SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
------------------------------------------------------------------
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Quarterly Period Ended June 30, 2004
-----------------------------
Commission File Number 1-15345
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 |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES |_| NO |X|
On August 12, 2004, there were 15,759,287 shares of Common Stock, $.01 par
value per share, outstanding.
1
GALAXY NUTRITIONAL FOODS, INC.
Index to Form 10-Q
For Quarter Ended June 30, 2004
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
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operation 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
Item 4. Controls and Procedures 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 27
2
PART I. FINANCIAL INFORMATION
-----------------------------
GALAXY NUTRITIONAL FOODS, INC.
Balance Sheets
JUNE 30, MARCH 31,
Notes 2004 2004
----- ------------ ------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash $766,779 $449,679
Trade receivables, net 4,834,191 3,964,198
Inventories, net 4,713,641 4,632,843
Prepaid expenses and other 547,987 266,301
------------ ------------
Total current assets 10,862,598 9,313,021
PROPERTY AND EQUIPMENT, NET 19,760,573 20,232,089
OTHER ASSETS 379,149 416,706
------------ ------------
TOTAL $31,002,320 $29,961,816
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit 2 $4,658,851 $4,605,277
Accounts payable 2,563,368 1,266,346
Accrued liabilities 1,934,352 1,812,300
Current portion of accrued employment contract 7 366,305 366,305
Current portion of term notes payable 2 1,320,000 1,140,000
Current portion of obligations under capital leases 206,841 231,432
------------ ------------
Total current liabilities 11,049,717 9,421,660
ACCRUED EMPLOYMENT CONTRACT, less current portion 7 1,201,529 1,293,142
TERM NOTES PAYABLE, less current portion 2 7,911,985 8,241,985
OBLIGATIONS UNDER CAPITAL LEASES, less current portion 162,071 204,967
------------ ------------
Total liabilities 20,325,302 19,161,754
------------ ------------
COMMITMENTS AND CONTINGENCIES -- --
REDEEMABLE CONVERTIBLE PREFERRED STOCK 3 2,950,488 2,573,581
STOCKHOLDERS' EQUITY:
Common stock 157,241 156,573
Additional paid-in capital 64,261,061 64,520,084
Accumulated deficit (43,799,111) (43,557,515)
------------ ------------
20,619,191 21,119,142
Less: Notes receivable arising from the exercise of
stock options and sale of common stock (12,772,200) (12,772,200)
Treasury stock (120,461) (120,461)
------------ ------------
Total stockholders' equity 7,726,530 8,226,481
------------ ------------
TOTAL $31,002,320 $29,961,816
============ ============
See accompanying notes to financial statements.
3
GALAXY NUTRITIONAL FOODS, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
NOTES 2004 2003
THREE MONTHS ENDED JUNE 30, ----- ------------ ------------
NET SALES $ 11,191,678 $ 8,695,781
COST OF GOODS SOLD 8,251,330 6,051,116
------------ ------------
Gross margin 2,940,348 2,644,665
------------ ------------
OPERATING EXPENSES:
Selling 1,460,400 1,313,873
Delivery 593,326 451,817
Non-cash compensation related to options and warrants 1,4 162,374 1,307,131
General and administrative 633,342 983,479
Research and development 72,686 63,084
------------ ------------
Total operating expenses 2,922,128 4,119,384
------------ ------------
INCOME (LOSS) FROM OPERATIONS 18,220 (1,474,719)
Interest expense 259,816 495,385
------------ ------------
NET LOSS $ (241,596) $ (1,970,104)
Preferred Stock Dividends 3 42,392 54,780
Preferred Stock Accretion to Redemption Value 3 512,175 894,929
------------ ------------
NET LOSS TO COMMON SHAREHOLDERS $ (796,163) $ (2,919,813)
============ ============
BASIC & DILUTED NET LOSS PER COMMON SHARE 5 $ (0.05) $ (0.21)
============ ============
See accompanying notes to financial statements.
4
GALAXY NUTRITIONAL FOODS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
Common Stock Notes
------------------------ Receivable
Additional Accumulated for Common Treasury
Shares Par Value Paid-In Capital Deficit Stock Stock Total
--------------------------------------------------------------------------------------------------------
Balance at March 31,
2004 15,657,321 $ 156,573 $ 64,520,084 $(43,557,515) $(12,772,200) $ (120,461) $ 8,226,481
Costs associated with
equity raise -- -- (22,500) -- -- -- (22,500)
Conversion of
preferred stock 66,752 668 116,148 116,816
Non-cash compensation
related to variable
securities -- -- 158,166 -- -- -- 158,166
Dividends on
preferred stock -- -- (42,392) -- -- -- (42,392)
Accretion of discount
on preferred stock -- -- (468,445) -- -- -- (468,445)
Net loss -- -- -- (241,596) -- -- (241,596)
--------------------------------------------------------------------------------------------------------
Balance at June 30,
2004 15,724,073 $ 157,241 $ 64,261,061 $(43,799,111) $(12,772,200) $ (120,461) $ 7,726,530
========================================================================================================
See accompanying notes to financial statements.
