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 June 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.)
890 N. Industrial Park Road, Orem, Utah 84057
---------------------------------------------
(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 August 13, 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 --
June 30, 1999 and March 31, 1999 .....................................1
Condensed Consolidated Statements of Operations --
Three months ended June 30, 1999 and 1998 ............................2
Condensed Consolidated Statements of Cash Flows --
Three months ended June 30, 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 ........................4
PART II - OTHER INFORMATION
Item 4. Submission of Matters for a Vote of Security Holders .................8
Item 6. Exhibits and Reports on Form 8-K .....................................8
<PAGE>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
Galaxy Enterprises, Inc. and Subsidiaries
Unaudited Condensed Consolidated Balance Sheet as of:
Unaudited Audited
Jun 30, 1999 Dec 31, 1998
----------------- -----------------
Assets
<S> <C> <C>
Current Assets:
Cash 337,226 24,718
Accounts Receivable 297,039 81,620
Inventory 44,133
Prepaid Expenses 208,630 18,549
Deferred Income Taxes 14,200 14,200
Credit Card Reserves 185,347 129,205
----------------- -----------------
Total Current Assets 1,086,575 268,292
Fixed Assets:
Computer & Office Equipment 236,401 190,508
Computer Software 57,076 32,189
Furniture & Fixtures 8,832 6,104
Other 30,354 2,840
Less: Accumulated Depreciation (102,949) (59,773)
----------------- -----------------
Net Book Value 229,714 171,868
Goodwill 879,205 794,753
Organizational, Start-up, Offering Costs 67,127
Deferred Income Taxes 296,045
Other Assets 29,582 32,815
----------------- -----------------
Total Assets 2,521,121 1,334,855
================= =================
Liabilities & Equity
Current Liabilities:
Notes Payable - Short Term 37,443 115,000
Accounts Payable 836,234 830,774
Accrued Expenses 264,528 108,536
Income Taxes Currently Payable 7,900
Unearned Income 6,060
----------------- -----------------
Total Current Liabilities 1,138,205 1,068,270
Long Term Debt:
Deferred Income Taxes 10,300 10,300
Vendor Reserves Retained 89,860
Shareholder Equity:
Common Stock 39,978 36,971
Additional Paid-in Capital 1,547,052 91,959
Retained Earnings (304,274) 127,355
----------------- -----------------
Total Shareholder Equity 1,282,756 256,285
Total Liabilities & Shareholders Equity 2,521,121 1,334,855
================= =================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Galaxy Enterprises, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statement of Operations
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
---------------- ----------------- ----------------- -------------------
<S> <C> <C> <C> <C>
REVENUES
Sales 4,555,163 3,222,696 8,167,288 6,168,018
Cost of sales 2,685,833 1,398,781 4,643,970 2,733,755
---------------- ----------------- ----------------- -------------------
GROSS PROFIT 1,869,330 1,823,915 3,523,318 3,434,263
OPERATING EXPENSES
Selling 1,727,463 1,208,912 3,009,021 2,241,851
General and administrative 632,980 307,940 1,101,036 509,144
Depreciation 17,451 12,858 43,175 24,994
Amortization 14,650 11,863 29,100 23,727
---------------- ----------------- ----------------- -------------------
TOTAL OPERATING EXPENSES 2,392,544 1,541,573 4,182,332 2,799,716
OPERATING INCOME (523,214) 282,342 (659,014) 634,547
OTHER (INCOME) EXPENSES
Interest income (3,948) (6,177)
Other income
Interest expense 928 484 4,567 780
Other expense 1,072 13,658 7,241 10,486
---------------- ----------------- ----------------- -------------------
TOTAL OTHER (INCOME) EXPENSES (1,948) 14,142 5,631 11,266
---------------- ----------------- ----------------- -------------------
Income before income taxes (521,266) 268,200 (664,645) 623,281
Income tax expense (benefit) (232,805) 93,045 (277,997) 241,429
---------------- -----------------
Income before cumulative effect of a
change in accounting principle (288,461) (386,648)
Cumulative effect on prior years of
accounting change (less income taxes of
$25,432) 44,982 44,982
NET INCOME (LOSS) (333,443) 175,155 (431,630) 381,852
================ ================= ================= ===================
Weighted average shares outstanding:
Basic 5,705,444 5,271,652 5,705,444 5,271,652
Diluted 5,714,644 5,280,452 5,714,644 5,280,452
Net income per share:
Basic (0.058) 0.033 (0.076) 0.072
Diluted (0.058) 0.033 (0.076) 0.072
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Galaxy Enterprises, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statement of Cash Flows
For the six months ending June 30, 1999 and 1998
1999 1998
------------------------ ------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) (431,630) 381,852
Adjustments to reconcile net earnings to net
cash flows from (used by) operating activities:
Depreciation 43,175 27,152
Amortization 29,100 34,914
Effect of accounting change 67,127
Changes in operating assets and liabilities:
Increase in accounts receivable (215,419) (346,362)
Increase in inventories (44,133)
Increase in prepaid expenses (190,081) (5,859)
(Increase) decrease in credit card reserves (56,142) 39,808
Increase in deferred income taxes (296,045)
Decrease (increase) in other assets 3,233 3,001
Increase in goodwill (113,352)
(Decrease) increase in accounts payable 5,460 (129,450)
Increase (decrease) in accrued expenses 155,992 (198,493)
Increase in vendor reserves retained 89,860
(Decrease) increase in accrued income taxes payable (7,900) 241,166
Increase (decrease) in other current liabilities (6,258) (7,342)
------------------------ ------------------------
Net cash flows (used by) operating activities (967,013) 40,387
------------------------ ------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment (101,022) (37,425)
------------------------ ------------------------
Net cash used by investing activities (101,022) (37,425)
------------------------ ------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash from notes payable
Repayment of notes (77,557)
Common stock issued for cash 1,458,100
------------------------ ------------------------
Net cash flows from financing activities 1,380,543 0
------------------------ ------------------------
NET INCREASE (DECREASE) IN CASH 312,508 2,962
CASH AT THE BEGINNING OF THE PERIOD 24,718 113,144
======================== ========================
CASH AT THE END OF THE PERIOD 337,226 116,106
======================== ========================
</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.
