U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
AMENDMENT NO. 1
(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, 1999.
[ ] 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.
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(Name of small business issuer in its charter)
Nevada 88-0315212
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
754 E. Technology Avenue 84097
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Orem, Utah (Zip Code)
(Address of principal executive office)
(801) 227-0004
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(Issuer's telephone number)
Securities to be registered under
Section 12(b) of the Act: Name of each exchange
Title of each class on which registered
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Common Stock, NONE
Par Value $.007
Indicated by check mark whether the registrant (1) has 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), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No[ ] .
Indicated by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not 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: $17,934,277.
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 21, 2000, was
$26,044,205.
As of March 21, 2000, 5,952,014 shares of registrant's Common Stock, par value
$.007 per share were outstanding.
Documents incorporated by reference: Specifically identified portions of the
Company's Definitive Proxy Statement for its Annual Shareholders Meeting into
Part III of this Report.
<PAGE>
GALAXY ENTERPRISES, INC.
March 30, 2000
Form 10-KSB/A
PART I.
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.
On March 13, 2000, Galaxy announced that it had signed a merger agreement with
Netgateway, Inc. ("Netgateway") pursuant to which the Company is to be acquired
by Netgateway. See Item 11(c) Changes in Control.
2. Bankruptcy, receivership or similar proceedings.
The Company has neither filed nor been the subject of a bankruptcy, receivership
or similar proceeding.
3. Materialreclassifications, mergers, consolidations, or purchase
or 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 the business of 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 the
business of 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.
Effective May 31, 1999, the Company, through its wholly owned subsidiary IMI,
Inc. ("IMI"), 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 included, among other things, equipment,
inventory and finished goods, intellectual property, computer programs and cash
and accounts receivable, the primary use of which assets relate to the design,
manufacture and marketing of Impact Media's products and services.
B. Business of Issuer.
1. Principal Products and Services.
GALAXY MALL BUSINESS:
The Company, through its subsidiary GMI, engages in the business of selling to
its customers Internet services and products which include 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 assist its customers in establishing their businesses on the Internet.
Storefronts designed and programmed by or for customers by the Company are
displayed on the mall. The Galaxy Mall is located at http://www.galaxymall.com.
In addition to the Galaxy Mall business the Company operates the portal and
search engine MatchSite.com. This search engine allows Internet users to locate
sites of interest on the Web. When a Web user types in a search request,
MatchSite sends the query to several different resources, including several
leading, major search engines. The responses are then returned to the user
organized into a uniform format, and ranked by relevance. (www.matchsite.com).
The Company's Galaxy Mall business contracts with consultants and independent
contractors, or creates and produces in-house, various products and services
which are used by its customers in marketing their own products or services. The
Company's 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 by the Company 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 the mall itself, or provides virtual
hosting, which gives the customer/merchant's site the appearance of having its
own server and a non-Galaxy Mall IP address.
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 auto-responder 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 (URL). 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 word 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.
Banner Course/Banner License: The Banner Course consists of over 200 pages and
10 audio cassettes of instruction. Banners are the equivalent of billboards on
the Internet. They are graphical images placed throughout the Internet
advertising specific web pages. Internet users simply click on the banner image
when it is displayed 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. They enhance 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
Banner Network, 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 the banner network's Internet
sites. Galaxy's customer purchases a number of impressions based upon its
specific marketing and advertising needs. The Galaxy BannerSource network
currently markets in excess of one million banner impressions daily to
businesses doing commerce on the Internet. (www.bannersource.com).
Executive Mentor Program: Galaxy's mentoring program is a ten week 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. These services are
provided by Professional Marketing International, Inc. on a contract basis.
IMI BUSINESS:
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The Company, through its subsidiary IMI, is engaged in the design, manufacture
and marketing of multimedia brochures, shaped compact disks and other products
and services intended to facilitate traditional marketing and to bridge the gap
between conventional and Internet marketing. These CDs are an advertising tool
and can be used by companies seeking to drive traffic to their website. Through
the use of custom cut CDs, businesses can, in an inexpensive, broad band like
format, deliver a multimedia presentation of their corporate image or product or
tell their story and market their products. A link can be embedded on a custom
cut CD which activates a local Internet connection and browser to connect a
customer to that company's web page, thereby allowing that company's customer to
place an order or find out the latest information about that company and
generally interact with that company's website. Custom cut CD's have also been
introduced to the trading card industry to turn traditional trading cards into a
multimedia presentation or even an Internet experience for collectors.
IMI's products and services include the following:
o Multimedia Presentations: IMI creates custom multimedia presentations which
allow a company or individual to deliver its message using sound, video,
text, photos, and which can link to a corporate web site when provided on a
CD.
o Custom CDs: IMI works with clients to design shaped CD-Roms which IMI then
sells to its clients.
o Web Sites: IMI designs and develops custom built web sites for small and
medium sized companies.
2. Distribution Methods.
Galaxy Mall Business: Most of the products of the Company's Galaxy Mall business
are Internet related and, consequently, do not utilize traditional distribution
channels. The Company's principal products involve delivering to its customers
the ability 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 a
90-minute information seminar which previews the Internet, the "Registered
Merchant" section and the option to establish a storefront on the Galaxy Mall
and the Internet marketing workshop. Preview attendees are invited to attend a
one day workshop at which the Company provides an intensive training course on
Internet marketing using e-mail, news groups, auto-responders, classified ads,
search engines and other Internet "tools" to market their products and services
on the Internet. Interested attendees are then offered the opportunity to pay a
fee to become a registered merchant with the option to establish "storefront"
presence on the Galaxy Mall to market their products and services.
The Company advertises its preview sessions 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 personnel.
Mailing lists approximating the demographics established by the Company are
obtained from list brokers. Announcements of upcoming preview sessions also
appear in newspaper advertisements in scheduled cities.
The Company also uses a telemarketing effort to market Company products and
services, and also conducts its preview sessions and workshops for audiences
assembled by third parties at selected locations.
IMI Business. IMI primarily sells its products through two channels, consisting
of eight distributors and an inside sales force of seven employees primarily
engaged in outbound telemarketing. IMI has no long term agreements with its
customers.
3. Status of Publicly Announced New Products
None.
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, none of these competitors have 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.
IMI's markets are relatively new and there is little accumulated data or
accurate means of assessing size but they are believed to be highly fragmented.
IMI competes with other providers of custom cut CDs, as well as providers of
regular CDs, zip disks, and other means which may be used to deliver a
multimedia presentation to the end consumer. IMI's website development business
and multimedia presentation creation business compete with many different
businesses, including advertising agencies, web development houses and
multimedia development houses as well as similar internal resources of many
businesses.
5. Sources and Availability of Raw Material.
GMI does not rely on any raw materials for its business operations. IMI
purchases its custom cut CDs ready for shipment to IMI's customers pursuant to
purchase orders without guaranteed supply arrangements from two suppliers.
6. Dependence on Major Customers.
Registrant does not rely nor is it dependent on one or a few major customers.
IMI's top two customers accounted for approximately 54% of IMI's sales during
the period May 31, 1999 through December 31, 1999 although neither of these
customers accounted for more than 10% of Galaxy's total sales.
7. Intellectual Property.
The Company's business significantly depends on intellectual property developed
by the Company and intellectual property licensed from third parties. The
Company generally does not seek copyright and patent protection for its
intellectual property but does endeavor to treat such as trade secrets where
appropriate and has procedures in place to maintain their status as such. The
Company has been informed that certain of IMI's shaped CD products may infringe
patents of third parties. The Company's supplier of these CDs has agreed to
indemnify the Company with respect to these claims and the Company currently
plans to continue to sell these products pending further developments. There can
be no assurance that the Company's products do not infringe these or other
patents.
8. Need For Governmental Approval.
The Company believes that its business operations do not require governmental
approval. At least one jurisdiction, however, asserted that the Company's
products constitute a "business opportunity" and must be registered prior to
sale. The Company disputed this assertion and entered into a settlement with
that jurisdiction pursuant to which no such registration was 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.
From time to time, the Company receives inquiries from attorneys general offices
and other regulators about civil and criminal compliance matters with various
state and federal regulations. These inquiries sometimes rise to the level of
investigations and litigation. In the past the Company has received letters of
inquiry from and/or has been made aware of investigations by the attorney
general offices in Hawaii, Illinois, Nebraska, North Carolina, Utah and Texas
and from a regional office of the Federal Trade Commission. The Company has
responded to these inquiries, and has generally been successful in addressing
the concerns of these persons and entities, although there is generally no
formal closing of the inquiry or investigation and certain of these, including
Illinois and Utah, are believed to be ongoing. Hawaii has taken the position
that the Company's marketing efforts, in their current form, must comply with
its "Door-to-Door Sale Law". On June 18, 1998 the Commonwealth of Kentucky filed
an action against GMI under the Kentucky business opportunity statute. On
December 15, 1998, an Order of Dismissal was entered based on GMI agreeing to
advise the Kentucky Attorney General's office of any complaints from GMI
customers in Kentucky for a period of twelve months from the date of entry of
the Order of Dismissal. There can be no assurance that these or other inquiries
and investigations will not have a material adverse effect on the Company.
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 real time order processing system interface 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.
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 text, rather than relying on
Galaxy's programmers to make such changes.
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 allowing Galaxy to sell advertising space
based upon the impressions each site generates. The banner exchange is
located at bannersource.com.
Development of "Quick-Links" for incorporation into multimedia
presentations to allow easy access to customer websites.
A search engine, Matchsite.com, which simultaneously queries other search
engines.
The Company estimates that it spent approximately $146,000 during 1999 and
$250,000 during 1998 on such research and development activities.
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 21, 2000, the Company employed 163 people, 137 of whom work
full-time. Of the total employees, six employees are executive personnel, 44 are
technical personnel, 64 are in marketing and sales, 26 are in fulfillment and 23
were administrative, accounting, information systems, and clerical personnel.
13. Risk Factors
This Annual Report (including without limitation the following Risk Factors)
contains forward-looking statements (within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934)
regarding the Company and its business, financial condition, results of
operations and prospects including, without limitation, statements referring to
the proposed acquisition of the Company by Netgateway, new methods of acquiring
customers and their impact on margins, the ability to compete successfully in
the face of new technologies, reductions in administrative expenses as a percent
of sales, changes in the IMI product mix to include more multi media projects,
projected better results and overall margins at IMI and the ability to raise
additional capital through independent investors. Words such as "expects,"
"anticipates," "intends," "plans," "believes," "seeks," "estimates" and similar
expressions or variations of such words are intended to identify forward-looking
statements, but are not the exclusive means of identifying forward-looking
statements in this Annual Report. Additionally, statements concerning future
matters such as the development of new services, technology enhancements,
possible changes in legislation and other statements regarding matters that are
not historical are forward-looking statements.
Although forward-looking statements in this Annual Report reflect the good faith
judgment of the Company's management, such statements can only be based on facts
and factors currently known by the Company. Consequently, forward-looking
statements are inherently subject to risks and uncertainties, and actual results
and outcomes may differ materially from results and outcomes discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences in result and outcomes include without limitation those discussed
below as well as those discussed elsewhere in this Annual Report. Readers are
urged not to place undue reliance on these forward-looking statements, which
speak only as of the date of this Annual Report. The Company undertakes no
obligation to revise or update any forward-looking statements in order to
reflect any event or circumstance that may arise after the date of this Annual
Report.
Limited Operating History; Need to Develop Recurring Revenue
The Company has a limited operating history on which to base an evaluation of
its business and prospects. The Company's business and prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in their early stage of development, particularly
companies in new and rapidly evolving markets such as on-line commerce. Such
risks for the Company include, but are not limited to, an evolving and
unpredictable business model, management of growth, the Company's ability to
anticipate and adapt to a developing market and unforeseen changes and
developments in the Company's strategic alliances. To address these risks, the
Company must, among other things, implement and successfully execute its
business strategy, continue to develop and upgrade its technology, improve its
Web sites, provide superior customer service, respond to competitive
developments, attract, retain and motivate qualified personnel and meet the
expectations of its strategic partners. There can be no assurance that the
Company will be successful in addressing such risks, and the failure to do so
could have a material adverse effect on the Company's business, prospects,
financial condition and results of operations.
Historical Limited Profitability; Anticipated Losses
Since inception, the Company has achieved only limited profitability and, with
the growth rates contemplated by the Company's business plan and the recently
adopted Staff Accounting Bulletin 101 it will be some period of time before the
Company achieves profitability and the Company believes that it will incur
substantial losses for the foreseeable future. There can be no assurance that
the Company will ever achieve or maintain profitability or generate cash from
operations in the future.
Fluctuations in Operating Results
As a result of the Company's limited operating history and the emerging nature
of the markets in which it competes, the Company is unable to accurately predict
its revenues. The Company expects to experience significant fluctuations in its
future quarterly operating results due to a variety of factors, many of which
are outside the Company's control. Factors that may adversely affect the
Company's quarterly operating results include: (i) the Company's ability to
retain and attract merchants on its Web sites, (ii) the level of traffic on the
Company's Web sites, (iii) consumer confidence in encrypted transactions on the
Internet, (iv) the level of use of the Internet and on-line services and
increasing consumer acceptance of the Internet as a medium for commerce, (v) the
Company's ability to upgrade and develop its systems and infrastructure and
attract new personnel in a timely and effective manner, (vi) the announcement or
introduction of new sites, services and products by the Company and its
competitors, (vii) technical difficulties, system downtime or Internet
brownouts, (viii) the amount and timing of operating costs and capital
expenditures relating to expansion of the Company's business, operations and
infrastructure, (ix) governmental regulation, (x) implementation, renewal or
expiration of significant contracts with Millionaires in Training, Professional
Marketing, Inc., and others the Company may enter into in the future, and (xi)
general economic conditions and economic conditions specific to the Internet and
on-line commerce. The Company also faces unforeseeable seasonal sales
fluctuations related to its increasing focus on retail Internet commerce. Due to
the foregoing factors, in one or more future quarters, the Company's operating
results may fall below the expectations of securities analysts and investors. In
such event, the trading price of the Common Stock would likely be materially
adversely affected.