5
GALAXY NUTRITIONAL FOODS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED JUNE 30, NOTES 2004 2003
----- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (241,596) $(1,970,104)
Adjustments to reconcile net loss to net cash from (used in)
operating activities:
Depreciation and amortization 546,041 558,125
Amortization of debt discount and financing costs 33,349 99,440
Provision for losses on trade receivables 107,000 (91,000)
Non-cash compensation related to options and warrants 1,4 162,374 1,307,131
(Increase) decrease in:
Trade receivables (976,993) 991,452
Inventories (80,798) 133,003
Prepaid expenses and other (281,686) (14,354)
Increase (decrease) in:
Accounts payable 1,297,022 (824,061)
Accrued liabilities 13,325 (328,009)
----------- -----------
NET CASH FROM (USED IN) OPERATING ACTIVITIES 578,038 (138,377)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (74,525) (91,388)
Decrease in other assets -- 1,807
----------- -----------
NET CASH FROM (USED IN) INVESTING ACTIVITIES (74,525) (89,581)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES: 6
Book overdrafts -- (957,396)
Net borrowings (payments) on lines of credit 53,574 (249,676)
Repayments on subordinated note payable -- (4,000,000)
Borrowings on term note payable -- 2,000,000
Repayments on term notes payable (150,000) (437,393)
Principal payments on capital lease obligations (67,487) (93,934)
Financing costs for long term debt -- (188,361)
Proceeds from issuance of common stock, net of offering costs (22,500) 3,793,120
Proceeds from exercise of common stock warrants -- 360,000
----------- -----------
NET CASH FROM (USED IN) FINANCING ACTIVITIES (186,413) 226,360
----------- -----------
NET INCREASE (DECREASE) IN CASH 317,100 (1,598)
CASH, BEGINNING OF PERIOD 449,679 1,598
----------- -----------
CASH, END OF PERIOD $ 766,779 $ --
=========== ===========
See accompanying notes to financial statements.
6
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The unaudited financial statements have been prepared by the Company,
under the rules and regulations of the Securities and Exchange Commission.
The accompanying 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 omitted
under such rules and regulations although the Company believes that the
disclosures are adequate to make the information presented not misleading.
The March 31, 2004 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 financial statements should be read in conjunction with
the financial statements and notes included on Form 10-K for the fiscal
year ended March 31, 2004. Interim results of operations for the
three-month period ended June 30, 2004 may not necessarily be indicative
of the results to be expected for the full year.
Stock Based Compensation
The Company accounts for its stock-based employee compensation plans under
the accounting provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", furnishes the pro forma
disclosures required under Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation", and applies
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure" on a prospective basis for options granted after March 31,
2003.
In December 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 148, "Accounting for Stock Based Compensation--Transition and
Disclosure--an Amendment to SFAS 123." SFAS 148 provides two additional
transition methods for entities that adopt the preferable method of
accounting for stock based compensation. Further, the statement requires
disclosure of comparable information for all companies regardless of
whether, when, or how an entity adopts the preferable, fair value based
method of accounting. Effective April 1, 2003, the Company adopted the
fair value method of recording compensation expense related to all stock
options granted after March 31, 2003, in accordance with SFAS 123 and SFAS
148 (the prospective method, as defined by SFAS 148). Accordingly, the
fair value of stock options as determined on the date of grant using the
Black-Scholes option-pricing model, will be expensed over the vesting
period of the related stock options. The negative impact on diluted
earnings per share related to the issuance of employee stock options in
fiscal 2004 was approximately $0.03.
SFAS No. 123, "Accounting for Stock Based Compensation", requires the
Company to provide pro- forma information regarding net income (loss) and
earnings (loss) per share amounts as if compensation cost for the
Company's employee and director stock options had been determined in
accordance with the fair market value-based method prescribed in SFAS No.
123. The Company estimates the fair value of each stock option at the
grant date by using a Black-Scholes option-pricing model. The following
assumptions were used for options issued during the periods:
Quarter Ended June 30, June 30,
2004 2003
-------- --------------
Dividend Yield None None
Volatility NA 41% to 42%
Risk Free Interest Rate NA 2.01% to 3.77%
Expected Lives in Months NA 36 to 120
7
Under the accounting provisions of SFAS No. 123, the Company's net income
(loss) and net income (loss) per basic and diluted share would have been
reduced to the pro forma amounts indicated below:
Quarter Ended June 30, 2004 June 30, 2003
------------- -------------
Net loss available to common shareholders as
reported $ (796,163) $(2,919,813)
Add: Stock-based compensation expense included
in reported net income 162,374 1,307,131
Deduct: Stock-based compensation expense
determined under fair value based method for
all awards (192,581) (1,500,127)
----------- -----------
Pro forma net loss available to common
shareholders $ (826,370) $(3,112,809)
=========== ===========
Net loss per common share:
Basic & diluted - as reported $ (0.05) $ (0.21)
=========== ===========
Basic & diluted - pro forma $ (0.05) $ (0.23)
=========== ===========
Net Income (Loss) per Common Share
Net income (loss) per common share is computed by dividing net income or
loss by the weighted average shares outstanding. Diluted income (loss) per
common share is computed on the basis of weighted average shares
outstanding plus potential common shares which would arise from the
exercise of stock options, warrants and conversion of the Series A
convertible preferred stock.
Use of Estimates
The preparation of 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 and disclosure of contingent assets and
liabilities at the date of the financial statements and reported amounts
of revenues and expense during the reporting period. The Company's
significant estimates include the allowance for doubtful accounts
receivable, which is made up of reserves for promotions, discounts and bad
debts, provision for inventory obsolescence, valuation of deferred taxes,
and valuation of stock options and warrants. Actual results could differ
from those estimates.
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. The
Company's sales are generated primarily within the United States of
America.
