U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark one)
[X] Annual report under section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended December 31, 1998.
[ ] Transition report under section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from ____________ to
_____________.
Commission file number
GALAXY ENTERPRISES, INC.
(Name of small business issuer in its charter)
Nevada 88-0315212
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
890 North Industrial Park Drive
Orem, Utah 84057
(Address of principal executive office) (Zip Code)
(Issuer's telephone number) (801) 227-0004
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, Par Value $.007 None
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
Yes X No , and (2) has been subject to such filing requirements for the past 90
days. Yes No __X_
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulations S-B 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-KSB
or any amendment to this Form 10-KSB.
State the registrant's net revenue for its most recent fiscal year: $11,448,392.
The aggregate market value of voting stock held by non-affiliates of the
registrant computed by reference to the price at which the stock was sold, or
the average bid and asked prices of such stock, as of March 24, 1999, was
$13,540,180.
As of March 24, 1999, 5,700,841 shares of registrant's Common Stock, par value
$.007 per share were outstanding.
Documents incorporated by reference: Proxy Statement for June 1999 Annual
Shareholders Meeting (Part III of this Report).
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GALAXY ENTERPRISES, INC.
March 31, 1999
Form 10-KSB
PART 1.
ITEM 1. Description Of Business
(A) Business Development
(1) Form and year of organization.
Galaxy Enterprises, Inc. (the "Company" or "Galaxy") was organized as a
corporation under the laws of the State of Nevada on March 3, 1994. The Company
was originally formed under the name Cipher Voice, Inc., and was incorporated
for the purpose of developing, producing and marketing equipment related to
computer hardware security, known as a digital voice encryption-decryption
electronic device. The Company was unsuccessful in developing the technology and
subsequently ceased operations. On December 4, 1996, the Company acquired all of
the issued and outstanding common stock of Galaxy Mall, Inc., a Wyoming
corporation ("GMI"), in exchange for 3,600,000 shares of the Company's common
stock. On December 16, 1996, the Company changed its name from Cipher Voice,
Inc. to Galaxy Enterprises, Inc. As a result of this stock acquisition, GMI
became a wholly owned subsidiary of the Company. Most of the Company's current
products and services are offered through GMI.
(2) Bankruptcy, receivership or similar proceedings.
The Company has neither filed nor been the subject of a bankruptcy, receivership
or similar proceeding.
(3) Material reclassifications, mergers, consolidations, or purchase or
sale of a significant amount of assets not in the ordinary course of
business.
Effective October 1, 1997 the Company, through its wholly-owned subsidiary GMI,
acquired Profit Education Systems, ("PES"), a Wyoming corporation organized
April 26, 1993. The Company previously had used the services of PES as a
marketer of the Company's services and as a provider and conductor of the
Company's Internet education seminars. As part of the PES acquisition, the
Company acquired PES's marketing strategies and products, employees and assets.
Also effective October 1, 1997 the Company, again through GMI, acquired CO-OP
Business Services, Inc., ("CO-OP"), a Utah corporation organized August 31,
1989. CO-OP previously had provided GMI with customer support, electronic
storefront programming, and merchant and client interface programs for GMI's
storefronts on the Galaxy Mall. As part of the transaction, the Company agreed
to assume approximately $85,000 of CO-OP payables and liabilities, and assumed
future payment of certain existing equipment and other leases. CO-OP agreed to
transfer to GMI its assets including computers, office equipment and inventory.
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(B) Business of Issuer
(1) Principal Products and Services
The Company, through its subsidiary GMI, engages in the business of selling to
its customers electronic home pages, or "storefronts," on its Galaxy Mall, an
Internet shopping mall, and hosts those storefront sites on its Internet server.
The Company's business is to allow its customers (i) to acquire a presence on
the Internet and (ii) to advertise and sell their products or services on the
Internet. Storefronts designed by or for the customers are programmed by the
Company for display on the mall. The Galaxy Mall is located at
http://www.galaxymall.com.
The Company contracts with consultants and independent contractors, or creates
and produces in-house, various products which it markets. Such products include
the following:
Commercial Web Sites/Web Hosting: The Company programs commercial web sites with
the most current and up-to-date types of Internet programming, such as HTML,
JavaScript, and Perl. Each site programmed for its customer/merchants has
available on-line ordering capabilities. All orders processed on-line are
supported by encrypted security, which provides merchants and their customers
confidence in the safety of ordering products and services on-line. Galaxy
either hosts the sites on its own infrastructure (servers), or provides virtual
hosting, which give the customer/merchant's site the appearance of having its
own web pages hosted by such customer/merchant.
Auto-responders: Galaxy sets up e-mail addresses for its merchants that send
back to the individual requesting information an instant reply, then forwards
the original message to the owner of the auto-responder. Similar to
fax-on-demand, auto-responders are a powerful marketing tool for merchants
offering products or services. A merchant can write advertising copy for its
product and when someone inquires to the merchant's e-mail address, the ad copy
immediately is sent to the potential customer.
Tracking Software: The Company provides software for a merchant's web site which
tracks the volume of traffic to that web site. It also provides the merchant
with information concerning the derivation of its potential customer and such
person's referring universal resource locator. This enables the merchant to
track its marketing efforts to determine if its potential customer found the
merchant through the merchant's Internet advertisements or its listings in
search directories.
Internet Classified Advertisements: Galaxy sells 200 world classified ads on its
classified ad network. Each classified ad runs on the network for 90 days. This
network is comprised of thousands of listings.
Merchant Accounts: Galaxy sells merchant accounts combined with software which
allows the customer to have real time on-line processing for credit cards and
checks.
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Banner Course/Banner License: The Banner Course consists of over 200 pages and
10 audio cassettes of instruction. Banners are the equivalent of billboards.
They are graphical images placed throughout the Internet advertising specific
web pages. Internet users simply click on the image and they are taken
immediately to the site the image is advertising. The purpose of this course is
to help merchants better understand how banner advertising works on the
Internet. It helps them benefit their own Internet business by learning how to
properly use banner advertising to promote their Internet site. The banner
license, which is sold in conjunction with the course, allows the customer to
put banners on multiple sites within the Galaxy Mall, as well as benefit from
ongoing discounts for future impression and banner purchases.
Banner/Impressions: Galaxy designs and program banners for its customers. These
banners are then advertised on Galaxy's network of over 20,000 Internet sites.
The number of banner impressions is determined by the number of times the banner
advertisement is uploaded, or displayed, on one of Galaxy's Internet sites.
Galaxy's customer purchases a number of impressions based upon its specific
marketing and advertising needs.
Executive Mentor Program: Galaxy's mentoring program is a one-year program in
which a select number of Galaxy's customers become involved. This program
provides a personal coach to the customer who works with the customer one-on-one
to help the customer build its business on the Internet.
(2) Distribution Methods
Most of the Company's products are Internet related and, consequently,
do not utilize traditional distribution channels. The Company's principal
products involve delivering to its customers access to the Internet or the
capacity to conduct business via the Internet. The Company attracts its
customers through Internet marketing workshops. Such workshops are presented
several times a week during most weeks of the year. The Company rents hotel
conference rooms in various cities throughout the United States in which it
hosts its preview sessions and Internet training workshops. The Company uses an
information seminar representing a 90-minute preview of the Galaxy Mall and the
Internet. Preview attendees are then invited to attend a one day workshop at
which the Company provides an intensive training course on Internet and e-mail
use, news groups, auto-responders, classified ads, and search engines used to
market their products and services on the Galaxy Mall. Interested attendees are
then offered the opportunity to acquire a "storefront" presence on the Galaxy
Mall to market their products and services. As a customer of the Company, the
customer acquires a website hosted by Galaxy Mall created and maintained by the
Company for which it charges the customer a fee.
