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U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2000
COMMISSION FILE NO. 0-16251
GALAXY FOODS COMPANY
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(name of small business issuer as specified in its charter)
DELAWARE 25-1391475
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(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
2441 VISCOUNT ROW
ORLANDO, FLORIDA 32809
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(Address of principal executive offices) (Zip Code)
Registrant'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)
Indicate by check mark whether the registrant has (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-K 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-K
or any amendment to this Form 10-K. [ ]
State registrant's revenues for its most recent fiscal year. $42,234,984
The aggregate market value of the voting stock held by non-affiliates as of
JUNE 15, 2000 was $33,340,766 based on the closing sales price of $ 3.63 per
share on such date.
The number of shares outstanding of Galaxy Foods Company's Common Stock as of
JUNE 15, 2000 was 9,184,784.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
Transitional Small Business Disclosure Format. Yes [ ] No [X]
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
Galaxy Foods Company (the "Company") was originally organized in Pennsylvania
in 1980 under the name "Galaxy Cheese Company," and was subsequently
reincorporated in Delaware in 1987. After relocating to Orlando, Florida, the
Company formally changed its name to "Galaxy Foods Company." The Company is
principally engaged in 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(R), formagg(R), Soyco(R), and Soymage(R)
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 conventional cheese. These healthy cheese and dairy related
products have the flavor, appearance and texture of conventional cheeses and
products that use conventional cheeses, and are nutritionally equal or superior
to such cheeses and products. Some of the Company's cheese alternatives have
either no or low cholesterol but are not nutritionally equivalent or superior
to conventional cheeses. The Company also manufactures and markets non-branded
and private label process and blended cheese products, as well as branded
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
supermarket chains and health food stores; food service operations, such as
restaurant chains, cafeterias, hospitals and schools; and industrial food
manufacturers of products such as frozen pizza and desserts.
The Company's sales effort is primarily directed to retailers, to take
advantage of what it perceives to be an increased consumer emphasis on
nutrition, by offering a diverse line of low and no fat, low and no cholesterol
and no lactose cheese products. These include individually wrapped cheese
slices, shredded cheeses, grated toppings, deli cheeses, and soft cheeses like
sour cream, cream cheese and cheese sauces.
The Company'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.
PRODUCTS
VEGGIE(R) NATURES ALTERNATIVE - COMPLETE LINE OF HEALTHY DAIRY ALTERNATIVES -
The Company's flagship brand - a complete line of nutritious dairy alternative
products made with soy. All Veggie(R) products are low in fat, contain less
calories and are cholesterol and lactose free. The Veggie(R) product line
includes Veggie(R) Slices, Veggie(R) Chunks, Veggie(R) Cream Cheese,
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Veggie(R) Sour Cream, Veggie(R) Butter, Veggie(R) Honey Butter, Veggie(R)
Grated Toppings, Veggie(R) Milk, Veggie(R) Ice Cream, Veggie(R) Yogurt and
Sweetened Condensed Milk.
DAIRY FREE - SOYMAGE(R) VEGAN DAIRY ALTERNATIVES - Soymage(R) products were
developed for health food and specialty stores. These products are for
consumers who are allergic to dairy products, specifically milk protein and /
or are practicing a vegan lifestyle. The Soymage(R) Vegan line is completely
dairy free, contains no animal fats and has no casein ( skim milk protein). The
Soymage(R) Vegan product line includes: vegan cheese slices, vegan grated
toppings, vegan chunk cheese and vegan sour cream and cream cheese
alternatives.
SOY FREE - SOY FREE DAIRY ALTERNATIVES MADE WITH RICE, OAT AND ALMOND -- The
Company has developed three dairy free alternatives made with organic brown
rice, almonds and oats. All three lines are low fat, cholesterol free, lactose
free, soy free and are fortified with essential vitamins and minerals. These
products are formulated for people with soy allergy or just looking for
alternatives for conventional dairy products. The Soy Free product line
includes: Individual slices available in Rice, Oat and Almond, and chunks
available in Rice, Oat and Almond. Sour cream and butter are available as well.
VEGGY(R) - SOY NUTRITIOUS - SOY DAIRY ALTERNATIVES - These Veggy(R) products
offer the taste of cheese, are available in many forms, and are made from soy.
These products are low fat or fat free, and are lactose and cholesterol free.
The Veggy(R) product line are available in singles and chunks, and several
flavors are available.
WHOLESOME VALLEY ORGANIC(TM) - PRODUCTS MADE FROM ORGANIC Milk - These products
are processed cheese foods made from organic milk, and contain 1/3 less fat
than regular processed cheese food. The farmland, cows and feed are free from
pesticides, antibiotics, growth hormones and chemicals.
PROCESSED CHEESE PRODUCTS - CONVENTIONAL CHEESE ALTERNATIVES - These products
are low in cholesterol and serve as an alternative to conventional dairy
cheeses. They are not nutritionally equivalent or superior to conventional
cheeses and may have more cholesterol than the Company's substitute cheeses.
The only branded product line which accounts for more than 10% of sales for
fiscal 2000 is the Veggie line of products. Sales of this product line for
fiscal 2000 were $19,025,942 or 45% of net sales.
The characteristics of the Company's products vary according to the specific
requirements of individual customers within each market. In the retail market
today, 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
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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 ships all its products from its warehouse and
cooler facility in Orlando, FL.
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(R) products are also made using the Company's formulas, processes and
manufacturing equipment from these principal ingredients, except that
Soymage(R) 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.
CAPITAL EXPENDITURES
During the fiscal years ended March 31, 2000, 1999 and 1998, the Company's
capital expenditures were approximately $4,405,000, $2,168,000 and $1,705,000,
respectively. This included capitalized interest of $490,442, $395,963 and
$234,772 during fiscal 2000, 1999 and 1998, respectively. The substantial
capital expenditures for fiscal 2000, 1999 and 1998 were primarily due to the
purchase and construction of several large pieces of production equipment. This
equipment includes packaging equipment, modifications to the Pullman/loaf
machinery, and industrial blenders for powdered products. In addition, during
fiscal 2000 the Company increased its operations in Orlando, Florida to include
a 80,000 square foot warehouse and cooler facility.
SALES AND MARKETING
In the retail market, the Company markets its healthy products to supermarkets,
health food stores and club 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
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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(R) cheese
products as well as lower cost cheese alternatives. In marketing its formagg(R)
line of products to food service customers, the Company emphasizes that
formagg(R) tastes like conventional cheese and has no or low fat, low or no
cholesterol, no lactose and more calcium than conventional cheeses. The Company
also promotes its food service products on the basis of their considerably
longer shelf life and microbiologically safer profile than conventional
cheeses. In both the food service and industrial markets, the Company sells
directly to its customers. In the retail 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, 2000, 1999 and 1998, the Company
purchased, $8,105,407, $6,178,308 and $4,757,744, 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 of this ingredient which either alone, or together with their
affiliates, provided 5% or more of such item to the Company, based on dollar
volume purchased.
PERCENTAGE OF CASEIN PURCHASES
FISCAL YEAR ENDED MARCH 31,
TYPE OF
RAW MATERIAL NAME OF SUPPLIER 2000 1999 1998
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Casein Besnier-Scerma U.S.A. 34% 37% 48%
Avonmore Food Products Ltd. 35% 28% 22%
Rely France International 6% 15% 17%
Irish Dairy Board 10% 12% 8%
New Zealand Milk Products 6% 8% --
Kerry Ingredients 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, 2000, 1999 and 1998, expenditures for product development were
$226,436, $198,398 and $129,068 respectively. None of the research and
development costs are directly borne by the customer, instead they are
considered part of operating expenses.
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TRADEMARKS AND PATENTS
The Company owns several 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.
MARK COUNTRY RENEWAL DATE
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formagg(R) 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(R)& Design United States September 19, 2009
Labella's(R)& Design United States October 9, 2004
Soyco(R) United States January 12, 2003
Soyco(R)& Design United States August 17, 2003
Soymage(R) United States January 5, 2003
Veggy Singles(R) United States February 27, 2007
Lite "n" Less(TM) United States (1)
Health Value Foods(TM) United States (1)
Soy Singles(TM) 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.
WORKING CAPITAL
Although not previously required due to the nature of the business, the Company
now maintains a supply of finished goods to meet the strict time deadlines of
selling product direct to retail supermarkets. In the past, the Company has
sold primarily through distributors and the required turnaround time for orders
was more lenient. With the conversion to direct sales for many of the Company's
customers, there is a need to keep a safety stock of inventory to meet orders
with potential time constraints.
MARKETS AND CUSTOMERS
The Company sells to customers in approximately 48 states and 22 international
countries. International sales are less than 10% of total sales.
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For the fiscal years ended March 31, 2000, 1999 and 1998, the Company had net
sales of $42,234,984, $29,790,025 and $20,552,782, 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, 2000, 1999 and 1998:
PERCENTAGE OF SALES
FISCAL YEAR ENDED MARCH 31,
CUSTOMER NAME 2000 1999 1998
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Foodservice Purchasing Co-op * * 10.1%
Cacique, Inc. * 5.1% *
* Less than 5% of sales for the stated fiscal year.
