____________________________________________________________________________
1998
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, 1998
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 executive offices) (Zip Code)
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. $ 20,552,782
The aggregate market value of the voting stock held by non-affiliates as of
June 15, 1998 was $29,485,500 based on the closing sales price of $ 0.81 per
share on such date.
The number of shares outstanding of Galaxy Foods Company's Common Stock as of
June 15, 1998 was 61,717,051.
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 formal-
ly changed its name to "Galaxy Foods Company." The Company is principally
engaged in developing, manufacturing and marketing of a variety of healthy
cheese and dairy related products, as well as other cheese alternatives. The
healthy cheese and dairy related products, sold under the Company's Veggie
Slices, Veggy Singles, 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 one-third fewer calories and more calcium than conven-
tional cheese. These healthy cheese and dairy related products have the flavor,
appearance and texture of conventional cheeses and products that use conven-
tional 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 soy-based, 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
the Company's state-of-the-art 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 super-
market chains and health food stores; food service operations, such as
restaurant chains, cafeterias, hospitals and schools; and industrial food manu-
facturers 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 names "Veggie Slices" and
"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.
The formagg line includes more than 30 varieties of cheese products in many
flavors and forms including hard, semi-hard, and 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.
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.
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.
Blended Cheeses -- cheese products, primarily sold to industrial customers,
which consist of either substitute or imitation cheeses combined with already
prepared conventional cheeses.
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.
Conventional Cheese Shreds -- already manufactured cheese products purchased
from suppliers for shredding at the Company's facility.
<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, pepper jack, cheddar, American,
parmesan and Swiss.
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, 1998 and 1997, the Company's capital
expenditures were approximately $1,705,000 and $3,355,000, respectively. This
included capitalized interest of $234,772 during fiscal 1998. The substantial
capital expenditures for fiscal 1998 and 1997 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, Veggie,
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
foodservice and industrial markets, the Company sells directly to its customers.
In the food service market, the Company utilizes both its in-house 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, and it believes that all of these ingredients are readily
available from numerous suppliers. Due to more cost effective 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, 1998 and 1997, the Company purchased
$4,757,744 and $3,614,421, respectively, of casein, the principal raw material
used to manufacture the Company's products. The following table sets forth the
name of each supplier along with the percentage they supplied this ingredient
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 1998 1997
Casein Besnier-Scerma U.S.A. 48% 70%
Avonmore Food Products Ltd. 22% 18%
Rely France International 17% --
Irish Dairy Board 8% 9%
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, 1998 and 1997, expenditures for product development were
$129,068 and $204,126, 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 ten-year
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 40 states and 20 international
countries. International sales are less than 10% of total sales. The only
principal customer of the Company is Foodservice Purchasing Co-op, a food
distributor with principal offices located in Louisville, Kentucky.
For the fiscal years ended March 31, 1998 and 1997, the Company had net sales
of $20,552,782 and $17,171,496, 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, 1998 or 1997:
Percentage of Sales
Fiscal Year Ended March 31,
Customer Name 1998 1997
Foodservice Purchasing Co-op 10.1% 34.0%
H.E. Butt Grocery 4.3% 6.9%
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 service 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, 1998
and 1997:
Percentage of Sales
Fiscal Years Ended March 31,
Category 1998 1997
Retail sales 79% 52%
Food service sales 20% 45%
Industrial sales 1% 3%
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 1998.
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 $15,000 and $12,000 during the fiscal years ended March 31,
1998 and 1997 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 low or no 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 manufacturer 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, 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 15, 1998, the Company had a total of 141 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
approximately 350 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, 1998 and 1997, the Company's plant
is producing approximately 8.5 and 7.3 million pounds of cheese products,
respectively, on an annualized basis, which is approximately 2.4% and 4.7%,
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, 1998.
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> 10
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, 1998 and 1997:
Period High Sales Price Low Sales Price
1998 Fiscal Year, quarter ended:
June 30, 1997 $0 15/16 $0 23/32
September 30, 1997 $1 13/32 $0 3/4
December 31, 1997 $1 3/8 $0 23/32
March 31, 1998 $1 9/32 $0 25/32
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
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 15, 1998, there were approximately 683 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.
<PAGE> 11
RESULTS OF OPERATIONS
Sales for the fiscal year ended March 31, 1998 increased by 19.7% over the same
period in 1997. This increase in sales is attributable to the introduction of
new and improved products to the retail market, as well as the increased
consumer awareness of the Company's branded products. In addition, there was a
large increase in marketing activities promoting these product lines. The
Company believes the increasing consumer awareness of the benefits of plant-
based foods has positively impacted sales.
Sales for the fourth quarter fiscal 1998 were $5,068,934 compared to $4,306,934
for the same period in fiscal 1997. This 17.6% 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 1999 due to
the addition of new capital equipment and expanded product lines.
Cost of goods sold as a percentage of sales was 74.1% for the fiscal year ended
March 31, 1998 compared with 90.6% for the same period in fiscal 1997. The
improvement in gross margin is primarily a result of the Company reaching the
breakeven level to cover fixed costs of the manufacturing facility. In
addition, the Company elected to eliminate selected lower margin foodservice
business and focus its selling efforts on retail product lines for fiscal 1998.
Selling expenses increased 12.2% for the fiscal year ended March 31, 1998
compared with the same period in fiscal 1997. This increase in selling expenses
over the prior fiscal year is attributed to the increase in sales. Brokerage
costs are a large portion of this expense and these costs increase in direct
proportion to sales. In addition, the Company initiated an advertising program
in the fourth quarter of fiscal 1998 to promote the Veggie Slices product line
and capitalize on increasing consumer awareness of the benefits of plant-based
foods.
Delivery expenses increased 37.6% for the fiscal year ended March 31, 1998
compared with the same period in fiscal 1997. The increase in delivery costs
is a direct result of the increase in sales shipments to customers. Delivery
expenses have increased more than sales due to rising freight costs.
