UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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 Sept. 30, 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
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.)
754 Technology Avenue, Orem, Utah 84097
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(Address of principal executive offices) (Zip Code)
(801) 227-0004
--------------------------
(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 outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. As of November 15, 1999
-------------------
Classes of Common Stock Number of shares outstanding
- ----------------------------- ----------------------------
Common Stock, $.007 par value 5,706,444
Transitional Small Business Disclosures Forms
(Check one):
Yes [ ] No [ X ]
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Galaxy Enterprises, Inc.
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INDEX TO FORM 10-QSB
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited) Page
Condensed Consolidated Balance Sheets --
September 30, 1999 and December 31, 1998 ............................3
Condensed Consolidated Statements of Operations --
Nine months ended September 30, 1999 and 1998 and
Three Months ended September 30, 1999 and 1998 ......................4
Condensed Consolidated Statements of Cash Flows --
Nine months ended September 30, 1999 and 1998 .......................5
Notes to Condensed Consolidated Financial Statements ................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations .......................7
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ....................................13
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<TABLE>
<CAPTION>
Galaxy Enterprises, Inc. and Subsidiary
Unaudited Condensed Consolidated Balance Sheet as of:
Unaudited Audited
Sept 30, 1999 Dec 31, 1998
---------------- ----------------
Assets
<S> <C> <C>
Current Assets:
Cash 114,919 24,718
Accounts Receivable 864,739 81,620
Inventory 38,132
Prepaid Expenses 889,603 18,549
Deferred Income Taxes 14,200 14,200
Credit Card Reserves 656,924 129,205
---------------- ----------------
Total Current Assets 2,578,517 268,292
Fixed Assets:
Computer & Office Equipment 256,091 190,508
Computer Software 64,744 32,189
Furniture & Fixtures 10,885 6,104
Other 40,215 2,840
Less: Accumulated Depreciation (130,527) (59,773)
---------------- ----------------
Net Book Value 241,408 171,868
Goodwill 875,066 794,753
Organizational, Start-up, Offering Costs 67,127
Deferred Income Taxes 317,546
Other Assets 40,404 32,815
---------------- ----------------
Total Assets 4,052,941 1,334,855
================ ================
Liabilities & Equity
Current Liabilities:
Notes Payable - Short Term 207,172 115,000
Accounts Payable 1,101,066 830,774
Accrued Expenses 356,658 108,536
Deferred Revenue 996,503
Income Taxes Currently Payable 7,900
Unearned Income 6,060
---------------- ----------------
Total Current Liabilities 2,661,399 1,068,270
Long Term Debt:
Deferred Income Taxes 10,300 10,300
Vendor Reserves Retained 151,129
Shareholder Equity:
Common Stock 39,985 36,971
Additional Paid-in Capital 1,547,795 91,959
Retained Earnings (357,667) 127,355
---------------- ----------------
Total Shareholder Equity 1,230,113 256,285
Total Liabilities & Shareholders Equity 4,052,941 1,334,855
================ ================
</TABLE>
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<TABLE>
<CAPTION>
Galaxy Enterprises, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statement of Operations
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
Sept. 30, 1999 Sept. 30, 1998 Sept. 30, 1999 Sept. 30, 1998
---------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C>
REVENUE
Sales 6,257,927 2,346,950 14,425,215 8,514,968
Cost of sales 3,485,778 1,048,745 8,129,748 3,782,500
---------------- ----------------- ---------------- ----------------
GROSS PROFIT 2,772,149 1,298,205 6,295,467 4,732,468
OPERATING EXPENSES
Selling 2,139,661 1,315,198 5,148,682 3,557,049
General and administrative 634,770 360,169 1,735,806 869,313
Depreciation 27,579 11,881 70,754 36,875
Amortization 16,276 11,864 45,376 35,591
---------------- ----------------- ---------------- ----------------
TOTAL OPERATING EXPENSES 2,818,286 1,699,112 7,000,618 4,498,828
OPERATING INCOME (46,137) (400,907) (705,151) 233,640
OTHER (INCOME) EXPENSES
Interest income (606) (6,783)
Other income
Interest expense 1,708 223 6,275 1,003
Other expense 3,301 5,247 10,542 15,733
---------------- ----------------- ---------------- ----------------
TOTAL OTHER (INCOME) EXPENSES 4,403 5,470 10,034 16,736
Income before income taxes (50,540) (406,377) (715,185) 216,904
Income tax expense (benefit) 2,852 (158,457) (275,145) 82,972
---------------- ----------------- ---------------- ----------------
Income before cumulative effect of
a change in accounting principal (53,392) (247,920) (440,040) 133,932
Cumulative effect on prior years of
accounting change
(less income taxes of $25,432) 44,982
NET INCOME (LOSS) (53,392) (247,920) (485,022) 133,932
================ ================= ================ ================
Weighted average shares outstanding:
Basic 5,706,444 5,271,652 5,706,444 5,271,652
Diluted 6,262,059 5,271,652 6,262,059 5,271,652
Net income per share:
Basic (0.009) (0.047) (0.085) 0.025
Diluted (0.047) 0.025
</TABLE>
