FORM 10-Q/A
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 SEPTEMBER 30, 2001
-----------------------------
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 December 18, 2001, there were 10,624,586 shares of Common Stock $.01
par value per share, outstanding.
GALAXY NUTRITIONAL FOODS, INC.
INDEX TO FORM 10-Q/A
FOR QUARTER ENDED SEPTEMBER 30, 2001
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Balance Sheets 3
Statements of Operations 4
Statement of Stockholders' Equity 5
Statements of Cash Flows 6
Notes to Financial Statements 7-11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12-17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 18
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 19
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 19
ITEM 5. OTHER INFORMATION 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 21-22
SIGNATURES 23
2
PART I. FINANCIAL INFORMATION
BALANCE SHEETS
GALAXY NUTRITIONAL FOODS, INC.
SEPTEMBER 30, MARCH 31,
2001 2001
------------ ------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,747,921 $ 500
Trade receivables, net 8,251,088 8,053,561
Inventories, net 6,776,423 10,774,540
Other receivables 526,630 519,624
Deferred tax asset 532,000 532,000
Prepaid expenses 1,072,740 1,107,100
------------ ------------
Total current assets 19,906,802 20,987,325
PROPERTY & EQUIPMENT, NET 25,413,920 25,303,094
DEFERRED TAX ASSET 1,028,000 1,028,000
OTHER ASSETS 740,705 764,707
------------ ------------
TOTAL $ 47,089,427 $ 48,083,126
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Book overdrafts $ 648,703 $ 446,829
Line of credit 6,966,894 8,776,278
Accounts payable - trade 7,492,727 9,456,065
Accrued liabilities 533,834 143,782
Current portion of term note payable 1,716,000 1,666,000
Current portion of subordinated notes payable 3,586,540 502,866
Current portion of obligations under capital leases 181,630 28,755
------------ ------------
Total current liabilities 21,126,328 21,020,575
TERM NOTE PAYABLE,
less current portion 8,726,535 9,614,499
SUBORDINATED NOTES PAYABLE -- 2,878,930
OBLIGATIONS UNDER CAPITAL LEASES,
less current portion 571,593 29,825
------------ ------------
Total liabilities 30,424,456 33,543,829
------------ ------------
COMMITMENTS AND CONTINGENCIES -- --
REDEEMABLE CONVERTIBLE PREFERRED STOCK 1,502,423 --
STOCKHOLDERS' EQUITY:
Common stock 106,080 100,176
Additional paid-in capital 59,778,141 51,902,100
Accumulated deficit (31,829,012) (24,570,318)
------------ ------------
28,055,209 27,431,958
Less: Notes receivable arising from the exercise
of stock options and sale of common stock (12,772,200) (12,772,200)
Less: Treasury stock, 26,843, at cost (120,461) (120,461)
------------ ------------
Total stockholders' equity 15,162,548 14,539,297
------------ ------------
TOTAL $ 47,089,427 $ 48,083,126
============ ============
See accompanying notes to condensed financial statements.
3
GALAXY NUTRITIONAL FOODS, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ---------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
NET SALES $ 11,381,321 $ 12,214,562 $ 23,196,111 $ 23,470,983
COST OF GOODS SOLD 9,547,698 7,732,948 18,169,634 14,940,861
------------ ------------ ------------ ------------
Gross margin 1,833,623 4,481,614 5,026,477 8,530,122
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Selling 1,925,768 2,044,596 3,564,374 3,957,484
Delivery 570,362 628,676 1,212,621 1,280,051
Non-cash compensation related to options 2,047,577 -- 3,621,143 --
General and administrative 1,603,941 733,273 2,467,561 1,408,071
Research and development 44,540 67,401 97,856 124,311
------------ ------------ ------------ ------------
Total operating expenses 6,192,188 3,473,946 10,963,555 6,769,917
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS (4,358,565) 1,007,668 (5,937,078) 1,760,205
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense (652,986) (311,186) (1,325,510) (613,639)
Other income (expense) (5,372) 15,748 3,894 14,988
------------ ------------ ------------ ------------
Total (658,358) (295,438) (1,321,616) (598,651)
------------ ------------ ------------ ------------
NET INCOME (LOSS) BEFORE INCOME
TAX BENEFIT (5,016,923) 712,230 (7,258,694) 1,161,554
INCOME TAX BENEFIT -- -- -- 240,000
------------ ------------ ------------ ------------
NET INCOME (LOSS) (5,016,923) 712,230 (7,258,694) 1,401,554
PREFERRED STOCK DIVIDENDS 876,877 -- 1,201,891 --
------------ ------------ ------------ ------------
NET INCOME (LOSS) AVAILABLE TO
COMMON SHAREHOLDERS $ (5,893,800) $ 712,230 $ (8,460,585) $ 1,401,554
============ ============ ============ ============
BASIC NET EARNINGS (LOSS) PER
COMMON SHARE $ (0.59) $ 0.08 $ (0.84) $ 0.15
============ ============ ============ ============
DILUTED NET EARNINGS (LOSS) PER
COMMON SHARE $ (0.59) $ 0.07 $ (0.84) $ 0.15
============ ============ ============ ============
See accompanying notes to condensed financial statements.
4
GALAXY NUTRITIONAL FOODS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
Notes
Common Stock Receivable
--------------------- Additional Accumulated for Common Treasury
Shares Par Value Paid-In Capital Deficit Stock Stock Total
---------- --------- --------------- ------------ ------------ --------- ------------
Balance at March 31, 2001 10,017,612 $100,176 $ 51,902,100 $(24,570,318) $(12,772,200) $(120,461) $ 14,539,297
Exercise of Options 4,143 41 19,480 -- -- -- 19,521
Issuance of common stock 582,648 5,826 2,994,774 -- -- -- 3,000,600
Issuance of common stock
under employee stock
purchase plan 3,701 37 17,108 -- -- -- 17,145
Non-cash compensation related
to options under non-recourse
note receivable -- -- 3,621,143 -- -- -- 3,621,143
Dividends on preferred stock -- -- (175,000) -- -- -- (175,000)
Discount on preferred stock -- -- 2,020,734 -- -- -- 2,020,734
Accretion of discount on
preferred stock -- -- (622,198) -- -- -- (622,198)
Net loss -- -- -- (7,258,694) -- -- (7,258,694)
---------- -------- ------------ ------------ ------------ --------- ------------
Balance at September 30, 2001 10,608,104 $106,080 $ 59,778,141 $(31,829,012) $(12,772,200) $(120,461) $ 15,162,548
========== ======== ============ ============ ============ ========= ============
See accompanying notes to condensed financial statements.
