1997
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended March 31, 1997
Commission File No. 0-16251
GALAXY FOODS COMPANY
(name of small business issuer as specified in its charter)
Delaware 25-1391475
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
2441 Viscount Row
Orlando, Florida 32809
(Address of principal (Zip Code)
executive offices)
Issuer's telephone number: (407) 855-5500
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $.01 per share
(Title of Class)
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the
past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No____
Check if a disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form,
and no disclosure will be contained, to the best of
registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal
year. $17,171,496
The aggregate market value of the voting stock held by
nonaffiliates as of June 20, 1997 was $25,458,806 based on the
closing sales price of $0.75 per share on such date.
The number of shares outstanding of Galaxy Foods Company's
Common Stock as of June 20, 1997 was 58,332,048.
DOCUMENTS INCORPORATED BY REFERENCE: None
Transitional Small Business Disclosure Format. Yes ___ No X
________________________________________________________________
<PAGE> 2
PART I
Item 1. Description of Business.
GENERAL
Galaxy Foods Company (the "Company") was originally organized
in Pennsylvania in 1980 under the name "Galaxy Cheese Company,"
and was subsequently reincorporated in Delaware in 1987.
After relocating to Orlando, Florida, the Company formally
changed its name to "Galaxy Foods Company." The Company
is principally engaged in the development, manufacturing and
marketing of a variety of healthy cheese and dairy related
products, as well as other cheese alternatives. The healthy
cheese and cheese related products, sold under the Company's
formagg, Soyco, and Soymage brand names, are low or no fat,
low or no cholesterol and lactose (milk sugar) free, vitamin and
mineral enriched, and contain onethird fewer calories and more
calcium than conventional cheese. These healthy cheese and
dairy related products have the flavor, appearance and texture
of conventional cheeses and products that use conventional
cheeses, and are nutritionally equal or superior to such
cheeses and products. Some of the Company's cheese alternatives
have either no or low cholesterol but are not nutritionally
equivalent or superior to conventional cheeses. The Company also
manufactures and markets non-branded and private label process and
blended cheese products, as well as branded soybased, rice-based and
non-dairy cheese products. Most of these products are made using
the Company's formulas and processes, which are believed to be
proprietary, and manufacturing equipment.
In June 1992, the Company relocated to Orlando, Florida and
began production and shipment of its products directly from its
Orlando plant to customers in each of the Company's three
principal markets--retail stores, such as supermarket chains
and health food stores; food service operations, such as
restaurant chains, cafeterias, hospitals and schools; and
industrial food manufacturers of products such as frozen pizza
and desserts.
The Company's sales effort is primarily directed to retailers,
to take advantage of what it perceives to be an increased
consumer emphasis on nutrition, by offering a diverse line of
low and no fat, low and no cholesterol and no lactose
cheese products. These include individually wrapped cheese
slices, shredded cheeses, grated toppings, deli cheeses, and
soft cheeses like sour cream, cream cheese and cheese
sauces. The Company also markets the Lite Bakery line of
products which uses formagg , a product described below, as
a base ingredient. This line includes bakery mixes for use
by commercial and in-store bakeries to produce pies, icings,
and cheesecakes utilizing formagg. The mixes also substitute other
healthy ingredients to reduce or eliminate cholesterol, fat,
lactose, sodium, and excessive calories associated with
traditional bakery products.
The Company's strategy for the future is to continue its
primary marketing efforts in the retail market to capitalize
on the continuing interest among consumers in reducing their
cholesterol levels and saturated fat intake. The Company
believes that one of the leading contributors of cholesterol and
saturated fat in the American diet is cheese. By providing good
tasting cheese alternatives available in diverse forms and flavors,
the Company believes it will be able to attract an increasing number
of worldwide consumers interested in improving their health and eating
habits.
<PAGE> 3
PRODUCTS
The Company's products include the following:
formagg Cheese Products -- the Company's flagship line of
vitamin and mineral enriched cheese products sold under the
brand name "formagg," which contain all of the
characteristics of conventional cheeses but have low or no fat,
low or no cholesterol, no lactose, and one-third fewer calories and
more calcium than conventional cheeses. For the fiscal years
ended March 31, 1997 and 1996, sales of formagg products
accounted for approximately 43.7% and 16.1%, respectively,
of the Company's sales.
The formagg line includes more than 30 varieties of
cheese products in many flavors and forms including hard,
semi-hard, soft cheese products and cheese sauces.
Soyco and Soymage -- Soyco is a line of all natural soy-based
and rice-based products, which was introduced to the retail
market in early 1987 and includes individually wrapped
slices, chunks, grated and soft cheese products. Under the
Soyco division, the Company also markets Soymage brand
products, which have no casein or other dairy ingredients,
and are aimed primarily to vegetarians and to consumers who
are allergic to the lactose or milk protein contained in dairy
products. For the fiscal years ended March 31, 1997 and 1996,
sales of Soyco and Soymage products accounted for approximately
13.5% and 23.5%, respectively, of the Company's sales.
Substitute Cheeses -- cheese products which are not as
nutritious as formagg cheese products but are
nutritionally equal or superior to conventional cheeses,
and which may contain small amounts of butterfat, lactose
and cholesterol. These products contain fewer calories than
conventional cheese but, generally, more calories than
formagg. For the fiscal years ended March 31, 1997 and 1996,
sales of branded, nonbranded and private label substitute
cheeses accounted for approximately 2.0% and 12.8%, respectively,
of the Company's sales.
Process Cheeses -- a line of products, sold under private
label, made by combining one or more conventional cheeses
with certain other ingredients, generally excluding substitute
and imitation cheeses. For the fiscal years ended March 31,
1997 and 1996, sales of process cheeses accounted for
approximately 1.1% and 0%, respectively, of the Company's sales.
Blended Cheeses -- cheese products, primarily sold to
industrial customers, which consist of either substitute
or imitation cheeses combined with already prepared
conventional cheeses. For the fiscal years ended March 31,
1997 and 1996, sales of blended cheeses accounted for
approximately 0.2% and 4.1%, respectively, of the Company's sales.
Imitation Cheeses -- low cholesterol alternatives to
conventional cheeses which differ from the Company's
substitute cheeses in that they are not nutritionally
equivalent or superior to conventional cheeses and may
have more cholesterol than the Company's substitute
cheeses. For the fiscal years ended March 31, 1997 and
1996, sales of imitation cheeses accounted for approximately
10.0% and 26.1%, respectively, of the Company's sales.
Conventional Cheese Shreds -- already manufactured
cheese products purchased from suppliers for shredding at the
Company's facility. For the fiscal years ended March 31, 1997
and 1996, sales of shredded conventional cheeses
accounted for approximately 26.9% and 17.4%, respectively, of the
Company's sales.
<PAGE> 4
The characteristics of the Company's products vary according
to the specific requirements of individual customers within
each market. In the retail market, the Company's products
are formulated to meet the health concerns of today's
consumers. In the industrial food manufacturing and food
service markets, the Company's products are made
according to the customer's specifications as to color,
texture, shred, melt, cohesiveness, stretch, browning, fat
retention, and protein, vitamin and mineral content. The
Company's products are manufactured in various forms,
including individual slices, grated, shredded, salad toppings,
deli loaves, and multi-pound blocks and are available in
several flavors, including, but not limited to mozzarella,
cheddar, American, parmesan and Swiss.
The Company has obtained kosher dairy certification (O.U.D.) for all
of its substitute and imitation cheese products, and has obtained kosher
nondairy pareve (O.U.) certification for Soymage.
DISTRIBUTION METHODS
The Company currently distributes all of its products by
common carrier and customer pick-up. The Company does not
have any warehousing arrangements; therefore, all products
are shipped from the Company's manufacturing facility in
Orlando, Florida.
MANUFACTURING PROCESS
Most of the Company's products are made using the
Company's formulas, processes, and manufacturing equipment, from four
principal ingredients: casein, a pure skim milk protein
(instead of liquid milk which is used to make conventional
cheeses); soybean and canola oil; water; and natural
flavorings. The Company's Soymage products are also made
using the Company's formulas, processes and manufacturing
equipment from these principal ingredients, except that
Soymage does not contain casein. All of these products are
produced at a temperature above that required for
pasteurization. The Company's formulas and processes were
designed and developed by the Company's Chief Executive
Officer, Angelo S. Morini. The rights to these formulas,
processes and equipment have been assigned by Mr. Morini
to the Company. Unlike the conventional cheese process, the
production of the Company's products does not require the
costly and time-consuming use of bacteria to curdle milk, nor
does it require removal of whey or product curing.
QUALITY CONTROL
Throughout the production process, the Company subjects
its products to stringent quality control inspections in order
to satisfy federal and state regulations for good manufacturing
procedures, meet customer specifications, and assure consistent
product quality. A sample of each production run is tested for
various characteristics including microbiology, taste, color,
acidity (Ph), surface tension, melt, stretch and fat retention.
Random samples are also regularly sent to an independent
laboratory to test for bacteria and other micro-organisms.
The Company is presently adopting ISO9000 standards and will
seek worldwide certification in the future.
CAPITAL EXPENDITURES
During the fiscal years ended March 31, 1997 and 1996,
the Company's capital expenditures were approximately $3,355,000
and $1,307,000, respectively. The substantial capital expenditures
for fiscal 1997 and 1996 were primarily due to the purchase of several
large items of production equipment.
<PAGE> 5
SALES AND MARKETING
In the retail market, the Company markets its healthy
formagg, Soyco and Soymage products to supermarkets, club
stores and health food stores. The Company believes its
healthy products appeal to a wide range of consumers
interested in lower fat, lower cholesterol, lactose free
products and other nutraceutical ingredients found in these
products and that this market will continue to expand.
These products are sold through distributors and directly to
customers by in-house and territory sales managers and a
nationwide network of non-exclusive commission brokers. The
Company uses conventional marketing and public relations
techniques for market introductions such as promotional
allowances and events, in-store consumer sampling, print
advertising and television.
In the food service market, the Company promotes its
healthy formagg cheese products as well as lower
cost cheese alternatives. In marketing its formagg line of
products to food service customers, the Company emphasizes
that formagg tastes like conventional cheese and has no or low
fat, low or no cholesterol, no lactose and more calcium than
conventional cheeses. The Company also promotes its food
service products on the basis of their considerably longer
shelf life and microbiologically safer profile than conventional
cheeses. In both the food service and industrial markets, the
Company sells directly to its customers. In the food service
market, the Company utilizes both its inhouse sales staff, territory
managers and a nationwide network of nonexclusive commission brokers
to sell the Company's products.
SUPPLIERS
The Company purchases the ingredients used in its
manufacturing operations, i.e., casein, soybean and canola
oil, enzymes and other ingredients, from several sources. It
believes that all of these ingredients are readily available
from numerous suppliers. Due to more cost effective and environmentally
safer production conditions in other countries, suppliers
from such countries are often able to supply casein at prices
lower than domestic suppliers. Accordingly, the Company currently
purchases its major ingredient, casein, from foreign suppliers.
Because casein purchased by the Company is imported, its
availability is subject to a variety of factors,
including federal import regulations. The Company believes
that it could obtain casein at a higher cost from domestic
sources if the foreign supply of casein were reduced or terminated.
For the fiscal years ended March 31, 1997 and 1996, the
Company purchased $3,614,421 and $1,398,230, respectively,
of casein, canola and other oils, and other ingredients- the
principal raw materials used to manufacture the Company's
products. The following table sets forth the name of each
supplier along with the percentage they supplied of casein, canola
oil, and other ingredients which either alone, or together with
their affiliates, provided 5% or more of such items to the Company,
based on dollar volume purchased.
<PAGE> 6
Percentage of Raw Material Purchases
Fiscal Year Ended March 31,
Type of Raw Material Name of Supplier 1997 1996
Casein Besnier-Scerma U.S.A. 70% 62%
Avonmore Food Products Ltd. 18% 24%
Irish Dairy Board 9% 9%
Canola Oil Fugi Vegetable Oil, Inc. 0% 27%
Wilsey Foods Inc. 0% 25%
C & T Refinery 2% 24%
Archer Daniels Midland Co. 88% 24%
Sunlite Foods 7% 0%
Fructose Industrial Commodities, Inc. 13% 100%
Food Ingredient Sales, Inc. 87% 0%
Chemicals Van Waters & Rogers 70% 54%
Ashland Chemical Company 30% 46%
Enzyme-modified Cheese Systems Bio-Industries 23% 87%
Armour Foods 74% 11%
Corn Starch Food Ingredient Sales, Inc. 30% 54%
Grain Processing Corporation 60% 46%
A.E. Staley Manufacturing Co. 10% 0%
PRODUCT DEVELOPMENT
The Company conducts ongoing research to develop new varieties
of cheese, dessert products and dairy related products, in addition
to developing new flavors and customized formulations for existing
products. For the fiscal years ended March 31, 1997 and 1996,
expenditures for product development were $204,126 and
$112,854, respectively. None of the research and development
costs are directly borne by the customer, instead they are
considered part of operating expenses.
TRADEMARKS AND PATENTS
The Company owns the trademark for formagg. The Company
believes this trademark is an important means of establishing
consumer recognition of its products. The Company also owns
several other registered and unregistered trademarks which are
used in the marketing and sale of the Company's products.
The registered trademarks are generally in effect for ten years
from the date of their initial registration, and may be renewed
for successive tenyear periods thereafter. The following
table sets forth the registered and unregistered
trademarks of the Company, the country in which the mark is
filed, and the renewal date for such mark.
<PAGE> 7
Mark Country Renewal Date
formagg Canada March 1, 2000
France June 6, 2004
Japan August 31, 2004
United States October 9, 2004
Ireland April 25, 2005
United Kingdom April 25, 2005
Israel December 16,2007
Greece October 3, 2004
Lite Bakery & Design United States September 19, 2009
Labella's & Design United States October 9, 2004
Soyco United States January 12, 2003
Soyco & Design United States August 17, 2003
Soymage United States January 5, 2003
Veggy Singles United States February 27, 2007
Lite "n" Less United States (1)
Health Value Foods United States (1)
Soy Singles United States (1)
Veggie Milk United States (1)
Wholesome Valley United States (1)
(1) Registration pending; however, the Company has received a
Notice of Allowance for this trademark.
Although the Company believes that its formulas and processes
are proprietary, the Company has not sought and does not intend to
seek patent protection for such technology. In not seeking patent
protection, the Company is instead relying on the complexity of its
technology, on trade secrecy laws, and on employee
confidentiality agreements. The Company believes that its
technology has been independently developed and does not
infringe on the patents or trade secrets of others.
MARKETS AND CUSTOMERS
The Company sells to customers in approximately 33 states
and eight international countries. Principal customers of
the Company include Foodservice Purchasing Co-op, a food
distributor with principal offices located in Louisville,
Kentucky; H.E. Butt Grocery, a supermarket chain with
principal offices located in San Antonio, Texas; and
Multi-Foods Corporation, a food distributor with principal
offices located in Rice, Minnesota.
For the fiscal years ended March 31, 1997 and 1996, the
Company had net sales of $17,171,496 and $3,950,455,
respectively. The following table sets forth the name of
each customer of the Company, which either alone, or
together with its affiliates, accounted for 5% or more of
the Company's sales for the fiscal years ended March 31,
1997 or 1996:
Percentage of Sales
Fiscal Year Ended March 31,
Customer Name 1997 1996
Foodservice Purchasing Co-op 34.0% 17.9%
H.E. Butt Grocery 6.9% 0.0%
Multi-Foods Corporation 2.2% 7.9%
The Company's products are sold primarily in three
commercial markets: retail, food service, and industrial.
<PAGE> 8
In the retail market, where the Company believes
nutrition generally outweighs price considerations, the Company
markets its formagg and Veggie Slices products at prices
comparable to conventional cheeses. In this market, the
Company sells directly to retail establishments, including
national and regional supermarket chains, and to
distributors that sell and deliver to retail establishments.
In both the food service and industrial markets, the
Company markets its more expensive premium products to
customers who place importance on nutrition and its less
expensive branded, nonbranded and private label substitute
and conventional-type cheese products to customers whose
primary consideration is cost. The food servise products are
primarily sold to distributors who supply food to
restaurants, schools and hospitals. The Company also
markets its products directly to large national restaurant
chains.
In the industrial market, the Company sells its products
to industrial manufacturers whose food products, such as
pizza, frozen foods, salad dressings, cheese dips and
spreads, potato and vegetable toppings, and baked goods
(such as crackers and croutons), ordinarily contain cheese as
an ingredient.
The following chart sets forth the percentage of sales that
the industrial, food service and retail markets represented
for the fiscal years ended March 31, 1997 and 1996:
Percentage of Sales
Fiscal Years Ended March 31,
Category 1997 1996
Retail sales 52% 35%
Food service sales 45% 49%
Industrial sales 3% 16%
GOVERNMENT REGULATION
As a manufacturer of food products for human consumption,
the Company is subject to extensive regulation by federal,
state and local governmental authorities regarding the
quality, purity, manufacturing, distribution and labeling of
food products.
The Company's United States product labels are subject
to regulation by the United States Food and Drug
Administration ("FDA"). Such regulation includes standards
for product descriptions, nutritional claims, label
format, minimum type sizes, content and location of
nutritional information panels, nutritional comparisons, and
ingredient content panels. The Company's labels, ingredients,
and manufacturing techniques and facilities are subject to
inspection by the FDA. In May 1994, the United States enacted
a new labeling law which dramatically impacted the food industry
as a whole. The regulations require specific details of ingredients
and their components along with nutritional information on labels. The
Company believes this will enhance marketability and result
in increased sales of the Company's products because the new
labels make it easier for consumers to recognize the
nutritional benefits of the Company's products compared to
other products.
The Company's facility and manufacturing processes are subject
to inspection by the Florida Department of Health. The
Company received its Annual Food Permit from that bureau for
1997.
The Company believes that it is in compliance, in all
material respects, with governmental regulations regarding
its current products and has obtained the necessary
government permits, licenses, qualifications, and approvals
which are required for its operations.
<PAGE> 9
ENVIRONMENTAL REGULATION
The Company is required to comply with environmental
regulations in connection with the development of its
products and the operation of its business. It spent
approximately $12,000 and $20,000 during the fiscal years
ended March 31, 1997 and 1996 respectively, in
environmental related compliance, mainly concerning the
disposal of corrugated packaging.
At the present time, the Company believes that it is in
compliance in all material aspects with the federal,
state and local environmental laws and regulations applicable
to it. The Company believes that continued compliance with any
current or reasonably foreseeable future environmental laws
and regulations will not have a material adverse effect
on the capital expenditures, earnings, financial condition
or competitive position of the Company.
COMPETITION
The food industry is highly competitive, and the Company
faces substantial competition in connection with the
manufacturing, marketing, and sale of its products. In
the retail cheese market, the Company competes with
conventional cheeses, including "light" products produced
by manufacturers of conventional cheeses. "Light" cheese
generally has lower fat content than regular cheese but still
contains cholesterol and lactose, unlike the Company's formagg
line which contains low or no cholesterol and is lactose free.
Conventional cheeses are being promoted widely by the American
Dairy Association and other trade associations representing the dairy
industry. In the industrial and food service markets, the
Company's substitute and imitation cheese products compete
with other substitute and imitation cheese products, as well
as with conventional cheeses.
The Company believes it has the most complete line of
cheese products in the industry having healthy characteristics
such as no and low fat, low or no cholesterol, no lactose and no
artificial colorings or flavorings. The Company further believes
that the most important competitive factors in the Company's markets
are product appearance, taste, nutritional value and price. The Company
believes its products excel in these areas. Among the
Company's competitors in the cheese industry are national
and regional manufactures of conventional and imitation cheeses,
such as Kraft (which produces products under the Kraft Free label),
Borden's, and ConAgra (which produces products under the Healthy Choice
label). Each of these competitors are well established and
have substantially greater marketing, financial and human
resources than the Company. However, management believes
the competitors' current products do not have all of the healthy
characteristics that the Company's branded products possess
(i.e. low and no fat, no saturated fat, low unsaturated fat,
low or no cholesterol, no lactose and no artificial
colorings or flavorings). Competitors may succeed in
developing similar or enhanced products, and because of
greater resources, these competitors may prove more
successful in marketing and selling such products. There can be no
assurance that the Company will be able to compete successfully
with any of these companies or achieve a greater market share.
EMPLOYEES
As of June 20, 1997, the Company had a total of 122 employees,
all of whom were full-time employees. In addition, the Company
also utilizes other personnel through employee leasing companies
and temporary contract arrangements. The Company considers its
relations with employees to be satisfactory. No employee is a member
of a trade union.
<PAGE> 10
Item 2. Description of Property.
The Company's headquarters, sales offices, manufacturing, warehouse,
and research and development facilities occupy approximately 56,000
square feet situated in Orlando, Florida. The Company's facilities are
comprised of approximately 8,500 square feet in office space,
approximately 31,897 square feet of dock-height, air-conditioned
manufacturing space, and a cooler of approximately 15,000 square feet,
which are situated on 2.4 acres of a 5.2 acre site in an industrial park.
The Company entered into a lease agreement with Anco Company, a Florida
general partnership, on November 13, 1991. The initial term of the
lease was for a five-year period which expired on November 13, 1996.
On November 13, 1996, the lease was renewed for an additional five-year
period expiring on November 12, 2001. The original lease provided
for fixed rental payments of $20,799 per month through the end of the
initial five-year lease term which expired on November 13, 1996. The
five-year renewal period provides for fixed rental payments of $23,919
per month through the end of the renewal period. After the completion
of the renewal period, there are no limitations on the rent
increase that may be charged by the landlord in any
further renewal periods. If the parties are unable to
agree upon a rental increase for any renewal period, then the
lease shall terminate as of the expiration of the last agreed
upon period. The Company has a right of first refusal to
purchase or lease the remaining 2.8 acres upon 20 days notice
to the landlord in the event that the landlord elects to
sell or lease such remaining land. The lease is a "triple
net" lease which means that the Company is responsible
for all taxes, insurance, maintenance and repair of the
facilities, in addition to rental payments. The Company's
manufacturing facility is capable of producing 250 million
pounds of cheese and dairy related products per year. The
Company believes the capacity of production at the plant
should be more than adequate to cover the estimated growth of
the Company for the next three to five years. Management
believes that the Company's properties are adequately covered
by casualty insurance.
The Company produces all of its products at this Orlando
plant. Based on the results for the fiscal years ended March
31, 1997 and 1996, the Company's plant is producing
approximately 7.3 and 2.3 million pounds of cheese
products, respectively, on an annualized basis, which is
approximately 4.7% and 1.5%, respectively, of plant
capacity. The Company has production equipment for mixing,
blending, cooking and heating ingredients, cold storage areas
for cooling finished goods, and several warehouse areas
where ingredients are stored. The Company owns and leases
equipment for production, shredding, dicing, slicing, chopping,
grating, packaging and labeling of its products. The Company
believes that its facilities are adequate to meet current
requirements, and that suitable additional space is available
as needed to accommodate any further physical expansion of
corporate operations.
Item 3. Legal Proceedings.
In the opinion of management, there are no material
legal proceedings pending or threatened against the Company as
of March 31, 1997.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted during the fourth quarter of the
period covered in this report to a vote of shareholders.
<PAGE> 11
PART II
Item 5. Market for Common Equity and Related
Stockholder Matters.
The Company's Common Stock, $.01 par value (the "Common
Stock"), is traded on the inter-dealer automated quotation
system operated NASDAQ, Inc., a subsidiary of the National
Association of Securities Dealers, Inc. (the "NASDAQ
System") under the symbol "GALX" in the category of Small-Cap
Issues. The following table sets forth the high and low sales
prices for each quarter for the Company's Common Stock as
reported on the NASDAQ System during the fiscal years ended
March 31, 1997 and 1996:
Period High Sales Price Low Sales Price
1997 Fiscal Year, quarter ended:
June 30, 1996 $2 7/32 $1
September 30, 1996 $1 27/32 $1 1/16
December 31, 1996 $1 5/8 $0 31/32
March 31, 1997 $1 $0 23/32
1996 Fiscal Year, quarter ended:
June 30, 1995 $1 15/16 $0 11/16
September 30, 1995 $1 15/32 $0 15/32
December 31, 1995 $0 3/4 $0 15/32
March 31, 1996 $2 15/16 $0 7/16
All of the above quotations were obtained from the monthly statistical
report provided to the Company by the National Association of
Securities Dealers, Inc.
On June 20, 1997, there were approximately 665 shareholders of record.
The Company has not paid any dividends with respect to its Common
Stock and does not expect to pay dividends on the Common Stock
in the foreseeable future. It is the present policy of
the Company's Board of Directors to retain future earnings to
finance the growth and development of the Company's business.
Any future dividends will be declared at the discretion of
the Board of Directors and will depend, among other things,
upon the financial condition, capital requirements, earnings
and liquidity of the Company. See Management's Discussion
and Analysis or Plan of Operation for a discussion of the
Company's current capital position and dividend payments
with respect to certain preferred securities of the Company.
Item 6. Management's Discussion and Analysis or Plan of
Operation.
Statements other than historical information contained in
this report are considered forward looking and involve a
number of risks and uncertainties. Factors that could cause such
statements not to be accurate include, but are not limited
to, increased competition for the Company's products,
improvements in alternative technologies, a lack of market
acceptance for new products introduced by the Company and the
failure of the Company to successfully market its products.
RESULTS OF OPERATIONS
Sales for the fiscal year ended March 31, 1997 increased
by 334.7% over the same period in 1996. This significant
increase in sales is attributable to the introduction of new
and improved products to the retail market, as well as the
escalation of orders from major retail and food service
customers throughout fiscal 1997. In addition, there was
a large increase in marketing activities promoting these new
products. Finally, the Company was able to improve its
cash flow position through financing activities which
facilitated the completion of customer orders on a timely
basis.
<PAGE> 12
Sales for the fourth quarter fiscal 1997 were $4,306,934
compared to $1,651,789 in the same period in fiscal 1996. This
160.7% increase is the result of increased production capacity,
the escalation in sales of new and existing product lines and
strategic marketing efforts.