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 $41,495 (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
Six Months Ended June 30, 1999 and the second calendar quarter of 1999 compared
to Six Months Ended June 30, 1998 and the second calendar quarter of 1998
Revenues. The Company's sales for the six-month period ending June 30, 1999 were
$8,167,288 as compared to $6,168,018 for the similar period ending June 31,
1998, an increase of 32.4%. Sales for the second quarter of 1999 were $4,555,163
compared to 3,222,696 in 1998 an increase of 41.1%. The increase in both periods
was do to increased attendance at the Company's Internet training workshops.
During the first six months of 1999 the Company conducted 76 workshops compared
with 55 for the similar period in 1998. Furthermore, during the six months of
1999 the company's telemarketing revenue was $3,761,541 compared to $2,397,462
in 1998, an increase of 56.8%.
Cost of Services/Products Sold. Cost of sales during the first six months of
1999 totaled $4,643.970, which is equal to 56.9.8% of revenues. Cost of sales
during the first six months of 1998 totaled $2,733,755, which is equal to 44.3%
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 second quarter of 1999 Cost
of sales were equal to 59.0% of revenues compared to 43.4% 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
storefront and contract telemarketing services. Cost of sales does not include
depreciation.
Selling, General and Administrative Expenses. Selling, General and
Administrative Expenses in the first six months of 1999 were $4,110,057 in 1999
compared to $2,360,443 in 1998. These expenses, as a percentage of sales,
increased in 1999 to 50.9% from 45.0% in 1998. The increase in the expenses as a
percentage of sales is attributable to the Company's development of its
telemarketing channel, increased customer service and programming staff, larger
facilities to accommodate growth and increased legal fees. 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 the first six months of 1999 was $43,175
compared to $24,994 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 half of 1999.
Amortization. During 1999 amortization of Goodwill and Deferred Charges was
$96,027 compared to $23,727 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 $66,927 during this period for previously capitalized organization
costs. The balance of the amortization, $29,100 results from the amortization of
Goodwill. Total Goodwill at the end of the six-month period was $879,205. 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. Income tax benefit for 1999 was $233,015 compared to an expense of
$241,429 in 1998. Both amounts were calculated at the statutory rates and assume
that the Company will be profitable during the next twelve months.
Net Income/Loss. The Company reported a Net Loss of $431,360 for the six months
June 30, 1999, as compared to Net Income of $381,852 for the similar period in
1998. On a per share basis this amounted to a loss of $.076 per share in 1999 as
compared to a profit of $.072 per share in 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 June 30, 1999 totaled $337,226 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 1,086,575 and $268,292,
respectively.
Prepaid Expenses. Prepaid expense at June 30, 1999 were $208,630 compared to
18,549 at the end of last year. The increase is mainly the result of recording
certain marketing costs ($141,130) incurred in the second quarter of 1999 as
prepaid expenses since they apply directly to Internet training workshops to be
held during the third quarter of 1999. Revenues to be derived from these
expenditures will occur in the third 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 June 30, 1999 were $185,347
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.
Accounts Payable. Accounts payable at June 30, 1999 totaled $836,234 as compared
to $830,774 at the end of 1998. Total current liabilities at June 30, 1998 were
$842,160 compared to $1,068,270 at December 31, 1998.
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.
Equipment and Property. Equipment increased during the first six months of 1999
from $231,641 to $332,633 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 $1,282,756 during
the first six 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 June 30, 1999 the Company's current ratio, current assets compared to
current liabilities, was a .96 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. 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 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Shareholders held on May
27, 1999, the stockholders re-elected the following persons to a
one-year term to the Board of Directors:
NOMINEES FOR WITHHOLD
-------- --- --------
John J. Poelman 2,901,071 4,015
Brandon Lewis 2,901,071 4,015
Frank C. Heyman 2,901,071 4,015
Darral G. Clarks 2,901,071 4,015
B. Ray Anderson 2,901,071 4,015
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 is attached.
(b) Reports on Form 8-K
A Report on Form 8-K dated July 9, 1999, was filed by the
Registrant during the three months ended June 30, 1999. The 8-K
reported that 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. See Item 2 of Part I above.
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: August 16, 1999 GALAXY ENTERPRISES, INC.
/S/
______________________________________
Frank C. Heyman
Chief Financial Officer
(As a duly authorized officer of the
Company and asprincipal financial
officer of the Company)
<TABLE> <S> <C>
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<CIK> 0001063450
<NAME> Galaxy Enterprises, Inc.
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<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1.000
<CASH> 337,226
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