FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________________________
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended June 30, 1998
_____________________________
Commission File Number 0-16251
GALAXY FOODS COMPANY
(Exact name of registrant as specified in its charter)
Delaware 25-1391475
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2441 Viscount Row
Orlando, Florida 32809
(Address of principal executive (Zip Code)
offices)
(407) 855-5500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 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
On August 10, 1998, there were 61,717,051 shares of Common
Stock $.01 par value per share, outstanding.
<PAGE> 2
GALAXY FOODS COMPANY
Index to Form 10-Q
For Quarter Ended June 30, 1998
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets 3
Condensed Statements of Operations 4
Condensed Statements of Cash Flows 5
Notes to Condensed Financial Statements 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 10-13
SIGNATURES 14
<PAGE> 3
<TABLE>
PART I. FINANCIAL INFORMATION
GALAXY FOODS COMPANY
CONDENSED BALANCE SHEETS
<CAPTION>
JUNE 30, MARCH 31,
1998 1998
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 139,568 $ 20,069
Trade receivables, net 3,048,893 2,646,667
Inventories 3,423,489 2,458,743
Prepaid expenses 737,508 464,701
Total current assets 7,349,458 5,590,180
PROPERTY & EQUIPMENT, NET 10,864,332 10,668,155
OTHER ASSETS 139,065 190,717
TOTAL 18,352,855 16,449,052
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Book overdrafts $ - $ 836,762
Line of credit 2,693,252 1,840,757
Accounts Payable- trade 2,114,061 1,088,658
Accrued liabilities 407,821 453,662
Current portion of term note payable 150,000 150,000
Current portion of obligations under
capital leases 21,517 21,517
Total current liabilities 5,386,651 4,391,356
TERM NOTE PAYABLE,
less current portion 2,039,347 1,276,847
OBLIGATIONS UNDER CAPITAL LEASES,
less current portion 8,176 11,152
Total liabilities 7,434,174 5,679,355
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock 617,095 617,065
Additional paid-in capital 45,932,115 45,930,645
Accumulated deficit (22,858,329) (23,005,813)
23,690,881 23,541,897
Less: Notes receivable arising from the
exercise of stock options and sale of
common stock 12,772,200 12,772,200
Total stockholders' equity 10,918,681 10,769,697
TOTAL 18,352,855 16,449,052
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE> 4
<TABLE>
GALAXY FOODS COMPANY
CONDENSED STATEMENTS OF OPERATIONS
<CAPTION>
THREE MONTHS ENDED JUNE 30,
1998 1997
(Unaudited) (Unaudited)
<S> <C> <C>
NET SALES $ 5,762,538 $ 5,883,454
COST OF GOODS SOLD 4,331,294 4,769,957
Gross margin 1,431,244 1,113,497
OPERATING EXPENSES:
Selling 577,861 413,197
Delivery 274,046 217,726
General and administrative 382,912 385,766
Research and development 40,518 43,759
Total operating expenses 1,275,337 1,060,448
INCOME FROM OPERATIONS 155,907 53,049
OTHER INCOME (EXPENSE):
Interest expense (42,465) (31,945)
Interest income - 2,308
Other income (expense) 34,042 (291)
Total (8,423) (29,928)
NET INCOME $ 147,484 $ 23,121
BASIC NET EARNINGS PER
COMMON SHARE $ - $ -
DILUTED NET EARNINGS PER COMMON
SHARE $ - $ -
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE> 5
<TABLE>
GALAXY FOODS COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
<CAPTION>
THREE MONTHS ENDED JUNE 30,
1998 1997
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM/(USED IN) OPERATING ACTIVITIES:
Net Income $ 147,484 $ 23,121
ADJUSTMENTS TO RECONCILE NET INCOME
TO NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES:
Depreciation expense 165,392 157,497
Gain on sale of assets - (1,329)
Bad debt expense 89,607 -
Consulting and director fees paid through
issuance of common stock warrants - 8,346
(Increase) decrease in:
Trade receivables (491,833) (740,990)
Inventories (964,746) (489,268)
Prepaid expenses (272,807) 83,106
Increase (decrease) in:
Accounts payable 1,025,403 1,265,143
Accrued liabilities (45,841) (11,265)
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (347,341) 294,361
CASH FLOWS FROM/(USED IN) INVESTING ACTIVITIES:
Purchase of property and equipment (361,569) (627,587)
Decrease in other assets 51,652 11,386
Sale of marketable securities - 300,000
NET CASH USED IN INVESTING
ACTIVITIES (309,917) (316,201)
CASH FLOWS FROM/(USED IN) FINANCING ACTIVITIES:
Net borrowings on line of credit 852,495 25,717
Decrease in bank overdrafts (836,762) -
Borrowings under term note payable 800,000 -
Prinicpal payments on term note payable (37,500) -
Principal payments on capital lease obligations (2,976) (9,728)
Proceeds from exercise of common stock options 1,500 -
Refund of stock issuance costs - 8,750
NET CASH FROM FINANCING
ACTIVITIES 776,757 24,739
NET INCREASE IN CASH AND
CASH EQUIVALENTS 119,499 2,899
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD 20,069 16,485
CASH AND CASH EQUIVALENTS, END
OF PERIOD $ 139,568 $ 19,384
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE> 6
GALAXY FOODS COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(1) Management Representation
In the opinion of Galaxy Foods Company (the "Company"), the
accompanying unaudited financial statements contain all
adjustments necessary to present fairly the Company's
financial position, results of operations and cash flows for
the periods presented. The results of operations for the
interim periods presented are not necessarily indicative of
the results to be expected for the full year.