Management of Growth
The Company anticipates that significant expansion of its present operations
will be required to address potential growth in its market opportunities. This
expansion has placed, and is expected to continue to place, a significant strain
on the Company's management, operational and financial resources. In order to
manage its growth, the Company will be required to continue to implement and
improve its operational and financial systems, to expand existing operations, to
attract and retain superior management and to train, manage and expand its
employee base. Further, the Company's management will be required to maintain
relationships with various merchants and other third parties. There can be no
assurance that the Company will be able to effectively manage the expansion of
its operations, that the Company's systems, procedures or controls will be
adequate to support the Company's operations or that the Company's management
will be able to successfully implement its business plan. If the Company is
unable to manage growth effectively, the Company's business, financial condition
and results of operations could be materially adversely affected.
Need for Additional Financing
It is likely the Company will require additional financing. The Company's
working capital requirements in the foreseeable future will depend on a variety
of factors including the completion of the proposed merger with Netgateway and
Company's ability to implement its business plan. There can be no assurance that
the Company will be able to successfully negotiate or obtain additional
financing, or that such financing will be on terms favorable or acceptable to
the Company. The Company does not have any commitments for additional financing.
The Company's ability to obtain additional capital will be dependent on market
conditions, the national economy and others factors outside the Company's
control. If adequate funds are not available or are not available at acceptable
terms, the Company's ability to finance its expansion, develop or enhance
services or products or respond to competitive pressures would be significantly
limited. The failure to secure necessary financing could have a material adverse
effect on the Company's business, prospects, financial condition and results of
operations.
Dependence on the Internet
The Company's ability to derive revenues is substantially dependent upon
continued growth in the use of the Internet and the infrastructure for providing
Internet access and carrying Internet traffic. There can be no assurance that
the necessary infrastructure, such as a reliable network backbone, or
complementary products will be developed or that the Internet will prove to be a
viable commercial marketplace. To the extent that the Internet continues to
experience significant growth in the level of use and the number of users, there
can be no assurance that the infrastructure will continue to be able to support
the demands placed upon it by such potential growth. In addition, delays in the
development or adoption of new standards or protocols required to handle levels
of Internet activity, or increased governmental regulation may restrict the
growth of the Internet. Critical issues concerning the commercial use of the
Internet, including but not limited to, security, reliability, cost, ease of use
and access, and quality of service, remain unresolved and may impact the growth
of Internet use. If the necessary infrastructure or complementary products and
services are not developed or if the Internet does not become a viable
commercial marketplace, the business, operating results and financial condition
of the Company would be materially adversely affected.
Developing Market; Uncertain Acceptance of the Internet as Medium for Commerce
The market for the Company's services has only recently begun to develop and is
rapidly evolving. As is typical for a new and rapidly evolving industry, demand
and market acceptance for recently introduced products and services over the
Internet are subject to a high level of uncertainty and risk. Moreover, since
the market for the Company's services is new and evolving, it is difficult to
predict the size of this market and the future growth rate, if any. The success
of the Company's services will be substantially dependent upon the widespread
acceptance and use of the Internet as a medium for commerce by a broad base of
consumers. Rapid growth in the use of the Internet is a recent phenomenon, and
the Company relies on consumers who have historically used traditional means of
commerce to buy goods and services. For the Company to be successful, these
consumers must accept and utilize novel ways of conducting business and
exchanging information. There can be no assurance that there will be broad
acceptance of the Internet as an effective medium for commerce by consumers. If
the Company's on-line services do not achieve market acceptance or if the
Internet does not become a viable commercial marketplace, the Company's
business, results of operations and financial condition would be materially
adversely affected.
Risks Associated with Brand Development
The Company believes that establishing and maintaining the Galaxy Mall and
Impact Media are a critical aspect of its efforts to attract and expand its
audience and that the importance of brand recognition will increase due to the
growing number of Internet sites and the relatively low barriers to entry.
Promotion and enhancement of their brands will depend largely on the Company's
success in providing high-quality products and services and in designing and
implementing effective media promotions, which success cannot be assured. In
order to attract and retain users and to promote and maintain brand recognition
of these brands in response to competitive pressures, the Company believes it is
necessary to increase substantially its financial commitment to creating and
maintaining a distinct brand loyalty among consumers. If the Company is unable
to provide high-quality products and services, design and implement effective
media promotions or otherwise fails to promote and maintain its brands, or if
the Company incurs excessive expenses in an attempt to improve its products and
services or promote and maintain its brands, the Company's business, operating
results and financial condition would be materially adversely affected.
Intellectual Property And Proprietary Rights
The Company's success is dependent in part upon its proprietary technology. The
Company relies on a combination of trademark, copyright and trade secret laws,
as well as confidentiality agreements and technical measures to protect its
proprietary rights. The Company does not currently possess any patents and the
Company has not applied for any patents. There can be no assurance that the
Company will develop proprietary products or technologies that are patentable.
The Company has generally not registered any of its trademarks but claims
trademark rights in a number of marks, and has applied for a trademark
registrations in the United States for the Galaxy Mall trademark. There can be
no assurance that the Company will be able to secure significant protection for
these trademarks. Despite the Company's efforts to protect its proprietary
rights, unauthorized parties may attempt to copy aspects of the Company's
products or services or to obtain and use information that the Company regards
as proprietary. There can be no assurance that the Company's means of protecting
its proprietary rights will be adequate or that the Company's competitors will
not independently develop similar technology or duplicate the Company's products
or design around patents issued to the Company or other intellectual property
rights of the Company.
There have been substantial amounts of litigation in the computer industry
regarding intellectual property rights. There can be no assurance that third
parties will not in the future claim infringement by the Company with respect to
current or future products, trademarks or other proprietary rights, that the
Company will counterclaim against any such parties in such actions or that if
the Company makes claims against third parties with respect thereto, that any
such party will not counterclaim against the Company in such action. Any such
claims or counterclaims could be time-consuming and result in costly litigation,
require the Company to redesign its products or require the Company to enter
into royalty or licensing agreements, any of which could have a material adverse
effect on the Company's business, prospects, financial condition and results of
operations. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to the Company or at all.
Rapid Technological Change
The Internet and on-line commerce industries are characterized by rapid
technological change, changing market conditions and customer demands and the
emergence of new industry standards and practices that could render the
Company's existing products and services offerings, including its Web sites and
proprietary technology obsolete. The Company's future success will substantially
depend on its ability to enhance its existing services, develop new services and
proprietary technology and respond to technological advances in a timely and
cost-effective manner. The development of Web site and other proprietary
technology entails significant technical and business risk. There can be no
assurance that the Company will be successful in developing and using new
technologies or adapting its proprietary technology and systems to meet emerging
industry standards and customer requirements. If the Company is unable, for
technical, legal, financial, or other reasons, to adapt in a timely manner in
response to changing market conditions or customer requirements, the Company's
business, prospects, results of operations and financial condition would be
materially adversely affected.
Reliance On Key Management Personnel
The Company's performance is substantially dependent on the continued services
and the performance of its senior management and other key personnel. The
Company's performance also depends on the Company's ability to retain and
motivate its other executive officers and key employees. The loss of the
services of any of its executive officers or other key employees could have a
material adverse effect on the Company's business, prospects, financial
condition and results of operations. The Company's future success also depends
on its ability to identify, attract, hire, train, retain and motivate other
highly skilled technical, managerial and marketing personnel. Competition for
such personnel is intense, and there can be no assurance that the Company will
be successful in attracting and retaining such personnel. The failure to attract
and retain the necessary technical, managerial and marketing personnel could
have a material adverse effect on the Company's business, prospects, financial
condition and results of operations.
Competition
The on-line commerce market, particularly over the Internet, is new, rapidly
evolving and intensely competitive. The Company's current or potential
competitors include: (i) e-commerce solution providers that provide shopping
cart based transaction products such as: Yahoo Store!, iCAT, Pandesic; (ii)Web
developers that incorporate e-commerce products in their solutions such as
Mercantec, and Simplenet; (iii) on-line shopping malls such as The Internet
Mall, iMall, Branch Mall, and Yahoo! Shopping; (iv) payment gateway providers
such as Cybercash and Clear Commerce; (v) banner exchanges such as LinkExchange,
LinkTrader and (vi) metasearch engines, such as Dogpile and Metacrawler.
The Company believes that the principal competitive factors in its market are
simplicity, brand recognition, product selection, personalized services,
convenience, price, accessibility, customer service, quality of storefront
tools, quality of editorial and other site content and reliability and speed of
fulfillment. Many of the Company's competitors have longer operating histories,
larger customer bases, greater brand recognition and significantly greater
financial, marketing and other resources than the Company. Certain of the
Company's competitors may be able to devote greater resources to marketing and
promotional campaigns, adopt more aggressive pricing or inventory availability
policies and devote substantially more resources to Web site and systems
development than the Company. Increased competition may result in reduced gross
margins, loss of market share and a diminished brand franchise.
There can be no assurance that the Company will be able to compete successfully
against current and future competitors.
The Company expects that competition in the on-line commerce market will
intensify in the future. For example, as various market segments obtain large,
loyal customer bases, participants in those segments may seek to leverage their
market power to the detriment of participants in other market segments.
Competitive pressures created by any one of the Company's competitors, or by the
Company's competitors collectively, could have a material adverse effect on the
Company's business, prospects, financial condition and results of operations.
Internet Commerce Security Risks
A significant barrier to on-line commerce is the secure transmission of
confidential information over public networks. The Company relies on encryption
and authentication technology to provide the security and authentication
necessary to effect secure transmission of confidential information. There can
be no assurance that advances in computer capabilities, new discoveries in the
field of cryptography, or other developments will not result in a compromise or
breach of the algorithms used by the Company to protect consumers' transaction
data. If any such compromise of the Company's security were to occur, it could
have a material adverse effect on the Company's business, prospects, financial
condition and results of operations. A party who is able to circumvent the
Company's security measures could misappropriate proprietary information or
cause interruptions in the Company's operations. The Company may be required to
expend significant capital and other resources to protect against such security
breaches or to alleviate problems caused by such breaches.
Concerns over the security of transactions conducted on the Internet and the
privacy of users may also hinder the growth of on-line services generally,
especially as a means of conducting commercial transactions. To the extent that
activities of the Company or third-party contractors involve the storage and
transmission of proprietary information, such as credit card numbers, security
breaches could damage the Company's reputation and expose the Company to a risk
of loss or litigation and possible liability. There can be no assurance that the
Company's security measures will not prevent security breaches or that failure
to prevent such security breaches will not have a material adverse effect on the
Company's business, prospects, financial condition and results of operations.
Risk of System Failure
The success of the Company is substantially dependent upon its ability to
deliver high quality, uninterrupted Internet hosting, which requires that the
Company protect its computer equipment and the information stored in its
servers, substantially all of which is located at the Company's primary server
location in Salt Lake City, Utah. The Company's systems are vulnerable to damage
by fire, earthquake, natural disaster, power loss, telecommunications failures,
unauthorized intrusion and other catastrophic events. Any substantial
interruption in the Company's systems would have a material adverse effect on
Company's business, prospects, financial condition and results of operations.
Although the Company carries property and business interruption insurance, its
coverage may not be adequate to compensate for the losses that may occur. In
addition, the Company's systems may be vulnerable to computer viruses, physical
or electronic break-ins and other similar disruptive events. Computer viruses,
break-ins or other problems caused by third parties could lead to interruptions,
delays, loss of data or cessation in service to users of the Company's services.
The occurrence of any of these risks could have a material adverse effect on the
Company's business, prospects, financial condition and results of operations.
Risk of Capacity Constraints
The Company seeks to generate a high volume of traffic and transactions on its
Web sites. Accordingly, the satisfactory performance, reliability and
availability of the Company's Web sites, processing systems and network
infrastructure are critical to its reputation and ability to attract and retain
large numbers of users who purchase items on its Web sites while maintaining
adequate customer service levels. Any system interruptions that result in the
unavailability of the Company's Web sites or reduced customer activity would
reduce the volume of items purchased. Any substantial increase in the volume of
traffic on the Company's Web sites will require the Company to expand and
upgrade its technology, transaction processing systems and network
infrastructure. There can be no assurance that the Company will be able to
accurately project the rate or timing of increases, if any, in the use of the
its services or timely expand and upgrade its systems and infrastructure to
accommodate such increases in a timely manner. Any failure to expand or upgrade
its systems could have a material adverse effect on the Company's business,
results of operations and financial condition.
The Company uses a combination of internally developed and third party systems
to operate its services and for transaction processing, including billing and
collections processing. The Company must continually enhance and improve these
systems in order to accommodate the level of use of its services. Furthermore,
in the future, the Company may add additional features and functionality to its
services that would result in the need to develop or license additional
technologies. The Company's inability to add additional software and hardware or
to develop and further upgrade its existing technology, transaction processing
systems or network infrastructure to accommodate increased traffic on its Web
sites or increased transaction volume through its processing systems or to
provide new features or functionality may cause unanticipated system
disruptions, slower response times, degradation in levels of customer service,
impaired quality of the user's experience, and delays in reporting accurate
financial information. There can be no assurance that the Company will be able
in a timely manner to effectively upgrade and expand its systems or to integrate
smoothly any newly developed or purchased technologies with its existing
systems. Any inability to do so would have a material adverse effect on the
Company's business, results of operations and financial condition.