The Company expects these sales trends to continue
throughout fiscal 1998 due to the addition of new capital
equipment and expanded product lines.
Cost of goods sold as a percentage of sales was 90.6% for
the fiscal year ended March 31, 1997 compared with 106.3%
for the same period in fiscal 1996. The improvement in gross
margin is primarily a result of expanded production runs
creating greater production efficiencies and an increase in
sales volume to cover the Company's fixed costs. In
addition, the Company placed into service a second individually
wrapped slice machine during the fourth quarter of fiscal 1997.
The introduction of this second machine helped the Company to further
improve efficiency of production runs.
Selling expenses increased 58.4% for the fiscal year ended
March 31, 1997 compared with the same period ended March
31, 1996. This increase in selling expenses over the prior
fiscal year is mainly attributed to an increase in initial
product introduction charges, advertising, brokerage costs and
marketing personnel. For fiscal 1996, strict cost reductions
were in place due to a lack of working capital; therefore,
the Company's marketing and advertising costs were significantly less in
fiscal 1996. In addition, brokerage costs are a function of
sales and therefore, increase proportionately to sales. Delivery expenses
increased 124.5% for the fiscal year ended March 31, 1997 compared
with the same period in 1996. The increase in delivery costs is a
direct result of the increase in sales shipments to customers; however,
the ratio of delivery expense to net sales is decreasing due to
more favorable shipping rates, larger orders, and customers
absorbing more of the delivery costs. General and administrative
costs decreased 5.5% during the fiscal year ended March 31, 1997
compared to the same period in 1996. The decline in general and
administrative costs is primarily the result of lower professional fees
for fiscal 1997.
Research and development expenses increased 80.9% for the
fiscal year ended March 31, 1997 compared with the same period
in fiscal 1996. This increase in expense is largely the result
of employee relocation allowances paid during the first
quarter of fiscal 1997, increased wage expense, and a change
in the allocation of expense between divisions.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities -- The Company decreased cash used
in operating activities by approximately 19.3% to $3,569,601
for the year ended March 31, 1997 from $4,420,620 for the
same period last year. The decline in cash used for
operations is primarily the result of an increase in sales
combined with a decline in general and administrative costs
and an improvement in gross margin.
Investing -- The Company spent $3,663,205 in investing
activities for the fiscal year ended March 31, 1997 compared
with $1,111,794 for fiscal 1996. This large increase is
the result of the Company investing its cash reserves from
financing activities into marketable securities and the
purchase of several large items of production equipment.
<PAGE> 13
Financing -- The Company realized a net inflow of $7,121,355
from financing activities for the fiscal year ended March
31, 1997 compared with $5,644,145 during the same period last
year. The large cash flows from financing activities
resulted from a Regulation D offering of the Company's stock and
borrowings on a line of credit in fiscal 1997 and a Regulation S
offering of the Company's stock in fiscal 1996.
On April 16, 1996, the Company completed a Regulation D
private placement of 1,337,524 shares of Common Stock at an
aggregate price of $2,000,000 and 4,000 shares of convertible
preferred stock at an aggregate price of $4,000,000. Between
July 1997 and March 31, 1997, 1,443 shares of convertible preferred
stock were converted into 1,965,824 shares of Common Stock at an
average conversion price of $0.73 per share.
On March 3, 1995, the Company began to offer certain of its securities to
non-U.S. persons under Regulation S promulgated by the Securities and
Exchange Commission under the Securities Act of 1933, as amended.
These sales of securities continued through the beginning of June 1995
with sales totaling 5,590,372 shares of Common Stock at the
average price of $0.92 per share. Additionally, the
Company sold 353,755 shares of various series of convertible
preferred stock at an average price of $20.06 per share for total gross
proceeds of $7,095,700. The resulting proceeds from all securities
sold during the offering were approximately $12.2 million, of which
$2,088,360 was used to pay investment brokerage commissions and related
offering fees and over $3 million was used to eliminate the
principal and accrued interest on all debt owed to stockholders.
Between May 1995 and September 1995, all of the shares of convertible
preferred stock were converted into 16,760,458 shares of Common Stock
at an average conversion price of $0.42 per share.
In March 1997, the Securities and Exchange Commission Staff (the "Staff")
announced its position on accounting for preferred stock which is
convertible into common stock at a discount from the market rate at the
date of issuance. The Staff's position is that a preferred stock dividend
should be recorded for the difference between the conversion price
and the quoted market price of common stock at the date of
issuance. To comply with this position, the Company restated its prior
year's financial statements to reflect a dividend of $3,130,294 related to
the fiscal 1996 sales of convertible preferred stock as discussed
above. The Company also restated the reported net loss per share of
common stock from the previously reported amount of $0.13.
In compliance with the Staff's position, the Company
also recorded a preferred stock dividend in the amount of
$1,594,406 in fiscal 1997 for the April 1996 sale of convertible
preferred stock.
In addition, on November 1, 1997, the Company secured
a $2 million line of credit with Finova Capital Corporation
with interest at the prime rate plus two percent. At March 31, 1997,
the balance outstanding under this line of credit agreement was $1,370,953.
The Company is in the final stages of negotiating $1.5 million
in equipment financing to fund additional capital expenditures.
Management believes that these actions will allow the
Company to meet its future liquidity needs until the Company
establishes a positive cash flow.
Effect of Certain New Accounting Pronouncements -- The
Financial Accounting Standards Board recently issued
Statement No. 128 ("SFAS 128"), Earnings per Share. This
statement is effective for the Company's fiscal year
ending March 31, 1998 and establishes standards for
computing and presenting earnings per share. Adoption of
this standard would not have a material effect on reported
net loss per share for fiscal 1997.
<PAGE> 14
Effective April 1, 1995, the Company adopted the Statement
of Financial Accounting Standards No. 123 ("SFAS 123"),
Accounting for Stock-Based Compensation which establishes fair
value as the measurement basis for transactions in which an
entity acquires goods or services from nonemployees in
exchange for equity instruments. Under the provisions of
SFAS 123, the Company elected not to adopt the fair
value method for stock issued to employees, but will
instead account for all employee stock transactions under
APB Opinion No. 25, Accounting for Stock Issued to
Employees. The Company recorded additional consulting
expense of $31,307 and $130,027 in connection with warrants
issued during fiscal 1997 and 1996, respectively. If compensation
cost for employee stock transactions was determined based on the fair
value of options at their grant dates in accordance with FAS
123, net loss would have been increased by $125,347 and
$51,355 for fiscal 1997 and 1996, respectively. The effect
on net loss per share is less than $.01 per share for fiscal
1997 and 1996.
<PAGE> 15
Item 7. Financial Statements.
Report of Independent Certified Public Accountants
To the Board of Directors and Stockholders
Galaxy Foods Company
We have audited the accompanying balance sheet of Galaxy
Foods Company as of March 31, 1997 and the related
statements of operations, stockholders' equity and cash flows
for each of the two years in the period ended March 31,
1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an
opinion on these 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 audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as the overall financial statement
presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to
above present fairly, in all material respects, the financial
position of Galaxy Foods Company as of March 31, 1997 and the
results of its operations and its cash flows for each of the
two years in the period ended March 31, 1997 in conformity
with generally accepted accounting principles.
As discussed in Note 2 to the financial statements, the
Company has restated certain stockholders' equity accounts and
its 1996 loss per share of common stock to comply with
a recently announced Securities and Exchange Commission Staff
position on preferred stock convertible at a discount from
market.
/s/BDO Seidman, LLP
Orlando, Florida
May 21, 1997
<PAGE> 16
GALAXY FOODS COMPANY
Balance Sheet
ASSETS
MARCH 31,
1997
CURRENT ASSETS:
Cash and cash equivalents $ 16,485
Marketable securities 298,671
Trade receivables, net of allowance of $131,300 1,631,268
Inventories 1,802,244
Prepaid expenses 346,082
Total current assets 4,094,750
PROPERTY & EQUIPMENT, NET 8,186,009
OTHER ASSETS 211,687
TOTAL $ 12,492,446
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 1,370,953
Accounts payable - trade 449,227
Accrued liabilities 418,968
Current portion of obligations under capital leases 24,396
Total current liabilities 2,263,544
OBLIGATIONS UNDER CAPITAL LEASES,less current portion 32,668
Total liabilities 2,296,212
COMMITMENTS AND CONTINGENCIES --
STOCKHOLDERS' EQUITY:
Convertible preferred stock, $.01 par value,
authorized 1,000,000, issued and outstanding 2,557 26
Common stock, $.01 par value, shares authorized
85,000,000, issued and outstanding 57,128,241 571,282
Additional paid-in capital 45,780,462
Accumulated deficit (23,383,336)
22,968,434
Less: Notes receivable arising from the exercise
of stock options and sale of common stock 12,772,200
Total stockholders' equity 10,196,234
TOTAL $ 12,492,446
See accompanying notes to financial statements.
<PAGE> 17
GALAXY FOODS COMPANY
Statements of Operations
Year ended March 31, 1997 1996
NET SALES $ 17,171,496 $ 3,950,455
COST OF GOODS SOLD 15,565,825 4,199,571
Gross margin 1,605,671 (249,116)
OPERATING EXPENSES:
Selling 2,145,530 1,354,357
Delivery 665,822 296,592
General and administrative 1,374,130 1,453,730
Research and development 204,126 112,854
Total operating expenses 4,389,608 3,217,533
OPERATING LOSS (2,783,937) (3,466,649)
OTHER INCOME (EXPENSE):
Interest expense (46,984) (66,190)
Interest income 107,679 85,482
Litigation expense -- (39,000)
Other income (expense) (13,418) 203,759
Total 47,277 184,051
NET LOSS (2,736,660) (3,282,598)
PREFERRED STOCK DIVIDENDS (1,594,406) (3,268,271)*
NET LOSS APPLICABLE TO
COMMON STOCK $ (4,331,066) $ (6,550,869)*
LOSS PER COMMON SHARE $ (.12) $ (.25)*
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 35,039,360 26,316,832
* Amounts have been restated from previously reported to
reflect a stock dividend on preferred stock which is
convertible at a discount from market value at the date of
issuance (See Note 2).
See accompanying notes to financial statements.
<PAGE> 18
GALAXY FOODS COMPANY
Statements of Stockholders' Equity
<TABLE>
<CAPTION> Convertible
Common Stock Preferred Stock Additional Notes Rec &
Par Par Paid-In Accumulated Subs. for
Shares Value Shares Value Capital Deficit Common Stock Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1995 14,024,826 $ 140,248 -- $ -- $ 15,530,314 $ (12,501,401) $ (1,200,000) $ 1,969,161
Exercise of options 64,000 640 -- -- 31,360 -- (24,000) 8,000
Issuance of common stock
through Reg S offering 3,978,464 39,785 -- -- 1,780,393 -- -- 1,820,178
Issuance of convertible preferred
stock through Reg S offering -- -- 353,755 3,537 5,990,557 -- -- 5,994,094
Stock dividends paid 135,753 1,358 -- -- 136,619 (137,977) -- 0
Conversion of convertible preferred
stock into common stock 16,760,458 167,604 (353,755) (3,537) (164,067) -- -- 0
Reversal to unissued stock (4,153) (42) -- -- (5,928) -- -- (5,970)
Issuance of common stock
per employment agreement 18,000,000 180,000 -- -- 11,392,200 -- (11,572,200) 0
Issuance of common stock in
payment of consulting fees 200,000 2,000 -- -- 108,500 -- -- 110,500
Exercise of warrants 240,000 2,400 -- -- 181,850 -- -- 184,250
Issuance of common stock under
employee stock purchase plan 22,500 225 -- -- 11,025 -- -- 11,250
Issuance of warrants -- -- -- -- 459,821 -- -- 459,821
Preferred stock dividend -- -- -- -- 3,130,294* (3,130,294)* --
Net loss -- -- -- -- -- (3,282,598) -- (3,282,598)
Balance at March 31, 1996,
as restated 53,421,848 $ 534,218 -- $ -- $ 38,582,938* $ (19,052,270)* $(12,796,200) $ 7,268,686
Exercise of options 96,166 962 -- -- 47,321 -- -- 48,283
*Amounts have been restated from previously reported to reflect a stock dividend on preferred stock which is
convertible at a discount from market value at the date of issuance.
<PAGE> 19
Issuance of common stock under
employee stock purchase plan 91,879 919 -- -- 86,681 -- -- 87,600
Collection of note receivable -- -- -- -- -- -- 24,000 24,000
Issuance of common stock
through Reg D offering 1,337,524 13,375 -- -- 1,846,096 -- -- 1,859,471
Issuance of convertible
preferred stock through
Reg D offering -- -- 4,000 40 3,733,901 -- -- 3,733,941
Conversion of convertible
preferred stock into common
stock 1,965,824 19,658 (1,443) (14) (19,644) -- -- --
Issuance and revaluation
of warrants -- -- -- -- (211,400) -- -- (211,400)
Exercise of warrants 215,000 2,150 -- -- 120,163 -- -- 122,313
Preferred stock dividend -- -- -- -- 1,594,406 (1,594,406) -- --
Net loss -- -- -- -- -- (2,736,660) -- (2,736,660)
Balance at March 31, 1997 57,128,241 $ 571,282 2,557 $ 26 $ 45,780,462 $ (23,383,336) $ (12,772,200) $ 10,196,234
</TABLE>
See accompanying notes to the financial statements.
<PAGE> 20
GALAXY FOODS COMPANY
Statements of Cash Flows
Year ended March 31, 1997 1996
CASH FLOWS FROM/(USED IN)
OPERATING ACTIVITIES:
Net Loss $ (2,736,660) $ (3,282,598)
ADJUSTMENTS TO RECONCILE NET
LOSS TO NET CASH USED IN
OPERATING ACTIVITIES:
Depreciation expense 435,608 350,099
(Gain)/Loss on assets 23,236 (20,709)
Provision for losses on trade receivables 94,531 87,834
Issuance of common stock in payment
of compensation and consulting fees -- 110,500
Issuance of common stock warrants in payment of
consulting and director fees 31,307 130,027
Reversal to unissued stock -- (5,970)
(Increase) decrease in:
Trade receivables (1,008,362) (685,095)
Inventories (613,570) (660,278)
Prepaid expenses (56,765) 6,945
Increase (decrease) in:
Accounts payable 165,700 (456,074)
Accrued liabilities 95,374 4,699
NET CASH USED IN OPERATING
ACTIVITIES (3,569,601) (4,420,620)
CASH FLOWS FROM/(USED IN) INVESTING
ACTIVITIES:
Proceeds from sale of property and equipment 22,500 29,668
Purchase of property and equipment (3,354,796) (1,142,632)
(Increase) decrease in other assets (32,238) 1,170
Purchase of marketable securities, net (298,671) --
NET CASH USED IN INVESTING
ACTIVITIES (3,663,205) (1,111,794)
CASH FLOWS FROM/(USED IN) FINANCING
ACTIVITIES:
Principal payments on stockholder notes -- (2,697,388)
Principal payments on note payable and
long-term debt (63,451) --
Net borrowings on line of credit 1,370,953 --
Principal payments on capital lease
obligations (61,755) (79,403)
Proceeds from issuance of common stock,
net of offering costs 1,947,071 1,925,782
Proceeds from issuance of convertible
preferred stock, net of offering costs 3,733,941 6,302,904
Proceeds from exercise of common stock
options 48,283 8,000
Proceeds from exercise of common stock
warrants 122,313 184,250
Collection of note receivable for common stock 24,000 --
NET CASH FROM FINANCING
ACTIVITIES 7,121,355 5,644,145
<PAGE> 21
GALAXY FOODS COMPANY
Statements of Cash Flows
(continued)
Year ended March 31, 1997 1996
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (111,451) 111,731
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR 127,936 16,205
CASH AND CASH EQUIVALENTS, END
OF YEAR $ 16,485 $ 127,936
See accompanying notes to financial statements.
<PAGE> 22
GALAXY FOODS COMPANY
NOTES TO FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
Business
Galaxy Foods Company (the "Company") is principally
engaged in the development, manufacturing and marketing of
a variety of healthy cheese and dairy related products,
as well as other cheese alternatives. These healthy
cheese and dairy related products include low or no fat, low or
no cholesterol and lactose-free varieties. These
products are sold throughout the United States and
internationally to customers in the retail, food
service and industrial markets. The Company's headquarters
and manufacturing facilities are located in Orlando, Florida.
Marketable Securities
Marketable securities consist of investments in
taxable bonds which mature in May 1997. The market
value of the securities approximate their cost as of
March 31, 1997.
Inventories
Inventories are valued at the lower of cost
(weighted average) or market.
Property, Equipment and Depreciation
Property and equipment are stated at cost. Depreciation
is computed over the estimated useful lives of the
assets by the straight-line method for financial
reporting and by accelerated methods for income tax
purposes.
Capital leases are recorded at the lower of fair
market value or the present value of future minimum lease
payments. Assets under capital leases are depreciated by
the straightline method over their useful lives.
Revenue Recognition
Sales are recognized upon shipment of products to
customers.
Net Loss per Share
Net loss per share is computed using the weighted
average number of shares outstanding during each
period. Common stock equivalents have not been included
since the effect would be antidilutive.
Financial Instruments
Statement of Financial Accounting Standards No.
107, Disclosures about Fair Value of Financial
Instruments, requires disclosure of fair value
information about financial instruments. Fair value
estimates discussed herein are based upon certain
market assumptions and pertinent information available
to management as of March 31, 1997.
The respective carrying value of certain on-balance-
sheet financial instruments approximated their fair
values. These financial instruments include cash and
cash equivalents, trade receivables, accounts payable
and accrued expenses. Fair values were assumed to
approximate carrying values for these financial
instruments since they are short term in nature and
their carrying amounts approximate fair values or
they are receivable or payable on demand.
<PAGE> 23
GALAXY FOODS COMPANY
NOTES TO FINANCIAL STATEMENTS
(Continued)
Income Taxes
The Company accounts for income taxes under the
provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" which
requires recognition of estimated income taxes payable or
refundable on income tax returns for the current year and for
the estimated future tax effect attributable to temporary
differences and carryforwards. Measurement of deferred income
tax is based on enacted tax laws including tax rates, with the
measurement of deferred income tax assets being reduced
by available tax benefits not expected to be realized.
Recently Issued Accounting Standards
The Financial Accounting Standards Board recently
issued Statement No. 128, Earnings per Share. This
statement is effective for the Company's fiscal year
ending March 31, 1998 and established standards for
computing and presenting earnings per share. Adoption
of this standard would not have a material effect on
reported net loss per share for fiscal 1997.
Use of 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 period reported.
Actual results could differ from those estimates.
(2) Restatement of 1996 Stockholders' Equity
In March 1997, the Securities and Exchange Commission
Staff (the "Staff") announced its position on
accounting for preferred stock which is convertible into
common stock at a discount from the market rate at the
date of issuance. The Staff's position is that a preferred
stock dividend should be recorded for the difference between the
conversion price and the quoted market price of common
stock at the date of issuance. To comply with this
position, the Company restated its prior year's
financial statements to reflect a dividend of $3,130,294
related to the fiscal 1996 sales of convertible
preferred stock discussed in Note 7. The Company also
restated the reported net loss per share of common stock from
the previously reported amount of $0.13. In compliance with the
Staff's position, the Company also recorded a preferred stock
dividend in the amount of $1,594,406 in fiscal 1997 for the
April 1996 sale of convertible preferred stock.
(3) Inventories
Inventories are summarized as follows:
Raw materials $ 1,136,269
Finished goods 665,975
Total $ 1,802,244
<PAGE> 24
GALAXY FOODS COMPANY
NOTES TO FINANCIAL STATEMENTS
(Continued)
(4) Property and Equipment
Property and equipment are summarized as follows:
Useful Lives
Leasehold improvements 10-25 years $ 2,673,225
Machinery and equipment 5-15 years 5,872,400
Delivery equipment and autos 3- 5 years 15,652
Equipment under capital leases 7-15 years 314,522
Construction in progress 881,044
9,756,843
Less accumulated depreciation 1,570,834
Property and equipment, net $ 8,186,009
Accumulated depreciation on equipment under capital leases was
$149,774 as of March 31, 1997.
The Company estimates that approximately $1,500,000 of additional
costs will be incurred to complete the construction in progress project.
(5) Commitments and Contingencies
Leases
The Company leases its operating facilities and
certain equipment under operating and capital leases,
expiring at various dates through fiscal year 2002. The
following is a schedule by years as of March 31,
1997, of (1) future minimum lease payments under
capital leases, together with the present value of the
net minimum lease payments and (2) future minimum rental
payments required under operating leases that have
initial or remaining terms in excess of one year:
Capital Operating
Leases Leases
1998 $ 26,956 $ 342,335
1999 20,294 325,155
2000 8,247 308,965
2001 5,772 305,937
2002 1,924 178,463
Total net minimum lease payments 63,193 $ 1,460,855
Less amount representing interest 6,129
Present value of net minimum lease payments 57,064
Less current portion 24,396
Long-term obligations under capital
leases $ 32,668
Rental expense was approximately $393,000 and $416,000 for the
fiscal years ended March 31, 1997 and 1996, respectively.
<PAGE> 25
GALAXY FOODS COMPANY
NOTES TO FINANCIAL STATEMENTS
(Continued)
Employment Agreement
In October 1995, the Company entered into an employment
agreement with the Company's President. The
agreement provides for base compensation of $250,000
annually through October 2000. In addition to the base
compensation, the President will receive an annual bonus
equal to five percent of the Company's pre-tax net income. The
employment agreement also provides for the grant of
common stock options upon the Company's achievement of
certain net income levels as follows:
Net Income Level Option Shares
Reaching break-even for one quarter 1,000,000
Annual net operating income of $1 million or more 1,000,000
Each increment of $1 million of annual net
operating income in excess of $1 million 1,000,000
The exercise price of the options granted will be equal
to the market value of the Company's common stock on the
last trading day preceding the date of the Company's
achievement of the required net income level.
(6) Capital Stock
Employee Stock Purchase Plan
In January 1992, the Company's stockholders approved
the 1991 Employee Stock Purchase Plan (the "1991
Purchase Plan"). The 1991 Purchase Plan provides for the
sale of up to an aggregate of 250,000 shares of
common stock to eligible employees. Up to 2,500 shares
may be purchased by each eligible employee at the
lesser of 85% of the fair market value of the shares on
the first or last business day of the six-month
purchase periods ending August 31 and February 28.
Substantially all full-time employees are eligible to
participate in the plan. During the year ended March
31, 1997, 91,879 shares were purchased under this plan
at prices ranging from $0.69 to $1.06 per share.
During the fiscal year ended March 31, 1996, 22,500
shares were purchased at $0.50 per share. The weighted
average fair value of the shares issued were $0.45 and
$0.63 per share for the fiscal years ended March
31, 1997 and 1996, respectively.
Common Stock Options and Warrants Issued for Consulting Services
During the fiscal years ended March 31, 1997 and
1996, consulting expense of $31,307 and $130,027, respectively,
was recognized on common stock options and warrants granted to
officers, directors and consultants. During fiscal 1997, the vesting
provisions of certain warrants issued for consulting services were
re-evaluated. In accordance with Statement of Financial Accounting
Standards No. 123 governing options and warrants issued
to non-employees, $211,400 of prepaid consulting services were
reversed to additional paid-in capital in fiscal 1997 for warrants
that are not expected to vest.
<PAGE> 26
GALAXY FOODS COMPANY
NOTES TO FINANCIAL STATEMENTS
(Continued)
Stock Warrants
At March 31, 1997, the Company had common stock
warrants outstanding which were issued in connection
with sales consulting, financial consulting, and financing
arrangements. Information relating to these warrants is
summarized as follows:
Number of Exercise
Expiration date Warrants Price
August 1998 510,000 .90
October 1998 50,000 1.47
December 1999 50,000 .53
March 2000 1,097,291 .74 - .99
August 2000 100,000 1.49
September 2000 478,170 .74
December 2000 2,000,000 .56
May 2001 30,000 1.22
September 2001 5,000 3.50
October 2001 1,000,000 1.47
August 2005 50,000 .64
December 2005 2,000,000 .53
January 2006 300,000 .69
7,670,461
Stock Options
At March 31, 1997, the Company has three employee stock
option plans which were adopted in 1987, 1991, and 1996 and
has granted additional non-plan stock options. The Company
applies APB Opinion 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for
these plans. Under the provisions of APB Opinion 25, if
options are granted or extended at exercise prices less than
fair market value, compensation expense is recorded for the
difference between the grant price and the fair market value
at the date of grant.
Under the Company's stock option plans, qualified and
nonqualified stock options to purchase up to 1,250,000 shares
of the Company's common stock may be granted to employees and
members of the Board of Directors. The maximum term of
options granted under the plans is ten years.
Statement of Financial Accounting Standards No. 123 ("FAS
123"), Accounting for Stock Based Compensation, requires the
Company to provide pro forma information regarding net income
and earnings per share as if compensation cost for the
Company's stock options had been determined in accordance
with the fair value based method prescribed in FAS 123. The
Company estimates the fair value of each stock option at the
grant date by using a Black-Scholes optionpricing model with
the following assumptions used for grants in 1997: no
dividend yield, volatility from 87% to 112%, risk-free
interest rates ranging from 5.3% to 6.5%, and expected lives
ranging from three to five years. Assumptions used in the
fiscal 1996 option-pricing model are as follows: volatility of
40%, risk-free interest rates ranging from 5.5% to 6.4%, and
expected lives of three to five years. Had compensation cost been
determined based on the fair value of options at their grant dates
in accordance with FAS 123, the Company's net loss would have been
increased by $125,347 and $51,355 for fiscal 1997 and 1996,
respectively. The effect on net loss per share is less than
$.01 per share for fiscal 1997 and 1996.