The condensed financial statements should be read in
conjunction with the financial statements and the related
disclosures contained in the Company's Form 10-KSB dated
June 15, 1998, filed with the Securities and Exchange
Commission.
(2) Reclassifications
Certain items in the financial statements of prior periods
have been reclassified to conform to current period
presentation.
(3) Inventories
Inventories are summarized as follows:
JUNE 30, MARCH 31,
1998 1998
(unaudited)
Raw materials $ 1,832,132 $ 1,277,783
Finished goods 1,591,357 1,180,960
Total $ 3,423,489 $ 2,458,743
(4) Earnings Per Share
The following is a reconciliation of basic net earnings per
share to diluted net earnings per share for the three months
ended June 30, 1998 and 1997:
Three months ended June 30, 1998 1997
Basic net earnings per share $ .00 $ .00
Average shares outstanding - basic 61,709,056 57,864,665
Potential shares exercisable under stock
option plans 1,114,495 893,746
Potential shares exercisable under stock
warrant agreements 7,738,961 7,707,824
Potential shares assumed converted from
preferred stock -- 4,108,195
Less: Shares assumed repurchased under
treasury stock method (6,909,738) (8,874,171)
Average shares outstanding - diluted 63,652,774 61,700,259
Diluted earnings per share $ .00 $ .00
<PAGE> 7
GALAXY FOODS COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Continued)
(5) 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, money market funds
and certificates of deposits.
For the three months ended June 30, 1998 1997
Noncash financing and investing activities:
Consulting and directors fees paid through
issuance of common stock warrants 6,314 8,346
Cash paid for:
Interest - 31,945
<PAGE> 8
GALAXY FOODS COMPANY
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion and analysis should be read in
conjunction with the Condensed Financial Statements and Notes
thereto appearing elsewhere in this report.
The following discussion contains certain forward-looking
statements, within the meaning of the "safe-harbor" provisions of
the Private Securities Reform Act of 1995, the attainment of
which involves various risks and uncertainties. Forward-looking
statements may be identified by the use of forward-looking
terminology such as "may", "will", "expect", "believe",
"estimate", "anticipate", "continue", or similar terms,
variations of these terms or the negative of those terms. The
Company's actual results may differ materially from those
described in these forward-looking statements due to among other
factors, competition in the Company's product markets, dependence
on suppliers, the Company's manufacturing experience, and
production delays or inefficiencies.
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.
Results of Operations
Net Sales were $5,762,538 in the quarter ended June 30, 1998,
compared to net sales of $5,883,454 for the quarter ended June
30, 1997. The 2% decrease in sales is attributable to the
Company's decision to discontinue certain lower margin
foodservice business in July 1997 and to replace this business
with more profitable retail sales
Cost of Goods Sold were $4,331,294 representing 75% of net sales
for the quarter ended June 30, 1998, compared with $4,769,957 or
81% of net sales for the same period ended June 30, 1997. The
Company was able to improve gross margin by focusing their
selling efforts on higher margin retail business, including sales
of branded product.
Selling expenses were $577,861 for the quarter ended June 30,
1998, compared with $413,197 for the same period ended June 30,
1997. The 40% increase in expenses over the same period a year
ago is mainly attributed to an increase in advertising and
marketing efforts to promote the Company's branded products in
the retail market. In addition, the strategic abatement of
certain foodservice business and the subsequent replacement of
this business with retail accounts resulted in increased
brokerage costs.
Delivery expenses were $274,046 for the quarter ended June 30,
1998, compared with $217,726 for the same period ended June 30,
1997. The 26% increase in delivery costs is a result of the
increase in individual shipments to retail customers as well as a
general increase in shipping rates for the industry as a whole.
General and Administrative expenses were $382,912 for the quarter
ended June 30, 1998, compared with $385,766 for the same period
ended June 30, 1997. This marginal decrease corresponds with the
decline in sales between the three months ended June 30, 1997 and
June 30, 1998.