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<TABLE>
<CAPTION>
Galaxy Enterprises, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statement of Cash Flows
For the nine months ending September 30, 1999 and 1998
1999 1998
---------------------- ----------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) (485,022) 133,932
Adjustments to reconcile net earnings to net
cash flows from (used by) operating activities:
Depreciation 70,754 51,026
Amortization 45,376 35,591
Effect of accounting change 67,127
Changes in operating assets and liabilities:
Increase in accounts receivable (783,119) (181,398)
Increase in inventories (38,132)
Increase in prepaid expenses (871,054) (22,500)
(Increase) decrease in credit card reserves (527,719) (18,488)
Increase in deferred income taxes (317,546)
Decrease (increase) in other assets (7,589) (30,469)
Increase in goodwill (125,689) 16,781
(Decrease) increase in accounts payable 270,292 (35,784)
Increase (decrease) in accrued expenses 248,122 (200,075)
Increase in deferred revenue 996,503
Increase in vendor reserves retained 151,129 14,920
(Decrease) increase in accrued income taxes payable (7,900) 82,235
Increase (decrease) in other current liabilities (6,060) (6,872)
---------------------- ----------------------
Net cash flows (used by) operating activities (1,320,527) (161,101)
---------------------- ----------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment (140,294) (80,920)
---------------------- ----------------------
Net cash used by investing activities (140,294) (80,920)
---------------------- ----------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash from notes payable 92,172 100,000
Repayment of notes
Common stock issued for cash 1,458,850
---------------------- ----------------------
Net cash flows from financing activities 1,551,022 100,000
---------------------- ----------------------
NET INCREASE (DECREASE) IN CASH 90,201 (142,021)
CASH AT THE BEGINNING OF THE PERIOD 24,718 113,144
---------------------- ----------------------
CASH AT THE END OF THE PERIOD 114,919 (28,877)
====================== ======================
</TABLE>
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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.
Deferred Revenue
Deferred revenues represent advance payments made by some customers to the
Company at the time an order is placed. The prepayment is between 33% and 67% of
the total purchase price. The customer is invoiced for the difference when title
to the products transfers to the customer. At that point the deferred revenue is
recognized.
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 $44,982 (net of tax benefit of
$25,432) or $.007 per share for write-off of previously capitalized organization
costs.
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
Nine Months Ended September 30, 1999 and the third calendar quarter of 1999
compared to Nine Months Ended September 30, 1998 and the third calendar quarter
of 1998
Revenues. The Company's sales for the nine-month period ending September 30,
1999 were $14,425,215 as compared to $8,514,968 for the similar period ending
September 30, 1998, an increase of 69%. Sales for the third quarter of 1999 were
$6,257,927 compared to 2,346,950 in 1998 an increase of 167%. The increase in
both periods was partially do to increased attendance at the Company's Internet
training workshops. During the first nine months of 1999 the Company conducted
121 workshops compared with 84 for the similar period in 1998. Furthermore,
during the nine months of 1999 the company's telemarketing revenue was
$6,478,735 compared to $3,116,976 in 1998, an increase of 108%. In addition the
Company's Impact Media division contributed $1,322,168 in sales. Impact Media
was purchased on May 31, 1999 so there were no corresponding sales in 1998.
Cost of Services/Products Sold. Cost of sales during the first nine months of
1999 totaled $8,129,748, which is equal to 56% of revenues. Cost of sales during
the first nine months of 1998 totaled $3,782,500, which is equal to 44% 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. Another factor contributing to
the lower gross profit was the increase in telemarketing sales, which have lower
margins. The Company is making efforts to bring more of these telemarketing
sales in-house, as opposed to contracting the sales with outside companies,
which will help increase these margins. During the third quarter of 1999 Cost of
sales were equal to 56% of revenues compared to 45% for the same quarter in
1998. 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 storefronts
and contract telemarketing services. Cost of sales does not include
depreciation.
Selling, General and Administrative Expenses. Selling, General and
Administrative Expenses in the first nine months of 1999 were $6,884,488 in 1999
compared to $4,426,362 in 1998. These expenses, as a percentage of sales,
decreased in 1999 to 48% from 52% in 1998. The decrease in the expenses as a
percentage of sales is attributable to the Company's cost control measures
undertaken even as it expanded its telemarketing channel, increased customer
service and programming staff, obtained larger facilities to accommodate growth
and experienced increased legal fees. The Company anticipates that such
expenses, as a percentage of sales, will continue to improve in the future, as
increasing revenues will allow for economies of scale.