Government Regulations And Legal Uncertainties
The Company is not currently subject to direct regulation by any government
agency, other than regulations applicable to businesses, and there are currently
few laws or regulations directly applicable to access to or commerce on the
Internet, although the Company has been the subject of a number of governmental
inquiries and investigations. In addition, it is possible, however, that a
number of laws and regulations may be adopted with respect to the Internet,
covering issues such as user privacy, pricing and characteristics and quality of
products and services. The adoption of any such laws or regulations may decrease
the growth of the Internet, which in turn, could decrease the demand for the
Company's services and increase the Company's cost of doing business or
otherwise have an material adverse effect on the Company's business, prospects,
financial condition and results of operations. Moreover, the applicability to
the Internet or other on-line services of existing laws in various jurisdictions
governing issues such as property ownership, sales and other taxes, libel and
personal privacy is uncertain and may take years to resolve. Any such new
legislation or regulation, the application of laws and regulations from
jurisdictions whose laws do not currently apply to the Company's business, or
the application of existing laws and regulations to the Company's current
methods of acquiring customers, the Internet or other on-line services could
have a material adverse effect on the Company's business, prospects, financial
condition and results of operations.
Possible Volatility of Stock Price
The trading price of the Company's common stock is likely to be highly volatile
and could be subject to wide fluctuations in response to factors such as actual
or anticipated variations in the Company's quarterly operating results,
announcements of technological innovations, or new services by the Company or
its competitors, changes in financial estimates by securities analysts,
conditions or trends in the Internet and on-line commerce industries, changes in
the market valuations of other Internet or on-line service companies,
announcements by the Company or its competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments, additions or
departures of key personnel, sales of the Company's common stock in the open
market, a termination of the Merger Agreement with Netgateway and other events
or factors, many of which are beyond the Company's control. Further, the stock
markets in general, and the Nasdaq Stock Market and the market for
Internet-related and technology companies in particular, have experienced
extreme price and volume fluctuations that have often been unrelated or
disproportionate to the operating performance of such companies. The trading
prices of many technology companies' stocks are at or near historical highs and
reflect valuations substantially above historical levels. There can be no
assurance that these trading prices and valuations will be sustained. These
broad market and industry factors may materially adversely affect the market
price of the Company's common stock, regardless of the Company's operating
performance. Market fluctuations, as well as general political and economic
conditions such as recession or interest rate or currency rate fluctuations, may
also adversely affect the market price of the Company's common stock. In the
past, following periods of volatility in the market price of a company's
securities, securities class-action litigation has often been instituted against
such company. Such litigation, if instituted, could result in substantial costs
and a diversion of management's attention and resources, which would have a
material adverse effect on the Company's business, prospects, results of
operations and financial condition.
In valuing Galaxy common stock and the prospects of Galaxy, you should also
consider the following risks that are associated with the Netgateway merger:
Failure to Close Merger
If the proposed merger with Netgateway does not close, Galaxy's business,
results of operations and financial condition will be seriously harmed because
the announcement of the merger and Galaxy's efforts to close the merger have:
o disrupted Galaxy's sales and marketing efforts;
o diverted the attention of Galaxy's management; and
o delayed certain strategic initiatives of Galaxy.
In addition, under certain circumstances Galaxy will be required to pay
Netgateway a termination fee of $1.5 million plus expenses to up to $500,000.
Failure to Integrate Netgateway and Galaxy May Limit Benefits of Merger
In order to realize the benefits of the merger, Netgateway and Galaxy will have
to effectively integrate their operations and their management, engineering and
sales and marketing personnel. If they are not successful in accomplishing this
integration, then the benefits of the merger, including the operating results of
the combined entity and the retention of key personnel, will not be realized. A
key benefit of the merger is perceived to be using Galaxy's personnel to execute
Netgateway's cable strategy. However, if the integration is not successful,
including if the combined company is not able to retain Galaxy's management, the
combined company will not realize these benefits. In addition, the attention and
effort devoted to the integration of the two companies will have significantly
diverted management's attention from other important issues, and could have a
material adverse impact on the combined company, whether or not the integration
is successful.
Combined Financial Results Could Be Adversely Affected by Merger; Costs of the
Merger Are Difficult to Estimate
The business and financial model of Galaxy is different from the Netgateway
model. If the benefits of the merger to Netgateway and Galaxy stockholders do
not exceed the costs associated with the merger, including the integration
costs, which are difficult to calculate, then Netgateway's financial results,
including earnings per share, could be adversely affected.
The Market Price of Netgateway Common Stock May Decline as a Result of the
Merger.
The market price of Netgateway common stock may decline as a result of the
merger if:
o the integration of Netgateway and Galaxy is unsuccessful;
o the combined company does not achieve the perceived benefits of the merger
as rapidly or to the extent anticipated by financial analysts; or
o the effect of the merger on the combined company's financial results is not
consistent with the expectations of financial analysts.
The Merger Is Intended to Qualify as a Pooling of Interests and Financial
Results Would Be Negatively Affected by the Failure to so Qualify
To qualify the merger as a pooling of interests for accounting purposes,
Netgateway and Galaxy and their respective affiliates must meet the criteria for
pooling of interests accounting established in pronouncements of the Accounting
Principles Board and the Financial Accounting Standards Board and
interpretations by the Securities & Exchange Commission. These accounting
principles and their interpretations are complex. Consummation of the merger is
not conditioned upon the receipt by Netgateway of letters from its independent
accountants and Galaxy's independent accountants that they concur with
management's conclusion that no conditions exist that would preclude Netgateway
and Galaxy from being parties to a business combination that would be accounted
for as a pooling of interests.
Fixed Exchange Ratio May Adversely Impact Value of Netgateway Stock Being
Received.
Each outstanding share of Galaxy common stock will be converted into the right
to receive approximately six-tenths of a share of Netgateway common stock at the
effective time of the merger. The exchange ratio will not be adjusted in
response to any fluctuations in the price of either Netgateway common stock or
Galaxy common stock. Consequently, the value of the equivalent per share price
that Galaxy stockholders expect to receive for each share of Galaxy common stock
exchanged in the merger may decrease from the date that they submit their proxy
and the effective date of the merger. If the market price for Netgateway common
stock decreases before the effective time of the merger, the market value at the
effective time of Galaxy's common stock will correspondingly decrease and, as
noted above, Galaxy's stockholders will not be compensated for decreases in the
market price of Netgateway common stock. Galaxy's stockholders voting on the
merger are urged to obtain recent market quotations for Netgateway common stock
and Galaxy common stock. Galaxy cannot predict or give any assurances as to the
market price of Netgateway common stock or Galaxy common stock at any time
before or after the effective time of the merger.
ITEM 2. Description Of Property.
The Company's principal office is located at 754 E. Technology Avenue, Orem,
Utah 84097. The property consists of the basement and third floor (12,700 square
feet total) of a three story office building 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 five years
with an annual rental of $241,764.
The Company's IMI business 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.
The Company maintains tenant fire and casualty insurance on its property located
in such buildings in an amount deemed adequate by the Company.
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
The Company has completed transactions with over 40,000 customers this year and
in its regular course of business receives requests for refunds from customers,
who at times threaten and/or have brought legal proceedings. The Company
analyzes each refund request on a case-by-case basis and grants refunds where
appropriate. In the vast majority of cases the Company has been successful in
defending these actions. The Company considers these to be routine claims
incidental to its business. See Item 1.A.9 Effect of Government Regulation on
Business.
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 1999.
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 1999 Quarter Ended High Low
December 31, 1999 $6.00 $1.13
September 30, 1999 $2.81 $1.47
June 30, 1999 $4.24 $1.56
March 31, 1999 $6.88 $2.50
Fiscal Year 1998 Quarter Ended High Low
December 31, 1998 $8.63 $.56
September 30, 1998 $2.32 $.56
June 30, 1998 $2.12 $.75
March 31, 1998 $2.25 $.75
On March 21, 2000, the closing quotation for the common stock on the bulletin
board was $5.34 per share. As of March 21, 2000, there were 5,952,014 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.
On June 25, 1999 the Company issued 250,000 shares of its common stock to Impact
Media in connection with the purchase of the business of Impact Media. These
shares are held in escrow and are to be distributed pursuant to the terms of an
earn-out agreement based on results achieved by the Impact Media business during
the annual periods ending May 31, 2000 and May 31, 2001. The Company relied on
an exemption provided by Section 4(2) of the Security Act of 1933.
On November 11, 1999 the Company issued 5,400 shares of its common stock to a
public relations firm in exchange for services provided by it. The Company
relied on an exemption provided by Section 4(2) of the Securities Act of 1933.
On November 23, 1999 the Company issued 228,570 shares of its common stock to an
institutional investor for $1.31 per share. The Company relied on an exemption
provided by Section 4(2) of the Securities Act of 1933 as amended.
During the period January 1, 1999 to December 31, 1999 the Company issued to six
employees a total of 11,800 shares of its common stock at a price of $.75 per
share. The options had been issued prior to the effectiveness of the Company's
registration statement on Form 10SB and accordingly the Company relied on the
exemption from registration as provided by Rule 701 under the Securities Act of
1933, as amended.
During the period of January 1, 1999 to December 31, 1999 the Company issued to
71 persons pursuant to the Company's employee stock option plan a total of
959,500 options to purchase its common stock, at exercise prices ranging from
$1.00 to $2.63 per share. The issuance of 788,750 of these options is subject to
approval by the stockholders of the Company and will be submitted to the
stockholders for approval at the next annual meeting or the stockholders of the
Company. The Company relied on an exemption from registration as provided by
Section 4(2) under the Securities Act.
During January, 1999 the Company issued to a group of persons warrants to
purchase a total of 50,000 shares of its common stock at $7.05 per share as a
fee in connection with a private placement of its convertible debentures. The
Company relied on the exemption from registration as provided by Section 4(2) of
the Securities Act of 1933, as amended.
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 the Company and other financial
information appearing elsewhere herein.
Results of Operations
Revenues. The Company's sales for the calendar year ending December 31, 1999
were $17,934,277 as compared to $11,448,392 for the twelve months ending
December 31, 1998, an increase of 56.7%. This sales comparison between the two
years should only be made taking into account that during December 1999 the
Securities and Exchange Commission (SEC) published Staff Accounting Bulletin
Number 101 which deals with revenue recognition issues. The Staff issued the
Bulletin to offer guidance on how revenue should be recognized for various
transactions including nonrefundable up front fees. Some of Galaxy's revenues
come from up front fees and therefor should be accounted for as described in the
Bulletin. See the notes to the financial statements for a more detailed
explanation of this change. The Company deferred $10,551,402 of 1999 revenues
into the years 2000 and 2001 and recognized $5,256,490 as revenues carried into
1999 from 1998. These transactions were accounted for as a change in accounting
principal pursuant to Staff Accounting Bulletin 101 during the year ending
December 31, 1999.
The sales increase was partially due to increased attendance at the Company's
Internet training workshops. During the year the Company conducted 177 workshops
compared to 108 in 1998. In addition the Company's Impact Media business
generated sales for the year of $3,646,315. Additional segment information is in
footnote 14 to the financial statements. The Impact Media business was acquired
effective May 31, 1999 when Galaxy, through its subsidiary IMI, purchased the
assets and business interests of Impact Media. There were no corresponding sales
in 1998. The purchase transaction is more completely described the Company's
Form 8-K/A dated June 25, 1999.
The pending merger with Netgateway will also offer the Company additional
opportunities to increase revenues through contacts with Netgateway's customers.
In particular, the Cable Division of Netgateway has a program which it is
anticipated will bring additional people into the Company's workshops.
Seasonality. Revenues during the year are subject to seasonal fluctuations. The
first and second calendar quarters are generally stronger than the third and
fourth quarters. Customers seem less interested in attending the Company's
workshops during the period July 15th through Labor day, and again during the
holiday season from Thanksgiving Day through the first week of the following
January.
IMI sales began May 31, 1999 and therefore it is not possible to determine the
seasonal fluctuations that may be present on a quarterly basis until such time
as we have at least 12 full months of operations.
The change in accounting principle mentioned above was proposed by the SEC in
December 1999 so previously reported quarterly revenues during the year were on
the same basis used in 1998 and prior periods.
Cost of Services/Products Sold. Cost of sales during 1999 totaled $13,506,633,
which is equal to 75.3% of revenues. Cost of sales during 1998 totaled
$5,105,617, which is equal to 44.5% of revenues. This comparison, like the sales
comparison, should be made in light of the effect of adopting Staff Accounting
Bulletin 101. The increase in the cost of sales as a percentage of revenues is
primarily due to the deferral of revenue. Also affecting the change was an
increase in telemarketing sales, which have lower margins and IMI's sales which
also have lower margins.
Galaxy Mall's cost of sales were equal to 67.3% of sales in 1999 and 44.5% in
1998. This increase is due to the factors explained above. IMI's cost of sales
was 107.4% in 1999.
IMI's sales are made up of compact discs and multi media presentations. During
1999 only $69,487 were multi media projects. The mix is expected to change in
favor of the multi media projects which have a higher gross profit. IMI has also
raised its prices for the compact discs and the Company expects this product
line to show better results in the future. We therefor anticipate that overall
margins at IMI will improve in the year 2000.
Cost of sales is made up of the cost of tangible products sold, the cost to
conduct Internet training workshops, the cost to program customer storefronts
and contract telemarketing services. Cost of sales does not include any
depreciation.