The Company advertises its preview sessions and workshops in direct mail
solicitations targeted to potential customers meeting certain demographic
criteria established by the Company. The direct mail pieces are mailed to
persons and small businesses located in cities scheduled to be visited by the
Company's workshop personnel. Mailing lists approximating the demographics
established by the Company are obtained from list brokers. Announcements of
upcoming preview sessions and workshops also appear in newspaper advertisements
in scheduled cities.
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The Company also uses a telemarketing company to advertise and/or
market Company products and services, including advertising preview sessions and
workshops at selected locations.
(3) Status of Publicly Announced New Products
On May 27, 1998 Galaxy announced the introduction of a new product known as
BannerSource. BannerSource is a means by which merchants with storefronts on the
Internet can increase traffic to their sites by using banner advertising on the
World Wide Web. The Galaxy BannerSource network currently markets in excess of
one million banner impressions daily to businesses doing commerce on the
Internet. (www.bannersource.com).
On December 1, 1998 Galaxy announced the completion of successful testing of a
new search engine developed by the Company called MatchSite. This search engine
allows Internet users to browse the Web and find sites of interest. When a Web
user types in a search request, MatchSite sends the query to several different
resources, including the leading, major search engines. The responses are then
returned to the user organized into a uniform format, and ranked by relevance.
(www.matchsite.com).
(4) Competitive Business Conditions
The Internet has developed at a very rapid pace and it is impossible to
determine what, if any, changes could or will occur that would change current
competitive business conditions. The Company anticipates that new entrants will
try to develop competing Internet malls or new forums for conducting e-commerce
that could be deemed competitors. The Company, however, believes that it
presently has a competitive advantage due to its marketing strategies for its
Galaxy Mall and other products. In 1995, certain of the Company's principals,
who at that time were working with PES, were instrumental in creating an
Internet marketing workshop industry. The Company obtained this Internet
marketing workshop expertise when it acquired PES. To the knowledge of Galaxy
there were no other businesses engaged in the Internet marketing workshop
industry at that time. Due to its experience with such marketing workshops, the
Company believes it enjoys a strong competitive position in this industry.
Galaxy has used its position as a leader in the Internet marketing workshop
industry to establish its Galaxy Mall as one of the largest malls on the
Internet. According to the December, 1998 edition of Internet World, Galaxy is
considered "one of the large general malls."
Galaxy is aware of several companies previously active in the Internet marketing
workshop industry that no longer are connected with the industry. Galaxy is
aware of only three companies currently in the industry with which it competes,
and to the knowledge of Galaxy, only one of these competitors has been engaged
in the industry as long as has Galaxy.
Anticipated and expected technology advances associated with the Internet
itself, increasing use of the Internet, and new software products, are welcome
advancements expected to attract more interest in the Internet and broaden its
potential as a viable marketplace and industry. Galaxy anticipates it can
compete successfully, building on its three-year head start in its segments of
the industry by relying on its infrastructure, existing marketing strategies and
techniques, systems and procedures, by adding additional products and services
in the future, and by periodic revision of such methods of doing business as
deemed necessary.
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(5) Sources and Availability of Raw Material
Galaxy does not rely on any raw materials for its business operations.
(6) Dependence on Major Customers
Registrant does not rely nor is it dependent on one or a few major customers.
(7) Intellectual Property
Registrant business operations do not depend upon any proprietary intellectual
property other than certain trade secrets.
(8) Need For Governmental Approval
The Company believes that its business operations do not require governmental
approval. At least one jurisdiction, however, has asserted that the Company's
products constitute a "business opportunity" and must be registered prior to
sale. The Company has disputed this assertion and has entered into a settlement
with that jurisdiction pursuant to which no such registration will be necessary.
See "Legal Proceedings."
(9) Effect of Governmental Regulation on Business
The Company is not aware of any existing governmental regulation and does not
anticipate any governmental regulation which materially affects the Company's
ability to conduct its business operations. Currently sales on the Internet are
not taxed. Whether or when governmental agencies impose sales taxes on Internet
sales, it is expected they will be passed on to the consumer as in traditional
marketing and sales.
(10) Research and Development
During the last two fiscal years Galaxy has engaged in extensive research and
development activities, developing the various products and services described
above. Galaxy also has developed the following:
An on-line order processing system allowing its customers to have real time
verification and processing of all their orders.
A "shopping cart" system allowing unlimited products to be added to an on-line
order. It calculates the product price totals and adds shipping, handling and
other applicable charges.
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Specialized "bridges" allowing faster access to on-line processing of credit
cards by credit card processors.
A "window shopping" feature allowing users to surf through random storefronts
with greater ease.
Automated auto-responder software allowing a Galaxy customer to Log in to make
changes to the customer's auto-responder, rather than relying on Galaxy's
programmers to make such changes manually.
A database driven merchant registration service allowing Galaxy to monitor and
keep secure its "Merchants Only" section of the Galaxy Mall.
Integrated directory database and billing database, providing Galaxy with faster
and easier billing of its customers.
New banner exchange software and search engine software allowing Galaxy to sell
advertising space based upon the impressions each site generates. The banner
exchange is located at bannersource.com and the search engine is located at
matchsite.com.
The Company estimates that it spent approximately $150,000 during 1997 and
$250,000 during 1998 on such research and development activities. In addition,
the Company spent during such time in excess of $100,000 in marketing research,
development and market testing to introduce its products and services to the
Canadian market.
(11) Compliance with Environmental Laws
Cost of compliance with environmental laws are nominal, if any, and are
therefore immaterial to the Company's operations.
(12) Employees
As of March 12, 1999, the Company employed 84 people, 55 of whom work full-time.
Of the total employees, three employees are executive personnel, 35 are
technical personnel, 24 are in marketing and sales, and 22 were administrative,
accounting, information systems, and clerical personnel.
ITEM 2. Description Of Property
The Company's principal office is located at 890 North Industrial Park Drive,
Orem, Utah 84057. The property is an unfurnished two-story office building
having approximately 8,000 square feet, and includes landscaping and a paved
parking area adequate for employee and customer vehicle parking. The property is
leased from an unaffiliated third party for a period of three years with annual
rental of $72,000, payable monthly in the amount of $6,000. The Company
maintains tenant fire and casualty insurance on its property located in such
building in an amount deemed adequate by the Company.
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The Company also rents on a daily basis hotel conference rooms and facilities
from time to time in various cities throughout the United States and Canada at
which it hosts its preview session and Internet training workshops. The Company
is under no long-term obligations in connection with such hotels.
ITEM 3. Legal Proceedings
On May 14, 1998 the Company initiated legal action against a competitor, certain
of its officers and employees, and others, in the Third Judicial District Court
of Salt Lake County, State of Utah in a proceeding entitled Galaxy Enterprises,
Inc. vs. Cyberworks Institute, Inc. The Commercium, Inc., Scott Alexander, Marek
Shon, Curtis Matsko, Adam Maher, and John Does I through XX, case number
980904883. In this action, the Company asserts claims of breach of contract,
misappropriation of trade secrets, common law unfair competition, interference
with contract and economic advantage, breach of duty of good faith and fair
dealing, breach of fiduciary duty and common law duty of loyalty, and conspiracy
for which the Company seeks a minimum of $3,000,000. The case is still in the
discovery state and no trial date has yet been scheduled.
