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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2000
------------------------------
COMMISSION FILE NUMBER 0-16251
GALAXY NUTRITIONAL FOODS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 25-1391475
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2441 VISCOUNT ROW
ORLANDO, FLORIDA 32809
(Address of principal executive offices) (Zip Code)
(407) 855-5500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO ____
On February 1, 2001, there were 10,011,947_shares of Common Stock $.01
par value per share, outstanding.
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GALAXY NUTRITIONAL FOODS, INC.
INDEX TO FORM 10-Q
FOR QUARTER ENDED DECEMBER 31, 2000
PAGE NO.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Balance Sheets 3
Statements of Operations 4
Statements of Stockholders' Equity 5
Statements of Cash Flows 6
Notes to Financial Statements 7-10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11-14
ITEM 3. QUANTITATIVE AND QUALITATIVE DATA CONCERNING MARKET RISK 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 15
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURES 17
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PART I. FINANCIAL INFORMATION
GALAXY NUTRITIONAL FOODS, INC.
BALANCE SHEETS
DECEMBER 31, MARCH 31,
2000 2000
------------ ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 500 $ 383
Trade receivables, net of allowances of
$675,000 and $175,000 7,596,408 7,456,936
Inventories 12,002,890 9,022,948
Other receivables 454,893 296,291
Deferred tax asset 693,000 453,000
Prepaid expenses 1,094,514 1,521,634
------------ ------------
Total current assets 21,842,205 18,751,192
------------ ------------
PROPERTY & EQUIPMENT, NET 24,250,212 16,020,746
DEFERRED TAX ASSET 867,000 867,000
OTHER ASSETS 718,254 811,455
------------ ------------
TOTAL $ 47,677,671 $ 36,450,393
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Book overdrafts $ 883,444 $ 1,694,753
Line of credit 7,055,703 4,784,999
Accounts payable - trade 6,778,141 5,016,556
Accrued liabilities 161,502 167,334
Current portion of term note payable 787,050 78,705
Current portion of obligations under capital leases 45,155 30,364
------------ ------------
Total current liabilities 15,710,995 11,772,711
TERM NOTE PAYABLE,
less current portion 10,679,318 3,914,201
SUBORDINATED NOTE PAYABLE 3,156,242 3,168,607
OBLIGATIONS UNDER CAPITAL LEASES,
less current portion 30,232 69,829
------------ ------------
Total liabilities 29,576,787 18,925,348
------------ ------------
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY:
Common stock 100,118 91,845
Additional paid-in capital 50,778,985 48,289,955
Accumulated deficit (19,885,558) (18,084,555)
------------ ------------
30,993,545 30,297,245
Less: Notes receivable arising from the exercise
of stock options and sale of common stock (12,772,200) (12,772,200)
Less: Treasury stock, 30,443 and 0, at cost (120,461) --
------------ ------------
Total stockholders' equity 18,100,884 17,525,045
------------ ------------
TOTAL $ 47,677,671 $ 36,450,393
============ ============
See accompanying notes to financial statements.
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GALAXY NUTRITIONAL FOODS, INC.
