Hitchcock 30,000 3.6% $5.90 Oct. 29, 2011 $102,000
Christopher New 100,000 11.9% $4.98 Sept. 4, 2011 $287,000
Christopher Morini 75,000 9.0% $4.40 April 19, 2011 $190,500
John Jackson 75,000 9.0% $4.40 April 19, 2011 $190,500
67
(1) The total number of options granted to employees in the 2002 fiscal year
was 836,858.
(2) The Company estimated the fair value of the stock options at the grant date
using a Black-Scholes option-pricing model with the following assumptions:
(i) no dividend yield; (ii) 38% volatility, (iii) risk-free interest rate
of 4.75%, and (iv) expected life of ten years.
Aggregate Option Exercises and Fiscal Year-End Option Value Table
- -----------------------------------------------------------------
The following table summarizes for each Named Executive Officer each exercise of
stock options during the fiscal year ended March 31, 2002 and the fiscal
year-end value of unexercised options. The value of unexercised in-the-money
options at March 31, 2002 is based on a value of $5.43 per share, the prior
closing price of the Company's Common Stock on the American Stock Exchange on
March 28, 2002:
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES
Name Shares Value Number of Options Value of
Acquired on Realized Of Common Stock Unexercised
Exercise Underlying Unexercised In-the-Money Options
at Year-end At Year-end
- -----------------------------------------------------------------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------------------------------------------------------
Angelo S. Morini -- -- 1,938,197 300,000 $3,547,270 $ 309,000
LeAnn Hitchcock -- -- 10,000 20,000 -- --
Christopher New -- -- -- 100,000 -- $ 45,000
Christopher Morini -- -- 44,286 52,857 $ 56,729 $ 58,900
John Jackson -- -- 43,572 52,857 $ 55,351 $ 58,900
- -----------------------------------------------------------------------------------------------------------
Compensation of Directors
- -------------------------
Standard Arrangements. Each non-employee director who served on the Board of
Directors during the last fiscal year received a fee of $2,000 plus expenses for
his services. Additionally, each non-employee director of the Company is
entitled to receive on October 1 of each year, options to purchase a number of
shares of Common Stock equal to (i) 286 shares, if such director served for a
full year prior to the October 1 anniversary date, or (ii) a pro rated amount
equal to 24 shares for each full month served during the year prior to such
anniversary date, if such director did not serve for a full year prior to the
anniversary date. Such options are granted pursuant to the Company's 1991
Non-Employee Director Stock Option Plan which was adopted by the Board of
Directors on October 1, 1991, and approved by the shareholders of the Company on
January 31, 1992, as the same was amended by that certain 1996 Amendment and
Restatement of the 1991 Non-Employee Director Stock Option Plan (as amended, the
"Director Plan").
Other Arrangements. During each of the fiscal years ended March 31, 2002, 2001
and 2000, Joseph Juliano, a director of the Company, was paid $79,600, $27,000,
and $36,000, respectively, in return for developing and maintaining business
relationships with prospective and existing customers and suppliers on behalf of
the Company.
68
Employment Agreements
- ---------------------
ANGELO S. MORINI. 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 was granted an option to purchase 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 have a term of ten years from the date
granted and are 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 become 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 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. Pursuant to the Agreement, the Company will obtain, and maintain in
effect during the term of the 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 Company agreed to
cancel the $11,572,200 Note and the $1,200,000 Note (with the Company
forgiving any accrued interest thereunder) and the parties entered
into a new loan agreement in lieu thereof. Pursuant to the agreement,
Mr. Morini and the Company executed a new non-interest bearing and
non-recourse promissory note in the amount of $12,772,200 and a stock
pledge agreement. The Company has not perfected its interest in the
shares of Common Stock pledged under the stock pledge agreement.
69
LeAnn Hitchcock. In October 2001, LeAnn Hitchcock was appointed Chief Financial
Officer of the Company. Ms. Hitchcock's employment agreement provides for an
annual base salary of $130,000. The agreement also provided Ms. Hitchcock with a
non-qualified stock option to purchase up to 30,000 shares of the Company's
common stock at an exercise price of $5.90 with one-third of the options vesting
immediately and one-third on each of the following two anniversary dates of the
date of grant. In the event the Company is purchased, all such stock options
will immediately vest.
Christopher New. On September 4, 2001, Christopher J. New was appointed Chief
Marketing Officer and Vice President of Strategy and in December 2001, the Board
appointed him to Chief Operating Officer. Mr. New's employment agreement
provides for a base salary of $150,000, which will increase to $180,000 upon the
Company's achievement of a profitable quarter. Mr. New will also be entitled to
receive a bonus of up to 40% of his base salary at fiscal year end with the
qualification of such bonus to be determined by the Board of Directors. The
agreement also provides for an automobile lease with insurance. In the event of
a change in ownership of the Company which results in his termination, Mr. New
will be entitled to receive three years of his base salary as severance. In the
event Mr. New's employment is otherwise terminated after September 4, 2002, but
prior to September 4, 2003, he will be entitled to receive one year of his base
salary as severance. In the event Mr. New's employment is terminated after
September 4, 2003, but prior to September 4, 2004, he will be entitled to
receive two years of his base salary as severance. In the event Mr. New's
employment is terminated after September 4, 2004, he will be entitled to receive
three years of his base salary as severance. Mr. New was also granted stock
options to purchase 100,000 shares of Common Stock at an exercise price of
$4.98. The stock options will expire on September 4, 2011. One third of the
stock options will vest on each anniversary of the grant date until fully
vested. In the event the Company is purchased, all such stock options will
immediately vest.