<PAGE> 27
GALAXY FOODS COMPANY
NOTES TO FINANCIAL STATEMENTS
(Continued)
The following table summarizes information about plan stock
option activity for the years ended March 31, 1997 and 1996:
Weighted-Average Weighted-Average
Exercise Price Fair Value of
Shares Per Share Options Granted
Balance, March 31, 1995 502,600 $ 1.08 $ --
Granted 143,000 .52 .27
Exercised (64,000) .50 --
Canceled (48,000) .50 --
Balance, March 31, 1996 533,600 1.33 --
Granted 89,833 1.40 .98
Exercised (96,166) .69 --
Canceled ( 2,000) 1.47 --
Balance, March 31, 1997 525,267 $ 1.43 $ --
At March 31, 1997 and 1996, a total of 435,761 and 457,764 of the
outstanding plan options were exercisable with a weighted-average
exercise price of $1.48 and $1.31 per share, respectively.
The following table summarizes information about non-plan
stock option activity for the years ended March 31, 1997 and 1996:
Weighted-Average Weighted-Average
Exercise Price Fair Value of
Shares Per Share Options Granted
Balance, March 31, 1995 98,501 $ 2.00 $ --
Granted 15,000 .81 .27
Canceled ( 1,000) .02 --
Balance, March 31, 1996 112,501 1.93 --
Granted 250,000 1.21 .99
Balance, March 31, 1997 362,501 $ 1.50 $ --
At March 31, 1997 and 1996, a total of 152,501 and 112,501 of the
outstanding non-plan options were exercisable with a weighted-average
exercise price of $1.51 and $1.93 per share, respectively.
The following table summarizes information about stock
options outstanding and exercisable at March 31, 1997:
Options
Outstanding Weighted- Weighted-
Range of Weighted- Average Average
Exercise Number Average Exercise Number Exercise
Prices Outstanding Remaining Life Price Exercisable Price
$0.50-0.62 355,934 4.3 years $ 0.51 320,928 $ 0.50
0.81-1.21 340,500 8.9 years 1.17 113,000 1.12
1.47-2.00 157,834 4.8 years 1.83 120,834 1.92
2.50-2.75 28,000 1.5 years 2.53 28,000 2.53
4.38-5.38 5,500 2.7 years 5.30 5,500 5.30
887,768 588,262
<PAGE> 28
GALAXY FOODS COMPANY
NOTES TO FINANCIAL STATEMENTS
(Continued)
Shares Reserved
At March 31, 1997, the Company has reserved common stock for
future issuance under all of the above arrangements totaling
12,037,183 shares.
Authorized Shares
On July 11, 1995 and November 28, 1995, the Company's Board
of Directors approved increases in the authorized shares of
common stock from 20,000,000 to 60,000,000 and from
60,000,000 to 85,000,000, respectively. These amendments
were then consented to and authorized on July 11, 1995 and
January 31, 1996 by the holders of a majority of the issued
and outstanding stock of the Company.
(7) Sale of Securities
On April 16, 1996, the Company completed a private placement
of 1,337,524 shares of the Company's common stock at an
aggregate price of $2,000,000, and 4,000 shares of the
Company's convertible preferred stock at an aggregate price
of $4,000,000. Of the total proceeds of $6,000,000,
$406,588 was used to pay brokerage fees and various expenses
related to the offering. The holders of the convertible
preferred stock have the right to convert such shares into
shares of the Company's common stock at any time after June
30, 1996 at a conversion price equal to 71.5% of the average
market price of the common stock for the five consecutive
trading days ending one trading day prior to the date of the
Company's receipt of a notice of conversion from the holder;
provided that none of the buyers' aggregate shares of the
Company's common stock exceed 4.9% of the then outstanding
shares of common stock. Between July 1996 and March 31,
1997, 1,443 shares of Convertible Preferred Stock were
converted into 1,965,824 shares of Common Stock at an
average conversion rate of $0.73 per share.
On March 3, 1995, the Company began to offer certain of its
securities to non-U.S. persons under Regulation S
promulgated by the Securities and Exchange Commission under
the Securities Act of 1933, as amended. The sales of
securities continued through the beginning of June 1995,
with sales totaling 5,590,372 shares of common stock at the
average price of $0.92 per share. Additionally, the Company
sold 353,755 shares of the Company's convertible preferred
stock at an average price of $20.06 per share. The
resulting proceeds from all securities sold during the
offering were approximately $12.2 million, $2,088,360 of
which were used to pay investment brokerage commissions and
related offering fees and over $3 million was used to
eliminate the principal and accrued interest on all debt
owed to stockholders. By September 30, 1995, all of the
shares of convertible preferred stock had been converted into
16,760,458 shares of common stock in accordance with the terms
of the convertible preferred stock agreement. The average
conversion rate was $0.42 per common share.
The holders of the convertible preferred stock issued under
Regulation S were entitled to receive cash dividends on each
share from any surplus or net profits at a rate of 10% per
annum based upon the respective purchase price paid by each
investor; or at the Company's sole discretion, the holders
were entitled to receive shares of the Company's common
stock at a rate of 11% per annum. This dividend was
cumulative and payable before any dividends on the common
stock could be paid. The dividends on the convertible
preferred stock paid during fiscal 1996 totaled $137,977.
These dividends were paid through the issuance of a total of
135,753 shares of common stock in July 1995 and October
1995.
Under a selling agreement entered into with Sands Brothers &
Co., Ltd. ("Sands"), the Company's agent in connection with
the aforementioned offering, Sands and its designees
received warrants to purchase a total of 1,650,461 shares of
common stock, with exercise prices of $0.74 and $0.99 per
share.
<PAGE> 29
GALAXY FOODS COMPANY
NOTES TO FINANCIAL STATEMENTS
(Continued)
(8) Income Taxes
The components of the net deferred assets consist of the
following:
Year Ended March 31, 1997 1996
Deferred tax assets:
Net operating loss carryforwards $ 7,536,000 $ 6,364,000
Investment and general business
tax credits 106,000 199,000
Nondeductible expenses from stock warrants 189,000 182,000
Nondeductible compensation from stock options 39,000 39,000
Bad debts 52,000 52,000
Other 36,000 36,000
Gross deferred income tax assets 7,938,000 6,872,000
Valuation allowance (7,664,000 (6,668,000)
Total deferred income tax assets 274,000 204,000
Deferred income tax liabilities:
Depreciation (274,000) (204,000)
Net deferred income tax assets $ -- $ --
The change in the valuation allowance for deferred tax
assets was an increase of $996,000 during fiscal 1997.
The following summary reconciles differences from taxes at
the federal statutory rate with the effective rate:
Year ended March 31, 1997 1996
Federal income taxes at statutory rates (34.0%) (34.0%)
Losses without tax benefits 34.0% 34.0%
Income taxes at effective rates 0% 0%
Unused net operating losses for income tax purposes,
expiring in various amounts from 2003 through 2012, of
approximately $20,000,000 are available at March 31, 1997
for carryforward against future years' taxable income.
Under Section 382 of the Internal Revenue Code, the annual
utilization of this loss may be limited due to changes in
ownership. The tax benefit of these losses of approximately
$7,536,000 has been offset by a valuation allowance due to
it being more likely than not that the deferred tax assets
will not be realized.
<PAGE> 30
GALAXY FOODS COMPANY
NOTES TO FINANCIAL STATEMENTS
(Continued)
(9) Related Party Transaction
Under the provisions of his employment agreement, the
Company's President was granted the right to purchase up to
18,000,000 shares of the Company's common stock. In October
1995, the President elected to purchase all 18,000,000
shares. As consideration for the purchase and as stipulated
for in his employment agreement, the President executed an
$11,572,200 note payable to the Company. The note bears
interest at 7% per annum and is secured by the common shares
purchased. The principal balance, along with any accrued
interest, is payable in full in October 2000. If certain
conditions are met, the note may be extended up to five
additional years. No interest receivable related to the
note has been accrued.
Under this employment agreement, the Company also extended
the maturity date of a $1,200,000 non-interest bearing
promissory note due from the President from November 4, 1999
to November 4, 2001. The promissory note was executed
during the fiscal year ended March 31, 1995 in connection
with the exercise of options previously granted by the
Company.
(10) Economic Dependence
For the fiscal years ended March 31, 1997 and 1996, the
Company had one customer which comprised sales approximating
$5,831,000 and $708,000 or 34% and 18% of net sales,
respectively.
For the fiscal year ended March 31, 1997, the Company had
three major suppliers which each comprised more than 10% of
total purchases. Purchases from these suppliers totaled
approximately $7,420.000 or 56.4% of total purchases. For
the fiscal year ended March 31, 1996, the Company had no
major supplier which comprised more than 10% of purchases.
(11) Line of Credit
During November 1996, the Company entered into a two year
agreement which provided a $2 million line of credit
for working capital and expansion purposes. The
amount available under the line of credit is based on a
formula of 80% of eligible accounts receivable plus 35% of
eligible inventories, as defined in the agreement. Amounts
outstanding under the agreement are collateralized by all
accounts receivable, inventory and machinery and equipment
owned by the Company. Interest is payable on the
outstanding draws on the line of credit at a rate of prime
plus two percent (10.5% at March 31, 1997). As of March
31, 1997, the Company has an outstanding obligation of
$1,370,953 under this line of credit agreement.
<PAGE> 31
GALAXY FOODS COMPANY
NOTES TO FINANCIAL STATEMENTS
(Continued)
(12) Employee Benefit Plan
The Company established a 401(k) defined contribution plan
covering substantially all employees meeting certain minimum
age and service requirements. The Company's contributions
to the plan are determined by the Board of Directors and are
limited to a maximum of 25% of the employee's contribution
and 6% of the employee's compensation. Contributions to the
plan amounted to $11,946 and $10,154 for the fiscal years
ended March 31, 1997 and 1996, respectively.
(13) Supplemental Cash Flow Information
For purposes of the statement of cash flows, all highly
liquid investments with a maturity date of three months or
less are considered to be cash equivalents. Cash and cash
equivalents include checking accounts and money market
funds.
Year ended March 31, 1997 1996
Noncash financing and investing activities:
Purchase of equipment through capital
lease obligations $ 26,105 $ 10,652
Deposit on equipment applied toward
the equipment purchased -- 164,800
Deferred public offering costs applied
to the proceeds -- 403,164
Note receivable from exercise of common
stock options and sale of common stock -- 11,596,200
Consulting and directors fees paid through
issuance of common stock warrants 211,400 329,794
Cash paid for:
Interest 53,963 64,946
<PAGE> 32
Item 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure.
Not Applicable.
<PAGE> 33
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act.
The following table sets forth the current directors and
executive officers of the Company as of June 20, 1997, as well as
their respective ages and positions with the Company:
Name Age Positions
Angelo S. Morini (1)(2) 54 Chairman of the Board of Directors,
President, and Chief Executive Officer
LeAnn H. Davis 27 Chief Financial Officer and Assistant
Secretary
Earl G. Tyree (1) 76 Director
Douglas A. Walsh (1)(2) 52 Director
Marshall K. Luther(2) 44 Director
(1) Compensation and Benefits Committee
(2) Audit Committee
Each director is elected to hold office until the next annual
meeting of shareholders and until his successor is chosen and
qualified. The officers of the Company are elected annually at
the first Board of Directors meeting following the annual meeting
of shareholders, and hold office until their respective
successors are duly elected and qualified, unless sooner
displaced. There are no family relationships among the Company's
executive officers.
Angelo S. Morini has been President of the Company since its
inception in 1980 and is the inventor of formagg. He was elected
Chairman of the Board of Directors, President, and Chief
Executive Officer in 1987. Between 1974 and 1980, Mr. Morini was
the general manager of Galaxy Cheese Company, which operated as a
sole proprietorship until its incorporation in May 1980. Prior
to 1974, he was associated with the Food Service Division of
Pillsbury Company and the Post Division of General Foods Company.
In addition, he worked in Morini Markets, his family-owned and
operated chain of retail grocery stores in the New Castle,
Pennsylvania area. Mr. Morini received a B.S. degree in
Business Administration from Youngstown State University in 1968.
LeAnn H. Davis, CPA was employed by the Company as the Controller
on December 18, 1995 and on January 18, 1996 was elected Chief
Financial Officer and Assistant Secretary. Prior to joining the
Company, Ms. Davis worked as a senior auditor for Coopers and
Lybrand LLP in Orlando, Florida from 1994 to 1995. From 1992 to
1994, she worked for the local public accounting firm of Pricher
and Company in Orlando, Florida as a senior auditor and tax
accountant. Prior to 1992, Ms. Davis worked for Arthur Andersen
LLP as a staff auditor. During her years in public accounting,
Ms. Davis was responsible for coordinating and overseeing audits
on a variety of clients including manufacturing, insurance and
pharmaceutical companies, time-share developers and homeowners
associations, as well as not-for-profit organizations. Ms. Davis
earned a BS in Business Administration and a BS in Accounting
from Palm Beach Atlantic College in West Palm Beach, Florida in
May 1990 and a Masters in Accounting from Florida State
University, Tallahassee, Florida in August 1991.
<PAGE> 33
Earl G. Tyree has been a director of the Company since September
1992. From 1980 to 1987, Mr. Tyree was President of Bruce
Novograd Advertising Agency, a company he co-founded. From 1975
to 1979, Mr. Tyree was with American Home Products Corporation,
as President - John F. Murray Division. From 1961 to 1975, Mr.
Tyree served in various positions, including President and Chief
Executive Officer, for the Bayer Company (Bayer Aspirin), the
Charles H. Philips Company (Milk of Magnesia), and Glenbrook
Laboratories, all divisions of Sterling Drug, Inc. Mr. Tyree
attended the University of Richmond where he majored in
accounting.
Douglas A. Walsh, D.O. has been a director of the Company since
January 1992. Dr. Walsh has been a practicing physician since
1970, specializing in Family Practice and Sports Medicine. From
1984 to present, he has been affiliated with Family Doctors, a
four-physician group located in Tampa, Florida. From 1985 to
1988, he was a flight surgeon at Patrick Air Force Base, Cocoa
Beach, Florida and from 1971 to 1984, he was the Health
Commissioner for Mahoning County, Ohio. From 1983 to 1985, he
was the Clinic Commander for the U.S. Air Force 911 Tac Clinic in
Pittsburgh, Pennsylvania. Dr. Walsh's teaching appointments
include Associate Professor of Family Practice (Clinical) at Ohio
University and Clinical Preceptor at the University of Health
Sciences, Kansas City, Missouri. Dr. Walsh received a B.S. degree
in Microbiology from the University of Houston, Houston, Texas in
1965, and a D.O. degree from the University of Health Sciences,
Kansas City, Missouri in 1970. Dr. Walsh also serves as a team
physician for the Pittsburgh Pirates and as a consultant for the
Atlanta Braves.
Marshall K. Luther was elected to the Board of Directors on
January 31, 1996. From 1993 to 1995, Mr. Luther served as Senior
Vice President, Marketing of Tropicana Products, Inc. and from
1975 to 1992, he served in various marketing positions for
General Mills International Restaurants. Mr. Luther received his
BS in Engineering from Brown University in 1974 and his M.B.A. in
Marketing from the Wharton Graduate School of Business in 1976.
Item 10. Executive Compensation.
The following table sets forth the compensation of the Company's
Chief Executive Officer and any executive officer of the Company,
other than the Chief Executive Officer, whose aggregate
compensation exceeded $100,000 for the fiscal years ended March
31, 1997, 1996, and 1995.
SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Securities All
Annual Restricted Under- Other
Name and Compen- Stock lying LTIP Compen-
Principal Fiscal Salary Bonus sation Award(s) Options/ Payouts sation
Position Year ($) ($) ($) ($) SARs (#) ($) ($)
Angelo S. Morini (1)1997 250,000 -- 16,262(2) -- -- -- --
Chairman of the 1996 227,917 -- 14,704(3) -- 18,000,000 -- --
Board of Directors, 1995 196,999 -- 14,496(4) -- 2,400,000 -- --
President, and Chief
Executive Officer
<PAGE> 35
(1) For the fiscal years ended March 31, 1996 and 1995, Mr.
Morini was also paid $8,208 and $33,577, respectively, for
interest on three loans, aggregating $1,035,652, made to the
Company by Mr. Morini. The interest rates on these notes ranged
from 12% to 14% per annum. These notes were paid in full by June
7, 1995. On October 10, 1995, the Company entered into an
employment agreement with Mr. Morini upon terms and conditions
approved by the Board of Directors. In accordance with the terms
of such employment agreement, Mr. Morini was granted the right to
purchase up to 18,000,000 shares of the Company's Common Stock at
a per share price of 110% of the average closing bid price as
reported on the NASDAQ System for the ten trading days preceding
the receipt by the Company of written notice of Mr. Morini's
election to purchase shares. Mr. Morini exercised this option on
October 11, 1995, for a price per share of $0.6429 and currently
owes $11,572,200 for a note payable to the Company. On August
11, 1993, the Board of Directors approved the issuance to Angelo
S. Morini of an option to purchase 2,400,000 shares of the
Company's Common Stock for a purchase price of $.50 per share in
consideration for Mr. Morini's past services to the Company, the
pledge by Mr. Morini of all of then-current shares owned by Mr.
Morini to the Company's principal lender, J&C Resources, Inc.
("J&C"), to secure loans made to the Company, and the
subordination of all loans made by Mr. Morini to the Company to
payment of the sums due J&C. Mr. Morini exercised this option on
November 4, 1994 and currently owes $1,200,000 for a note payable
to the Company. See "Management - Certain Relationships and
Related Party Transactions."
(2) For the fiscal year ended March 31, 1997, the Company paid
$9,107 in lease payments for Mr. Morini's automobile and $7,155
in club dues for Mr. Morini.
(3) For the fiscal year ended March 31, 1996, the Company paid
$9,107 in lease payments for Mr. Morini's automobile and $5,597
in club dues for Mr. Morini.
(4) For the fiscal year ended March 31, 1995, the Company paid
$9,107 in lease payments for Mr. Morini's automobile and $5,389
in club dues for Mr. Morini.
Each non-employee director who served on the Board of Directors
during the last fiscal year received a fee of $500 plus expenses
for his services.
The following table sets forth information concerning each exercise of stock
options and freestanding stock appreciation rights during the fiscal year
ended March 31, 1997, by each executive officer named in the Summary of
Compensation Table above, and the fiscal year-end value of unexercised options
and SARS.
OPTIONS/SAR EXERCISES
For the Fiscal Year Ended March 31, 1997
Aggregated Option/SAR Exercises in Last Fiscal Year and
Fiscal Year-End Option/SAR Values
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Options/SARS Options/SARS
at FY-End (#) at FY-End ($)
Shares Value
Acquired Realized Exer- Unexer- Exer- Unexer-
Name on Exercise ($) cisable cisable cisable cisable
Angelo S. Morini -- -- 141,500 -- 44,219(1) --
(1) The value of the unexercised shares at March 31, 1997 is based on the
difference between the closing sales price of the Company's Common Stock of
$0.8125 on March 31, 1997 and an exercise price of $0.50.
EMPLOYMENT AGREEMENT OF CHIEF EXECUTIVE OFFICER
As of October 10, 1995, the Company entered into an Employment
Agreement (the "Agreement") with Angelo S. Morini, the Company's
President and Chief Executive Officer. The Agreement has a term
of five years and provides for an annual base salary of $250,000.
Additionally, Mr. Morini will receive an annual bonus in an
amount equal to five percent of the Company's pre-tax net income
for book purposes, as determined by the Company's independent
certified public accounting firm. Other material provisions of
the Agreement are as follows:
1. Mr. Morini shall have the right to purchase (the "Purchase
Rights") up to 18,000,000 shares of the Company's Common Stock at
a per share price of 110% of the average closing bid price as
reported on the NASDAQ System for the ten trading days preceding
the receipt by the Company of written notice of Mr. Morini's
election to purchase shares. The purchase price for such shares
may be evidenced by a promissory note executed by Mr. Morini in
favor of the Company, which note shall bear interest at a rate at
least equal to the applicable federal rate established by the
United States Internal Revenue Service. The promissory note
shall have a term of five years. Mr. Morini shall have the
option to extend the note for up to five additional years
provided that he pays at least one-third of the then accrued but
unpaid interest, with any remaining unpaid interest to be added
to principal. Any such promissory note shall be secured by a
first priority security interest in all shares purchased by Mr.
Morini in conjunction with the exercise of the Purchase Rights as
evidenced by a stock pledge and security agreement executed by
Mr. Morini in favor of the Company.
<PAGE> 36
2. Mr. Morini shall be granted certain options to purchase
Common Stock upon the Company's achievement of each of the
following milestone events:
Milestone Event Number of Options Granted
Reaching break-even for a 1,000,000
calendar quarter
Annual net operating income 1,000,000
of $1,000,000 or more
Each increment of $1,000,000 1,000,000
of annual net operating income
in excess of $1,000,000
Each of the options granted as aforesaid shall have a term of
five years from the date granted and shall be exercisable in
whole or in part upon the delivery by Mr. Morini to the Company
of written notice of exercise. The exercise price for each of
the options shall be the closing bid price of the Company's
Common Stock on the trading day immediately preceding the
Company's achievement of the related milestone event as
established by the NASDAQ System. The exercise price for any
such option shares may be evidenced by a promissory note executed
by Mr. Morini in favor of the Company and bearing interest at a
rate at least equal to the applicable federal rate established by
the United States Internal Revenue Service. The promissory note
shall have a term of five years. Mr. Morini shall have the
option to extend the note for up to five additional years
provided that he pays at least one-third of the then accrued but
unpaid interest, with any remaining unpaid interest to be added
to principal. Any such promissory note shall be secured by a
first priority security interest in all shares purchased by Mr.
Morini in conjunction with the exercise of the options as
evidenced by a stock pledge and security agreement executed by
Mr. Morini in favor of the Company.
3. The Agreement is terminable by Mr. Morini upon the delivery
of written notice of termination in the event that a majority of
the Company's Board of Directors is at any time comprised of
persons for whom Mr. Morini did not vote in his capacity as a
director or a shareholder of the Company (a "Change of Control").
If Mr. Morini abstains from voting for any person as a director,
such abstention shall be deemed to be an affirmative vote by Mr.
Morini for such person as a director.
4. If the Agreement is terminated, regardless of the reason for
such termination, Mr. Morini shall be entitled to retain all
unexercised Purchase Rights and options granted under the
Agreement and all shares of Common Stock issued in connection
with the exercise of such Purchase Rights and options, and shall
receive all earned but unpaid base salary through the effective
date of termination and all accrued but unpaid bonuses for the
fiscal year(s) ending prior to the effective date of termination.
Additionally, in the event that Mr. Morini's employment is
terminated without cause or due to his death, total disability or
legal incompetence, or if Mr. Morini terminates his employment
upon a Change of Control, the Company shall pay to Mr. Morini or
his estate severance pay equal to three times the amount of Mr.
Morini's annual base salary (before deductions for withholding,
employment and unemployment taxes), and a bonus for the year of
termination and the following two years equal to the average of
the two bonuses paid to Mr. Morini under the Agreement.
<PAGE> 37
5. In the event of a Change of Control, Mr. Morini may, at any
time thereafter, require that the Company purchase up to
1,638,564 shares of his Common Stock at a purchase price of $.50
per share, subject to adjustment for any increase or decrease in
the number of outstanding shares of the Company's Common Stock or
in the event that the Common Stock is changed into or exchanged
for a different number or class or kind of shares or securities
of the Company, by reason of merger, consolidation,
reorganization, recapitalization, reclassification, stock
dividend, stock split, combination of shares, exchange of shares,
change in corporate structure or the like.
6. The Company extended the maturity date of that certain
Promissory Note dated as of November 4, 1994, executed by Mr.
Morini in favor of the Company in the principal amount of
$1,200,000 in conjunction with his exercise of options previously
granted by the Company for two additional years until November 4,
2001.
7. Mr. Morini has agreed that in the event he voluntarily
terminates his employment with the Company or if he is terminated
for "cause" (as defined in the Agreement), he will not compete
with the Company for a period of one year following the date of
termination of his employment with the Company, whether as an
employee, officer, director, partner, shareholder, consultant or
independent contractor in any business substantially similar to
that conducted by the Company within those areas in the United
States in which the Company is doing business as of the date of
termination.
On October 11, 1995, Mr. Morini exercised the Purchase Rights
with respect to all 18,000,000 shares of Common Stock subject
thereto (the "Purchase Right Shares"). In connection with the
exercise of such Purchase Rights, Mr. Morini executed in favor of
the Company a balloon promissory note (the "Note") in the
principal amount of $11,572,200. The Note bears interest at the
rate of seven percent per annum and is due and payable in full on
October 11, 2000, subject to Mr. Morini's option to extend the
Note for up to five additional years provided that he pays at
least one-third of the then accrued but unpaid interest, with any
remaining unpaid interest to be added to principal. In order to
secure the Note, Mr. Morini executed in favor of the Company a
stock pledge and security agreement pursuant to which Mr. Morini
granted the Company a first priority security interest in all of
the Purchase Right Shares.
CERTAIN PLANS
1987 Stock Plan -- The 1987 Stock Plan of the Company (the "1987
Plan") was adopted by the Board of Directors of the Company on
May 18, 1987, and was approved by the shareholders of the Company
on May 19, 1987. On October 1, 1991, the Board of Directors
amended the 1987 Plan to increase the number of shares of Common
Stock available for issuance from 400,000 shares to 600,000
shares. The shareholders of the Company ratified such amendment
on January 31, 1992. Under the 1987 Plan, directors, officers
and employees of the Company, and consultants to the Company, may
acquire a proprietary interest in the Company through the
purchase or other acquisition of Common Stock; such Common Stock
may be acquired through awards, by direct purchase, or through
the exercise of options granted under the 1987 Plan to purchase
Common Stock under specified conditions at prescribed prices.
Interests under the 1987 Plan, as amended, up to and including
the sum of 200,000 shares, were registered with the SEC on March
2, 1992, through the filing of Form S-8. The 1987 Stock Plan expired
by its terms on June 8, 1997.