The Company's products are sold primarily in three commercial markets: retail,
food service, and industrial.
In the retail market, where the Company believes nutrition generally outweighs
price considerations, the Company markets its formagg(R) 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, 2000, 1999 and 1998:
PERCENTAGE OF SALES
FISCAL YEARS ENDED MARCH 31,
CATEGORY 2000 1999 1998
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Retail sales 92% 87% 79%
Food service sales 7% 12% 20%
Industrial sales 1% 1% 1%
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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 2000.
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.
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 $16,000, $15,000 and $15,000 during the fiscal years ended
March 31, 2000, 1999 and 1998 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 Veggie and
formagg(R) lines which contain low or no cholesterol and are 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.
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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 manufacturers of conventional and
imitation cheeses, such as Kraft (which produces products under the Kraft
Free(R) label), Borden's, and ConAgra (which produces products under the
Healthy Choice(R) 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, 2000, the Company had a total of 288 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.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company's headquarters, sales offices, manufacturing, warehouse, and
research and development facilities occupy approximately 136,000 square feet
situated in Orlando, Florida. The Company's facilities are comprised of
approximately 12,000 square feet in office space, approximately 46,900 square
feet of dock-height, air-conditioned manufacturing space, coolers of
approximately 32,000 square feet, and a warehouse facility of approximately
45,100 square feet.
For the manufacturing and corporate office facilities, 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 lease, as
renewed, 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 current five-year renewal term on November 13, 2001. 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.
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The Company produces the majority of its products at this Orlando plant. Some
of the company's products are co-packed by dairy companies throughout the
United States and Canada. These products represent less than 5% of production.
Based on the results for the fiscal years ended March 31, 2000, 1999 and 1998,
the Company's plant produced approximately 19.5, 17.7, and 11.6 million pounds
of cheese products, respectively, on an annualized basis. 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.
For the cooler, warehouse and remaining office space totaling approximately
80,000 square feet, the Company entered into a lease agreement with Cabot
Industrial Properties, a Florida limited partnership, on July 28, 1999. The
term of the lease is for five years and provides for escalating rental payments
ranging from $18,674 to $20,871 per month through the end of the lease period.
The lease is a "triple net lease", which means the Company is responsible for
all taxes, insurance, maintenance, and repair of the facilities, in addition to
rental payments. Management believes that the Company's properties are
adequately covered by casualty insurance. 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, 2000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On February 10, 2000, the Company held its annual meeting of shareholders in
Orlando, Florida. In addition to regular and annual agenda items, the
shareholders voted on and approved the following proposals:
1. To fix the number of directors at five and to elect a Board
of Director for the ensuing year. The board members were
voted in with the following number of votes for their
election: Angelo Morini - 4,533,896, Joseph Juliano -
4,541,527, Marshall Luther - 4,544,498, and Douglas Walsh -
$4,536,611.
2. To consider and vote upon an amendment to the Company's 1991
Employee Stock Purchase Plan to extend the expiration date of
the Plan and to increase the number of shares of common Stock
subject thereto. The vote tabulation for this proposal was as
follows: for - 4,395,260, against - 236,369, abstain -
22,155.
3. To consider and vote upon an amendment to the Company's 1996
Amendment and Restatement of the 1991 Non-Employee director
Stock Option Plan to extend the expiration date of the Plan
and to increase the number of shares of Common Stock subject
thereto. The vote tabulation for this proposal was as
follows: for - 4,347,390, against - 278,398, abstain -
27,996.
4. To ratify the retention of BDO Seidman L.L.P. as the
independent auditors of the Company for the fiscal year ended
March 31, 2000. The vote tabulation for this proposal was as
follows: for - 4,547,161, against - 83,566, abstain - 23,057.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
As of August 1999, the Company's Common Stock, $.01 par value (the "Common
Stock"), is traded on the inter-dealer automated quotation system operated
American Stock Exchange. (the "AMEX System") under the symbol "GXY". Prior to
August 1999, the Company's Common Stock was traded on the inter-dealer
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 AMEX and NASDAQ Systems during the fiscal years ended March 31,
2000, 1999 and 1998:
Period High Sales Price Low Sales Price
-------------------------------------------------------------------------------
2000 Fiscal Year, quarter ended:
June 30, 1999 $4 $3 1/4
September 30, 1999 $4 7/8 $3 5/8
December 31, 1999 $4 5/8 $2 13/16
March 31, 2000 $4 1/2 $3 5/16
1999 Fiscal Year, quarter ended:
June 30, 1998 $6 9/16 $5 11/16
September 30, 1998 $6 9/16 $3 1/16
December 31, 1998 $7 $2 5/8
March 31, 1999 $6 1/4 $3 11/16
On February 11, 1999 the Company completed a one for seven reverse stock split.
All common share information has been adjusted to give effect to this reverse
stock split.
On June 15, 2000, there were 701 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.
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ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
2000 1999 1998 1997 1996
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Sales $42,234,984 $29,790,025 $20,552,782 $ 17,171,496 $ 3,950,455
Net Income (Loss) before taxes 2,420,560 1,351,367 377,523 (2,736,660) (3,282,598)
Net Income (Loss) 0.40 0.14 0.04 (0.84) (0.91)
Per Common Share - Basic
Net Income (Loss) 0.39 0.14 0.04 (0.84) (0.91)
Per Common Share - Diluted
Total Assets 36,450,393 24,476,912 16,449,052 12,492,446 8,031,972
Long Term Debt 7,261,706 3,178,991 1,459,516 57,064 92,714
Redeemable Preferred Stock -- -- -- 2,557 --
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Statements other than historical information contained in this report are
considered forward looking and involve a number of risks and uncertainties.
Factors that could cause such statements not to be accurate include, but are
not limited to, increased competition for the Company's products, improvements
in alternative technologies, a lack of market acceptance for new products
introduced by the Company and the failure of the Company to successfully market
its products.
RESULTS OF OPERATIONS
FISCAL 2000 AS COMPARED TO FISCAL 1999
SALES for the fiscal year ended March 31, 2000 increased by 42% over the same
period in 1999. This increase in sales is attributable to increased consumer
awareness of the Company's branded products, resulting from an increase in
marketing activities promoting these product lines, particularly the Company's
Veggie brand of products. In addition, the Company has focused on moving its
Veggie line of products from the dairy to the produce section of supermarkets
to target the health conscious consumer. The Company believes the increasing
consumer awareness of the benefits of plant-based foods has positively impacted
sales. The Company expects this trend in sales volume to continue throughout
fiscal 2001.
COST OF GOODS SOLD as a percentage of sales were 64% for the fiscal year ended
March 31, 2000 compared with 65% for the same period in fiscal 1999. The
moderate increase in gross margin is primarily a result of volume and
production efficiencies during fiscal 2000.
SELLING expenses increased 26% for the fiscal year ended March 31, 2000
compared with the same period in fiscal 1999. Brokerage costs are a large
portion of selling expenses and these costs increased in direct proportion to
sales. In addition, the Company initiated an advertising program during fiscal
1999 that continued and expanded during fiscal 2000 to promote the
12
<PAGE> 13
Veggie Slices product line and capitalized on increasing consumer awareness of
the benefits of plant-based foods. This targeted advertising campaign has been
launched in key markets throughout the United States and Puerto Rico where
distribution of the Company's product is well established in a majority of the
major supermarket chains.
DELIVERY expenses increased 42% for the fiscal year ended March 31, 2000
compared with the same period in fiscal 1999. This increase is mainly
attributable to the Company's 42% increase in sales.
GENERAL AND ADMINISTRATIVE expenses increased 47% for the fiscal year ended
March 31, 2000, as compared to fiscal 1999. The change is the result of an
increase in expenses for consulting services for conversion to a new network
server to accommodate additional users and year 2000 compliance issues, as well
as additional employees hired to accommodate the Company's projected growth.
RESEARCH AND DEVELOPMENT expenses increased 14% for the fiscal year ended March
31, 2000 compared with the same period in fiscal 1999. This increase in expense
is mainly the result of the addition of an additional food scientist during the
first quarter of fiscal 2000.
INTEREST expense increased from $233,826 in fiscal 1999 to $744,498 in fiscal
2000. On September 30, 1999, the Company entered into a $4,000,000 subordinated
note payable with Finova Mezzanine Corporation. This debt bears interest at a
rate of 13.5% and includes an original issue discount of $786,900 which is
amortized through interest expense. During fiscal 2000, $78,690 was amortized
to interest expense. The increase is partially the result of additional
borrowings on the Company's line of credit to finance the increase in
inventory. In March 2000, the Company refinanced its term note payable;
however, this has not effected interest expense during fiscal 2000 due to the
timing of the refinancing.