STATEMENTS OF OPERATIONS
NINE MONTHS ENDED THREE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2000 1999 2000 1999
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
NET SALES $ 34,729,293 $ 31,021,298 $ 11,258,310 $ 10,118,593
COST OF GOODS SOLD 22,402,602 19,062,299 7,461,741 5,952,992
------------ ------------ ------------ ------------
Gross margin 12,326,691 11,958,999 3,796,569 4,165,601
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Selling 8,360,800 4,347,732 3,687,567 1,399,308
Delivery 1,876,215 1,576,364 596,164 588,652
General and administrative 2,299,827 2,692,475 891,756 893,570
Research and development 195,395 167,250 71,084 71,935
------------ ------------ ------------ ------------
Total operating expenses 12,732,237 8,783,821 5,246,571 2,953,465
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS (405,546) 3,175,178 (1,450,002) 1,212,136
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense (897,620) (299,980) (283,981) (106,581)
Other income (expense) 48,592 (5,252) 33,604 (1,549)
------------ ------------ ------------ ------------
Total (849,028) (305,232) (250,377) (108,130)
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES $ (1,254,574) $ 2,869,946 $ (1,700,379) $ 1,104,006
INCOME TAX BENEFIT (EXPENSE) 240,000 (60,000) -- (30,000)
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE CUMULATIVE
EFFECT OF CHANGE IN
ACCOUNTING POLICY $ (1,014,574) $ 2,809,946 $ (1,700,379) $ 1,074,006
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING POLICY (786,429) -- (786,429) --
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (1,801,003) $ 2,809,946 $ (2,486,808) $ 1,074,006
============ ============ ============ ============
BASIC NET EARNINGS (LOSS) PER COMMON SHARE
INCOME (LOSS) BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING POLICY $ (0.11) $ 0.31 $ (0.18) $ 0.12
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING POLICY (0.09) -- (0.09) --
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (0.20) $ 0.31 $ (0.27) $ 0.12
============ ============ ============ ============
DILUTED NET EARNINGS (LOSS) PER COMMON SHARE
INCOME (LOSS) BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING POLICY $ (0.11) $ 0.30 $ (0.18) $ 0.11
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING POLICY (0.09) -- (0.09) --
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (0.20) $ 0.30 $ (0.27) $ 0.11
------------ ------------ ------------ ------------
See accompanying notes to financial statements
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GALAXY NUTRITIONAL FOODS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
Additional Notes Receivable
Common Stock Paid-In Accumulated for Common Treasury
Shares Par Value Capital Deficit Stock Stock Total
---------------------------------------------------------------------------------------------------------
Balance at March 31,
2000 9,184,546 $ 91,845 $48,289,955 $(18,084,555) $(12,772,200) $ -- $ 17,525,045
Purchase of treasury
stock -- -- -- -- -- (120,461) (120,461)
Issuance of common
stock under employee 12,401 123 44,851 -- -- -- 44,974
stock purchase plan
Exercise of warrants,
net of costs 815,000 8,150 2,444,179 -- -- -- 2,452,329
Net loss -- -- -- (1,801,003) -- -- (1,801,003)
---------------------------------------------------------------------------------------------------------
Balance at December
31, 2000 (unaudited) 10,011,947 $100,118 $50,778,985 $(19,885,558) $(12,772,200) $(120,461) $ 18,100,884
=========================================================================================================
See accompanying notes to condensed financial statements.
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GALAXY NUTRITIONAL FOODS, INC.
STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
DECEMBER 31,
2000 1999
------------ -----------
(Unaudited) (Unaudited)
CASH FLOWS USED IN OPERATING
ACTIVITIES:
Net Income (Loss) $ (1,801,003) $ 2,809,946
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS)
TO NET CASH USED IN OPERATING ACTIVITIES:
Depreciation expense 1,073,702 663,150
Amortization of debt discount 118,035 39,345
Cumulative effect of change in accounting policy 786,429 --
Deferred tax benefit (240,000) --
Amortization of consulting and director fee expense
paid through issuance of common stock warrants 104,843 21,468
Changes in operating assets and liabilities:
Trade receivables (139,472) (2,761,161)
Other receivables (158,602) --
Inventories (3,391,335) (2,701,154)
Prepaid expenses 52,082 (609,758)
Accounts payable 1,761,585 550,585
Accrued liabilities (5,833) (170,465)
------------ -----------
NET CASH USED IN
OPERATING ACTIVITIES (1,839,569) (2,158,044)
------------ -----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase and construction of property and equipment (9,303,168) (1,873,406)
Increase in other assets (11,639) (354,454)
------------ -----------
NET CASH USED IN INVESTING ACTIVITIES: (9,314,807) (2,227,860)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on line of credit 2,270,704 940,344
Book overdrafts (811,309) 211,190
Net proceeds from subordinated note payable -- 3,870,732
Net borrowings (payments) on note payable 7,473,462 (288,000)
Principal payments on capital lease obligations (24,805) (350,453)
Proceeds from issuance of common stock 44,974 --
Purchase of treasury stock (120,461) --
Proceeds from exercise of common stock warrants,
net of costs 2,321,928 3,528
------------ -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 11,154,493 4,387,341
------------ -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 117 1,436
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD 383 112
------------ -----------
CASH AND CASH EQUIVALENTS, END
OF PERIOD $ 500 $ 1,548
============ ===========
See accompanying notes to condensed financial statements.