Christopher Morini. Angelo S. Morini's brother, Christopher Morini, works for
the Company as Vice President of International Sales and Specialty Accounts.
From February of 1993 until October 2001, Christopher Morini served as Vice
President of Marketing. Mr. C. Morini's employment agreement provides for
$126,250 base salary. In May 2000, his base salary was increased to $155,000 per
year. The agreement also provides for an automobile lease with insurance, which
together shall not exceed $1,100 per month. Mr. C. 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 the event Mr. C. Morini's employment is terminated, Mr. C. Morini
will be entitled to receive three years of his base salary as severance.
John Jackson. In August of 1993, John Jackson was appointed as Vice President of
Sales. Mr. Jackson's employment agreement provides for $113,750 base salary. In
January 2000, his base salary was increased to $125,000 per year and then
increased to $138,000 per year in January 2001. 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. In the event of a change in ownership of
the Company which results in his termination, Mr. Jackson will be entitled to
receive three years of his base salary as severance. In the event Mr. Jackson's
employment is otherwise terminated, he is entitled to receive one year of his
base salary as severance, the payment of which shall be made at the Company's
discretion.
Additional Information with Respect to Insider Participation in Compensation
- ----------------------------------------------------------------------------
Committee
- ---------
The Company did not have during the fiscal year ended March 31, 2002, and does
not currently have, a compensation committee or a committee of the Board of
Directors performing similar functions. Compensation for executive officers
other than Mr. Angelo Morini, the Company's Chief Executive Officer, is
determined independently by Mr. Morini. Joseph Juliano, Marshall K. Luther and
Douglas A. Walsh, each a member of the
70
Board of Directors, conducted discussions and negotiations with Mr. Morini, and
deliberations with respect to the amendment of Mr. Morini's employment agreement
and compensation which occurred during the fiscal year ended March 31, 2001.
Additionally, since October 2000, Mr. Morini has drawn an aggregate of $304,000
in advances which were to be charged against future bonuses under the new
employment agreement. However, in March 2002, Mr. Morini advanced the Company
$330,000 to help the Company with its cash flow. This $330,000 was applied
against all his outstanding advances.
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- 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
forgives the interest on the existing note, provides for a salary increase to
$300,000 and decreases the annual bonus to a sliding scale of pre-tax income,
beginning with the fiscal year ending March 31, 2000. This new agreement has a
rolling five-year term. Angelo S. Morini's brother, Christopher Morini, works
for the Company as Vice President of International Sales and Specialty Accounts.
Angelo S. Morini's wife, Julie Morini, is employed by the Company in the
marketing and public relations departments and serves as the Company's Corporate
Secretary. Mr. Morini's brother-in-law, Robert Peterson, is employed by the
Company as a sales representative.
Board Report on Executive Compensation
- --------------------------------------
The following report describes the Company's executive officers' compensation
for the fiscal year ended March 31, 2002:
The Board of Directors of the Company does not have a general compensation
policy applicable to the Company's executive officers. Compensation for
executive officers other than Mr. Angelo Morini, the Company's Chief
Executive Officer, is determined independently by Mr. Morini.
The Company and Mr. Morini entered into an Amended and Restated Employment
Agreement effective June 15, 1999, which agreement was approved by the
Board of Directors. See "Chief Executive Officer's Employment Agreement"
above for a description of the terms of the agreement. The Board of
Directors based its approval of the agreement and the terms thereof on a
number of factors including Mr. Morini's significant contribution to the
turnaround and improvement of the Company's performance and position, Mr.
Morini's level of commitment and loyalty to the Company and his high degree
of accepted risk on behalf of the Company, and the improved performance and
anticipation of continuing improvements in performance, particularly in
revenues and profit margin, and the associated potential growth in
shareholder value. In addition, the Board of Directors determined that it
was in the Company's best interest, and the best interest of the
shareholders, to modify certain terms and conditions of Mr. Morini's prior
employment agreement. These modifications included, among other things,
reducing the formula for the profit sharing bonus, eliminating a right
whereby Mr. Morini could require that the Company repurchase certain of his
common stock upon the occurrence of certain events, and the elimination of
mandatory performance stock options upon the Company's achievement of
specified "milestone" events.
Mr. Morini's compensation includes a profit sharing percentage incentive
component based upon the Company's achievement of certain levels of pre-tax
net income as determined by the Company's independent accounting firm. Due
to the Company's current year loss, no amounts were paid under this
incentive program during the year ended March 31, 2002.
Respectively submitted by the Board of Directors: Angelo S. Morini
Joseph Juliano
Marshall K. Luther
Douglas A. Walsh
71
Stock Performance Graph
- -----------------------
The following graph provides comparison of the yearly percentage change in the
Company's cumulative total shareholder return on the Company's Common Stock with
the cumulative total return of (a) Standard & Poor's SmallCap Index and (b) a
peer group index:
COMPARATIVE OF FIVE YEAR (1) CUMULATIVE TOTAL RETURNS OF (2)
GALAXY NUTRITIONAL FOODS COMMON STOCK, THE S&P
SMALLCAP INDEX (3) AND A PEER GROUP INDEX (4)
[GRAPHIC OMITTED]
COMPARATIVE OF FIVE YEAR (1) CUMULATIVE TOTAL RETURNS OF (2)
GALAXY NUTRITIONAL FOODS COMMON STOCK, THE S&P
SMALLCAP INDEX (3) AND A PEER GROUP INDEX (4)
1998 1999 2000 2001 2002
--------------------------------------------------------
Galaxy Nutritional Foods $ 119.23 $ 68.10 $ 64.82 $ 86.82 $ 95.43
S&P Small Cap $ 146.50 $ 117.49 $ 152.42 $ 149.38 $ 180.84
Peer Group $ 106.25 $ 103.94 $ 89.42 $ 91.02 $ 67.50
(1) Compares fiscal years ending on or about March 31st of the years indicated.