Selling, General and Administrative Expenses. Selling, General and
Administrative Expenses were equal to $10,703,741 in 1999 compared to $6,147,356
in 1998. These expenses, as a percentage of sales, increased in 1999 to 59.6%
from 53.6% in 1998. The increase in the expenses as a percentage of sales is
attributable to increases in advertising, postage, mailing expenses and other
costs to solicit persons to attend the Company's preview sessions and workshops.
In 1998 the revenue generated by these activities was recognized when the sale
at the workshop was made. Under the changed accounting policy much of the
revenue from 1999 is deferred into the year 2000, which results in the higher
percentage of recognized sales when compared to the same type of expenses.
The Company anticipates that selling expenses, as a percentage of sales, will
improve in the future as lower cost methods of attracting people to the
workshops are employed. The Company has developed a number of programs which it
believes will have lower costs and anticipates that they will be implemented
beginning in second quarter of 2000.
Certain administrative expenses such as legal, telephone and rent for larger
quarters showed increases as a percentage of sales from 1998 to 1999. 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.
Selling, general and administrative expenses for IMI totaled $545,621 which was
equal to 14.9% of sales. These same expenses for Galaxy Mall were $9,700,658
which is equal to 69.9% of sales. Galaxy's expenses were affected by the
deferral of revenue mentioned above.
Depreciation. Depreciation expense in 1999 was $97,591, ($90,867 at Galaxy and
$6,724 at IMI) compared to $53,260 in 1998. This was the result of purchases of
computer equipment, software and other long-term assets.
Amortization. During 1999 amortization of Goodwill and Deferred Charges was
$61,974 ($57,800 at Galaxy and $4,174 at IMI) compared to $80,175 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.
Further, SOP 98-5 requires that the write-off be reported as the cumulative
effect of a change in accounting principle. Accordingly, the Company reported a
cumulative effect charge of $67,127 during the year for previously capitalized
organization costs. The balance of the amortization, $61,974, results from the
amortization of Goodwill. Total Goodwill at the end of 1999 was $850,434, net of
amortization. The Goodwill arose through the purchase by the Company of the
assets and business interests of Profit Education Systems, Inc., CO-OP Business
Services, Inc. and Impact Media, L.L.C.
Income Taxes. Income tax expense for 1999 was $2,692, resulting from minimum
payments due for State Income taxes and deferred taxes due for various timing
differences between financial and tax accounting. The Company has not recorded
an income tax benefit as a result of the loss for the year or other temporary
differences since it is uncertain as to when the Company will become profitable
and thereby be able to use the benefit of such items.
Net Income/Loss. The Company reported a Net Loss of $12,638,600 for the Calendar
year ending December 31, 1999, as compared to Net Income of $35,375 for the
twelve-month period ending December 31, 1998. The loss included a non-cash
charge of $5,517,778 which resulted from the deferral of revenue into the years
2000 and 2001 and the write-off of organization costs which are reflected as a
change in accounting principle discussed previously. On a per share basis the
loss amounted to $2.23 per share in 1999 as compared to a profit of $.0067 per
share in 1998.
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, (ii) sold
250,000 shares of the Company's common stock to Invest Linc Capital Corp.
("Invest Linc") for $1,000,000 and (iii) sold 228,570 shares of the Company's
common stock to Zylo Ltd. for $300,000. During January and February 1999, the
Augustine Fund converted the note into 169,192 shares of the Company's common
stock. These capital infusions significantly improved the Company's liquidity
and its ability to meet ongoing working capital needs.
Cash. Cash on hand at December 31, 1999 totaled $132,741 as compared to $24,719
at the end of 1998. Bank overdrafts for the same periods were $348,907 and
$179,301 respectively.
Accounts Receivable. Accounts receivable, net of allowance for doubtful
accounts, was $1,112,947 at December 31, 1999 ($717,971 at Galaxy and $394,976
at IMI) compared to $40,838 at the prior year's end. This increase is the result
of the Company offering to finance customer purchases with monthly payments at
its Internet training workshops and the Impact Media division selling to
customers in the normal course of business on open account. The receivables
associated with the Internet training workshops are collected for the Company by
Travelers Investment Corporation for a fee.
Prepaid Expenses. Prepaid expense at December 31, 1999 were $336,148 compared to
$18,549 at the end of 1998. The increase is mainly the result of payments made
by Galaxy Mall for certain marketing costs ($200,764) incurred in the third and
fourth quarters that apply directly to Internet training workshops to be held
during the year 2000. Revenues to be derived from these expenditures will be
earned in 2000 and 2001. 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 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 December 31, 1999 were $248,431
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. Some banks require the company to leave on deposit with them 5% of
the credit card proceeds until the amount reaches 50% of one month's
transactions. This reserve earns interest at the bank's certificate of deposit
rate and will be returned to the company at a future date.
Accounts Payable. Accounts payable at December 31, 1999 totaled $1,808,482.
There was also a bank overdraft of $348,907 bringing the total payable up to
$2,157,389 as compared to $830,774 at the end of 1998.
Deferred Revenue. Deferred revenue at December 31, 1999 totaled $10,745,563 as
compared to zero at the previous year's end. As explained under "Revenues"
earlier in this discussion the Company has adopted a change in accounting
principle as contemplated by Staff Accounting Bulletin 101, which resulted in
this amount being established for the first time.
Customer Deposits. Customer Deposits amounted to $285,226 at December 31, 1999
as compared to $6,060 at December 31, 1998. This represents amounts paid to the
company as deposits from customers for orders to be delivered in the future. At
the time the goods are shipped and title transfers to the customer, the amount
will be taken into income.
Equipment and Property. Equipment increased during 1999 to $259,577 from
$171,868 net of accumulated depreciation of $157,364 in1999 and $59,773 in 1998.
This was due to the need for additional computers 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, 1999 future
aggregate minimum obligations under leases for the year 2000 were $474,273. This
includes both the Company's office and warehouse buildings and equipment leases.
Stockholders' Equity. Total Stockholders' Equity decreased to a deficit of
$10,593,690 during 1999 from $256,285 at December 31, 1998. This was mainly the
result of the change in accounting principle described earlier that established
the Deferred Revenue with the resultant net loss from operations for the Year.
The sale of additional stock partially offset this decline by the amounts
discussed in "New Investments" above. Since the establishment of the Deferred
Revenue was a non-cash transaction, and no monies were required to be repaid to
customers as a result of the change, the Company believes it can continue to
operate inspite of the negative net worth.
Liquidity
Ratios. At December 31, 1999 the Company's current ratio, current assets
compared to current liabilities, was .16 to 1 compared to .25 to 1 as of
December 31, 1998. This out of balance situation is exacerbated by the deferred
revenue adjustment. Based on the previous accounting policy the ratio at the end
of 1999 would have been .68 to 1, an improvement over 1998. The current ratio is
expected to improve by projected profitable operations. The Company also
believes it has the ability to raise equity capital through independent
investors. This would bring the ratio into line with industry standards.
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. During the first quarter of 1999 the Company obtained $1,450,000 from
the sale of debt and equity securities and in the fourth quarter obtained
$300,000 from the sale of unregistered common stock. $8,850 was obtained from
employees who exercised their stock options during the year so the total cash
in-put from debt and equity transactions was $1,758,850. 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.
In conjunction with the Merger Agreement with Netgateway and upon consummation
of the merger, the Company will become a wholly-owned subsidiary of Netgateway.
The merger is expected to close during the second quarter of 2000 and is subject
to the satisfaction or waiver by the parties of certain conditions. The Company
may be required to pay a substantial termination fee if the merger agreement is
terminated for certain specific reasons. If required, payment of the fee would
have a material adverse effect on the Company's business, prospects, financial
conditions, results of operations and its ability to raise future capital.
Business Development
Effective on May 31, 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 presentations, 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, intellectual
property, computer programs, 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.
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.
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. B. Ray
Anderson filed his Initial Statement of Beneficial Ownership on Form 3 with
respect to 10,000 shares on approximately April 20, 1999 rather than prior to
the effectiveness of the Company's initial registration statement on Form 10SB.
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.
(a) Security Ownership of Certain Beneficial Owners
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.
(b) Security Ownership of 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.
(c) Changes in Control
In December 1999, the Company announced that it had signed a letter of intent to
be acquired by Netgateway. On January 7, 2000, Galaxy obtained $300,000 in
bridge financing from Netgateway for working capital purposes and for the
payment of certain professional fees incurred by Galaxy in connection with the
proposed merger. On February 4, 2000, Netgateway advanced an additional $150,000
to Galaxy for working capital purposes and for the payment of certain
professional fees incurred by Galaxy in connection with the proposed merger.
Each loan is secured by a pledge of Galaxy common stock by John J. Poelman, the
chief executive officer and largest shareholder of Galaxy. The notes bear
interest at 9.5% and are due and payable on the earlier of June 1, 2000 or the
consummation date of the merger. In the Merger Agreement Netgateway has agreed
to cause Galaxy to repay the loans following the merger.
On March 13, 2000, Galaxy Enterprises, Inc. and Netgateway, Inc., a Delaware
corporation, issued a press release concerning the execution of a Merger
Agreement between the parties and a wholly-owned subsidiary of Netgateway,
pursuant to which the subsidiary would be merged with and into Galaxy, with
Galaxy remaining as the surviving corporation in the merger and a subsidiary of
Netgateway. Upon consummation of the merger, Netgateway will acquire Galaxy for
approximately 3.9 million shares of Netgateway common stock, or approximately
six tenths of one share of Netgateway common stock for each share of Galaxy
common stock. In addition, Netgateway has agreed to assume all outstanding
options under Galaxy's 1997 Stock Option Plan. Assuming that all such options
granted as of the date of the Merger Agreement are outstanding on the date of
the merger such assumed options will, following the merger, be exercisable for
approximately 1.1 million shares of Netgateway common stock. Consummation of the
merger is subject to certain terms, conditions and termination rights specified
in the Merger Agreement, including approval of both companies' stockholders. A
copy of the press release is filed as an exhibit to this current report.
In connection with the execution of the Merger Agreement, Netgateway and John J.
Poelman, the Chief Executive Officer of Galaxy, entered into a voting agreement
pursuant to which, among other things, Mr. Poelman agreed to vote in favor of
approval and adoption of the merger. In addition, in connection with the Merger
Agreement, Netgateway and Sue Ann Cochran entered into a voting agreement
pursuant to which, among other things, Ms. Cochran agreed to vote in favor of
approval and adoption of the merger. Mr. Poelman and Ms. Cochran together own
approximately 19% of the total outstanding shares of Galaxy.
In connection with the execution of the Merger Agreement, Netgateway and Mr.
Poelman entered into an option agreement, pursuant to which, among other things,
Mr. Poelman granted to Netgateway an option to purchase his shares of Galaxy
common stock, representing approximately 16% of the total outstanding shares of
Galaxy common stock. This option may only be exercised for a limited period of
time following a termination of the Merger Agreement and only if the Merger
Agreement is terminated for certain specified reasons.
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.
ITEM 13. Exhibits And Reports On Form 8-K.
A. Exhibits.
<PAGE>
Exhibit
Number Description
- -------- -----------
2.1 (2) Asset Purchase Agreement, dated as of May 31, 1999, by and
between Impact Media, L.L.C. and IMI, Inc.
2.2 (2) Earn-Out Agreement, dated as of May 31, 1999, by and among Impact
Media, L.L.C., IMI, Inc. and Jay Poelman.
2.3 (3) Agreement and Plan of Merger dated as of March 10, 2000 by and
among Netgateway, Inc., Galaxy Acquisition Corp., and Galaxy
Enterprises, Inc.
3.1 (1) Articles of Incorporation of Cipher Voice, Inc.
3.2 (1) Certificate of Amendment of Articles of Incorporation for Cipher
Voice, Inc., dated October 30, 1996
3.3 (1) Certificate of Amendment of Articles of Incorporation for Cipher
Voice, Inc., dated December 16, 1996
3.4 (1) By-Laws of Cipher Voice, Inc.
10.1 (1) Stock for Stock Agreement dated December 4, 1996 between Cipher
Voice and the shareholders Galaxy Mall, Inc.
10.2 (1) Exchange Agreement between Galaxy Mall, Inc. and Profit Education
Systems, Inc. dated October 1, 1997
10.3 (1) Transfer Agreement Between Galaxy Mall, Inc. and CO-OP Business
Services dated October 1, 1997
10.4 (1) 1997 Employee Stock Option Plan
10.5 (1) Incentive Stock Option Agreement
10.6 (1) Stock Option Agreement between Ray Anderson and Galaxy
Enterprises, Inc. dated August 10, 1998
10.7 (1) Stock Option Agreement between Darral G. Clarke and Galaxy
Enterprises, Inc. dated August 10, 1998
10.8 (1) Consulting Agreement with Gary Cochran dated October 1, 1998
10.9 (1) Royalty and Consulting Agreement with Gary Cochran May 1, 1998
10.10 (3) Promissory Note dated January 7, 2000 in the principal amount of
$300,000 made by Galaxy Enterprises, Inc. and payable to
Netgateway, Inc.
10.11 (3) Promissory Note dated February 4, 2000 in the principal amount of
$150,000 made by Galaxy Enterprises, Inc. and payable to
Netgateway, Inc.
10.12 Form of Employment Agreement between the Company and each of John
J. Poelman, Frank Heyman and Brandon Lewis.
21.1 Subsidiaries of the Company
27.1 Financial Data Schedule
99.1 (3) Voting Agreement dated as of March 10, 2000, by and among
Netgateway, Inc., Galaxy Acquisition Corp., and John J. Poelman.
99.2 (3) Voting Agreement dated as of March 10, 2000, by and among
Netgateway, Inc., Galaxy Acquisition Corp., and Sue Ann Cochran.