On June 18, 1998, the Commonwealth of Kentucky filed an action against Galaxy
Mall, Inc., a wholly-owned subsidiary of the Company, in a proceeding filed in
the Fayette County Circuit Court entitled Commonwealth of Kentucky, ex rel. A.B.
Chandler III, Attorney General vs. Galaxy Mall, Inc., civil action number
98CI2257. The action alleges Galaxy Mall, Inc. offered for sale in Kentucky
business opportunities without first registering with the Attorney General or
posting a surety bond as required by Kentucky law. The suit seeks to: (i) enjoin
Galaxy Mall, Inc. from further sales unless first registered, (ii) impose a
$2,000 civil penalty, (iii) cancel any contracts made in Kentucky and (iv)
return of funds to Kentucky purchasers. Galaxy Mall, Inc. denied all
allegations. On December 15, 1998, an Order of Dismissal was entered based on
Galaxy agreeing to advise the Kentucky Attorney General's office of any
complaints from Galaxy customers in Kentucky for a period of twelve months from
the date of entry of the Order of Dismissal.
In December, 1998 the Company and GMI were served as defendants in a purported
class action filed in the Superior Court of Orange County, State of California,
in a case entitled Pamela Chang vs. Busting Out, Inc., De'Nae Walker, New Body,
Inc., Steven Olschwanger, Natural Curves LLC, New Woman, Ltd, Galaxy
Enterprises, Inc., Galaxy Mall, Inc., The Barnstead Trust, East Bay Products,
LLC, Rick Raynford, et al., in which the plaintiff claims to have been damaged
in that she was offered the opportunity to purchase a certain product from
various web sites on the Internet operated by defendants. Plaintiff alleges the
product was offered for sale through unfair, deceptive, untrue or misleading
advertising intended to result in the sale of the product, in violation of
applicable California law. Plaintiff seeks to enjoin the use of such alleged
deceptive practices, an accounting of all money received and all profits
acquired as a result of such practices, an order of restitution to all persons
of funds acquired by such alleged practices, a distribution of any moneys
recovered, unspecified actual damages, unspecified punitive damages, attorney's
fees and costs. The Company has denied all allegations and has asserted numerous
affirmative defenses. The Company also filed a motion to quash service of the
summons for lack of jurisdiction. On March 17, 1999 the Superior Court granted
the motion to quash.
Consequently, the Superior Court currently has no jurisdiction over the Company.
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ITEM 4. Submission Of Matters To A Vote Of Security Holders
No matters were submitted for a vote of the shareholders during the fourth
quarter of 1998.
PART II
ITEM 5. Market For Common Equity And Related Stockholders Matters
The Company's common stock is listed on the National Association of Securities
Dealers Automated Quotation bulletin board system, under the symbol "GLXY." The
common stock was first publicly traded on January 7, 1997.
The following table sets forth the range of high and low bids for the common
stock of the Company for the past two years.
Common Stock Schedule
Fiscal Year 1998 Quarter Ended High Low
September 30, 1998 ........... $ 2.32$ .562
June 30, 1998 ................ 2.12 .750
March 31, 1998 ............... 2.25 .750
December 31, 1997 ............ 2.72 1.375
Fiscal Year 1997 Quarter Ended High Low
September 30, 1997 ........... $ 3.87$ 1.375
June 30, 1997 ................ 5.25 3.000
March 31, 1997 ............... 5.50 2.500
December 31, 1996 ............ n/a n/a
On March 24, 1999, the closing quotation for the common stock on the bulletin
board was $2.875 per share. As of March 24, 1999, there were 5,700,841 shares of
common stock issued and outstanding, held by approximately 141 shareholders of
record, including several holders who are nominees for an undetermined number of
beneficial owners.
The trading volume of the Company's common stock is limited, creating
significant changes in the trading price of the common stock as a result of
relatively minor changes in the supply and demand. Consequently, potential
investors should be aware that the price of the common stock in the trading
market can change dramatically over short periods as a result of factors
unrelated to the operations, earnings and business activities of the Company.
The Company has not paid any dividends with respect to its common stock and does
not anticipate paying any dividends in the near future. The Company's credit
facility with its bank prohibits the payment of dividends without the consent of
the bank.
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ITEM 6. Management's Discussion and Analysis or Plan of Operation
The following discussion and analysis should be read in conjunction with the
Financial Statements and Notes thereto of Galaxy Enterprises, Inc. and other
financial information appearing elsewhere herein.
Results of Operations
Revenues. The Company's sales for the calendar year ending December 31, 1998
were $11,448,392 as compared to $2,495,096 for the twelve months ending December
31, 1997. This increase was due in part to the purchase by the Company of the
assets and business interests of PES and CO-OP. Both companies were acquired on
October 1, 1997, and therefor the revenues from them were included in 1998 for
the full year, but in1997 for only the fourth quarter. The Company does not
break down sales for the businesses acquired from PES and CO-OP and,
consequently, the Company cannot give meaningful comparisons of the revenue
attributable to each for the fourth quarter of each year.
Cost of Services/Products Sold. Cost of sales during 1998 totaled $5,105,614,
which is equal to 44.6% of revenues. Cost of sales during 1997 totaled
$1,056,579, which is equal to 42.3% of revenues. This increase in the cost of
sales as a percentage of revenues is primarily due to 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 storefronts 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 $6,244,453 in 1998
compared to $1,167,880 in 1997. These expenses, as a percentage of sales,
increased in 1998 to 54.5% from 46.8% in 1997. The increase in the expenses as a
percentage of sales is attributable to increases in royalty payments, legal
expenses, telephone expenses and rent for larger quarters; as well as postage
and mailing expenses to solicit persons to attend the Company's preview sessions
and workshops that are disproportionately higher than the increase in revenues.
The Company anticipates that such expenses, as a percentage of sales, will stay
the same because the Company had a significant moving expense in 1998 which will
not occur in 1999 and mailing costs are anticipated to stay substantially the
same.
Amortization. During 1998 amortization of Goodwill and Deferred Charges was
$80,175 compared to $36,826 in 1997. Total Goodwill at the end of 1998 was
$794,753 and Deferred Charges were $67,127 (net of amortization). The Goodwill
arose through the purchase by GMI of PES and CO-OP. The Company believes that
the combination of the three companies will reduce costs and provide the Company
with greater control over its business activities.
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Non-Recurring Expenses. An expense item in the income statement for fiscal year
1997 called "Merger Expenses" was a one time, non-recurring charge relative to
an investment in Books Now, Inc. ("Books Now") The Company entered into an
agreement to purchase Books Now in a stock for stock exchange and to provide
working capital for the implementation of its business plan. Pursuant to the
agreement, the Company advance $108,000 to Books Now. By December 1997 the
Company determined that it was not in the best interest of the Company to
continue the arrangement with Books Now. A settlement was negotiated and the
companies signed a mutual release of claims against each other. The advance was
written off the financial records of the Company.
Income Taxes. Income tax benefit for 1998 was $15,951. The net benefit arose as
a result of tax refunds from prior years and a reversal of a prior year
over-accrual, offset by the current year income tax liability.
Net Income/Loss. The Company reported Net Income of $35,375 for the Calendar
year ending December 31, 1998, as compared to Net Income of $87,328 for the
twelve-month period ending December 31, 1997. On a per share basis this amounted
to a profit of $.0067 per share in 1998 as compared to a profit of $.02 per
share in 1997.
