UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2
TO
FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED March 31, 1999
or
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ to _______.
Commission File Number: 0-25055
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Galaxy Enterprises, Inc.
------------------------
(Exact name of small business issue as specified in its charter)
Nevada 88-031-5212
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
890 N. Industrial Park Road, Orem, Utah 84057
---------------------------------------------
(Address of principal executive offices) (Zip Code)
(801) 227-0004
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(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports) and (2)
has been subject to such filing requirements for the past 90 days. Yes [ X ] No
[ ].
State the number of shares outstading of each of the issuer's classes
of common stock, as of the latest practicable date. As of August 30, 1999.
-------------------
Classes of Common Stock Number of shares outstanding
- ----------------------------- ----------------------------
Common Stock, $.007 par value 5,705,444
Transitional Small Business Disclosures Forms
(Check one):
Yes [ ] No [ X ]
<PAGE>
Galaxy Enterprises, Inc.
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INDEX TO FORM 10-Q
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited) Page
Condensed Consolidated Balance Sheets --
March 31, 1999 and December 31, 1998 .................................1
Condensed Consolidated Statements of Operations --
Three months ended March 31, 1999 and 1998 ...........................2
Condensed Consolidated Statements of Cash Flows --
Three months ended March 31, 1999 and 1998 ...........................3
Notes to Condensed Consolidated Financial Statements .................4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ........................5
PART II - OTHER INFORMATION
Item 1. Changes in Securities and Use of Proceeds ............................8
Item 6. Exhibits and Reports on Form 8-K .....................................8
<PAGE>
<TABLE>
<CAPTION>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Galaxy Enterprises, Inc. and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets
Unaudited Audited
March 31, December 31,
1999 1998
ASSETS ----------- ---------
<S> <C> <C>
CURRENT ASSETS
Cash 639,237 24,718
Trade accounts receivable 250,401 81,620
Inventory 26,000
Prepaid expenses 488,291 18,549
Deferred income taxes 14,200 14,200
Credit card reserves 184,163 129,205
----------- ---------
TOTAL CURRENT ASSETS 1,602,292 268,292
EQUIPMENT
Computer and office equipment 209,512 190,508
Computer software 41,843 32,189
Furniture and fixtures 6,401 6,104
Other 25,915 2,840
Less: Accumulated depreciation (79,904) (59,773)
----------- ---------
NET BOOK VALUE 203,767 171,868
OTHER ASSETS
Deferred charges 67,127
Deferred Income Taxes 69,974
Goodwill 780,303 794,753
Other 13,015 32,815
----------- ---------
TOTAL ASSETS 2,669,351 1,334,855
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Trade accounts payable 788,365 830,774
Accrued expenses 145,380 108,536
Income taxes currently payable 7,900
Notes payable 90,000 115,000
Unearned income 6,060
----------- ---------
TOTAL CURRENT LIABILITIES 1,023,745 1,068,270
DEFERRED INCOME TAXES 10,300 10,300
VENDOR RESERVES RETAINED 51,561
SHAREHOLDERS' EQUITY
Common Stock 39,947 36,971
Additional paid-in capital 1,543,483 91,959
Retained earnings 315 127,355
----------- ---------
TOTAL STOCKHOLDER'S EQUITY 1,583,745 256,285
----------- ---------
TOTAL LIABILITIES AND EQUITY 2,669,351 1,334,855
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Galaxy Enterprises, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statement of Operations
Three Months Ended
March 31,
1999 1998
----------- -----------
<S> <C> <C>
REVENUE
Sales 3,612,125 2,945,322
Cost of sales 1,950,094 1,328,807
----------- -----------
GROSS PROFIT 1,662,031 1,616,515
OPERATING EXPENSES
Selling 1,281,558 1,032,939
General and administrative 481,693 208,113
Depreciation 20,130 11,394
Amortization 14,450 11,864
----------- -----------
TOTAL OPERATING EXPENSES 1,797,831 1,264,310
OPERATING INCOME (135,800) 352,205
OTHER (INCOME) EXPENSES
Interest income (2,229)
Other income (3,172)
Interest expense 3,639 296
Other expense 566
----------- -----------
TOTAL OTHER (INCOME) EXPENSES 1,976 (2,876)
Income before income taxes (137,776) 355,081
Income tax expense (benefit) (52,355) 148,384
Income before cumulative effect of a change
in accounting principal (85,421)
Cumulative effect on prior years of
accounting change (less income taxes of 25,508) 41,619
----------- -----------
NET INCOME (LOSS) (127,040) 206,697
Weighted average shares outstanding:
Basic 5,625,272 5,271,652
Diluted 6,276,382 5,280,452
Net income per share:
Basic (0.023) 0.039
Diluted (0.020) 0.039