<PAGE> 38
The 1987 Plan is administered by the Board of Directors or the
Compensation Committee which is authorized to determine which
individuals will receive options or awards and which individuals
will be provided with the opportunity to make direct purchases of
Common Stock. The Board of Directors or the Compensation
Committee also is authorized and responsible for determining the
number of shares subject to each option, award and purchase,
whether any options that are granted are to be exercisable in
full at the time of grant or in installments, and any other terms
and provisions pertaining to an option, award or purchase,
including the purchase or exercise price.
Options granted under the 1987 Plan may be either (i) options
intended to constitute incentive stock options ("ISOs") under the
Internal Revenue Code of 1986, as amended (the "Code"); or (ii)
nonqualified stock options ("NQSOs"). ISOs may be granted under
the Plan to employees and officers of the Company. NQSOs may be
granted to consultants, directors (whether or not they are
employees), employees and officers of the Company. Awards of
Common Stock may be made to consultants, directors, employees or
officers of the Company; direct purchases of Common Stock also
may be made by such individuals.
During the fiscal year ended March 31, 1996, NQSOs covering
140,000 shares of Common Stock were granted under the 1987 Plan,
to provide additional incentives to certain employees. During
the fiscal year ended March 31, 1997, NQSOs covering 27,500
shares of Common Stock were granted under the 1987 Plan.
Shares Exercise
Subject Price
Name of Optionee to Option Per Share
LeAnn Davis . . . . . . . . . . . . . . . 7,500 $1.21
Robert Peterson. . . . . . . . . . . . . 20,000 $1.21
27,500
On August 31, 1993, the disinterested members of the Board of
Directors reduced to $.50 per share the exercise price for
options held by certain executives of the Company representing
306,500 shares of Common Stock, including options for 141,500
shares of Common Stock being held by Mr. Angelo Morini, in
recognition of the then-current market value of Common Stock.
That market value was determined on the basis of the closing bid
quotation price for Common Stock on the NASDAQ over-the-counter
market on August 3, 1993. The reduction in price was made to
encourage the commitment and loyalty to the Company, and to
provide renewed incentive to such executives. As part of the
reduction in exercise price, the Compensation Committee converted
ISOs for 198,500 shares of Common Stock into NQSOs for the same
number of shares, in accordance with the terms of the 1987 Plan.
1991 Non-Employee Director Stock Option Plan -- The 1991 Non
Employee Director Stock Option Plan (the "1991 Director Plan")
was adopted by the Board of Directors of the Company on October
1, 1991, to provide incentive to outside directors of the Company
through the periodic granting on NQSOs to such outside directors.
The 1991 Director Plan was approved by the shareholders of the
Company on January 31, 1992. Under the 1991 Director Plan as
originally adopted and approved, 33,500 shares of Common Stock
were authorized for issuance, subject to adjustment for capital
changes. On September 30, 1996, the Board approved the 1996
Amendment and Restatement of the 1991 Non-Employee Director Stock
Option Plan (the "1996 Amendment") which extended the term of the
plan and increased the number of shares available under the plan.
The Compensation Committee is responsible for the discharge of
any administrative matters; however, since the 1991 Director Plan
is a formula-based plan by its terms, few administrative matters
arise. Interests under the 1991 Director Plan, as originally
adopted and approved, were registered with the SEC on March 2,
1992, through the filing of Form S-8.
<PAGE> 39
Under the 1991 Director Plan, each eligible non-employee director
received on October 1, 1991 (the "Approval Date"), in
consideration for his prior years of service as a director of the
Company, NQSOs to purchase approximately 83.33 shares of Common
Stock for each month (or fraction of a month) that such director
had served on the Board of Directors prior to the Approval Date;
as such, directors serving on the Board of Directors on the
Approval Date could be granted NQSOs to purchase 1,000 shares of
Common Stock for each full year spent as a director of the
Company. Options for fractional shares were rounded to the next
highest whole number. On each anniversary of the Approval Date
until September 30, 1996, each eligible director who has served
for an entire year prior to such anniversary was automatically
granted an option to purchase an additional 1,000 shares of
Common Stock. The 1996 Amendment increased the options for each
year of continuous service on the Board of Directors to a total of
2,000 per director, per year. The 1996 Amendment expires on September
30, 2001, but such expiration will not effect any options then
outstanding on such expiration date. Each individual thereafter
elected to the Board of Directors who has served for less than
an entire year (determined each year, as of the Approval Date) is
granted NQSOs for a prorated number of shares of Common Stock, depending
on how many months that individual has served as a director during the
prior year. All NQSOs granted under the 1991 Director Plan and
the 1996 Amendment have an exercise price equal to the fair
market value per share of Common Stock on the date of grant.
Options granted under the original terms of the 1991 Director
Plan or the 1996 Amendment are exercisable in full at the time of
grant. An optionee who ceases to be a director of the Company
other than by reason of death continues to have the right to
exercise the NQSOs granted under the original provisions of the
1991 Director Plan, including the original term of such option.
In the event an optionee dies, the 1991 Director Plan provides
for the exercise of an option on behalf of the deceased director.
Options may not be assigned or transferred except by will or by
operation of the laws of descent and distribution.
Other Grants to Directors -- Since September 24, 1987, the Board
has approved the grant of the following additional options to
purchase shares of Common Stock of the Company to the following
current and former nonemployee directors:
Number of Shares
of Common Stock
Name of Optionee/Director Initially Subject to Option
Richard Gentile (1) 15,250
Earl Tyree (2) 16,000
Douglas Walsh (3) 16,667
Sheldon Tannen 20,000
Charles Tanner 15,000
William Rawlings 20,000
Stanley Turk 19,000
Michael Monus 15,584
Thomas Singer 20,000
Joseph C. McNay 15,000
Robert Kowalski 8,000
Marshall K. Luther (4) 15,000
<PAGE> 40
(1) Dr. Gentile, a former member of the Board of Directors, was
granted an option on June 19, 1993, for an aggregate of 15,000
shares at an exercise price of $1.25 per share. The closing bid
price of the Company's Common Stock as quoted on the NASDAQ
System on June 18, 1993 was $1.25 per share. Dr. Gentile's
exercise price was increased to $2.00 per share on January 31,
1994. The closing bid price of the Company's Common Stock as
quoted on the NASDAQ System on January 28, 1994 was $4.625 per
share. Dr. Gentile exercised his option as to all 15,000 shares
on February 14, 1994. On October 1, 1993, Dr. Gentile was
granted an option to acquire 250 shares at an exercise price of
$2.125 per share. This option expires on October 1, 2003. The
closing bid price of the Company's Common Stock as quoted on the
NASDAQ System on September 30, 1993, was $2.00 per share. On
January 31, 1994, the exercise price of this option was reduced
to $2.00 per share. The closing bid price of the Company's
Common Stock as quoted on the NASDAQ System on January 28, 1994
was $4.625 per share. Dr. Gentile's remaining 250 shares are
currently exercisable.
(2) Mr. Tyree, a current member of the Board of Directors, was
granted an option to acquire 15,000 shares of Common Stock on
September 11, 1992 for an exercise price of $2.88 per share.
This option expires on September 11, 2002. The closing bid price
of the Company's Common Stock as quoted on the NASDAQ System on
September 10, 1992 was $2.875 per share. Mr. Tyree was granted
an additional option on October 1, 1993 to acquire 1,000 shares
of Common Stock at an exercise price of $2.125 per share. This
option expires on October 1, 2003. The closing bid price of the
Company's Common Stock as quoted on the NASDAQ System on
September 30, 1993 was $2.00 per share. The exercise price of
all of Mr. Tyree's options was reduced to $2.00 per share on
January 31, 1994. The closing bid price of the Company's Common
Stock as quoted on the NASDAQ System on January 28, 1994 was
$4.625 per share. All of Mr. Tyree's options currently are
exercisable.
(3) Dr. Walsh, a current member of the Board of Directors, was
granted an option to acquire 15,000 shares of Common Stock on
January 31, 1992 for an exercise price of $3.00 per share. This
option expires on January 31, 2002. The closing bid price of the
Company's Common Stock as quoted on the NASDAQ System on January
30, 1992 was $2.50 per share. Dr. Walsh was granted an
additional option on October 1, 1992 to acquire 667 shares of
Common Stock at an exercise price of $2.875 per share. This
option expires on October 1, 2002. The closing bid price of the
Company's Common Stock as quoted on the NASDAQ System on
September 30, 1992 was $2.625 per share. Dr. Walsh was granted
an additional option on October 1, 1993 to acquire 1,000 shares
of Common Stock at an exercise price of $2.125 per share. This
option expires on October 1, 2003. The exercise price of all of
Dr. Walsh's options was reduced to $2.00 per share on January 31,
1994. The closing bid price of the Company's Common Stock as
quoted on the NASDAQ System on January 28, 1994 was $4.625 per
share. All of Dr. Walsh's options currently are exercisable.
(4) Mr. Luther, a current member of the Company's Board of
Directors, holds warrants to acquire 50,000 shares of Common
Stock at a price of $0.6407 per share. These warrants were
granted as compensation for work per the terms of Mr. Luther's
agreement with the Company to serve as Senior Vice President of
Marketing for a term of one year. In addition, Mr. Luther was
granted options to acquire 15,000 shares of the Company's Common
Stock on January 31, 1996, for an exercise price of $0.8125 per
share, which option expires on January 31, 2006. The closing bid
price of the Company's Common Stock as quoted on the NASDAQ
System on January 30, 1996 was $0.71875 per share. All of Mr.
Luther's options currently are exercisable.
<PAGE> 41
In addition, on August 11, 1993, the Board of Directors approved
the issuance to Angelo S. Morini of an option to purchase
2,400,000 shares of the Company's Common Stock for a purchase
price of $.50 per share in consideration for Mr. Morini's past
services to the Company, the pledge by Mr. Morini of all then
current shares owned by Mr. Morini to the Company's principal
lender, J&C, to secure loans made to the Company, and the
subordination of all loans made by Mr. Morini to the Company to
payment of sums due J&C. The Board approved Mr. Morini's payment
for the shares issued upon exercise of the option by way of a
promissory note in favor of the Company, payable in full, without
interest, five years from the date of execution. The promissory
note used to pay for the shares would be secured by a pledge of
the shares of Common Stock issued to Mr. Morini upon exercise of
this option. On November 4, 1994, Mr. Morini exercised this
option to purchase the shares and executed in favor of and
delivered to the Company the promissory note in the principal
amount of $1,200,000 evidencing the purchase price of the shares
and a stock pledge and security agreement encumbering such shares
to secure such note. See "Management - Certain Relationships and
Related Transactions."
On October 10, 1995, Mr. Morini received an option to purchase up
to 18,000,000 shares of Common Stock in accordance with the terms
of his employment Agreement as approved by the Board of
Directors. As of October 11, 1995, Mr. Morini exercised the
option with respect to all 18,000,000 shares of Common Stock.
Pursuant to the terms of the employment agreement, Mr. Morini
executed in favor of the Company a balloon promissory note in the
principal amount of $11,572,200 to evidence the purchase price
for the shares of Common Stock. The note bears interest at the
rate of seven percent per annum and is due and payable in full on
October 11, 2000, subject to Mr. Morini's option to extend the
note for up to five additional years provided that he pays at
least one-third of the then accrued but unpaid interest, with any
remaining unpaid interest to be added to principal. In order to
secure the note, Mr. Morini executed in favor of the Company a
stock pledge and security agreement pursuant to which Mr. Morini
granted the Company a first priority security interest in all of
the shares obtained upon the exercise of his option. See
"Management - Certain Relationships and Related Transactions."
The options granted to Mr. Morini as described in the preceding
paragraphs and the options granted to the non-employee directors
described in the forgoing table were not granted pursuant to a
plan approved by the shareholders of the Company, and the shares
underlying such options are not included in the Registration
Statement on Form S-8 described above. Accordingly, shares
issued pursuant to the options described above as "Other Grants
to Directors" will constitute upon exercise, "restricted"
securities and may thereafter be sold to the public generally
only pursuant to an effective registration statement or pursuant
to Rule 144.
1991 Employee Stock Purchase Plan -- The 1991 Employee Stock
Purchase Plan (the "1991 Purchase Plan") was adopted by the Board
of Directors on December 10, 1991, and was approved by the
shareholders of the Company on January 31, 1992. The 1991
Purchase Plan provides a general incentive to all regular
employees of the Company by providing them with an opportunity to
purchase Common Stock at a discount, thereby encouraging all
regular Company employees to share in the fortunes of the Company
by acquiring a proprietary interest in the Company at a favorable
price.
Through the 1991 Purchase Plan, an aggregate of 250,000 shares of
Common Stock have been made available for purchase by those
Company employees who participate. All Company employees who
have completed six months of employment with the Company and are
customarily employed for more than 20 hours per week and more
than five months per calendar year are eligible to participate;
those who choose to participate receive nontransferable options
to purchase Common Stock at less than fair market value.
However, Company employees who own 5% or more of the total
combined voting power or value of all classes of stock of the
Company and directors who are not Company employees are not
eligible to participate in the 1991 Purchase Plan. The 1991
Purchase Plan is administered by the Compensation Committee.
Interests under the 1991 Purchase Plan were registered with the
SEC on March 2, 1992, through filing of Form S-8.
<PAGE> 42
The opportunity to purchase Common Stock is provided every six
months, commencing each March 1 and September 1. Eligible
employees participate by filing a written election to contribute
between 2% and 10% of their total compensation. All
contributions are made by payroll deduction. An eligible
employee can purchase a maximum of 5,000 shares of Common Stock
in a single plan year (a maximum of 2,500 shares during each six
month purchase period). However, a participating employee may
not in any event purchase Common Stock having a value of more
than $25,000 (based on the value of Common Stock at the beginning
of each six month purchase period) in any individual calendar
year. The Company retains all withheld funds, without crediting
any interest, pending the issuance of Common Stock. Common Stock
purchased under the 1991 Purchase Plan is distributed to
purchasing employees, in the form of stock certificates
evidencing those shares so purchased, as soon as practicable
following the close of each six month purchase period.
Withholding in excess of the amounts capable of being used under
the 1991 Purchase Plan to purchase Common Stock is refunded to
the participating employees from whom such amounts were withheld,
after the purchase of Common Stock is completed.
The purchase price at which Common Stock is sold to participating
employees under the 1991 Purchase Plan generally is equal to the
lesser of (i) 85% of the fair market value of shares of Common
Stock on the first business day of the six-month purchase period;
or (ii) 85% of the fair market value of shares of Common Stock on
the last business day of such six-month purchase period. The
1991 Purchase Plan is intended to function as an employee stock
purchase plan under Section 423 of the Code; accordingly,
participating Company employees who purchase shares of Common
Stock at a discount are not subject to federal taxation on the
value of such discount (generally, 15% of fair market value),
unless and until they either dispose of such shares or die while
holding such shares.
Common Stock is provided under the 1991 Purchase Plan solely
through the issuance of Common Stock by the Company; no shares of
Common Stock have been purchased in the open market to satisfy
employee elections made under the 1991 Purchase Plan, and the
Company does not expect that any such open market purchases will
occur in the future. The 1991 Purchase Plan expires on January
31, 2001 or at such time when all or substantially all of the
250,000 shares of Common Stock reserved for issuance under the
1991 Purchase Plan have been purchased.
During the fiscal year ended March 31, 1997, 91,879 shares of Common
Stock were purchased under the 1991 Purchase Plan by employees of
the Company.
1996 Stock Plan -- The 1996 Stock Plan of the Company (the "1996
Plan") was approved by the shareholders of the Company on
September 30, 1996. Under the 1996 Plan, directors, officers,
employees, and consultants of the Company may acquire a
proprietary interest in the Company through the purchase of
Common Stock; such Common Stock may be acquired through awards,
by direct purchase, or through the exercise of options granted
under the 1996 Plan. These options allow for the purchase of
Common Stock under specified conditions at predetermined prices.
The aggregate number of shares which may be issued under the 1996
Stock Plan is 250,000 shares.
The 1996 Stock Plan in administered by the Board of Directors of
the Company or a committee of two or more of its members
appointed by the Board. Members of this committee are not
eligible to participate in the plan while they are serving on the
committee. The committee is responsible for determining to whom
the options or awards are granted, the option price of shares
subject to option, the purchase price of shares subject to
purchase, the time at which options shall be exercisable, and for
general interpretation of the plan.
<PAGE> 43
Options issued under the 1996 Stock Plan may either be options
intended to constitute ISOs under the Code or NQSOs. ISOs may be
granted under the Plan to employees and officers of the Company.
NQSOs may be granted to consultants, directors (whether or not
they are employees), employees and officers of the Company.
Awards of Common Stock may be made to consultants, directors,
employees or officers of the Company. Direct purchases of Common
Stock also may be made to consultants, directors, employees or
officers of the Company.
During the fiscal year ended March 31, 1997, NQSOs covering
57,000 shares of Common Stock were granted under the 1996 Stock
Plan, to provide additional incentives to certain employees.
Additional Single Purpose Plan -- Since March 1993, the Company
and Continental Capital & Equity Corporation ("Continental")
executed three agreements whereby Continental would provide
public relation services for the Company. Continental is a
public relations and direct marketing advertising firm
specializing in the dissemination of information about companies
whose securities are traded on an exchange or on the NASDAQ
System. Under the terms of the agreements, dated March 27, 1993,
December 30, 1993, and May 30, 1994, Continental was to be paid
$125,000, $125,000, and $190,000, respectively, in each instance
payable in Common Stock; and, accordingly, Continental was issued
138,000 shares, 41,700 shares, and 95,000 shares, respectively.
Interests under Continental Capital and Equity Corporation
Financial Services Agreement plans were registered with the SEC
on September 28, 1993, May 6, 1994, and July 18, 1994, through
the filing of Forms S-8.
On January 3, 1995, the Company entered into a consulting
agreement with Martin Consulting Corporation ("Martin"),
pursuant to which Martin would provide financial consulting and
public relations services to the Company for the period ending
December 31, 1995. Under the terms of the agreement, Martin
received 200,000 shares of Common Stock having a fair market
value of approximately $300,000. Common shares under the Martin
Consulting Corporation Financial Services Agreement plans were
registered with the SEC in January 1995, through the filing of
Form S-8. On October 6, 1995, the Company extended Martin's
consulting agreement until December 31, 1996, and, in
consideration therefor, issued to Martin 200,000 additional
shares of Common Stock having a fair market value on the date of
issuance of approximately $112,500. Such shares were registered
with the SEC on October 19, 1995, through the filing of Form S-8.
Martin also received warrants to purchase 100,000 shares of
Common Stock exercisable at $0.5625 per share. This exercise
price equaled the closing bid price of the Common Stock as listed
on the NASDAQ System on October 6, 1995.
Item 11. Security Ownership of Certain Beneficial Owners and
Management.
BENEFICIAL OWNERS OF MORE THAN 5% OF THE COMPANY'S COMMON STOCK
The following table sets forth, to the knowledge of management,
each person or entity who is the beneficial owner of more than 5%
of the outstanding shares of the Company's Common Stock
outstanding as of June 20, 1997 (assuming all of the outstanding
rights, options, and warrants of the Company's Common Stock
currently outstanding and exercisable are, in fact, exercised),
the number of shares owned by each such person and the percentage
of the outstanding shares represented thereby.
<PAGE> 44
Amount and
Name and Address Nature of Percent of
of Beneficial Owner Beneficial Ownership(1) Class (2)
Angelo S. Morini
2441 Viscount Row
Orlando, Florida 32809 24,254,874(3) 41.4%
Cede & Co.
Box #20
Bowling Green Station
New York, New York 30,270,246(4) 51.7%
(1) The inclusion herein of any shares deemed beneficially owned
does not constitute an admission of beneficial ownership of these
shares.
(2) The total number of shares outstanding assuming the exercise
of all currently exercisable and vested options and warrants held
by all executive officers, current directors, and holders of 5%
or more of the Company's issued and outstanding Common Stock is
58,545,548 shares. Does not assume the exercise of any other
options or warrants.
(3) Includes options to acquire 141,500 shares of the Company's
Common Stock. All of Mr. Morini's options currently are
exercisable at $.50 per share. The original exercise prices of
the options ranged from $2.50 per share to $3.575 per share. The
exercise prices of all Mr. Morini's options were reduced by the
Board of Directors to $.50 per share on August 31, 1993. Options
expire as to 50,000 shares on December 4, 1997, and as to 91,500
shares on October 1, 2001. Also includes 5,000 shares owned by
Mr. Morini that are held in a nominee name and 2,000 shares held
in joint tenancy.
(4) Cede & Co. is a share depository used by shareholders to
hold stock in street name. Does not include 5,000 shares
beneficially owned by Angelo S. Morini and held by Cede & Co. in
street name.
<PAGE> 45
SHARE OWNERSHIP OF OFFICERS AND DIRECTORS
The following table sets forth, as of June 20, 1997, the number
of shares owned directly, indirectly and beneficially of each
executive officer and director of the Company, and by all
executive officers and directors as a group.
Amount and
Name and Address Nature of Percent of
of Beneficial Owner Beneficial Ownership (1) Class (2)
Angelo S. Morini
Galaxy Foods Company
2441 Viscount Row
Orlando, Florida 32809 24,254,874(3) 41.4%
Earl G. Tyree
240 North Line Drive
Apopka, Florida 32703 20,000(4) *
Douglas A. Walsh
607 Tamiami Trail
Ruskin, Florida 33570 20,667(5) *
Marshall K. Luther
Galaxy Foods Company
2441 Viscount Row
Orlando, Florida 32809 66,333(6) *
LeAnn H. Davis
Galaxy Foods Company
2441 Viscount Row
Orlando, Florida 32809 25,100(7) *
All executive officers and directors
as a group 24,386,974 41.7%
* Less than 1%.
(1) The inclusion herein of any shares deemed beneficially owned
does not constitute an admission of beneficial ownership of these
shares.
(2) The total number of shares outstanding assuming the exercise
of all currently exercisable and vested options and warrants held
by all executive officers, directors, and holders of 5% or more
of the Company's issued and outstanding Common Stock is
58,545,548 shares. Does not assume the exercise of any other
options or warrants.
(3) Includes options to acquire 141,500 shares of the Company's
Common Stock. All of Mr. Morini's options currently are
exercisable at $.50 per share. The original exercise prices of
the options ranged from $2.50 per share to $3.575 per share. The
exercise prices of all Mr. Morini's options were reduced by the
Board of Directors to $.50 per share on August 31, 1993. Options
expire as to 50,000 shares on December 14, 1997, and as to 91,500
shares on October 1, 2001. Also includes 5,000 shares owned by
Mr. Morini that are held in a nominee name and 2,000 shares held
in joint tenancy.
<PAGE> 46
(4) Mr. Tyree, a current member of the Board of Directors, was
granted an option to acquire 15,000 shares of Common Stock on
September 11, 1992 for an exercise price of $2.88 per share.
This option expires on September 11, 2002. The closing bid price
of the Company's Common Stock as quoted on the NASDAQ System on
September 10, 1992 was $2.875 per share. Mr. Tyree was granted
an additional option on October 1, 1993 to acquire 1,000 shares
of Common Stock at an exercise price of $2.125 per share. This
option expires on October 1, 2003. The closing bid price of the
Company's Common Stock as quoted on the NASDAQ System on
September 30, 1993 was $2.00 per share. The exercise price of
all of Mr. Tyree's then existing options was reduced to $2.00 per
share on January 31, 1994. The closing bid price of the
Company's Common Stock as quoted on the NASDAQ System on January
28, 1994 was $4.625 per share. On October 1, 1994, Mr. Tyree was
granted an option to acquire 1,000 shares at an exercise price of
$2.75 per share. The closing bid price of the Company's Common
Stock as quoted on the NASDAQ System on September 30, 1994, was
$2.875 per share. This option expires on October 1, 2004. On
October 1, 1995, Mr. Tyree was granted an option to acquire 1,000
shares at an exercise price of $0.59 per share. The closing bid
price of the Company's Common Stock as quoted on the NASDAQ
System on September 29, 1995, was $0.59375 per share. This
option expires on October 1, 2005. This option expires on October
1, 2005. On October 1, 1996, Mr. Tyree was granted an option to
acquire 2,000 shares at an exercise price of $1.47 per share
which expire on October 1, 2006. The closing bid price of the
Company's Common Stock as quoted on the NASDAQ System on
September 30, 1996 was $1.50 per share. All of Mr. Tyree's
options currently are exercisable.
(5) Dr. Walsh, a current member of the Board of Directors, was
granted an option to acquire 15,000 shares of Common Stock on
January 31, 1992 for an exercise price of $3.00 per share. This
option expires on January 31, 2002. The closing bid price of the
Company's Common Stock as quoted on the NASDAQ System on January
30, 1992 was $2.50 per share. Dr. Walsh was granted an
additional option on October 1, 1992 to acquire 667 shares of
Common Stock at an exercise price of $2.875 per share. This
option expires on October 1, 2002. The closing bid price of the
Company's Common Stock as quoted on the NASDAQ System on
September 30, 1992 was $2.625 per share. The exercise price of
all of Dr. Walsh's then existing options was reduced to $2.00 per
share on January 31, 1994. The closing bid price of the
Company's Common Stock as quoted on the NASDAQ System on January
28, 1994 was $4.625 per share. On October 1, 1994, Dr. Walsh was
granted an option to acquire 1,000 shares at an exercise price of
$2.75 per share. The closing bid price of the Company's Common
Stock as quoted on the NASDAQ System on September 30, 1994, was
$2.875 per share. This option expires on October 1, 2004. On
October 1, 1995, Dr. Walsh was granted an option to acquire 1,000
shares at an exercise price of $.59 per share. The closing bid
price of the Company's Common Stock as quoted on the NASDAQ
System on September 29, 1995, was $.59375 per share. This option
expires on October 1, 2005. On October 1, 1996, Dr. Walsh was
granted an option to acquire 2,000 shares at an exercise price of
$1.47 per share which expire on October 1, 2006. The closing bid
price of the Company's Common Stock as quoted on the NASDAQ
System on September 30, 1996 was $1.50 per share. All of Dr.
Walsh's options currently are exercisable.