Capital Resources
New Investments. Since the end of fiscal year 1998, 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)
entered into an agreement with Invest Linc Capital Corp. ("Invest Linc") whereby
Invest Linc, through certain related funds, will invest up to $1,000,000 in
exchange for equity in the Company. Also as part of the Agreement, Invest Linc
received a warrant to purchase an additional 250,000 shares of the Company's
stock, at $2.84 per share. The warrant has a two-year term. During January and
February, 1999, the Augustine Fund converted the note into 169,189 shares of the
Company's common stock at a weighted average price of $2.96 per share. Invest
Linc has invested a total of $1,000,000 in exchange for 250,000 shares of the
Company's common stock. This capital infusion has significantly improved the
Company's liquidity and its ability to meet ongoing working capital needs.
Cash. Cash on hand at December 31, 1998 totaled $24,718 as compared to $113,144
at the end of 1997. Total current assets were $268,292 and $202,042,
respectively.
Accounts Payable. Accounts payable at December 31, 1998 totaled $651,473. There
was also a bank overdraft of $179,301 bringing the total payable up to $830,744
as compared to $738,004 at the end of 1997. Some of the proceeds of the sale of
the convertible note were used to retire the overdraft. Total current
liabilities at December 31, 1998 were $1,068,270 compared to $1,052,555 at
December 31, 1997.
Equipment and Property. Equipment increased during 1998 from $121,702 to
$171,868 net of accumulated depreciation of $6,592 in 1997 and $59,773 in 1998.
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. As of December 31, 1998 future
aggregate minimum obligations under equipment leases for the year 1999 were
$141,027. This includes both the corporate office building and equipment leases.
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Stockholders' Equity. Total Stockholders' Equity increased to $256,285 during
1998 from $207,160 at December 31, 1997, an increase of $49,125. This resulted
from net income together with the sale of 10,000 shares of stock to a member of
the board of directors for $13,750.
Liquidity
Ratios. At December 31, 1998 the Company's current ratio, current assets
compared to current liabilities, was a negative 4 to 1 compared to a negative
5.2 to 1 as of December 31, 1997. This out of balance situation is being
corrected by projected profitable operations and through the sale of Company
stock.
Financing Arrangements. The Company has worked out extended payment plans with
hotels and other vendors and is meeting its commitments under the plans. 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 February
and March 1999 the Company sold 250,000 shares of common stock to Invest Linc
for a total investment of $1,000,000. 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
In October of 1997 the Company embarked on a campaign to increase sales by
telemarketing to its customers and other interested parties. Independent firms
under contract to GEI provided the telemarketing services. The program was
successful and sales during fiscal year 1998 from telemarketing efforts were
$4,338,663 compared to $74,320 for the fourth quarter of 1997. After the end of
fiscal year 1998, 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. 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.
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Year 2000 Readiness
In general, the Year 2000 issue relates to computers and other systems being
unable to distinguish between the years 1900 and 2000 because they use two
digits, rather than four, to define the applicable year. Systems that fail to
properly recognize such information will likely generate erroneous data or cause
a system to fail possibly resulting in a disruption of operations. The Company's
products and services do incorporate such date coding so the Company's efforts
to address the Year 2000 issue fall in the following three areas: (i) the
Company's information technology ("IT") systems; (ii) the Company's non-IT
systems (i.e., machinery, equipment and devices which utilize technology which
is "built in" such as embedded microcontrollers); and (iii) third-party
suppliers. Management has initiated a program to prepare for compliance in these
three areas and expects such program to be implemented and completed by June
1999. Costs will be expensed as incurred and currently are not expected to be
material.
The Company believes its current IT systems, with a few exceptions which are
being addressed, are year 2000 compliant. The Company is currently conducting an
inventory of non-IT systems which may have inadequate date coding and will
commence efforts to remedy any non-compliant systems by the end of the first
quarter of 1999. Third party suppliers and customers present a different problem
in that the Company cannot control the efforts of such third parties. The
Company anticipates requesting confirmations from third party suppliers that
they are year 2000 compliant to avoid disruptions of services and supplies.
However, any failure on the part of such companies with whom the Company
transacts business to be year 2000 compliant on a timely basis may adversely
affect the operations of the Company.
The foregoing statements are based upon management's current assumptions
ITEM 7. Financial Statements
The financial statements and supplementary data are included beginning at page
F-1.
ITEM 8. Changes In And Disagreements With Accountants On Accounting And
Financial Disclosure
None.
13
<PAGE>
PART III
ITEM 9. Directors, Executive Officers, Promoters And Control Persons; Compliance
With Section 16(a) Of The Exchange Act
The information required is set forth under the captions "Election of Directors,
Directors and Executive Officers; Compliance with Section 16(a) of Securities
Exchange Act of 1934" in the Company's definitive proxy statement to be filed
pursuant to Regulation 14A and is incorporated herein by reference.
ITEM 10. Executive Compensation
The information required is set forth under the caption "Compensation of
Executive Officers" in the Company's definitive proxy statement to be filed
pursuant to Regulation 14A and is incorporated herein by reference.
ITEM 11. Security Ownership Of Certain Beneficial Owners And Management
The information required is set forth under the caption "Security Ownership of
Certain Beneficial Owners and Management" in the Company's definitive proxy
statement to be filed pursuant to Regulation 14A and is incorporated herein by
reference.
ITEM 12. Certain Relationships And Related Transactions
The information required is set forth under the caption "Election of Directors -
Certain Relationships and Related Transaction" in the Company's definitive proxy
statement to be filed pursuant to Regulation 14A and is incorporated herein by
reference.
14
<PAGE>
ITEM 13. Exhibits And Reports On Form 8-K
(a) Exhibits
Exhibit No. Description
*3.1 Articles of Incorporation of Cipher Voice, Inc.
*3.2 Certificate of Amendment of Articles of Incorporation for
Cipher Voice, Inc., dated October 30, 1996
*3.3 Certificate of Amendment of Articles of Incorporation for
Cipher Voice, Inc., dated December 16, 1996
*3.4 By-Laws of Cipher Voice, Inc.
*10.1 Stock for Stock Agreement dated December 4, 1996 between
Cipher Voice and the shareholders Galaxy Mall, Inc.
*10.2 Exchange Agreement between Galaxy Mall, Inc. and Profit
Education Systems, Inc. dated October 1, 1997
*10.3 Transfer Agreement Between Galaxy Mall, Inc. and CO-OP
Business Services dated October 1, 1997
*10.4 1997 Employee Stock Option Plan
*10.5 Incentive Stock Option Agreement
*10.6 Stock Option Agreement between Ray Anderson and Galaxy
Enterprises, Inc. dated August 10, 1998
*10.7 Stock Option Agreement between Darral G. Clarke and Galaxy
Enterprises, Inc. dated August 10, 1998
*10.8 Consulting Agreement with Gary Cochran dated October 1, 1998
*10.9 Royalty and Consulting Agreement with Gary Cochran May 1, 1998
**23.1 Consent of Wisan, Smith, Racker & Prescott, LLP
**27.1 Financial Data Schedule - filed herewith
* Filed as an Exhibit to the Form 10-SB filed on November 12, 1998.
** Filed herewith.
(b) Reports on Form 8-K.
None.
15
<PAGE>
Signatures
In accordance with Section 13 or 15(d) of the Exchange Act, the Company caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: April 3, 1999 GALAXY ENTERPRISES, INC.
By: /s/ John J. Poelman
John J. Poelman
President, Chief Executive Officer
and Director
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Company and in the capacities and on the
dates indicated below.