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Galaxy Enterprises, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statement of Cash Flows
Three Months Ended
March 31,
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) (127,040) 206,697
Adjustments to reconcile net earnings to net
cash flows from (used by) operating activities:
Depreciation 20,130 11,394
Amortization 14,450 11,864
Changes in operating assets and liabilities:
Increase in accounts receivable (168,781) (5,175)
Increase in inventories (26,000) 0
Increase in prepaid expenses (469,742) 0
(Increase) decrease in credit card reserves (54,958) 13,145
Decrease in deferred charges 67,127
Decrease (increase) in other assets 19,800 (6,999)
Decrease in accounts payable (42,410) (158,034)
Increase in vendor reserves retained 51,562 0
(Decrease) increase in accrued income taxes payable (77,873) 148,384
Increase (decrease) in other current liabilities 30,784 (129,479)
----------- -----------
Net cash flows (used by) operating activities (762,951) 91,797
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment (52,030) (10,432)
----------- -----------
Net cash used by investing activities (52,030) (10,432)
CASH FLOWS FROM FINANCING ACTIVITIES
Cash from notes payable
Repayment of notes (25,000) 0
Common stock issued for cash 1,454,500 0
----------- -----------
Net cash flows from financing activities 1,429,500 0
NET INCREASE (DECREASE) IN CASH 614,519 81,365
CASH AT THE BEGINNING OF THE PERIOD 24,718 113,144
CASH AT THE END OF THE PERIOD 639,237 194,509
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See accompanying notes.
</TABLE>
<PAGE>
GALAXY ENTERPRISES, INC.
NOTES TO UNAUDITED CONSENSED CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation
In the opinion of management, the accompanying unaudited interim consolidated
financial statements reflect all adjustments, consisting of normal recurring
adjustments, necessary to present fairly the financial position, and results of
operations and cash flows of Galaxy Enterprises, Inc. ("the "Company") for the
respective periods presented. The results of operations for an interim period
are not necessarily indicative of the results, which may be expected for any
other interim period, or for the year as a whole.
Certain information and footnote disclosures normally included in financial
statements presented in accordance with generally accepted accounting principles
have been omitted. The accompanying unaudited interim consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes in the Company's Form 10-KSB for the year ending December
31, 1998. All inter-company accounts and transactions have been eliminated in
consolidation.
Credit Card Reserves
Credit card reserves represent amounts of money due the Company from banks and
credit card processing companies who have handled Visa, Master Card, American
Express and Discover Card transactions. The Company recognizes revenue at the
time the customer's credit card is charged by establishing an account
receivable. Later when the cash is received from a credit card processing
company and placed in a Company bank account the receivable is credited.
Vendor Reserves Retained
These reserves represent amounts withheld from sales commissions earned by
contract telemarketing companies. It is anticipated that some customer refunds
will be made and the company retains a small percentage of the commissions
earned to assure recovery of the sales commissions in the event that the
contract telemarketing company is no longer earning commissions. There is a
contractual limit to the amount of reserve the Company is authorized to retain.
Six months after termination of services by the telemarketing company any unused
reserve will be given to the contractor.
Change in Accounting Principle
In July 1998, the AICPA issued Statement of Position 98-5 "Reporting on the
Costs of Start-up Activities". SOP 98-5 requires start-up costs to be expensed
as incurred and requires previously capitalized organization and start-up costs
to be written-off effective for fiscal years beginning after December 15, 1998.
Accordingly, the Company has reported a charge of $41,619 (net of tax benefit of
$25,508) or $.007 per share for write-off of previously capitalized organization
costs.
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the Unaudited Condensed
Consolidated Financial Statements and Notes thereto included elsewhere herein.
Results of Operations
Three Months Ended March 31, 1999 compared to Three Months Ended March 31, 1998
Revenues. The Company's sales for the three-month period ending March 31, 1999
were $3,612,125 as compared to $2,945, 322 for the quarter ending March 31,
1998, an increase of 22.6%. The increase was due to increased attendance at the
Company's Internet training workshops. During the first quarter of 1999 the
Company conducted 38 workshops compared with 25 for the similar period in 1998.
