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, 1999
_____________________________
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 offices) (Zip Code)
(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 July 26, 1999, there were 9,183,032 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, 1999
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets 3
Statements of Income 4
Statements of Stockholders' Equity 5
Statements of Cash Flows 6
Notes to Financial Statements 7-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-12
Item 4. Submission of Matters to a Vote of Security Holders12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
13
SIGNATURES 14
<PAGE> 3
PART I. FINANCIAL INFORMATION
BALANCE SHEETS
JUNE 30, MARCH 31,
1999 1999
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 218 $ 112
Trade receivables, net 5,591,670 4,428,778
Inventories 6,586,580 6,235,737
Prepaid expenses 862,740 856,267
Total current assets 13,041,208 11,520,894
PROPERTY & EQUIPMENT, NET 12,751,406 12,503,830
OTHER ASSETS 470,996 452,188
TOTAL $26,263,610 $24,476,912
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Book overdrafts $ 620,058 $ 502,942
Line of credit 4,929,769 3,912,917
Accounts payable - trade 3,504,676 3,311,043
Accrued liabilities 419,926 468,513
Current portion of term note payable 432,000 432,000
Current portion of obligations under
capital leases 86,971 82,433
Total current liabilities 9,993,400 8,709,848
TERM NOTE PAYABLE,
less current portion 285,173 289,711
OBLIGATIONS UNDER CAPITAL LEASES,
less current portion 2,266,847 2,374,847
Total liabilities 12,545,420 11,374,406
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY:
Common stock 91,830 91,830
Additional paid-in capital 47,497,322 47,497,322
Accumulated deficit (21,098,762) (21,714,446)
26,490,390 25,874,706
Less: Notes receivable arising
from the exercise of stock options
and sale of common stock 12,772,200 12,772,200
Total stockholders' equity 13,718,190 13,102,506
TOTAL $ 26,263,610 $ 24,476,912
See accompanying notes to financial statements.
<PAGE> 4
GALAXY FOODS COMPANY
STATEMENTS OF INCOME
THREE MONTHS ENDED
JUNE 30,
1999 1998
(Unaudited) (Unaudited)
NET SALES $ 10,381,075 $ 5,762,538
COST OF GOODS SOLD 6,590,662 4,331,294
Gross margin 3,790,413 1,431,244
OPERATING EXPENSES:
Selling 1,745,609 577,861
Delivery 441,844 274,046
General and administrative 852,211 382,912
Research and development 41,662 40,518
Total operating expenses 3,081,326 1,275,337
INCOME FROM OPERATIONS 709,087 155,907
OTHER INCOME (EXPENSE):
Interest expense (79,033) (42,465)
Other income 630 34,042
Total (78,403) (8,423)
NET INCOME $ 630,684 $ 147,484
INCOME TAX EXPENSE 15,000 -
NET INCOME APPLICABLE TO COMMON STOCK $ 615,684 $ 147,484
BASIC NET EARNINGS PER
COMMON SHARE $ 0.07 $ 0.02
DILUTED NET EARNINGS PER
COMMON SHARE $ 0.07 $ 0.02
See accompanying notes to financial statements.
<PAGE> 5
GALAXY FOODS COMPANY
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<C> <C> <C> <C> <C> <C> <C>
Common Stock Additional Notes Rec
Shares Par Value Paid-In Capital Accumulated
Deficit for Common Stock Total
Balance at March 31, 1998 8,816,699 $ 88,167 $ 46,459,542 $(23,005,813) $(12,772,200) $ 10,769,696
Exercise of options 1,144 11 3,989 - - 4,000
Issuance of common stock
under private placement 357,143 3,571 933,929 - - 937,500
Issuance of common stock
under employee stock
purchase plan 8,046 81 31,362 - - 31,443
Issuance of warrants - - 68,500 - - 68,500
Net income - - - 1,291,367 - 1,291,367
Balance at March 31, 1999 9,183,032 $ 91,830 $ 47,497,322 $(21,714,446) $(12,772,200) $ 13,102,506
Net income - - - 615,684 - 615,684
Balance at June 30, 1999 9,183,032 $ 91,830 $ 47,497,322 $(21,098,762) $(12,772,200) $ 13,718,190
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE> 6
GALAXY FOODS COMPANY
STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
JUNE 30,
1999 1998
(Unaudited) (Unaudited)
CASH FLOWS USED IN OPERATING
ACTIVITIES:
Net Income $ 615,684 $ 147,484
ADJUSTMENTS TO RECONCILE NET INCOME
TO NET CASH USED IN
OPERATING ACTIVITIES:
Depreciation expense 201,644 165,392
Bad debt expense - 89,607
Consulting and director fee expense paid through
issuance of common stock warrants 3,421 6,314
(Increase) decrease in:
Trade receivables (1,162,892) (491,833)
Inventories (350,843) (964,746)
Prepaid expenses (6,473) (227,469)