(2) The comparison of total return on investment assumes $100 invested on April
1, 1997 in Galaxy Nutritional Foods Common Stock and in each S&P Small Cap
Index and the S&P Food Group Index.
72
(3) The S&P Small Cap Index is composed of public companies with market
capitalizations between zero and $1 billion. As of June 27, 2002, the
Company had a market capitalization of approximately $55 million.
(4) Companies in the Peer Group Index are as follows: Hain Celestial Group,
Horizon Organic, Conagra Foods, International Multifoods, Lance, and
Tofutti Brands.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
EQUITY COMPENSATION PLAN INFORMATION
- ------------------------------------
The following table describes the Company's compensation plans under which the
Company's Common Stock are authorized for issuance as of June 27, 2002:
EQUITY COMPENSATION PLAN INFORMATION TABLE
(a) (b) (c)
Plan Category Number of Securities to Weighted-average Number of securities
be issued upon exercise exercise price of remaining available for
of outstanding options, outstanding options, future issuance under
warrants and rights warrants and rights equity compensation
plans (excluding
securities reflected in
column (a))
Equity compensation plans
approved by security holders 102,062 $ 4.53 182,119
Equity compensation plans not
approved by security holders (1) 3,869,738 $ 4.42 N/A
--------------------------------
Total 3,971,800 $ 4.42
================================
(1) The securities issued pursuant to equity compensation plans not approved by
security holders include 3,869,738 options issued to employees or directors
under individual compensation arrangements.
================================================================================
Security Ownership of Certain Beneficial Owners
- -----------------------------------------------
The following tables describe as of June 27, 2002, the beneficial ownership of
the Company's Common Stock and the Company's Series A Preferred Stock by each
person or entity known to the Company to be the beneficial owner of more than 5%
of the outstanding shares of the Company's capital stock outstanding as of June
27, 2002. The tables show beneficial ownership in accordance with the rules of
the Securities and Exchange Commission to include securities that a named person
or entity has the right to acquire within 60 days. However, for the sake of
clarity, the tables do not report beneficial ownership of the Series A Preferred
Stock as beneficial ownership of Common Stock (even though all shares of Series
A Preferred Stock are currently convertible into Common Stock) but instead,
report holdings of Common Stock and Series A Preferred Stock separately:
73
COMMON STOCK OWNERSHIP OF 5% OR MORE STOCKHOLDERS
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 6,546,617 (3) 44.2%
Cede & Co.
Box #20
Bowling Green Station
New York, New York 5,547,823 (4) 37.4%
John Hancock Advisors, Inc.
200 Clarendon Street
Boston, Massachusetts 02117 1,441,348 (5) 9.7%
Frederick A. DeLuca
c/o Doctor's Associates, Inc.
325 Bic Drive
Milford, Connecticut 06460 714,286 4.8%
(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 14,817,855 shares. Does not assume
the exercise of any other options or warrants or the conversion of the
Series A Preferred Stock.
(3) Includes options to acquire 3,102,095 shares of the Company's Common Stock.
As of June 27, 2002, 3,102,095 of Mr. Morini's options are currently are
exercisable at $3.31 to $5.72 per share. The original exercise prices of
20,215 of the options ranged from $17.50 per share to $25.03 per share. The
exercise prices of these options were reduced by the Board of Directors to
$3.50 per share on August 31, 1993. Options expire as to 7,143 shares on
December 4, 2007, as to 13,072 shares on October 1, 2006, as to 142,857 on
July 1, 2007, as to 1,357,000 shares on June 15, 2009, as to 343,125 on
December 15, 2010, as to 375,000 on April 19, 2011, and as to 1,163,898 on
May 24, 2012. Also includes a warrant to purchase 250 shares at an exercise
price of $5.74 which expires on January 17, 2007. With the exception of the
options, 10,500 shares held in a nominee name, 286 shares held in joint
tenancy and 714 shares held individually, all of Mr. Morini's shares and
warrant are held by Morini Investments Limited Partnership, a Delaware
limited liability partnership, of which Angelo Morini is the sole Limited
Partner and Morini Investments LLC is the sole General Partner. Mr. Morini
is the sole member of Morini Investments LLC.
(4) Cede & Co. is a share depository used by shareholders to hold stock in
street name. Does not include 10,500 shares beneficially owned by Angelo S.
Morini and 778,700 beneficially owned by John Hancock Advisers, Inc., both
of which are held by Cede & Co. in street name.