(2) LINE OF CREDIT AND NOTES PAYABLE
On May 27, 2003, the Company obtained from Textron Financial Corporation
("Textron") a revolving credit facility (the "Textron Loan") with a
maximum principal amount of $7,500,000 pursuant to the terms and
conditions of the Textron Loan and Security Agreement. The Textron Loan is
secured by the Company's inventory, accounts receivable and all other
assets. Generally, subject to the maximum principal amount, which can be
borrowed under the Textron Loan and certain reserves that must be
maintained during the term of the Textron Loan, the amount available under
the Textron Loan for borrowing by the Company from time to time is equal
to the sum of (i) eighty-five percent (85%) of the net amount of its
eligible accounts receivable plus (ii) sixty percent (60%) of the
Company's eligible inventory not to exceed $3,500,000. Advances under the
Textron Loan bear interest at a variable rate, adjusted on the first (1st)
day of each month, equal to the prime rate plus one and three-quarter
percent (1.75%) per annum (5.75% at June 30, 2004) calculated on the
average cash borrowings for the preceding month. The Textron Loan matures
and all amounts are due and payable in full on May 26, 2006. However, in
accordance with EITF 95-22, "Balance Sheet Classification of Borrowings
Outstanding under Revolving Credit Agreements that involve both a
Subjective Acceleration Clause and a Lock-Box Arrangement," the balance is
reflected as current on the balance sheet. As of June 30, 2004, the
outstanding principal balance on the Textron Loan was $4,658,851.
8
Simultaneous with the closing of the Textron Loan in May 2003, SouthTrust
Bank extended the Company a new term loan in the principal amount of
$2,000,000. This loan was consolidated with the Company's March 2000 term
loan with SouthTrust Bank, which had a then outstanding principal balance
of $8,131,985 for a total term loan amount of $10,131,985. The revised
term loan bears interest at SouthTrust Bank's prime rate of interest plus
1% (5% at June 30, 2004), and is due in increasing principal installments
by June 2009. Each month, the Company will pay the accrued interest on the
loan plus principal amounts as follows: $110,000 from July 2004 to June
2005, and $166,250 from July 2005 until maturity in June 2009. In a Loan
Modification letter dated May 21, 2004, beginning in October 2004,
interest may be adjusted quarterly from prime to prime plus 1.25%
according to the Company's performance in its Maximum Funded Debt to
EBITDA ratio in prior quarters. This note is secured by all of the
Company's equipment and certain related assets. The balance outstanding on
the term loan as of June 30, 2004 was $9,231,985.
(3) CAPITAL STOCK
Preferred Stock Issuances
On April 6, 2001, the Company received from BH Capital Investments, L.P.
and Excalibur Limited Partnership (the "Series A Preferred Holders")
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 with a face value of $3,500,000 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 such
shares into shares of common stock at any time. The per share conversion
price is equal to the quotient of $48.18, plus all accrued and unpaid
dividends for each share of the Series A convertible preferred stock,
($61.63 at June 30, 2004), divided by the lesser of (x) $1.75 or (y) 95%
of the average of the two lowest closing bid prices of the Company's
common stock on the American Stock Exchange ("AMEX") out of the fifteen
trading days immediately prior to conversion.
The Series A Preferred Holders converted 1,900 and 1,500 shares of the
Series A convertible preferred stock plus accrued dividends, into 66,752
and 52,302 shares of common stock, respectively, during the three months
ended June 30, 2004 and 2003, respectively. The conversion prices ranged
from $1.6483 to $1.75 based on the above formula.
The Series A Preferred Holders have the right to receive on any
outstanding Series A convertible preferred stock a ten percent dividend on
the shares, payable one year after the issuance of such preferred stock,
and an eight percent dividend for the subsequent three years thereafter,
payable in either cash or shares of preferred stock. For the three months
ended June 30, 2004 and 2003, the Company recorded preferred dividends of
$42,392, and $54,780, respectively, on the outstanding shares of the
Series A convertible preferred stock.
On April 6, 2001, the Company recorded the initial carrying value of the
preferred stock as $521,848. Each quarter the Company calculates an
estimated redemption value of the remaining preferred stock and then
calculates the difference between the initial carrying value and this
estimated redemption value. The difference is then accreted over the
redemption period (48 months beginning April 2001) using the straight-line
method, which approximates the effective interest method. For the three
months ended June 30, 2004, and 2003, the Company recorded $512,175, and
$894,929, respectively, related to the accretion of the redemption value
of preferred stock and the beneficial conversion feature of accrued
dividends. As of June 30, 2004, the value of the remaining 41,994 shares
of redeemable convertible preferred stock is $2,950,488.
The Series A Preferred Holders have the right to require the Company to
redeem their remaining 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 aggregate market price on the date of redemption of the
common stock that would be then issuable upon conversion of the preferred
stock and multiplied by the market price on the date of redemption. The
market price is based on a five-day average of the closing bid prices for
the five trading days prior to the date of redemption. Should there be no
additional conversions on the Series A convertible preferred stock before
April 6, 2005, the Company may be required to redeem the shares at a
minimum price in excess of $2.7 million.