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GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(1) MANAGEMENT REPRESENTATION
In the opinion of Galaxy Nutritional Foods, Inc. (the "Company"), the
accompanying unaudited financial statements contain all adjustments
necessary to present fairly the Company's financial position, results
of operations and cash flows for the periods presented. The results of
operations for the interim periods presented are not necessarily
indicative of the results to be expected for the full year.
The financial statements should be read in conjunction with the audited
financial statements and the related disclosures contained in the
Company's Form 10-K/A for the year ended March 31, 2000, filed with the
Securities and Exchange Commission.
(2) PRIOR PERIOD RESTATEMENTS
The results of operations for the three and nine months ended December
31, 1999 have been restated to reflect the fourth quarter adjustments
made in fiscal 2000. These adjustments include $385,391 and $720,927 of
labor, overhead and interest capitalized to construction in progress
for the three and nine months ended December 31, 1999, respectively. In
addition, during the three and nine months ended December 31, 1999, the
Company recorded an additional $39,345 to interest expense for
amortization of the debt discount related to warrants issued in
connection with the subordinated note payable.
(3) 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.
(4) INVENTORIES
Inventories are summarized as follows:
DECEMBER 31, MARCH 31,
2000 2000
(unaudited)
---------------------------------------------------------------------------------
Raw materials $ 4,762,268 $ 4,005,324
Finished goods 7,240,622 5,017,624
---------------------------------------------------------------------------------
Total $12,002,890 $ 9,022,948
---------------------------------------------------------------------------------
(5) SUPPLEMENTAL CASH FLOW INFORMATION
For purposes of the statement of cash flows, all highly liquid
investments with a maturity date of three months or less are considered
to be cash equivalents. Cash and cash equivalents include checking
accounts, money market funds and certificates of deposits.
For the nine months ended December 31, 2000 1999
------------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited)
Cash paid for:
Interest $1,491,326 $580,498
Noncash investing and financing activities:
Original issue discount related to price guarantee on
Finova transaction 945,400 --
Issuance of Subordinated Note Payable related to price
Guarantee on Finova transaction 815,000 --
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GALAXY NUTRITIONAL FOODS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(CONTINUED)
(6) EARNINGS PER SHARE
The following is a reconciliation of basic net earnings per share to
diluted net earnings per share for the three-month and nine-month
periods ended December 31, 1999:
Nine Months Ended Three Months Ended
December 31, 1999 December 31, 1999
(unaudited) (unaudited)
Basic net earnings per share $0.31 $0.12
========== ==========
Weighted average shares outstanding--basic 9,183,726 9,180,752
Potential shares exercisable under stock
Option plans 1,176,702 1,629,035
Potential shares exercisable under warrant
agreements 919,137 1,529,137
Less: Shares assumed repurchased under
Treasury stock method (1,954,099) (2,908,354)
Average shares outstanding--diluted 9,325,466 9,430,570
---------- ----------
Diluted earnings per share $0.30 $0.11
========== ==========
Potential common shares for the three and nine months ended December
31, 2000 were not presented as their effects were antidilutive.
Weighted average shares for basic and diluted loss per share for the
nine and three month periods ended December 31, 2000 were 9,185,734 and
9,211,102, respectively.
(7) INCOME TAXES
The Company recorded a deferred tax benefit of $240,000 for the nine
months ended December 31, 2000, which reduced the Company's valuation
allowance and states the deferred tax asset of $1,560,000 at December
31, 2000 at estimated net realizable value. The deferred tax asset
represents mainly tax operating loss carry forwards incurred in prior
years, which are expected to be realized in the future. Based upon an
assessment of all available evidence, management believes that
realization of the deferred tax asset is more likely than not. In the
event that realization of the remaining deferred tax asset is
considered more likely than not in the future, a portion of the related
benefit will be allocated to the cumulative effect of the change in
accounting policy.