INCOME TAX BENEFIT for fiscal 2000 was $1,209,331 compared to income tax
expense of $60,000 for fiscal 1999. Alternate minimum tax was $110,669 and
$60,000 for fiscal years 2000 and 1999, respectively. During fiscal 2000, the
Company recorded a deferred tax benefit of $1,320,000 derived from tax net
operating losses incurred in prior years which are expected to be realized in
the future. This represents approximately 30% of the tax net operating loss
carryforward available at March 31,2000.
FISCAL 1999 AS COMPARED TO FISCAL 1998
SALES for the fiscal year ended March 31, 1999 increased by 44.9% over the same
period in 1998. 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, resulting from an
increase in marketing activities promoting these product lines, particularly
the Company's Veggie brand of products. The Company believes the increasing
consumer awareness of the benefits of plant-based foods has positively impacted
sales. The Company expects this trend in sales volume to continue throughout
fiscal 2001.
COST OF GOODS SOLD as a percentage of sales was 65.0% for the fiscal year ended
March 31, 1999 compared with 74.1% for the same period in fiscal 1998. The
improvement in gross margin is primarily a result of new production
efficiencies, price increases and changes in the product mix to focus on higher
margin, branded products.
SELLING expenses increased 101% for the fiscal year ended March 31, 1999
compared with the same period in fiscal 1998. Brokerage costs are a large
portion of selling expenses and these costs increased in direct proportion to
sales. In addition, the Company initiated an advertising
13
<PAGE> 14
program during fiscal 1999 to promote the Veggie Slices product line and
capitalized on increasing consumer awareness of the benefits of plant-based
foods. This targeted advertising campaign has been launched in key markets
throughout the United States and Puerto Rico where distribution of the
Company's product is well established in a majority of the major supermarket
chains.
DELIVERY expenses increased 70.7% for the fiscal year ended March 31, 1999
compared with the same period in fiscal 1998. A portion of the increase in
delivery expenses is a result of the increase in sales. However, delivery
expenses as a percentage of sales have increased due to rising freight costs.
GENERAL AND ADMINISTRATIVE expenses increased 61.8% for the fiscal year ended
March 31, 1999, as compared to fiscal 1998. The change is the result of an
increase in consulting fees and an increase in salary expense to accommodate
the growth of the Company. Consulting fees included costs to convert the
Company's systems to comply with Year 2000 constraints.
RESEARCH AND DEVELOPMENT expenses increased 53.7% for the fiscal year ended
March 31, 1999 compared with the same period in fiscal 1998. This increase in
expense is the result of the expansion of the Company's branded lines of
product to include additional flavors and entirely new products, such as Veggie
Milk.
INTEREST expense increased 71.0% for the fiscal year ended March 31, 1999 as
compared with the same period in fiscal 1998. The increase is the result of
additional borrowings on the Company's line of credit to finance the increase
in inventory.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES -- For the fiscal year ended March 31, 2000, the Company's
cash used in operating activities was $1,815,800 an increase of $99,798 over
the same period in fiscal 1999. The increase in cash used for operations is the
result of a build-up of inventory and accounts receivable, partially offset by
an increase in accounts payable associated with an increase in sales during
fiscal 2000. In addition, in an effort to increase response time to customer
orders and convert from distributor to direct sales, the Company is
accumulating an inventory of finished goods of its most popular product lines.
Prepaid expenses increased due to slotting fees paid to retailers to move the
Veggie line of products from the dairy to produce section of stores.
INVESTING -- The Company spent $4,508,133 in investing activities for the
fiscal year ended March 31, 2000 compared with $2,105,501 for the same period
in fiscal 1999. During fiscal 2000 and 1999, the Company invested in production
equipment to accommodate the demand for slice products in the retail and
foodservice industries. The Company anticipates incurring approximately
$4,000,000 in additional costs to acquire additional equipment and build-out
during fiscal 2001 to complete the construction in progress projects.
FINANCING -- The Company realized a net inflow of $6,324,204 from financing
activities for the fiscal year ended March 31, 2000 compared with $3,801,546
during the same period in fiscal 1999. The large cash flows from financing
activities resulted from borrowings on the line of credit and term notes in
both years to finance the increase in accounts receivable, inventory and
construction in progress and proceeds from the sale of common stock in fiscal
1999. In addition, during fiscal 2000, the Company entered into a $4 million
subordinated note payable to finance working capital and capital expenditures.
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, $3.5 million in June 1998, $5.5 million in December
1998 and $7.5 million in April 2000. The amount available under the line of
credit is
14
<PAGE> 15
based on a formula of 80% of eligible accounts receivable plus 35% of eligible
inventories in an amount not to exceed $3,000,000, 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 balance of the line of credit at a rate of prime
plus one half percent (9.25% at March 31, 2000). The line of credit expires on
October 31, 2002. As of March 31, 2000, the Company had an outstanding balance
of $4,784,999 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. Amounts outstanding
under the agreement are collateralized by machinery and equipment owned by the
Company. During June 1998, the Company signed an amendment to the above
contract which expanded the term note payable to $3 million. This note is
payable at the rate of $432,000 per year, with a balloon payment due on October
31, 2001. This note was paid in full during March 2000 through a new financing
agreement with SouthTrust Bank, N.A. The new term note payable has availability
to a maximum of $8.5 million and bears interest at the prime rate (8.75% at
March 31, 2000). This note is payable interest only through February 1, 2001,
with monthly principal payments of $78,705, plus interest payable beginning
March 1, 2001. The note will mature on March 1, 2005. Amounts under the new
agreement are collateralized by machinery and equipment owned by the Company.
The new note is being used to finance new production equipment that the Company
anticipates purchasing in fiscal 2001. As of March 31, 2000, the balance
outstanding under this agreement was $3,992,906. The Company paid approximately
$26,000 in loan costs in connection with this new financing.
On September 30, 1999, the Company secured a $4 million subordinated note
payable less loan costs of $380,000 to finance working capital and capital
improvement needs of the Company. Amounts outstanding under the agreement are
collateralized by a subordinated lien on substantially all assets of the
Company. The subordinated note is payable interest only monthly with a
principal payment in one lump sum upon maturity on September 30, 2004 and bears
interest at a rate of 13.5%. The Company issued a warrant to purchase up to
915,000 shares of common stock to the subordinated note holder at an exercise
price of $3.41 per share which represented 80% of the fair value of the
Company's stock on the date the warrant was issued. The warrant was valued at
$786,900 which was recorded as a debt discount and is being amortized to
interest expense from the date of issuance of the note to the maturity date of
the note of September 30, 2004. During fiscal 2000, $78,690 was recorded as
interest expense. As of March 31, 2000, the unamortized debt discount was
$708,210 and the principal balance on the note was $3,876,817.
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.
15
<PAGE> 16
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, as amended by FAS 137, is effective
for all fiscal quarters of fiscal years beginning after June 15, 2000.
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 July 1, 2000 to affect its
financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The interest on the Company's debt is floating and based on the prevailing
market interest rates. For market based debt, interest rate changes generally
do not affect the market value of the debt but do impact future interest
expense and hence earnings and cash flows, assuming other factors remain
unchanged. A theoretical 1% change in market rates in effect on March 31, 2000
with respect to the Company's anticipated debt as of such date would increase
interest expense and hence reduce the net income of the Company by
approximately $90,000 per year.
The Company's fiscal 2000 and 1999 sales denominated in a currency other than
U.S. dollars were less than 1% of total sales and no net assets were maintained
in a functional currency other than U. S. dollars at March 31, 2000 and 1999.
The effects of changes in foreign currency exchange rates has not historically
been significant to the Company's operations or net assets.
16
<PAGE> 17
ITEM 8. FINANCIAL STATEMENTS.
Report of Independent Certified Public Accountants
To the Board of Directors and Stockholders
Galaxy Foods Company
We have audited the accompanying balance sheets of Galaxy Foods Company as of
March 31, 2000 and 1999 and the related statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended March 31,
2000. 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, 2000 and 1999 and the results of its operations and its cash flows for
each of the three years in the period ended March 31, 2000 in conformity with
generally accepted accounting principles.