(4) NON-CASH COMPENSATION RELATED TO OPTIONS AND WARRANTS
The Company calculates non-cash compensation related to its securities on
three primary items:
9
A. NOTES RECEIVABLE FOR COMMON STOCK
The Financial Accounting Standards Board issued Interpretation No. 44
("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. Accordingly, any increase in the market price of the
Company's common stock over the exercise price of the options that was not
previously recorded is recorded as compensation expense at each reporting
period. If there is a decrease in the market price of the Company's common
stock compared to the prior reporting period, the reduction is recorded as
compensation income. Compensation income is limited to the original base
exercise price (the "Floor") of the options. In accordance with FIN 44,
the underlying shares related to the $12,772,200 note receivable from the
Company's founder, Angelo S. Morini, are treated as variable due to the
nature of the note being non-interest bearing and non-recourse. The Floor
for the underlying shares is $4.38 per share. There was no non-cash
compensation expense or income related to these shares recorded during the
three months ended June 30, 2004 and 2003 as the price of the Company's
common stock at the beginning and end of the periods was below the Floor.
B. OPTION AND WARRANT REPRICING
On October 11, 2002, the Company repriced all outstanding options granted
to employees prior to October 11, 2002 (4,284,108 shares at former prices
ranging from $2.84 to $10.28) to the market price of $2.05 per share. In
addition, the Company repriced the outstanding warrants held by current
consultants as of October 11, 2002 (291,429 shares at former prices
ranging from $3.31 to $5.50) to the market price of $2.05 per share. This
stock option repricing resulted in variable accounting treatment for these
stock options beginning with the quarter ended December 31, 2002 and such
variable accounting treatment will continue until the related options have
been cancelled, expired or exercised. On December 4, 2002, as a result of
discussions and negotiations with certain major shareholders, the
Company's founder, Angelo S. Morini, agreed to reverse the repricing of
his 3,692,035 options for the purpose of improving shareholder value and
lessening potential financial statement expense. Although the exercise
prices of the options were reversed back to their original amounts, the
Company is still required to account for any outstanding options related
to these reversed-repriced options in accordance with variable accounting
standards each period.
The Company recorded $158,166 and $833,642 as non-cash compensation
expense related to these variable options and warrants in the three months
ended June 30, 2004 and 2003, respectively. The remaining outstanding
variable options and warrants as of June 30, 2004 were 3,882,092.
C. OPTION AND WARRANT ISSUANCES
During the three months ended June 30, 2004 and 2003, the Company recorded
$4,208 and $473,489, respectively as non-cash compensation expense related
to stock, options and warrants that were issued to and vested by officers,
directors and consultants. This expense is included in non-cash
compensation in the Company's Statements of Operations.
(5) EARNINGS PER SHARE
The following is a reconciliation of basic net earnings (loss) per share
to diluted net earnings (loss) per share:
Three months ended June 30, 2004 2003
- --------------------------------------------------------------------------------
Net loss available to common shareholders $ (796,163) $ (2,919,813)
Weighted average shares outstanding -
basic & diluted 15,666,399 13,590,879
------------ ------------
Basic & diluted net loss per common share $ (0.05) $ (0.21)
============ ============
Potential conversion of Series A convertible preferred stock for 1,478,815
shares, options for 4,742,201 shares and warrants for 1,242,856 shares
have not been included in the computation of diluted net income (loss) per
common share for the three months ended June 30, 2004, as their effect
would be antidilutive. Potential conversion of Series A convertible
preferred stock for 1,815,502 shares, options for 4,651,521 shares and
warrants for 1,242,856 shares have not been included in the computation of
diluted net income (loss) per common share for the three months ended June
30, 2003, as their effect would be antidilutive.
10
(6) 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.
Three months ended June 30, 2004 2003
- --------------------------------------------------------------------------------
NON-CASH FINANCING AND INVESTING ACTIVITIES:
Fair value of stock, options and warrants issued $ -- $565,800
Accrued preferred stock
dividends 42,392 54,780
Beneficial conversion feature related to preferred
stock dividends 11,531 25,105
Accretion of discount on preferred stock
$843,752
500,644 869,824
Cash paid for:
Interest 221,350 530,198
Income taxes -- --
(7) RELATED PARTY TRANSACTIONS
Angelo S. Morini
In June 1999, in connection with an amended and restated employment
agreement for Angelo S. Morini, the Company's Founder, the Company
consolidated two full recourse notes receivable ($1,200,000 from November
1994 and $11,572,200 from October 1995) related to the exercise of
2,914,286 shares of the Company's common stock into a single note
receivable in the amount of $12,772,200 that is due on June 15, 2006. This
new consolidated note is non-interest bearing and non-recourse and is
secured by the 2,914,286 shares of the Company's common stock. Per the
June 1999 employment agreement and the October 2003 Second Amended and
Restated Employment Agreement, this loan may be forgiven upon the
occurrence of any of the following events: 1) Mr. Morini is terminated
without cause; 2) there is a material breach in the terms of Mr. Morini's
employment agreement; or 3) there is a change in control of the Company
for which Mr. Morini did not vote "FOR" in his capacity as a director or a
shareholder.
In a Second Amended and Restated Employment Agreement effective October
13, 2003, Angelo S. Morini the Company's Founder, Vice-Chairman and
President resigned from his positions with the Company as Vice Chairman
and President and will no longer be involved in the daily operations of
the Company. He will retain the title of Founder and has been named
Chairman Emeritus. Mr. Morini will continue as an employee and as a member
of the Company's Board of Directors. Additionally, he may carry out
special assignments designated to him by the Chairman of the Board. The
agreement is for a five-year period beginning October 13, 2003 and
provides for an annual base salary of $300,000 plus standard health
insurance benefits, club dues and an auto allowance. The Company accrued
and expensed the five-year cost of this agreement in the quarter ended
December 31, 2003. The total estimated costs expensed under this agreement
are $1,830,329 of which $1,567,834 remained unpaid but accrued ($366,305
as short-term liabilities and $1,201,529 as long-term liabilities) as of
June 30, 2004. The long-term portion will be paid out in nearly equal
monthly installments ending in October 2008.