(5) John Hancock Advisers, Inc. is a wholly-owned subsidiary of The Berkeley
Financial Group, Inc., which is a wholly-owned subsidiary of John Hancock
Subsidiaries, Inc., which a wholly-owned subsidiary of John Hancock Life
Insurance Company, which is a wholly-owned subsidiary of John Hancock
Financial Services, Inc. Pursuant to a Securities Purchase Agreement dated
as of September 24, 2001, Hare & Co. f/b/o John Hancock Small Cap Value
Fund, an affiliate of John Hancock Advisors, Inc., purchased 522,648 shares
of Common Stock and warrants to purchase 140,000 shares of Common Stock, at
an aggregate sales price of $3,000,000. The warrants held by Hare & Co.
f/b/o John Hancock Small Cap Value Fund are exercisable at a price per
share equal to $6.74 until September 25, 2006. Subsequently, the Company
agreed to reduce the per share exercise price on all the warrants to $4.50
in order to induce Hare & Co. f/b/o John Hancock Small Cap Value Fund to
exercise their warrants. All of the warrants were exercised in January 2002
at a price of $4.50 per share.
74
SERIES A PREFERRED STOCK OWNERSHIP OF 5% OR MORE STOCKHOLDERS
Amount and Nature of
Name and Address of Beneficial Owner Beneficial Ownership (1) Percent of Class (2)
- ----------------------------------------------------------------------------------------
BH Capital Investments, L.P.
175 Bloor Street East
South Tower, 7th Floor
Toronto, Ontario, Canada M4W 3R8 39,955 Series A (2) 50% (7)
Excalibur Limited Partnership
33 Prince Arthur Avenue
Toronto, Ontario, Canada M5R IB2 39,955 Series A (2) 50% (7)
(1) The inclusion herein of any shares deemed beneficially owned does not
constitute an admission of beneficial ownership of these shares.
(2) Pursuant to a certain Series A Preferred Stock and Warrants Purchase
Agreement dated as of April 6, 2001, BH Capital Investments, L.P. and
Excalibur Limited Partnership each purchased 36,323 shares of the Company's
Series A convertible preferred stock and warrants to purchase 60,000 shares
of Common Stock, at an aggregate sales price of approximately $3,082,000.
As of June 27, 2002, the holders of the Series A Preferred Stock are also
entitled to an additional 3,632 shares of Series A Preferred Stock each due
to accrued stock dividends on their initial purchase of the Series A
Preferred Stock. The warrants held by BH Capital Investments, L.P. and
Excalibur Limited Partnership were exercisable at a price per share equal
to $5.30 until April 6, 2006. In addition, BH Capital Investments, L.P. and
Excalibur Limited Partnership received other warrants to purchase an
aggregate of 120,000 shares of Common Stock at $2.67 per share.
Subsequently, the Company agreed to reduce the per share exercise price on
all the warrants to $2.67 in order to induce BH Capital Investments, L.P.
and Excalibur Limited Partnership to exercise their warrants and to gain
their required approval for a private placement. In January 2002, BH
Capital Investments, L.P. and Excalibur Limited Partnership exercised all
240,000 warrants. The Company received total proceeds of $640,800 from the
exercise of warrants.
Security Ownership of Management
- --------------------------------
The following table describes as of June 27, 2002, the beneficial ownership of
the Company's Common Stock
75
by (i) each Named Executive Officer, (ii) each director, and (iii) all of the
Company's directors and executive officers as a group, outstanding as of June
27, 2002. The tables show beneficial ownership in accordance with the rules of
the Securities and Exchange Commission to include securities that a named person
or entity has the right to acquire within 60 days.
Amount and Nature of
Name and Address of Beneficial Owner Beneficial Ownership (1) Percent of Class (2)
- ----------------------------------------------------------------------------------------
Angelo S. Morini 6,546,617 (3) 44.2%
Douglas A. Walsh 4,384 (4) *
Marshall K. Luther 13,001 (5) *
Joseph Juliano 42,929 (6) *
LeAnn Hitchcock 13,393 (7) *
Christopher New 6,588 (8) *
Christopher Morini 44,286 (9) *
John Jackson 47,274 (10) *
Kulbir Sabharwal 30,320 (11) *
All executive officers and
directors as a group 6,748,792 46.7%
========= =====
* 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 14,817,855 shares. Does not assume the exercise
of any other options or warrants.
(3) Includes options to acquire 3,102,095 shares of the Company's Common Stock.
As of June 27, 2002, 3,102,095 of Mr. Morini's options are currently are
exercisable at $3.31 to $5.72 per share. The original exercise prices of
20,215 of the options ranged from $17.50 per share to $25.03 per share. The
exercise prices of these options were reduced by the Board of Directors to
$3.50 per share on August 31, 1993. Options expire as to 7,143 shares on
December 4, 2007, as to 13,072 shares on October 1, 2006, as to 142,857 on
July 1, 2007, as to 1,357,000 shares on June 15, 2009, as to 343,125 on
December 15, 2010, as to 375,000 on April 19, 2011, and as to 1,163,898 on
May 24, 2012. Also includes a warrant to purchase 250 shares at an exercise
price of $5.74 which expires on January 17, 2007. With the exception of the
options, 10,500 shares held in a nominee name, 286 shares held in joint
tenancy and 714 shares held individually, all of Mr. Morini's shares and
warrant are held by Morini Investments Limited Partnership, a Delaware
limited liability partnership, of which Angelo Morini is the sole Limited
Partner and Morini Investments LLC is the sole General Partner. Mr. Morini
is the sole member of Morini Investments LLC.
76
(4) Dr. Walsh, a current member of the Board of Directors, holds warrants to
acquire 2,143 shares of Common Stock at a price of $4.99 per share, which
expire on June 11, 2012. In addition, Dr. Walsh was granted options to
acquire 2,241 shares of the Company's Common Stock. All of these options
were issued at the closing bid price as quoted on the American Stock
Exchange on the date of the grant. All of the options are currently
exercisable at $3.06 to $19.25 per share. Options expire as to 96 shares on
October 1, 2002, 143 shares on each October 1, for the years 2003 to 2005,
and 286 shares on each October 1, for the years 2006 to 2011.