Cost of Services/Products Sold. Cost of sales during 1999 totaled $1,950,094
which is equal to 54.0% of revenues. Cost of sales during 1998 totaled
$1,328,807, which is equal to 45.1% of revenues. This increase in the cost of
sales as a percentage of revenues is primarily due to an increase in the cost of
conducting the Internet training workshops and programming customer storefronts
while the sales price of the products remained unchanged. The Company will
increase sales prices in the second and subsequent quarters to improve margins.
Another factor contributing to the lower gross profit was the increase in
telemarketing sales, which have lower margins. Cost of sales is made up of the
cost of tangible products sold, the cost to conduct Internet training workshops,
the cost to program customer storefront and contract and telemarketing services.
Cost of sales does not include any depreciation.
Selling, General and Administrative Expenses. Selling, General and
Administrative Expenses plus depreciation were equal to $1,783,381 in 1999
compared to $1,252,446 in 1998. These expenses, as a percentage of sales,
increased in 1999 to 49.4% from 42.5% in 1998. The increase in the expenses as a
percentage of sales is attributable to increases in salary expense, royalty
payments, legal expenses, shareholder relations and rent for larger quarters.
The Company anticipates that such expenses, as a percentage of sales, will
improve in the future as increasing revenues will allow for economies of scale.
Depreciation. Depreciation expense in 1999 was $20,130 compared to 11,394 in
1998. This was the result of purchases of computer equipment, software and other
long-term assets during the latter part of 1998 and the first quarter of 1999.
Amortization. During 1999 amortization of Goodwill was $14,450 compared to
$11,864 in 1998. Total Goodwill at the end of the quarter was $780,303 (net of
amortization). The Goodwill arose from the purchase by the Company of Profit
Education System and CO-OP Business Services, Inc. Deferred charges of $67,127
were written off during the quarter due to a change in accounting principle. See
the notes to the financial statements for a further explanation. In the first
quarter of 1998 amortization of Deferred Charges was $5,594.
Income Taxes. Income tax benefit for 1999 was $77,863 compared to an expense of
$148,384 in 1998. Both amounts were calculated at the statutory rates and assume
that the Company will be profitable for the year ending December 31, 1999.
Net Income/Loss. The Company reported Net Loss of $127,040 for the Quarter
ending March 31, 1999, as compared to Net Income of $206,697 for the three-month
period ending March 31, 1998. On a per share basis this amounted to a loss of
$.023 per share in 1999 as compared to a profit of $.039 per share in 1998.
<PAGE>
Capital Resources
New Investments. During the first quarter of 1999, the Company (i) sold a
$500,000 convertible note to the Augustine Fund through Augustine Capital
Management, an institutional investor based in Chicago, Illinois, and (ii) sold
250,000 shares of common stock to Invest Linc Emerging Growth Fund I, L.L.C. and
granted the fund a warrant to purchase up to 250,000 additional shares at an
exercise price of $2,84 per share for a total consideration of $1,000,000.
During January and February 1999, the Augustine Fund converted the note into
169,192 shares of the Company's common stock at a weighted average price of
$2.96 per share. This capital infusion has significantly improved the Company's
liquidity and its ability to meet ongoing working capital needs.
Cash. Cash on hand at March 31, 1999 totaled $639,237 as compared to $24,178 at
December 31, 1998 because of the cash received by the sale of stock described
above. For the same reason, total current assets were 1,602,292 and $268,292,
respectively.
Prepaid Expenses. Prepaid expense at March 31, 1999 were $488,291 compared to
18,549 at the end of last year. The increase is mainly the result of recording
certain marketing costs ($420,790) incurred in the first quarter of 1999 as
prepaid expenses since they apply directly to Internet training workshops to be
held during the second quarter of 1999. Revenues to be derived from these
expenditures will occur in the second or subsequent quarters of 1999. These
marketing costs consist of mailings to and newspaper advertising for potential
customers for our Internet training workshops that target dates in subsequent
quarters; the salaries, travel costs, meeting rooms and supplies used by our
employees to hold "preview sessions" which will secure attendees to workshops in
subsequent quarters; and travel, hotel and other costs which must be prepaid to
support workshops in subsequent quarters.
Credit Card Reserves. Credit card reserves at March 31, 1999 were $184,163
compared to $129,205 at December 31, 1998. Credit card reserves represent
amounts of money due the Company from banks and credit card processing companies
who have handled Visa, Master Card, American Express and Discover Card
transactions for us. The accounting policy used is to recognize revenue at the
time the customer's credit card is charged by establishing an account
receivable. Later when the cash is transferred to one of our bank operating
accounts the receivable is credited. The cash arrives in our bank accounts at
various times depending on the nature of the transaction and can be as early as
48 hours or as late as several weeks.