(6) Mr. Luther, a current member of the Board of
Directors, holds warrants to acquire 50,000 shares of Common
Stock at a price of $0.6407 per share. These warrants were
granted as compensation for work per the terms of Mr. Luther's
agreement with the Company to serve as Senior Vice President of
Marketing for a term of one year. In addition, Mr. Luther was
granted options to acquire 15,000 shares of the Company's Common
Stock on January 31, 1996, for an exercise price of $.8125 per
share, which option expires on January 31, 2006. On October 1,
1996, Mr. Luther was granted an option to acquire 1,333 shares at
an exercise price of $1.47 per share which expire on October 1,
2006. The closing bid price of the Company's Common Stock as
quoted on the NASDAQ System on September 30, 1996 was $1.50 per
share. All of Mr. Luther's options currently are exercisable.
<PAGE> 47
(7) Includes options to acquire 15,000 shares of the Company's
Common Stock which were granted to Ms. Davis on December 18, 1995
pursuant to the Company's 1987 Stock Option Plan. Such options
are exercisable at $0.5156 per share and expire on December 19,
2005. This option is currently exercisable. On May 16, 1996,
Ms. Davis was granted an option to purchase 7,500 shares at an
exercise price of $1.21 per share. This option will be exercisable
in the future and will expire on May 16, 2006.
Item 12. Certain Relationships and Related Transactions.
On August 28, 1995, the Company entered into a one year agreement
with Marshall K. Luther for Mr. Luther to serve in the capacity
of Senior Vice President of Marketing. Mr. Luther will be
overseeing marketing of the Company's product as well as
identifying new markets and products. He is a former senior
marketing executive with companies such as Tropicana Products
Inc. and General Mills, Inc. Under the terms of this contract,
Mr. Luther received the right to purchase 50,000 shares of the
Company's Common Stock at a price of $0.6407 per share. The
Company has also agreed to pay a standard broker commission to
Mr. Luther for any sales generated by him. Mr. Luther became a
member of the Board of Directors of the Company on January 31,
1996.
On October 10, 1995, the Company entered into an employment
agreement with Angelo S. Morini. The agreement increases Mr.
Morini's base salary to $250,000 per year from $200,000.
Additionally, the agreement details additional non-cash
compensation based on the performance of the Company. The
agreement also grants the rights to purchase up to 18,000,000
shares of the Company's Common Stock by Mr. Morini. See
"Employment Agreement of Chief Executive Officer."
Angelo S. Morini's brother, Christopher Morini, works for the
Company as Vice President of Marketing. On May 16, 1996,
Christopher Morini was issued an option to purchase 50,000 shares
of the Company's Common Stock at a price of $1.21 per share.
This option expires on May 16, 2006. This option is currently
exercisable for 10,000 of the 50,000 shares under option.
Item 13. Exhibits and Reports on Form 8-K.
<PAGE> 48
The following Exhibits are filed as part of this Form 10-KSB.
Exhibit No Exhibit Description
*3.1 Certificate of Incorporation of the Company, as
amended (Filed as Exhibit 3.1 to the Company's
Registration Statement on Form S-18, No. 33-15893-NY,
incorporated herein by reference.)
*3.2 Amendment to Certificate of Incorporation of the
Company, filed on February 24, 1992 (Filed as Exhibit
4(b) to the Company's Registration Statement on Form S8,
No. 33-46167, incorporated herein by reference.)
*3.3 By-laws of the Company, as amended (Filed as
Exhibit 3.2 to the Company's Registration Statement on
Form S-18, No. 33-15893-NY, incorporated herein by
reference.)
*3.4 Amendment to Certificate of Incorporation of the
Company, filed on January 19, 1994 (Filed as Exhibit
3.4 to the Company's Registration Statement on Form SB2,
No. 33-80418, and incorporated herein by reference.)
*3.5 Amendment to Certificate of Incorporation of the
Company, filed on July 11, 1995 (Filed as Exhibit 3.5
on Form 10-KSB for fiscal year ended March 31, 1996,
and incorporated herein by reference.)
*3.6 Amendment to Certificate of Incorporation of the
Company, filed on January 31, 1996 (Filed as Exhibit
3.6 on Form 10-KSB for fiscal year ended March 31,
1996, and incorporated herein by reference.)
*10.1 1987 Stock Plan of the Company, as amended (Filed
as Exhibit 4(d) to the Company's Registration Statement
on Form S-8, No. 33-46167, incorporated herein by
reference.)
*10.2 Form of Non-Qualified Stock Option Agreement
between the Company and certain directors (Filed as
Exhibit 10 (n) to the Company's Report on Form 10-KSB
for fiscal year ended March 31, 1988, and incorporated
herein by reference.)
*10.3 Form of Incentive Stock Option Agreement issued
pursuant to the Company's 1987 Stock Plan (Filed as
Exhibit 10 (o) to the Company's Report on Form 10-KSB
for fiscal year ended March 31, 1988, and incorporated
herein by reference.)
*10.4 1991 Non-Employee Director Stock Option Plan of
the Company (Filed as Exhibit 4 (g) to the Company's
Registration Statement on Form S-8, No. 33-46167,
incorporated herein by reference.)
*10.5 1991 Employee Stock Purchase Plan of the Company
(Filed as Exhibit 4 (h) to the Company's Registration
Statement on Form S-8, No. 33-46167, incorporated
herein by reference.)
* Previously filed
<PAGE> 49
Exhibit No Exhibit Description
*10.6 Lease Agreement between ANCO Company and Company
dated as of November 13, 1991 (Filed as Exhibit 10 (bb)
to the Company's Report on Form 10-KSB for fiscal year
ended March 31, 1992, and incorporated herein by
reference.)
*10.7 Factoring Agreement, Assignment and Repurchase
Agreement, Security Agreement and Power of Attorney,
dated as of June 1, 1993, between the Company and
J.T.A. Factors, Inc. (Filed as Exhibit 10 (nn) to the
Company's Report on Form 10-QSB for the quarterly
period ended June 30, 1993.)
*10.8 Company's Registration Statement on Form S-8,
Number 33-69546, filed September 28, 1993 (Filed as
Exhibit 10.40 to the Company's Registration Statement
on Form SB-2, No. 33-80418, and incorporated herein by
reference.)
*10.9 Post-Effective Amendment No. 1 to Company's
Registration Statement on Form S-8, No. 33-69546, filed
October 28, 1993 (Filed as Exhibit 10.41 to the
Company's Registration Statement on Form SB-2, No. 33
80418, and incorporated herein by reference.)
*10.10 Company's Registration Statement on Form S-8, No.
33-78684, filed May 6, 1994 (Filed as Exhibit 10.42 to
the Company's Registration Statement on Form SB-2, No.
33-80418, and incorporated herein by reference.)
*10.11 Post-Effective Amendment No. 1 to Company's
Registration Statement on Form S-8, No. 33-78684 (Filed
June 6, 1994, and incorporated herein by reference.)
*10.12 Company's Registration Statement on Form S-8, No.
33-81636 (Filed July 18, 1994, and incorporated herein
by reference.)
*10.13 Post-Effective Amendment No. 1 to Company's
Registration Statement on Form S-8, No. 33-81636 (Filed
August 10, 1994, and incorporated herein by reference.)
*10.14 Subscription for shares and investment letter,
dated November 4, 1994, between the Company and Angelo
S. Morini (Filed as Exhibit 10.122 on report 10-QSB,
for the quarterly period ended December 31, 1994, and
incorporated herein by reference.)
*10.15 Balloon promissory note, dated November 4, 1994
(Filed as Exhibit 10.123 on report 10-QSB, for the
quarterly period ended December 31, 1994, and
incorporated herein by reference.)
*10.16 Stock pledge and security agreement dated November
4, 1994 (Filed as Exhibit 10.124 on report 10-QSB, for
the quarterly period ended December 31, 1994, and
incorporated herein by reference.)
* Previously filed
<PAGE> 50
Exhibit No Exhibit Description
*10.17 First Amendment to Lease Agreement between ANCO
Company and the Company dated as of April 1, 1994
(Filed as Exhibit 10.76 on report 10-KSB for the fiscal
year ended March 31, 1995, and incorporated herein by
reference.)
*10.18 Consulting Agreement, dated March 15, 1995,
between Lee Chira and the Company (Filed as Exhibit
10.77 on report 10-KSB for the fiscal year ended March
31, 1995, and incorporated herein by reference.)
*10.19 Consulting Agreement, dated March 15, 1995,
between Martin Consulting, Inc. and the Company (Filed
as Exhibit 10.78 on report 10-KSB for the fiscal year
ended March 31, 1995, and incorporated herein by
reference.)
*10.20 Selling Agreement, dated February 6, 1995, between
Sands Brothers & Co., Ltd. and the Company (Filed as
Exhibit 10.79 on report 10-KSB for the fiscal year
ended March 31, 1995, and incorporated herein by
reference.)
*10.21 Amendment Number 1 to Selling Agreement, dated
February 14, 1995, between Sands Brothers & Co., Ltd.
and the Company (Filed as Exhibit 10.80 on report 10
KSB for the fiscal year ended March 31, 1995, and
incorporated herein by reference.)
*10.22 Amendment Number 2 to Selling Agreement, dated
March 8, 1995, between Sands Brothers & Co., Ltd. and
the Company (Filed as Exhibit 10.81 on report 10-KSB
for the fiscal year ended March 31, 1995, and
incorporated herein by reference.)
*10.23 Consulting agreement between the Company and Koi
Communications Corporation, dated June 1, 1995. (Filed
as Exhibit 10.82 on report 10-QSB for the quarterly
period ended June 30, 1995, and incorporated herein by
reference.)
*10.24 Employment Agreement dated as of October 10, 1995,
by and between the Company and Angelo S. Morini (Filed
as Exhibit 10.83 on report 8-K, and incorporated herein
by reference.)
*10.25 Balloon Promissory Note dated as of October 11,
1995, by Angelo S. Morini in favor of the Company
(Filed as Exhibit 10.84 on report 8-K, and incorporated
herein by reference.)
*10.26 Stock Pledge and Security Agreement dated as of
October 11, 1995, by and between the Company and Angelo
S. Morini (Filed as Exhibit 10.85 on report 8-K, and
incorporated herein by reference.)
*10.27 Consulting agreement between the Company and
Marshall K. Luther dated August 28, 1995 (Filed as
Exhibit 10.86 on Form 10-QSB/A for the nine months
ended December 31, 1995, and incorporated herein by
reference.)
* Previously filed
<PAGE> 51
Exhibit No Exhibit Description
*10.28 Amendment to Factoring Agreement (original agreement
dated June 1, 1993) dated January 29, 1996 between the
Company and J.T.A. Factors, Inc. (Filed as Exhibit
10.28 on Form 10-KSB for fiscal year ended March 31,
1996, and incorporated herein by reference.)
10.29 1996 Amendment and Restatement of the 1991 Non
Employee Director Stock Option Plan (Filed herewith.)
10.30 1996 Stock Plan (Filed herewith.)
10.31 Line of Credit Agreement with Finova Financial
Services (Filed herewith.)
10.32 Second Amendment to the Lease Agreement between ANCO
Company and the Company dated as April 1, 1994 (Filed
herewith.)
27 Financial Data Schedule (Filed herewith.)
Reports on Form 8-K
No reports on Form 8-K were filed during the last
quarter of the period covered by this report.
* Previously filed
<PAGE> 52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
GALAXY FOODS COMPANY
Date: June 27, 1997 /s/ Angelo S. Morini
Angelo S. Morini
Chairman and President
(Principal Executive Officer)
Date: June 27, 1997 /s/ LeAnn H. Davis
LeAnn H. Davis, CPA
Chief Financial Officer (Principal
Financial and Accounting Officer)
<PAGE> 53
"EXHIBITS"
<PAGE> 54
Exhibit No Exhibit Description Page No.
*3.1 Certificate of Incorporation of the
Company, as amended (Filed as Exhibit 3.1 to
the Company's Registration Statement on Form
S-18, No. 33-15893-NY, incorporated herein by
reference.)
*3.2 Amendment to Certificate of
Incorporation of the Company, filed on
February 24, 1992 (Filed as Exhibit 4(b) to
the Company's Registration Statement on Form
S-8, No. 33-46167, incorporated herein by
reference.)
*3.3 By-laws of the Company, as amended
(Filed as Exhibit 3.2 to the Company's
Registration Statement on Form S-18, No. 33
15893-NY, incorporated herein by reference.)
*3.4 Amendment to Certificate of
Incorporation of the Company, filed on
January 19, 1994 (Filed as Exhibit 3.4 to the
Company's Registration Statement on Form SB2,
No. 33-80418, and incorporated herein by
reference.)
*3.5 Amendment to Certificate of Incorporation
of the Company, filed on July 11, 1995 (Filed
as Exhibit 3.5 on Form 10-KSB for fiscal year
ended March 31, 1996, and incorporated herein
by reference.)
*3.6 Amendment to Certificate of Incorporation
of the Company, filed on January 31, 1996
(Filed as Exhibit 3.6 on Form 10-KSB for fiscal
year ended March 31, 1996, and incorporated herein
by reference.)
*10.1 1987 Stock Plan of the Company, as
amended (Filed as Exhibit 4(d) to the
Company's Registration Statement on Form S-8,
No. 33-46167, incorporated herein by
reference.)
*10.2 Form of Non-Qualified Stock Option
Agreement between the Company and certain
directors (Filed as Exhibit 10 (n) to the
Company's Report on Form 10-K for fiscal year
ended March 31, 1988, and incorporated herein
by reference.)
*10.3 Form of Incentive Stock Option Agreement
issued pursuant to the Company's 1987 Stock
Plan (Filed as Exhibit 10 (o) to the
Company's Report on Form 10-K for fiscal year
ended March 31, 1988, and incorporated herein
by reference.)
* Previously filed
<PAGE> 54
Exhibit No Exhibit Description Page No.
*10.4 1991 Non-Employee Director Stock Option
Plan of the Company (Filed as Exhibit 4 (g)
to the Company's Registration Statement on
Form S-8, No. 33-46167, incorporated herein
by reference.)
*10.5 1991 Employee Stock Purchase Plan of the
Company (Filed as Exhibit 4 (h) to the
Company's Registration Statement on Form S-8,
No. 33-46167, incorporated herein by
reference.)
*10.6 Lease Agreement between ANCO Company and
Company dated as of November 13, 1991 (Filed
as Exhibit 10 (bb) to the Company's Report on
Form 10-K for fiscal year ended March 31,
1992, and incorporated herein by reference.)
*10.7 Factoring Agreement, Assignment and
Repurchase Agreement, Security Agreement and
Power of Attorney, dated as of June 1, 1993,
between the Company and J.T.A. Factors, Inc.
(Filed as Exhibit 10 (nn) to the Company's
Report on Form 10-QSB for the quarterly
period ended June 30, 1993.)
*10.8 Company's Registration Statement on Form
S-8, No. 33-69546, filed September 28, 1993
(Filed as Exhibit 10.40 to the Company's
Registration Statement on Form SB-2, No. 33
80418, and incorporated herein by reference.)
*10.9 Post-Effective Amendment No. 1 to
Company's Registration Statement on Form S-8,
No. 33-69546, filed October 28, 1993 (Filed
as Exhibit 10.41 to the Company's
Registration Statement on Form SB-2, No. 33
80418, and incorporated herein by reference.)
*10.10 Company's Registration Statement on Form
S-8, No. 33-78684, filed May 6, 1994 (Filed
as Exhibit 10.42 to the Company's
Registration Statement on Form SB-2, No. 33
80418, and incorporated herein by reference.)
*10.11 Post-Effective Amendment No. 1 to
Company's Registration Statement on Form S-8,
No. 33-78684 (Filed June 6, 1994, and
incorporated herein by reference.)
*10.12 Company's Registration Statement on Form
S-8, No. 33-81636 (Filed July 18, 1994, and
incorporated herein by reference.)
*10.13 Post-Effective Amendment No. 1 to
Company's Registration Statement on Form S-8,
No. 33-81636 (Filed August 10, 1994, and
incorporated herein by reference.)
* Previously filed
<PAGE> 55
Exhibit No Exhibit Description Page No.
*10.14 Subscription for shares and investment
letter, dated November 4, 1994, between the
Company and Angelo S. Morini (Filed as
Exhibit 10.122 on report 10-QSB, for the
quarterly period ended December 31, 1994, and
incorporated herein by reference.)
*10.15 Balloon promissory note, dated November
4, 1994 (Filed as Exhibit 10.123 on report 10
QSB, for the quarterly period ended December
31, 1994, and incorporated herein by
reference.)
*10.16 Stock pledge and security agreement
dated November 4, 1994 (Filed as Exhibit
10.124 on report 10-QSB, for the quarterly
period ended December 31, 1994, and
incorporated herein by reference.)
*10.17 First Amendment to Lease Agreement
between ANCO Company and the Company dated as
of April 1, 1994 (Filed as Exhibit 10.76 on
report 10-KSB for the fiscal year ended March
31, 1995, and incorporated herein by
reference.)
*10.18 Consulting Agreement, dated March 15,
1995, between Lee Chira and the Company
(Filed as Exhibit 10.77 on report 10-KSB for
the fiscal year ended March 31, 1995, and
incorporated herein by reference.)
*10.19 Consulting Agreement, dated March 15,
1995, between Martin Consulting, Inc. and the
Company (Filed as Exhibit 10.78 on report 10KSB
for the fiscal year ended March 31, 1995, and
incorporated herein by reference.)
*10.20 Selling Agreement, dated February 6,
1995, between Sands Brothers & Co., Ltd. and
the Company (Filed as Exhibit 10.79 on report
10-KSB for the fiscal year ended March 31,
1995, and incorporated herein by reference.)
*10.21 Amendment Number 1 to Selling Agreement,
dated February 14, 1995, between Sands
Brothers & Co., Ltd. and the Company (Filed
as Exhibit 10.80 on report 10-KSB for the
fiscal year ended March 31, 1995, and
incorporated herein by reference.)
*10.22 Amendment Number 2 to Selling Agreement,
dated March 8, 1995, between Sands Brothers &
Co., Ltd. and the Company (Filed as Exhibit
10.81 on report 10-KSB for the fiscal year
ended March 31, 1995, and incorporated herein
by reference.)
* Previously filed
<PAGE> 56
Exhibit No Exhibit Description Page No.
*10.23 Consulting agreement between the Company
and Koi Communications Corporation, dated
June 1, 1995. (Filed as Exhibit 10.82 on
report 10-QSB for the quarterly period ended
June 30, 1995, and incorporated herein by
reference.)
*10.24 Employment Agreement dated as of October
10, 1995, by and between the Company and
Angelo S. Morini (Filed as Exhibit 10.83 on
report 8-K, and incorporated herein by
reference.)
*10.25 Balloon Promissory Note dated as of
October 11, 1995, by Angelo S. Morini in
favor of the Company (Filed as Exhibit 10.84
on report 8-K, and incorporated herein by
reference.)
*10.26 Stock Pledge and Security Agreement
dated as of October 11, 1995, by and between
the Company and Angelo S. Morini (Filed as
Exhibit 10.85 on report 8-K, and incorporated
herein by reference.)
*10.27 Consulting agreement between the Company
and Marshall K. Luther dated August 28, 1995
(Filed as Exhibit 10.86 on Form 10-QSB/A for
the nine months ended December 31, 1995, and
incorporated herein by reference.)
*10.28 Amendment to Factoring Agreement (original
agreement dated June 1, 1993) dated January
29, 1996 between the Company and J.T.A.
Factors, Inc. (Filed as Exhibit 10.28 on Form
10-KSB for fiscal year ended March 31, 1996,
and incorporated herein by reference.)
10.29 1996 Amendment and Restatement of the 1991
Non Employee Director Stock Option Plan (Filed
herewith.) 5
10.30 1996 Stock Plan (Filed herewith.) 10
10.31 Line of Credit Agreement with Finova Financial
Services (Filed herewith.) 19
10.32 Second Amendment to the Lease Agreement between
ANCO Company and the Company dated as April 1, 1994
(Filed herewith.) 34
27 Financial Data Schedule (Filed herewith.) 38
* Previously filed
<PAGE> 57
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 16,485
<SECURITIES> 298,671
<RECEIVABLES> 1,762,568
<ALLOWANCES> 131,300
<INVENTORY> 1,802,244
<CURRENT-ASSETS> 4,094,750
<PP&E> 9,756,843
<DEPRECIATION> 1,570,834
<TOTAL-ASSETS> 12,492,446
<CURRENT-LIABILITIES> 2,263,544
<BONDS> 0
<COMMON> 571,282
0
26
<OTHER-SE> (12,772,200)
<TOTAL-LIABILITY-AND-EQUITY> 12,492,446
<SALES> 17,171,496
<TOTAL-REVENUES> 17,171,496
<CGS> 15,565,825
<TOTAL-COSTS> 15,565,825
<OTHER-EXPENSES> 4,295,347
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 46,984
<INCOME-PRETAX> (2,736,660)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,736,660)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,736,660)
<EPS-PRIMARY> (.12)
<EPS-DILUTED> (.12)
</TABLE>
Exhibit 10.29
1996 Amendment and Restatement of the
1991 Non-Employee Director Stock Option Plan
<PAGE> 59
GALAXY FOODS COMPANY
THE 1996 AMENDMENT AND RESTATEMENT OF THE
1991 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
Purpose. This 1996 Amendment and Restatement of the
1991 Non-Employee Director Stock Option Plan (the "Plan") is
intended to provide incentives to certain directors of
Galaxy Foods Company (the "Company") by providing them with
opportunities to purchase stock in the Company pursuant to options.
Board Will Administer the Plan. The Plan shall
be administered by the Board of Directors of the Company (for
Plan purposes, the "Committee"). The Committee shall consist
of the Board of Directors, when authorized and acting as
a board otherwise in accordance with the Company's by-
laws and regulations and relevant state corporate law. The
Chairman of the said Board shall preside over all meetings
and actions by the Committee. Subject to the terms of the
Plan, the Committee shall have authority to determine the
terms and provisions of the instruments by which options
shall be evidenced.
Eligible Directors. Options shall be granted to each
Non Employee Director of the Company. For all Plan purposes,
a "Non Employee Director" shall mean a director of the
Company who currently is not an officer of the Company, or
otherwise employed by (or a consultant to) the Company or any
subsidiary thereof, as further defined in 17 CFR 240.16b
3(b)(3)(i).
Stock. The Stock subject to the options shall be
authorized but unissued shares of the common stock of the
Company, $.01 par value per share (the "Common Stock"), or
shares of Common Stock reacquired by the Company including
shares purchased in the open market. The aggregate
number of shares which may be issued pursuant to the Plan
is 33,500 subject to adjustment as provided in paragraph 14.
In the event any option granted under the Plan shall expire
or terminate on without having been exercised in full or shall
cease for any reason to be exercisable in whole or in part,
the unpurchased shares subject thereto shall again be available
under the Plan.
Automatic Grant of Options. Subject to shareholder approval
(as provided in Section 16 hereof), effective October 1,
1996, and each successive October 1st so long as this Plan
remains effective, each Non-Employee Director who has
continuously served for the one-year period ending on
such effective date (or anniversary date thereof) is
automatically granted an option to purchase 2,000 shares
of the Company's Common Stock. Each otherwise-eligible Non
Employee Director who has served continuously as a Non-
Employee Director for less than the one year period ending
on any such date is automatically granted an option to
purchase a pro-rated number of shares of the Company's Common
Stock, equal to 166.66 shares for each complete calendar
month such Non-Employee Director has so served but rounding
the total number of shares upward to the nearest whole share.
Maximum Option Shares. The number of options granted to
a director under the Plan shall not exceed 2,000 shares in
any calendar year.
Option Price. The price per share specified in each
option granted under the Plan shall be equal to the fair
market value per share of common stock on the date of such
grant.
<PAGE> 60
Option Duration. Each option shall expire ten years
from the date of grant, unless a lesser period is specified
by the Committee. The Committee may extend the term of any
previously granted option provided that such option, as
extended, expires within ten years of its original date of
grant.
Vesting of Options. Subject to the provisions of
paragraphs 12, 13 and 16, each option granted under the
Plan shall be fully exercisable immediately upon grant
thereof.
Termination of Non-Employee Director Status. In the
event an optionee ceases to be a Non-Employee Director, other
than by reason of death, at a time when he holds an
option, he may exercise such option, within the original
term of the option, as to all or any of the shares covered
thereby, at the time or times such exercise is permitted
under the terms of the option. Nothing in the Plan
shall be deemed to give any optionee the right to be
nominated as a director by the Company for any period of time.
Death. If an optionee dies, any option of his may
be exercised, to the extent of the number of shares with
respect to which he could have exercised it on the date of
his death, by his estate, personal representative or
beneficiary who acquires the option by will or by the laws of
descent and distribution, at any time prior to the option's
specified expiration date.
Assignability. No option shall be assignable or
transferable by the optionee except by will or by the laws
of descent and distribution, and during the lifetime of the
optionee each option shall be exercisable only by him.
Terms and Conditions of Options. Options shall be
evidenced by instruments (which need not be identical) in such
forms as the Committee may from time to time approve. Such
instruments shall conform to the terms and conditions set
forth in paragraphs 7 through 12 hereof and may contain
such other provisions not inconsistent with the Plan,
including restrictions applicable to shares of Common Stock
issuable upon exercise of options granted under the Plan, as
the Committee deems advisable.
Adjustments. Upon the occurrence of any of the
following events, an optionee's rights with respect to
options granted to him hereunder shall be adjusted as
hereinafter provided, unless otherwise specifically provided
in the written agreement between the optionee and the Company
relating to such option:
Stock Dividends and Stock Splits. If the shares of
Common Stock shall be subdivided or combined into a greater
or smaller number of shares or if the Company shall issue
any shares of Common Stock as a stock dividend on its
outstanding Common Stock, the number of shares of Common
Stock deliverable upon the exercise of options shall be
appropriately increased or decreased proportionately, and
appropriate adjustments shall be made in the purchase price
per share to reflect such subdivision, combination or stock
dividend.