99.3 (3) Stock Option Agreement dated as of March 10, 2000, by and among
Netgateway, Inc. and John J. Poelman.
99.4 (3) Pledge Agreement, dated as of January 7, 2000, between John J.
Poelman and Netgateway, Inc.
99.5 (3) Pledge Agreement dated February 4, 2000, between John J. Poelman
and Netgateway, Inc.
(1) Incorporated herein by reference to the exhibits to the Company's Form
10-SB filed on November 12, 1998. (File No. 98745003)
(2) Incorporated herein by reference to the exhibits to the Company's Form 8-K
filed on June 25, 1999 (File No. 0-25055)
(3) Incorporated herein by reference to the exhibits to Company's Form 8-K
filed on March 22, 2000 (File No. 0-25055)
B. Reports on Form 8-K.
None
<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: March 30, 2000 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: March 30, 2000 By: /s/ John J. Poelman
John J. Poelman
President, Chief Executive Officer
and Director
Date: March 30, 2000 By: /s/ Brandon B. Lewis
Brandon B. Lewis
Executive Vice President,
Chief Operating Officer
and Director
Date: March 30, 2000 By: /s/ Frank C. Heyman
Frank C. Heyman
Chief Financial Officer
Date: March 30, 2000 By: /s/
Darral G. Clarke
Director
<PAGE>
GALAXY ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
C O N T E N T S
Page
INDEPENDENT AUDITORS' REPORT................................................ F-2
CONSOLIDATED BALANCE SHEETS................................................. F-3
CONSOLIDATED STATEMENTS OF OPERATIONS....................................... F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY............................. F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS....................................... F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.................................. F-7
F-1
<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 Subsidiaries as of December 31, 1999 and 1998, 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 Subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
As discussed in Note 7 to the consolidated financial statements, the Company
changed its revenue recognition policies effective January 1, 1999.
WISAN, SMITH, RACKER & PRESCOTT LLP
Salt Lake City, Utah
March 15, 2000
F-2
<PAGE>
GALAXY ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
1999 1998
---------------- --------------
ASSETS
CURRENT ASSETS
Cash $ 132,741 $ 24,719
Trade accounts receivable (net allowance of
$677,551 and $43,832 respectively) 1,112,947 40,838
Related party trade accounts receivable 52,518 38,910
Inventories 102,203 --
Prepaid expenses 336,148 18,549
Prepaid income taxes 5,030 --
Employee advances 89,660 1,871
Deferred income tax asset -- 14,200
Credit card reserves 248,431 129,205
---------------- --------------
TOTAL CURRENT ASSETS 2,079,678 268,292
EQUIPMENT 259,577 171,868
OTHER ASSETS
Deferred charges -- 67,127
Goodwill 850,434 794,753
Other 40,940 32,815
---------------- --------------
891,374 894,695
---------------- --------------
TOTAL ASSETS $ 3,230,629 $ 1,334,855
================ ==============
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 1,808,482 $ 606,553
Related party trade accounts payable -- 44,920
Bank overdraft 348,907 179,301
Accrued expenses 469,286 108,536
Income taxes payable 1,100 7,900
Notes payable - current portion 161,486 115,000
Deferred revenue - current portion 10,334,844 --
Customer deposits 285,226 6,060
---------------- --------------
TOTAL CURRENT LIABILITIES 13,409,331 1,068,270
DEFERRED INCOME TAXES -- 10,300
DEFERRED REVENUE 410,719 --
NOTES PAYABLE 4,269 --
STOCKHOLDERS EQUITY
Common stock par value $.007, Authorized
25,000,000 shares, 5,947,514 and 5,281,652
shares issued and outstanding, respectively 41,632 36,971
Additional paid-in-capital 2,034,923 91,959
Unearned stock compensation (159,000) ---
Retained earnings (deficit) (12,511,245) 127,355
---------------- --------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (10,593,690) 256,285
---------------- --------------
TOTAL LIABILITIES AND EQUITY $ 3,230,629 $ 1,334,855
================ ==============
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
GALAXY ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1999 and 1998
1999 1998
--------------- --------------
INCOME
Sales $ 17,934,277 $ 11,448,392
Cost of sales 13,506,633 5,105,617
--------------- --------------
GROSS PROFIT 4,427,644 6,342,775
OPERATING EXPENSES
Selling 8,064,631 4,758,694
General and administrative 2,639,110 1,388,662
Bad debt expense 675,200 43,832
Depreciation 97,591 53,260
Amortization 61,974 80,175
--------------- --------------
11,538,506 6,324,623
--------------- --------------
OPERATING INCOME (LOSS) (7,110,862) 18,152
OTHER INCOME (EXPENSES)
Interest income 6,836 11
Other income (expenses) (2,952) 5,403
Interest expense (11,152) (4,142)
--------------- --------------
(7,268) 1,272
--------------- --------------
Income (loss) before income taxes and
cumulative effect of a change in
accounting principle (7,118,130) 19,424
Income tax expense (benefit) 2,692 (15,951)
--------------- --------------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT
OF A CHANGE IN ACCOUNTING PRINCIPLE (7,120,822) 35,375
CUMULATIVE EFFECT ON PRIOR YEARS
OF ACCOUNTING CHANGE (5,517,778) --
--------------- --------------
NET INCOME (LOSS) $ (12,638,600) $ 35,375
=============== ==============
Weighted average number of shares
outstanding:
Basic 5,675,744 5,272,069
Diluted 5,675,744 5,724,683
Net income (loss) per share
Basic $ (2.23) $ 0.0067
============== ==============
Diluted $ (2.23) $ 0.0062
============== ==============
The accompanying notes are an integral part of the financial statement.
F-4
<PAGE>
<TABLE>
<CAPTION>
GALAXY ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1999 and 1998
Common Stock Additional
-------------------------------- Paid in Retained
Shares Amount Capital Other Earnings
-------------- ----------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
Balance December 31, 1997 5,271,652 $ 36,901 $ 78,279 $ -- $ 91,980
Common stock issued for stock options 10,000 70 13,680 -- --
Net income for the year ended December -- -- -- -- 35,375
31, 1998
-------------- ----------------- -------------- -------------- ----------------
Balance December 31, 1998 5,281,652 36,971 91,959 -- 127,355
Common stock issued on conversion of 169,192 1,184 448,816 -- --
debt
Common stock issued for cash 478,570 3,350 1,111,651 -- --
Issuance of common stock warrants - - 185,000 -- --
Common stock issued for stock options 11,800 83 8,767 -- --
Common stock issued for services 6,300 44 8,730 -- --
rendered
Deferred stock compensation -- -- 180,000 (159,000) --
Net loss for the year ended December -- -- -- -- (12,638,600)
31, 1999
-------------- ----------------- -------------- -------------- ----------------
Balance December 31, 1999 5,947,514 $ 41,632 $ 2,034,923 $ (159,000) $(12,511,245)
============== ================= ============== ============== ================
The accompanying notes are an integral part of the financial statements.
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
GALAXY ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1999 and 1998
1999 1998
------------------ - ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss) $ (12,638,600) $ 35,375
Adjustments to reconcile net income
(loss) to net cash used by
operating activities:
Depreciation 97,591 53,260
Amortization 61,974 80,175
Deferred compensation 21,000 --
Deferred income taxes 3,900 (11,000)
Bad debt provision 675,200 43,832
Changes in operating assets and liabilities:
Increase in credit card reserves (119,226) (82,416)
Increase in trade accounts receivable (1,747,309) (43,561)
Increase in employee advances (87,789) (871)
Increase in prepaid expenses (317,599) (18,549)
Increase in prepaid income taxes (5,030) --
Increase in inventories (89,070) --
Increase in trade accounts receivable -related entity (13,608) (38,910)
Decrease in deferred charges 67,127 --
Increase in other assets (8,125) (16,799)
Increase (decrease) in trade accounts payable 1,082,289 (66,491)
Decrease in trade accounts payable - related entity (44,920) (20,040)
Increase (decrease) in accrued expenses 344,814 (171,507)
Decrease in income taxes payable (6,800) (19,736)
Increase in deferred revenue 10,745,563 --
Increase (decrease) in customer deposits 279,166 (812)
------------------ -----------------
Net cash used by operating activities (1,699,452) (278,050)
------------------ -----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash from purchase of subsidiary 16,905 --
Purchase of equipment (149,839) (103,426)
------------------ -----------------
Net cash used by investing activities (132,934) (103,426)
------------------ -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash from notes payable 11,951 100,000
Increase in bank overdraft 169,606 179,301
Cash received from short-term debt 450,000 --
Common stock and common stock warrants issued for cash 1,308,851 13,750
------------------ -----------------
Net cash flows from financing activities 1,940,408 293,051
------------------ -----------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 108,022 (88,425)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 24,719 113,144
------------------ -----------------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 132,741 $ 24,719
================== =================
Supplemental schedule of non-cash
investing and financing activities:
Conversion of debt for common stock $ 450,000 $ --
Deferred stock compensation included
in additional paid-in capital 21,000 --
Common stock issued for services rendered 8,774 --
The accompanying notes are an integral part of the financial statements.
</TABLE>
F-6
<PAGE>
GALAXY ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Business Activity
------------------
The Company, through its Galaxy Mall subsidiary, engages in the business of
leasing to its customers electronic home pages, or "storefronts," through
galaxymall.com, an Internet shopping mall, and hosts those storefront sites
on its Internet server. Galaxy Mall'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 Galaxy Mall for display on the mall. Galaxy
Mall also contracts with consultants and independent contractors, or
creates and produces in-house, various other internet business related
products which it markets. The Company's other subsidiary, Impact Media, is
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. Impact Media also
performs custom website development. 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 subsidiaries, Galaxy Mall and IMI (dba Impact
Media). IMI was purchased during 1999. 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.
Inventories
-----------
Inventories are stated at the lower of cost (first-in, first-out) or
market. Inventory consists mainly of manufactured multi-media products.
F-7
<PAGE>
GALAXY ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Goodwill
--------
Goodwill resulting from business acquisitions represents the excess of
purchase price over fair value of net assets acquired and is being
amortized over 15 years using the straight-line method. Periodically, the
Company re-evaluates goodwill whenever significant events or changes occur
which might impair recovery of recorded asset costs.
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. Examples include provisions for bad debts and
the length of product life cycles and property and equipment lives. Actual
results could differ from those estimates.
Revenue Recognition
-------------------
Revenue is recognized when earned. The Company has adopted new revenue
recognition policies in 1999 (see Note 7). Such policies are as follows:
Revenue from customer web site hosting and related products and services is
deferred and recognized over a twenty-four month period which represents
the twelve months in which a customer can activate a web site plus twelve
months of free hosting upon activation. Revenue from web site hosting
rights that expire is recognized at the point of expiration. Revenue from
manufactured multimedia products is recognized when products are shipped.
Fees received from the sale of third-party merchant credit card processing
services are reported on a net basis.
On a quarterly basis, management reviews all aspects of revenue recognition
and adjusts recognition of revenue as required, based on actual activation
and expiration experience.
At December 31, 1999, deferred revenue under the aforementioned recognition
policies totaled $10.75 million.
F-8
<PAGE>
GALAXY ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
SFAS No. 123, "Accounting for Stock-Based Compensation", requires the
Company to provide proforma 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 proforma 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 $146,000 in 1999 and $250,000 in 1998.
Advertising and Promotion
-------------------------
The Company expenses advertising and promotion costs as they are incurred,
except for direct-response advertising, which is capitalized and amortized
over its expected period of future benefits. Direct response advertising
consists primarily of advertising costs incurred in connection with the
procurement of leases for space in the Company's on-line mall. The costs
capitalized in connection with direct response advertising are amortized
over the period in which the events (workshops) that have been advertised
are held. These events are generally held during the three months following
the advertising expenditure.
F-9
<PAGE>
GALAXY ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Advertising and Promotion (Continued)
-------------------------------------
Advertising expenses of $4,553,900 and $2,414,500 were incurred for the
years ended December 31, 1999 and 1998, respectively. Direct response
advertising costs deferred and included in prepaid expenses amounted to
$200,764 and $19,800 at December 31, 1999 and 1998, respectively.
Segment Information
-------------------
Subsequent to the purchase of the assets of Impact Media, LLC, the company
adopted Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information" (SFAS No. 131).
This statement establishes standards for the reporting of information about
operating segments in annual and interim financial statements and requires
restatement of prior year information. Operating segments are defined as
components of an enterprise for which separate financial information is
available that is evaluated regularly by the chief operating decision
maker(s) in deciding how to allocate resources and in assessing
performance. SFAS No. 131 also requires disclosures about products and
services, geographic areas and major customers. The adoption of SFAS No.
131 did not affect results of operations or financial position but did
affect the disclosure of segment information, as presented in Note 14.
Reclassifications
-----------------
Certain amounts in 1998 have been reclassified to conform with the 1999
financial statement presentation.
NOTE 2 - ACQUISITION OF IMPACT MEDIA, LLC
Effective May 31, 1999, the Company acquired substantially all the net
assets of Impact Media, LLC (Impact) using the purchase method of
accounting by assuming the liabilities of Impact. The purchase of Impact
resulted in the recording of goodwill in the amount of $117,655, which was
the extent to which liabilities assumed exceeded the fair values of the
assets acquired.
The terms of the acquisition provide for additional consideration of up to
250,000 shares of common stock to be paid if certain agreed-upon targets
are met during the years ended May 31, 2000 and May 31, 2001. As of
December 31, 1999, none of the targets had been met. If in the future any
of the targets are met and the additional consideration becomes issuable,
it will be recorded as additional goodwill.