/s/ BDO Seidman, LLP
--------------------------------
Orlando, Florida
June 27, 2000
17
<PAGE> 18
GALAXY FOODS COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 383 $ 112
Trade receivables, net of allowance of
$175,000 and $100,000 7,456,936 4,428,778
Other receivables 296,291 228,551
Inventories 9,022,948 6,235,737
Deferred tax asset 453,000 --
Prepaid expenses 1,521,634 627,716
------------ ------------
Total current assets 18,751,192 11,520,894
PROPERTY & EQUIPMENT, NET 16,020,746 12,503,830
DEFERRED TAX ASSET 867,000 --
OTHER ASSETS 811,455 452,188
------------ ------------
TOTAL $ 36,450,393 $ 24,476,912
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Book overdrafts $ 1,694,753 $ 502,942
Line of credit 4,784,999 3,912,917
Accounts payable - trade 5,016,556 3,311,043
Accrued liabilities 167,334 468,513
Current portion of term note payable 78,705 432,000
Current portion of obligations under capital leases 30,364 82,433
------------ ------------
Total current liabilities 11,772,711 8,709,848
TERM NOTE PAYABLE, LESS CURRENT PORTION 3,914,201 2,374,847
SUBORDINATED NOTE PAYABLE 3,168,607 --
OBLIGATIONS UNDER CAPITAL LEASES,
less current portion 69,829 289,711
------------ ------------
Total liabilities 18,925,348 11,374,406
------------ ------------
</TABLE>
18
<PAGE> 19
<TABLE>
<S> <C> <C>
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, authorized 85,000,000,
issued and outstanding 9,184,546 and 9,183,032 91,845 91,830
Additional paid-in capital 48,289,955 47,497,322
Accumulated deficit (18,084,555) (21,714,446)
------------ ------------
30,297,245 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 17,525,045 13,102,506
------------ ------------
TOTAL $ 36,450,393 $ 24,476,912
============ ============
</TABLE>
See accompanying notes to financial statements
19
<PAGE> 20
GALAXY FOODS COMPANY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
NET SALES $ 42,234,984 $ 29,790,025 $ 20,552,782
COST OF GOODS SOLD 27,233,736 19,390,253 15,239,405
------------ ------------ ------------
Gross margin 15,001,248 10,399,772 5,313,377
------------ ------------ ------------
OPERATING EXPENSES:
Selling 6,147,442 4,861,703 2,407,992
Delivery 2,215,903 1,564,514 916,448
General and administrative 3,240,019 2,204,623 1,362,022
Research and development 226,436 198,398 129,068
------------ ------------ ------------
Total operating expenses 11,829,800 8,829,238 4,815,530
------------ ------------ ------------
INCOME FROM OPERATIONS 3,171,448 1,570,534 497,847
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense (744,498) (233,826) (136,774)
Interest income -- 6,023 10,593
Other income (expense) (6,390) 8,636 5,857
------------ ------------ ------------
Total (750,888) (219,167) (120,324)
------------ ------------ ------------
NET INCOME BEFORE TAXES 2,420,560 1,351,367 377,523
INCOME TAX BENEFIT (EXPENSE) 1,209,331 (60,000) --
------------ ------------ ------------
NET INCOME $ 3,629,891 $ 1,291,367 $ 377,523
============ ============ ============
BASIC NET EARNINGS PER
COMMON SHARE $ 0.40 $ 0.14 $ 0.04
============ ============ ============
DILUTED NET EARNINGS PER
COMMON SHARE $ 0.39 $ 0.14 $ 0.04
============ ============ ============
</TABLE>
See accompanying notes to financial statements
20
<PAGE> 21
GALAXY FOODS COMPANY
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Convertible
Common Stock Preferred Stock
------------------- ---------------- Additional Notes Rec
Par Par Paid-In Accumulated for Common
Shares Value Shares Value Capital Deficit Stock Total
--------- ------- ------ ----- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1997 8,162,653 $81,627 2,557 $ 26 $ 46,270,116 $(23,383,336) $(12,772,200) $10,196,233
Exercise of options 16,300 163 -- -- 57,121 -- -- 57,284
Exercise of warrants 9,286 93 -- -- 45,245 -- -- 45,338
Issuance of common stock under
employee stock purchase plan 6,634 66 -- -- 33,182 -- -- 33,248
Conversion of preferred stock
into common stock 621,826 6,218 (2,557) (26) (6,192) -- -- --
Issuance of warrants -- -- -- -- 51,320 -- -- 51,320
Refund of stock issuance costs -- -- -- -- 8,750 -- -- 8,750
Net income -- -- -- -- -- 377,523 -- 377,523
--------- ------- ------ ---- ------------ ------------ ------------ -----------
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
Exercise of options 1,000 10 -- -- 4,705 -- -- 4,715
Issuance of common stock under
employee stock purchase plan 514 5 -- -- 1,028 -- -- 1,033
Issuance of warrants -- -- -- -- 786,900 -- -- 786,900
Net income -- -- -- -- -- 3,629,891 -- 3,629,891
--------- ------- ------ ---- ------------ ------------ ------------ -----------
Balance at March 31, 2000 9,184,546 $91,845 -- $ -- 48,289,955 $(18,084,555) $(12,772,200) $17,525,045
========= ======= ====== ==== ============ ============ ============ ===========
</TABLE>
See accompanying notes to financial statements
21
<PAGE> 22
GALAXY FOODS COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net Income $ 3,629,891 $ 1,291,367 $ 377,523
ADJUSTMENTS TO RECONCILE NET INCOME
TO NET CASH USED IN OPERATING ACTIVITIES:
Depreciation and amortization 1,149,729 735,220 649,334
Amortization of debt discount 78,690 -- --
Deferred tax benefit (1,320,000) -- --
Gain on sale of assets -- -- (1,329)
Provision for losses on trade receivables 75,000 (4,794) 14,794
Consulting and director fee expense paid through
issuance of common stock warrants 18,583 22,293 78,494
(Increase) decrease in:
Trade receivables (3,103,158) (1,777,317) (1,030,192)
Other receivables (67,740) (136,808) (72,704)
Inventories (2,787,211) (3,776,994) (656,499)
Prepaid expenses (893,918) (306,204) (45,914)
Increase (decrease) in:
Accounts payable 1,705,513 2,222,385 639,431
Accrued liabilities (301,179) 14,850 34,694
------------ ------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (1,815,800) (1,716,002) (12,368)
------------ ------------ ------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property and equipment (4,404,501) (2,168,027) (1,704,633)
(Increase) decrease in other assets (103,632) 62,526 (6,206)
Sale of marketable securities -- -- 300,000
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (4,508,133) (2,105,501) (1,410,839)
------------ ------------ ------------
</TABLE>
22
<PAGE> 23
<TABLE>
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Book overdrafts 1,191,811 (333,820) 836,762
Borrowings on line of credit 39,555,000 29,017,000 19,518,445
Repayments on line of credit (38,682,918) (26,944,840) (19,048,641)
Borrowings on term note payable 3,992,906 1,624,000 --
Repayments on term note payable (2,806,847) (244,000) --
Borrowings on subordinated note payable 3,876,817 -- --
Principal payments on capital lease obligations (366,816) (63,394) (24,395)
Proceeds from issuance of common stock, net of
offering costs 1,033 968,943 33,248
Refund of stock issuance costs -- -- 8,750
Financing costs for long term debt (441,497) (226,343) --
Proceeds from exercise of common stock options 4,715 4,000 57,284
Proceeds from exercise of common stock warrants -- -- 45,338
------------ ------------ ------------
NET CASH FROM FINANCING ACTIVITIES 6,324,204 3,801,546 1,426,791
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 271 (19,957) 3,584
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD 112 20,069 16,485
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END
OF PERIOD $ 383 $ 112 $ 20,069
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
23
<PAGE> 24
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.
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, 2000.
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
24
<PAGE> 25
GALAXY FOODS COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
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 affect attributable to temporary differences and
carry forwards. 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.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year financial
statements to conform with the current year 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.
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
25
<PAGE> 26
GALAXY FOODS COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
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, as amended by FAS 137, is effective for all fiscal
year quarters of fiscal years beginning after June 15, 2000.
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 July 1, 2000 to affect its financial statements.
(2) INVENTORIES
Inventories are summarized as follows:
March 31, 2000 March 31, 1999
Raw materials $ 4,005,324 $ 2,750,781
Finished goods 5,017,624 3,484,956
------------------------------------
Total $ 9,022,948 $ 6,235,737
====================================
(3) PREPAID EXPENSES
Prepaid expenses are summarized as follows:
March 31, 2000 March 31, 1999
Prepaid advertising $ 375,364 $ 227,939
Prepaid slotting 457,162 2,898
Prepaid commissions 151,114 87,967
Other prepaids 537,994 308,912
------------------------------------
Total $ 1,521,634 $ 627,716
------------------------------------
The Company expenses the production costs of advertising the first time
the advertising takes place, except for direct response advertising,
which is capitalized and amortized over its expected period of future
benefits. Direct response advertising consists primarily of newspaper
and magazine inserts that include coupons for the Company's products.
The capitalized costs of direct response advertising are amortized over
the twelve month period following the publication in which it appears.
Advertising expense was approximately $904,000, $698,000, and $289,000
during fiscal 2000, 1999 and 1998, respectively.
The Company incurs slotting fees to obtain shelf space in retail stores
which are amortized over the shorter of the expected utility or one
year.
(4) PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
Useful Lives March 31, 2000 March 31, 1999
<S> <C> <C> <C>
Leasehold improvements 10-25 years $ 3,184,988 $ 2,838,475
Machinery and equipment 5-15 years 14,935,169 6,513,084
Delivery equipment and autos 3- 5 years 15,652 15,652
Equipment under capital leases 7-15 years 314,543 717,391
Construction in progress 1,525,905 5,374,616
------------------------------------
19,976,257 15,459,218
Less accumulated depreciation 3,955,511 2,955,388
------------------------------------
Property and equipment, net $ 16,020,746 12,503,830
====================================
</TABLE>
26
<PAGE> 27
GALAXY FOODS COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Interest in the amount of $490,442, $395,963 and $234,772 was
capitalized to construction in progress during the years ended March
31, 2000, 1999 and 1998, respectively.