Research and development expenses decreased 36.7% for the fiscal year ended
March 31, 1998 compared with the same period in fiscal 1997. This decrease in
expense is largely the result of employee relocation allowances paid during
fiscal 1997 and the capitalization of certain payroll expenses to the new
production line.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities -- The Company decreased cash used in operating activities
of $12,368 from $3,569,601 for the same period in fiscal 1997. The decline in
cash used for operations is primarily the result of an increase in sales and a
higher gross margin percentage as a result of the Company reaching the breakeven
point. In addition, general and administrative costs did not increase with the
increase in sales.
Investing -- The Company spent $1,410,839 in investing activities for the fiscal
year ended March 31, 1998 compared with $3,663,205 for the same period in fiscal
1997. During fiscal 1998, the Company invested in production equipment to
accommodate the demand for slice products in the foodservice industry. The
Company anticipates incurring approximately $500,000 in additional costs during
fiscal 1999 to complete the construction in progress project. During fiscal
1997, the Company purchased an additional individually wrapped slice machine.
In addition, marketable securities purchased in fiscal 1997 were sold in fiscal
1998.
<PAGE> 12
Financing -- The Company realized a net inflow of $1,426,791 from financing
activities for the fiscal year ended March 31, 1998 compared with $7,121,355
during the same period in fiscal 1997. The large cash flows from financing
activities resulted from borrowings on the line of credit in both years and a
Regulation D offering of the Company's stock in fiscal 1997.
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.
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. The availability under this line of credit arrangement is calculated
on a borrowing base of eligible inventory and accounts receivable. This line of
credit was increased to $3 million during February 1998. At March 31, 1998, the
balance outstanding under this line of credit agreement was $1,840,757.
On June 27, 1997, the Company secured a $1.5 million term note payable with
Finova Capital Corporation to finance the acquisition of certain production
equipment. The agreement calls for interest at the prime rate plus two percent.
As of March 31, 1998, the balance outstanding under this agreement was
$1,426,847.
During June 1998, the Company signed an amendment to the above contracts which
expanded the line of credit availability to $3.5 million and the term note
payable to $3 million. The amendment also reduced the interest on the line of
credit and term note to prime plus one percent.
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 -- In June 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" (FAS 130), and No. 131, "Disclosure
about Segments of an Enterprise and Related Information" (FAS 131). FAS 130
establishes standards for reporting and displaying comprehensive income, its
components and accumulated balances. FAS 131 establishes standards for the way
that public companies report information about operating segments in annual
financial statements and requires reporting of selected information about
operating segments in interim financial statements issued to the public. Both
FAS 130 and FAS 131 are effective for periods beginning after December 15, 1997.
The Company has not determined the impact that the adoption of these new
accounting standards will have on its future financial statements and
disclosures.
<PAGE> 13
Year 2000
The Company has conducted a comprehensive review of its computer systems to
identify systems that could be affected by the "Year 2000" issue and has
developed an implementation plan to resolve the issue. The Year 2000 problem is
the result of computer programs being written using two digits rather than four
to define the applicable year. Any of the Company's programs that have time-
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000. This could result in a major system failure or miscalculations
if not appropriately addressed. The Company presently believes that, with
modifications to existing software and by converting to new software, the Year
2000 problem will not pose significant operational problems for the Company's
computer systems as so modified and converted.
<PAGE> 14
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, 1998 and the related statements of operations, stockholders' equity
and cash flows for each of the two years in the period ended March 31, 1998.
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 evaluating 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, 1998 and the results of its operations and its cash flows for each of
the two years in the period ended March 31, 1998 in conformity with generally
accepted accounting principles.
/s/BDO Seidman, LLP
Orlando, Florida
May 29, 1998, except for Note 10
which is as of June 3, 1998
<PAGE> 15
GALAXY FOODS COMPANY
Balance Sheet
ASSETS
MARCH 31,
1998
CURRENT ASSETS:
Cash and cash equivalents $ 20,069
Trade receivables, net of allowance of $104,794 2,646,667
Inventories 2,458,743
Prepaid expenses 464,701
Total current assets 5,590,180
PROPERTY & EQUIPMENT, NET 10,668,155
OTHER ASSETS 190,717
TOTAL $ 16,449,052
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Book overdrafts $ 836,762
Line of credit 1,840,757
Accounts payable - trade 1,088,658
Accrued liabilities 453,662
Current portion of term note payable 150,000
Current portion of obligations under capital leases 21,517
Total current liabilities 4,391,356
TERM NOTE PAYABLE, less current portion 1,276,847
OBLIGATIONS UNDER CAPITAL LEASES, less current portion 11,152
Total liabilities 5,679,355
COMMITMENTS AND CONTINGENCIES --
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, shares authorized
85,000,000, issued and outstanding 61,706,551 617,065
Additional paid-in capital 45,930,645
Accumulated deficit (23,005,813)
23,541,897
Less: Notes receivable arising from the exercise
of stock options and sale of common stock 12,772,200
Total stockholders' equity 10,769,697
TOTAL $ 16,449,052
See accompanying notes to financial statements.
<PAGE> 16
GALAXY FOODS COMPANY
Statements of Operations
Year ended March 31, 1998 1997
NET SALES $ 20,552,782 $17,171,496
COST OF GOODS SOLD 15,239,405 15,565,825
Gross margin 5,313,377 1,605,671
OPERATING EXPENSES:
Selling 2,407,992 2,145,530
Delivery 916,448 665,822
General and administrative 1,362,022 1,374,130
Research and development 129,068 204,126
Total operating expenses 4,815,530 4,389,608
OPERATING INCOME (LOSS) 497,847 (2,783,937)
OTHER INCOME (EXPENSE):
Interest expense (136,774) (46,984)
Interest income 10,593 107,679
Other income (expense) 5,857 (13,418)
Total (120,324) 47,277
NET INCOME (LOSS) 377,523 (2,736,660)
PREFERRED STOCK DIVIDENDS -- (1,594,406)
NET INCOME (LOSS) APPLICABLE
TO COMMON STOCK $ 377,523 $ (4,331,066)
BASIC NET EARNINGS (LOSS)
PER COMMON SHARE $ .01 $ (.12)
DILUTED NET EARNINGS PER
COMMON SHARE $ .01
See accompanying notes to financial statements.