<PAGE> 9
Research and Development expenses were $40,518 for the quarter
ended June 30, 1998, compared with $43,759 for the quarter ended
June 30, 1997. This decrease in expenses is due to cost savings
measures in purchasing supplies for this department.
Other Income and Expenses netted to $8,423 in expense for the
quarter ended June 30, 1998 as compared to $29,928 in expense for
the quarter ended June 30, 1997. During the first quarter of
fiscal 1999, the Company recorded other income for a refund
received from one of the Company's service suppliers. Interest
expense increased due to additional draws on the Company's line
of credit and term note payable.
Liquidity and Capital Resources
Operating Activities -- Net cash used in operating activities was
$347,341 for the period ended June 30, 1998 compared to net cash
provided of $294,361 for the same period in 1997. This change in
operating activities is the result of a build up in the Company's
inventory balances to provide for increased sales during the
second quarter of fiscal 1999. In addition, the Company's
receivable balance has increased due to the addition of retail
accounts and the abatement of one large foodservice account.
Investing Activities -- Net cash used in investing activities
totaled $309,917 for the period ended June 30, 1998 compared to
net cash used of $316,201 for the same period in 1997.
Purchases of property and equipment decreased as a result of
construction on the new manufacturing equipment nearing
completion during the first quarter of fiscal 1999.
Financing Activities -- Net cash flows from financing activities
were $776,757 for the three months ended June 30, 1998 compared
to $24,739 for the same period in 1997. The large cash flows
from financing activities in the three months ended June 30, 1998
resulted from additional advances on the line of credit to
finance working capital needs related to the increase in
inventory and accounts receivable.
Outlook
Management is not aware of any adverse trends that would
materially affect the Company's projected financial growth. It
is expected that fiscal 1999 will be another year of continued
improvement for the Company.
<PAGE> 10
PART II. OTHER INFORMATION
GALAXY FOODS COMPANY
ITEM 6. Exhibits and Reports on Form 8-K
The following exhibits are filed as part of this Form 10-QSB.
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> 11
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.)
*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.)
* Previously filed
<PAGE> 12
Exhibit
No Exhibit Description
*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.)
*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
10.29 on Form 10-KSB for fiscal year ended March 31,
1997, and incorporation herein by reference.)
*10.30 1996 Stock Plan (Filed as Exhibit 10.30 on Form 10-
KSB for fiscal year ended March 31, 1997, and
incorporation herein by reference.)
* Previously filed
<PAGE> 13
Exhibit
No Exhibit Description
*10.31 Line of Credit Agreement with Finova Financial
Services (Filed as Exhibit 10.31 on Form 10-KSB for
fiscal year ended March 31, 1997, and incorporation
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 10.32 on Form 10-KSB for fiscal year ended
March 31, 1997, and incorporation herein by reference.)
*10.33 Purchase Money Accommodation for the Purchase of
Specific Equipment with FINOVA Financial Services
(Filed as Exhibit 10.33 on Form 10-KSB for the fiscal
year ended March 31, 1998, and incorporated herein by
reference.)
27 Financial Data Schedule (Filed herewith.)
Reports on Form 8-K
No reports on Form 8-K were filed during the three
months ended June 30, 1998.
* - Previously filed
<PAGE> 14
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GALAXY FOODS COMPANY
/s/Angelo S. Morini
Date: August 10, 1998 Angelo S. Morini
Chairman and President
(Principal Executive Officer)
Date: August 10, 1998 /s/Cynthia L. Hunter
Cynthia L. Hunter, CPA
Chief Financial Officer
(Principal Financial and
Accounting Officer)
[ARTICLE] 5
<TABLE>
<S> <C>
[PERIOD-TYPE] 3-MOS
[FISCAL-YEAR-END] MAR-31-1999
[PERIOD-END] JUN-30-1998
[CASH] 139,568
[SECURITIES] 0
[RECEIVABLES] 3,048,893
[ALLOWANCES] 0
[INVENTORY] 3,423,489
[CURRENT-ASSETS] 737,508
[PP&E] 10,864,332
[DEPRECIATION] 0
[TOTAL-ASSETS] 18,352,855
[CURRENT-LIABILITIES] 5,386,651
[BONDS] 0
[COMMON] 617,095
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[OTHER-SE] 10,301,586
[TOTAL-LIABILITY-AND-EQUITY] 18,352,855
[SALES] 5,762,538
[TOTAL-REVENUES] 5,796,580
[CGS] 4,331,294
[TOTAL-COSTS] 1,275,337
[OTHER-EXPENSES] 0
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 42,465
[INCOME-PRETAX] 147,484
[INCOME-TAX] 0
[INCOME-CONTINUING] 147,484
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 147,484
[EPS-PRIMARY] 0
[EPS-DILUTED] 0
</TABLE>