(8) COMMITMENTS AND CONTINGENCIES
The Company has incurred costs totaling approximately $8 million on the
current construction in progress project. The Company is expanding its
manufacturing capacity by adding six new production lines. Costs to
complete this project are estimated at $2,600,000 and the project is
expected to be complete by March 2001.
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GALAXY NUTRITIONAL FOODS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(CONTINUED)
(9) CHANGE IN ACCOUNTING POLICY
The Company changed its accounting policy in the third quarter of
fiscal 2001 with regards to slotting fees and certain advertising
costs. The effect of this accounting change is to adopt this policy as
of the beginning of fiscal 2001 (April 1, 2000). Previously, slotting
fees and certain advertising costs were capitalized and amortized over
the shorter of the expected period of benefit or one year. The Company
changed this accounting policy to expense these costs as incurred. This
change was made because there has been a change in the expected period
of benefit related to these costs. During fiscal 2001, the Company's
slotting fees and advertising costs increased significantly in order
for the Company to maintain current relationships with brokers and
customers as opposed to generation and stimulation of future sales. As
a result, the Company believes these expenses are more appropriately
period expenses, rather than those that would benefit future periods,
and should be expensed as incurred. The cumulative effect of this
change in accounting policy was $786,429. Pro forma earnings per share
amounts on previous quarters, assuming the new accounting policy was
applied retroactively, are as follows:
Three Months Ended
9/30/00 6/30/00
---------------------------
Basic Earnings per Share:
Net income - as reported $0.08 $0.08
Net income - pro forma $0.02 $0.06
Diluted Earnings per Share:
Net income - as reported $0.07 $0.07
Net income - pro forma $0.02 $0.06
(10) SUBORDINATED NOTE PAYABLE AND WARRANTS
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.
On December 26, 2000, the subordinated note holder exercised their
warrant to purchase 815,000 shares of common stock at a price of $3.41
per share. The Company received net proceeds of $2,452,329, after
paying transaction costs of $326,822. In connection with this
transaction, the Company agreed to reimburse the note holder for
brokerage commission and other expenses incurred by the note holder for
the sale of the 815,000 shares to the public. These costs and expenses
were recorded as a reduction in the proceeds received from the exercise
of the warrants. In addition, the Company agreed to guarantee the price
at which the shares the note holder sold to the public at $4.41 per
share. The actual price received by the note holder was $3.25 per share
and the difference
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GALAXY NUTRITIONAL FOODS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(CONTINUED)
of $945,400 was recorded as a debt discount and is being amortized over
the remaining term of the subordinated note. The consideration for the
difference between the exercise price of $3.41 and the guaranteed price
of $4.41 was $815,000 and was funded through the issuance of an
additional subordinated term note which is due in December 2001.
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GALAXY NUTRITIONAL FOODS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the
Financial Statements and Notes thereto appearing elsewhere in this report.
The following discussion contains certain forward-looking statements, within the
meaning of the "safe-harbor" provisions of the Private Securities Reform Act of
1995, the attainment of which involves various risks and uncertainties.
Forward-looking statements may be identified by the use of forward-looking
terminology such as "may", "will", "expect", "believe", "estimate",
"anticipate", "continue", or similar terms, variations of these terms or the
negative of those terms. The Company's actual results may differ materially from
those described in these forward-looking statements due to among other factors,
competition in the Company's product markets, dependence on suppliers, the
Company's manufacturing experience, and production delays or inefficiencies.
Galaxy Nutritional Foods, Inc. (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, manufacturing and warehouse facilities are
located in Orlando, Florida.
RESULTS OF OPERATIONS
NET SALES were $11,258,310 in the quarter ended December 31, 2000, compared to
net sales of $10,118,593 for the quarter ended December 31, 1999, an increase of
11%. Net sales were $34,729,293 for the nine months ended December 31, 2000 as
compared to $31,021,298 for the same period one year ago, an increase of 12%.
The increase in sales has been a trend for the company over the last three
fiscal years. The Company commenced targeted advertising campaigns for its
flagship brand of Veggie products, including print, television and radio
advertising in key markets across the country. This has resulted in an upward
trend in sales volume for the Veggie line of products.