Vendor Reserves Retained. These reserves represent amounts withheld from sales
commissions earned by contract telemarketing companies. It is anticipated that
some customer refunds will be made and the company retains a small percentage of
the commissions earned to assure recovery of the sales commissions in the event
that the contract telemarketing company is no longer earning commissions. There
is a contractual limit to the amount of reserve the Company is authorized to
retain. Six months after termination of services by the telemarketing company
any unused reserve will be given to the contractor.
Accounts Payable. Accounts payable at March 31, 1999 totaled $788,364 as
compared to $830,774 at the end of 1999. Total current liabilities at March 31,
1998 were $1,023,745 compared to $1,068,270 at December 31, 1998. This
improvement occurred because proceeds from the sale of stock were used to pay
past due accounts payable invoices.
Equipment and Property. Equipment increased during the first quarter of 1999
from $231,641 to $283,671 before depreciation. This was due to the need for
additional computer and other equipment to conduct the Company's business.
Additional capital equipment purchases will be necessary as the Company grows.
The Company also leases equipment. Leasing allows the Company the use of
equipment without the need to disburse the entire purchase price in cash at the
time of acquisition.
<PAGE>
Stockholders' Equity. Total Stockholders' Equity increased to $1,551,063 during
the first quarter of 1999 from $256,285 at December 31, 1998, an increase of
$1,294,778. This resulted from the sale of Company stock as explained in New
Investment above, but partially offset by the net loss for the quarter.
Liquidity
Ratios. At March 31, 1999 the Company's current ratio, current assets compared
to current liabilities, was a 1.6 to 1 compared to a negative 4.0 to 1 as of
December 31, 1998. This improvement was accomplished by the sale of Company
stock.
Financing Arrangements. On July 30, 1998 the Company was able to arrange a bank
line of credit for $100,000 with Far West Bank of Provo, Utah. This line is
intended to assist the Company through the seasonal slow periods it experiences.
From July 15 through Labor Day and again from Thanksgiving Day until January 15
of the following year the business is slower than at other times. It is the
result of fewer attendees at the Company's Internet training seminars during
these traditional vacation and holiday periods.
Cash flow. Current cash flow from operations plus cash from the sale of Company
stock will allow the Company to meet its current obligations. During the first
quarter of 1999 the Company sold 250,000 shares of common stock and a
convertible note resulting in net proceeds to the company of $1,450,000. These
cash inflows enabled the Company to begin implementing its strategic plan for
future growth, but they will not be sufficient to fund the entire business plan.
Therefore, it will be necessary to obtain additional equity funding and
long-term loans from banks or other financial institutions to meet its long-term
goals. The Company anticipates that it will sell additional stock through either
private or registered public offerings during 1999, and will continue its
efforts to improve its financial condition so as to qualify for long term loans
from commercial banking institutions.
Business Development
On February 25, 1999 the Company signed a letter of intent to acquire Impact
Media, L.L.C. ("Impact"). Impact is a product development company and produces
products that can be sold to GMI customers and others. The Company estimates
that one-half of these additional sales will occur via telemarketing. With the
acquisition of Impact, the Company believes it will be able to significantly
increase sales.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Changes in Securities and Use of Proceeds
(c) During January 1999, the Company sold to an accredited
institutional investor a $500,000 convertible note. During January and February
1999 the purchaser converted the note into 169,192 common shares of the Company
at a weighted average price of $2.96per share. The Company relied upon SEC Rule
504 and Section 4(2) of the Securities Act of 1933, in the sale of the note and
shares.
During February and March 1999, the Company sold 250,000 common
shares and issued a two-year, 250,000 share warrant to an accredited
institutional investor for $1,000,000. The Company relied upon Section 4(2) of
the Securities Act of 1933, as amended.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(b) Reports on Form 8-K
A Report on Form 8-K dated February 23, 1999, was filed by the
Registrant during the three months ended March 31, 1999. The 8-K
reported at Item 5 the private sale of common stock. See Item 1 above
and also Part I Item 2.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: October 18, 1999 GALAXY ENTERPRISES, INC.
/s/
--------------------------------------------
Frank C. Heyman
Chief Financial Officer
(As a duly authorized officer of the Company
and as principal financial officer of the
Company)
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001063450
<NAME> GALAXY ENTERPRISES, INC.
<MULTIPLIER> 1
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1.00
<CASH> 639,237
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<RECEIVABLES> 250,401
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<COMMON> 39,947
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</TABLE>