5
GALAXY NUTRITIONAL FOODS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
SEPTEMBER 30,
2001 2000
----------- -----------
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net Income (Loss) $(7,258,694) $ 1,401,554
ADJUSTMENTS TO RECONCILE NET INCOME
TO NET CASH USED IN OPERATING ACTIVITIES:
Depreciation expense 1,045,613 695,425
Amortization of debt discount 204,744 78,690
Provision for doubtful accounts 475,000 --
Provision for inventory reserve 600,000 --
Consulting and director services paid in exchange
for issuance of common stock and warrants 8,125 78,507
Deferred tax benefit -- (240,000)
Non-cash compensation related to options under
non-recourse note receivable 3,621,143 --
(Increase) decrease in:
Trade receivables (672,527) (649,331)
Other receivables (7,006) (162,399)
Inventories 3,398,117 (2,961,242)
Prepaid expenses and other 85,237 (1,346,244)
Increase (decrease) in:
Accounts payable (2,342,338) 566,745
Accrued liabilities --
215,052 (53,635)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES: (627,534) (2,591,930)
----------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property and equipment (371,439) (6,439,812)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings(payments) on line of credit (1,809,384) 3,339,544
Increase in book overdrafts 201,874 375,675
Net borrowings (payments) on term note payable (458,964) 5,393,692
Principal payments on capital lease obligations (90,357) (23,387)
Proceeds from issuance of common stock 3,017,745 44,975
Proceeds from exercise of common stock options 19,521 --
Proceeds from issuance of preferred stock 2,936,983 --
Financing costs from issuance of preferred stock (36,024) --
Purchase of treasury stock -- (99,024)
Financing costs for long-term debt (35,000) --
----------- -----------
NET CASH FROM FINANCING ACTIVITIES 3,746,394 9,031,475
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,747,421 (267)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 500 383
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,747,921 $ 116
=========== ===========
See accompanying notes to condensed financial statements.
6
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The unaudited condensed consolidated financial statements have been prepared by
the Company, under the rules and regulations of the Securities and Exchange
Commission. The accompanying condensed consolidated financial statements contain
all normal recurring adjustments which are, in the opinion of management,
necessary for the fair presentation of such financial statements. Certain
information and disclosures normally included in the financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted under such rules and regulations although the Company
believes that the disclosures are adequate to make the information presented not
misleading. The year-end balance sheet data was derived from the audited
financial statements, but does not include all disclosures required by
accounting principles generally accepted in the United States of America. These
unaudited condensed consolidated financial statements should be read in
conjunction with the financial statements and notes included on Form 10-K/A for
the fiscal year ended March 31,2001. Interim results of operations for the
six-month period ended September 30, 2001 may not necessarily be indicative of
the results to be expected for the full year.
Net Income (Loss) per Common Share
Net income (loss) per common share is computed by dividing net income or loss by
the weighted average number of common and potentially dilutive securities
outstanding during the year. Stock options and warrants are included in the
calculation of diluted net income per share, using the treasury stock method,
when the result is dilutive.
Use of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the consolidated financial
statements and reported amounts of revenues and expense during the reporting
period. Actual results could differ from those estimates.
New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 141 "Business Combinations," and
SFAS No. 142 "Goodwill and Other Intangible Assets," which change the accounting
for business combinations and goodwill. SFAS No. 141 requires that the purchase
method of accounting be used for business combinations initiated after June 30,
2001. Use of the pooling-of-interests method will be prohibited. SFAS No. 142
changes the accounting for goodwill from an amortization method to an
impairment-only approach. Amortization of goodwill, including goodwill recorded
in past business combinations, will therefore cease upon adoption of the
Statement, which for the Company will be January 1, 2002. The Company is
currently evaluating the impact of SFAS No. 141 and SFAS No. 142 on its
financial statements.
In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets," which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. While SFAS No.
144 supersedes both SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" and APB Opinion No. 30,
"Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," it retains the fundamental provisions of those
Statements. SFAS No. 144 becomes effective for fiscal years beginning after
December 15, 2001. The Company is currently evaluating the impact of SFAS No.
144 on its financial statements.
Reclassifications
Certain items in the financial statements of the prior period have been
reclassified to conform to current period presentation.
Segment Information
The Company does not identify separate operating segments for management
reporting purposes. The results of operations are the basis on which management
evaluates operations and makes business decisions.
7
(2) INVENTORIES
Inventories are summarized as follows:
SEPTEMBER 30, MARCH 31,
2001 2001
----------- -----------
(Unaudited)
Raw materials $ 3,157,754 $ 4,314,685
Finished goods 4,218,669 6,459,855
Inventory Reserve (600,000) --
----------- -----------
Total $ 6,776,423 $10,774,540
=========== ===========
(3) LINE OF CREDIT AND NOTES PAYABLE
In November 1996, the Company obtained a line of credit with a maximum
principal amount of $2 million from FINOVA Capital Corporation, the
proceeds of which were used for working capital and expansion purposes.
Over the years, the Company received several increases to the line to
its current level of $13 million. Interest is payable monthly on the
outstanding draws on the line of credit at a rate of prime plus two
percent (8.0% at September 30, 2001). The line of credit expires on
October 15, 2002 at which time the entire outstanding principal amount
of the line of credit, and all accrued but unpaid interest thereon, is
due and payable in full. As of September 30, 2001, the Company had an
outstanding balance of $6,966,894 under this line of credit agreement.
On September 30, 1999, the Company secured a $4 million subordinated
note payable from FINOVA Mezzanine to finance working capital and
capital improvement needs of the Company. The subordinated note is
payable interest only monthly with a principal payment in one lump sum
upon maturity on October 15, 2002 and bears interest at a rate of
13.5%. In connection with the subordinated note, 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 October 15, 2002 maturity
date of the note.
On December 26, 2000, the subordinated note holder exercised a portion
of the warrant to purchase 815,000 shares of common stock at a price of
$3.41 per share. 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, which were sold at a price of $3.25 per share. In
addition, the Company agreed to guarantee the price ($4.41 per share)
at which the shares would be sold to the public. The difference between
the actual price received by the note holder ($3.25) and the guaranteed
price ($4.41) was $945,400, which was recorded as a debt discount and
is being amortized over the remaining term of the subordinated note.
The consideration for the $815,000 difference between the exercise
price of $3.41 and the guaranteed price of $4.41 on 815,000 shares was
funded through the issuance of an additional subordinated term note
bearing interest at an annual rate of 13.5% and is due in December
2001. As of September 30, 2001, the Company showed an outstanding
balance of $3,586,540 which includes principal of $4,815,000 less
$1,228,460 of debt discount remaining to be amortized.
The line of credit and subordinated loans described above contain
certain financial and operating covenants. For the fiscal quarter ended
September 30, 2001, the Company was in violation of the minimum
operational cash flow to contractual debt service ratio, the funded
debt to EBITDA ratio, and the capital expenditure limitation. As of
November 14, 2001, the Company received a waiver from FINOVA Capital
and FINOVA Mezzanine pursuant to which they waived the duty to comply
with such financial covenants for the fiscal quarter ended September
30, 2001.
In consideration of the waivers, the Company accepted an acceleration
of the maturity date of the line of credit and the subordinated notes
from September August 1, 2003 to October 15, 2002. Since the Company
has not received a waiver for future quarters and has not been able to
change the existing loan covenants with FINOVA Capital and FINOVA
Mezzanine which they will again fail to meet in the future, the entire
balance of the subordinated notes are classified as current for the
quarter ended September 30, 2001.
In March 2000, we obtained a $10 million term loan from SouthTrust
Bank, N.A. This note bears interest at prime rate (6% at September 30,
2001) and is due in monthly principal installments of $93,000 plus
interest. The note matures in March 2005. The balance outstanding on
this note as of September 30, 2001 was $9,242,535.
8
In October 2000, the Company obtained a $1.5 million short-term bridge
loan from SouthTrust Bank, N.A. This note bears interest at prime rate
(6.0% at September 30, 2001) and is due in monthly principal
installments of $50,000 plus interest. The note matures in October
2003. The balance outstanding on this note as of September 30, 2001 was
$1,200,000.