Consolidations or Mergers. If the Company is to
be consolidated with or acquired by another entity in a
merger, sale of all or substantially all of the Company's
assets or otherwise (an "Acquisition"), the Committee or the
board of directors of any entity assuming the obligations of
the Company hereunder (the "Successor Board"), shall, as to
outstanding options, either (i) make appropriate
provision for the continuation of such options by
substituting on an equitable basis for the shares then subject
to such options the consideration payable with respect to the
outstanding shares of Common Stock in connection with the
Acquisition; or (ii) upon written notice to the
optionees, provide that all options must be exercised, to the
extent then exercisable, within a specified number of days of
the date of such notice, at the end of which period the
options shall terminate; or (iii) terminate all options in
exchange for a cash payment equal to the excess of the fair
market value of the shares subject to such options (to the
extent then exercisable) over the exercise price thereof.
<PAGE> 61
Recapitalization or Reorganization. In the event of
a recapitalization or reorganization of the Company (other
than a transaction described in subparagraph B above)
pursuant to which securities of the Company or of another
corporation are issued with respect to the outstanding
shares of Common Stock, an optionee upon exercising an
option shall be entitled to receive for the purchase price
laid upon such exercise the securities he would have received
if he had exercised his option prior to such recapitalization
or reorganization.
Dissolution or Liquidation. In the event of the
Proposed dissolution or liquidation of the Company, each
option will terminate immediately prior to the consummation
of such proposed action or at such other time and subject to
such other conditions as shall be determined by the Committee.
Issuances of Securities. Except as expressly
provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares
of stock of any class, shall affect, and no adjustment by
reason thereof shall be made with respect to, the number or
price of shares subject to options. No adjustments shall be
made for dividends paid in cash or in property other than
securities of the Company.
Fractional Shares. No fractional shares shall be
issued under the Plan and the optionee shall receive from
the Company cash in lieu of such fractional shares.
Adjustments. Upon the happening of any of the
events described in subparagraphs A, B or C above, the
class and aggregate number of shares set forth in paragraph
4 hereof that are subject to options which previously hove
been or subsequently may be granted under the Plan shall
also be appropriately adjusted to reflect the events
described in such subparagraphs. The Committee or the
Successor Board shall determine the specific adjustments to
be made under this paragraph 14 and, subject to paragraph 2,
its determination shall be conclusive.
If any optionee owning restricted Common Stock obtained
by exercise of an option receives shares or securities or
cash in connection with a corporate transaction described in
subparagraphs A, B or C above as a result of owning such
restricted Common Stock, such shares of securities or cash
shall be subject to all of the conditions and restrictions
applicable to the restricted Common Stock with respect to
which such shares or securities or cash were issued, unless
otherwise determined by the Committee or the Successor Board.
Exercise of Options. An option (or any part or
installment thereof) shall be exercised by giving written
notice to the Company at its principal office address,
identifying the option being exercised, and specifying the
number of shares as to which such option is being exercised,
such written notice to constitute a binding commitment of the
optionee to purchase and pay for the shares to which the
option relates. Payment of the purchase price for such
shares shall be made in United States dollars, in cash, by
certified check, by bank draft or by personal check. The
holder of an option shall not have the rights of a
stockholder with respect to the shares covered by his
option until a stock certificate has been issued to him for
such shares. No adjustment will be made for dividends or
similar rights for which the record date is after the
exercise of the option but prior to the date such stock
certificate is issued. In no case may a fraction of a share
be purchased or issued under the Plan.
<PAGE> 62
Shareholder Approval; Plan Amendment and Plan Term. The
Plan shall be effective October 1, 1996, subject to approval
by the holders of a majority of the outstanding shares of
Common Stock of the Company at the annual meeting of
Company shareholders next following such date, and shall expire
on September 30, 2001, except as to options them outstanding
on such expiration date. Options subject to shareholder
approval shall automatically be granted under the Plan prior
to the date for such shareholder approval, but shall be
conditioned upon receipt of such approval, and shall
automatically be rescinded in the event timely shareholder
approval is not obtained. The Board of Directors may
terminate or amend the Plan in any respect at any time;
provided, that without the prior approval of
the stockholders (a) the total number of shares that may be
issued under the Plan and the maximum number of shares
available for each grant may not be increased (except by
adjustment pursuant to paragraph 14); (b) the provisions of
paragraph 5 relating to the limits on grants in any
calendar year may not be modified; (c) the provisions of
paragraph 7 relating to the option price may not be
modified; (d) the provisions of paragraph 9 relating to the
exercise of options may not be modified; (e) the provisions
of paragraph 3, regarding eligibility, may not be modified;
and (f) the expiration date of the Plan may not be
extended; provided, further, that the provisions of the Plan
specified in Rule 16b-3(c)(2)(ii)(A), promulgated under
Section 16 of the Securities Exchange Act of 1934, as
amended, may not be amended more than once every six
months other than to comport with changes in the Internal
Revenue Code, the Employee Retirement Income Security Act,
or the rules thereunder. No action of the Board of
Directors or shareholder, however, may, without the consent
of an optionee, alter or impair his rights under any option
previously granted to him.
Application of Funds. The proceeds received by the
Company from the sale of stock pursuant to options granted
under the Plan will be used for general corporate purposes.
Governmental Regulation. The Company's obligation to
sell and deliver shares of the Company's Common Stock under
this Plan is subject to the approval of any governmental
authority required in connection with the authorization,
issuance or sale of such shares.
Exhibit 10.30
1996 Stock Plan
<PAGE> 64
GALAXY FOODS COMPANY
1996 STOCK PLAN
Purpose. This 1996 Stock Plan (the "Plan") is intended
to provide incentives: (a) to the officers and other
employees of Galaxy Foods Company (the "Company"), its parent
(if any), and any present or future subsidiaries of the
Company (collectively, the "Related Corporations"), by
providing them with opportunities to purchase stock in the
Company pursuant to options granted hereunder which qualify
as "incentive stock options" under Section 422A(b) of the
Internal Revenue Code of 1986 (the "Code") ("ISO" or "ISOs");
(b) to directors, officers, employees and consultants of the
Company and Related Corporations by providing them with
opportunities to purchase stock in the Company pursuant to
options granted hereunder which do not qualify as ISOs ("Non
Qualified Option" or "Non-Qualified Options"); (c) to
directors, officers, employees and consultants of the company
and Related Corporations by providing them with awards of
stock in the Company ("Awards"); and (d) to directors,
officers, employees and consultants of the Company and Related
Corporations by providing them with opportunities to make
direct purchases of stock in the Company ("Purchases"). Both
ISOs and Non-Qualified Options are referred to hereafterindividually
as an "Option" and collectively as "Options". Options, Awards and
authorizations to make Purchases are referred to hereafter collectively as
"Stock Rights". As used herein, the terms "parent" and "subsidiary"
mean "parent corporation" and "subsidiary
corporation", respectively, as those terms are defined in
Section 425 of the Code.
Administration of the Plan.
The Plan shall be administered by the Board of Directors
of the Company (the "Board") or by a committee of two or more
of its members appointed by the Board (the "Committee");
provided, that, to the extent required by Rule 16b-3, or any
successor provision ("Rule 16b-3"), of the Securities
Exchange Act of 1934, with respect to specific grants of
Stock Rights, the Plan shall be administered by Non-Employee
Directors within the meaning of 17 CFR 240.16b-3(b)(3)(i).
No member of the Committee, while a member, shall be
eligible to participate in the Plan. Subject to ratification
of the grant or authorization of each Stock Right by the Board
(if so required by applicable state law), and subject to the
terms of the Plan, the Committee, if so appointed, shall have
the authority to (i) determine the employees of the Company and
Related Corporations (from among the class of employees
eligible under paragraph 3 to receive ISOs) to whom ISOs may
be granted, and to determine (from among the class of
individuals and entities eligible under paragraph 3 to receive
Non-Qualified Options and Awards and to make individuals and
entities eligible under paragraph 3 to receive Non-Qualified
options and Awards and to make Purchases) to whom Non-
Qualified Options, Awards and authorizations to make
Purchases may be granted; (ii) determine the time or times
at which options or Awards may be granted or Purchases made;
(iii) determine the option price of shares subject to
each Option, which price shall not be less than the minimum
price specified in paragraph 6, and the purchase price of
shares subject to each Purchase; (iv) determine whether
each Option granted shall be an ISO or a Non-Qualified
Option; (v) determine (subject to paragraph 7) the time or
times when each Option shall become exercisable and the
duration of the exercise period; (vi) determine whether
restrictions such as repurchase options are to be imposed
on shares subject to Options, Awards and Purchases and
the nature of such restrictions, if any, and (vii)
interpret the Plan and prescribe and rescind rules and
regulations relating to it. If the Committee determines to
issue a Non-Qualified Option, it shall take whatever actions it
deems necessary, under Section 422 of the Code and the regulations
promulgated thereunder, to ensure that such Option is not treated
as an ISO. The interpretation and construction by the Committee of any
provisions of the Plan or of any Stock Right granted under
it shall be final unless otherwise determined by the Board.
The Committee may from time to time adopt such rules and
regulations for carrying out the Plan as it may deem
best. No member of the Board or the Committee shall be
liable for any action or determination made in good faith
with respect to the Plan or any Stock Right granted under it.
<PAGE> 65
The Committee may select one of its members as its
chairman, and shall hold meetings at such times and places
as it may determine. Acts by a majority of the Committee, or
acts reduced to or approved in writing by a majority of the
members of the Committee (if consistent with applicable state
law), shall be the valid acts of the Committee. From time to
time the Board may increase the size of the Committee and
appoint additional members thereof, remove members (with or
without cause) and appoint new members in substitution
therefor, fill vacancies however caused, or remove all
members of the Committee and thereafter directly administer
the Plan.
Stock Rights may be granted to members of the
Board consistent with the provisions of the first sentence of
paragraph 2(A) above, if applicable. All grants of Stock
Rights to members of the Board shall in all other respects be
made in accordance with the provisions of this Plan
applicable to other eligible persons. Members of the Board
who are either (i) eligible for Stock Rights pursuant to the
Plan or (ii) have been granted Stock Rights may vote on any
matters affecting the administration of the Plan or the grant
of any Stock Rights pursuant to the Plan, except that no such
member shall act upon the granting to himself of Stock
Rights, but any such member may be counted in
determining the existence of a quorum at any meeting of the
Board during which action is taken with respect to the granting
to him at Stock Rights.
Eligible Employees and Others. ISOs may be granted to
any employee of the Company or any Related Corporation.
Those officers and directors of the Company who are not
employees may not be granted ISOs under the Plan. Non-
Qualified Options, Awards and authorizations to make Purchases
may be granted to any director (whether or not also an
employee), officer, employee or consultant of the Company or
any related Corporation. Subject to the foregoing conditions
and limitations, the Committee may take into consideration a
recipient's individual circumstances in determining whether
to grant an ISO, a Non-Qualified Option or an authorization to
make a Purchase. Granting of any Stock Right to any individual
or entity shall neither entitle that individual or entity to,
nor disqualify him from, participate in any other grant of
Stock Rights.
Stock. The stock subject to Options, Awards and
Purchases shall be authorized but unissued shares of Common
Stock of the Company, par value $.01 per share (the "Common
Stock"), or shares of Common Stock reacquired by the Company in
any manner. The aggregate number of shares which may be issued
pursuant to the Plan is 250,000, subject to adjustment as provided in
paragraph 13. Any such shares may be issued as ISOs, Non-
Qualified Options or Awards, or to persons or entities making
Purchases, so long as the number of shares so issued does not
exceed such number, as adjusted. If any Option granted under
the Plan shall expire or terminate for any reason without
having been exercised in full or shall cease for any reason to
be exercisable in whole or in part, or if the Company shall
reacquire any unvested shares issued pursuant to Awards or
Purchases, the unpurchased shares subject to such Options
and any unvested shares so reacquired by the Company shall
again be available for grants of Stock Rights under the Plan.
<PAGE> 66
Granting of Stock Rights. Stock Rights may be granted
under the Plan at any time after September 30, 1996 and
prior to September 29, 2006. The date of grant of a Stock
Right under the Plan will be the date specified by the
Committee at the time it grants the Stock Right; provided,
however, that such date shall not be prior to the date an
which the Committee acts to approve the grant. The Committee
shall have the right, with the consent of the optionee, to
convert an ISO granted under the Plan to a Non-Qualified
Option pursuant to paragraph 16.
Minimum Option Price; ISO Limitations.
The price per share specified in the agreement relating
to each Non-Qualified option granted under the Plan shall
in no event be less than the minimum legal consideration
required therefor under the laws of Delaware or the
lows of any jurisdiction in which the Company or its successors
in interest may be organized.
The price per share specified in the agreement relating
to each ISO granted under the Plan shall not be less than the
fair market value per share of Common Stock on the date of such
grant. In the case of an ISO to be granted to an employee
owning stock possessing more than ten percent of the total
combined voting power of all classes of stock of the
Company or any Related Corporation (determined as of the
date of grant), the price per share specified in the
agreement relating to such ISO shall not be less than 110%
of the fair market value per share of Common Stock on the date
of grant.
In no event shall the aggregate fair market value
(determined at the time an ISO is granted) of Common Stock
for which ISOs granted to any employee are exercisable for the
first time by such employee during any calendar year (under
all stock option plans of the Company and any Related
Corporation) exceed $100,000. To the extent any such grant
of Options in excess of $100,000 (in the aggregate) is made,
those Options in excess of $100,000 (in the aggregate)
shall be treated as Non-Qualified Options.
If, at the time an Option granted under the Plan,
the Company's Common Stock is publicly traded, "fair market
value" shall be determined as of the last business day for
which the prices or quotes discussed in this sentence are
available prior to the date such Option is granted and shall
mean (i) the average (on that date) of the high and low prices
of the Common Stock on the principal national securities
exchange on which the Common Stock is traded, if the Common
Stock is then traded on a national securities exchange; or
(ii) the last reported sale price (on that date) of the
Common Stock on the NASDAQ National Market List, if the
Common Stock is not then traded on a national securities
exchange; or (iii) the closing bid price (or average of bid
prices) last quoted (on that date) by an established
quotation service for over-the-counter securities, if the
Common Stock is not reported on the NASDAQ National Market
List. However, if the Common Stock is not publicly traded at
the time an Option is granted under the Plan, "fair market
value" shall be deemed to be the fair value of the Common Stock
as determined by the Committee after taking into consideration
all factors which it deems appropriate, including, without
limitation, recent sale and offer prices of the Common Stock
in private transactions negotiated at arm's length.
Option Duration. Subject to earlier termination as
provided in paragraphs 9 and 10, each Option shall expire on
the date specified by the Committee, but not more than
(i) ten years and one day from the date of grant in the
case of Non-Qualified Options, (ii) ten years from the
date of grant in the case of ISOs generally, and (iii) five
years from the date of grant in the case of ISOs granted to
an employee owning stock possessing more than ten percent of
the total combined voting power of all classes of stock of the
Company or any Related Corporation (determined as of the
date of grant). Subject to earlier termination as provided in
paragraphs 9 and 10, the term of each ISO shall be the
term set forth in the original instrument granting such ISO,
except with respect to any part of such ISO that is converted
into a Non-Qualified Option pursuant to paragraph 16.
<PAGE> 67
Exercise of Option. Subject to the provisions
of paragraphs 9 through 12, each Option granted under the Plan
shall be exercisable as follows:
The Option shall either be fully exercisable on the date
of grant or shall become exercisable hereafter in such
installments as the Committee may specify.
Once an installment becomes exercisable it shall
remain exercisable until expiration or termination of the
Option, unless otherwise specified by the Committee.
Each Option or installment may be exercised at any time
or from time to time, in whole or in part, for up to the
total number of shares with respect to which it is then
exercisable.
The Committee shall have the right to accelerate the date
of exercise of any installment of any Option.
Termination of Employment. If an ISO optionee ceases to
be employed by the Company and all Related Corporations other
than by reason of death or disability as defined in paragraph
10, no further installments of ISOs granted to such
optionee shall become exercisable, and all then exercisable
ISOs shall terminate after the passage of 60 days from the
date of termination of employment, but in no event later
than on their specified expiration dates, except to the
extent that such ISOs (or unexercised installments
thereof) have been converted into Non-Qualified Options
pursuant to paragraph 16. Employment shall be considered as
continuing uninterrupted during any bona fide leave of absence
(such as those attributable to illness, military obligations or
governmental service) provided that the period of such leave
does not exceed 90 days or, if longer, any period during
which such optionee's right to reemployment is guaranteed by
statute. A bona fide leave of absence with the written
approval of the Committee shall not be considered an
interruption of employment under the Plan, provided that such
written approval contractually obligates the Company or any
Related Corporation to continue the employment of the optionee
after the approved period of absence. ISOs granted under the
Plan shall not be affected by any change of employment within
or among the Company and Related Corporations, so long as the
optionee continues to be an employee of the Company or any
Related Corporation. Nothing in the Plan shall be deemed to give
any grantee of any Stock Right the right to be retained in employment
or other service by the Company or any Related Corporation for any
period of time.
Death; Disability.
If an ISO optionee ceases to be employed by the Company
and all Related Corporations by reason of death, any ISO of
such optionee may be exercised, to the extent of the number of
shares with respect to which such optionee could have exercised
the ISO on the date of death, by such optionee's
estate, personal representative or beneficiary who has
acquired the ISO by will or by the laws of descent and
distribution, at any time prior to the earlier of the ISO's
specified expiration date or 180 days from the date of the
optionee's death.
If an ISO optionee ceases to be employed by the Company
and all Related Corporations by reason of disability, such
optionee shall have the right to exercise any ISO held by the
optionee on the date of termination of employment, to the
extent of the number of shares with respect to which such
optionee could have exercised the ISO on that date, at any
time prior to the earlier of the ISO's specified expiration
date or 180 days from the date of the termination of the
optionee's employment. For the purposes of the Plan, the
term "disability" shall mean "permanent and total disability"
as defined in Section 22(e)(3) of the Code or successor
statute.
<PAGE> 68
Assignability. No Stock Right shall be assignable
or transferable by the grantee except by will or by the
laws of descent and distribution, and during the lifetime of
the grantee each Stock Right shall be exercisable only by such
grantee.
Terms and Conditions of Options. Options shall be evidenced
by instruments (which need not be identical) in such forms as
the Committee may from time to time approve. Such instruments
shall conform to the terms and conditions set forth in
paragraphs 6 through 11 hereof and may contain such other
provisions as the Committee deems advisable which are not
inconsistent with the Plan, including restrictions applicable
to shares of Common Stock issuable upon exercise of Options.
In granting any Non-Qualified option, the Committee may specify
that such Non-Qualified Option shall be subject to the
restrictions set forth herein with respect to ISOs, or to
such other termination and cancellation provisions as the
Committee may determine. The Committee may from time to
time confer authority and responsibility on one or more of
its own members and/or one or more officers of the Company
to execute and deliver such instruments. The proper
officers of the Company are authorized and directed to take
any and all action necessary or advisable from time to time to
carry out the terms of such instruments.
Adjustments. Upon the occurrence of any of the
following events, an optionee's rights with respect to
Options granted hereunder shall be adjusted as hereinafter
provided, unless otherwise specifically provided in the
written agreement between the optionee and the Company
relating to such Option:
If the shares of Common Stock shall be subdivided
or combined into a greater or smaller number of shares or if
the Company shall issue any shares of Common Stock as a
stock dividend on its outstanding Common Stock, the number of
shares of Common Stock deliverable upon the exercise of
options shall be appropriately increased or decreased
proportionately, and appropriate adjustments shall be made in the
purchase price per share to reflect such subdivision, combination
or stock dividend.
If the Company is to be consolidated with or acquired
by another entity in a merger, sale of all or substantially
all of the Company's assets or otherwise (an
"Acquisition"); the Committee or the board of directors of
any entity assuming the obligations of the Company hereunder (the "Successor
Board"), shall, as to outstanding Options, either (i) make
appropriate provision for the continuation of such Options by
substituting on an equitable basis for the shares then
subject to such Options the consideration payable with
respect to the outstanding shares of Common Stock in
connection with the Acquisition; or (ii) upon written notice to
the optionees, provide that all Options must be exercised, to
the extent then exercisable, within a specified number of
days of the date of such notice, at the end of which period
the options shall terminate; or (iii) terminate all
Options in exchange for a cash payment equal to the excess of
the fair market value of the shares subject to such Options
(to the extent then exercisable) over the exercise price
thereof.
In the event of a recapitalization or reorganization of
the Company (other than a transaction described in
subparagraph B above) pursuant to which securities of the
Company or of another corporation are issued with respect to
the outstanding shares of Common Stock, an optionee, upon
exercising an Option, shall be entitled to receive, for
the purchase price paid upon such exercise, the
securities the optionee would have received had such optionee
exercised the Option prior to such recapitalization or
reorganization.
Notwithstanding the foregoing, any adjustments made
pursuant to subparagraphs A, B or C with respect to ISOs
shall be made only after the Committee, after consulting
with counsel for the Company, determines whether such
adjustments would constitute a "modification" of such ISOs
(as that term is defined in Section 424 of the Code) or
would cause any adverse tax consequences for the holders of
such ISOs. If the Committee determines that such adjustments
made with respect to ISOs would constitute a modification of such
ISOs, it may refrain from making such adjustments.
In the event of the proposed dissolution or liquidation
of the Company, each Option will terminate immediately prior
to the consummation of such proposed action or at such other
time and subject to such other conditions as shall be
determined by the Committee.
Except as expressly provided herein, no issuance by
the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall
affect, and no adjustment by reason thereof shall be made
with respect to, the number or price of shares subject to
Options. No adjustments shall be made for dividends paid in
cash or in property other than securities of the Company.
No fractional shares shall be issued under the Plan and
the optionee shall receive from the Company cash in lieu of
such fractional shares.
Upon the happening of any of the foregoing events
described in subparagraphs A, B or C above, the class and
aggregate number of shares set forth in paragraph 4 hereof
that are subject to Stock Rights which previously have been
or subsequently may be granted under the Plan shall also be
appropriately adjusted to reflect the events described
in such subparagraphs. The Committee or the Successor Board
shall determine the specific adjustments to be made under this
paragraph 13 and, subject to paragraph 2, its determination shall
be conclusive.
If any person or entity owning restricted Common
Stock obtained by exercise of a Stock Right made hereunder
receives shares or securities or cash in connection with a
corporate transaction described in subparagraphs A, B or C
above as a result of owning such restricted Common Stock,
such shares or securities or cash shall be subject to all of the
conditions and restrictions applicable to the restricted Common Stock
with respect to which such shores or securities or cash were
issued, unless otherwise determined by the Committee or the
Successor Board.
Means of Exercising Stock Rights. A Stock Right (or
any part or installment thereof) shall be exercised by giving
written notice to the Company at its principal office
address. Such notice shall identify the Stock Right being exercised and
specify the number of shares as to which such Stock Right
is being exercised, accompanied by full payment of the
purchase price therefor (including any amounts required in
accordance with paragraph 19 hereof), in United States
dollars, in cash, by certified check, by bank draft or by personal check.
The holder of a Stock Right shall not have the rights of a
shareholder with respect to the shares covered by his Stock
Right until the date of issuance of a stock certificate to
him for such shares. Except as expressly provided above in
paragraph 13 with respect to changes in capitalization and
stock dividends, no adjustment shall be made for dividends
or similar rights for which the record date is before the
date such stock certificate is issued.
<PAGE> 70
Term and Amendment of Plan. This Plan was adopted by
the Board effective as of September 30, 1996, subject (with
respect to the validation of ISOs granted under the Plan) to
approval of the Plan by the stockholders of the Company at the
next Meeting of Stockholders or, in lieu thereof, by
unanimous written consent. If the approval of stockholders is
not obtained by September 30, 1997, any grants of ISOs under the
Plan made prior to that date will be rescinded. The Plan shall
expire on September 29, 2006 (except as to Options outstanding an
that date). Subject to the provisions of paragraph 5 above,
Stock Rights may be granted under the Plan prior to the date of
stockholder approval of the Plan. The Board may terminate or
amend the Plan in any respect at any time, except that,
without the approval of the stockholders obtained within 12
months before or after the Board adopts a resolution
authorizing any of the following actions: (a) the total
number of shares that may be issued under the Plan may not be
increased (except by adjustment pursuant to paragraph 13);
(b) the provisions of paragraph 3 regarding eligibility for
grants of ISOs may not be modified; (c) the provisions of
paragraph 6(B) regarding the exercise price at which shares may
be offered pursuant to ISOs may not be modified (except by
adjustment pursuant to paragraph 13); and (d) the expiration date
of the Plan may not be extended. Except as provided in the fourth
sentence of this paragraph 15, in no event may action of the Board or
stockholders alter or impair the rights of a grantee, without his
consent, under any Stock Right previously granted to him.
Conversion of ISOs Into Non-Qualified Options;
Termination of ISOs. The Committee, at the written request of
any optionee, may in its discretion take such written
actions as may be necessary to convert such optionee's ISOs (or
any installments or portions of installments thereof) that have not been
exercised on the date of conversion into Non-Qualified
Options at any time prior to the expiration of such ISOs,
regardless of whether the optionee is an employee of the
Company or a Related Corporation at the time of such
conversion. Such written actions may include, but not be
limited to, extending the exercise period or reducing the
exercise price of the appropriate installments of
such Options. At the time of such conversion, the
Committee (with the consent of the Optionee) may impose such
conditions on the exercise of the resulting Non-Qualified Options as
the Committee in its discretion may determine, provided that such
conditions shall not be inconsistent with this Plan. Except
as provided in Paragraph 6.C hereof, nothing in the Plan
shall be deemed to give any optionee the right to have such
optionee's ISOs converted into Non-Qualified Options, and no
such conversion shall occur until and unless the Committee
takes appropriate action. The Committee, with the consent
of the optionee, may also terminate any portion of any ISO
that has not been exercised at the time of such termination.
Application of Funds. The proceeds received by the
Company from the sale of shares pursuant to Options granted and
Purchases authorized under the Plan shall be used for
general corporate purposes.