The Company estimates that approximately $4,000,000 of additional costs
will be incurred to complete the construction in progress projects.
(5) COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases its operating facilities and certain equipment under
operating and capital leases, expiring at various dates through fiscal
year 2005. The following is a schedule by years as of March 31, 2000,
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:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
----------- -----------
<S> <C> <C>
2001 $ 39,064 $ 596,987
2002 42,775 464,789
2003 23,916 248,474
2004 5,164 246,602
Thereafter 3,873 146,094
----------- -----------
Total net minimum lease payment 114,792 $ 1,702,946
===========
Less amount representing interest 14,599
Present value of the net minimum lease payment 100,193
Less current portion 30,364
Long-term obligations under capital leases $ 69,829
===========
</TABLE>
Rental expense was approximately $750,000, $520,000 and $480,000 for
the fiscal years ended March 31, 2000, 1999 and 1998, respectively.
EMPLOYMENT AGREEMENT
On June 17, 1999, the Company's Board of Directors issued a new
employment agreement for the Company's President. The new agreement
allows for a one time grant of a stock option to purchase a maximum of
1,357,000 shares of common stock which, if exercised, would bring the
President's ownership interest in the Company to 45%. The option was
granted in June 1999 and is exercisable immediately at $3.31 per share
and expires June 2009. The new agreement also forgives the unaccrued
interest on the existing note, provides for a salary of $300,000 and
decreases the annual bonus to a sliding scale of pre-tax income,
beginning with the fiscal year ending March 31, 2000. This new
agreement has a rolling five-year term.
27
<PAGE> 28
GALAXY FOODS COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
(6) CAPITAL STOCK
REVERSE STOCK SPLIT
On February 11, 1999, the Company completed a one for seven reverse
stock split with respect to its common stock. All common share
information, included in the accompanying financial statements, has
been retroactively adjusted to give effect to the reverse stock split.
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 35,715 shares of common
stock to eligible employees. Up to 358 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, 2000, 7,802 shares were accrued and 514 shares were
issued under this plan at prices ranging from $3.24 to $3.78 per share.
During the year ended March 31, 1999, 8,046 shares were purchased under
this plan at prices ranging from $3.77 to $3.94 per share. During the
year ended March 31, 1998, 6,634 shares were purchased under this plan
at prices ranging from $4.76 to $5.18 per share. The weighted average
fair value of the shares issued were $3.52, $3.91, and $4.97 per share
for the fiscal years ended March 31, 2000, 1999 and 1998, respectively.
COMMON STOCK OPTIONS AND WARRANTS ISSUED FOR CONSULTING SERVICES
During the fiscal years ended March 31, 2000, 1999 and 1998, consulting
expense of $18,583, $22,293, and $78,494, respectively, was recognized
on common stock options and warrants granted to officers, directors and
consultants.
STOCK WARRANTS
At March 31, 2000, 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 2000 7,143 $ 5.46
May 2001 4,286 8.53
August 2000 14,286 10.46
July 2002 1,071 5.67
September 2002 143 6.79
December 2002 10,714 5.04
September 2004 915,000 3.41
August 2005 7,143 4.48
January 2006 33,571 4.81
August 2008 15,715 4.81
January 2009 1,430 3.94
---------
1,010,502
=========
28
<PAGE> 29
GALAXY FOODS COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
STOCK OPTIONS
At March 31, 2000, 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 178,572 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 in the fiscal 2000 option-pricing model are
as follows: no dividend yield, 43% volatility, risk-free interest rate
of 4.64%, and expected lives of ten years. Assumptions used for grants
in 1999: no dividend yield, volatility of 80%, risk-free interest rates
ranging from 4.64% to 5.25% and expected lives of ten years.
Assumptions used in the fiscal 1998 option-pricing model are as
follows: no dividend yield, volatility from 116% to 129%, risk-free
interest rate of 6.3% and expected lives ranging from two 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 reduced net income by $2,755,910 for fiscal 2000, would have
reduced net income by $73,808 for fiscal 1999 and would have had a net
loss of $317,887 for fiscal 1998. Basic and diluted pro forma earnings
per share would have been $0.10 and $0.09, respectively for fiscal
2000. The effect on earnings per share is less than $0.01 per share for
fiscal 1999 and 1998.
The following table summarizes information about plan stock option
activity for the years ended March 31, 2000, 1999 and 1998:
<TABLE>
<CAPTION>
Weighted-Average Weighted-Average
Exercise Price Fair Value of
Shares Per Share Options Granted
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, March 31, 1997 75,039 $ 10.01 $ --
Granted - at market 29,785 5.46 3.92
Exercised (16,300) 3.50 --
Canceled (18,500) 11.13 --
Balance, March 31, 1998 70,024 8.96 --
Granted - at market 28,572 2.84 2.59
Exercised (1,143) 3.50 --
Canceled (10,834) 8.81 --
Balance, March 31, 1999 86,619 4.73 --
Granted - at market 5,000 3.91 2.40
Exercised (1,000) 4.71 --
Canceled (2,643) 10.55 --
-------------------------------------------------------------------------------------------------
Balance, March 31, 2000 87,976 $ 4.51 $ --
=================================================================================================
</TABLE>
29
<PAGE> 30
GALAXY FOODS COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
At March 31, 2000, 1999 and 1998, a total of 61,261, 56,430 and 52,988
of the outstanding plan options were exercisable with a
weighted-average exercise price of $4.90, $5.28 and $9.45 per share,
respectively.
The following table summarizes information about non-plan stock option
activity for the years ended March 31, 2000, 1999 and 1998:
<TABLE>
<CAPTION>
Weighted-Average Weighted-Average
Exercise Price Fair Value of
Shares Per Share Options Granted
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, March 31, 1997 51,787 10.50 --
Granted - at market 142,857 5.25 4.41
Canceled (6,429) 12.74 --
---------------------------------------------------------------------------------------------
Balance, March 31, 1998 188,215 6.86 --
Canceled (2,834) 14.00 --
---------------------------------------------------------------------------------------------
Balance, March 31, 1999 185,381 6.10 --
Granted - at market 1,357,000 3.31 2.03
Canceled (2,286) 14.00 --
---------------------------------------------------------------------------------------------
Balance, March 31, 2000 1,540,095 $ 3.63 $ --
=============================================================================================
</TABLE>
At March 31, 2000, 1999 and 1998, a total of 1,532,956, 171,095, and
166,072 of the outstanding non-plan options were exercisable with a
weighted-average exercise price of $3.61, $5.90, and $6.58 per share,
respectively. The following table summarizes information about plan and
non-plan stock options outstanding and exercisable at March 31, 2000:
<TABLE>
<CAPTION>
Options Outstanding
Range of Number Weighted-Average Weighted-Average Number Weighted-Average
Exercise Prices Outstanding Remaining Life Exercise Price Exercisable Exercise Price
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$2.84 - 5.25 1,560,643 8.8 years $ 3.48 1,538,498 $ 3.49
5.46 - 7.00 21,571 6.2 years 6.40 16,999 6.44
8.31 -10.28 43,333 6.2 years 8.64 36,195 8.68
14.00 -19.25 2,524 2.1 years 14.30 2,525 14.30
--------- ---------
1,628,071 1,594,217
</TABLE>
SHARES RESERVED
At March 31, 2000, the Company has reserved common stock for future
issuance under all of the above arrangements totaling 2,438,311 shares.
(7) SALE OF SECURITIES
On April 16, 1996, the Company completed a private placement of 191,075
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
30
<PAGE> 31
GALAXY FOODS COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
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 902,658 shares of Common Stock at an average conversion rate of
$4.41 per share. 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.
(8) INCOME TAXES
The components of the net deferred assets consist of the following:
<TABLE>
<CAPTION>
March 31, 2000 1999
-------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carry forwards $ 4,184,000 $ 5,605,000
Investment, alternative minimum and
general business tax credits 140,000 173,000
Nondeductible expenses from stock warrants 152,000 122,000
Nondeductible compensation from stock options 39,000 39,000
Bad debts 66,000 38,000
Inventory overhead allocation 4,000 58,000
-------------------------------------------------------------------------------------------
Gross deferred income tax assets 4,585,000 6,035,000
Valuation allowance (2,014,000) (4,800,000)
-------------------------------------------------------------------------------------------
Total deferred income tax assets 2,571,000 1,235,000
Deferred income tax liabilities:
Prepaid advertising -- (85,000)
Depreciation (1,251,000) (1,150,000)
-------------------------------------------------------------------------------------------
Net deferred income tax assets 1,320,000 --
===========================================================================================
</TABLE>
The valuation allowance decreased by $2,786,000 amd $2,612,000 for the
years ended March 31, 2000 and 1999, respectively and increased by
$996,000 during fiscal 1998. The Company has recorded a valuation
allowance to state its deferred tax assets at estimated net realizable
value due to the uncertainty related to realization of these assets
through future taxable income.