(4) EARNINGS PER SHARE
The following table reflects the calculation of basic and diluted net
earnings (loss) per common share:
Three months ended Six months ended
September 30, September 30,
----------------------------- --------------------------
2001 2000 2001 2000
-------------- ----------- ----------- -----------
Numerator:
Net income (loss) $ (5,893,800) $ 712,230 $(8,460,585) $ 1,401,554
============== =========== =========== ===========
Denominator:
Weighted average shares outstanding - basic 10,048,447 9,170,104 10,033,874 9,179,052
Potential shares exercisable under stock option
plans -- 1,417,785 -- 1,417,785
Potential shares exercisable under warrant agreements -- 922,143 -- 915,000
Less: Shares assumed repurchased under treasury
stock method -- (1,716,506) -- (1,864,535)
-------------- ----------- ----------- -----------
Weighted average shares outstanding - diluted 10,048,447 9,793,526 10,033,874 9,647,302
============== =========== =========== ===========
Basic net earnings (loss) per common share $ (0.59) $ 0.08 $ (0.84) $ 0.15
============== =========== =========== ===========
Diluted net earnings (loss) per common share $ (0.59) $ 0.07 $ (0.84) $ 0.15
============== =========== =========== ===========
Options of 2,781,845 and warrants of 1,050,214 have not been included
in the computation of diluted net earnings (loss) per common share for
the three and six months ended September 30, 2001, as their effect
would be antidilutive.
(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.
For the six months ended September 30, 2001 2000
---------------------------------------------------------------------------------
(unaudited) (unaudited)
Noncash financing and investing activities:
Preferred dividends recorded for preferred
shareholder waiver received in exchange for
issuance of common stock $ 359,400 $ --
Preferred stock dividends and related beneficial
conversion feature $ 220,400 $ --
Discount related to preferred stock $2,020,734 $ --
Accretion of discount on preferred stock $ 622,198 $ --
Cash paid for:
Interest $1,203,820 $ 535,039
(6) INCOME TAXES
The Company has a deferred tax asset as of September 30, 2001 of
$1,560,000. The deferred tax asset represents mainly tax operating loss
carryforwards 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 tax asset is considered more likely than not in the
9
future, a portion of the related benefit will be allocated to the
cumulative effect of a change in accounting policy recorded in the
third quarter of fiscal 2001.
(7) CAPITAL STOCK
On September 30, 1999, we obtained a $4,000,000 subordinated loan from
FINOVA Mezzanine. In December 2000, we obtained an additional $815,000
subordinated loan from FINOVA Mezzanine in connection with a price
guarantee we gave to FINOVA Mezzanine upon the exercise of their
warrants to purchase the Company's common stock and sale of the
underlying common shares to the public. Both of the subordinated loans
originally bore interest at a rate of 11.5%, but in July 2001 the notes
were amended to increase the rate to 13.5%. The subordinated debt
includes an original issue discount of $786,900, recorded in September
1999 and an additional $945,400 recorded in December 2000 in connection
with the price guarantee, which is amortized as interest expense over
the term of the debt. During the first six months of fiscal 2002,
$204,743 was amortized to interest expense for these debt discounts, as
compared to $78,600 during the first six months of fiscal 2001.
In March 2000, we obtained a $10 million term loan from SouthTrust
Bank, N.A. This loan bears interest at prime rate and is due in monthly
principal installments of $93,000 plus interest. The balance
outstanding on this note as of September 30, 2001 was $9,242,535. This
loan was used to payoff a prior term note payable and to finance
approximately $7.5 million in new equipment to expand our production
capacity. Additionally, we obtained a $1.5 million loan from SouthTrust
Bank, N.A. in October 2000. This loan bears interest at prime and is
payable in monthly principal installments of $50,000 plus interest. The
balance on this loan was $1.2 million as of September 30, 2001.
On April 6, 2001, in accordance with an exemption from registration
under Regulation D promulgated under the Securities Act of 1933, as
amended, the Company received proceeds of approximately $3,082,000 less
costs of $181,041 for the issuance of 72,646 shares of the Company's
Series A convertible preferred stock and warrants to purchase shares of
the Company's common stock. The shares are subject to certain
designations, preferences and rights, including the right to convert
each preferred share into ten shares of common stock, the right to a
ten percent stock dividend after one year of issuance payable in shares
of preferred stock, and an eight percent stock dividend for the
subsequent three years thereafter payable in either cash or shares of
preferred stock. The per share conversion price is the lower of (x)
$5.10, (y) the market price on the original issue date or (z) 95% of
the average of the two lowest closing bid prices on the principal
market of the common stock out of the fifteen trading days prior to
conversion. The liquidation preference of each preferred share is
$48.18 plus accrued dividends ($50.58 at September 30, 2001).
The warrants include initial warrants of 120,000 shares, redemption
warrants of 120,000 shares, and 30% warrants. The initial warrants are
exercisable for a period of five years at an exercise price equal to
the lower of (a) $5.30 or (b) a price equal to 110% of the average of
the closing bid price of the common stock for the 30 trading days
ending on January 1, 2002. The redemption warrants are exercisable upon
redemption for a period of five years at an exercise price equal to the
lower of (a) 110% of the market price of the common stock at the
redemption date or (b) 110% of the average closing bid price of the
common stock for 30 trading days ending on the 270th day following the
redemption date. The 30% warrants shall only become exercisable if at
any time after February 15, 2002 that both (a) all of the preferred
shares have not been redeemed in full and (b) the Registration
Statement covering the resale of all of the registerable securities is
not then effective. The number of shares underlying the 30% warrants is
determined by dividing (x) 30% of the preferred shares originally
purchased by the investor by (y) the average closing bid price of the
Company's common stock during the five day period ending on February
15, 2002.
The holders of the preferred stock have the right to require the
Company to redeem their shares of preferred stock on April 6, 2005 or
upon occurrence of other events, as defined. The redemption price shall
be paid in cash at a price per preferred share equal to the greater of
(a) 100% of the preference amount ($48.18 plus accrued dividends) or
(b) an amount equal to the product of (1) the number of shares of
common stock then issuable to the holders upon conversion of the
preferred stock being redeemed and (2) the market price on the date of
redemption.
In connection with the issuance of the preferred stock and warrants,
the Company has recorded accrued dividends of $175,000 for the 10%
preferred stock dividend and $45,400 of dividends related to the
beneficial conversion feature on the accrued dividends to be paid with
preferred stock. The Company recorded a discount on preferred stock of
$2,020,734 related to the beneficial conversion feature ($1,466,334),
the fair value of the initial warrants ($277,200) and redemption
warrants ($277,200) and the fair value of the mandatory redemption
price. The excess of the
10
redemption value of $5,492,771 over the initial carrying value of
$506,866 was $4,985,905 at September 30, 2001 and is being accreted and
recorded as dividends over the redemption period (48 months) using the
straight line method, which approximates the effective interest method.
For the six months ended September 30, 2001, the Company recorded
$622,198 of dividends related to the accretion of preferred stock.
On September 25, 2001, the Company issued to one specified investor, in
accordance with an exemption from registration under Regulation D
promulgated under the Securities Act of 1933, as amended, (i) an
aggregate of 522,648 shares of common stock, $0.01 par value, and (ii)
warrants to purchase 140,000 shares of common stock, $0.01 par value,
at an aggregate sales price of approximately $3,000,000. Registration
of the shares was completed by October 25, 2001.