<PAGE> 17
GALAXY FOODS COMPANY
CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
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,
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
Exercise of warrants 215,000 2,150 -- -- 120,163 -- -- 122,313
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
preferred stock into
common stock 1,965,824 19,658 (1,443) (14) (19,644) -- -- --
Issuance and revaluation
of warrants -- -- -- -- (211,400) -- -- (211,400)
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
Exercise of options 114,100 1,141 -- -- 56,143 -- -- 57,284
Conversion of
preferred stock
into common stock 4,352,776 43,528 (2,557) (26) (43,502) -- -- --
Issuance of warrants -- -- -- -- 51,320 -- -- 51,320
Exercise of warrants 65,000 650 -- -- 44,688 -- -- 45,338
Refund of stock
issuance costs -- -- -- -- 8,750 -- -- 8,750
Issuance of common stock
under Employee stock
purchase plan 46,434 464 -- -- 32,784 -- -- 33,248
Net income -- -- -- -- -- 377,523 -- 377,523
Balance
March 31, 1998 61,706,551 $ 617,065 -- $ -- $ 45,930,645 $ (23,005,813) $ (12,772,200) $ 10,769,697
</TABLE>
See accompanying notes to financial statements.
<PAGE> 18
GALAXY FOODS COMPANY
Statements of Cash Flows
Year ended March 31, 1998 1997
CASH FLOWS FROM/(USED IN)
OPERATING ACTIVITIES:
Net Income (Loss) $ 377,523 $(2,736,660)
ADJUSTMENTS TO RECONCILE NET
INCOME (LOSS) TO NET CASH FROM
(USED IN) OPERATING ACTIVITIES:
Depreciation expense 649,334 435,608
Loss (gain) on disposal of assets (1,329) 23,236
Provision for losses on trade
receivables 14,794 94,531
Issuance of common stock warrants
in payment of consulting and
director fees 78,494 31,307
Increase in:
Trade receivables (1,030,192) (1,008,362)
Inventories (656,499) (613,570)
Prepaid expenses (118,618) (56,765)
Increase in:
Accounts payable 639,431 165,700
Accrued liabilities 34,694 95,374
NET CASH USED IN OPERATING ACTIVITIES (12,368) (3,569,601)
CASH FLOWS FROM/(USED IN) INVESTING
ACTIVITIES:
Proceeds from sale of property and
equipment -- 22,500
Purchase of property and equipment (1,704,633) (3,354,796)
Increase in other assets (6,206) (32,238)
Sale of marketable securities 300,000 --
Purchase of marketable securities -- (298,671)
NET CASH USED IN INVESTING
ACTIVITIES (1,410,839) (3,663,205)
CASH FLOWS FROM/(USED IN) FINANCING
ACTIVITIES:
Principal payments on note payable
and long-term debt -- (63,451)
Book overdrafts 836,762 --
Borrowings on line of credit 19,518,445 7,943,417
Repayments on line of credit (19,048,641) (6,572,464)
Principal payments on capital lease
obligations (24,395) (61,755)
Proceeds from issuance of common
stock, net of offering costs 33,248 1,947,071
Proceeds from issuance of convertible
preferred stock, net of offering costs -- 3,733,941
Refund of stock issuance costs 8,750 --
Proceeds from exercise of common stock
options 57,284 48,283
Proceeds from exercise of common stock
warrants 45,338 122,313
Collection of note receivable for common
stock -- 24,000
NET CASH FROM FINANCING ACTIVITIES 1,426,791 7,121,355
<PAGE> 19
GALAXY FOODS COMPANY
Statements of Cash Flows
(continued)
Year ended March 31, 1998 1997
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 3,584 (111,451)
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR 16,485 127,936
CASH AND CASH EQUIVALENTS, END
OF YEAR $ 20,069 $ 16,485
See accompanying notes to financial statements.
<PAGE> 20
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.
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 straight-line method over their useful lives.
Revenue Recognition
Sales are recognized upon shipment of products to customers.
Book Overdrafts
Under the Company's cash management system, checks issued but not presented to
banks frequently result in overdraft balances for accounting purposes and are
classified as "book overdrafts" in the balance sheet. In accordance with the
Company's agreement with a financial institution, all cash receipts are applied
against a revolving line of credit, and a daily draw is requested to cover
checks clearing the bank.
Earnings per Share
The Company implemented Statement of Financial Accounting Standards No. 128
("SFAS 128"), "Earnings Per Share" during the fiscal year ended March 31, 1998.
SFAS 128 requires companies with complex capital structures that have publicly
held common stock or common stock equivalents to present both basic and diluted
earnings per share ("EPS") on the face of the statement of operations. Basic
EPS is calculated as income available to common stockholders divided by the
weighted average number of common shares outstanding during the period. Diluted
EPS is calculated using the "if converted" method for convertible securities and
the treasury stock method for options and warrants as previously prescribed by
Accounting Principles Board Opinion No. 15, "Earnings Per Share." Accordingly,
the effect of shares issuable under the Company's stock plans are included in
the calculation of diluted EPS. The implementation of SFAS 128, which also
required the restatement of previously reported EPS, did not have a material
impact on the Company's reported EPS for any periods presented.
<PAGE> 21
GALAXY FOODS COMPANY
NOTES TO FINANCIAL STATEMENTS
(Continued)
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, 1998.
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, book overdrafts, 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. The fair value of the Company's long term debt is estimated based upon
the quoted market prices for the same or similar issues or on the current rates
offered to the Company for debt of the same remaining maturities.