31
<PAGE> 32
GALAXY FOODS COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
Significant components of income tax (expense) benefit are as follows:
Year ended March 31, 2000 1999 1998
------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ (110,669) $ (60,000) $ --
State -- -- --
------------------------------------------------
(110,669) (60,000) --
------------------------------------------------
Deferred:
Federal 1,127,100 -- --
State 192,900 -- --
------------------------------------------------
1,320,000 -- --
------------------------------------------------
$ 1,209,331 $ (60,000) $ --
================================================
</TABLE>
Tax expense for the years ended March 31, 2000 and 1999 for the
Company's liability for alternative minimum tax was $110,669 and
$60,000, respectively. The alternative minimum tax system limits the
amount of alternative minimum NOL carry forward that can be applied
against current year alternative minimum income, thus creating
alternative minimum taxable income. Alternative minimum tax paid is
carried forward as a tax credit to offset federal tax if incurred in
the future. This credit does not expire.
The following summary reconciles differences from taxes at the federal
statutory rate with the effective rate:
<TABLE>
<CAPTION>
Year ended March 31, 2000 1999 1998
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income taxes at statutory rates 34.0% 34.0% 34.0%
Reduction of deferred tax asset valuation allowance (54.6%) -- --
Alternative minimum tax 4.6% 4.4% --
Utilization of net operating loss carry forward (34.0%) (34.0%) (34.0%)
-------------------------------------------------------------------------------------------------
Income taxes (benefit) at effective rates 50.0% 4.4% 0%
-------------------------------------------------------------------------------------------------
</TABLE>
Unused net operating losses for income tax purposes, expiring in
various amounts from 2007 through 2012, of approximately $11,390,000
are available at March 31, 2000 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.
(9) RELATED PARTY TRANSACTIONS
Under the provisions of his former employment agreement, which was
rescinded on June 17, 1999 (see Note 4) the Company's President was
granted the right to purchase up to 2,571,429 shares of the Company's
common stock. In October 1995, the President elected to purchase all
2,571,429 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 bore interest at 7% per annum and
is secured by the common shares purchased. The principal balance, was
payable in full in October 2000. In connection with his new employment
agreement, the interest on the note was forgiven and the term of the
note was extended to June 15, 2006.
32
<PAGE> 33
GALAXY FOODS COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Included in Other receivables on the Balance Sheet is $130,835 in
advances to the Company's President, these advances will be charged
against future bonuses under the new employment agreement.
A director of the Company was paid consulting fees totaling $36,000 for
introductions into several large foodservice companies during each of
the fiscal years ended March 31, 2000 and 1999.
(10) ECONOMIC DEPENDENCE
For the fiscal year ended March 31, 1998, the Company had one customer,
which comprised sales approximating, $2,074,901 or 10% of net sales.
For the fiscal years ended March 31, 2000 and 1999, the Company did not
have any customers, which comprised sales more than 10% of net sales.
For the fiscal year ended March 31, 1998, the Company had one major
supplier, which comprised more than 10% of purchases. Purchases from
this supplier totaled approximately $2,202,000 or 16.6% of total
purchases for fiscal 1998.
For the fiscal years ended March 31, 2000, the Company did not have any
single supplier which comprised more than 10% of purchases. During
fiscal 1999, one supplier comprised purchases of $2,285,974, or 11.8%
of total purchases for the year.
(11) LINE OF CREDIT AND LONG TERM DEBT
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, $3.5 million in June 1998,
$5.5 million in December 1998 and $7.5 million in April 2000. The
amount available under the line of credit is based on a formula of 80%
of eligible accounts receivable plus 35% of eligible inventories not to
exceed $3,000,000, 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 one half percent (9.25% at March 31, 2000). The line of
credit expires on October 31, 2002. As of March 31, 2000, the Company
had an outstanding balance of $4,784,999 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. Amounts
outstanding under the agreement are collateralized by machinery and
equipment owned by the Company. 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. This note is payable at the rate of $432,000
per year, with a balloon payment due on October 31, 2001. This note was
paid in full during March 2000 through a new financing agreement with a
different financial institution. The new term note payable has
availability to $8.5 million and bears interest at the prime rate
(8.75% at March 31, 2000). This note is payable interest only through
February 1, 2001, with monthly payments of $78,705, plus interest
payable beginning March 1, 2001. The note will mature on March 1,
2005. Amounts under the new agreement are
33
<PAGE> 34
GALAXY FOODS COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
collateralized by machinery and equipment owned by the Company. The new
note is being used to finance new production equipment to be purchased
by the Company throughout fiscal 2001. As of March 31, 2000, the
balance outstanding under this agreement was $3,992,906. The Company
paid approximately $26,000 in loan costs in connection with this new
financing.
On September 30, 1999, the Company secured a $4 million subordinated
note payable less loan costs of $380,000 to finance working capital and
capital improvement needs of the Company. Amounts outstanding under the
agreement are collateralized by a subordinated lien on substantially
all assets of the Company. The subordinated note is payable in one lump
sum upon maturity on September 30, 2004 and bears interest payable
monthly at a rate of 13.5%. The Company issued a warrant to purchase
915,000 shares of common stock to the subordinated note holder at an
exercise price of $3.41 per share which represented 80% of the fair
value of the Company's stock on the date the warrant was issued. The
warrant were valued at $786,900 which was recorded as a debt discount
and is being amortized to interest expense from the date of issuance of
the note to the maturity date of the note of September 30, 2004. During
fiscal 2000, $78,690 was recorded as interest expense. As of March 31,
2000, the unamortized debt discount was $708,210 and the principal
balance on the note was $3,876,817.
Aggregate maturities of the term note and subordinated note payable
over future years are as follows: 2001 - $78,705, 2002 - $944,460, 2003
- $944,460, 2004 - $944,460 and 2005 - $4,957,638.
The line of credit and notes payable contain certain financial and
operating covenants. The Company was in compliance with all covenants
at March 31, 2000.
(12) EMPLOYEE BENEFIT PLAN
The Company established a 401(k) defined contribution plan covering
substantially all employees meeting certain minimum age and service
requirements. The Company's contributions to the plan are determined by
the Board of Directors and are limited to a maximum of 25% of the
employee's contribution and 6% of the employee's compensation.
Contributions to the plan amounted to $17,025, $15,180, and $12,004 for
the fiscal years ended March 31, 2000, 1999 and 1998, respectively.
34
<PAGE> 35
GALAXY FOODS COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
(13) SUPPLEMENTAL CASH FLOW INFORMATION
For purposes of the statement of cash flows, all highly liquid
investments with a maturity date of three months or less are considered
to be cash equivalents. Cash and cash equivalents include checking
accounts and money market funds.
<TABLE>
<CAPTION>
Year ended March 31, 2000 1999 1998
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Non-cash financing and investing activities:
Purchase of equipment through capital lease
obligations and term note payable $ 94,865 $ 402,869 $1,426,847
Consulting and directors fees paid through
issuance of common stock warrants 18,583 68,500 51,320
Issuance of warrants in connection with
Subordinated note payable 786,900 -- --
Cash paid for:
Interest 1,620,941 663,831 350,407
Income Taxes 95,401 -- --
</TABLE>
(14) EARNINGS PER SHARE
The following is a reconciliation of basic net earnings per share to
diluted net earnings per share for the years ended March 31, 2000, 1999
and 1998:
<TABLE>
<CAPTION>
Year ended March 31, 2000 1999 1998
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic net earnings per common share $ .40 $ .14 $ .04
Average shares outstanding - basic 9,183,814 9,005,843 8,638,225
Potential shares exercisable under stock option plans 1,128,506 185,786 224,359
Potential shares exercisable under stock warrant agreements 457,500 514,545 1,102,756
Potential shares assumed converted from preferred stock -- -- 162,504
Less: Shares assumed repurchased under treasury stock method (1,360,005) (593,964) (988,098)
----------- ---------- ----------
Average shares outstanding - diluted 9,409,815 9,112,210 9,139,746
Diluted earnings per common share $ .39 $ .14 $ .04
----------- ---------- ----------
</TABLE>
The above reconciliation excludes 215,575 options and 95,501 warrants
as they were anti-dilutive.