In conjunction with the Series A Purchase Agreement, the Company agreed
that it would not sell or enter into any agreement to sell any of its
securities or incur any indebtedness outside the ordinary course of
business for the time period beginning April 6, 2001 and continuing
until three months after the date the investors' shares are effectively
registered ("Anti-Financing Right"). To induce the investors to waive
their Anti-Financing Right to allow the Company to proceed with
transactions contemplated by the September 25, 2001 Common Stock
issuance, the Company issued 30,000 shares of Common Stock to each of
the investors at a per share purchase price of par value ($.01). The
difference between the total purchase price ($600) and the market price
of the stock on the closing date of ($360,000) is considered preferred
stock dividends. This dividend amount of $359,400 is included in the
computation of earnings per common share.
11
GALAXY NUTRITIONAL FOODS, INC.
ITEM 2. 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. Our actual results may differ materially from those
described in these forward-looking statements due to among other factors,
competition in our product markets, dependence on suppliers, our 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. Our headquarters and manufacturing facilities are located in Orlando,
Florida.
Results of Operations
During fiscal year 2000, the Company experienced increasing demand for its
products but was unable to fill all of the orders it received due, in part, to a
lack of production capacity. During the latter part of fiscal 2001 and the
beginning of fiscal 2002, we significantly increased our production capacity by
purchasing and installing additional production equipment for six new production
lines that included slice lines, a new chunk cheese line, a cup line, a string
cheese line, and a shred line. This equipment will enable us to produce new
products, and to improve the quality, and increase the production, of existing
products. The installation of the equipment was delayed significantly due to
late shipments by manufacturers and problems with configuring the machines to
meet the manufacturing needs of our unique line of products, but was completed
by September 2001. Because of the delays in the installation of the equipment,
we experienced excess overhead costs and downtime during the first and second
quarter of fiscal 2002, which resulted in increased costs and reduced cash flows
for that period. Additionally, although a substantial portion of the purchase
price and installation costs incurred in connection with the new equipment was
financed through a loan obtained from SouthTrust Bank, N.A., we used nearly all
of the excess cash that we had at the time to purchase and install the new
equipment. As a result of the large cash outlays related to this expansion along
with the delays in new product shipment, we experienced and are continuing to
experience shortfalls in cash that has affected nearly every aspect of our
operations.
Net Sales were $11,381,321 in the three months ended September 30, 2001,
compared to net sales of $12,214,562 for the three months ended September 30,
2000, a decrease of 7%. Net sales were $23,196,111 for the six months ended
September 30, 2001 as compared to $23,470,983 for the same period one year ago,
a decrease of 1%.
Due to the significant reduction in cash flows in the second quarter of fiscal
2002 as described above, we experienced an inability to purchase raw materials,
which resulted in an inability to fill orders and created short shipments to
customers. The short shipments to customers forced us to temporarily reduce
product prices to maintain our shelf space in supermarkets. While demand for our
products continues to increase rapidly, sales growth was maintained at prior
year levels until we obtained the cash required to meet these demands. We
believe that we would have shown an increase in sales had we not experienced
cash shortages, production delays, and shipping shortages.
Cost of Goods Sold were $9,547,698 representing 84% of net sales for the quarter
ended September 30, 2001, compared with $7,732,948 or 63% of net sales for the
same period ended September 30, 2000. Cost of goods sold were $18,169,634 for
the six months ended September 30, 2001, representing 78% of net sales as
compared to $14,940,861 or 64% of net sales for the six months ended September
30, 2000.
The increase was primarily the result of four key factors: (a) problems and
delays associated with the construction of new production lines, (b) an increase
in raw materials costs, (c) an inability to negotiate beneficial vendor terms,
and (d) a
12
change in production focus. First, the installation of our new production
equipment was delayed significantly due to late shipments by manufacturers and
problems with configuring the machines to meet the manufacturing needs of our
unique line of products. These delays caused excess overhead costs and downtime
during the first and second quarter of fiscal 2002. Second, due to a worldwide
shortage of our primary raw ingredient, casein, resulting from the outbreak of
"Mad Cow" and "foot and mouth" disease epidemics in Europe, the price of casein
increased by approximately 26% in the six months ended September 30, 2001
compared to the same period one year ago. Third, due to our cash shortage
resulting from our use of cash to purchase and install new production equipment,
and delays in implementing the new equipment, our purchasing department was
unable to purchase our raw materials in sufficient quantities or to take
advantage of beneficial terms for cash payment that has, in the past, created
optimum pricing for our raw materials and supplies and helps us reduce our
costs. Finally, in the second quarter of fiscal 2002, we changed our production
focus by scaling back our product mix to 200 core items that made up nearly 98%
of our sales. As a result of the change in focus, we have provided for a
$600,000 reserve for potential obsolete and slow moving inventory.
Selling expenses were $1,925,768 for the quarter ended September 30, 2001,
compared with $2,044,596 for the same period ended September 30, 2000, a
decrease of 6%. For the six months ended September 30, 2001, selling expenses
were $3,564,374 as compared to $3,957,484 for the same period one year ago, a
decrease of 10%. The decrease in expenses is due to a reduction in advertising
and promotional expenses during the first and second quarters in fiscal 2002.
During the six months ended September 30, 2000, we were involved in an extensive
advertising campaign to promote our flagship Veggie product line. This campaign
included print, television, and radio advertising and focuses on key markets
throughout the country where distribution of our products is widespread. We also
incurred increased slotting fees to expand our shelf space in retail stores
during the six months ended September 2000. These fees have been significantly
reduced during the six months ended September 30, 2001. Finally, we terminated
several executive sales employees during April 2001 in an effort to streamline
operations and reduce costs.
Delivery expenses were $570,362 for the quarter ended September 30, 2001,
compared with $628,676 for the same period ended September 30, 2000, a 9%
decrease. Delivery expenses were $1,212,621 for the six months ended September
30, 2001 as compared to $1,280,051 for the six months ended September 30, 2000,
a decrease of 5%. The decrease in delivery costs is a result of bringing the
scheduling and coordinating of shipments in-house during the six months ended
September 30, 2001.
Non-cash compensation related to stock options increased $2,047,577 and
$3,621,143 for the three and six months ended September 30, 2001, respectively,
as compared to the same periods one year ago. The change is the result of the
adoption of Interpretation No. 44 ("FIN 44"). The Financial Accounting Standards
Board issued FIN 44, which clarifies the application of APB Opinion 25 relating
to the accounting consequences of various modifications to fixed stock options.
FIN 44 covers specific events that occurred after December 15, 1998 and was
effective as of July 2, 2000. FIN 44 clarified that when an option is repriced,
it is treated as a variable option and is marked to market each quarter. The
adoption of FIN 44 required us to change our accounting related to the note
receivable from our president. The underlying options were required to be
treated as variable due to the exchange of interest bearing recourse notes with
a non-interest bearing non-recourse note. Accordingly, any differences between
the exercise price of the options and the market price of our common stock is
recorded as compensation expense at each reporting period.