Impairment of Long-Lived Assets
The Company evaluates impairment of long-lived assets in accordance with
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
(SFAS 121). SFAS 121 requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount.
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.
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.
<PAGE> 22
GALAXY FOODS COMPANY
NOTES TO FINANCIAL STATEMENTS
(Continued)
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (FAS
130), and No. 131, "Disclosure about Segments of an Enterprise and Related
Information" (FAS 131). FAS 130 establishes standards for reporting and
displaying comprehensive income, its components and accumulated balances. FAS
131 establishes standards for the way that public companies report information
about operating segments in annual financial statements and requires reporting
of selected information about operating segments in interim financial statements
issued to the public. Both FAS 130 and FAS 131 are effective for periods
beginning after December 15, 1997. The Company has not determined the impact
that the adoption of these new accounting standards will have on its future
financial statements and disclosures.
(2) Inventories
Inventories are summarized as follows:
Raw materials $ 1,277,783
Finished goods 1,180,960
Total $ 2,458,743
(3) Property and Equipment
Property and equipment are summarized as follows:
Useful Lives
Leasehold improvements 10-25 years $ 2,838,475
Machinery and equipment 5-15 years 5,880,797
Delivery equipment and autos 3- 5 years 15,652
Equipment under capital leases 7-15 years 314,522
Construction in progress 3,838,878
12,888,324
Less accumulated depreciation 2,220,169
Property and equipment, net $ 10,668,155
Accumulated depreciation on equipment under capital leases was $173,180 as
of March 31, 1998. Interest in the amount of $234,772 was capitalized to
construction in progress during the year ended March 31, 1998.
The Company estimates that approximately $500,000 of additional costs will
be incurred to complete the construction in progress project.
<PAGE> 23
GALAXY FOODS COMPANY
NOTES TO FINANCIAL STATEMENTS
(Continued)
(4) 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
2003. The following is a schedule by years as of March 31, 1998, 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
1999 $ 20,294 $ 401,946
2000 8,247 385,231
2001 5,772 363,051
2002 1,924 210,258
2003 -- 5,198
Total net minimum lease payments 36,237 $ 1,365,684
Less amount representing interest 3,568
Present value of the net minimum
lease payments 32,669
Less current portion 21,517
Long-term obligations under capital
leases $ 11,152
Rental expense was approximately $480,000 and $393,000 for the fiscal
years ended March 31, 1998 and 1997, respectively.
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. During the fiscal year
ended March 31, 1998, the Company granted common stock options to purchase
1,000,000 shares at an exercise price of $0.75 per share under the employment
agreement.
<PAGE> 24
GALAXY FOODS COMPANY
NOTES TO FINANCIAL STATEMENTS
(Continued)
(5) 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, 1998, 46,434 shares were purchased under this
plan at prices ranging from $0.68 to $0.74 per share. During the fiscal year
ended March 31, 1997, 91,879 shares were purchased at prices ranging from $0.69
to $1.06 per share. The weighted average fair value of the shares issued were
$0.71 and $0.45 per share for the fiscal years ended March 31, 1998 and 1997,
respectively.
Common Stock Options and Warrants Issued for Consulting Services
During the fiscal years ended March 31, 1998 and 1997, consulting expense of
$78,494 and $31,307, 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.
Stock Warrants
At March 31, 1998, 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
April 1998 7,500 .81
August 1998 510,000 .90
September 1998 1,000 .97
October 1998 50,000 1.47
December 1999 50,000 .53
March 2000 1,097,291 .74 - .99
April 2000 50,000 .78
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
December 2002 75,000 .72
August 2005 50,000 .64
December 2005 2,000,000 .53
January 2006 235,000 .69
7,738,961
<PAGE> 25
GALAXY FOODS COMPANY
NOTES TO FINANCIAL STATEMENTS
(Continued)
Stock Options
At March 31, 1998, 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 option-pricing
model with the following assumptions used for grants in 1998: no dividend
yield, volatility from 116% to 129%, risk-free interest rate of 6.3% and
expected lives ranging from two to five years. Assumptions used in the fiscal
1997 option-pricing model are as follows: 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. Had compensation cost been determined
based on the fair value of options at their grant dates in accordance with FAS
123, the Company would have had a net loss of $317,887 for fiscal 1998 and a net
loss applicable to common stock of $4,456,413 for fiscal 1997. The effect on
earnings per share is less than $.01 per share for fiscal 1998 & 1997.
The following table summarizes information about plan stock option activity for
the years ended March 31, 1998 and 1997:
Weighted-Average Weighted-Average
Exercise Price Fair Value of
Shares Per Share Options Granted
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 --
Granted 208,000 .78 .56
Exercised (114,100) .50 --
Canceled (129,500) 1.59 --
Balance, March 31, 1998 490,167 $ 1.28 $ --
At March 31, 1998 and 1997, a total of 370,916 and 435,761 of the outstanding
plan options were exercisable with a weighted-average exercise price of $1.35
and $1.48 per share, respectively.
<PAGE> 26
GALAXY FOODS COMPANY
NOTES TO FINANCIAL STATEMENTS
(Continued)
The following table summarizes information about non-plan stock option activity
for the years ended March 31, 1998 and 1997:
Weighted-Average Weighted-Average
Exercise Price Fair Value of
Shares Per Share Options Granted
Balance, March 31, 1996 112,501 $ 1.93 --
Granted 250,000 1.21 --
Balance, March 31, 1997 362,501 1.50 --
Granted 1,000,000 .75 .63
Canceled (45,000) 1.82 --
Balance, March 31, 1998 1,317,501 $ .98 $ --
At March 31, 1998 and 1997, a total of 1,162,501 and 152,501 of the outstanding
non-plan options were exercisable with a weighted-average exercise price of
$0.94 and $1.51 per share, respectively.