Date: April 3, 1999 By: /s/ John J. Poelman
John J. Poelman
President, Chief Executive Officer
and Director
Date: April 3, 1999 By: /s/ Brandon B. Lewis
Brandon B. Lewis
Executive Vice President, Chief Operating
Officer and Director
Date: April 3, 1999 By: /s/ Frank C. Heyman
Frank C. Heyman
Chief Financial Officer
Date: April 3, 1999 By: /s/ __________________
Darral G. Clarke
Director
Date: April ___, 1999 By:_________________________
B. Ray Anderson
Director
16
<PAGE>
GALAXY ENTERPRISES, INC.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
F-1
<PAGE>
C O N T E N T S
Page
INDEPENDENT AUDITORS'
REPORT.......................................................................F 3
CONSOLIDATED BALANCE
SHEETS.......................................................................F 4
CONSOLIDATED STATEMENTS OF
OPERATIONS...................................................................F 6
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY.......................................................................F 7
CONSOLIDATED STATEMENTS OF CASH
FLOWS........................................................................F 8
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS...................................................................F 9
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Galaxy Enterprises, Inc.
Orem, Utah
We have audited the accompanying consolidated balance sheets of Galaxy
Enterprises, Inc. and Subsidiary as of December 31, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Galaxy Enterprises,
Inc. and Subsidiary as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
Wisan, Smith, Racker & Prescott LLP
Salt Lake City, Utah
March 19, 1999
F-3
<PAGE>
GALAXY ENTERPRISES, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
1998 1997
----------- -----------
ASSETS
CURRENT ASSETS
Cash ............................................. $ 24,718 $ 113,144
Trade accounts receivable (net of allowance of
$43,832 at December 31, 1998) ................... 40,839 41,109
Related party trade accounts receivable .......... 38,910 --
Prepaid expenses ................................. 18,549 --
Employee advances ................................ 1,871 1,000
Deferred income taxes ............................ 14,200 --
Credit card reserves ............................. 129,205 46,789
---------- ----------
TOTAL CURRENT ASSETS ................. 268,292 202,042
EQUIPMENT .......................................... 171,868 121,702
OTHER ASSETS
Deferred charges ................................. 67,127 89,502
Goodwill ......................................... 794,753 852,553
Other ............................................ 32,815 16,016
---------- ----------
894,695 958,071
TOTAL ASSETS ......................... $1,334,855 $1,281,815
========== ==========
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
GALAXY ENTERPRISES, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
1998 1997
----------------- -----------
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Trade accounts payable ....................... $ 606,553 $ 673,044
Related party trade accounts payable ......... 44,920 64,960
Bank overdraft ............................... 179,301 --
Accrued expenses ............................. 108,536 280,043
Income taxes currently payable ............... 7,900 27,636
Notes payable ................................ 115,000 --
Unearned income .............................. 6,060 6,872
---------- ----------
TOTAL CURRENT LIABILITIES .............. 1,068,270 1,052,555
DEFERRED INCOME TAXES .......................... 10,300 7,100
NOTE PAYABLE ................................... -- 15,000
STOCKHOLDERS' EQUITY
Common stock, par value $.007
Authorized 25,000,000 shares
5,281,652 and 5,271,652 shares
issued and outstanding, respectively ........ 36,971 36,901
Additional paid-in capital ................... 91,959 78,279
Retained earnings ............................ 127,355 91,980
---------- ----------
TOTAL STOCKHOLDERS' EQUITY ............. 256,285 207,160
---------- ----------
TOTAL LIABILITIES AND EQUITY ........... $1,334,855 $1,281,815
========== ==========
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
GALAXY ENTERPRISES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1998 and 1997
1998 1997
----------------- -----------
REVENUE
Sales .................................... $ 11,448,392 $ 2,495,096
Cost of sales ............................ 5,105,614 1,056,579
------------ ------------
GROSS PROFIT ................... 6,342,778 1,438,517
------------ ------------
OPERATING EXPENSES
Selling .................................. 4,764,340 856,073
General and administrative ............... 1,383,021 305,215
Bad debt expense ......................... 43,832 --
Depreciation ............................. 53,260 6,592
Amortization ............................. 80,175 36,826
Merger expenses .......................... -- 108,000
------------ ------------
TOTAL OPERATING EXPENSES ........ 6,324,628 1,312,706
------------ ------------
OPERATING INCOME ................ 18,150 125,811
OTHER (INCOME) EXPENSES
Interest income .......................... (11) (31)
Other income ............................. (5,405) --
Interest expense ......................... 4,142 433
------------ ------------
TOTAL OTHER (INCOME) EXPENSES ..... (1,274) 402
Income before income taxes ............... 19,424 125,409
Income tax expense (benefit) ............. (15,951) 38,081
------------ ------------
NET INCOME ..................... $ 35,375 $ 87,328
============ ============
Weighted average shares outstanding:
Basic .................................... 5,272,069 5,271,652
Diluted .................................. 5,724,683 5,271,652
Net income per share:
Basic .................................... $ .0067 $ .02
============ ============
Diluted .................................. $ .0062 $ .02
============ ============
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
GALAXY ENTERPRISES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1998 and 1997
Additional
Common Stock Paid in Retained
Shares Amount Capital Earnings
------------------------------------
Balance, December 31, 1996 .............. 5,255,352 $36,787 $78,279 $ 4,652
Common stock issued for
bonuses at $.007 per share ............. 16,300 114 -- --
Net income for the period ended
December 31, 1997 ...................... -- -- -- 87,328
--------- ------- ------- --------
Balance, December 31, 1997 .............. 5,271,652 36,901 78,279 91,980
Common stock issued for
stock options at $.007 per share ....... 10,000 70 13,680 --
Net income for the year ended
December 31, 1998 ...................... -- -- -- 35,375
--------- ------- ------- --------
Balance, December 31, 1998 .............. 5,281,652 $36,971 $91,959 $127,355
========= ======= ======= ========
The accompanying notes are an integral part of the financial statements.
F-7
<PAGE>
GALAXY ENTERPRISES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998 and 1997
1998 1997
----------------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ......................................... $ 35,375 $ 87,328
Adjustments to reconcile net income
to net cash flows from (used by)
operating activities:
Depreciation ...................................... 53,260 6,592
Amortization ...................................... 80,175 36,826
Deferred income taxes ............................. (11,000) 7,100
Bad debt provision ................................ 43,832 --
Changes in operating assets and liabilities:
Increase in credit card reserves ................. (82,416) (46,789)
Increase in trade accounts receivable ............ (43,562) (41,109)
Increase in employee advances .................... (871) (1,000)
Increase in prepaid expenses ..................... (18,549) --
(Increase) decrease in trade accounts receivable
- related entity .............................. (38,910) 87,787
Increase in deposits ............................. (16,799) (16,015)
Increase in goodwill ............................. -- (867,004)
Increase (decrease) in trade accounts payable .... (66,491) 673,044
Increase (decrease) in trade accounts payable
- related entity ............................... (20,040) 63,741
Increase (decrease) in accrued expenses .......... (171,507) 280,043
Increase (decrease) in income taxes payable ...... (19,736) 26,527
Decrease in unearned income ...................... (812) (80,915)
--------- ---------
Net cash flows from (used by)
operating activities .......................... (278,051) 216,156
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment .............................. (103,426) (128,294)
--------- ---------
Net cash used by investing activities .......... (103,426) (128,294)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash from notes payable ............................ 100,000 15,000
Increase in bank overdraft ......................... 179,301 --
Common stock issued for cash ....................... 13,750 --
Common stock issued for bonuses .................... -- 114
--------- ---------
Net cash flows from financing activities ....... 293,051 15,114
--------- ---------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS ........................ (88,426) 102,976
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR ........................... 113,144 10,168
--------- ---------
CASH AND CASH EQUIVALENTS
AT END OF YEAR ................................. $ 24,718 $ 113,144
========= =========
The accompanying notes are an integral part of the financial statements.