F-10
<PAGE>
GALAXY ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 2 - ACQUISITION OF IMPACT MEDIA, LLC
Following are the summarized unaudited proforma combined results of
operations for the years ended December 31, 1999 and 1998, assuming the
acquisition had taken place at the beginning of each of those years. The
unaudited proforma results are not necessarily indicative of future
earnings or earnings that would have been reported had the acquisition been
completed when assumed.
1999 1998
-------------- --------------
Net sales $ 18,657,177 $ 14,659,464
Income (loss) before income (7,380,034) 139,062
Income taxes 2,692 (15,951)
Net income (loss) (12,900,504) 155,013
Per basic share (2.27) 0.03
Per diluted share (2.27) 0.03
NOTE 3 - EQUIPMENT
Equipment as of December 31, 1999 and 1998 is detailed in the following
summary:
<TABLE>
<CAPTION>
1999
---- Cost Accumulated Net Book
Depreciation Value
--------------- --------------- -------------
<S> <C> <C> <C>
Computer equipment $ 228,728 $ 112,730 $ 115,998
Computer software 69,602 20,529 49,073
Office equipment 60,865 16,408 44,457
Furniture and fixtures 26,955 3,452 23,503
Leasehold improvements 30,791 4,245 26,546
--------------- --------------- -------------
$ 416,941 $ 157,364 $ 259,577
=============== =============== =============
1998
---- Cost Accumulated Net Book
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
=============== =============== =============
</TABLE>
F-11
<PAGE>
GALAXY ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 3 - EQUIPMENT (CONTINUED)
Amounts included in property and equipment for assets capitalized under
capital lease obligations at December 31, 1999 and 1998 are $18,346 and $0,
respectively. Accumulated amortization for the items under capitalized
leases was $2,072 and $0 at December 31, 1999 and 1998, respectively.
Amortization expense, which is computed using the straight-line method over
the term of each lease, is included with depreciation expense.
NOTE 4 - DEFERRED CHARGES (See Note 7)
Deferred charges consist of the following:
1999 1998
------------- -------------
Organization costs $ - $ 7,955
Startup costs - 103,923
------------- -------------
- 111,878
Accumulated amortization - (44,751)
------------- -------------
$ - $ 67,127
============= =============
NOTE 5 - GOODWILL
Goodwill is comprised of the following amounts, resulting from the purchase
of assets from the corresponding entities:
1999 1998
--------------- ---------------
Profit Education Systems (PES) $ 793,393 $ 793,394
CO-OP Business Services (CO-OP) 73,610 73,610
Impact Media (IMI) 117,655 -
--------------- ---------------
984,658 867,004
Accumulated amortization (134,224) (72,251)
--------------- ---------------
$ 850,434 $ 794,753
=============== ===============
F-12
<PAGE>
GALAXY ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 6 -INCOME TAXES
The components of income tax expense (benefit) related to continuing
operations are as follows:
<TABLE>
<CAPTION>
1999 1998
------------------- -------------------
<S> <C> <C>
Current $ 1,100 $ (4,951)
Deferred 1,592 (11,000)
------------------- -------------------
$ 2,692 $ (15,951)
=================== ===================
Differences between the U.S. statutory and effective tax rates
U.S. statutory rate $ - $ 6,600
State income taxes, net of federal tax effect 1,100 3,300
Refund of prior year taxes - (17,650)
Under (over) accrual of prior year tax 11,892 (3,750)
Other, net (10,300) (4,451)
------------------- ------------------
Income tax expense $ 2,692 $ (15,951)
=================== ==================
Cash paid for income taxes $ 4,003 $ 32,400
=================== ==================
The net deferred income taxes in the accompanying balance sheets
include the following amounts of deferred income tax assets and
liabilities:
1999 1998
------------------- -------------------
Deferred Tax Assets
Receivable valuation $ 253,000 $ 14,200
Deferred revenue 4,008,000 -
Customer deposits 106,000 -
Net operating loss 210,000 -
Officer bonuses 40,300 -
Accrued vacation 7,400 -
Asset valuation 3,700 -
Deferred compensation 7,800 -
------------------- -------------------
4,636,200 14,200
Valuation allowance (4,636,200) -
------------------- -------------------
- 14,200
------------------- -------------------
</TABLE>
F-13
<PAGE>
GALAXY ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 6 - INCOME TAXES (CONTINUED)
<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
<S> <C> <C>
Deferred Tax Liabilities
Depreciation - 10,300
---------------- ----------------
- 10,300
---------------- ----------------
Net deferred tax asset (liability) $ - $ 3,900
================ ================
Presentation in financial statements
Current deferred tax asset $ - $ 14,200
Noncurrent deferred tax liability - $ (10,300)
---------------- ----------------
Net deferred tax asset (liability) $ - $ 3,900
================ ================
</TABLE>
At December 31, 1999, the Company's deferred tax assets are fully offset by
a valuation allowance. In assessing the realizability of deferred tax
assets, management considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the period in which those
temporary differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income, and
tax planning strategies in making this assessment. Based on the projections
for future taxable income over the periods that the deferred tax assets are
deductible, management believes it is more likely than not that the Company
will not realize the benefits of these deductible differences.
At December 31, 1999, the Company has approximately $564,000 of net
operating loss carryforwards available to reduce future taxable income.
These carryforwards will expire beginning in 2019.
F-14
<PAGE>
GALAXY ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 7 - CHANGES IN ACCOUNTING PRINCIPLES
Revenue Recognition
-------------------
As of December 31, 1999, the Company recorded a charge of $5.45 million
($0.96 per share), which represents the cumulative effect of a change in
accounting principle regarding revenue recognition, in accordance with APB
Opinion No. 20, Accounting Changes. In December, 1999, the Securities and
Exchange Commission released Staff Accounting Bulletin No. 101 - Revenue
Recognition in Financial Statements (SAB 101), which provides guidance on
various revenue recognition issues including nonrefundable fees received
upon entering into arrangements to provide products or services. The
Company receives such fees on many of the products and services it
provides. In prior years, the Company recognized such fees at the time of
sale based on the belief that its ongoing obligation did not involve
significant cost or effort and should not impact revenue recognition. Upon
evaluation of the accounting requirements of SAB 101, the Company
determined that it is required to adopt SAB 101's provisions and that
revenue recognition will more closely parallel the time period over which
the revenue is earned. The adoption of this change is reflected in the
accompanying 1999 financial statements. Fees received at the time of sale
are deferred and recognized systematically over the periods in which they
are earned. The Company's revenue recognition policies are disclosed in
Note 1.
The portion of the cumulative effect adjustment recognized in 1999 amounted
to $5.26 million with the remainder to be recognized in 2000. The following
table presents sales, income before income taxes, net income, and per share
information for the year ended December 31, 1998 as if the new principle
had been applied during all periods presented.
1998
--------------
Sales $ 5,997,741
Income (loss) before income taxes $ (5,431,227)
Net income (loss) $ (5,415,276)
Per basic share $ (1.03)
Per diluted share $ (1.03)
F-15
<PAGE>
GALAXY ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 7 - CHANGES IN ACCOUNTING PRINCIPLES (CONTINUED)
Start-Up Costs
--------------
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities." This SOP provides guidance on the financial reporting
of start-up costs and organization costs. It requires costs of start-up
activities and organization costs to be expensed as incurred. The Company
was required to adopt SOP 98-5 for the year ended December 31, 1999.
Restatement of previously issued financial statements is not permitted.
Initial application of this SOP was required to be reported as the
cumulative effect of a change in accounting principle, as described in APB
Opinion No. 20, Accounting Changes. The SOP did not require the Company to
report the proforma effects of retroactive application; however, the
Company is required to disclose the effect of adopting this SOP on net
income and on the related per share amounts in the period of the change. As
a result of the change in accounting principle, the Company recorded a
charge of $67,127 ($0.01 per share) during the year ended December 31,
1999, representing the balance in capitalized start-up and organization
costs as of December 31, 1998.
NOTE 8 - NOTES PAYABLE
Notes payable as of December 31, 1999 and 1998 are detailed in the
following summary:
<TABLE>
<CAPTION>
1999 1998
---------------- -----------------
<S> <C> <C>
Note payable to an individual, interest at 8.5%, $ - $ 15,000
unsecured
Not payable to a financial institution due in June
2000, interest at 10.75% at December 31, 1999, unsecured
7,096 -
Note payable to a financial institution due September 14, 2000,
interest at prime plus 3% (11.50% at December 31, 1999), secured
by common stock pledged by a major stockholder
148,347 100,000
Obligations under leases classified as capital leases
due in monthly installments of $548 including imputed
interest at 7.0% 10,312 -
---------------- -----------------
165,755 115,000
Less current portion (161,486) (115,000)
---------------- -----------------
Long-term portion $ 4,269 $ -
================ =================
</TABLE>
F-16
<PAGE>
GALAXY ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 8 - NOTES PAYABLE (CONTINUED)
Interest paid during the years ended December 31, 1999 and 1998 was
approximately $11,200 and $4,100, respectively.
Maturities of notes payable over the next five years are as follows:
2000 $ 161,486
2001 4,269
2002 -
2003 -
2004 -
Thereafter -
-------------
$ 165,755
=============
The following is a schedule by years of future minimum lease payments under
capital leases together with the present value of the net minimum payments
as of December 31, 1999:
2000 $ 6,573
2001 4,382
2002 -
2003 -
2004 -
Thereafter -
-------------
Total minimum lease payments 10,955
Amount representing interest (643)
-------------
Present value of net minimum
lease payments (including
$6,043 classified as current) $ 10,312
=============
F-17
<PAGE>
GALAXY ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 9 - COMMITMENTS AND CONTINGENCIES
The Company leases certain of its equipment and corporate offices under
long-term operating lease agreements expiring at various dates through
2004. Future aggregate minimum obligations under operating leases as of
December 31, 1999, exclusive of taxes and insurance, are as follows:
Operating
Leases
-----------
Year ending December 31
2000 $ 467,700
2001 379,000
2002 298,800
2003 301,800
2004 154,200
-----------
$1,601,500
===========
Rental expense totaled approximately $276,000 and $186,900 for the years
ended December 31, 1999 and 1998, respectively.
The Company is involved in various legal proceedings 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.
NOTE 10 - RELATED ENTITY TRANSACTIONS
During 1998, in addition to its direct sales efforts, the Company utilized
the services of American Marketing Systems, Inc. ("AMS"), a Nevada
corporation. AMS provided telemarketing services to its various clients,
including the Company. It sold coaching (mentoring) services to Galaxy Mall
merchants, and coaching services and Company products to prospects who had
not previously purchased Company products. During the years ended December
31, 1999 and 1998, the Company paid AMS $0 and $1,441,800 in sales
commissions, respectively. John J. Poelman, President, Chief Executive
Officer and a Director of the Company is a 30% shareholder of AMS.
F-18
<PAGE>
GALAXY ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 10 - RELATED ENTITY TRANSACTIONS (CONTINUED)
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, realtime 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
years ended December 31, 1999 and 1998 totaled approximately $722,400 and
$306,400, respectively. The Company also has a receivable from ECI for
leases in process at December 31, 1999 of $52,518.
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 3.1% (at December 31, 1999) 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 $66,000 and $60,000 in 1999 and 1998,
respectively.
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 agreement also calls for Cochran to
receive speaker fees and reimbursement of travel expenses when Cochran
participates in Company-sponsored seminars. 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 years ended December 31, 1999 and 1998, the Company paid Cochran
approximately $147,240 and $60,500, respectively for royalties and speaker
fees.
F-19
<PAGE>
GALAXY ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 11 - STOCK PURCHASE WARRANTS
In January 1999, the Company sold a $500,000 convertible promissory note
bearing interest at 7% per annum to an institutional investor. During the
first quarter, the note was converted into 169,192 shares of the Company's
common stock. Along with the convertible promissory note, the Company
issued the institutional investor warrants to purchase 50,000 shares of
common stock. The warrants are exercisable at $7.05 per share and expire
January 11, 2002.
During February and March 1999, the Company entered into an agreement with
an institutional investor, whereby the investor invested $1 million in
exchange for 250,000 shares of common stock. The investor was also issued
warrants to purchase up to 250,000 additional shares of the Company's stock
at an exercise price of $2.84 per share. The warrants expire March 18,
2001.
NOTE 12 - STOCK OPTION PLAN
The Company has 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. During 1999, the Company granted 170,750 options to certain
employees at an exercise price of $1.00 to $2.63 per share.
Stock options expire ten years from the date of grant and vest ratably over
five years from the date of grant. There are no shares available for future
grants at December 31, 1999.
F-20
<PAGE>
GALAXY ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 12 - STOCK OPTION PLAN (CONTINUED)
A summary of the status of the Company's stock option plan as of December
31, 1999 and 1998 and changes during the years then ended is presented
below:
Weighted
Average Number
Exercise Exercise of
Price Price Shares
----------- ---------- -----------
Balance, December 31, 1997 $ - $ - -
Granted .63-3.50 0.80 928,250
Exercised 1.38 1.38 (10,000)
Cancelled or expired .63-2.00 0.82 (76,500)
----------- ---------- -----------
Balance, December 31, 1998 .63-3.50 0.79 841,750
Granted 1.00-2.63 1.36 170,750
Exercised 0.75 0.75 (11,800)
Cancelled or expired .63-3.50 1.06 (22,500)
----------- ---------- -----------
Balance, December 31, 1999 $ .75-3.50 $ 0.88 978,200
=========== ========== ===========
Options currently outstanding and exercisable are as follows:
Weighted Average
Number Remaining Number
Exercise Price Outstanding Contractual Life Exercisable
-------------- ----------- ---------------- -----------
$ 0.75 to 1.00 887,700 8.36 years 291,252
1.01 to 2.00 78,000 9.43 years 16,278
2.01 to 3.50 12,500 9.26 years 1,882
--------------- ----------- ---------------- -----------
$ 0.75 to 3.50 978,200 8.46 years 309,412
=============== =========== ================ ===========
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," (APB 25) under which no
compensation cost for stock options is recognized for stock option awards
granted at or above fair market value. During 1999, the Company recognized
$21,000 of compensation expense for options granted below fair market
value. During 1998, the Company recognized no compensation expense.