The following table summarizes information about stock options outstanding and
exercisable at March 31, 1998:
Options Outstanding Weighted-
Range of Number Weighted-Averag Weighted-Average Number Average
Exer. Prices Outstanding Remain. Life Exer. Price Exer. Exer. Price
$0.50 - 0.75 1,228,834 9.0 years $ 0.72 1,225,500 $ 0.72
0.78 - 1.00 174,000 8.4 years 0.91 84,000 0.93
1.19 - 1.47 343,833 8.2 years 1.26 162,916 1.28
2.00 - 2.75 55,501 4.0 years 2.05 55,501 2.05
4.38 - 5.38 5,500 1.6 years 5.30 5,500 5.30
1,807,668 1,533,417
Shares Reserved
At March 31, 1998, the Company has reserved common stock for future issuance
under all of the above arrangements totaling 10,920,183 shares.
(6) 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, 1998,
all 4,000 shares of Convertible Preferred Stock were converted into 6,318,600
shares of Common Stock at an average conversion rate of $0.63 per share.
<PAGE> 27
GALAXY FOODS COMPANY
NOTES TO FINANCIAL STATEMENTS
(Continued)
(7) Income Taxes
The components of the net deferred assets consist of the following:
Year Ended March 31, 1998 1997
Deferred tax assets:
Net operating loss carryforwards $7,504,000 $7,536,000
Investment and general business
tax credits 115,000 106,000
Nondeductible expenses from stock
warrants 112,000 189,000
Nondeductible compensation from
stock options 39,000 39,000
Bad debts 39,000 52,000
Other 49,000 16,000
Gross deferred income tax assets 7,858,000 7,938,000
Valuation allowance (7,412,000) (7,664,000)
Total deferred income tax assets 446,000 274,000
Deferred income tax liabilities:
Depreciation (446,000) (274,000)
Net deferred income tax assets -- $ --
The change in the valuation allowance for deferred tax assets was a decrease of
$252,000 during fiscal 1998.
The following summary reconciles differences from taxes at the federal statutory
rate with the effective rate:
Year ended March 31, 1998 1997
Federal income taxes at statutory rates 34.0% (34.0%)
Losses without tax benefits -- 34.0%
Utilization of net operating loss
carryforward (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 $19,900,000 are available at March 31,
1998 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
$7,504,000 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> 28
GALAXY FOODS COMPANY
NOTES TO FINANCIAL STATEMENTS
(Continued)
(8) 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.
(9) Economic Dependence
For the fiscal years ended March 31, 1998 and 1997, the Company had one customer
which comprised sales approximating $2,074,901and $5,831,000 or 10% and 34% of
net sales, respectively.
For the fiscal year ended March 31, 1998, the Company had one major supplier
which comprised more than 10% of total purchases. Purchases from this supplier
totaled approximately $2,202,000 or 16.6% of total purchases. For the fiscal
year ended March 31, 1997, the Company had three major suppliers which each
comprised more than 10% of purchases. Purchases from these suppliers totaled
approximately $7,420,000 or 56.4% of total purchases.
(10) Line of Credit and Term Note Payable
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 availability under this line of credit was increased to $3 million in
February 1997. 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, 1998). As of
March 31, 1998, the Company has an outstanding obligation of $1,840,757 under
this line of credit agreement.
On June 27, 1997, the Company secured a $1.5 million term note payable to
finance the acquisition of certain production equipment. The agreement calls
for interest at the prime rate plus two percent (10.5% at March 31, 1998). As
of March 31, 1998, the balance outstanding under this agreement was $1,426,847.
On June 3, 1998, the Company signed an amendment to the above contracts which
expanded the line of credit availability to $3.5 million and the term note
payable to $3 million. The amendment also reduced the interest on the line of
credit and term note to prime plus one percent.
<PAGE> 29
GALAXY FOODS COMPANY
NOTES TO FINANCIAL STATEMENTS
(Continued)
(11) 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 $12,004 and $11,946 for the fiscal years ended March 31, 1998 and
1997, respectively.
(12) 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, 1998 1997
Noncash financing and investing activities:
Purchase of equipment through capital lease
obligations and term note payable $1,426,847 $ 26,105
Consulting and directors fees paid through
issuance of common stock warrants 51,320 211,400
Cash paid for:
Interest 350,407 53,963
(13) Earnings Per Share
The following is a reconciliation of basic net earnings per share to diluted net
earnings per share for the year ended March 31, 1998:
Year ended March 31, 1998
Basic net earnings per share $ .01
Average shares outstanding - basic 60,467,573
Potential shares exercisable under stock
option plans 1,570,515
Potential shares exercisable under stock
warrant agreements 7,719,295
Potential shares assumed converted from
preferred stock 1,137,528
Less: Shares assumed repurchased under
treasury stock method (6,916,683)
Average shares outstanding - diluted 63,978,228
Diluted earnings per share .01
Basic loss per common share for the year ended March 31, 1997 was $(.12) based
upon 35,039,360 weighted average common shares outstanding. Diluted earnings
per common share for the year ended March 31, 1997 was not presented since the
effects of potential dilution would be antidilutive.
(14) Subsequent Event
During April 1998, the Company signed a capital lease agreement to purchase
approximately $500,000 in production equipment.
<PAGE> 30
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not Applicable.
<PAGE> 31
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 15, 1998, as well as their respective ages and positions
with the Company:
Name Age Positions
Angelo S. Morini (1)(2) 55 Chairman of the Board of Directors,
President, and Chief Executive Officer
Cynthia L. Hunter 28 Chief Financial Officer and
Corporate Secretary
Earl G. Tyree (1) 77 Director
Douglas A. Walsh (1)(2) 53 Director
Marshall K. Luther(2) 45 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.
Cynthia L. Hunter, CPA was elected Chief Financial Officer and Corporate
Secretary as of June 18, 1998. Prior to joining the Company, Ms. Hunter worked
as a senior auditor for Coopers and Lybrand LLP in Orlando, Florida from 1993 to
1997. From 1992 to 1993, she worked for United Technologies as a cost
accountant. During her years in public accounting, Ms. Hunter was responsible
for coordinating and overseeing audits on a variety of clients including
companies in the manufacturing, high-tech and financial institution industries.