(5) Mr. Luther, a current member of the Company's Board of Directors, holds
warrants to acquire 7,143 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 3,763
shares of the Company's Common Stock. All of these options were issued at
the closing bid price as quoted on the American Stock Exchange on the date
of the grant. All of the options are currently exercisable at $3.06 to
$10.28 per share. Options expire as to 2,143 shares on January 31, 2006,
190 shares on October 1, 2006, and 286 shares on each October 1, for the
years 2007 to 2011.
(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. Additionally,
Mr. Juliano was granted options to acquire 2,787 shares of the Company's
Common Stock. All of these options were issued at the closing bid price as
quoted on the American Stock Exchange on the date of the grant. All of the
options are currently exercisable at $3.44 to $6.00 per share. Options
expire as to 2,143 shares on May 27, 2009, 72 shares on October 1, 2009,
286 shares on each October 1, for the years 2010 and 2011. 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.
10,000 of Ms. Hitchcock's options currently are exercisable at $5.90 per
share and expire on October 29, 2011. Also includes a warrant to purchase
250 shares at an exercise price of $5.74 which expires on January 17, 2007.
(8) Includes a warrant to purchase 1,318 shares of the Company's Common Stock
at an exercise price of $5.74 which expires on January 17, 2011.
(9) Includes options to acquire 44,286 shares of the Company's Common Stock.
44,286 of Mr. C. Morini's options currently are exercisable at $2.84 to
$8.47 per share. Options expire as to 7,143 shares on May 16, 2006, as to
714 on August 31, 2003, as to 11,429 shares on September 24, 2008, and as
to 25,000 shares on April 19, 2011.
(10) Includes options to acquire 43,572 shares of the Company's Common Stock.
43,572 of Mr. Jackson's options currently are exercisable at $2.84 to $8.47
per share. Options expire as to 7,143 shares on May 16, 2006, as to 11,429
shares on September 24, 2008, and as to 25,000 shares on April 19, 2011.
(11) Includes options to acquire 22,143 shares of the Company's Common Stock.
22,143 of Mr. Sabharwal's options currently are exercisable at $4.40 to
$8.47 per share. Options expire as to 7,143 shares on May 16, 2006, and as
to 15,000 shares on April 19, 2011. Also, includes a warrant to purchase
1,250 shares of the Company's Common Stock at an exercise price of $5.74
which expires on January 17, 2007.
77
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Transactions with Management and Others
- ---------------------------------------
Employment Agreements
Please see "ITEM 11. EXECUTIVE COMPENSATION - Employment Agreements."
Options Grants to Management
Please see "ITEM 11. EXECUTIVE COMPENSATION - Option Grants in Last Fiscal
Year Table."
Angelo S. Morini, Chairman, President and Chief Executive Officer
In November 2000, Angelo S. Morini guaranteed a $1.5 million short-term bridge
loan to the Company from SouthTrust Bank, N.A., with 1,000,000 shares of his
Common Stock pledged as collateral. The Company has not perfected its security
interest in the pledged shares. In consideration of his guarantee and related
pledge, the Company granted stock options to acquire 343,125 shares of Common
Stock at an exercise price of $3.88 per share. Such options shall expire on
December 15, 2010.
In March 2002, Angelo S. Morini, personally, obtained a $500,000 line of credit
from SouthTrust Bank, N.A., and repaid $330,000 in past advances to him by the
Company in order to ensure that debt payments were made to SouthTrust Bank
pursuant to the bridge loan.
In May 2002, the Company granted Angelo S. Morini additional stock options to
acquire 1,163,898 shares of Common Stock at an exercise price of $5.72 per
share, pursuant to a Non-Qualified Stock Option Agreement. 960,750 of those
stock options were granted in consideration of the stock appreciation of the
1,000,000 shares of Common Stock previously pledged to SouthTrust Bank, N.A. in
connection with the guarantee of the bridge loan and 186,048 of those stock
options were granted in consideration of the interest accrued on the pledged
shares for the 2001 calendar year. The remaining 17,100 stock options granted in
May 2002, were granted in consideration of the personal line of credit obtained
by Mr. Morini on behalf of the Company.
In August 2001, the Board of Directors agreed to extend the exercise period of
13,072 stock options held by Angelo S. Morini by five years, from October 1,
2001 to October 1, 2006.
Pursuant to a Securities Purchase Agreement dated as of January 17, 2002, Angelo
S. Morini, the Company's Chairman, Chief Executive Officer and President,
purchased 1,000 shares of Common Stock and warrants to purchase 250 shares of
Common Stock, at an aggregate sales price of $4,744. The warrants held by Mr.
Morini are exercisable at a price per share equal to $5.74. All of the warrants
are exercisable until January 17, 2007. The shares of Common Stock purchased and
those underlying the warrants were included in Registration Statement No.
333-83248, filed on February 22, 2002.
Angelo S. Morini's brother, Christopher Morini, works for the Company as Vice
President of International Sales and Specialty Accounts. Angelo S. Morini's
wife, Julie Morini, is employed by the Company as Corporate Secretary and works
in the marketing and public relations departments. Mr. Morini's brother-in-law,
Robert Peterson, is employed by the Company as a sales representative. Mr.