Christopher J. New
On July 8, 2004, Christopher J. New resigned from his position as Chief
Executive Officer in order to pursue other opportunities. In accordance
with the Separation and Settlement Agreement between the Company and Mr.
New, the Company will record approximately $445,000 related to the
employment contract expense in July 2004, which will be reflected in the
results for the Company's second quarter of fiscal 2005 ending September
30, 2004. This settlement will be paid out in nearly equal installments
over two years. In addition to the compensation, the Company agreed that
Mr. New's stock option rights under that certain Non-Qualified Stock
Option Agreement dated December 5, 2002 (for 25,000 shares at $1.67) and
that certain Non-Qualified Stock Option Agreement dated July 16, 2001 (for
100,000 shares at $2.05) will continue in full force and effect as if he
was employed by the Company.
Michael E. Broll
On July 8, 2004, Michael E. Broll, a member of the Company's Board of
Directors, was appointed as the new Chief Executive Officer upon the
resignation of Mr. New. The Company entered into a one-year employment
agreement whereby Mr. Broll is entitled to receive an annual base salary
of $200,000 plus a performance bonus at the discretion of the Board,
standard health benefits, a housing allowance of up to $500 per week for
one year and an auto allowance of $1,500 per month. The employment
agreement renews automatically for one-year periods unless cancelled by
either party ninety days prior to the end of the term. In the event Mr.
Broll's employment is terminated without cause, he will be entitled to
receive one year of his base salary as severance.
11
(8) ECONOMIC DEPENDENCE
The Company had one customer that accounted for nearly 11% of sales in the
quarter ended June 30, 2004. As of June 30, 2004, the amount due from this
customer is approximately 16% of the balance of accounts receivable. There
were no customers that accounted for greater than 10% of sales or of the
accounts receivable balance as of June 30, 2003.
12
GALAXY NUTRITIONAL FOODS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
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. These
forward-looking statements are based on the Company's current expectations,
estimates and projections about the Company's industry, management's beliefs and
certain assumptions made by us. 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. These statements are not guarantees
of future performance and are subject to certain risks, uncertainties and
assumptions that are difficult to predict. Therefore, 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. The Company undertakes no obligation to
update publicly any forward-looking statements for any reason, even if new
information becomes available or other events occur in the future.
Galaxy Nutritional Foods, Inc. (the "Company") is principally engaged in
developing, manufacturing and marketing a variety of healthy cheese and dairy
related products, as well as other cheese alternatives, and is a leading
producer of dairy alternative products made with soy. These healthy cheese and
dairy related products include low or no fat, no saturated fat, no trans-fat,
low or no cholesterol and lactose-free varieties. These products are sold
throughout the United States and internationally to customers in the retail and
food service markets. The Company's headquarters and manufacturing facilities
are located in Orlando, Florida.
MATERIAL FUTURE EVENTS
On April 6, 2005, the Series A Preferred Holders have the right to require the
Company to redeem the outstanding shares of Series A convertible preferred
stock. The redemption price is payable 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 aggregate market price on the date of
redemption of the common stock that would be then issuable upon conversion of
the Series A convertible preferred stock. The market price is based on a
five-day average of the closing bid prices for the five trading days prior to
the date of redemption.
As of August 12, 2004, there are 40,994 shares of Series A convertible preferred
stock outstanding. Assuming that no further conversions are made and the
conversion price remains at $1.75, the redemption price of the outstanding
Series A convertible preferred stock would be the greater of (a) $2,646,556
(100% of the preference amount plus accrued dividends through April 6, 2005 -
$64.56 per share) or (b) the value of 1,512,318 shares of common stock
multiplied by the market price on the date of redemption (currently estimated at
$2,595,137 using the average of the closing market price of the Company's common
stock from August 6, 2004 - August 12, 2004).
The Company is considering a number of alternatives related to the redemption of
the Series A convertible preferred stock, which, individually or in combination,
could resolve the Series A redemption obligations. These alternatives include
procuring the necessary funds from operating activities and existing credit
facilities, or from additional equity financing, or identifying one or more
investors to buy out the Series A Preferred Holders directly, or negotiating an
extension of such date with the current Series A Preferred Holders. However,
there are no assurances that any of such alternatives will be viable or
available to the Company on terms that are acceptable to the Company, or that,
even if viable, that the Company will be successful in implementing any of such
alternatives. If the Company is required to redeem the outstanding Series A
convertible preferred stock and does not have the funds to do so, the Company
will be in default of its obligations and the Series A Preferred Holders will be
entitled to pursue their remedies against the Company. In addition, any unpaid
redemption amount owed to the Series A Preferred Holders shall bear interest at
the rate of 3% per month until paid in full.
A default by the Company in its obligations to redeem the Series A convertible
preferred stock will also result in a default by the Company under the Textron
Loan, which, in turn, will result in a default by the Company under the
SouthTrust Loan. In the cases of the Textron Loan and the SouthTrust Loan, the
lenders thereunder could exercise their respective rights under their loan
documents to, among other things, declare a default under the loans, accelerate
the outstanding indebtedness such that it would become immediately due and
payable, and pursue foreclosure of the Company's assets which are pledged as
collateral for such loans. In such event, it is unlikely that the Company would
be able to continue as a going concern.