Depreciation. Depreciation expense in the first nine months of 1999 was $70,754
compared to $36,875 in 1998. This was the result of purchases of computer
equipment, software and other long-term assets.
Amortization. During 1999 amortization of Goodwill and Deferred Charges was
$115,790 compared to $35,591 in 1998. 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 $70,414 during this period for previously capitalized
organization costs. The balance of the amortization, $45,376 results from the
amortization of Goodwill. Total Goodwill at the end of the nine-month period was
$875,066. The Goodwill arose from the purchase by the Company of the assets and
business interests of Profit Education Systems, Inc., CO-OP Business Services,
Inc. and Impact Media, LLC.
Income Taxes. The income tax benefit for 1999 was $275,145 compared to an
expense of $82,972 in 1998. Both amounts were calculated at statutory rates.
Management believes that the Company will be profitable during the next twelve
months and thus be able to use the net operating loss carry forward during that
period of time.
Net Income/Loss. The Company reported a Net Loss of $485,022 for the nine months
ending September 30, 1999, as compared to Net Income of $133,932 for the similar
period in 1998. On a per share basis this amounted to a loss of $.085 per share
in 1999 as compared to a profit of $.025 per share in 1998. During the third
quarter of 1999 the loss was $53,392 compared to a loss of $247,920 in the
comparable period of 1998.
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 September 30, 1999 totaled $114,919 as compared to $24,178
at December 31, 1998. Total current assets were 2,578,517 and $268,292,
respectively.
Accounts Receivable. Accounts Receivable were $864,739 at September 30, 1999
compared to $81,620 in 1998. This increase is the result of the Company offering
to finance customer purchases with monthly payments at its Internet training
workshops and the Impact Media division selling to customers in the normal
course of business on open account. The workshop receivable is carried at 60% of
the principal balance owed, the remainder being reserved for non-payment, while
the Impact Media is carried at full value due to the credit worthiness of its
customers. The net workshop receivable is $508,377 and Impact Media's is
$160,290.
Prepaid Expenses. Prepaid expense at September 30, 1999 were $889,603 compared
to 18,549 at the end of last year. The increase is mainly the result of payments
made, prior to delivery, to vendors of the Impact Media division for
manufacturing custom cut compact discs. This amounted to $558,780. Impact
Media's customers also make advance payments to the Company. Also Galaxy Mall
recorded certain marketing costs ($310,700) incurred in the third quarter of
1999 as prepaid expenses since they apply directly to Internet training
workshops to be held during the fourth and subsequent quarters of 1999 and 2000.
Revenues to be derived from these expenditures will occur in the fourth or
subsequent quarters of 1999 and 2000. 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 September 30, 1999 were $656,924
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. One bank has required the company to leave
on deposit with them 5% of the credit card proceeds until the amount reaches 50%
of one month's transactions. This reserve earns interest at the bank's
certificate of deposit rate and will be returned to the company at a future
date. The balance in this account at September 30, 1999 was $138,999.
Accounts Payable. Accounts payable at September 30, 1999 totaled $1,101,066 as
compared to $830,774 at the end of 1998.
Deferred Revenue. Deferred Revenue at September 30, 1999 was $996,503 as
compared to zero at the end of last year. These are advance payments made by
some customers to the Company at the time an order is placed. The prepayment is
between 33% and 67% of the total purchase price. The customer is invoiced for
the difference when title to the products transfers to the customer. At that
point the deferred revenue is recognized.
Vendor Reserves Retained. These reserves, $151,129 at September 30, 1999,
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.
Equipment and Property. Equipment increased during the first nine months of 1999
from $231,641 to $371,935 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.
Stockholders' Equity. Total Stockholders' Equity increased to $1,230,113 during
the first nine months of 1999 from $256,285 at December 31, 1998. This resulted
from the sale of Company stock as explained in New Investment above, but
partially offset by the net loss for the period.
Liquidity
Ratios. At September 30, 1999 the Company's current ratio, current assets
compared to current liabilities, was a .97 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. The Company was able to arrange a bank line of credit
for $200,000 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. Sale of Company stock has allowed 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 June 25, 1999, IMI, Inc., a wholly-owned subsidiary of the Company
acquired substantially all of the assets of Impact Media, L.L.C., a Utah limited
liability company ("Impact Media") engaged in the design, manufacture and
marketing of multimedia brochure kits, shaped compact discs and similar products
and services intended to facilitate conducting business over the Internet. The
assets acquired include, among other things, equipment, inventory and finished
goods, intellectual property, computer programs and cash and accounts
receivable, the primary use of which relates to the design, manufacture and
marketing of Impact Media's products and services. It is the present intent of
the Company to continue to devote the assets to such purposes. The transaction
is more fully described in a Form 8-K filing dated July 9, 1999.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
Exhibit No. Exhibit
----------- -------------------------------------------
27.1 Financial Data Schedule
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: September 15, 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1.000
<CASH> 114,919
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