Ms. Hunter earned a BS in Accounting from Florida State University in 1991 and a
Masters in Accounting Information Systems from Florida State University in 1992.
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.
<PAGE> 32
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 $100,000 for the fiscal years
ended March 31, 1998, 1997, and 1996.
SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Securities All
Annual Rest. Under- Other
Name and Compen- Stock lying LTIP Compen-
Principal Fiscal Salary Bonus sation Award Options Payouts sation
Position Year ($) ($) ($) ($) SARs(#) ($) ($)
Angelo S. Morini(1) 1998 250,000 -- 19,132(2) -- -- -- --
Chairman of the 1997 250,000 -- 16,262(3) -- -- -- --
Board of Directors, 1996 227,917 -- 14,704(4) --18,000,000(5)-- --
President, and Chief
Executive Officer
(1) For the fiscal years ended March 31, 1996, Mr. Morini was also paid $8,208
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."
<PAGE> 33
(2) For the fiscal year ended March 31, 1998, the Company paid $11,500 in lease
payments for Mr. Morini's automobile and $7,632 in club dues for Mr. Morini.
(3) 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.
(4) 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.
(5) 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.
Each non-employee director who served on the Board of Directors during the last
fiscal year received a fee of $500 plus expenses for his services.
The following table sets forth information concerning each exercise of stock
options and freestanding stock appreciation rights during the fiscal year ended
March 31, 1998, by each of the executive officers named in the Summary of
Compensation Table above, and the fiscal year-end value of unexercised options
and SARs.
The following table sets forth information concerning each exercise of stock
options and freestanding stock appreciation rights during the fiscal year ended
March 31, 1998 by each of the executive officers named in the Summary of
Compensation Table above, and the fiscal year-end value of unexercised options
and SARs.
<PAGE> 34
OPTION/SAR EXERCISES
For the Fiscal Year Ended March 31, 1998
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End
Option/SAR Values
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Options/SARs Options/SARs
at FY-End (#) at FY-End ($)
Shares Value
Acquired Realized
Name on Exercise(#) ($) Exer. Unexer. Exer. Unexer.
Angelo S. Morini -- -- 1,141,500 0 284,329(1) 0
(1) The value of the unexercised shares at March 31, 1998 is based on the
difference between the closing sales price of the Company's Common Stock of
$0.96875 on March 31, 1998 and an exercise prices from $0.50 to $0.75.
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.
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
<PAGE> 35
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.
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.
<PAGE> 36
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.
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, 1997, NQSOs covering 27,500 shares of
Common Stock were granted under the 1987 Plan. No NQSO's were granted during
the fiscal year ended March 31, 1998.
<PAGE> 37
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.
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.
<PAGE> 38
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) 18,000
Douglas Walsh (3) 18,667
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) 17,000
(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.
<PAGE> 39
(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.
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."
<PAGE> 40
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.
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.
<PAGE> 41
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, 1998, 46,434 shares of Common Stock were
purchased under the 1991 Purchase Plan by employees of the Company at purchase
prices ranging from $0.68 to $0.74.
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.
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 years ended March 31, 1998 and 1997, NQSOs covering 111,000
and 57,000 shares, respectively 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.
<PAGE> 42
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 $.5625 per share, which 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 15, 1998 (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.
Amount and
Name and Address Nature of Percent of
of Beneficial Owner eneficial Ownership(1) Class (2)
Angelo S. Morini
2441 Viscount Row
Orlando, Florida 32809 25,170,199(3) 40.0%
Cede & Co.
Box #20
Bowling Green Station
New York, New York 35,037,357(4) 55.7%
(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 62,936,218 shares. Does not assume the exercise
of any other options or warrants.
<PAGE> 43
(3) Includes options to acquire 1,141,500 shares of the Company's Common Stock.
All of Mr. Morini's options currently are exercisable at $.50 to $.75 per share.
The original exercise prices of 141,500 of the options ranged from $2.50 per
share to $3.575 per share. The exercise prices of these 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, as to 91,500 shares on October 1, 2001 and
as to 1,000,000 on July 1, 2007. 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.
SHARE OWNERSHIP OF OFFICERS AND DIRECTORS
The following table sets forth, as of June 15, 1998, 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 25,170,199(3) 40.0%
Earl G. Tyree
240 North Line Drive
Apopka, Florida 32703 22,000(4) *
Douglas A. Walsh
607 Tamiami Trail
Ruskin, Florida 33570 22,667(5) *
Marshall K. Luther
Galaxy Foods Company
2441 Viscount Row
Orlando, Florida 32809 68,333(6) *
Cynthia L. Hunter
Galaxy Foods Company
2441 Viscount Row
Orlando, Florida 32809 32,000(7) *
All executive officers and directors
as a group 25,315,199 40.2%
* Less than 1%.
(1) The inclusion herein of any shares deemed beneficially owned does not
constitute an admission of beneficial ownership of these shares.
<PAGE> 44
(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 62,936,218 shares. Does not assume the exercise of
any other options or warrants.
(3) Includes options to acquire 1,141,500 shares of the Company's Common Stock.
All of Mr. Morini's options currently are exercisable at $.50 to $.75 per share.
The original exercise prices of 141,500 of the options ranged from $2.50 per
share to $3.575 per share. The exercise prices of these 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, as to 91,500 shares on October 1, 2001,
and 1,000,000 as to July 1, 2007. 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) 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. On October 1, 1997, he was granted an option to acquire 2,000 shares at
an exercise price of $1.1875 per share which expire on October 1, 2007. The
closing bid price of the Company's Common Stock as quoted on the NASDAQ system
on September 30, 1997 was $1.1875 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. On October 1, 1997, he was granted an
option to acquire 2,000 shares at an exercise price of $1.1875 per share which
expire on October 1, 2007. The closing bid price of the Company's Common Stock
as quoted on the NASDAQ system on September 30, 1997 was $1.1875 per share. All
of Dr. Walsh's options currently are exercisable.