Governmental Regulation. The Company's obligation to
sell and deliver shares of the Common Stock under this Plan is
subject to the approval of any governmental authority
required in connection with the authorization, issuance or
sale of such shares.
Withholding of Additional Income Taxes. Upon the
exercise of a Non-Qualified Option, the grant of an Award, the
making of a Purchase of Common Stock for less than its fair
market value, the making of a Disqualifying Disposition (as
defined in Paragraph 20, or in connection with the exercise
of an ISO involving the premature surrender of Common Stock
acquired under a previously exercised ISO) or the vesting of
restricted Common Stock acquired on the exercise of a Stock
Right hereunder, the Company, in accordance with Section
3402(a) of the Code (and any other state or federal
withholding law(s) determined by the Committee to be
applicable to such exercise or Purchase), may require
the optionee, Award recipient or purchaser to pay withholding
taxes in respect of the amount that it considered
compensation includable in such person's taxable income. The
Committee in its discretion may condition (i) the exercise of an Option;
(ii) the grant of an Award; (iii) the making of a Purchase of
Common Stock for less than its fair market value; or (iv)
the vesting of restricted Common Stock acquired by exercising
a Stock Right, on the grantee's payment of such withholding
taxes.
<PAGE> 71
Notice to Company of Disqualifying Disposition.
Each employee who receives an ISO must agree to notify the
Company in writing immediately after the employee makes a
Disqualifying Disposition of any common stock acquired pursuant
to the exercise of an ISO. A Disqualifying Disposition is
any disposition (including any sale) of such Common Stock
before the later of (a) two years after the date the
employee was granted the ISO or (b) one year after the date
the employ e acquired Common Stock by exercising the ISO. If
the employee has died before such stock is sold, these
holding period requirements do not apply and no Disqualifying
Disposition can occur thereafter.
Governing Law; Construction. The validity and
construction of the Plan and the instruments evidencing Stock
Rights shall be governed by the laws of the State of Delaware.
In construing this Plan, the singular shall include the plural
and the masculine gender shall include the feminine and neuter,
unless the context otherwise requires.
Exhibit 10.31
Line of Credit Agreement with
Finova Financial Services
<PAGE> 73
SECURITY AGREEMENT
(ACCOUNTS RECEIVABLE
INVENTORY AND EQUIPMENT)
BETWEEN
FINOVA CAPITAL CORPORATION
111 WEST 40TH STREET
NEW YORK, NEW YORK 10018
AND
GALAXY FOODS COMPANY
2441 VISCOUNT ROW
ORLANDO, FL 32809
This Security Agreement, made and entered into in New York,
New York, as of this 1st day of November, 1996 by and
between GALAXY FOODS COMPANY, a corporation existing under and
by virtue of the laws of the State of Delaware, with its
principal place of business located at 2441 Viscount Row,
Orlando, Fl 32809 ("Borrower") and FINOVA CAPITAL
CORPORATION, a Delaware corporation, with a place of
business located at 111 West 40th Street, New York, New York
10018 ("FINOVA"). This Agreement sets forth the terms and
conditions upon which FINOVA may, in its sole and absolute
discretion, make loans, advances and other financial
accommodations to or for the benefit of Borrower upon the
security referred to herein.
Section 1. DEFINED TERMS
1.1. All terms used herein which are defined in Article 1
or Article 9 of the Uniform Commercial Code (the "UCC") shall
have the same meaning as given therein unless otherwise
defined in this Agreement. All references to the plural shall
also mean the singular.
1.2. "Account" or "Accounts" shall mean all of
Borrower's present and hereafter created accounts
receivable, contract rights, general intangibles, security
deposits, chattel paper, notes, drafts, acceptances, leases,
lease payments, rents, tax refunds, options to purchase
real or personal property, securities, stock options,
customer lists, insurance claims, patents, patent
applications, documents, instruments, copyrights, claims, and
any other chooses in action, as such terms may be defined
in the UCC, including, without limitation, all
obligations for the payment of money arising out of
Borrower's sale, lease or other disposition of goods or other
property or Borrower's rendition of services, and to all
of Borrower's merchandise which is represented thereby
whether delivered or undelivered, and to all proceeds
thereof including, but not limited to, the proceeds of any
insurance thereon whether or not specifically assigned to
FINOVA.
1.3. "Account Debtor" shall mean each debtor or obligor
in any way obligated on or in connection with any Account.
1.4. "Collateral" shall have the meaning set forth
in Section 4.1 hereof.
<PAGE> 74
1.5. "Costs and Expenses" shall include, but not be
limited to commissions, fees, appraisal fees, taxes, title
insurance premiums, internal and external audit expenses for
routine and non-routine audits, field examination expenses,
filing, recording and search expenses, reasonable attorney's
fees and disbursements (as may be incurred with respect to
the effectuation of this Agreement or any claim of any
nature or litigation whatsoever arising out of or as a
result of the interpretation of this Agreement or the
financing provided for hereunder, including, but not limited
to, all fees and expenses for the service and filing of
papers, premiums on bonds and undertakings, fees of marshals,
sheriffs, custodians, auctioneers and others, travel expenses
and all court costs and collection charges), Facility Fees (as
defined herein), postage, wire transfer fees, check dishonor
fees and other out of pocket expenses arising out of or
relating to the negotiations, preparation, consummation,
administration and enforcement of this Agreement or any other agreement
between Borrower and FINOVA including, but not limited to any
guaranty of the Obligations (as defined herein).
1.6. "Default Rate of Interest" shall have the meaning set
forth in Section 3.2 hereof.
1.7. "Eligible Accounts" shall mean Accounts created by
Borrower in the ordinary course of its business arising out
of its sale of goods or rendition of services, which are and
at all times shall continue to be acceptable to FINOVA in its
sole and absolute discretion. Standards of eligibility may
be fixed and revised from time to time solely by FINOVA in
its exclusive judgment. In determining eligibility, FINOVA
may, but need not, rely on agings, reports and schedules of
Accounts furnished by Borrower but reliance by FINOVA thereon
from time to time shall not be deemed to limit its right
to revise standards of eligibility at any time without
notice as to both Borrower's present and future Accounts.
1.8. "Events of Default" shall have the meaning set forth
in Section 8.1 hereof.
1.9. "Facility Fee" shall have the meaning set forth in
Section 3.5 hereof.
1.10. "Line of Credit" as used herein is solely for
the purpose of computing the Facility Fee and does not represent
any amount or amounts available for borrowing purposes nor any
limit as to the amount or amounts available for borrowing
purposes, each of which shall be determined at FINOVA's sole
and absolute discretion. Any increase in the Line of Credit
shall be subject to the Borrower's request and consent.
Subject to the preceding sentence, Borrower's Line of Credit is
$2,000,000.
1.11. "Net Amount of Eligible Accounts" shall mean the
gross amount of Eligible Accounts less sales, excise or
similar taxes, and less returns, discounts, claims, credits,
reserves (as determined by FINOVA in its sole discretion) and
allowances of any nature at any time issued, owing,
granted, outstanding, available or claimed.
1.12. "Obligations" shall mean any and all
loans, advances, accommodations, indebtedness, liabilities, Costs
and Expenses and all obligations of every kind and nature
owing by Borrower to FINOVA, however evidenced, whether as
principal, guarantor or otherwise, whether arising under this
Agreement, any supplement hereto, or otherwise, whether now existing
or hereafter arising, whether direct or indirect, absolute
or contingent, joint or several, due or not due,
primary or secondary, liquidated or unliquidated, secured
or unsecured, original, renewed, modified or extended, and
whether arising directly or acquired from others (including,
without limitation, wherever applicable, FINOVA's
participations or interests in Borrower's
obligations to others) and including, without
limitation, FINOVA's charges, of whatever nature,
commissions, interest, expenses, costs and attorneys' fees,
all of which are chargeable to Borrower in connection with any
of the foregoing.
<PAGE> 75
1.13. "Records" shall have the meaning set forth in
Section 4.1(f) hereof.
1.14. "Renewal Date" shall have the meaning set forth in
Section 9.1 hereof.
1.15 "Service Fee" shall have the meaning set forth in
Section 3.5 hereof.
Section 2. LOANS AND ADVANCES
2.1. FINOVA shall from time to time, in its sole and
absolute discretion, make loans, advances and other
financial accommodations to or for the benefit of Borrower of
up to: (a) 80% of the Net Amount of Eligible Accounts (or
such greater or lesser percentage thereof as FINOVA shall,
in its sole and absolute discretion determine); (b) 35% of
eligible inventory (as determined by FINOVA in its sole and
absolute discretion and priced at the lower of cost or
market) in an amount not to exceed $750,000.
2.2. All Obligations shall be charged to an account in the
Borrower's name as maintained on FINOVA's books. FINOVA
shall render to Borrower a monthly statement of its
account which statement shall be deemed correct, accepted by,
and conclusively binding upon Borrower as an account stated,
except to the extent that Borrower shall deliver to FINOVA
written notice of any specific exceptions thereto within
thirty (30) days after the date such statement is rendered.
2.3. All principal, interest, fees, commissions,
charges, Costs and Expenses incurred with or in respect of this
Agreement or any supplement or amendment hereto (all of
which shall be cumulative and not exclusive) and any and all
Obligations shall be charged as an advance to Borrower's
account as maintained by FINOVA.
2.4. All Obligations shall be payable at FINOVA's office
specified above or at such other place as FINOVA may
hereafter designate from time to time. If requested,
Borrower shall execute and deliver to FINOVA one or more
promissory notes in form and substance satisfactory to FINOVA
to further evidence the Obligations.
Section 3. INTEREST AND FEES
3.1. FINOVA is authorized to charge the Borrower's loan
account as an advance on the first day of each month as
follows: (a) all Costs and Expenses; (b) interest on
Borrower's monthly average loan balance (inclusive of all
advances made pursuant to paragraph 2.1 of this Agreement
together with all costs and expenses charged to Borrower's
account); and (c) Letter of Credit, Guaranty or Acceptance
Fees ("LC Fees"), if any. Interest shall be payable by Borrower
to FINOVA at the per annum Prime Rate (the "Prime Rate") plus 2% (the
"Interest Rate"). As used herein the term "Prime Rate" shall be
deemed to mean the prime commercial rate as published from time to
time in the Wall Street Journal, in effect on the date hereof (whether or
not such rate is the lowest rate available by FINOVA) and as
same may be adjusted upwards or downwards from time to time.
The Interest Rate shall never be less than six (6%) percent
per annum nor greater than the highest rate permitted by
law. Any change in the Interest Rate shall become effective
on the first day of the month following the month in which the
Prime Rate shall have been increased or decreased, as the
case may be. The Interest Rate shall be calculated based on a
three hundred sixty (360) day year for the actual number of
days elapsed and shall be charged to Borrower on all
Obligations. All interest charged or chargeable to Borrower
shall be deemed as an additional advance and shall become
part of the Obligations.
<PAGE> 76
3.2 In the event any amount to be advanced or charged to
the Borrower under this Agreement together with any
other agreement between us exceeds the amount available to
Borrower pursuant to any percentage or sublimit set
forth in this Agreement (hereinafter sometimes referred to as
an "Overadvance") on each of any day in any month the Interest
Rate charged to the Borrower for that month on all Obligations shall
be at a rate which is one percent (1%) above the Interest Rate
otherwise applicable herein without regard as to whether
any such Overadvance is made with or without FINOVA's knowledge or
consent.
3.3. Borrower agrees that upon the occurrence of any
Event of Default (whether caused by the Borrower, an Account
Debtor or others), the Interest Rate on all Obligations shall
immediately convert to the rate of 1/15th of 1% per day (the
"Default Rate of Interest") and all interest accruing hereunder
together with all Obligations shall thereafter be payable upon
demand.
3.4. In no event shall the Interest Rate or the Default
Rate of Interest exceed the highest rate permitted
under any applicable law or regulation. If any part or provision of
this Agreement is in contravention of any such law or
regulation such part or provision shall be deemed amended to
conform thereto and any payments of interest made in excess
of such highest rate permitted, if any, shall be deemed to
be payments of principal Obligations to the extent of such
excess.
3.5. Borrower shall pay FINOVA an annual Facility Fee in
the amount of 1.25% of the Line of Credit extended by
FINOVA to Borrower. The Facility Fee is payable upon the execution
and delivery of this Agreement and upon each annual anniversary
date of this Agreement until such time as this Agreement
has been terminated in accordance with its terms. In
addition, Borrower shall pay FINOVA a monthly Service Fee in
the amount of $1,000. The Service Fee is due and payable
upon the execution and delivery of this Agreement and on
the first day of each month until such time as this
Agreement has been terminated in accordance with its terms.
3.6 Borrower shall pay FINOVA an Audit Fee in the amount
of $700 per day for each auditor performing an examination of
the Borrower's books and records, such Audit Fee to be in
addition to all other Costs and Expenses incurred by FINOVA
with regard to each such examination, all of which shall be
deemed part of the Obligations.
Section 4. GRANTING PROVISIONS
4.1. As security for the prompt performance, observance
and payment in full of all Obligations, Borrower hereby
grants to FINOVA a continuing security interest in, lien upon and right
of setoff against, and Borrower hereby assigns, transfers,
pledges and sets over to FINOVA the following (which, together
with any of Borrower's other property in which FINOVA may at
any time have a security interest or lien, whether pursuant
to any supplement or amendment hereto, or otherwise, all of
which are herein collectively referred to as the
"Collateral"): (a) All of Borrower's present and future Accounts;
(b) all of Borrower's monies, securities and other property and the
proceeds thereof, now or hereafter held or received by, or
in transit to, FINOVA from or for Borrower, or for the account
of Borrower, whether for safekeeping, pledge, custody,
transmission, collection or otherwise, and all of Borrower's
deposits (general or special) including, but not limited to security
deposits, balances, sums and credits with FINOVA at any time existing
or with a third party for the Borrower's account; (c) all
of Borrower's present and future right, title and interest,
and all of Borrower's present and future rights, remedies,
security and liens, in, to and in respect of the Accounts and
other Collateral, including, without limitation, rights of stoppage in
transit, replevin, repossession and reclamation and other
rights and remedies of an unpaid vendor, lienor or secured party,
guarantees or other contracts of suretyship with respect to the Accounts,
deposits or other security for the obligation of any Account
Debtor, and credit and other insurance; (d) all of
Borrower's present and future right, title and interest in,
to and in respect of all goods relating to, or which by sale
have resulted in, Accounts including, without limitation,
all goods described in invoices, documents, contracts or
instruments with respect to, or otherwise representing or
evidencing, any Accounts or other Collateral, including
without limitation, all returned, reclaimed or
repossessed goods; (e) all of Borrower's present and
future deposit accounts; (f) all of Borrower's present and
future books, records, ledger cards, computer programs
(including all software and data contained in or by any
computer whether in the possession of the Borrower or any
other party) and other property and general intangibles
evidencing or relating to the Accounts and any other
Collateral or any Account Debtor, together with the file
cabinets, containers, tapes or disks, in which the foregoing
are stored ("Records"); (g) all of Borrower's presently owned
or hereafter acquired inventory; (h) all of Borrower's
machinery and equipment, set forth on schedule 4.1 annexed
hereto and made a part hereof; (i) all other of Borrower's
present and future general intangibles of every kind and
description, including, without limitation, customer lists,
stock options, patent, and the goodwill of the business
symbolized thereby, patents, copyrights, licenses and
Federal, State and local tax refund claims, leases, rents
and insurance claims of all kinds; and (j) all proceeds of
the foregoing, in any form, including, without limitation, all
claims against third parties for loss or damage to or
destruction of any or all of the foregoing. The security
interests granted herein shall remain effective whether or
not the Collateral covered thereby is acceptable to FINOVA or
deemed by it to be ineligible for the purposes of any loans or
advances contemplated under this Agreement.
<PAGE> 77
4.2. Borrower shall deliver to FINOVA a duplicate
and/or original invoice, and all original documents
evidencing the delivery of goods or the performance of
services with regard to each Account, including but not
limited to all original contracts, orders, invoices, bills
of lading, warehouse receipts, delivery tickets and shipping
receipts, together with schedules describing the Accounts
and/or written confirmatory assignments to FINOVA of each
Account, in form and substance satisfactory to FINOVA and
duly executed by Borrower, together with such other
information as FINOVA may request. In no event shall the
making (or the failure to make) of any schedule or assignment
or the content of any schedule or assignment or Borrower's
failure to comply with the provisions hereof be deemed or
construed as a waiver, limitation or modification of
FINOVA's security interest in, lien upon and assignment of
the Collateral or Borrower's representations, warranties or
covenants under this Agreement or any supplement or amendment
hereto.
Section 5. ENFORCEMENT OF RIGHTS IN AND TO COLLATERAL
5.1. Until Borrower's authority to do so is curtailed
upon alleging the occurrence of an Event of Default or
terminated at any time by FINOVA in its sole and absolute
discretion, Borrower shall (at Borrower's expense) collect
on FINOVA's behalf as FINOVA's property and in trust for
FINOVA, and deliver to FINOVA in their original form on the
same date as the date of the actual receipt thereof, all
checks, drafts, notes, acceptances, cash, wire transfers and
any other evidences of payment, applicable to any assigned
Account ("Collection"). Five (5) working days shall be
allowed subsequent to receipt by FINOVA of all collections to
permit bank clearance and Collection.
<PAGE> 78
5.2. FINOVA or FINOVA's representatives shall during
regular business hours have free access to and right of
inspection of the Collateral and have full access to and the right
to examine and make copies of Borrower's Records, to confirm and
verify all Accounts, to perform general audits. FINOVA may
at any time remove from Borrower's premises or require
Borrower or its accountants or auditors to deliver any
Records to FINOVA. FINOVA may, at Borrower's cost and
expense, use any of Borrower's personnel, supplies,
computer equipment (including all computer programs, software
and data) and space at Borrower's places of business or at
any other place as FINOVA may designate, as may be reasonably
necessary for the handling of collections.
5.3. Merchandise received in settlement of any
assigned Account shall be received in trust for, segregated
and delivered to or for the account of FINOVA. All returns
of merchandise, credits, issued by Borrower, claims or
disputes of Account Debtors whether or not accepted by
Borrower or given an allowance of any nature shall be
reported by Borrower to FINOVA at least weekly. Each such
report shall be accompanied by copies of all documentation
provided to Borrower in support of all merchandise returns,
credits, claims and disputes. Borrower shall
immediately upon obtaining knowledge thereof report to FINOVA
all reclaimed, repossessed and returned goods, Account Debtor
claims and any other matter affecting the value,
enforceability or collectability of Accounts. At FINOVA's
request, any goods reclaimed or repossessed by or returned to
Borrower will be set aside, marked with FINOVA's name and
held by Borrower (at Borrower's place of business or at such
other place as FINOVA may designate) for FINOVA's account and
subject to FINOVA's security interest.
5.4 All claims and disputes relating to Accounts shall
be resolved by Borrower within a reasonable time at Borrower's
own cost and expense.
5.5. FINOVA is authorized and empowered at any time,
upon alleging the occurrence of an Event of Default, to
compromise or extend the time for payment of any Account, for
such amounts and upon such terms as FINOVA may in its sole
discretion determine, and to accept the return of the
merchandise represented by any Account, all without notice
to or consent by Borrower, and without discharging or
affecting Borrower's Obligations hereunder to any extent, and
Borrower will, upon demand, pay to FINOVA the amount of any
allowance given or authorized by FINOVA hereunder. FINOVA
shall have the right (in addition to its other rights
hereunder or otherwise), upon alleging the occurrence of an
Event of Default and without notice to Borrower, to
appropriate, set off and apply to the payment of any or all
of the Obligations, any portion or all of the Collateral, in
such manner as FINOVA shall in FINOVA's sole discretion
determine, to enforce payment of any Collateral, to settle,
compromise or release in whole or in part, any amounts owing
on any Collateral, to prosecute any action, suit or
proceeding with respect to the Collateral, to extend the
time of payment of any and all Collateral, to make allowances
and adjustments with respect thereto, to issue credits in
FINOVA's or Borrower's name, to sell, assign and deliver the
Collateral (or any part thereof) at public or private sale,
for cash, upon credit or otherwise at FINOVA's sole
option and discretion, and FINOVA may bid or become purchaser
at any such sale, free from any right of redemption which is
hereby expressly waived. Any public or private sale of the
Collateral shall be deemed reasonable to the extent
Borrower shall have received written notice of such sale at
least five (5) days prior to its occurrence and shall not
have delivered written objection to FINOVA.
SECTION 6. REPRESENTATIONS AND WARRANTIES
<PAGE> 79
Borrower hereby represents, warrants and covenants to
FINOVA the following (which shall survive the execution and
delivery of this Agreement), the truth and accuracy of which,
and continuing compliance with, being a continuing condition of
the making of all loans and advances hereunder by FINOVA or under
any supplement or amendment hereto:
6.1. Except as set forth in Schedule 6.1 annexed hereto
and made a part hereof Borrower is and shall be the owner
of the Collateral free and clear of all liens, security interests,
claims and encumbrances of every kind and nature, except
in FINOVA's favor or as otherwise consented to in writing by
FINOVA, and Borrower shall indemnify and defend FINOVA from
and against all cost, loss and expense with regard to the same. None
of Borrower's Accounts nor any of its inventory has been
previously sold or assigned to any person, firm or corporation and will
not be sold or assigned, other than to FINOVA, at any time
during the term of this Agreement without first obtaining
FINOVA's consent in writing. Borrower shall not execute any
security agreement or UCC financing statement in favor of any
other party or borrow against the security of any corporate
asset, including but not limited to the Collateral,
without first obtaining FINOVA's consent in writing which
shall not be unreasonably withheld.
6.2. (a) Without first obtaining FINOVA's consent in
writing Borrower will not directly or indirectly sell, lease,
transfer, abandon or otherwise dispose of all or any portion
of Borrower's property or assets (except in the ordinary course
of business) or consolidate or merge with or into any other
entity or permit any other entity to consolidate or merge with
or into Borrower;
(b) Borrower will preserve, renew and keep in
full force and effect Borrower's existence and good standing as a
corporation and its rights and franchises with respect thereto;
(c) Borrower will continue to engage in business of
the same type as Borrower is engaged as of the date hereof; and
(d) Borrower will give FINOVA thirty (30) days
prior written notice of any proposed change in Borrower's
corporate name which notice shall set forth the new name.
6.3. Borrower's Records and principal executive office
are maintained at the address referred to herein. Borrower
shall not change such location without FINOVA's prior written
consent which shall not be unreasonably withheld and prior to
making any such change, Borrower agrees to execute any
additional financing statements or other documents or notices
which FINOVA may require.
6.4. Borrower shall maintain its shipping forms, invoices
and other related documents in a form satisfactory to FINOVA
and shall maintain its books, records and accounts in
accordance with generally accepted accounting principles consistently
applied. Borrower agrees to furnish FINOVA monthly with
accounts receivable agings, inventory reports (if requested by
FINOVA), and interim financial statements (including balance
sheet, statement of income and surplus account, and cash flow statement)
hereafter collectively referred to as "Interim Financial
Statements"), and to furnish FINOVA, at any time or from time to time
with such other information regarding Borrower's business
affairs and financial condition as FINOVA may reasonably request, including,
without limitation, cash flow and other projections,
earnings forecasts, schedules, agings and reports. Borrower hereby
irrevocably authorizes and directs all accountants, auditors and
any other third parties to deliver to FINOVA, at Borrower's expense,
copies of Borrower's financial statements, papers related thereto, and
other accounting records of any kind or nature in their possession and
to disclose to FINOVA any information they may have regarding Borrower's
business affairs and financial condition. Borrower shall furnish
FINOVA with audited financial statements within one hundred twenty (120)
days of the end of its fiscal year end certified by independent
public accountants selected by Borrower and as to whom FINOVA
has no objection. All financial statements and information
shall fairly present Borrower's financial condition and the results
of Borrower's operations for the periods in which the
financial statements are furnished. FINOVA consents to
Borrower's employment of BDO Seidman as its accountants or any
other acceptable accountant.
<PAGE> 80
6.5. Each Account represents a valid and legally
enforceable indebtedness based upon a bona fide sale and
delivery of goods or rendition of services usually dealt in
by Borrower in the ordinary course of its business which
has been finally accepted by the Account Debtor. Each
Account is and will be for a liquidated amount maturing
as stated in the invoice rendered to the Account Debtor who
is unconditionally liable to make payment at maturity of the
amount stated in each invoice, document or instrument
evidencing the Account in accordance with the terms thereof,
and at the time of its creation without offset, defense,
deduction, counterclaim, discount or condition. Every
assigned Account, and any evidence of indebtedness with
respect thereto shall be paid in full at maturity. If any
Account is not paid in full at maturity, the amount of such
unpaid Account (whether in whole or in part) may be charged
against and deducted from any advance then or thereafter made
by FINOVA to Borrower or, in the event Borrower then has no
borrowing availability, Borrower shall pay FINOVA, upon
demand, the full amount remaining unpaid thereon. Such
payment or deduction shall not constitute a reassignment,
and FINOVA may retain the Account as collateral for all
Obligations of Borrower to FINOVA until the same have been
fully satisfied.
6.6. All statements made and all unpaid balances appearing
in the invoices, documents and instruments evidencing
each Account are true and correct and are in all respects
what they purport to be and to the best of Borrower's
knowledge all signatures and endorsements that appear thereon
are genuine and all signatories and endorsers have full
capacity to contract. To the best of Borrower's knowledge,
each Account Debtor is solvent and financially able to pay in
full each Account when it matures. None of the transactions
underlying or giving rise to any Account shall violate any
state or federal laws or regulations, and all documents
relating to the Accounts shall be legally sufficient under
such laws or regulations and shall be legally enforceable in
accordance with their terms and all recording, filing and
other requirements of giving public notice under any
applicable law have been and shall be duly complied with.
6.7. Borrower is solvent and will so remain. Borrower's
federal, state and local taxes of every kind and
nature, including, but not limited to employment taxes, are
current, and there are no pending tax audits or examinations
with respect to Borrower's federal, state or local tax
returns.