Peterson's total compensation for the last fiscal year was $100,550 (which
includes salary, car allowance and health benefits).
78
LeAnn Hitchcock, Chief Financial Officer
Pursuant to a Securities Purchase Agreement dated as of January 17, 2002, LeAnn
Hitchcock, the Company's Chief Financial Officer, purchased 1,000 shares of
Common Stock and warrants to purchase 250 shares of Common Stock, at an
aggregate sales price of $4,744. The warrants held by Ms. Hitchcock are
exercisable at a price per share equal to $5.74. All of the warrants are
exercisable until January 17, 2007. The shares of Common Stock purchased and
those underlying the warrants were included in Registration Statement No.
333-83248, filed on February 22, 2002.
Christopher New, Chief Operating Officer, Chief Marketing Officer and Vice
President of Strategy
Pursuant to a Securities Purchase Agreement dated as of January 17, 2002,
Christopher New, the Company's Chief Operating Officer, Chief Marketing Officer
and Vice President of Strategy, purchased 5,270 shares of Common Stock and
warrants to purchase 1,318 shares of Common Stock, at an aggregate sales price
of $25,001. The warrants held by Mr. New are exercisable at a price per share
equal to $5.74. All of the warrants are exercisable until January 17, 2007. The
shares of Common Stock purchased and those underlying the warrants were included
in Registration Statement No. 333-83248, filed on February 22, 2002.
Kulbir Sabharwal, Vice President of Technical Services
Pursuant to a Securities Purchase Agreement dated as of January 17, 2002, Kulbir
Sabharwal, the Company's Vice President of Technical Services, purchased 5,000
shares of Common Stock and warrants to purchase 1,250 shares of Common Stock, at
an aggregate sales price of $23,720. The warrants held by Mr. Sabharwal are
exercisable at a price per share equal to $5.74. All of the warrants are
exercisable until January 17, 2007. The shares of Common Stock purchased and
those underlying the warrants were included in Registration Statement No.
333-83248, filed on February 22, 2002.
Keith A. Ewing, former Chief Financial Officer
Keith A. Ewing was previously employed as the Chief Financial Officer of the
Company. On April 1, 2001, the Company and Mr. Ewing entered into an Employee
Severance/Settlement Agreement whereby the Company agreed to forgive a $20,000
loan given to Mr. Ewing on August 3, 2000, and to pay him severance in the
amount of $5,208. In addition, Mr. Ewing agreed to accept a warrant to purchase
10,000 shares of common stock in lieu of the stock options granted pursuant to
his employment agreement. Mr. Ewing exercised those warrants at an exercise
price of $5.00 per share. The Company included those shares in Registration
Statement No. 333-70884, filed on October 3, 2001. The settlement agreement also
provided for Mr. Ewing's return of certain Company property and mutual releases.
Joseph Juliano, Director
During each of the fiscal years ended March 31, 2002, 2001 and 2000, Joseph
Juliano, a director of the Company, was paid $79,600, $27,000 and $36,000,
respectively, in return for developing and maintaining business relationships
with prospective and existing customers and suppliers on behalf of the Company.
Beginning in April 2002, the Company leases an apartment in New York from 400
East 84th Street Associates, LP at $6,460 per month as payment for Mr. Juliano's
services.
BH Capital Investments, L.P., and Excalibur Limited Partnership, 5% Series A
Preferred Stockholders
Pursuant to a Series A Preferred Stock and Warrants Purchase Agreement, the
Company agreed not to sell or enter into any agreement to sell any of its
securities or incur any indebtedness outside the ordinary course of business for
the time period beginning on April 6, 2001 and continuing until 90 days after
the date the shares issuable to BH Capital Investments, L.P. and Excalibur
Limited Partnership, upon the conversion of Series A Preferred Stock and
exercise of warrant held by such stockholders have been registered pursuant to
an effective registration statement filed with the Securities and Exchange
Commission. In order to induce such stockholders to waive this right to allow
the completion of a private placement, the Company agreed to issue 30,000 shares
of Common Stock to each of them. Such shares were issued on September 25, 2001
and were included in the Registration Statement No. 333-70884, filed on October
3, 2001.
79
Pursuant to a letter agreement dated October 5, 2001, the Company agreed to
issue warrants to acquire 60,000 shares of Common Stock at an exercise price of
$5.86 per share to each of BH Capital Investments, L.P. and Excalibur Limited
Partnership. In exchange for the warrants, BH Capital Investments, L.P. and
Excalibur Limited Partnership agreed to provide the Company certain consulting
services, including the introduction of potential customers in Canada.
Subsequently, the Company agreed to reduce the per share exercise price of the
warrants to $2.67 in order to induce BH Capital Investments, L.P. and Excalibur
Limited Partnership to exercise their warrants and to gain their required
approval for a private placement. On January 17, 2002, BH Capital Investments,
L.P. and Excalibur Limited Partnership each exercised all of such warrants. The
shares of Common Stock issued upon the exercise of the warrants were included in
Registration Statement No. 333-83248, filed on February 22, 2002.
On June 26, 2002, the Company signed a $550,000 promissory note with Excalibur
Limited Partnership, one of the holders of the Company's Series A Preferred
Stock. In consideration of the note, the Company issued Excalibur Limited
Partnership a warrant to purchase 30,000 shares of Common Stock which are
exercisable until June 26, 2007 at a price equal to $5.50 per share. This note
was non-interest bearing assuming that it was repaid on or before July 26, 2002.
This note was secured by 250,000 shares of Common Stock owned by Angelo S.