<PAGE> 45
(6) 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 former 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. On October 1, 1997, he was
granted an option to acquire 2,000 shares at an exercise price of $1.1875 per
share which expire on October 1, 2007. The closing bid price of the Company's
Common Stock as quoted on the NASDAQ system on September 30, 1997 was $1.1875
per share. All of Mr. Luther's options currently are exercisable.
(7) Includes options to acquire 30,000 shares of the Company's Common Stock
which were granted to Ms. Hunter in fiscal 1998 pursuant to the Company's 1996
Stock Option Plan. Such options are exercisable at $0.78125 to $1.00 per share
and expire as to 15,000 on June 18, 2007 and as to 15,000 on October 23, 1997.
Of these options, 10,000 are currently exercisable.
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."
<PAGE> 46
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 20,000 of the 50,000 shares under option.
<PAGE> 47
Item 13. Exhibits and Reports on Form 8-K.
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 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 SB-2, 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> 48
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> 49
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> 50
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 as Exhibit 10.28 on Form 10-KSB for fiscal
year ended March 31, 1997, and incorporated herein by reference.)
*10.30 1996 Stock Plan (Filed as Exhibit 10.28 on Form 10-KSB for fiscal
year ended March 31, 1997, and incorporated herein by reference.)
*10.31 Line of Credit Agreement with Finova Financial Services (Filed
as Exhibit 10.28 on Form 10-KSB for fiscal year ended March 31, 1997,
and incorporated herein by reference.)
*10.32 Second Amendment to the Lease Agreement between ANCO Company and the
Company dated as April 1, 1994 (Filed as Exhibit 10.28 on Form 10-KSB
for fiscal year ended March 31, 1997, and incorporated herein by
reference.)
10.33 Amendment to the Security Agreement with Finova Financial Services
(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> 51
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, 1998 /s/ Angelo S. Morini
Angelo S. Morini
Chairman and President
(Principal Executive Officer)
Date: June 27, 1998 /s/ Cynthia L. Hunter
Cynthia L. Hunter, CPA
Chief Financial Officer
(Principal Financial and
Accounting Officer)
<PAGE> 52
"EXHIBITS"
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 SB-2, 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> 53
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> 54
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 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.)
* Previously filed
<PAGE>55
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 as Exhibit 10.28 on Form 10-KSB for fiscal
year ended March 31, 1997, and incorporated herein by reference.)
*10.30 1996 Stock Plan (Filed as Exhibit 10.28 on Form 10-KSB
for fiscal year ended March 31, 1997, and incorporated herein by reference.)
*10.31 Line of Credit Agreement with Finova Financial Services
(Filed as Exhibit 10.28 on Form 10-KSB for fiscal year ended March 31, 1997, and
incorporated herein by reference.)
*10.32 Second Amendment to the Lease Agreement between ANCO
Company and the Company dated as April 1, 1994 (Filed as Exhibit 10.28 on Form
10-KSB for fiscal year ended March 31, 1997, and incorporated herein by
reference.)
<PAGE> 56
10.33 Amendment to the Security Agreement with Finova
Financial Services (Filed herewith.)
27 Financial Data Schedule (Filed herewith.)
* Previously filed
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 20,069
<SECURITIES> 0
<RECEIVABLES> 2,646,667
<ALLOWANCES> 104,794
<INVENTORY> 2,458,743
<CURRENT-ASSETS> 464,701
<PP&E> 10,668,155
<DEPRECIATION> 2,220,169
<TOTAL-ASSETS> 16,449,052
<CURRENT-LIABILITIES> 4,391,356
<BONDS> 0
<COMMON> 617,065
0
0
<OTHER-SE> 10,152,632
<TOTAL-LIABILITY-AND-EQUITY> 16,449,052
<SALES> 20,552,782
<TOTAL-REVENUES> 20,552,782
<CGS> 15,239,405
<TOTAL-COSTS> 4,815,530
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 136,774
<INCOME-PRETAX> 377,523
<INCOME-TAX> 0
<INCOME-CONTINUING> 377,523
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 377,523
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
June 3, 1998
AMENDMENT TO THE SECURITY AGREEMENT
Galaxy Foods Company
2441 Viscount Row
Orlando, FL 32809
RE: FINOVA Capital Corporation ("FINOVA") with Galaxy Foods
Company ("Borrower")
Gentlemen:
Reference is made to that certain Security Agreement (Accounts
Receivable, Inventory and Equipment) dated November 1, 1996 by
and between FINOVA and Borrower, and reference is also made to
that certain Amendment to the Security Agreement dated June 27,
1997 and to that certain Amendment to the Security Agreement
dated February 9, 1998, each by and between FINOVA and Borrower
(collectively, the "Security Agreement"), Borrower has requested
and FINOVA has agreed to amend the terms of the Security
Agreement as follows:
1. The line of credit defined in paragraph 1.10 of the
Security Agreement is hereby increased from $4,500,000 to
$6,500,000;
2. Section 1 of the Security Agreement is hereby amended
by inserting the following defined term as paragraph 1.16:
"Operating Cash Flow/Actual" means; for any period, Borrower's
net income or loss (excluding the effect of any extraordinary
gains or losses), determined in accordance with GAAP, plus or
minus each of the following items, to the extent deducted from
or added to the revenues of Borrower in the calculation of net
income or loss: (i) depreciation; (ii) amortization and other
non-cash charges; (iii) interest expense paid or accrued; (iv)
total federal and state income tax expense determined as the
accrued liability of Borrower in respect of such period,
regardless of what portion of such expense has actually been
paid by Borrower during such period; and (v) Management Fees
paid, to the extent permitted hereunder, and after deduction for
each of (a) federal and state income taxes, to the extent
actually paid during such period; (b) any non-cash income; and
(c) all actual Capital Expenditures made during such period and
not financed.