6.8 Borrower shall duly pay and discharge all taxes,
assessments, contributions and governmental charges upon
or against it or its properties or assets prior to the date on
which penalties attach thereto. Borrower shall be liable for
all taxes and penalties imposed upon any transaction under
this Agreement or any supplement or amendment hereto or
giving rise to the Accounts or any other Collateral or
which FINOVA may be required to withhold or pay for any
reason. Borrower agrees to indemnify and hold FINOVA
harmless with respect thereto, and to repay to FINOVA on
demand the amount thereof, and until paid by Borrower such
amounts shall be added to and included in Borrower's
Obligations.
<PAGE> 81
6.9. There is no investigation by any state, federal or
local agency pending or to the best of Borrower's
knowledge threatened against Borrower and there is no
action, suit, proceeding or claim pending or to the
best of Borrower's knowledge threatened against Borrower or
Borrower's assets or goodwill or affecting any transactions
contemplated by this Agreement, or any supplement or amendment hereto,
or any agreements, instruments or documents delivered in
connection herewith or therewith before any court,
arbitrator, or governmental or administrative body or agency which if
adversely determined with respect to Borrower would result in
any material adverse change in Borrower's business, properties, assets,
goodwill or condition, financial or otherwise.
6.10. The execution, delivery and performance of this
Agreement, any supplement or amendment hereto, or any
agreements, instruments and documents executed and delivered
in connection herewith, are within Borrower's corporate
powers, have been duly authorized, are not in contravention
of law or the terms of Borrower's charter, by-laws or other
incorporation papers, or of any indenture, agreement or undertaking
to which Borrower is a party or by which Borrower is bound.
6.11. Borrower shall keep and maintain, at its sole cost
and expense, satisfactory and complete Records including
records of all Accounts, all payments received and
credits granted thereon, and all other dealings therewith.
Upon the sale of goods or the rendering of services, Borrower shall
make appropriate entries in its books and records disclosing
such assignments of Accounts to FINOVA, and shall execute and
deliver all papers and instruments, and do all things
necessary to effectuate this Agreement and facilitate the collection of
the Accounts. FINOVA is hereby vested with all of Borrower's
rights, securities and guarantees with respect to each Account,
including the right of stoppage in transit. Notwithstanding
the failure of Borrower to execute and deliver such
written assignment as aforesaid, each Account created by Borrower
shall be deemed assigned to FINOVA and shall become its property.
6.12. If any Account Debtor of Borrower shall reject or
return any of the goods which created an assigned
Account, Borrower shall promptly notify FINOVA. Borrower
shall use its best effort to re-sell the same and shall
remain liable for any difference between the original
invoice price and the net proceeds of re-sale.
Notwithstanding the foregoing, FINOVA may require Borrower to
pay to it the original invoice price of such rejected or
returned goods. In case any such goods shall be re sold, the
Account thereby created shall be FINOVA's property and shall
be deemed assigned hereunder.
6.13. All monies, Accounts and other property of
Borrower which may come into FINOVA's possession in any
manner, and all sums to the credit of Borrower may be retained
by FINOVA and applied to the Obligations. Borrower's
obligations as set forth in the preceding sentence shall
remain applicable and enforceable as against Borrower should
FINOVA be merged into or with any other entity, including, but not
limited to, its parent corporation. Borrower absolutely and unconditionally
guarantees and grants a security interest to FINOVA in and to
all of its Collateral to secure any and all Obligations.
6.14. FINOVA's agents and examiners shall have the right
at any time during Borrower's regular business hours to
review, inspect, examine, check and make copies of
extracts from Borrower's Records.
6.15. Borrower shall, at Borrower's expense, duly
execute and deliver, or shall cause to be duly executed
and delivered, such further agreements, instruments and
documents, including, without limitation, additional security
agreements, mortgages, deeds of trust, deeds to secure debt,
collateral assignments, UCC financing statements or
amendments and continuations thereof, landlord's or mortgagee's waivers of
liens and consents to the exercise by FINOVA of all of its
rights and remedies hereunder, under any supplement or
amendment hereto, or applicable law with respect to the Collateral. In
addition, Borrower shall do or cause to be done such further
acts as may be necessary or proper, in FINOVA's opinion, to
evidence, perfect, maintain and enforce its security
interest and the priority thereof in and to the
Collateral and to otherwise effect the provisions and
purposes of this Agreement or any supplement or amendment hereto.
Where permitted by law, Borrower hereby authorizes FINOVA to execute
and file one or more UCC financing statements covering the Collateral
signed only by FINOVA.
<PAGE> 82
6.16. Borrower shall, at Borrower's expense,
maintain insurance covering the Collateral in such amounts and
with such insurance companies as may be acceptable to FINOVA
in its sole and absolute discretion. Borrower shall have
FINOVA named as mortgagee, loss payee and additional insured on all
such insurance policies. In the event Borrower shall fail to
maintain insurance acceptable to FINOVA, FINOVA without notice,
may obtain such insurance in the name of the Borrower and
charge Borrower's account with the costs and expenses of
such insurance. All expenses incurred by FINOVA with regard to such
insurance policies shall be deemed part of the Obligations. Borrower
represents that FINOVA shall be named as loss payee on
the insurance quotation set forth in Schedule 6.16 attached
hereto and made a part hereof and FINOVA consents to such
insurance for the purposes hereof.
6.17. Borrower hereby grants to FINOVA a license to
use all of its trademarks and copyright applications, trade
names and trademarks (collectively, the "Trademarks") in
connection with the sale of its Collateral or any of it,
including but not limited to Borrower's inventory. Borrower
represents, warrants and covenants to FINOVA that Borrower
will not sell, lease, assign, encumber, pledge or
hypothecate its Trademarks or grant exclusive licenses with
respect thereto without FINOVA's prior consent.
Section 7. ADDITIONAL POWERS
7.1. FINOVA shall have the right at any time in its sole
and absolute discretion: (a) to notify Account Debtors
that Borrower's Accounts have been assigned to and are payable
to FINOVA; and (b) to collect any and all Accounts directly in
its own name and charge all of its collection costs and
expenses including, but not limited to, its legal
expenses to the Borrower's account as part of the
Obligations.
7.2. Borrower hereby appoints FINOVA or FINOVA's designee
as Borrower's attorney-in-fact, at Borrower's own cost and
expense, to exercise at any time all or any of the following
powers which, being coupled with an interest, shall be
irrevocable until all Obligations have been paid in full:
(a) upon FINOVA alleging an Event of Default, to redirect, receive,
open and dispose of all mail addressed to Borrower and to notify postal
authorities to change the address for delivery thereof to such address as
FINOVA may designate; (b) to execute and file in
Borrower's name financing statements and amendments under
the UCC; (c) to receive, take, endorse, assign, deliver, accept
and deposit, in FINOVA's or Borrower's name, any and all checks, notes,
drafts, acceptances, money orders, remittances or other
evidences of payment of money or Collateral which may come into
FINOVA's possession; (d) to sign Borrower's name on any
drafts against Account Debtors, assignments and verifications
of Accounts; (e) upon FINOVA alleging an Event of Default, to
transmit to Account Debtors notice of FINOVA's interest
therein and to request from such Account Debtors at any time, in
FINOVA's or Borrower's name or that of FINOVA's designee, information
concerning the Accounts and the amounts owing thereon; (f) upon FINOVA
alleging an Event of Default to notify Account Debtors to make
payment directly to FINOVA; (g) upon FINOVA alleging an Event
of Default, to take or bring, in FINOVA's or Borrower's name,
and in FINOVA's sole and absolute discretion all steps,
actions, suits or proceedings deemed necessary or desirable
by FINOVA to effect collection of the Collateral; and (h) to
do all other acts and things necessary to carry out this
Agreement. Borrower hereby releases FINOVA and FINOVA's
officers, employees and designees, from all liability (other
than acts of gross negligence or wanton misconduct)
arising from any act or acts under this Agreement or
in furtherance thereof, whether by omission or commission,
and whether based upon any error of judgment or mistake of
law or fact.
<PAGE> 83
Section 8. EVENTS OF DEFAULT
8.1. All Obligations shall be, at FINOVA's
option, immediately due and payable without notice or demand
and the provision of this Agreement (or any supplement or
amendment hereto) as to future loans and advances to or for the
benefit of Borrower shall, at FINOVA's option, terminate
forthwith upon the occurrence of any one or more of the
following events of default (the "Events of Default"): (a)
if Borrower shall fail to pay FINOVA when due any amounts
owing to FINOVA under any Obligation, or shall breach any
of the terms, covenants, conditions or provisions of this
Agreement, any supplement or amendment hereto or any other
agreement between Borrower and FINOVA; (b) if any entity
liable on the Obligations shall terminate or breach any of the
terms, covenants, conditions or provisions of any guaranty,
endorsement or other agreement of such person with, or in
favor of FINOVA; (c) if any representation, warranty, or
statement of fact made to FINOVA at any time by Borrower or
on Borrower's behalf is false or misleading; (d) if Borrower,
or any guarantor, endorser or other person liable on the
Obligations shall become insolvent, fail to meet its or their
debts as they mature, call a meeting of creditors or have a
creditors' committee appointed, make an assignment for the
benefit of creditors, commence or have commenced by or against
Borrower or any guarantor, endorser or other person liable
on the Obligations any action not dismissed within 30 days or
proceeding for relief under any bankruptcy law, or if a
judgment in excess of $25,000 is entered against Borrower or
any guarantor, endorser or other person liable on the
Obligations (which has not been bonded or otherwise secured)
or if Borrower or any guarantor, endorser or other person
liable on the Obligations suspends or discontinues doing
business for any reason, or if a receiver, custodian or
trustee of any kind is appointed with regard to any property
of Borrower or guarantor, endorser or other person liable on
the Obligations; (e) if there shall be a material adverse
change in Borrower's business, assets or condition (financial
or otherwise) from the date hereof; or (f) if at any time
FINOVA shall, in FINOVA's sole and absolute discretion,
consider the Obligations insecure or any part of the
Collateral unsafe, insecure or insufficient and Borrower
(or other person or entity acting on Borrower's behalf) shall
not on FINOVA's demand furnish other Collateral or make
payment on account, satisfactory to FINOVA.
8.2. In the event FINOVA seeks to take possession of all
or any portion of the Collateral by judicial process
(including, but not limited to, FINOVA obtaining an order
of attachment, a temporary restraining order, a
preliminary or permanent injunction or otherwise) against
the Borrower or with regard to the Collateral, Borrower
irrevocably waives: (a) the posting of any bond, surety or
security with respect thereto which might otherwise be
required, (b) any demand for possession prior to the
commencement of any suit or action to recover the Collateral,
and (c) any requirement that FINOVA retain possession and not
dispose of any Collateral until after trial or final judgment.
<PAGE> 84
8.3. Borrower agrees that the giving of five (5)
days' notice by FINOVA, sent by ordinary mail, postage prepaid, to
Borrower's address set forth herein, designating the place
and time of any public sale or of the time after which any
private sale or other intended disposition of the Collateral
is to be made, shall be deemed to be reasonable notice thereof and
Borrower waives any other notice with respect thereto.
8.4. The net cash proceeds resulting from the exercise
of any of FINOVA's rights or remedies under this Agreement,
under the UCC or otherwise, shall be applied by FINOVA to the
payment of the Obligations in such order as FINOVA may
elect, and Borrower shall remain liable to FINOVA for
any deficiency. Without limiting the generality of the
foregoing, if FINOVA enters into any credit transaction, directly
or indirectly, in connection with the disposition of any Collateral,
FINOVA shall have the option, at any time, in FINOVA's sole and
absolute discretion, to reduce the Obligations by the
amount of such credit transaction or any part thereof or to defer the
reduction thereof until actual receipt by FINOVA of cash in
connection therewith.
8.5. The enumeration of the foregoing rights and remedies
is not intended to be exclusive, and such rights and remedies
are in addition to and not by way of limitation of any other
rights or remedies FINOVA may have under the UCC or other
applicable law. FINOVA shall have the right, in FINOVA's sole
and absolute discretion, to determine which rights and remedies, and in
which order any of the same, are to be exercised, and to determine
which Collateral is to be proceeded against and in which
order, and the exercise of any right or remedy shall not preclude
the exercise of any others, all of which shall be cumulative.
8.6. No act, failure or delay by FINOVA shall constitute
a waiver of any of its rights or remedies. No single or
partial waiver by FINOVA of any provision of this Agreement or
any supplement or amendment hereto, or breach or default
thereunder, or of any right or remedy which FINOVA may have
shall operate as a waiver of any other provision, breach,
default, right or remedy or of the same provision, breach,
default, right or remedy on a future occasion.
8.7. Borrower waives presentment, notice of
dishonor, protest and notice of protest of all instruments
included in or evidencing any of the Obligations or the
Collateral and any and all notices or demands whatsoever
(except as expressly provided herein). FINOVA may, at all
times, proceed directly against Borrower or any guarantor or
endorser to enforce payment of the Obligations and shall not
be required to take any action of any kind to preserve,
collect or protect FINOVA's or Borrower's rights in the
Collateral.
Section 9. MISCELLANEOUS
9.1. This Agreement shall become effective upon
acceptance by FINOVA and shall continue in full force and
effect for a term ending two (2) years from the date hereof (the
"Renewal Date") and from year to year thereafter, unless and until
terminated pursuant to the terms hereof. In addition to
FINOVA's right to declare this Agreement immediately
terminated at any time upon the occurrence of an Event of
Default, either party may terminate this Agreement on the
Renewal Date or on the anniversary of the Renewal Date in any
year by giving the other party at least sixty (60) days prior
written notice by registered or certified mail, return
receipt requested. No termination of this Agreement,
however, shall relieve or discharge Borrower of
Borrower's duties, obligations and covenants hereunder until
all Obligations have been paid in full and FINOVA's continuing
security interest in and to the Collateral shall remain in effect until all
such Obligations have been fully discharged.
<PAGE> 85
9.2. If FINOVA terminates this Agreement upon the
occurrence of an Event of Default or if Borrower terminates
this Agreement as to future transactions other than on the
Renewal Date or any anniversary of the Renewal Date, in view
of the impracticality and extreme difficulty in ascertaining
FINOVA's actual damages and by mutual agreement of the
parties as to a reasonable calculation of FINOVA's lost
profits as a result thereof, Borrower hereby agrees that it
shall immediately pay to FINOVA by wire
transfer, certified check or bank cashier's check,
Borrower's entire Obligations owing thereunder, plus
liquidated damages of an amount equal to : (a) five percent
(5%) of the Line of Credit if this Agreement is terminated
prior to October 30, 1997; and (b) four percent (4%) of the
Line of Credit if this Agreement is terminated during the
period from October 31, 1997 to October 30, 1998. Prior to
its actual receipt of payment as aforesaid, FINOVA shall be
free to exercise, without limitation, all of its rights
under this Agreement or under any other agreement it may
then have with Borrower. Borrower's default of any
provision under this Agreement may be considered and
construed at the sole option of FINOVA, as a termination of
this Agreement by Borrower. The liquidated damages provided
for in this paragraph 9.2 shall be deemed included in the
Obligations and shall be presumed to be the amount of damages
sustained by FINOVA due to the Borrower's early
termination and Borrower agrees that such damages are
reasonable and appropriate under the circumstances currently
existing.
9.3. This Agreement, and any supplement or amendment
hereto and any agreements, instruments or documents delivered or to
be delivered in connection herewith, constitute the entire
agreement and understanding between FINOVA and Borrower
concerning the subject matter hereof and thereof and as
such supersedes all other prior or contemporaneous
agreements, understandings, negotiations and discussions,
representations, warranties, commitments, offers, contracts,
whether written or oral, all of which are merged into this
Agreement. FINOVA and Borrower agree that neither party
shall be bound by anything not expressed herein, nor shall
this Agreement be modified orally.
9.4. All amendments to and modifications of this
Agreement shall be in writing and signed by Borrower and FINOVA,
which requirement shall not be modified by oral agreement or by
course of conduct.
9.5. All notices, requests and demands to or upon
the respective parties hereto shall be deemed to have been duly
given or made: (a) by hand, immediately upon sending: (b) upon
posting if by Federal Express, Express Mail or any other
overnight delivery service; or (c) upon posting if by
certified mail, return receipt requested. All notices,
requests and demands are to be given or made to the
respective parties at the addresses set forth herein or at
such other addresses as either party may designate in writing
by notice in accordance with the provisions of this paragraph.
9.6. Borrower and FINOVA each hereby waive all rights to a
trial by jury in any action or proceeding of any kind arising
out of or relating to this Agreement, any supplement or
amendment hereto, the Obligations, the Collateral or any
such other transaction. Borrower hereby waives all of its
rights of setoff and rights to interpose any defenses and/or
counterclaims in the event of any litigation with respect to
any matter connected with this Agreement, any supplement or amendment
hereto, the Obligations, the Collateral or any other transaction between
the parties. Borrower hereby irrevocably consents and submits
to the jurisdiction and venue of the Supreme Court of the State of
New York or the United States District Court for the
Southern District of New York in connection with any action or
proceeding of any kind arising out of or relating to this
Agreement, any supplement hereto, the Obligations, the
Collateral or any such other transaction. Borrower agrees
that any action brought by it against FINOVA whether with
regard to this Agreement or otherwise shall be subject to the
exclusive jurisdiction and venue of the Supreme Court of the
State of New York, County of New York or the United States
District Court for the Southern District of New York.
<PAGE> 86
9.7. In any litigation brought by FINOVA, Borrower waives
personal service of any summons, complaint or other process
and agrees that service thereof may be made by
certified or registered mail directed to Borrower at Borrower's address
set forth below and service so made shall be complete two (2)
days after the same shall have been posted. Within twenty
(20) days after such mailing, Borrower shall appear and
answer such summons, complaint or other process, failing which
Borrower shall be deemed in default and judgment may be
entered by FINOVA against Borrower for the amount of the
claim and for any other relief requested therein.
9.8. This Agreement and all transactions hereunder are
deemed to be consummated in the State of New York and shall
be governed by and interpreted in accordance with the
substantive and procedural laws of the State of New York. If
any part or provision of this Agreement shall be determined
to be invalid or in contravention of any applicable law or
regulation of the controlling jurisdiction, such part or
provision shall be severed without affecting the validity of
any other part or provision of this Agreement.
9.9 Borrower hereby consents to and authorizes FINOVA to
issue appropriate press releases and to cause a tombstone to
be published announcing the consummation of this transaction
and the aggregate amount thereof.
9.10. This Agreement shall inure to and be binding upon
the parties hereto and their successors and assigns.
ATTEST: GALAXY FOODS COMPANY
/s/ Angelo S. Morini
Angelo S. Morini, President
ACCEPTED:
FINOVA CAPITAL CORPORATION
/s/ Cheryl Nichols
Cheryl Nichols, Assistant
Vice President
Exhibit 10.32
Second Amendment to the Lease Agreement
between ANCO Company and the Company
dated as April 1, 1994
<PAGE> 88
SECOND AMENDMENT TO LEASE AGREEMENT
This second amendment to lease agreement (the "Amendment")
made and entered into as of the 13th day of November, 1996 by and
between ANCO Company, a Florida general partnership (hereinafter
referred to as the "Landlord"), and Galaxy Foods Company (f/k/a
Galaxy Cheese Company), a Delaware corporation registered to do
business in Florida (hereinafter referred to as the "Tenant").
WITNESSETH:
Whereas, the Landlord and the tenant entered into that
certain Lease Agreement (the "Lease") dated as of the 13th day of
November, 1991, pursuant to which the Tenant leased from the
Landlord certain premises (the "Premises") generally described as
that certain building located at 2441 Viscount Row, Orlando
Central Park, Orlando, Orange County, Florida, and certain
surrounding land located at the same address; and
Whereas, the Landlord and Tenant entered in to that certain
First Amendment to the Lease Agreement dated as of April 1, 1994
amending certain provisions of the Lease; and
Whereas, the Landlord and Tenant acknowledge that they have
successfully concluded negotiations for an additional five (5)
year extension period and they wish to confirm this renewal term
and further amend the Lease for the purposes set forth in this
Amendment.
Now, therefore, the Landlord and the Tenant do hereby agree
as follows:
1. Definitions. Unless expressly defined in this Amendment,
capitalized terms contained herein shall have the meanings set
forth in the Lease. The term "Lease" from and after the date of
this Amendment shall refer to the Lease, as amended, and modified
by this Amendment.
2. Renewal Term. The parties hereto agree as follows:
(a) The Term shall be renewed for a five (5) year term
commencing on November 13,1996 and ending at midnight
(Orlando, Florida time) on November 12, 2001; and
(b) Effective November 13, 1996 and throughout said
renewal term, the Base Rent shall be Two Hundred Forty Three
Thousand Eight Hundred Ninety Six and 89/100 ($243,896.89) and the
Expanded Parking Lot Rent shall be Forty Three Thousand One
Hundred Twenty Five and No/100 ($43,125.00); and
(c) The Base Rent and expanded Parking Lot Rent each
respectively, shall be paid in twelve (12) equal monthly
installments (rounded) of Twenty Thousand Three Hundred
Twenty Four and 75/100 ($20,324.75) and Three Thousand Five
Hundred Ninety Three and 75/100 ($3,593.75) in the manner set
forth in paragraph 3(a) of the Lease, with the rental
installments due for the months of November, 1996 and November,
2001 prorated accordingly.
<PAGE> 89
3. Amendments to the Lease. The Lease is hereby amended as
follows:
(a) Paragraph 3(d) of the Lease is amended by deleting
subsections (ii), (iii) and (iv) thereof, and by
substituting in lieu thereof the following (the balance of said
paragraph 3(d) shall remain without change):
"(ii) Terms of Months 121 through 180: Increased to
amounts to be mutually agreed by Landlord and Tenant
before the expiration of the second Term (months 61 through 120)
which amounts shall not be less that the Base Rent and the
Expanded Parking Lot Rent for the immediately preceding Term;
(iii) Terms of Months 181 through 240: increased to
amounts to be mutually agreed by Landlord and Tenant
before the expiration of the third Term (months 121 through 180)
which amounts shall not be less than the Base Rent and the
Expanded Parking Lot Rent for the immediately preceding
Term; and
(iv) Term of Months 241 through 300: increased to
amounts to be mutually agreed by Landlord and Tenant
before the expiration of the fourth Term (months 181 through 240)
which amounts shall not be less than the Base Rent and the
Expanded Parking Lot Rent for the immediately preceding Term."
(b) Paragraph 46 of the Lease is amended by deleting the
provisions of said Paragraph 46 as the same now exists, and
by substituting in lieu thereof the following:
"46. Lien Waiver & Additional Security. Landlord hereby
waives its lien rights for rent upon the personal property of
Tenant and any rights to pursue distress proceedings with respect to
Tenant's personal property for the payment of rent under Chapter 83,
Florida Statutes, or any successor statute; provided, however, Landlord does
not waive any other remedies avoidable under Chapter 83, including
any rights to pursue eviction proceedings under Chapter 83.
The foregoing waivers shall be effective as to, and my
be relied upon by, any third party providing financing to
Tenant and Landlord agrees that it shall, from time to time,
execute in favor of any such third party such documents
or agreements as may be reasonably required by such third
party to evidence, affirm, or confirm the above waivers.
Notwithstanding the foregoing, (a) that certain equipment identified
on the list attached hereto as Exhibit "A" is the property of the
Landlord and Tenant shall obtain a written acknowledgment (in form
satisfactory to the Landlord) from Tenant's secured creditor(s) to such
effect and (b) any and all fixtures now or hereafter affixed to the
Premises (including, but not limited to the Buildout Improvements)
shall be or become the property of Landlord.
(c) Paragraph 50 of the Lease is hereby added to the Lease
as follows:
"50. Standby Letter of Credit. Upon the execution of
this Amendment by both parties, the Tenant shall cause
to be issued and maintained during the Term (through
and including November 12, 2001), and Irrevocable Standby letter
of Credit (the "L/C") in favor of Landlord in the
principal amount of $47,837.00 (Tenant shall, within
fifteen (15) days of date of any draw under the L/C, cause the
principal amount of the L/C to be so adjusted to this amount
in the event of any draw and Tenant's failure to cause
the L/C to be adjusted shall be considered an event of default
under the Lease). The Landlord shall be entitled to
receive a draw under the L/C (I) in the event that any
amount due under the Lease has remain unpaid for five (5)
consecutive business days after notice thereof has been
given by Landlord to the Tenant and (ii) upon delivery to
the issuing bank of a certificate stating the amount in default
and the date of the notice thereof to the Landlord. The
L/C shall be issued by the Chase Manhattan Bank (or other major U.S.
Money center bank reasonably acceptable to Landlord) (the "Bank"),
and shall otherwise be in form and substance reasonably
satisfactory to Landlord. In the event that a notice of non
renewal of the L/C is issued by the Bank prior to November
12, 2001, then the Landlord shall be entitled to draw
the remaining balance of the L/C and, upon receipt of such non
renewal notice, Tenant shall be in default under the Lease
unless within fifteen (15) days thereof Tenant either
provides to Landlord a replacement L/C bearing the same terms as
the initial L/C as set forth hereinabove or delivers to
Landlord a cash deposit in the full face amount of the
initial L/C as an additional security deposit"
<PAGE> 90
4. Ratification of Lease. Except as modified pursuant to
the terms of this Amendment, the Landlord and the Tenant do hereby
confirm and ratify the Lease and Tenant agrees that it has no
claims against the Landlord or offsets or counterclaims under the
Lease.
5. Counterpart Signatures. This instrument may be signed in
any number of counterpart copies, all of which taken together
shall be deemed one and the same original instrument.
In Witness whereof, the parties have executed this Amendment
as of the date set forth above.
ANCO Company, a Florida
general partnership
/s/ Marie Akesson
Marie Akesson, a general partner
GALAXY FOODS COMPANY
(f/k/a GALAXY CHEESE COMPANY), a
Delaware corporation
/s/ Angelo S. Morini
Angelo S. Morini, President