F-8
<PAGE>
GALAXY ENTERPRISES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Organization and Operating History
The Company was incorporated in the State of Nevada on March 3,
1994 under the name of Cipher Voice, Inc. The Company was
originally organized to engage in the research and development
for the production of equipment related to computer hardware
security. Initial capitalization consisted of $10,000 in cash
from incorporators for 821,429 shares of common stock (all shares
are post reverse split 1:7). In 1994 the Company received
$100,059 as the net proceeds from a public stock offering;
404,571 shares of common stock were issued. During 1994 and 1995,
1,293,858 shares of common stock were reacquired, at no cost, and
cancelled. Also, during 1994, 1995, and 1996, 651,067 shares of
common stock were issued for service rendered. During 1996, the
Company completed a public offering with net proceeds of $1,757;
1,130,000 shares of common stock were issued. The Company
expended all of the capital raised in the 1994 initial public
offering without completing the research and development
necessary to produce the computer hardware desired. The Company
was then considered to be a development stage company. On October
30, 1996 the Company changed its authorized capital to 25,000,000
shares of $.007 par value shares, by amending its articles of
incorporation, following the authorization of a 1 for 7 reverse
stock split.
On December 4, 1996, the Company acquired all of the outstanding
common stock of Galaxy Mall, Inc., (the Subsidiary) for 3,600,000
shares of the Company's common stock. For accounting purposes,
the acquisition of the Subsidiary has been treated as an
acquisition of the Company by the Subsidiary and as a
recapitalization of the Subsidiary. The acquired company, the
Subsidiary, is treated as the surviving entity for accounting
purposes. The Subsidiary was formed on June 7, 1996 in the state
of Wyoming. The Subsidiary is engaged in the field of Internet
marketing, training and providing storefronts in an Internet
shopping mall through seminars conducted throughout the United
States.
The Company changed its name to Galaxy Enterprises, Inc. by
amending its articles of incorporation on December 16, 1996. Due
to the operations conducted and revenues generated, the Company
is no longer considered a development stage company.
The Company purchased all of the assets of both Profit Education
Systems, Inc. (PES) and CO-OP Business Services (CO-OP) on
October 1, 1997. The Company agreed to assume the liabilities of
PES and CO-OP in exchange for their assets. The liabilities
assumed by the Company in excess of the assets acquired in these
transactions resulted in the recording of goodwill in the amount
of $867,004.
F-9
<PAGE>
GALAXY ENTERPRISES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Business Activity
The Company, through it subsidiary, engages in the business of
leasing to its customers electronic home pages, or "storefronts,"
on its Galaxy Mall, an Internet shopping mall, and hosts those
storefront sites on its Internet server. The Company's business
is to allow its customers (i) to acquire a presence on the
Internet and (ii) to advertise and sell their products or
services on the Internet. Storefronts designed by or for the
customers are programmed by the Company for display on the mall.
The Company also contracts with consultants and independent
contractors, or creates and produces in-house, various other
internet business related products which it markets. The Company
markets its products and services throughout the United States.
Principles of Consolidation
The consolidated financial statements include those of Galaxy
Enterprises, Inc. and its wholly-owned subsidiary, Galaxy Mall.
All significant intercompany accounts and transactions have been
eliminated.
Cash and Cash Equivalents
Cash equivalents are generally comprised of certain highly liquid
investments with maturities of less than three months.
Property and Equipment
Depreciation expense is computed principally on the straight-line
method in amounts sufficient to write off the cost of depreciable
assets over their estimated useful lives.
Normal maintenance and repair items are charged to costs and
expenses as incurred. The cost and accumulated depreciation of
property and equipment sold or otherwise retired are removed from
the accounts and gain or loss on disposition is reflected in net
income in the period of disposition.
Amortization
Deferred charges are amortized using the straight-line method
over five years for organization and startup costs. Goodwill is
amortized using the straight-line method over fifteen years.
Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
F-10
<PAGE>
GALAXY ENTERPRISES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Earnings per Share
In 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings Per Share" (SFAS 128). SFAS 128
replaced the calculation of primary and fully diluted net income
per share with basic and diluted net income per share. Basic
earnings per share exclude any dilutive effects of options,
warrants, and convertible securities. Diluted earnings per share
include any dilutive effects of options, warrants and convertible
securities, and therefore, are comparable to the earnings per
share the Company previously reported as earnings per share.
Revenue Recognition
Revenue is recognized when services are provided to customers.
Income Taxes
The Company accounts for income taxes using an asset and
liability approach to financial accounting and reporting for
income taxes. The difference between the financial statement and
tax bases of assets and liabilities is determined annually.
Deferred income tax assets and liabilities are computed for those
differences that have future tax consequences using the currently
enacted tax laws and rates that apply to the periods in which
they are expected to affect taxable income. Valuation allowances
are established, if necessary, to reduce the deferred tax asset
to the amount that will more likely than not be realized. Income
tax expense is the current tax payable or refundable for the
period plus or minus the net change in the deferred tax assets
and liabilities.
Comprehensive Income In June 1997, the Financial Accounting
Standards Board issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes new rules for the reporting and
display of comprehensive income and its components. Application
of SFAS No. 130 had no impact on the Company's net income or
stockholders' equity.
Stock-Based Compensation
The Company applies the Accounting Principles Board ("APB")
Opinion 25, "Accounting for Stock Issued to Employees", and the
related interpretation in accounting for all stock option plans.
Under APB Opinion 25, compensation cost is only recognized for
stock options issued when the exercise price of the Company's
stock options granted is less than the market price of the
underlying common stock on the grant date. Such costs are
expensed over the vesting period of the stock options.
F-11
<PAGE>
GALAXY ENTERPRISES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock-Based Compensation (continued)
SFAS No. 123, "Accounting for Stock-Based Compensation", requires
the Company to provide pro-forma information regarding net income
as if compensation cost for the Company's stock option plans had
been determined in accordance with the fair value based method
prescribed in SFAS No. 123. To provide the required pro-forma
information, the Company estimates the fair value of each stock
option at the grant date by using the Black-Scholes
option-pricing model.
Research and Development Costs
Research and development costs are expensed as incurred. Such
costs were approximately $250,000 in 1998 and $150,000 in 1997.
Advertising and Promotion
Costs of direct response advertising are matched with the
expected revenue stream, generally six to 24 months. Direct
response advertising consists primarily of advertising costs
incurred in connection with the procurement of leases of space in
the Company's on-line mall.
Advertising expenses of $2,675,335 and $524,055 were incurred for
the years ended December 31, 1998 and 1997, respectively.
Advertising costs deferred, included in other non-current assets,
amounted to $19,800 at December 31, 1998.
Reclassifications Certain amounts in 1997 have been reclassified
to conform with the 1998 financial statement presentation.