13
BUSINESS ENVIRONMENT
The Company is principally engaged in developing, manufacturing and marketing a
variety of healthy cheese and dairy related products, as well as other cheese
alternatives, and is a leading producer of dairy alternative products made with
soy. For the quarter ended June 30, 2004, 65% of the Company's sales were
derived from sales of sliced cheese products. However, due to the change in
consumers' eating habits toward low-carbohydrate meal preparation, the Company
is in the process of diversifying, strengthening and balancing the Company's
product segmentation between various forms of cheese such as slices, shreds, and
chunks, and in its other non-cheese related products. This diversification will
help the Company extend consumer usage occasions beyond lunchtime cheese slices
for sandwich usage. For example, the Company may add new products that appeal to
younger consumers and have portable functionality (that is, "on-the-go" users).
Management focuses on several items in order to measure the Company's
performance. In the short term (1 to 3 years), management is working towards
obtaining positive trends in the following areas:
o Operating cash flow
o Gross margin in dollars and % of net sales
o Operating income excluding certain employment contract expenses and
non-cash compensation related to options and warrants
o EBITDA excluding certain employment contract expenses and non-cash
compensation related to options and warrants
o Liquidity
o Key financial ratios (AR/AP/Inventory turnover)
o Net sales trends (as it relates to consumer demand)
In the long term (over 3 years), management is striving to generate consistent
and predictable net sales growth while incrementally enhancing net cash flow
from operations.
The principal raw material used by the Company is casein, which accounts for
approximately 42% of the Company's raw material purchases. As casein is a
significant component of the Company's product formulation, the Company is
vulnerable to short and long-term changes in casein pricing, which, at times has
been volatile. Management will pursue tactics that minimize the effects on the
Company of the volatility of casein pricing as well as trying to incorporate
alternative sources of protein that maintain the integrity of the Company's
product benefits.
To accelerate top line growth and better utilize existing assets, the Company is
pursuing strategic contract manufacturing business in addition to our branded
sales focus. Although the Company's expansion of its contract manufacturing
business may result in a decrease in the Company's overall gross margin
percentage, it should contribute incremental gross margin dollars through
increased net sales. Management will balance the additional contract
manufacturing growth by reinvesting additional gross margin dollars generated
from these sales into increased marketing spending against its core brands.
Management plans to build the core branded business by leveraging a premium
brand approach that begins with superior product quality over most of the direct
alternative cheese competition. Management believes that combining "healthy"
product attributes, improved taste and product functionality will lead to better
than expected consumer experiences with our brands. Management's focus is to
transfer those improved consumer experiences into enhanced market share and
higher margins.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2004 ("first quarter of fiscal 2005") Compared to
Three Months Ended June 30, 2003 ("first quarter of fiscal 2004")
PERCENTAGE
THREE MONTHS ENDED JUNE 30, 2004 2003 DIFFERENCE CHANGE
----------- ----------- ----------- -------
NET SALES $11,191,678 $ 8,695,781 $ 2,495,897 28.7%
COST OF GOODS SOLD 8,251,330 6,051,116 2,200,214 36.4%
----------- ----------- ----------- ----
Gross margin 2,940,348 2,644,665 295,683 11.2%
=========== =========== =========== ====
Gross profit percentage 26% 30%
=========== ===========
14
NET SALES increased approximately $2.5 million or 29% in the first quarter of
fiscal 2005 compared to the first quarter of fiscal 2004. This increase is
primarily due to increased sales in contract manufacturing, the food service
business and Wholesome Valley Organic products. During the first quarter of
fiscal 2005, the Company had one customer that accounted for nearly 11% of
sales. These contract manufacturing sales consist primarily of products which
generate lower margins. However, the higher sales volume helped to absorb the
fixed cost of production (overhead) resulting in a gross profit decline of only
four percent.
Management uses several internal and external reports to monitor sales by brand,
segment, form and channel of sale to determine the outside factors affecting the
sales levels. These reports provide management information on which brand,
segments, forms and/or channel sales are increasing or decreasing both in units
sold and price per unit. By reviewing these reports along with industry data
from publications, syndicated retail consumption reports, and conversations with
major retailers, other manufacturers in the food and beverage industry, and
ingredient and service suppliers, management makes decisions on which brands to
promote and analyzes trends in the consumer marketplace.
Our internal data indicates that our overall branded sales were relatively flat
in the first quarter of fiscal 2005 versus the first quarter of fiscal 2004.
Additionally, the data from several external sources does not indicate clearly
that any category trends have changed during the first quarter of fiscal 2005.
Management regularly reviews statistics such as case fill rates and order fill
rates. Case fill rates reflect the percentage of every case/item ordered that
was shipped complete. Order fill rates reflect the percentage of every order
placed that was shipped complete. The case fill rate was 99.6% and 99.9% in the
first quarter of fiscal 2005 and the first quarter of fiscal 2004, respectively,
and the order fill rate was 96.4% and 98.6%, respectively.