Morini, the Company's Chief Executive Officer and President. On June 26, 2002,
the Company received $500,000 in cash. The additional $50,000 is payment due for
consulting fees provided by Excalibur Limited Partnership in accordance with a
consulting agreement entered into on June 26, 2002, which expires December 31,
2002.
In connection with the sale of 367,647 shares of Common Stock and warrants to
purchase 122,549 shares of Common Stock at an exercise price of $5.52 per share
to Stonestreet Limited Partnership, the Company issued 4,687 shares of Common
Stock to H&H Securities Limited, an affiliate of Excalibur Limited Partnership
in exchange for its services as a finder. The Company agreed to register these
shares within 120 days of issuance. A portion of the proceeds of the sale of
Common Stock and warrants to Stonestreet Limited Partnership was used to pay in
full the $550,000 promissory note owed to Excalibur Limited Partnership.
Frederick DeLuca, 5% Common Stockholder
Pursuant to a Common Stock Purchase Warrant, dated as of October 8, 1998,
Frederick A. DeLuca was granted warrants to purchase 357,143 shares of Common
Stock at an exercise price of $2.63 per share. On November 8, 2001, Mr. DeLuca
exercised the warrant for 214,286 shares of Common Stock. On December 21, 2001,
in order to allow Mr. DeLuca to exercise the remaining 142,857 shares, the
Company accelerated the vesting of those remaining shares. On December 28, 2001,
Mr. DeLuca exercised the warrant for the remaining 142,857 shares of Common
Stock. Pursuant to a Consulting Agreement, the Company agreed to accept $189,286
of strategic planning and marketing consulting services to be provided to the
Company and $750,000 cash for the $2.63 exercise price for the shares underlying
the warrants. The shares were included in Registration Statement No. 333-83248,
filed on February 22, 2002.
80
John Hancock Advisors, Inc., 5% Common Stockholder
Pursuant to a Securities Purchase Agreement dated as of September 24, 2001, Hare
& Co. f/b/o John Hancock Small Cap Value Fund, an affiliate of John Hancock
Advisors, Inc., purchased 522,648 shares of Common Stock and warrants to
purchase 140,000 shares of Common Stock, at an aggregate sales price of
$3,000,000. The warrants held by Hare & Co. f/b/o John Hancock Small Cap Value
Fund are exercisable at a price per share equal to $6.74. All of the warrants
were exercised in January 2002 at a reduced price of $4.50 per share. The
Company included those shares in Registration Statement No. 333-70884, filed on
October 3, 2001.
Indebtedness of Management and Others
- -------------------------------------
On June 17, 1999, in conjunction with the entry into a new employment 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 was non-interest bearing, non-recourse to Mr. Morini, and was
secured by 2,571,429 shares of the Company's Common Stock beneficially owned by
Mr. Morini. The Company has not perfected its security interest in the pledged
shares. The current outstanding balance of the obligation is $12,772,200.
81
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
Financial Statements
- --------------------
Balance Sheets at March 31, 2002 and 2001
Statements of Operations for the years ended March 31, 2002, 2001 and 2000
Statement of Stockholders' Equity for the years ended March 31, 2002, 2001
and 2000
Statements of Cash Flows for the years ended March 31, 2002, 2001 and 2000
Notes to Financial Statements
Exhibits
- --------
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.)
*3.8 Certificate of Designations, Preferences and Rights of Series A
Convertible Preferred Stock filed on April 5, 2001 (Filed as
Exhibit 3.8 on Form 10-K/A for fiscal year ended March 31, 2001,
and incorporated herein by reference.)
*4.1 Series A Preferred Stock and Warrants Purchase Agreement, by and
among BH Capital Investments, L.P., Excalibur Limited Partnership
and the Company, dated April 6, 2001 (Filed as Exhibit 4.1 on
Form 10-K/A for fiscal year ended March 31, 2001, and
incorporated herein by reference.)
82
*4.2 Amendment and Waiver Agreement, by and among BH Capital
Investments, L.P., Excalibur Limited Partnership and the Company,
dated September 24, 2001 (Filed as Exhibit 4.5 to Registration
Statement on Form S-3 filed October 3, 2001, and incorporated
herein by reference.)
*4.3 Securities Purchase Agreement, by and between Hare & Co. f/b/o
John Hancock Small Cap Value Fund and the Company, dated
September 24, 2001 (Filed as Exhibit 4.6 to Registration
Statement on Form S-3 filed October 3, 2001, and incorporated
herein by reference.)
*4.4 Stock Purchase Warrant issued to Hare & Co. f/b/o John Hancock
Small Cap Value Fund and the Company, dated September 25, 2001
(Filed as Exhibit 4.7 to Registration Statement on Form S-3 filed
October 3, 2001, and incorporated herein by reference.)
*4.5 Registration Rights Agreement, by and between Hare & Co. f/b/o
John Hancock Small Cap Value Fund and the Company, dated
September 24, 2001 (Filed as Exhibit 4.8 to Registration
Statement on Form S-3 filed October 3, 2001, and incorporated
herein by reference.)
*4.6 Form of Securities Purchase Agreement by and between the Company
and the investors described in the Current Report on Form 8-K
dated January 22, 2002 (Filed as Exhibit 4.1 to Current Report on
Form 8-K filed January 22, 2002, and incorporated herein by
reference.)