COST OF GOODS SOLD were $7,461,741 representing 66% of net sales for the quarter
ended December 31, 2000, compared with $5,952,992 or 59% of net sales for the
same period ended December 31, 1999. Cost of Goods Sold were $22,402,602 for the
nine months ended December 31, 2000, representing 65% of net sales as compared
to $19,062,299 or 61% of net sales for the nine months ended December 31, 1999.
The increase in the cost of goods sold as a percentage of net sales was due to
inefficiencies associated with the construction of the new equipment in the
Company's main facility. Efficiencies are expected to return in the fourth
quarter, when the construction project is complete.
SELLING expenses were $3,687,567 for the quarter ended December 31, 2000,
compared with $1,399,308 for the same period ended December 31, 1999, an
increase of 164%. For the nine months ended December 31, 2000, selling expenses
were $8,360,800 as compared to $4,347,732 for the same period one year ago, an
increase of 92%. The increase in expenses over the same period a year ago is
mainly attributed to a significant increase in slotting fees and other
advertising costs in the first three quarters of fiscal 2001 in order to
maintain current relationships with brokers and customers. In addition. the
Company changed its accounting policy, as more fully described below, in the
third quarter of fiscal 2001, which was effective at the beginning of fiscal
2001 (April 1, 2000). The effects of this change for the quarters ended
September 30, 2000, and June 30, 2000 were reductions to net income of $565,286
and $150,462, respectively. The increase in selling expenses also correlates to
an increase in sales, as
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approximately 30% of selling expenses, such as brokerage commissions, are
variable in nature and increase as sales increase.
DELIVERY expenses were $596,164 for the quarter ended December 31, 2000,
compared with $588,652 for the same period ended December 31, 1999, a 1%
increase. Delivery expenses were $1,876,215 for the nine months ended December
31, 2000 as compared to $1,576,364 for the nine months ended December 31, 1999,
a 19% increase. The increase in delivery costs is a result of the increase in
sales shipments to customers for the periods ended December 31, 2000 as compared
with the same periods in the prior year. In addition, there was an increase in
shipping rates during the third quarter of fiscal 2000 due to increased fuel
costs.
GENERAL AND ADMINISTRATIVE expenses were $891,756 for the quarter ended December
31, 2000, compared with $893,570 for the same period ended December 31, 1999.
General and administrative expenses decreased 15% to $2,299,827 for the nine
months ended December 31, 2000 as compared to $2,692,475 for the same period one
year ago. This change is primarily the result of increased expenses during the
third quarter of fiscal 2000 in connection with consulting services for Year
2000 readiness.
RESEARCH AND DEVELOPMENT expenses were $71,084 for the quarter ended December
31, 2000, compared with $71,935 for the quarter ended December 31, 1999. These
expenses were $195,395 for the nine months ended December 31, 2000 as compared
to $167,250 for the same period one year ago. The increase is due to the
addition of a food scientist during the third quarter of fiscal 2000.
INTEREST EXPENSE was $283,981 for the quarter ended December 31, 2000 as
compared to $106,581 for the quarter ended December 31, 1999. Interest expense
was $897,620 for the nine months ended December 31, 2000 as compared to $299,980
for the same period in fiscal 2000. The increase was attributable to additional
borrowings under the Company's term note and line of credit as well as a
subordinated note issued on September 30, 1999. Interest capitalized to
construction in progress was $359,528 and $198,303 during the three months ended
December 31, 2000 and 1999, respectively, and $653,706 and $459,363 for the nine
months ended December 31, 2000 and 1999, respectively. 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 as interest expense
over the term of the debt. During the first nine months of fiscal 2001, $118,035
was amortized to interest expense. The increase is also the result of additional
borrowings on the Company's line of credit to finance the increase in inventory.
In March 2000, the Company signed an $10 million term note payable, the balance
outstanding as of December 31, 2000 was $9,966,368. This note was used to pay
off the Company's prior term note payable and to finance approximately $7.5
million in new equipment to expand the Company's production capacity.
INCOME TAX BENEFIT for the nine months ended December 31, 2000 was $240,000
compared to income tax expense of $60,000 for the same period in the prior year.