General and Administrative expenses were $1,603,941 for the quarter ended
September 30, 2001, compared with $733,273 for the same period ended September
30, 2000, an 119% increase. General and administrative expenses increased 75% to
$2,467,561 for the six months ended September 30, 2001 as compared to $1,408,071
for the same period one year ago. In the second quarter of fiscal 2002, we
increased the reserve for doubtful accounts by $475,000. Management has begun an
intense credit and collection effort on its significantly outstanding deductions
by customers and hopes to recover some of this in the future. In addition, we
have increased the number of administrative personnel in order to support our
anticipated growth.
Research and Development expenses were $44,540 for the quarter ended September
30, 2001, compared with $67,401 for the quarter ended September 30, 2000, a 34%
decrease. These expenses were $97,856 for the six months ended September 30,
2001 as compared to $124,311 for the same period one year ago, a 21% decrease.
This decrease in expenses is mainly the result of the completion of several new
formulas in fiscal 2001.
Interest expense increased to $652,986 for the quarter ended September 30, 2001
from $311,186 for the quarter ended September 30, 2000, a 110% increase.
Interest expense was $1,325,510 for the six months ended September 30, 2001 as
compared to $613,639 for the same period in fiscal 2001, an increase of 116%.
The main reason for the increase is that
13
approximately $160,000 and $305,000 of interest charges for the three and six
months ended September 30, 2000, respectively, were capitalized to construction
in progress. No interest was capitalized during the six months ended September
30, 2001. The increase is also attributable to additional borrowings under our
line of credit from FINOVA Capital Corporation and our term loan from SouthTrust
Bank, N.A., as well an additional loan we obtained from FINOVA Mezzanine
Capital, Inc., the lender which has extended to us a subordinated loan.
On September 30, 1999, we obtained a $4,000,000 subordinated loan from FINOVA
Mezzanine. In December 2000, we obtained an additional $815,000 subordinated
loan from FINOVA Mezzanine in connection with a price guarantee we gave to
FINOVA Mezzanine upon the exercise of their warrants to purchase the Company's
common stock and sale of the underlying common shares to the public. Both of the
subordinated loans originally bore interest at a rate of 11.5%, but in July 2001
the notes were amended to increase the rate to 13.5%. The subordinated debt
includes an original issue discount of $786,900, recorded in September 1999 and
an additional $945,400 recorded in December 2000 in connection with the price
guarantee, which is amortized as interest expense over the term of the debt.
During the first six months of fiscal 2002, $204,743 was amortized to interest
expense for these debt discounts, as compared to $78,600 during the first six
months of fiscal 2001.
In March 2000, we obtained a $10 million term loan from SouthTrust Bank, N.A.
This loan bears interest at prime rate and is due in monthly principal
installments of $93,000 plus interest. The balance outstanding on this note as
of September 30, 2001 was $9,242,535. This loan was used to payoff a prior term
note payable and to finance approximately $7.5 million in new equipment to
expand our production capacity. Additionally, we obtained a $1.5 million loan
from SouthTrust Bank, N.A. in October 2000. This loan bears interest at prime
and is payable in monthly principal installments of $50,000 plus interest. The
balance on this loan was $1.2 million as of September 30, 2001.
Income tax expense for the six months ended September 30, 2001 was zero compared
to income tax benefit of $240,000 for the same period in the prior year at
September 30, 2000. We have 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. This represents approximately 20% of the tax net
operating loss carry forward available at September 30, 2001.
Liquidity and Capital Resources
Operating Activities -- Net cash used in operating activities was $627,534 for
the six months ended September 30, 2001 compared to net cash used of $2,591,930
for the same period in 2000. The decrease in cash used for operations is
primarily attributable to a decrease in inventory as a result of the cash
shortages that we experienced during this period. Such decrease in cash used for
operations was partially offset by a decrease in accounts payable which was paid
down with proceeds from our preferred stock offering in April 2001. In addition,
we reported a net loss of $7,258,694 for the six months ended September 30, 2001
as compared to net income of $1,401,554 for the same period in the prior year.
The net loss was the result of delays in the installation of new production
lines of equipment during the latter part of fiscal 2001 and the first six
months of fiscal 2002.
Investing Activities -- Net cash used in investing activities totaled $371,439
for the six months ended September 30, 2001 compared to net cash used of
$6,439,812 for the same period in 2000. The decrease in cash used for investing
activities during fiscal 2002 as compared to fiscal 2001 resulted from the
majority of the new production equipment being purchased prior to March 31,
2001. There were still some remaining expenses related to this new production
equipment in the beginning of fiscal 2002. Installation of the new production
equipment was completed in September 2001. We expect the purchases and
installation of this new production equipment to double our production capacity
on key products.
Financing Activities -- Net cash flows provided by financing activities were
$3,746,394 for the six months ended September 30, 2001 compared to cash flows
provided by financing activities of $9,031,475 for the same period in 2000. The
large cash flows from financing activities during the six months ended September
30, 2001 were primarily the result of the issuance of common stock and preferred
stock. These proceeds were partially offset by payments under our line of credit
from FINOVA Capital Corporation and our term loan from SouthTrust Bank, N.A.
During the six months ended September 30, 2000, the large cash inflows were the
result of draws on the line of credit and the term loan. The increased draws in
fiscal 2001 were used to finance the increase in inventories, as well as to
purchase and install new state-of-the-art production equipment.
14
In November 1996, we obtained a line of credit with a maximum principal amount
of $2 million from FINOVA Capital Corporation, the proceeds of which were used
for working capital and expansion purposes. The maximum principal amount of 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 that we can borrow under the line of credit
is based on a formula of up to 85% of eligible accounts receivable plus 50% of
eligible inventories not to exceed $6,000,000, as defined in the agreement. The
line of credit is secured by all accounts receivable, inventory, machinery,
equipment, trademarks and patents owned by us. Interest is payable monthly on
the outstanding draws on the line of credit at a rate of prime plus two percent
(8.0% at September 30, 2001). The line of credit expires on October 15, 2002 at
which time the entire outstanding principal amount of the line of credit, and
all accrued but unpaid interest thereon, is due and payable in full.
On September 30, 1999, we obtained a $4 million subordinated loan from FINOVA
Mezzanine Capital, Inc. to finance additional working capital and capital
improvement needs. We received loan proceeds in the amount of $3,620,000 after
paying loan costs of $380,000. Amounts outstanding under the loan are secured by
a subordinated lien on substantially all of our assets. A balloon payment of the
entire principal amount of the loan, and all accrued but unpaid interest
thereon, is due upon maturity in October 2002. The interest rate applicable to
the loan was increased in July 2001 from 11.5% to 13.5%. In consideration of the
loan, we issued to FINOVA Mezzanine a warrant to purchase 915,000 shares of our
common stock at an exercise price of $3.41 per share which represented 80% of
the fair value of our 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.
On December 26, 2000, the FINOVA Mezzanine exercised a portion of the warrant to
purchase 815,000 shares of common stock at a price of $3.41 per share. We
received from the exercise of the warrant net proceeds of $2,452,329, after
paying transaction costs of $326,822. In connection with this transaction, we
agreed to reimburse FINOVA Mezzanine for brokerage commission and other expenses
incurred by it, in connection with the sale of the 815,000 shares to the public,
which were sold at a price of $3.25 per share. These costs and expenses were
recorded as a reduction in the proceeds received from the exercise of the
warrants. In addition, we agreed to guarantee the price ($4.41 per share) at
which the shares would be sold to the public. The difference between the actual
price received by FINOVA Mezzanine ($3.25) and the guaranteed price ($4.41) was
$945,400, which 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. FINOVA Mezzanine agreed to finance such amount under an additional
subordinated term loan which is payable in full on December 29, 2001. The
interest rate on the additional subordinated term loan is 13.5% per annum.