35
<PAGE> 36
GALAXY FOODS COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
(15) FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of fiscal 2000, the Company recorded the
following adjustments:
<TABLE>
<S> <C>
Capitalize labor, overhead and interest to construction in progress $ 720,927
Record debt discount related to warrants issued in connection with
subordinated note payable 786,900
</TABLE>
The effect of the above fourth quarter adjustments on previous quarters
is as follows:
Three Months Ended
December 31, 1999 September 30,1999
Net income:
As reported $ 727,960 $ 784,720
As restated 1,074,006 1,120,256
Basic earnings per share:
As reported $ 0.08 $ 0.09
As restated 0.12 0.12
Diluted earnings per share:
As reported $ 0.08 $ 0.08
As restated 0.11 0.12
(16) SCHEDULE OF VALUATION ACCOUNT
<TABLE>
<CAPTION>
Balance at Charged to Write-Offs
Beginning Costs and Retirements Balance at
of Year Expenses & Collections End of Year
<S> <C> <C> <C> <C>
Year Ended March 31, 1998:
Allowance for Doubtful Accounts
Receivable $131,300 $ 16,496 $ 43,004 $104,794
Year Ended March 31, 1999:
Allowance for Doubtful Accounts
Receivable $104,794 $138,595 $143,389 $100,000
Year Ended March 31, 2000:
Allowance for Doubtful Accounts
Receivable $100,000 $ 90,132 $ 15,132 $175,000
</TABLE>
36
<PAGE> 37
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
37
<PAGE> 38
PART III
ITEM 10. 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 1, 2000, as well as their respective ages and positions
with the Company:
NAME AGE POSITIONS
--------------------------------------------------------------------------------
Angelo S. Morini (1) 57 Chairman of the Board of Directors, President,
and Chief Executive Officer
Keith A. Ewing 39 Chief Financial Officer
Cynthia L. Hunter 29 Corporate Secretary
Joseph Juliano (1)(2) 49 Director
Douglas A. Walsh (1)(2) 55 Director
Marshall K. Luther(2) 47 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(R). 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.
Keith A. Ewing has been Chief Financial Officer of the Company since February
2000. Mr. Ewing was the Vice President of Finance for CNL Corporate Properties.
His main focus has been in completing large financing transactions for both
public and privately held companies. Before CNL Corporate Properties, Mr. Ewing
was Chief Financial Officer of Premier Properties, Inc., a privately held London
based company. Mr. Ewing's public company experience includes serving as
controller at Mid State Homes, a $3 billion finance company, and accounting
manager for Nutmeg Mills, Inc.. Mr. Ewing received a BS in Accounting from
Florida State University and has three courses remaining towards his MBA.
Cynthia L. Hunter, CPA was elected 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. 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.
38
<PAGE> 39
Joseph Juliano has been a director of the Company since February 2000. From 1973
to present, Mr. Juliano has served in various management positions for Pepsi
Cola North America. Most recently, Mr. Juliano holds the position of Vice
President of Entertainment sales for Pepsi Cola. Mr. Juliano received his
Masters in Business Administration from St. John's University in New York City.
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 11. EXECUTIVE COMPENSATION.
All figures set forth in this Item 11 related to the number of shares of the
Company's common stock or prices or values thereof are adjusted to reflect the
one-for-seven reverse stock split which was effected on February 11, 1999.
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 $100,000 for the fiscal years
ended March 31, 2000, 1999, and 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Securities All
Annual Restricted Under- Other
Name and Compen- Stock lying LTIP Compen-
Principal Fiscal Salary Bonus sation Award(s) Options/ Payouts sation
Position Year ($) ($) ($) ($) SARs (#) ($) ($)
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ANGELO S. MORINI (1) 2000 300,000 125,000 20,526(2) -- 1,357,000 -- --
Chairman of the 1999 250,000 -- 20,128(3) -- -- -- --
Board of Directors, 1998 250,000 -- 19,132(4) -- -- -- --
President, and Chief
Executive Officer
CHRISTOPHER MORINI 2000 126,250 10,000 6,553 -- -- -- --
Vice President of
Marketing
JOHN JACKSON 2000 113,750 45,838 8,917 -- -- -- --
Vice President of
Sales
</TABLE>
39
<PAGE> 40
(1) 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 2,571,429 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 $4.50 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 342,857 shares of the Company's Common Stock for a purchase price of
$3.50 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." On June 17, 1999, the Company's Board of Directors approved to
rescind the above employment agreement and issue a new agreement for the
Company's President. The new agreement eliminates the performance based option
arrangement and allows for a one time grant of a stock option which , if
exercised, would bring the President's ownership interest in the Company to 45%.
The option was granted in June 1999 for the purchase of a maximum of 1,357,000
shares of the Company's Common Stock at a per share price of $3.31. The option
is immediately exercisable. The new agreement also forgives the unaccrued
interest on the existing note, provides for a salary increase to $300,000 and
decreases the annual bonus to a sliding scale of pre-tax income, beginning with
the fiscal year ending March 31, 2000. This new agreement has a rolling five
year term. The agreement combined the two existing notes into a single note
payable in the amount of $12,772,200. This new note is non-interest bearing,
non-recourse to Mr. Morini, and is secured by the Purchase Right Shares.
Approximately $3,000,000 in unpaid interest on the previous Notes was forgiven
in connection with the new employment agreement.
(2) For the fiscal year ended March 31, 2000, the Company paid $11,860 in lease
payments for Mr. Morini's automobile and $8,666 in club dues for Mr. Morini.
(3) For the fiscal year ended March 31, 1999, the Company paid $11,860 in lease
payments for Mr. Morini's automobile and $8,268 in club dues for Mr. Morini.
(4) 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.
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. One director
received consulting fees totaling $36,000 during fiscal 2000.
The following table sets forth information concerning each exercise of stock
options and freestanding stock appreciation rights during the fiscal year ended
March 31, 2000 by each of the executive officers named in the Summary of
Compensation Table above, and the fiscal year-end value of unexercised options
and SARs.
40
<PAGE> 41
OPTION/SAR EXERCISES
FOR THE FISCAL YEAR ENDED MARCH 31, 2000
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Options/SARs Options/SARs
at FY-End (#) at FY-End ($)
Shares Value
Acquired Realized
Name on Exercise (#) ($) Exercisable Unexercisable Exercisable Unexercisable
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ANGELO S. MORINI -- -- 2,877,072 0 809,268(1) 0
</TABLE>
(1) The value of the unexercised shares at March 31, 2000 is based on the
difference between the closing sales price of the Company's Common Stock of
$3.69 on March 31, 2000 and exercise prices from $3.31 to $5.25.
EMPLOYMENT AGREEMENT OF CHIEF EXECUTIVE OFFICER
As of June 17, 1999, the Company entered into a new Employment Agreement (the
"Agreement") with Angelo S. Morini, the Company's President and Chief Executive
Officer. The Agreement has a rolling term of five years and provides for an
annual base salary of $300,000. Additionally, Mr. Morini will receive an annual
bonus in an amount equal to or between three and five percent of the Company's
pre-tax net income for book purposes, depending on the level of pre-tax income
achieved, as determined by the Company's independent certified public accounting
firm. Other material provisions of the Agreement are as follows:
1. Mr. Morini shall be granted an option to purchase a maximum of
1,357,000 shares of the Company's Common Stock at a per share
price of $3.31 per share. The options granted as aforesaid
shall have a term of ten 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.
2. 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.
3. If the Agreement is terminated by the Company without cause,
Mr. Morini shall be come fully vested in any stock 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 Mr. Morini's
41
<PAGE> 42
annual base salary (before deductions for withholding,
employment and unemployment taxes) for a period of sixty
months.
4. 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.
5. The Company will obtain, and maintain in effect during the
term of this Agreement, for the benefit of (i) a Two Million
Dollar (2,000,000) term life insurance policy insuring his
life, the beneficiaries of which shall be designated by Mr.
Morini, and (II) a disability insurance policy providing for
payment of at least two-thirds (2/3) of Mr. Morini's base
salary.
6. In connection with Mr. Morini's exercise of certain rights to
purchase Company common stock, Mr. Morini has previously
delivered two interest bearing promissory notes to the Company
in the amounts of $11,572,200 and $1,200,000, representing the
purchase price for such common stock purchases. The
$11,572,200 Note is secured by certain shares of the Company's
common stock owned by Mr. Morini. The parties hereby agree
that the $11,572,200 Note and the $1,200,000 Note shall be
canceled (with the Company forgiving any accrued interest
thereunder) and that the parties entered into a new Loan
Agreement. The Loan Agreement provides that Mr. Morini and the
Company execute a new promissory note in the amount of
$12,772,200 and stock pledge agreement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
All figures set forth in this Item 12 related to the number of shares of the
Company's common stock or prices or values thereof are adjusted to reflect the
one-for-seven reverse stock split which was effective on February 11, 1999.
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, 2000 (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 BENEFICIAL OWNERSHIP (1) CLASS (2)
------------------------------------------------------------------------------
Angelo S. Morini
2441 Viscount Row
Orlando, Florida 32809 4,952,743(3) 46%
Cede & Co.
Box #20
Bowling Green Station
New York, New York 5,075,015 54%
42
<PAGE> 43
(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 10,722,963 shares. Does not assume the exercise
of any other options or warrants.
(3) Includes options to acquire 1,520,072 shares of the Company's Common Stock.