Increase (decrease) in:
Accounts payable 193,633 188,641
Book overdrafts 117,116 -
Accrued liabilities (48,587) (45,841)
NET CASH USED IN
OPERATING ACTIVITIES (437,297) (1,132,451)
CASH FLOWS USED IN INVESTING
ACTIVITIES:
Purchase of property and equipment (449,220) (361,569)
Increase in other assets (22,229) -
NET CASH USED IN INVESTING
ACTIVITIES (471,449) (361,569)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net borrowings on line of credit 1,016,852 1,614,995
Principal payments on note payable (103,462) -
Principal payments on capital lease obligations (4,538) (2,976)
Proceeds from exercise of common stock options - 1,500
NET CASH FROM FINANCING
ACTIVITIES 908,852 1,613,519
NET INCREASE IN CASH AND
CASH EQUIVALENTS 106 119,499
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD 112 20,069
CASH AND CASH EQUIVALENTS, END
OF PERIOD $ 218 $ 139,568
See accompanying notes to condensed financial statements.
<PAGE> 7
GALAXY FOODS COMPANY
NOTES TO 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 financial statements should be read in conjunction with the
financial statements and the related disclosures
contained in the Company's Form 10-K dated June 8, 1999,
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.
Segment Information
The Company does not identify separate operating segments
for management reporting purposes. The results of
operations are the basis on which management evaluates
operations and makes business decisions.
(3) Inventories
Inventories are summarized as follows:
JUNE 30, MARCH 31,
1999 1999
(unaudited)
Raw materials $ 3,533,789 $ 2,750,781
Finished goods 3,052,791 3,484,956
Total $ 6,586,580 $ 6,235,737
(4) Earnings per Share
The following is a reconciliation of basic net earnings per
share to diluted net earnings per share for the three month
and six month periods ended December 31, 1998:
Three months Ended June 30,
1999 1998
(unaudited) (unaudited)
Basic net earnings per share $ .07 $ .02
Weighted average shares outstanding - basic 9,183,032 9,093,254
Potential shares exercisable under stock
Option plans 272,000 159,214
Potential shares exercisable under warrant
Agreements 613,423 1,105,566
Less: Shares assumed repurchased under
Treasury stock method ( 875,401) ( 987,106)
Average shares outstanding - diluted 9,193,054 9,370,928
Diluted earnings per share $ .07 $ .02
<PAGE> 8
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, 1999 1998
(unaudited) (unaudited)
Noncash financing and investing activities:
Consulting and directors fees paid
through issuance of
common stock warrants $ 3,121 $ 16,500
Cash paid for:
Interest $ 214,530 $ 14,557
<PAGE> 9
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 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 $10,381,075 in the quarter ended June 30, 1999,
compared to net sales of $5,762,538 for the quarter ended June
30, 1998, an increase of 80%. The increase in sales was
primarily attributed to an increase in sales generated by
marketing activities related to the promotion of the Company's
Veggie brand of products. Marketing activities included print,
television and radio advertising in key markets across the
country. This resulted in a steady upward trend in sales volume
for the Veggie line of products and the Company expects this
trend in sales volume to continue throughout fiscal 2000.
Cost of Goods Sold were $6,590,662 representing 63% of net sales
for the quarter ended June 30, 1999, compared with $4,331,294 or
75% of net sales for the same period ended June 30, 1998. The
Company was able to improve gross margin by focusing on
production efficiencies, including larger production runs,
reduced variable costs of production, and changes in the product
mix to focus on sales of higher margin, branded products.
Selling expenses were $1,745,609 for the quarter ended June 30,
1999, compared with $577,861 for the same period ended June 30,
1998, an increase of 202%. The increase in expenses over the
same period a year ago is mainly attributed to a new advertising
campaign to promote the Company's flagship line of products,
Veggie. This campaign focuses on key markets throughout the
country where distribution of the Company's products is
widespread. In addition, there are variable expenses, including
brokerage commissions that increase in proportion to the increase
in sales.