3. Paragraph 2.1 (a) shall be amended by increasing the
maximum sublimit for advances made against Eligible Receivables
from $3,000,000 to $3,500,000, and Paragraph 2.1 (b) of the
Security Agreement shall be amended by increasing the maximum
sublimit for advances made against Eligible Inventory from
$750,000 to $1,500,000 (collectively the "Revolving Line of
Credit");
4. Paragraph 2.1 c of the Security Agreement shall be
modified by increasing the Prior Purchase Money M&E Advance
(now, the "Term Loan") from $1,500,000 to $3,000,000 and
advancing such additional amounts so as to increase the existing
Term Loan to the amount of $3,000,000 which shall now be repaid
in arrears to FINOVA in Thirty Nine (39) successive monthly
installments of principal on the first day of each month,
beginning July1 1, 1998, and continuing through and including
September 1, 2001; and the final installment shall now be
payable on October 1, 2001 in the amount of the principal
balance together with accrued interest thereon from time to time
remaining unpaid. Interest shall be computed on the basis of a
360 day year for the actual number of days elapsed, and shall be
at the rate of one (1) point above the Prime Rate (as defined in
the Security Agreement) computed on the basis of a 360-day year;
provided, however, upon the occurrence and during the
continuance of an event of default (as defined in the Security
Agreement), interest shall accrued on the outstanding principal
balance at the Default Rate, as set forth in the Security
Agreement. Notwithstanding the foregoing, FINOVA shall have the
right at any time to demand and receive the immediate repayment
of the entire balance of the Term Loan in the event (a) of any
default or termination under this Agreement; (b) of any
reduction in the value of the Borrower's machinery and
equipment; or (c) that FINOVA, in its sole and absolute
discretion, shall consider the Term Loan insecure;
5. Paragraph 3.1 of the Security Agreement shall be
amended by deleting the first sentence of such paragraph and
replacing it with the following sentence:
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 charges to Borrower's account) which shall be payable
by Borrower to FINOVA (I) on the Borrower's monthly average
Revolving Line of Credit at the per annum Prime Rate (as defined
in the Security Agreement) plus one half of one (.5) point (the
"Revolver Interest Rate"), and (ii) on nay Term Loan advanced to
Borrower pursuant to Paragraph 2.1 of the Security Agreement, at
the per annum Prime Rate plus One (1) point (the "Term Interest
Rate") (c) Letter of Credit Fees ("LC Fee") in the amount of two
(2%) percent of the face amount of any such Letters of Credit
issued for the account of Borrower, the aggregate face amount of
which shall not exceed $500,000, which amount shall be fully
reserved by FINOVA frm Borrower's Revolving Line of Credit
Availability;
6. Paragraph 3.5 of the Security Agreement is hereby
amended reducing the monthly Service Fee payable by Borrower to
FINOVA from $1,000 to $750;
7. Section 3 of the Security Agreement is hereby amended
with the addition of paragraph 3.7 as follows:
"3.7 Borrower shall unconditionally pay to FINOVA a fee equal
to one-half of one percent (.5%) per annum of the difference
between the Revolving Line of Credit and the average daily
outstanding balance of the Revolving Line of Credit loans during
such quarter, or portion thereof ("Unused Line Fee"), which fee
shall be calculated and payable quarterly, in arrears, and shall
be due and payable, commencing on the first Business Day of the
Borrower's first fiscal quarter following the Closing Date and
continuing on the first Business Day of each fiscal quarter
thereafter.
8. Paragraph 9.1 of the Security Agreement shall be
amended extending the term of the Security Agreement to October
31, 2001;
9. Paragraph 9.2 of the Security Agreement shall be
amended by deleting subparagraphs (a) and (b) and replacing them
with the following language:
"(a) one (1%) percent of the Line of Credit if the Security
Agreement is terminated prior to October 30, 1999; and (b) one-
half of one (.5%) percent of the Line of Credit if the Security
Agreement is terminated during the period from October 31, 1999
to October 30, 2000;
10. Section 6 of the Security Agreement shall be amended
to include a new paragraph 6.18 the following language:
6.18 Total Debt Service Coverage Ratio. As of the last day of
each calendar quarter ended March 31, June 30, September 30 or
December 31, Borrower's Operating Cash Flow/Actual for the
consecutive 12-month period ending as of such last day must be
at least 1.25 times the amount necessary to meet Borrower's
Total Contractual Debt Service for such 12-month period;
provided however, that, with respect to the calculations set
forth herein for the period from the Closing Date through
December 31, 1998, Borrower's Operating Cash Flow/Actual and
Total Contractual Debt Service shall be determined beginning as
of March 31, 1998 (the "Start Date") and be measured as follows:
(I) the time period from the Start Date through June 30, 1998
shall be for such amounts for such period, (ii) the time period
from the Start Date through September 30, 1998 shall be for such
amounts for such period, and (iii) the time period from the
Start Date through December 31, 1998, shall be for such amounts
for such period; and, provided further, that all such
determinations shall be made on a consolidated basis.
In consideration of this Amendment to the Security Agreement,
Borrower shall pay FINOVA a fee in the amount of $45,000 which
amount shall be deemed earned and payable to FINOVA immediately
upon the execution and delivery of this Agreement
Except as provided for herein, all other terms and conditions
contained in the Security Agreement shall remain in full force
and effect and in all respects unchanged.
FINOVA CAPITAL CORPORATION
By: /s/ Frank Madonna
Frank Madonna, Assistant Vice
President
ACCEPTED AND AGREED TO
THIS 3RD DAY OF JUNE 1998
GALAXY FOODS COMPANY
By: /s/ Cynthia L. Hunter
Cynthia L. Hunter, Chief Financial Officer
Authorized Signatory