The line of credit and subordinated loans described above contain certain
financial and operating covenants. In July of 2001, we notified FINOVA Capital
and FINOVA Mezzanine that we had failed to comply with the minimum operational
cash flow to contractual debt service ratio, the funded debt to EBITDA ratio and
the capital expenditure limitation. At no time has FINOVA Capital or FINOVA
Mezzanine delivered to us a notice of default of the line of credit or the
subordinated loans as a result of such failures. FINOVA Capital agreed to amend
such covenants and to waive those violations for the fiscal year ended March 31,
2001 and the fiscal quarter ended June 30, 2001 pursuant to that certain
Amendment and Limited Waiver to Security Agreement dated July 13, 2001. In
consideration for this waiver and amendment, we accepted an increase in the
interest rate on the line of credit to prime plus 2% and agreed to pay a fee in
the amount of $100,000, of which $25,000 has been paid with the remainder due on
December 31, 2001. FINOVA Mezzanine also agreed to waive the violations of its
covenants for the fiscal year ended March 31, 2001 and the fiscal quarter ended
June 30, 2001, and to amend those covenants for future fiscal quarters pursuant
to a letter agreement dated July 12, 2001 and amendments to the subordinated
notes. In consideration of the waiver, we accepted an increase in the interest
rate to from 11.5% to 13.5% per annum on the subordinated loans, and agreed to
pay an amendment/waiver fee in the amount of $20,000, which is due on December
31, 2001.
For the fiscal quarter ended September 30, 2001, we were again in violation of
the minimum operational cash flow to contractual debt service ratio, the funded
debt to EBITDA ratio, and the capital expenditure limitation. As of November 14,
2001, we entered into an Amendment and Limited Waiver to Security Agreement with
FINOVA Capital pursuant to which FINOVA Capital waived our duty to comply with
such financial covenants for the fiscal quarter ended September 30, 2001 and
certain other financial covenants for the twelve months ended September 30,
2001. Additionally, the Amendment and Limited Waiver to Security Agreement also
provided for an acceleration of the maturity date of the line of credit from
August 1, 2003 to October 15, 2002, and the payment of an amendment/waiver fee
in the amount of $50,000 by December 31, 2001. In connection with the
aforementioned waivers and amendments, we also entered into an
15
Intellectual Property Security Agreement whereby we granted FINOVA Capital a
security interest in all of our intellectual property and other proprietary
property. FINOVA Mezzanine also agreed to waive the violations to its covenants
for the fiscal quarter ended September 30, 2001 pursuant to a letter agreement
dated as of November 14, 2001 and certain amendments to the subordinated notes.
In consideration of the waiver, we accepted an acceleration of the maturity date
of the subordinated notes from August 1, 2003 to October 15, 2002, and agreed to
pay an amendment/waiver fee in the amount of $10,000, which is due on December
31, 2001. We believe that we will again fail to meet certain financial and other
covenants of the line of credit and subordinated loans for the fiscal quarters
to end on December 31, 2001 and thereafter. Since the we have not received a
waiver for future quarters and have not been able to change the existing loan
covenants with FINOVA Capital and FINOVA Mezzanine, the entire balance of the
subordinated notes are classified as current for the quarter ended September 30,
2001.
We are already in discussions with FINOVA to obtain a waiver for these defaults
for the December 2001 quarter and to amend the covenants for the remaining term
of these loans. We believe that the likelihood of obtaining these waivers is
highly probable. However, in the event we cannot obtain waivers for these
covenant failures, FINOVA Capital, FINOVA Mezzanine and SouthTrust Bank N.A.
could exercise their respective rights under their loan documents to, among
other things, declare a default under the loans, accelerate their indebtedness
such that it would become immediately due and payable, and pursue foreclosure of
our assets which are pledged as collateral for such loans. We are also currently
in discussions with other lenders to replace these loans at the end of their
term in October 2002 or sooner, if necessary.
In March 2000, we obtained a $10 million term loan from SouthTrust Bank, N.A.
This note bears interest at prime rate and is due in monthly principal
installments of $93,000 plus interest. The note matures in March 2005. The
balance outstanding on this note as of September 30, 2001 was $9,242,535. This
note was used to payoff a prior term loan and to finance approximately $7.5
million in new equipment purchases to expand our production capacity, including
the new production equipment purchased and installed throughout fiscal 2001 and
the beginning of fiscal 2002. This term loan is secured by certain machinery and
equipment, including our new production equipment.
In October 2000, our president guaranteed a $1.5 million short-term bridge loan
that we obtained from SouthTrust Bank, N.A. by pledging some of his shares of
our common stock to secure the loan. Interest on this note is at the prime rate
(6% at September 30, 2001). The loan is being paid down by monthly principal
payments of $50,000 plus interest. The note matures in October 2003. In
consideration of his guarantee and related pledge, we granted our president
stock options to acquire 343,125 shares of our common stock at an exercise price
of $3.88 per share. Such options shall expire on December 15, 2010.
On April 6, 2001, we issued to two specified investors, in accordance with an
exemption from registration under Regulation D promulgated under the Securities
Act of 1933, as amended, (i) an aggregate of 72,646 shares Series A convertible
preferred stock, $0.01 par value, and (ii) warrants to purchase shares common
stock, $0.01 par value, at an aggregate sales price of approximately $3,082,000.
The shares are subject to certain designations, preferences and rights,
including the right to convert each preferred share into ten shares of common
stock, the right to a ten percent stock dividend after one year of issuance, and
an eight percent stock dividend for the subsequent three years thereafter.
The warrants include an initial issuance to the investors of warrants to
purchase an aggregate of 120,000 shares of common stock. The initial warrants
are exercisable for a period of five years from April 6, 2001, at a per share
exercise price equal to the lesser of (a) $5.30 or (b) a price equal to 110% of
the average of the closing bid price of the common stock for the thirty trading
days ending on January 1, 2002. The warrants also include the issuance to the
investors of warrants to purchase an aggregate of 120,000 shares of common
stock, which are exercisable simultaneous with and as a condition to any
redemption of the shares. Finally, the warrants include the issuance to the
investors of warrants to purchase shares of common stock in an amount determined
by dividing (x) 30% of the shares originally purchased by the investors by (y)
the average closing bid price of the common stock during the five day period
ending on February 15, 2002 (the "30% warrants"). The 30% warrants are
exercisable for a period of five years from February 15, 2002 at per share
exercise price equal to 110% of the average closing bid price of the common
stock during the five day period ending on February 15, 2002. We have filed a
registration statement with the Securities and Exchange Commission to register
the shares underlying the warrants and the preferred stock. Such registration
statement became effective on October 17, 2001.
On September 25, 2001, we issued to one specified investor, in accordance with
an exemption from registration under Regulation D promulgated under the
Securities Act of 1933, as amended, (i) an aggregate of 522,648 shares of common
stock, $0.01 par value, and (ii) warrants to purchase 140,000 shares of common
stock, $0.01 par value, at an aggregate
16
sales price of approximately $3,000,000. The warrants are exercisable at a price
per share equal to $6.74 until September 25, 2006. We have filed a registration
statement with the Securities and Exchange Commission to register the shares
issued and those shares underlying the warrant. Such registration statement
became effective on October 17, 2001.