F-21
<PAGE>
GALAXY ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 12 - STOCK OPTION PLAN (CONTINUED)
An alternative method of accounting for stock options is SFAS 123,
Accounting for Stock-Based Compensation. Under SFAS 123, employee stock
options are valued at grant date using the Black-Scholes valuation model
and compensation cost is recognized ratably over the vesting period. Had
compensation cost for the Company's stock option and employee stock
purchase plans been determined based on the Black-Scholes value at the
grant date for awards, the Company's proforma net income and income per
share would have been as follows:
1999 1998
---- ----
Net income (loss) as reported $ (12,638,600) $ 35,375
Proforma net loss $ (12,748,432) $ (3,059)
Basic EPS as reported $ (2.23) $ 0.0067
Proforma basic EPS $ (2.25) $ (0.0006)
Diluted EPS as reported $ (2.23) $ 0.0062
Proforma diluted EPS $ (2.25) $ (0.0005)
The fair value of the options was estimated using the Black-Scholes
option-pricing model based on the following weighted average assumptions:
1999 1998
---- ----
Risk-free interest rate 6.5% 4.7%
Expected life, in years 8.46 9.25
Dividend yield - -
Volatility 35.0% 4.4%
The weighted average grant date fair value of stock options granted during
the year is summarized as follows:
1999 1998
---- ----
Weighted average fair value $ 0.53 $ 0.27
During 1999, the Company's board of directors granted an additional 788,750
options pending the approval of the Company's shareholders. Shareholder
approval is necessary in order to expand the number of shares authorized
under the plan from 1,000,000 to 2,000,000. As shareholder approval had not
been obtained as of December 31, 1999, all options granted in excess of the
original 1,000,000 shares authorized are not considered outstanding and
have not been included in the preceding analysis. Management will seek
shareholder approval at the next annual meeting of shareholders. Once
shareholder approval is obtained, the additional options will be
effectively granted and the appropriate APB 25 and SFAS 123 calculations
can be completed.
F-22
<PAGE>
GALAXY ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 13 - 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. During the years
ended December 31, 1999 and 1998, $107,993 and $0 were earned under the
Plan.
NOTE 14 - SEGMENT INFORMATION
The Company has two principal business segments (Internet access and
expertise, and multimedia manufacturing). The first is primarily engaged in
the business of providing its customers with the ability to (i) acquire a
presence on the Internet and (ii) to advertise and sell their products or
services on the Internet. The second is primarily engaged in providing
assistance 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. Management evaluates
segment performance based on the contributions to earnings of the
respective segment. An analysis and reconciliation of the Company's
business segment information to the respective information in the
consolidated financial statements is as follows.
1999 1998
-------------- -------------
Segment sales:
Internet services $ 14,341,616 $ 11,448,392
Multimedia products and services 3,646,315 -
-------------- -------------
17,987,931 11,448,392
Elimination of intersegment sales (53,654) -
-------------- -------------
Total consolidated net sales $ 17,934,277 $ 11,448,392
============== =============
F-23
<PAGE>
GALAXY ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 14 - SEGMENT INFORMATION (CONTINUED)
1999 1998
--------------- --------------
Approximate contribution (charge)
to earnings:
Internet services $ (5,823,695) $ 128,059
Multimedia products (825,387) -
Corporate (461,780) (109,907)
--------------- ------------
(7,110,862) 18,152
Interest and other income (expense) 3,884 5,414
Interest expense (11,152) (4,142)
--------------- --------------
Income (loss) before income taxes (7,118,130) 19,424
Income tax expense (benefit) 2,692 (15,951)
--------------- --------------
Income (loss) before cumulative effect (7,120,822) 35,375
Cumulative effect adjustment (5,517,778) -
--------------- --------------
$ (12,638,600) $ 35,375
=============== ==============
Depreciation and Amortization:
Internet services $ 144,349 $ 106,741
Multimedia products 10,898 -
Corporate 4,318 26,694
--------------- --------------
$ 159,565 $ 133,435
=============== ==============
Capital expenditures:
Internet services $ 122,834 $ 103,426
Multimedia products 169,812 -
--------------- --------------
$ 292,646 $ 103,426
=============== ==============
Assets:
Internet services $ 2,525,344 $ 1,302,770
Multimedia products and services 844,909 -
Corporate 1,397,599 101,793
--------------- --------------
4,767,852 1,404,563
Less: Intersegment eliminations (1,537,223) (69,708)
--------------- --------------
Total consolidated assets $ 3,230,629 $ 1,334,855
=============== ==============
Intersegment sales for 1999 were made up primarily of the reimbursement of
fees charged related to the fulfillment of orders. There was no profit
added to the fees.
F-24
<PAGE>
GALAXY ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 15 - SUBSEQUENT EVENTS
On March 13, 2000 the Company signed a definitive merger agreement to be
acquired by Netgateway, Inc. for approximately 3.9 million shares in an
all-stock merger plus the assumption of all outstanding stock options. The
merger calls for Netgateway to issue about six-tenths of one Netgateway
share for each Galaxy share. The transaction is subject to shareholder
approval of both companies.
F-25
<PAGE>
EMPLOYMENT AGREEMENT
This Agreement, is effective as of the 29th day of September, 1999 (the
"Effective Date"), and is made and entered into by and between GALAXY
ENTERPRISES, INC., a Nevada Corporation, having its principal place of business
in Orem, Utah ("Galaxy"), and _______________ the undersigned individual
("Employee").
RECITALS
WHEREAS, Galaxy is in the business of developing and marketing computer
software and services to companies engaged in Internet commerce; and
WHEREAS, both Galaxy and Employee desire to embody the terms and
conditions of Employee's employment in a written agreement which shall supersede
any and all prior agreements of employment, whether written or oral.
NOW, THEREFORE, in consideration of the mutual agreements herein
contained, the parties hereby agree as follows:
GENERAL PROVISIONS
1. Employment and Term: Galaxy hereby employs Employee and Employee
hereby agrees to serve Galaxy as ____________________________________. The term
of Employee's employment shall be Thirty-six (36) months, and shall hereinafter
be referred to as the "Initial Term." The Initial Term shall begin as of the
Effective Date. Unless and until Employee's employment with Galaxy is terminated
by Galaxy or Employee for any reason or no reason, at the end of the Initial
Term this Agreement shall automatically be renewed and extended for additional
periods of twelve (12) months each and Employee's employment with Galaxy shall
continue during the extended period.
2. Employee's Time and Loyalty: Employee shall devote Employee's full
time and efforts to Galaxy during the term of Employee's employment. Employee
shall also act with complete loyalty to Galaxy, and during the period of
Employee's employment, Employee shall not engage in any activity or conduct
prohibited by Section 14.
3. Compensation:
(a) Base Salary: As compensation, Galaxy shall pay Employee a base
salary in the amount of $ per year ("Base Salary"). Galaxy shall have the
right, in its sole discretion, to prospectively increase the amount of
Employee's Base Salary. Base Salary shall be paid according to Galaxy's
regular payroll schedule.
(b) Discretionary Bonuses: In addition to Base Salary, Employee shall
be eligible to participate in the executive bonus program (the "Executive
Bonus Program"). Payment of any bonus under the Executive Bonus Program
shall be at the sole discretion of Galaxy and shall be according to the
then current practice and criteria established by Galaxy. Galaxy may upon
reasonable notice to Employee, discontinue the Executive Bonus Program for
Employee effective the end of any employment year of Employee's employment.
4. Employee's Benefits: In addition to Base Salary, until Employee's
employment is terminated, Employee shall be entitled to all standard employee
benefits then in effect for employees of Galaxy who are executive officers.
These presently include 100% of all medical and life insurance premiums and use
of a company automobile.
5. Employee's Conduct: Employee shall conduct himself or herself in a
professional manner at all times and perform the duties set forth in Exhibit
"A", attached hereto, and such other duties as shall be specified by Galaxy, in
a competent and responsible manner and to Galaxy's reasonable satisfaction.
Employee further agrees to abide by the policies and procedures as may be set
forth in handbooks, manuals and other materials provided by Galaxy.
6. Termination:
(a) Prior Employment Agreements. Employee has been continuously
employed by Galaxy on a full-time basis since ____________________. This
Agreement revokes, amends and replaces any and all other agreements of
employment, written or oral, between Employee and Galaxy. Employee's past
employment with Galaxy, if any, for more than six (6) months entitles
Employee to certain termination and severance benefits as set forth in
Sections 6 and 7.
(b) Discretionary Termination by Galaxy. If Employee has been
previously employed full-time by Galaxy for more than six months before the
Effective Date, then during and after the Initial Term, Galaxy may
terminate Employee's employment at will, subject to this Agreement and
Galaxy's obligation to pay Severance Pay to Employee as provided in Section
7. If Employee has not been previously employed full-time by Galaxy for
more than six months before the Effective Date, then during the first six
(6) months of the Initial Term, Galaxy may terminate Employee's employment
by giving Employee at least four (4) weeks' notice of termination or, in
lieu of such notice, by paying Employee the amount of Base Salary and the
benefits described in Section 4 otherwise due for such notice period.
(c) Discretionary Termination by Employee. During the Initial Term,
Employee may terminate Employee's employment by giving Galaxy at least two
(2) weeks' notice of said resignation. After the Initial Term, Employee may
terminate Employee's employment by giving Galaxy at least one (1) month
notice.
(d) Termination for Cause by Galaxy. Notwithstanding anything in this
Agreement, during the Initial Term and thereafter Galaxy may terminate
Employee's employment immediately for Cause. For purposes of this
Agreement, "Cause" shall include (i) material breach by Employee of this
Agreement, (ii) performance by Employee deemed unsatisfactory to Galaxy
acting reasonably, provided Galaxy's expectations for a specific
improvement or change have been communicated to Employee in writing with at
least a thirty (30) day probation period allowed for the requisite
improvement, (iii) Employee's dishonesty or violation of company rules by
Employee, or (iv) Employee's conviction of or entrance of a plea of nolo
contendere to a felony or to any other crime that may be punishable by
incarceration.
(e) Termination upon Death or Incapacity of Employee. Employee's
employment with Galaxy shall automatically terminate upon Employee's death,
or at the exclusive election of Galaxy, upon the Incapacity of Employee.
For purposes of Sections 6 and 7, termination of Employee's employment by
reason of Employee's death or Incapacity shall be considered termination of
Employee's employment by Galaxy without Cause and Employee, Employee's
estate or Employee's designated beneficiary, as the case may be, shall
receive the Severance Pay, if any, pursuant to Section 7.
(f) Definition of Incapacity. For purposes of this Agreement,
"Incapacity" shall mean that Employee is for a period of thirty (30)
consecutive days or more, unable to perform Employee's duties effectively,
for reasons such as mental illness, mental deficiency, physical illness or
disability, or other related condition. For purposes of this Agreement, if
at any time a question arises as to the "Incapacity" of Employee, then
Galaxy shall promptly engage three (3) physicians who are members of the
American Medical Association to examine Employee and determine if by reason
of sickness or injury, Employee is unable to perform the major duties of
Employee's employment with Galaxy. In the event Employee appears to have
mental capacity to act on Employee's own behalf, then one (1) of the three
(3) physicians engaged by Galaxy for this purpose shall be a physician
selected by Employee, one (1) shall be a physician selected by Galaxy, and
one (1) shall be a physician selected by the other two (2) physicians. The
decision of the three (3) physicians shall be certified in writing to
Galaxy and shall be sent by Galaxy to Employee or Employee's legal
representative, and shall be conclusive for all purposes of this Agreement.
7. Effect of Termination on Compensation and Benefits: If Employee's
employment is terminated by Galaxy without Cause during the first six (6) months
of Employee's employment with Galaxy, Employee shall be entitled to receive only
the amount of Base Salary and benefits as set forth in Section 6(b).
If Employee's employment is terminated by Galaxy without Cause after
the first six (6) months of Employee's employment with Galaxy, Employee shall be
entitled to receive an amount equal to Base Salary ("Severance Pay") for twelve
(12) months from the date of termination.
If Galaxy without Cause does not renew Employee's employment at the end
of the Initial Term, or the end of any employment period thereafter, or if
Employee's employment is terminated by reason of Employee's death or Incapacity,
then Employee (or Employee's estate or designated beneficiary, as the case may
be) shall receive Severance Pay for the applicable Severance Pay Period.
For purposes of this Agreement, a termination by Galaxy without Cause
includes a termination of employment by Employee within 30 days following any of
the following events: (i) the assignment of any duties to Employee inconsistent
with, or reflecting a materially adverse change in, Employee's position, duties,
responsibilities or status with the Company, or the removal of Employee from, or
failure to reelect Employee to any of such positions, or (ii) the relocation of
the Company's principal executive offices, or relocating Employee's principal
place of business, in excess of twenty five (25) miles from the Company's
current executive offices.
If Employee's employment is (i) terminated by Employee, or (ii)
terminated for Cause or for Cause not renewed by Galaxy, Employee shall receive
only Employee's Base Salary and the benefits described in Section 4 earned
through the date of such termination.
If Employee's employment is terminated by Galaxy without Cause, all
outstanding stock options held by Employee shall vest and remain exercisable for
180 days after termination of employment.