The Company has recorded a deferred tax asset of $1,560,000 derived mainly from
tax net operating losses incurred in prior years, which are expected to be
realized in the future.
Cumulative effect of change in accounting policy totaled $786,429 for the three
and nine month periods ended December 31, 2000. The Company changed its
accounting policy in the third quarter of fiscal 2001 in regards to slotting
fees and certain advertising costs. The effect of this accounting change is to
adopt this policy as of the beginning of fiscal 2001 (April 1, 2000).
Previously, slotting fees and certain advertising costs were capitalized and
amortized over the shorter of the expected period of benefit or one year. The
Company changed this accounting policy to expense these costs as incurred. This
change was made because there has been a change in the expected period of
benefit related to these costs. During fiscal 2001, the Company's slotting fees
and advertising costs increased significantly in order for the Company to
maintain current relationships with brokers and customers as opposed to
generation and
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stimulation of future sales. As a result, the Company believes these expenses
are more appropriately period expenses, rather than those that would benefit
future periods, and should be expensed as incurred.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES -- Net cash used by operating activities was $1,839,569 for
the nine months ended December 31, 2000 compared to net cash used of $2,158,044
for the same period in fiscal 1999. During the nine months ended December 31,
1999, the increase in cash used in operating activities was a result of an
increase in trade receivables in connection with the Company's growth in sales.
During fiscal 2001 and 2000, the Company had an increase in inventory levels due
to the growth in sales which was accommodated by the new warehouse facility
leased by the Company in November 1999, this increase is partially offset by an
increase in accounts payable owed to vendors mainly for inventory purchases.
During fiscal 2001, the Company recorded a cumulative effect of a change in
accounting policy of $786,249, as described above.
INVESTING ACTIVITIES -- Net cash used in investing activities totaled $9,314,807
for the nine-month period ended December 31, 2000 compared to net cash used of
$2,227,860 for the same period in fiscal 1999. Cash used for investing
activities during fiscal 2000 and 2001 resulted from purchases and construction
of manufacturing equipment for six new production lines at the Company's main
facility. Construction and testing is expected to be completed by March 2001.
FINANCING ACTIVITIES -- Net cash flows provided by financing activities were
$11,154,493 for the nine months ended December 31, 2000 compared to $4,387,341
for the nine months ended December 31, 1999. The large inflows in fiscal 2001
are the result of increased draws on the Company's line of credit as well as
draws on the equipment note payable. The increase in cash from financing
activities was used to finance the build up in inventories as well as the
purchase and construction of manufacturing equipment. In addition, the Company
received net proceeds of $2.3 million in connection with a warrant exercise and
private placement with Finova Mezzanine Corporation, as more fully disclosed
below.
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, $7.5
million in April 2000, and $13 million in August 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 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
December 31, 2000). The line of credit expires on October 31, 2002.
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 was
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 $10 million and bears interest at the prime rate (8.75% at
December 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 the construction of the production
manufacturing lines and the purchase of production equipment as described above.
During November 2000, the Company's president guaranteed a $1.5 million short
term bridge loan from Southtrust Bank, N.A. with shares of his common stock
pledged as collateral. Interest on this
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note is at the prime rate (8.75% at December 31, 2000). Principal payment of
$50,000 per month are payable, commencing in May 2001.
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.
On December 26, 2000, the subordinated note holder exercised their warrant to
purchase 815,000 shares of common stock at a price of $3.41 per share. The
Company received net proceeds of $2,452,329, after paying transaction costs of
$326,822. In connection with this transaction, the Company agreed to reimburse
the note holder for brokerage commission and other expenses incurred by the note
holder for the sale of the 815,000 shares to the public. These costs and
expenses were recorded as a reduction in the proceeds received from the exercise
of the warrants. In addition, the Company agreed to guarantee the price at which
the shares the note holder sold to the public at $4.41 per share. The actual
price received by the note holder was $3.25 per share and the difference of
$945,400 was recorded as a debt discount and is being amortized over the
remaining term of the subordinated note. The payment for the difference between
the exercise price of $3.41 and the guaranteed price of $4.41 was $815,000 and
was paid through the issuance of an addition subordinated term note which is due
December 2001.