NOTE 2 - EQUIPMENT
Equipment as of December 31, 1998 and 1997 are detailed in the
following summary:
Accumulated Net Book
1998 Cost Depreciation Value
---- ------- --------------- ----------
Computer equipment ... $157,351 $ 48,117 $109,234
Computer software .... 32,189 2,263 29,926
Office equipment ..... 33,157 7,883 25,274
Furniture and fixtures 6,104 505 5,599
Leasehold improvements 2,840 1,005 1,835
-------- -------- --------
$231,641 $ 59,773 $171,868
======== ======== ========
F-12
<PAGE>
GALAXY ENTERPRISES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE 2 - EQUIPMENT (CONTINUED)
Accumulated Net Book
1997 Cost Depreciation Value
---- ------- --------------- --------
Computer equipment $ 95,815 $ 5,007 $ 90,808
Computer software 201 10 191
Office equipment . 32,278 1,575 30,703
-------- -------- --------
$128,294 $ 6,592 $121,702
======== ======== ========
NOTE 3 - COMMITMENTS AND CONTINGENCIES
Leases
The Company leases certain of its equipment and corporate offices
under long-term lease agreements expiring at various dates
through 2003. Future aggregate minimum obligations under
operating leases as of December 31, 1998, exclusive of taxes and
insurance, are as follows:
Operating
Leases
Year ending December 31,
1999 $ 141,027
2000 139,255
2001 68,157
2002 33,334
2003 27,192
------------------
Total $ 408,965
==================
Rental expense under the operating lease agreements totaled
approximately $186,877 and $83,000 for the years ended December
31, 1998 and 1997 respectively.
The Company is a defendant in two lawsuits arising in the normal
course of its business. In the opinion of management the
liabilities, if any, resulting from these matters will not have a
material effect on the consolidated financial statements of the
Company.
F-13
<PAGE>
GALAXY ENTERPRISES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE 4 - DEFERRED CHARGES
Deferred charges consist of the following:
1998 1997
---------- -----------
Organization costs ..... $ 7,955 $ 7,955
Startup costs .......... 103,923 103,923
--------- ---------
111,878 111,878
Accumulated amortization (44,751) (22,376)
--------- ---------
$ 67,127 $ 89,502
========= =========
NOTE 5 - GOODWILL
Goodwill is comprised of the following amounts, resulting from the purchase of
assets from the corresponding entities:
1998 1997
----------- -----------
Profit Education System (PES) . $ 793,394 $ 793,394
CO-OP Business Services (CO-OP) 73,610 73,610
--------- ---------
867,004 867,004
Accumulated amortization ...... (72,251) (14,451)
--------- ---------
$ 794,753 $ 852,553
========= =========
NOTE 6 - INCOME TAXES
The components of income tax expense (benefit) related to
continuing operations are as follows:
1998 1997
----------- -----------
Current ........... $ (4,951) $ 30,981
Deferred .......... (11,000) 7,100
-------- --------
$(15,951) $ 38,081
======== ========
F-14
<PAGE>
GALAXY ENTERPRISES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE 6 - INCOME TAXES (CONTINUED)
1998 1997
------------------ -----------
Differences between the U.S. statutory
and effective tax rates
U.S. statutory rate ......... $ 6,600 $ 29,692
State income taxes, net of
federal tax effect .......... 3,300 3,500
Refund of prior year taxes .. (17,650) --
Overaccrual of prior year tax (3,750) --
Other, net .................. (4,451) 4,889
-------- --------
Effective tax expense (benefit) $(15,951) $ 38,081
======== ========
Cash paid for income taxes .... $ 32,400 $ 4,500
======== ========
The net deferred income taxes in the accompanying balance sheets
include the following amounts of deferred income tax assets and
liabilities:
1998 1997
----------- --------
Deferred tax assets
Receivable valuation ............. $14,200 $ --
Deferred tax liabilities
Depreciation ..................... 10,300 7,100
------- -------
Net deferred tax asset (liabilities) $ 3,900 $(7,100)
======= =======
F-15
<PAGE>
GALAXY ENTERPRISES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE 7 - NOTES PAYABLE
Notes payable as of December 31, 1998 and 1997 are detailed in
the following summary:
1998 1997
-------------- -----------
Note payable to an individual, interest at
8.5%, unsecured ............................... $ 15,000 $ 15,000
Note payable to a financial institution due
July 30, 1999, interest at prime plus 3%
(10.75% at December 31, 1998), secured
by equipment and common stock ................. 100,000 --
--------- ---------
115,000 15,000
Less current portion ......................... (115,000) --
--------- ---------
Long-term portion .............................. $ -- $ 15,000
========= =========
Interest paid during the years ended December 31, 1998 and 1997 was $4,100 and
$400, respectively.
NOTE 8 - RELATED ENTITY TRANSACTIONS
As discussed in Note 1, on October 1, 1997, the Subsidiary purchased
the assets and business interest of Profit Education Systems,
Inc. (PES). Until such date, PES had been working under contract
with the Subsidiary, providing marketing services for its
Internet workshops. The purchase price of PES was equal to the
obligations of PES which were assumed by the Subsidiary. Such
acquisition was accounted for as a purchase.
Also discussed in Note 1, on October 1, 1997, the Subsidiary
purchased the assets and business interests of CO-OP Business
Services, Inc. (CO-OP). Until such date, CO-OP had been working
under contract to the Subsidiary providing customer services to
its merchants on the Galaxy Mall, an Internet shopping mall. The
purchase price was equal to the obligations of CO-OP assumed by
the Subsidiary. Such acquisition was accounted for as a purchase
F-16
<PAGE>
GALAXY ENTERPRISES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE 8 - RELATED ENTITY TRANSACTIONS (CONTINUED)
In addition to its direct sales efforts, the Company utilizes the
services of American Marketing Systems, Inc. ("AMS"), a Nevada
corporation. AMS provides telemarketing services to its various
clients, including the Company. It sells coaching (mentoring)
services to Galaxy Mall merchants, and coaching services and
Company products to prospects who have not previously purchased
Company products. During the years ended December 31, 1998 and
1997, the Company paid AMS $1,441,800 and $220,200, in sales
commissions, respectively. John J. Poelman, President, Chief
Executive Officer and a Director of the Company is a 30%
shareholder of AMS.
The Company utilizes the services of Electronic Commerce
International, Inc. ("ECI"), a Utah corporation, which provides
merchant accounts and leasing services to small businesses. ECI
processes the financing of Company merchants' storefront leases
and also wholesales software to the Company used for on-line
processing of credit card transactions. John J. Poelman,
President, Chief Executive Officer and a Director of the Company
is the sole stockholder of ECI. Total fees paid to ECI during the
year ended December 31, 1998 totaled $306,400. The Company also
has a receivable from ECI for leases in process at December 31,
1998 of $38,910.
Effective October 1, 1997, Galaxy entered into a nonexclusive
three year consulting and marketing agreement with Profit
Education Specialists which is owned by Gary Cochran ("Cochran"),
the husband of a shareholder who owns approximately 12.1% of the
Company's outstanding stock. Such consulting and marketing
agreement requires Mr. Cochran to provide services to improve
existing marketing programs of Galaxy, assist in developing
brochures, advertisements and other marketing materials, training
potential sales personnel and evaluating future business
products, opportunities or strategies. Compensation payable to
Mr. Cochran is $60,000 per year commencing January 1, 1998, and
increasing 10% per year commencing the second year and subsequent
years. The agreement is automatically renewable unless terminated
prior thereto by consent of the parties. The Company further
agrees to pay Cochran royalties in various amounts on its sales
of Cochran created training and Internet educational materials.
Payments to Cochran totaled $63,000 in 1998.