Management believes that proceeds received in connection with the preferred
stock issuance in April 2001 and the common stock issuance in September 2001
together with cash flow from current operations will allow us to meet our
current liquidity needs based on current operation levels. However, additional
financing is necessary to meet the demands of expected future higher sales
volumes and to refinance the FINOVA Capital and FINOVA Mezzanine loans that are
coming due in October 2002.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" which
addresses the financial accounting and reporting for business combinations and
supersedes APB Opinion No. 16, "Business Combinations," and SFAS No. 38,
"Accounting for Preacquisition Contingencies of Purchased Enterprises." SFAS No.
141 requires that all business combinations be accounted for by a single method,
the purchase method, modifies the criteria for recognizing intangible assets,
and expands disclosure requirements. The provisions of SFAS No. 141 apply to all
business combinations initiated after June 30, 2001. We do not expect that the
adoption of SFAS No. 141 will have a material effect on our results of
operations or statements of financial position.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets" which addresses financial accounting and reporting for acquired goodwill
and other intangible assets and supersedes APB Opinion No. 17, "Intangible
Assets." SFAS No. 142 addresses how intangible assets that are acquired
individually or with a group of other assets should be accounted for in
financial statements upon their acquisition and after they have been initially
recognized in the financial statements. SFAS No. 142 requires that goodwill and
intangible assets that have indefinite useful lives not be amortized but rather
tested at least annually for impairment, and intangible assets that have finite
useful lives be amortized over their useful lives. SFAS No. 142 provides
specific guidance for testing goodwill and intangible assets that will not be
amortized for impairment. In addition, SFAS No. 142 expands the disclosure
requirements about goodwill and other intangible assets in the years subsequent
to their acquisition. SFAS No. 142 is effective for our fiscal year 2003.
Impairment losses for goodwill and indefinite-life intangible assets that arise
due to the initial application of SFAS No. 142 are to be reported as resulting
from a change in accounting principle. However, goodwill and intangible assets
acquired after June 30, 2001 will be subject immediately to provisions of SFAS
142. We do not expect that the adoption of SFAS No. 142 will have a material
effect on our results of operations or statements of financial position.
In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets," which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. While SFAS No.
144 supersedes both SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" and APB Opinion No. 30,
"Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," it retains the fundamental provisions of those
Statements. SFAS No. 144 becomes effective for fiscal years beginning after
December 15, 2001. We are currently evaluating the impact of SFAS No. 144 on our
financial statements.
17
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 September 30, 2001 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
$43,000 for the quarter.
The Company's sales for the six months ended September 30, 2001 and 2000
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 September 30, 2001. The effects of changes in foreign currency
exchange rates has not historically been significant to the Company's operations
or net assets.
18
PART II. OTHER INFORMATION
GALAXY NUTRITIONAL FOODS, INC.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On September 24, 2001, we sold 522,648 shares of common stock and warrants to
purchase 140,000 shares of common stock to Hare & Co. f/b/o John Hancock Small
Cap Value Fund pursuant to a certain Securities Purchase Agreement for an
aggregate sales price of approximately $3,000,000. The shares and warrants were
issued in reliance upon the exemption from securities registration afforded by
Rule 506 under Regulation D as promulgated by the Securities and Exchange
Commission under the Securities Act of 1933, as amended. The warrants held by
Hare & Co. f/b/o John Hancock Small Cap Value Fund are exercisable at a price
per share equal to $6.74. All of the warrants are exercisable until September
24, 2006.
Pursuant to that certain Amendment and Waiver Agreement dated as of September
24, 2001, we issued 30,000 shares of common stock to each of BH Capital
Investments, L.P. and Excalibur Limited Partnership in order to induce them to
waive our obligation not to sell or enter into any agreement to sell any of its
securities for the time period beginning April 6, 2001 and continuing until
January 15, 2002, to allow the transaction described in the preceding paragraph.
We undertook this obligation pursuant to that certain Series A Preferred Stock
and Warrants Purchase Agreement dated April 6, 2001, by and among us, BH Capital
Investments, L.P. and Excalibur Limited Partnership. The shares were issued in
reliance upon the exemption from securities registration afforded by Section
4(2) of the Securities Act of 1933, as amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
In July 2001, we notified FINOVA Capital and FINOVA Mezzanine that we had failed
to comply with the minimum operational cash flow to contractual debt service
ratio, the funded debt to EBITDA ratio and the capital expenditure limitation.
At no time has FINOVA Capital or FINOVA Mezzanine delivered to us a notice of
default of the line of credit or the subordinated loans as a result of such
failures. FINOVA Capital agreed to amend such covenants and to waive those
violations for the fiscal year ended March 31, 2001 and the fiscal quarter ended
June 30, 2001 pursuant to that certain Amendment and Limited Waiver to Security
Agreement dated July 13, 2001. In consideration for this waiver and amendment,
we accepted an increase in the interest rate on the line of credit to prime plus
2% and agreed to pay a fee in the amount of $100,000, of which $25,000 has been
paid with the remainder due on December 31, 2001. FINOVA Mezzanine also agreed
to waive the violations of its covenants for the fiscal year ended March 31,
2001 and the fiscal quarter ended June 30, 2001, and to amend those covenants
for future fiscal quarters pursuant to a letter agreement dated July 12, 2001
and amendments to the subordinated notes. In consideration of the waiver, we
accepted an increase in the interest rate to from 11.5% to 13.5% per annum on
the subordinated loans, and agreed to pay an amendment/waiver fee in the amount
of $20,000, which is due on December 31, 2001.
For the fiscal quarter ended September 30, 2001, we were again in violation of
the minimum operational cash flow to contractual debt service ratio, the funded
debt to EBITDA ratio, and the capital expenditure limitation. As of November 14,
2001, we entered into an Amendment and Limited Waiver to Security Agreement with
FINOVA Capital pursuant to which FINOVA Capital waived our duty to comply with
such financial covenants for the fiscal quarter ended September 30, 2001 and
certain other financial covenants for the twelve months ended September 30,
2001. Additionally, the Amendment and Limited Waiver to Security Agreement also
provided for an acceleration of the maturity date of the line of credit from
August 1, 2003 to October 15, 2002, and the payment of an amendment/waiver fee
in the amount of $50,000 by December 31, 2001. In connection with the
aforementioned waivers and amendments, we also entered into an Intellectual
Property Security Agreement whereby we granted FINOVA Capital a security
interest in all of our intellectual property and other proprietary property.
FINOVA Mezzanine also agreed to waive the violations to its covenants for the
fiscal quarter ended September 30, 2001 pursuant to a letter agreement dated as
of November 14, 2001 and certain amendments to the subordinated notes. In
consideration of the waiver, we accepted an acceleration of the maturity date of
the subordinated notes from August 1, 2003 to October 15, 2002, and agreed to
pay an amendment/waiver fee in the amount of $10,000, which is due on December
31, 2001. We believe that we will again fail to meet certain financial and other
covenants of the line of credit and subordinated loans for the fiscal quarters
to end on December 31, 2001 and thereafter. Since the we have not received a
waiver for future quarters and have not been able to change the existing loan
covenants with FINOVA Capital and FINOVA Mezzanine, the entire balance of the
subordinated notes are classified as current for the quarter ended September 30,
2001.