At the option of Galaxy, Severance Pay may be distributed in a lump sum
or in regular biweekly checks over the Severance Pay Period. Any Severance Pay
is subject to required payroll deductions and withholdings.
Except as provided in this Section 7, Employee shall not be entitled to
any further or other Severance Pay, Base Salary, benefits, compensation, damages
or other amounts. Employee understands and agrees that notwithstanding anything
in this Agreement, Galaxy's obligation to pay any Base Salary, benefits or
Severance Pay after termination of employment depends upon Employee's compliance
with the agreements and covenants of Sections 10 through 14. Notwithstanding
anything in this Agreement, Employee shall not receive, as Severance Pay or
otherwise, any health or life insurance coverage after the date of termination,
except COBRA benefits, if any, as and to the extent prescribed by law.
PROTECTION OF GALAXY
8. Definition of Confidential Information: In this Agreement, the term
"Confidential Information," with respect to Galaxy or any third party, shall
mean any and all information of Galaxy, or, as the case may be, of any third
party, including any and all of the following, which are not intended to be
mutually exclusive:
(a) intellectual property, trade secrets, know how, technology,
computer programs (whether owned by Galaxy or any third party or used under
license), designs, data, research, lab books, methods, systems, formulae,
formulations, recipes, compositions, devices, processes and records;
(b) marketing information and methods, including marketing data,
market research, sales techniques, and the names, addresses, telephone and
telecopier numbers, and the operation, buying habits and practices of
customers, potential customers, distributors and representatives;
(c) information regarding employees, including terms and conditions of
employment and performance evaluations;
(d) information regarding purchasing methods and sources including the
names and identifying and other information regarding vendors and
suppliers, costs of materials and prices at which materials, products or
services are or have been obtained or sold; and
(e) financial statements, forecasts, reports and all financial
information not disseminated to the public.
9. Duty of Confidentiality: Employee agrees to hold all Confidential
Information of Galaxy in strictest confidence. During the term of Employee's
employment, Employee may have access to and become acquainted with Confidential
Information of third parties (such as suppliers and customers of Galaxy) which
is in Galaxy's possession. Employee agrees to also hold such third parties'
Confidential Information in strictest confidence as if it were Confidential
Information of Galaxy.
During the term of Employee's employment and thereafter, Employee shall
not directly or indirectly in any way use, copy, transfer or disclose any
Confidential Information of Galaxy or of any third party, except as required in
the performance of Employee's duties for Galaxy, or as specifically authorized
by the Chief Executive Officer of Galaxy. After the termination of Employee's
employment, such authorization must be in writing. The parties understand,
acknowledge and agree that, as between them, all items of Confidential
Information are important, material and confidential trade secrets of Galaxy and
affect the successful conduct of the business of Galaxy and its good will. Any
breach of this Section 10 is a material breach of this Agreement.
All files, documents, works and other materials containing any (i)
Confidential Information of Galaxy, (ii) Confidential Information of a third
party which is in Galaxy's possession, or (iii) information which Employee
prepares, uses, possess or controls that affects or relates to the business of
Galaxy, shall be and remain the sole property of Galaxy; and, with the exception
of ordinary work routinely taken home or on business trips, shall not be removed
from Galaxy's facilities without prior specific authorization of the Chief
Executive Officer of Galaxy.
After Employee ceases to be an employee of Galaxy, Employee shall not
undertake any employment or activity if the loyal and complete fulfillment of
the duties of such employment or activity would require Employee to disclose or
use any Confidential Information in breach of this Section 10.
Employee shall not have any obligation of confidentiality with respect
to any Confidential Information which (through no fault of Employee) is or
becomes publicly known as evidenced by printed publication or other published
work.
Employee hereby covenants not to disparage, orally or in writing,
Galaxy or its management (including Galaxy's products, practices and policies)
to any Galaxy employee, associate, distributor or member of the public. Employee
understands and agrees that Employee may lose any right to Severance Pay if
Employee breaches this covenant not to disparage.
10. Return of Materials Upon Notice of Termination: Employee agrees
that effective when Employee gives Galaxy, or receives from Galaxy, notice
terminating Employee's employment, Employee shall immediately return to Galaxy
all property of Galaxy in Employee's possession, use or control, including any
and all originals and copies of any files, documents, works and other materials
containing any Confidential Information of Galaxy or of any third party.
Employee shall not take with him or her, or cause or permit any unauthorized
destruction, disclosure or copying of, or the removal from Galaxy's facilities
of, any originals or copies of any files, documents, works and other materials
containing any Confidential Information of Galaxy or of any third party.
11. Ownership of Works of Authorship and Inventions: Employee hereby
assigns and transfers to Galaxy, any and all works of authorship, inventions and
innovations (whether deemed patentable or not), made by Employee (or by Employee
jointly with others) during the term of Employee's employment (whether same were
made during or after normal office hours or at or away from Galaxy's facilities)
which relate to or are useful in the business of Galaxy. For purposes of
copyright law, any such work of authorship shall be deemed a work made for hire.
Employee agrees to promptly disclose to Galaxy all such works of authorship,
inventions and innovations. Employee agrees to execute any document reasonably
requested and prepared by Galaxy that is necessary or appropriate to document,
perfect or effect the intention of this Section 12 or to secure any patent,
copyright registration (as a work made for hire) or other protection thereof for
Galaxy.
12. Prior Relationships of Confidentiality: Employee represents and
warrants that Employee's employment under this Agreement does not violate any
other agreement binding Employee, nor violate any obligation of confidentiality
between Employee and any third party. Further, Employee agrees that Employee
will not use for Galaxy's benefit, or disclose to Galaxy, any Confidential
Information of any third party if Employee is prohibited by agreement (such as
an agreement with a prior employer) or otherwise from so using or disclosing
such Confidential Information. Employee represents and warrants that Employee
has disclosed to Galaxy any such obligations of confidentiality and
prohibitions, if any. Employee agrees to indemnify and hold Galaxy harmless from
all damages, expenses, costs (including reasonable attorneys' fees) and
liability incurred in connection with, or resulting from, any breach of this
Section 13.
13. Noncompetition and Nonsolicitation: Employee agrees to abide by the
following restrictive covenant, which shall apply in the United States and any
country where (on the date the notice terminating Employee's employment is
received) Galaxy is doing business or planning to do business within the next
year through a subsidiary or joint venture (the "Restricted Territory"). The
following restrictive covenant shall apply during the "Restrictive Period" which
is defined to mean the period
(i) commencing with the Effective Date, and
(ii) ending one (1) year after the later of (x) the date of
termination of Employee's employment (whether or not employment
is terminated by Galaxy or Employee, or for Cause or otherwise),
or (y) the date of final payment of Severance Pay was paid to
Employee (or would have been paid but for a breach of this
Agreement by Employee or for Cause termination of Employee's
employment).
Employee hereby covenants and agrees that Employee shall not, directly
or indirectly, in the Restricted Territory during the Restricted Period, do any
of the following:
(a) own an interest in, operate, join, control, participate in or be a
distributor, agent, consultant, independent contractor, employee, officer,
director, partner, principal or shareholder of any individual, person or
entity having revenues from the sale or license of computer software or
services used by companies engaged in the promotion of e-business over the
Internet. However, nothing in this Section 14 shall prohibit Employee from
acquiring or owning less than one percent (1%) of any type of outstanding
publicly traded securities of any company which Employee and Employee's
family are not otherwise associated or affiliated with.
(b) plan for or organize any business which competes or would compete
with any product or service of Galaxy; or combine with any other employee
or representative of Galaxy to organize any such competitive business.
(c) solicit, induce or influence (or seek to induce or influence) any
person under contract with Galaxy (including any associate or distributor
of Galaxy) to terminate or alter his or her relationship with Galaxy.
(d) solicit any existing customer of Galaxy.
Further, the parties agree that Galaxy, in its sole discretion, may
extend the Restrictive Period and the foregoing restrictive covenant for up to
an additional year. To do so, Galaxy must (i) give Employee at least ninety (90)
days prior notice of its intention to extend the restrictive covenant, and (ii)
pay Employee an amount equal to the Base Salary for and during the period of
such extension. Any such payments shall be paid according to Galaxy's regular
payroll schedule.
It is the intention of the parties that the foregoing restrictive
covenant shall be enforced as written, and, in any other event, enforced to the
greatest extent (but to no greater extent) in time, territory and degree of
participation as is permitted by applicable law. Therefore, the parties agree
that such covenant shall be construed to apply in time, territory and degree of
participation only so far as such covenant is enforced by a court of competent
jurisdiction. Thus, as generally set forth in Section 19, such covenant is
hereby declared divisible and severable.
14. Acknowledgement: Employee acknowledges that Employee's covenants
and agreements in Section 14 are reasonable and necessary to protect the
legitimate interests and Confidential Information of Galaxy. Employee
acknowledges that Section 14 is not so broad as to prevent Employee from earning
a livelihood or practicing Employee's chosen profession after termination of
Employee's employment. The parties acknowledge and agree that the compensation
and benefits provided for under this Agreement are in substantial part
consideration for Employee's covenants in Section 14.
Employee's covenants and agreements of Sections 10 through 16 shall
survive the termination of Employee's employment by any means, reason or party.
15. Enforcement: For any breach of Section 10, 11, 12, 13, 14 or 15,
Employee agrees that Galaxy shall be entitled to equitable and other injunctive
relief which may include, but shall not be limited to (i) restraining Employee
from rendering any service or performing any activity in breach of this
Agreement, (ii) an order for specific relief, (iii) other equitable relief, and
(iv) damages. However, no remedy available under this Agreement (including this
Section 16) is intended to be exclusive of any other remedy, and each and every
remedy shall be cumulative and shall be in addition to every other available
remedy or now or hereafter existing at law or in equity, by statute or
otherwise. The election of any one or more remedies by Galaxy shall not
constitute any waiver of the right to pursue other available remedies.
MISCELLANEOUS
16. Entire Agreement: This Agreement (including the recitals and
Exhibit "A", which is attached hereto) sets forth the entire agreement and
understanding between Employee and Galaxy and cannot be modified or altered, nor
can any provision hereof be waived, except in writing signed by Employee and a
duly authorized officer of Galaxy.
17. Interpretation: The Section and other headings in this Agreement
are for purposes of reference only and shall not limit, expand or otherwise
affect the construction of any of the provisions of this Agreement. Whenever the
context requires, the singular shall include the plural, the plural shall
include the singular, and the whole shall include any part thereof.
18. Invalidity of Provision: In case any one or more of the provisions
in this Agreement shall, for any reason, be held to be invalid, illegal or
unenforceable in any respect, such invalid, illegal or unenforceable
provision(s) shall be curtailed, limited, construed or eliminated to the extent
necessary to remove such invalidity, illegality or unenforceability with respect
to the applicable law as it shall then be applied and the other provisions of
this Agreement shall not be affected thereby.
19. Binding Effect: This Agreement shall inure to the benefit of and be
binding upon Employee and Employee's heirs and personal representatives, and
upon Galaxy and its successors and assigns, and is performable and enforceable
in the State of Utah.
20. Waiver: No waiver of any provision of this Agreement shall
constitute a waiver of any other provision, whether or not similar, nor shall
any waiver constitute a continuing waiver.
21. Notice: Any notice required or permitted to be given under this
Agreement shall be in writing and shall be sufficient if personally delivered or
sent by registered or certified mail, and addressed, if to Employee, to
Employee's address set forth in Galaxy's records, or if to Galaxy, to its
principal office. Such notice shall be deemed given when delivered, if delivered
personally, or, if sent by registered or certified mail, at the earlier of
actual receipt or three (3) days after mailing in United States mail, addressed
as aforesaid with postage prepaid.
22. Governing Law: This Agreement shall be governed by and construed in
accordance with the laws of the State of Utah. Any litigation arising out of
this Agreement shall be conducted in applicable courts located in Salt Lake
County, Utah, and the parties expressly consent to such jurisdiction and venue.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
Employee: Employer:
_________________________ GALAXY ENTERPRISES, INC.
_________________________ By _____________________________
Signature
Name ___________________________
Title __________________________
<PAGE>
1
EXHIBIT "A"
TO
EMPLOYMENT AGREEMENT
BETWEEN
GALAXY ENTERPRISES, INC.
AND
-------------------------
Duties of Employee
SUBSIDIARIES OF GALAXY ENTERPRISES, INC.
Subsidiary Name Jurisdiction
of Incorporation
------------------ ----------------
Galaxy Mall, Inc. Wyoming
IMI, Inc. Utah
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001063450
<NAME> GALAXY ENTERPRISES, INC.
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1.00
<CASH> 132,741
<SECURITIES> 0
<RECEIVABLES> 1,790,498
<ALLOWANCES> (677,551)
<INVENTORY> 102,203
<CURRENT-ASSETS> 2,079,678
<PP&E> 416,941
<DEPRECIATION> (157,364)
<TOTAL-ASSETS> 3,230,629
<CURRENT-LIABILITIES> 13,409,331
<BONDS> 0
0
0
<COMMON> 41,632
<OTHER-SE> (10,635,322)
<TOTAL-LIABILITY-AND-EQUITY> 3,230,629
<SALES> 17,934,277
<TOTAL-REVENUES> 17,934,277
<CGS> 13,506,633
<TOTAL-COSTS> 25,045,139
<OTHER-EXPENSES> 2,952
<LOSS-PROVISION> 675,200
<INTEREST-EXPENSE> 11,152
<INCOME-PRETAX> (7,118,130)
<INCOME-TAX> 2,692
<INCOME-CONTINUING> (7,120,822)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (5,517,788)
<NET-INCOME> (12,638,600)
<EPS-BASIC> (2.23)
<EPS-DILUTED> (2.23)
</TABLE>