F-17
<PAGE>
GALAXY ENTERPRISES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE 8 - RELATED ENTITY TRANSACTIONS (CONTINUED)
Effective May 1, 1998 Galaxy entered into a royalty and
consulting agreement with Cochran in which Galaxy agrees to pay
Cochran a royalty on Galaxy's sales of training manuals, audio
tape presentations and related educational items on marketing
techniques for the Internet user created by Cochran. Such items
are designed to explain Internet banner advertising and are used
by Galaxy to promote sales of its banner impressions, BannerWeb
License, and BannerWeb Network. The term of the agreement is for
three years, and is renewable yearly thereafter provided Galaxy
continues to use or distribute such Cochran created materials.
The agreement can be cancelled at any time upon consent of both
parties. During the year ended December 31, 1998, the Company
paid Cochran $60,500 for royalties.
NOTE 9 - MERGER EXPENSES
On June 23, 1997, the Company entered into an agreement with
Books Now, Inc. (Books) to purchase Books in a stock for stock
exchange and to provide working capital for the implementation of
Books business plan. The Company advanced $30,000 upon signing of
the agreement and made additional advances from time to time so
that the total advanced during the year was $108,000. No stock
was exchanged between the companies.
By December, 1997 it became clear that it was not in the best
interest of the Company to continue this arrangement since Books
needed significantly more cash than the Company had advanced to
implement its business plan. A settlement was negotiated and the
companies signed a mutual release of claims against each other.
This caused the advances made by the Company to be worthless and
they were written off accordingly. It did, however, protect the
Company from any liability in the future for breach of contract
or any other claim that may have been filed by Books.
NOTE 10 - STOCK OPTION PLAN
During 1998, the Company adopted a stock option plan under which
officers, employees, directors and others may be granted options
to purchase the Company's common stock. Under the Plan, the
Company may grant up to 1,000,000 shares of common stock. During
1998, the Company granted 928,250 options to certain employees
and directors at an exercise price of $.63 to $3.50 per share.
Stock options expire ten years from the date of grant and vest
ratably over five years from the date of grant. Shares available
to future grants amount to 148,250 at December 31, 1998.
Subsequent to year end, the board approved the addition of
500,000 shares to the plan to be available for future grants.
F-18
<PAGE>
<TABLE>
<CAPTION>
GALAXY ENTERPRISES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE 10 - STOCK OPTION PLAN (CONTINUED)
A summary of the status of the Company's stock option plan as of
December 31, 1998 and changes during the year is presented below:
Weighted
Average
Exercise Exercise Number
Price Price of Shares
Balance, December 31, 1997 -
<S> <C> <C> <C> <C>
Granted $ 0.63 - 3.50 $ 0.80 928,250
Exercised $ 1.38 $ 1.38 (10,000)
Cancelled or Expired $ 0.63 - 2.00 $ 0.82 (76,500)
------------------ ------------------ ------------------
Balance, December 31, 1998 $ 0.63 - 3.50 $ 0.79 841,750
================== ================== ==================
Options currently outstanding and exercisable are as follows:
Weighted Average
Number Remaining Number
Exercise Price Outstanding Contractual Life Exercisable
$ .63 to 1.00 817,500 9.20 years 126,184
$ 1.01 to 1.50 20,250 9.30 years 10,132
$ 1.51 to 2.00 2,000 9.70 years 192
$ 3.50 2,000 9.95 years 23
--------------------- ---------------------- ---------------------- ----------------------
$ .63 - 3.50 841,750 9.25 years 136,531
===================== ===================== ====================== ======================
</TABLE>
The Company has elected to account for stock-based compensation
under the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," under which no compensation cost for stock options is
recognized for stock option awards granted at or above fair
market value. During 1998, the Company recognized no compensation
expense. Had compensation cost been recognized based on the
estimated fair market value of the options at the grant date, the
Company's net income and income per share would have been as
follows:
F-19
<PAGE>
GALAXY ENTERPRISES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE 10 - STOCK OPTION PLAN (CONTINUED)
1998
----
Net income as reported $ 35,375
Pro-forma net loss (3,059)
Basic EPS as reported .0067
Pro-forma Basic EPS (.0006)
Diluted EPS as reported .0062
Pro-forma Diluted EPS (.0005)
The fair value of the options were estimated using the
Black-Scholes option-pricing model based on the following
weighted average assumptions:
1998
----
Risk-free interest rate 4.7%
Expected life, in years 9.25
Dividend yield 0%
Volatility 4.4%
The weighted average grant date fair value of stock options
granted during the year is summarized as follows:
1998
----
Weighted average fair value $ 0.27
==================
NOTE 11 - INCENTIVE COMPENSATION PLAN
During 1998 , the Company adopted an Officers' Incentive
Compensation Plan. The Plan, as amended, provides that incentive
compensation will be paid to the Company's chief executive
officer, chief operations officer and chief financial officer if
the Company achieves certain levels of revenues and pretax
profits as approved by the Board of Directors. No incentive
compensation was earned under such plan in 1998.
NOTE 12 - SUBSEQUENT EVENTS
Subsequent to year end, the Company sold a $500,000 convertible
promissory note bearing interest at 7% per annum to an
institutional investor. Prior to the issuance of these financial
statements, the note was converted into 169,189 shares of the
Company's common stock.
F-20
<PAGE>
GALAXY ENTERPRISES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE 12 - SUBSEQUENT EVENTS (CONTINUED)
The Company also entered into an agreement with another investor,
whereby the investor has invested $1 million in exchange for
250,000 shares of common stock. The investor was also issued a
warrant to purchase up to 250,000 additional shares of the
Company's stock at an exercise price of $2.84 per share. The
warrant has a two year term.
On March 4, 1999, the Company announced the signing of a letter
of intent to purchase Impact Media, L.L.C. Impact Media is a
marketing development company for internet products. Terms of the
letter of intent provide for the Company's purchase of
substantially all the assets and assumption of certain
liabilities of Impact Media.
F-21
<PAGE>
Consent of Wisan, Smith, Racker & Prescott, LLP, Independent Auditors
We consent to the use in this Annual Report (Form 10-KSB) of Galaxy Enterprises,
Inc. and Subsidiary of our report dated March 19, 1999, included in the 1998
Annual Report to Shareholders of Galaxy Enterprises, Inc. and Subsidiary.
Our audit also included the financial data schedule of Galaxy Enterprises, Inc.
and Subsidiary, listed in Item 13(a). This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audit. In our opinion, the financial data schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Wisan, Smith, Racker & Prescott LLP
Salt Lake City, Utah
March 31, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 24,718
<SECURITIES> 0
<RECEIVABLES> 84,671
<ALLOWANCES> (43,832)
<INVENTORY> 0
<CURRENT-ASSETS> 268,292
<PP&E> 231,641
<DEPRECIATION> (59,773)
<TOTAL-ASSETS> 1,334,855
<CURRENT-LIABILITIES> 1,068,270
<BONDS> 0
0
0
<COMMON> 36,971
<OTHER-SE> 219,314
<TOTAL-LIABILITY-AND-EQUITY> 1,334,855
<SALES> 11,448,392
<TOTAL-REVENUES> 11,448,392
<CGS> 5,105,614
<TOTAL-COSTS> 11,430,242
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 43,832
<INTEREST-EXPENSE> 4,142
<INCOME-PRETAX> 19,424
<INCOME-TAX> (15,951)
<INCOME-CONTINUING> 18,150
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 35,375
<EPS-PRIMARY> .007
<EPS-DILUTED> .006
</TABLE>