19
We are already in discussions with FINOVA to obtain a waiver for these defaults
for the December 2001 quarter and to amend the covenants for the remaining term
of these loans. We believe that the likelihood of obtaining these waivers is
highly probable. However, in the event we cannot obtain waivers for these
covenant failures, FINOVA Capital, FINOVA Mezzanine and SouthTrust Bank N.A.
could exercise their respective rights under their loan documents to, among
other things, declare a default under the loans, accelerate their indebtedness
such that it would become immediately due and payable, and pursue foreclosure of
our assets which are pledged as collateral for such loans. We are also currently
in discussions with other lenders to replace these loans at the end of their
term in October 2002 or sooner, if necessary.
ITEM 5. OTHER INFORMATION
On October 5, 2001, we issued warrants to acquire 60,000 shares of common stock
to each of BH Capital Investments, L.P. and Excalibur Limited Partnership in
consideration of consulting services to be provided to us by them for one year.
The warrants are exercisable for five years at a price of $5.86 per share. We
also agreed to register the shares underlying the warrants by filing a
registration statement with the Securities and Exchange Commission on or about
February 1, 2002.
20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The following exhibits are filed as part of this Form 10-Q/A.
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.)
*3.7 Amendment to Certificate of Incorporation of the Company, filed
on November 16, 2000, effective November 17, 2000 (Filed as
Exhibit 3.1 to Registration Statement on Form S-3 filed November
28, 2000, and incorporated herein by reference.)
*3.8 Certificate of Designations, Preferences and Rights of Series A
Convertible Preferred Stock filed on April 5, 2001 (Filed as
Exhibit 3.8 on Form 10-K/A for fiscal year ended March 31, 2001,
and incorporated herein by reference.)
*4.1 Series A Preferred Stock and Warrants Purchase Agreement, by and
among BH Capital Investments, L.P., Excalibur Limited Partnership
and the Company, dated April 6, 2001 (Filed as Exhibit 4.1 on
Form 10-K/A for fiscal year ended March 31, 2001, and
incorporated herein by reference.)
*4.2 Amendment and Waiver Agreement, by and among BH Capital
Investments, L.P., Excalibur Limited Partnership and the Company,
dated September 24, 2001 (Filed as Exhibit 4.5 to Registration
Statement on Form S-3 filed October 3, 2001, and incorporated
herein by reference.)
*4.3 Securities Purchase Agreement, by and between Hare & Co. f/b/o
John Hancock Small Cap Value Fund and the Company, dated
September 24, 2001 (Filed as Exhibit 4.6 to Registration
Statement on Form S-3 filed October 3, 2001, and incorporated
herein by reference.)
*4.4 Stock Purchase Warrant issued to Hare & Co. f/b/o John Hancock
Small Cap Value Fund and the Company, dated September 25, 2001
(Filed as Exhibit 4.7 to Registration Statement on Form S-3 filed
October 3, 2001, and incorporated herein by reference.)
*4.5 Registration Rights Agreement, by and between Hare & Co. f/b/o
John Hancock Small Cap Value Fund and the Company, dated
September 24, 2001 (Filed as Exhibit 4.8 to Registration
Statement on Form S-3 filed October 3, 2001, and incorporated
herein by reference.)
*10.1 Second Amendment to the Security Agreement with Finova Financial
Services dated June 1998 (Filed as Exhibit 10.1 on Form 10-K for
fiscal year ended March 31, 1999, and incorporated herein by
reference.)
21
*10.2 Third Amendment to the Security Agreement with Finova Financial
Services dated December 1998 (Filed as Exhibit 10.2 on Form 10-K
for fiscal year ended March 31, 1999, and incorporated herein by
reference.)
*10.3 Term Loan Agreement with Southtrust Bank dated March 2000 (Filed
as Exhibit 10.3 on Form 10-K/A for fiscal year ended March 31,
2000, and incorporated herein by reference.)
*10.4 Cabot Industrial Properties L.P. Lease dated July 1999 (Filed as
Exhibit 10.4 on Form 10-K/A for fiscal year ended March 31, 2000,
and incorporated herein by reference.)
*10.5 Preferability letter from BDO Seidman, L.L.P. (Filed as Exhibit
10.3 on Form 10-Q for quarter ended December 31, 2000, and
incorporated herein by reference.)
*10.6 Third Amendment to Lease Agreement, dated as of August 14, 2001,
by and between Anco Company and the Company (Filed as Exhibit
10.6 on Form 10-K/A for fiscal year ended March 31, 2001, and
incorporated herein by reference.)
*10.7 Amendment and Limited Waiver to Security Agreement, dated as of
July 13, 2001, by and between the Company and FINOVA Capital
Corporation (Filed as Exhibit 10.7 on Form 10-Q/A for the quarter
ended September 30, 2001, and incorporated herein by reference.)
*10.8 Waiver Letter from FINOVA Mezzanine Capital, Inc. to the Company
dated as of July 12, 2001 (Filed as Exhibit 10.8 on Form 10-Q/A
for the quarter ended September 30, 2001, and incorporated herein
by reference.)
*10.9 Amended and Restated Secured Promissory Note in the principal
amount of $815,000, dated as of July 13, 2001, by the Company in
favor of FINOVA Mezzanine Capital, Inc. (Filed as Exhibit 10.9 on
Form 10-Q/A for the quarter ended September 30, 2001, and
incorporated herein by reference.)
*10.10 Second Amended and Restated Secured Promissory Note in the
principal amount of $4,000,000, dated as of July 13, 2001, by the
Company in favor of FINOVA Mezzanine Capital, Inc. (Filed as
Exhibit 10.10 on Form 10-Q/A for the quarter ended September 30,
2001, and incorporated herein by reference.)
*10.11 Amendment and Limited Waiver to Security Agreement, dated as of
November 14, 2001, by and between the Company and FINOVA Capital
Corporation (Filed as Exhibit 10.11 on Form 10-Q/A for the
quarter ended September 30, 2001, and incorporated herein by
reference.)
*10.12 Intellectual Property Security Agreement, dated as of November
14, 2001, by and between the Company and FINOVA Capital
Corporation (Filed as Exhibit 10.12 on Form 10-Q/A for the
quarter ended September 30, 2001, and incorporated herein by
reference.)
*10.13 Waiver Letter from FINOVA Mezzanine Capital, Inc. to the Company
dated as of November 14, 2001 (Filed as Exhibit 10.13 on Form
10-Q/A for the quarter ended September 30, 2001, and incorporated
herein by reference.)
*10.14 Allonge to Second Amended and Restated Secured Promissory Note,
dated as of November 14, 2001, by the Company in favor of FINOVA
Mezzanine Capital, Inc. (Filed as Exhibit 10.14 on Form 10-Q/A
for the quarter ended September 30, 2001, and incorporated herein
by reference.)
* Previously filed
REPORTS ON FORM 8-K
There were no reports on Form 8-K filed by the Company during
this period.
22
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.
Date: February 12, 2002 /s/Angelo S. Morini
-----------------------------------
Angelo S. Morini
Chairman, Chief Executive Officer
and President
(Principal Executive Officer)
Date: February 12, 2002 /s/ LeAnn Hitchcock
-----------------------------------
LeAnn Hitchcock
Chief Financial Officer
(Principal Accounting Officer)
23