All of Mr. Morini's options currently are exercisable at $3.31 to $5.75 per
share. The original exercise prices of 20,215 of the options ranged from $17.50
per share to $25.03 per share. The exercise prices of these options were reduced
by the Board of Directors to $3.50 per share on August 31, 1993. Options expire
as to 7,143 shares on December 4, 1997, as to 13,072 shares on October 1, 2001
and as to 142,858 on July 1, 2007, and as to 1,357,000 shares on June 15, 2009.
Also includes 715 shares owned by Mr. Morini that are held in a nominee name and
286 shares held in joint tenancy. With the exception of the options and the
share held in a nominee name, all of Mr. Morini's shares have been transferred
to Morini Investments Limited Partnership, a Delaware limited liability
partnership, of which Angelo Morini is the Limited Partner and Morini
Investments LLC is the General Partner. Mr. Morini is the sole general partner
or Morini Investments LLC.
(4) Cede & Co. is a share depository used by shareholders to hold stock in
street name. Does not include 715 shares beneficially owned by Angelo S. Morini
and held by Cede & Co. in street name.
43
<PAGE> 44
SHARE OWNERSHIP OF OFFICERS AND DIRECTORS
The following table sets forth, as of June 1, 1999, 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 4,952,743(3) 46%
Joseph Juliano
Galaxy Foods company
2441 Viscount Row
Orlando, FL 32809 9,286(4) *
Douglas A. Walsh
607 Tamiami Trail
Ruskin, Florida 33570 3,239(5) *
Marshall K. Luther
Galaxy Foods Company
2441 Viscount Row
Orlando, Florida 32809 9,190(6) *
Keith Ewing
Galaxy Foods Company
2441 Viscount Row
Orlando, Florida 32809 1,200
All executive officers and directors
as a group 4,975,658 46%
* Less than 1%.
(1) The inclusion herein of any shares deemed beneficially owned does not
constitute an admission of beneficial ownership of these shares.
(2) The total number of shares outstanding assuming the exercise of all
currently exercisable and vested options and warrants held by all executive
officers, directors, and holders of 5% or more of the Company's issued and
outstanding Common Stock is 10,722,963 shares. Does not assume the exercise of
any other options or warrants.
(3) Includes options to acquire 1,520,072 shares of the Company's Common Stock.
All of Mr. Morini's options currently are exercisable at $3.31 to $5.75 per
share. The original exercise prices of 20,215 of the options ranged from $17.50
per share to $25.03 per share. The exercise prices of these options were reduced
by the Board of Directors to $3.50 per share on August 31, 1993. Options expire
as to 7,143 shares on December 14, 1997, as to 13,072 shares on October 1, 2001,
and 142,858 as to July 1, 200 and as to 1,357,000 shares on June 15, 2009. Also
44
<PAGE> 45
includes 2,143 shares owned by Mr. Morini that are held in a nominee name and
286 shares held in joint tenancy. With the exception of the options and the
share held in a nominee name, all of Mr. Morini's shares have been transferred
to Morini Investments Limited Partnership, a Delaware limited liability
partnership, of which Angelo Morini is the Limited Partner and Morini
Investments LLC is the General Partner. Mr. Morini is the sole general partner
or Morini Investments LLC.
(4) Mr. Juliano, a current member of the Company's Board of Directors, was
granted, on October 1, 1999, options to acquire 72 shares at an exercise price
of $4.13 per share, which expire on October 1, 2009. The closing bid price of
the Company's Common Stock as quoted on the NASDAQ system on September 30, 1999
was $4.13 per share. All of Mr. Juliano's options are currently exercisable.
(5) Dr. Walsh, a current member of the Board of Directors, was granted an option
to acquire 2143 shares of Common Stock on January 31, 1992 for an exercise price
of $21.00 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 $17.50 per share. Dr. Walsh was granted an additional option on
October 1, 1992 to acquire 96 shares of Common Stock at an exercise price of
$20.13 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 $18.38 per share. The exercise price of all of Dr. Walsh's then
existing options was reduced to $14.00 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 $32.38 per share. On October 1, 1994, Dr. Walsh was
granted an option to acquire 143 shares at an exercise price of $19.25 per
share. The closing bid price of the Company's Common Stock as quoted on the
NASDAQ System on September 30, 1994, was $20.13 per share. This option expires
on October 1, 2004. On October 1, 1995, Dr. Walsh was granted an option to
acquire 143 shares at an exercise price of $4.13 per share. The closing bid
price of the Company's Common Stock as quoted on the NASDAQ System on September
29, 1995, was $4.16 per share. This option expires on October 1, 2005. On
October 1, 1996, Dr. Walsh was granted an option to acquire 286 shares at an
exercise price of $10.29 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 $10.50 per share. On October 1, 1997, he was granted an
option to acquire 286 shares at an exercise price of $8.31 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 $8.31 per share. On
October 1, 1998, he was granted an option to acquire 286 shares at an exercise
price of $3.06 per share, which expire on October 1, 2008. The closing bid price
of the Company's Common Stock as quoted on the NASDAQ system on September 30,
1998 was $3.06 per share. On October 1, 1999, he was granted an option to
acquire 286 shares at an exercise price of $4.13 per share, which expire on
October 1, 2009. The closing bid price of the Company's Common Stock as quoted
on the NASDAQ system on September 30, 1999 was $4.13 per share. All of Dr.
Walsh's options currently are exercisable.
(6) Mr. Luther, a current member of the Company's Board of Directors, holds
warrants to acquire 7143 shares of Common Stock at a price of $4.48 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 2,143 shares of the Company's Common Stock on January 31, 1996, for an
exercise price of $5.69 per share, which option expires on January 31, 2006. On
October 1, 1996, Mr. Luther was granted an option to acquire 190 shares at an
exercise price of $10.29 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 $10.50 per share. On October 1, 1997, he was granted an
option to acquire 286 shares at an exercise price of
45
<PAGE> 46
$8.31 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
$8.31 per share. On October 1, 1998, he was granted an option to acquire 286
shares at an exercise price of $3.06 per share which expire on October 1, 2008.
The closing bid price of the Company's Common Stock as quoted on the NASDAQ
system on September 30, 1998 was $3.06 per share. On October 1, 1999, he was
granted an option to acquire 286 shares at an exercise price of $4.13 per share,
which expire on October 1, 2009. The closing bid price of the company's Common
Stock as quoted on the NASDAQ system on September 30, 1999 was $4.13 per share.
All of Mr. Luther's options currently are exercisable.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
All figures set forth in this Item 13 related to the number of shares of the
Company's common stock or prices or values thereof are adjusted to reflect the
one-for-seven reverse stock split, which was effective on February 11, 1999.
On June 17, 1999, the Company entered into an employment agreement with Angelo
S. Morini. The agreement increases Mr. Morini's base salary to $300,000 per year
from $250,000. Additionally, the agreement details additional non-cash
compensation based on the performance of the Company. The agreement also grants
an option to purchase up to 1,357,000 shares of the Company's Common Stock by
Mr. Morini. See "Employment Agreement of Chief Executive Officer." Included in
Other receivables on the Balance Sheet is $130,835 in advances to the Company's
President, these advances will be charged against future bonuses under the new
employment agreement.
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 7,143 shares of the Company's Common Stock at a price of $8.47 per
share. This option expires on May 16, 2006. This option is currently exercisable
for 4,286 of the 7,143 shares under option. On September 24, 1998, Christopher
Morini was issued an option to purchase 14,286 shares of the Company's Common
Stock at a price of $2.87 per share. This option expires on September 24, 2008.
This option is currently fully exercisable.
46
<PAGE> 47
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K.
The following Exhibits are filed as part of this Form 10-K.
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.
*10.2 Third Amendment to the Security Agreement with Finova Financial
Services dated December 1998.
10.3 Term Loan Agreement with SouthTrust Bank dated March 2000 (filed
herewith).
10.4 Cabot Industrial Properties L.P. lease dated July 1999 (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
47
<PAGE> 48
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, 2000 /s/ Angelo S. Morini
--------------------------------------------
Angelo S. Morini
Chairman and President
(Principal Executive Officer)
Date: June 27, 2000 /s/ Keith A. Ewing
--------------------------------------------
Keith A. Ewing
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: June 27, 2000 /s/ Douglas Walsh
--------------------------------------------
Douglas Walsh, M.D.
Director
Date: June 27, 2000 /s/ Marshall Luther
--------------------------------------------
Marshall Luther
Director
Date: June 27, 2000 /s/Joseph Juliano
--------------------------------------------
Joseph Juliano
Director
48
<PAGE> 49
"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 Second Amendment to the Security Agreement with Finova
Financial Services.
*10.2 Third Amendment to the Security Agreement with Finova
Financial Services.
10.3 Term Loan Agreement with SouthTrust Bank dated March 2000 (filed
herewith).
10.4 Cabot Industrial Properties L.P. lease dated July 1999 (filed
herewith).
27 Financial Data Schedule (filed herewith).
* Previously filed