Delivery expenses were $441,844 for the quarter ended June 30,
1999, compared with $274,046 for the same period ended June 30,
1998, a 61% increase. The increase in delivery costs is a result
of the increase in sales shipments to customers for the period
ended June 30, 1999 as compared with the same periods in the
prior year. Delivery expense as a percentage of sales decreased
slightly due to a seasonal lowering of shipping costs for
perishable goods during this period.
<PAGE> 10
General and Administrative expenses were $852,211 for the quarter
ended June 30, 1999, compared with $382,912 for the same period
ended June 30, 1998, a 123% increase. This change is primarily
attributed to increased expenses for consulting services related
to Year 2000 readiness and additional employee salaries
associated with the Company's growth in volume.
Research and Development expenses were $41,662 for the quarter
ended June 30, 1999, compared with $40,518 for the quarter ended
June 30, 1998. This 3% increase in expenses is due to normal
salary increases for this department.
Other Income and Expenses netted to $78,433 in expense for the
quarter ended June 30, 1999 as compared to $8,423 in expense for
the quarter ended June 30, 1998. Interest expense increased due
to additional draws on the line of credit during fiscal 2000 and
the capitalization of interest expense to construction in
progress during fiscal 1999. In addition, during fiscal 1999,
34,042 in other income was recorded related to a refund received
by the Company.
Liquidity and Capital Resources
Operating Activities -- Net cash used by operating activities was
$437,297 for the three months ended June 30, 1999 compared to net
cash used of $1,132,451 for the same period in 1998. This change
in operating activities is the result of increased sales for the
quarter ended June 30, 1999 and a large increase in prepaid
expenses during the first three months of fiscal 1999.
Investing Activities -- Net cash used in investing activities
totaled $471,449 for the period ended June 30, 1999 compared to
net cash used of $361,569 for the same period in 1998. The
increase in cash used for investing activities during fiscal 1999
as compared to fiscal 1998 resulted from purchases of packaging
equipment and the construction of a new Culinary School for
foodservice customers during the first quarter in fiscal 2000.
Financing Activities -- Net cash flows provided by financing
activities were $908,852 for the three months ended June 30, 1999
compared to cash flows provided by financing activities of
$1,613,519 for the same period in 1998. This increase is
attributed to a reduction in draws on the Company's line of
credit as the Company increases sales and collections on accounts
receivable.
In addition, on November 1, 1996, 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
1997. During June 1998, the Company signed an amendment to the
above contract which expanded the line of credit availability to
$3.5 million. The amendment also reduced the interest on the
line of credit to prime plus one half of a percent. During
December 1998, the Company signed a third amendment to the above
contract which expanded the line of credit availabilty to $5.5
milion.
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. During June
1998, the Company signed an amendment to the above contract which
expanded the term note payable to $3 million. The amendment
also reduced the interest on the term note to prime plus one
percent.
On October 16, 1998, the Company sold 357,143 shares of its
common stock to a private investor at an aggregate price of
$937,500.
Management believes that these actions will allow the Company to
meet its future liquidity needs until the Company establishes a
positive cash flow.
<PAGE> 11
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("FAS 133"). FAS
133 requires companies to recognize all derivative contracts as
either assets or liabilities in the balance sheet and to measure
them at fair value. If certain conditions are met, a derivative
may specifically be designated as a hedge, the objective of which
is to match the timing of gain or loss recognition of: (i) the
changes in the fair value of the hedged asset or liability that
are attributable to the hedged risk; or (ii) the earnings effect
of the hedged transaction. For a derivative not designated as a
hedging instrument, the gain or loss is recognized as income in
the period of change. FAS 133 is effective for all fiscal year
quarters of fiscal years beginning after June 15, 1999.
Historically, the Company has not entered into any derivative
contracts either to hedge existing risks or for speculative
purposes. Accordingly, the Company does not expect adoption of
the new standard on April 1, 2000 to affect its financial
statements.
Year 2000 Compliance
The Year 2000 problem is the result of information technology
systems and embedded systems (products that are made with
microprocessor (computer) chips) using a two-digit format, as
opposed to four digits, to indicate the year. Such information
technology and embedded systems may be unable to properly
recognize and process date-sensitive information beginning
January 1, 2000.
The Company has undertaken an assessment of the potential impact
of the Year 2000 issue to its internal operations. Such
assessment has included a review of the impact primarily in the
following areas: production and manufacturing systems, business
systems, including sales and marketing, billing, and
infrastructure. The Company's infrastructure consists of a
network of personal computers and servers that were obtained from
major suppliers. The Company also utilizes various business,
administrative and financial software applications on the
infrastructure to perform the business functions of the Company.