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 and 138, 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 the new standard to affect its financial statements.
In March 2000, the Financial Accounting Standards Board issued Interpretation
No. 44 ("FIN 44"), Accounting for Certain Transactions Involving Stock
Compensation, an Interpretation of APB Opinion No. 25. FIN 44 clarifies the
application of Opinion No. 25 for (a) the definition of employee for purposes of
applying Opinion No. 25, (b) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (c) the accounting consequences of various
modifications to the previously fixed stock option or award, and (d) the
accounting for an exchange of stock compensation awards in a business
combination. FIN 44 was effective July 2, 2000, but certain conclusions cover
specific events that occur after either December 15, 1998 or January 12, 2000.
The adoption of FIN 44 has not had a material effect on the Company's financial
position or results of operations.
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ITEM 3. 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 December 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
$33,000 for the quarter.
The Company's sales for the nine months ended December 31, 2000 and 1999
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 December 31, 2000. The effects of changes in foreign currency
exchange rates has not historically been significant to the Company's operations
or net assets.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 16, 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 set the number of directors at four and to elect a Board of
Directors for the ensuing year. The board members were voted in with
the following number of votes for their election: Angelo Morini -
4,584,109, Joseph Juliano - 4,585,351, Marshall Luther - 4,585,351, and
Douglas Walsh - 4,585,351.
2. To amend the Company's Certificate of Incorporation, as amended, to
change the name of the Company to "Galaxy Nutritional Foods, Inc.". The
vote tabulation for this proposal was as follows: for - 4,563,602,
against - 36,211, abstain - 1,233.
3. To ratify the retention of BDO Seidman L.L.P. as the independent
auditors of the Company for the fiscal year ended March 31, 2001. The
vote tabulation for this proposal was as follows: for - 4,565,698,
against - 28,621, abstain - 6,727.
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PART II. OTHER INFORMATION
GALAXY NUTRITIONAL FOODS, INC.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The following exhibits are filed as part of this Form 10-Q.
EXHIBIT NO EXHIBIT DESCRIPTION
*3.1 Certificate of Incorporation of the Company, as amended (Filed as
Exhibit 3.1 to the Company's Registration Statement on Form S-18,
No. 33-15893-NY, incorporated herein by reference.)
*3.2 Amendment to Certificate of Incorporation of the Company, filed on
February 24, 1992 (Filed as Exhibit 4(b) to the Company's
Registration Statement on Form S-8, No. 33-46167, incorporated
herein by reference.)
*3.3 By-laws of the Company, as amended (Filed as Exhibit 3.2 to the
Company's Registration Statement on Form S-18, No. 33-15893-NY,
incorporated herein by reference.)
*3.4 Amendment to Certificate of Incorporation of the Company, filed on
January 19, 1994 (Filed as Exhibit 3.4 to the Company's
Registration Statement on Form SB-2, No. 33-80418, and
incorporated herein by reference.)
*3.5 Amendment to Certificate of Incorporation of the Company, filed on
July 11, 1995 (Filed as Exhibit 3.5 on Form 10-KSB for fiscal year
ended March 31, 1996, and incorporated herein by reference.)
*3.6 Amendment to Certificate of Incorporation of the Company, filed on
January 31, 1996 (Filed as Exhibit 3.6 on Form 10-KSB for fiscal
year ended March 31, 1996, and incorporated herein by reference.)
*10.1 Second Amendment to the Security Agreement with Finova Financial
Services dated June 2000 (Filed as Exhibit 10.1 on Form 10-K for
fiscal year ended March 31, 2000, and incorporated herein by
reference.)
*10.2 Third Amendment to the Security Agreement with Finova Financial
Services dated December 2000 (Filed as Exhibit 10.2 on Form 10-K
for fiscal year ended March 31, 2000, and incorporated herein by
reference.)
18.1 Preferability letter from BDO Seidman L.L.P. (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.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GALAXY NUTRITIONAL FOODS, INC. COMPANY
Date: February 13, 2001 /s/Angelo S. Morini
Angelo S. Morini
Chairman and President
(Principal Executive Officer)
Date: February 13, 2001 /s/Keith A. Ewing
Keith A. Ewing, CPA
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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