*4.7 Form of Securities Purchase Agreement by and between the Company
and the executive officers described in the Current Report on
Form 8-K dated January 22, 2002 (Filed as Exhibit 4.2 to Current
Report on Form 8-K filed January 22, 2002, and incorporated
herein by reference.)
4.8 Common Stock and Warrants Purchase Agreement by and between the
Company and Stonestreet Limited Partnership dated June 28, 2002
(Filed herewith.)
4.9 Stock Purchase Warrant issued to Stonestreet Limited Partnership,
dated June 28, 2002 (Filed herewith.)
*10.1 Second Amendment to the Security Agreement with Finova Financial
Services 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 Financial
Services dated December 1998 (Filed as Exhibit 10.2 on Form 10-K
for fiscal year ended March 31, 1999, and incorporated herein by
reference.)
*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.)
*10.6 Third Amendment to Lease Agreement, dated as of August 14, 2001,
by and between Anco Company and the Company (Filed as Exhibit
10.6 on Form 10-K/A for fiscal year ended March 31, 2001, and
incorporated herein by reference.)
83
*10.7 Amendment and Limited Waiver to Security Agreement, dated as of
July 13, 2001, by and between the Company and FINOVA Capital
Corporation (Filed as Exhibit 10.7 on Form 10-Q/A for the quarter
ended September 30, 2001, and incorporated herein by reference.)
*10.8 Waiver Letter from FINOVA Mezzanine Capital, Inc. to the Company
dated as of July 12, 2001 (Filed as Exhibit 10.8 on Form 10-Q/A
for the quarter ended September 30, 2001, and incorporated herein
by reference.)
*10.9 Amended and Restated Secured Promissory Note in the principal
amount of $815,000, dated as of July 13, 2001, by the Company in
favor of FINOVA Mezzanine Capital, Inc. (Filed as Exhibit 10.9 on
Form 10-Q/A for the quarter ended September 30, 2001, and
incorporated herein by reference.)
*10.10 Second Amended and Restated Secured Promissory Note in the
principal amount of $4,000,000, dated as of July 13, 2001, by the
Company in favor of FINOVA Mezzanine Capital, Inc. (Filed as
Exhibit 10.10 on Form 10-Q/A for the quarter ended September 30,
2001, and incorporated herein by reference.)
*10.11 Amendment and Limited Waiver to Security Agreement, dated as of
November 14, 2001, by and between the Company and FINOVA Capital
Corporation (Filed as Exhibit 10.11 on Form 10-Q/A for the
quarter ended September 30, 2001, and incorporated herein by
reference.)
*10.12 Intellectual Property Security Agreement, dated as of November
14, 2001, by and between the Company and FINOVA Capital
Corporation (Filed as Exhibit 10.12 on Form 10-Q/A for the
quarter ended September 30, 2001, and incorporated herein by
reference.)
*10.13 Waiver Letter from FINOVA Mezzanine Capital, Inc. to the Company
dated as of November 14, 2001 (Filed as Exhibit 10.13 on Form
10-Q/A for the quarter ended September 30, 2001, and incorporated
herein by reference.)
*10.14 Allonge to Second Amended and Restated Secured Promissory Note,
dated as of November 14, 2001, by the Company in favor of FINOVA
Mezzanine Capital, Inc. (Filed as Exhibit 10.14 on Form 10-Q/A
for the quarter ended September 30, 2001, and incorporated herein
by reference.)
*10.15 Amendment and Limited Waiver to Security Agreement, dated as of
February 13, 2002, by and between the Company and FINOVA Capital
Corporation (Filed as Exhibit 10.15 of Form 10-Q for the quarter
ended December 31, 2001, and incorporated herein by reference.)
*10.16 Waiver Letter from FINOVA Mezzanine Capital, Inc. to the Company
dated as of February 13, 2002 (Filed as Exhibit 10.16 of Form
10-Q for the quarter ended December 31, 2001, and incorporated
herein by reference.)
*10.17 Allonge to Second Amended and Restated Secured Promissory Note
dated as of February 13, 2002, by the Company in favor of FINOVA
Mezzanine Capital, Inc. (Filed as Exhibit 10.175 of Form 10-Q for
the quarter ended December 31, 2001, and incorporated herein by
reference.)
10.18 Amendment and Limited Waiver to Security Agreement, dated as of
June 26, 2002, by and between the Company and FINOVA Capital
Corporation (Filed herewith.)
10.19 Amendment and Limited Waiver to Loan Agreement dated as of June
26, 2002, by and between the Company and FINOVA Mezzanine
Capital, Inc. (Filed herewith.)
84
10.20 Allonge to Second Amended and Restated Secured Promissory Note
dated as of June 26, 2002, by the Company in favor of FINOVA
Mezzanine Capital, Inc. (Filed herewith.)
* Previously filed
Reports on Form 8-K
- -------------------
The Company filed a Current Report on Form 8-K with the Securities and Exchange
Commission on January 22, 2002, whereby the Company disclosed a private
placement of its Common Stock to certain institutional investors and certain
executive officers of the Company.
85
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 NUTRITIONAL FOODS, INC.
Date: June 28, 2002 /s/Angelo S. Morini
Angelo S. Morini
Chairman and President
(Principal Executive Officer)
Date: June 28, 2002 /s/LeAnn Hitchcock
LeAnn Hitchcock
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: June 28, 2002 /s/Douglas Walsh
Douglas Walsh, M.D.
Director
Date: June 28, 2002 /s/Marshall Luther
Marshall Luther
Director
Date: June 28, 2002 /s/Joseph Juliano
Joseph Juliano
Director
86