The Company is in the process of testing and upgrading its
information technology systems and embedded systems, which may be
affected by the Year 2000 issue. Based on the progress the
Company has made in identifying and addressing the Company's Year
2000 issues and the plan and timeline to complete the compliance
program, management does not foresee significant risks associated
with the Company's Year 2000 compliance at this time. Management
estimates that the testing, upgrading, and replacement of
affected systems will be completed by August 31, 1999. However,
the inability of the Company to identify and timely correct
material Year 2000 deficiencies in the software and/or
infrastructure could result in an interruption in, or failure of,
certain of the Company's business activities or operations.
During Fiscal 1999, the Company replaced its accounting and
manufacturing software packages to systems which are Year 2000
compliant. The Company has also replaced any existing hardware
which was not Year 2000 compliant. These replacements were a
part of the normal upgrades to the Company's systems. To date,
the Company has incurred approximately $120,000 to upgrade its
systems for compliance with Year 2000 issues. These upgrades
were also undertaken to improve the functionality of the
Company's production and accounting systems. No material
expenses are expected during fiscal 2000 in connection with this
project.
The Company has established a team dedicated to periodically
reviewing not only the internal information technology and
embedded systems used in the operation of the Company, but also
the information technology and embedded systems and the Year 2000
compliance plans of the Company's significant customers and
suppliers, shipper, utilities, financial institutions and
transfer agent. The Company has material third party
relationships with its customers, suppliers, shippers, utilities,
financial institutions, and transfer agent. If the operations of
any of these third parties are adversely impacted by Year 2000
deficiencies, it may have a material impact on the Company.
Accordingly, the Company has requested information and
documentation from the Company's significant customers and
suppliers, shippers, utilities, financial institutions, and
transfer agent relating to their Year 2000 compliance plans in
the form of a survey. At this time, the Company has received
approximately 75% of its certifications from vendors and
customers. With respect to the responses received, no customers
or suppliers have indicated significant problems which could
result in a material loss. The Company will contact any
customers and suppliers who have not responded by September 30,
1999. Therefore, management does not, at this time, know of the
potential costs to the Company of any adverse impact or effect of
any Year 2000 deficiencies by these third parties.
<PAGE> 12
Because the Company has evaluated the status of the systems used
in business activities and operations of the Company and the
systems of the third parties with which the Company conducts its
business, management is developing a comprehensive contingency
plan and identifying "the most reasonably likely worst case
scenario" at this time. This assessment includes the Company's
production equipment, computer systems, HVAC systems, coolers and
security systems. Management expects to have completed and
tested all contingency plans no later than September 30, 1999.
As management identifies significant risks related to the
Company's Year 2000 compliance or if the Company's Year 2000
compliance program's progress deviates substantially from the
anticipated timeline, management will develop appropriate
contingency plans.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to security holders during this period.
<PAGE> 13
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-Q.
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 Second Amendment to the Security Agreement with
Finova Financial Services dated June 1998 (Filed as
Exhibit 10.1 on Form 10-K for fiscal year ended March
31, 1999, and incorporated herein by reference.)
*10.2 Third Amendment to the Security Agreement with
Finova Financial Services dated December 1998 (Filed as
Exhibit 10.2 on Form 10-K for fiscal year ended March
31, 1999, and incorporated herein by reference.)
27 Financial Data Schedule (Filed herewith.)
Reports on Form 8-K
No reports on From 8-K were filed during the last quarter of the
period covered by this report.
<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
Date: August 4, 1999 /s/Angelo S. Morini
Angelo S. Morini
Chairman and President
(Principal Executive Officer)
Date: August 4, 1999 /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-31-2000
[PERIOD-END] JUN-30-1999
[CASH] 218
[SECURITIES] 0
[RECEIVABLES] 5714670
[ALLOWANCES] 150000
[INVENTORY] 6586580
[CURRENT-ASSETS] 862740
[PP&E] 12751406
[DEPRECIATION] 0
[TOTAL-ASSETS] 26263610
[CURRENT-LIABILITIES] 9993400
[BONDS] 0
[COMMON] 91830
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[OTHER-SE] 13626360
[TOTAL-LIABILITY-AND-EQUITY] 26263610
[SALES] 10381075
[TOTAL-REVENUES] 10381075
[CGS] 6590662
[TOTAL-COSTS] 3081326
[OTHER-EXPENSES] 0
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 79033
[INCOME-PRETAX] 630684
[INCOME-TAX] 15000
[INCOME-CONTINUING] 615684
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 615684
[EPS-BASIC] 0
[EPS-DILUTED] 0
</TABLE>