In order to positively impact sales volume throughout fiscal 2005, the Company
is focusing on three primary areas:
o The Company is shifting the emphasis and resource allocation of its
marketing strategy from vendor promotions (retailer
publications/flyers featuring price reductions and on-shelf
temporary price reductions) to increase sales through consumer
advertising (magazine, radio, event sponsorship, etc.) and consumer
promotions (for example, on-pack "cents off" coupons, "cents off"
coupons delivered via newspapers, in-store product sampling, product
benefit communication at the point of purchase/shelf) while
highlighting and communicating the benefits of the Company's
products to meet the consumer demand for low carbohydrate and high
protein products. This is a significant strategy shift and is based
upon retail consumption data purchased from IRI (Information
Resources Incorporated) that indicates increased sales potential
from consumer focused marketing efforts versus similar dollars being
spent toward price related vendor advertising and promotions.
o The Company will also focus its efforts toward generating consumer
awareness, conducting product trials, and generating more repeat
purchases for its brands.
o The Company has begun to secure certain contract manufacturing
opportunities, which it previously turned away or did not pursue
earlier in prior years due to cash constraints. This will enable the
Company to better utilize some of its excess production capacity.
These efforts should result in a higher return on invested capital
in future periods. As the Company adds certain contract
manufacturing business to its product mix, the Company's gross
margin percentage may decrease. However, the overall gross margin
dollars should increase due to higher net sales volume.
COST OF GOODS SOLD increased from 70% of net sales in the first quarter of
fiscal 2004 to 74% of net sales in the first quarter of fiscal 2005. This four
percent increase was primarily the result of a 15% increase in key commodity
costs, as well as higher indirect labor costs due to the rapid growth in
manufacturing volume. Based on current pricing trends with its suppliers,
management expects to see continued substantial increases in its casein prices
during fiscal 2005. (Every 5% increase in casein prices will result in an annual
cost increase of approximately $307,000 assuming the same amount of pounds
purchased as in fiscal 2004.) Management is striving to offset these cost
increases by implementing projects to improve production efficiency and to
reduce costs of other raw materials. Additionally, management plans to pass
along some of these costs by increasing the sales price of certain products.
Management monitors its costs and production efficiencies through various ratios
including pounds produced per hour and cost per pound sold and uses these ratios
to make decisions in purchasing, production and setting sales prices.
PERCENTAGE
THREE MONTHS ENDED JUNE 30, 2004 2003 DIFFERENCE CHANGE
----------- ----------- --------------------------
----------- ----------- --------------------------
GROSS MARGIN 2,940,348 2,644,665 295,683 11.2%
----------- ----------- --------------------------
OPERATING EXPENSES:
Selling 1,460,400 1,313,873 146,527 11.2%
Delivery 593,326 451,817 141,509 31.3%
Non-cash compensation related to options and
warrants 162,374 1,307,131 (1,144,757) (87.6%)
General and administrative 633,342 983,479 (350,137) (35.6%)
Research and development 72,686 63,084 9,602 15.2%
----------- ----------- --------------------------
Total operating expenses 2,922,128 4,119,384 (1,197,256) (29.1%)
----------- ----------- --------------------------
INCOME (LOSS) FROM OPERATIONS 18,220 (1,474,719) 1,492,939 (101.2%)
Non-cash compensation related to options and
warrants(2) 162,374 1,307,131 (1,144,757) (87.6%)
----------- ----------- --------------------------
OPERATING INCOME (LOSS), AS ADJUSTED (1) (a
non-GAAP measure) $ 180,594 $ (167,588) $ 348,182 207.8%
=========== =========== ==========================
15
(1) Management utilizes certain non-GAAP measures such as Operating
Income, as adjusted, Net Income, as adjusted and EBITDA, as
adjusted, because they provide useful information to management,
lenders and investors in order to accurately review the Company's
current on-going operations and business trends related to its
financial condition and results of operations. Additionally, these
measure are key factors upon which the Company prepares its budgets
and forecasts, calculates bonuses, and evaluates loan covenants.
These non-GAAP measures are not in accordance with, or an
alternative for, generally accepted accounting principles and may be
different from non-GAAP measures reported by other companies.
(2) In its determination of non-GAAP measures, management excludes the
non-cash compensation related to options and warrants because it
believes that this item does not accurately reflect the Company's
current on-going operations. Non-cash compensation is calculated
based on fluctuations in the Company's stock price, which can skew
the financial results dramatically up and down. The price of the
Company's common shares as traded on AMEX are outside the Company's
control and typically do not reflect the Company's current
operations.
The increase in Operating Income, as adjusted, during the first quarter of
fiscal 2005 compared to the first quarter of fiscal 2004 is primarily due to the
increase in gross margin as described above and the decrease in operating
expenses (excluding the non-cash compensation component) as described more fully
below.
SELLING expenses were 13% of net sales in the first quarter of fiscal 2005
compared to 15% in the first quarter of fiscal 2004. The $146,527 increase in
selling expenses was due to the variable items of selling expenses such as
promotions increasing as a function of the increase in sales. However, selling
expenses are becoming a smaller percentage of sales in the first quarter of
fiscal 2005, as the fixed components of selling expenses are remaining
comparable to the first quarter of fiscal 2004. The Company expects that fiscal
2005 selling expenses will increase compared to fiscal 2004 expenses based on
the Company's current plan for expanding distribution of strategic products.
DELIVERY expenses increase $141,509 in the first quarter of fiscal 2005 compared
to the first quarter of fiscal 2004 in proportion to the increase in net sales.
Delivery expenses approximate 5% of net sales each period. Unless offset by
price savings from shipping larger loads, the Company anticipates that delivery
costs will increase as a percentage of sales in the future periods due to higher
fuel prices and rate changes due to the new laws regarding limitation of driver
hours. The Company anticipates that during fiscal 2005 delivery expenses will
increase from 5% of net sales to 6% of net sales based on the above factors.
NON-CASH COMPENSATION RELATED TO OPTIONS AND WARRANTS
THREE MONTHS ENDED JUNE 30, PERCENTAGE
2004 2003 DIFFERENCE CHANGE
----------- ----------- ----------- ----------
Notes Receivable for Common Stock $ -- $ -- $ --
Option and Warrant Repricing 158,166 833,642 (675,476) (81.0%)
Option and Warrant Issuances 4,208 473,489 (469,281) (99.1%)
----------- ----------- ----------- ----
Total Non-Cash Compensation
Expense $ 162,374 $ 1,307,131 $(1,144,757) (87.6%)
=========== =========== =========== ====
16
The Company values the non-cash compensation related to its securities on three
primary items:
a. Notes Receivable for Common Stock
The Financial Accounting Standards Board issued Interpretation No. 44
("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. Accordingly, any increase in the market price of the
Company's common stock over the exercise price of the options that was not
previously recorded is recorded as compensation expense at each reporting
period. If there is a decrease in the market price of the Company's common
stock compared to the prior reporting period, the reduction is recorded as
compensation income. Compensation income is limited to the original base
exercise price (the "Floor") of the options. In accordance with FIN 44,
the underlying shares related to the $12,772,200 note receivable from the
Company's founder, Angelo S. Morini, are treated as variable due to the
nature of the note being non-interest bearing and non-recourse. The Floor
for the underlying shares is $4.38 per share. There was no non-cash
compensation expense or income related to these shares recorded during the
three months ended June 30, 2004 and 2003 as the price of the Company's
common stock at the beginning and end of the periods was below the Floor.
Due to the volatility of the market price of its common stock, the Company
is incapable of predicting whether this expense will increase or decrease
in the future. If the Company's stock price is above the Floor of $4.38, a
$0.01 increase or decrease in the Company's common stock price results in
an expense or income, respectively, of approximately $29,000.
b. Option and Warrant Repricing
On October 11, 2002, the Company repriced all outstanding options granted
to employees prior to October 11, 2002 (4,284,108 shares at former prices
ranging from $2.84 to $10.28) to the market price of $2.05 per share. In
addition, the Company repriced the outstanding warrants held by current
consultants as of October 11, 2002 (291,429 shares at former prices
ranging from $3.31 to $5.50) to the market price of $2.05 per share. This
stock option repricing resulted in variable accounting treatment for these
stock options beginning with the quarter ended December 31, 2002 and such
variable accounting treatment will continue until the related options have
been cancelled, expired or exercised. On December 4, 2002, as a result of
discussions and negotiations with certain major shareholders, the
Company's founder, Angelo S. Morini, agreed to reverse the repricing of
his 3,692,035 options for the purpose of improving shareholder value and
lessening potential financial statement expense. Although the exercise
prices of the options were reversed back to their original amounts, the
Company is still required to account for any outstanding options related
to these reversed-repriced options in accordance with variable accounting
standards each period.
The Company recorded $158,166 and $833,642 as non-cash compensation
expense related to these variable options and warrants in the three months
ended June 30, 2004 and 2003, respectively. The remaining outstanding
variable options and warrants as of June 30, 2004 were 3,882,092. Assuming
no further options or warrants are exercised or cancelled and all are
vested and the Company's stock price is above the lowest Floor of $2.05, a
$0.01 increase or decrease in the Company's common stock price results in
an expense or income, respectively, up to $39,000.
c. Option and Warrant Issuances
During the three months ended June 30, 2004 and 2003, the Company recorded
$4,208 and $473,489, respectively as non-cash compensation expense related
to stock, options and warrants that were issued to and vested by officers,
directors and consultants. This expense is included in non-cash
compensation in the Company's Statements of Operations.
GENERAL AND ADMINISTRATIVE expenses decreased by $350,137 in the first quarter
of fiscal 2005 compared to the first quarter of fiscal 2004. This decrease
results primarily from a decrease in personnel costs of approximately $105,000
and a decrease in legal fees of approximately $206,000. Personnel costs declined
due to the change in the employment status of Angelo S. Morini per the amended
employment agreement in October 2003. Legal fees were higher in the first
quarter of fiscal 2004 due to the equity raise and corporate refinancing that
was completed in May 2003 as well as legal fees associated with the Schreiber
lawsuit which was settled in May 2004. Management is anticipating further
declines in general and administrative expenses in fiscal 2005 compared to
fiscal 2004 due to continued reductions in general overhead costs such as rent
along with a decrease in personnel expenses based on the amended employment
agreement with Angelo S. Morini. Additionally, management believes that legal
fees should continue to decrease significantly now that the Schreiber lawsuit
has been fully resolved.
RESEARCH AND DEVELOPMENT expenses increased by $9,602 in the first quarter of
fiscal 2005 compared to the first quarter of fiscal 2004 primarily as a result
of an increase personnel costs for existing personnel. The Company anticipates
increases in research and development expenses in fiscal 2005 compared to fiscal
2004 primarily due to additional personnel costs associated with new product
development.
17
PERCENTAGE
THREE MONTHS ENDED JUNE 30, 2004 2003 DIFFERENCE CHANGE
----------- ----------- ----------- ----------
INCOME (LOSS) FROM OPERATIONS $ 18,220 $(1,474,719) $ 1,492,939 (101.2%)
Interest Expense (259,816) (495,385) 235,569 47.6%
----------- ----------- ----------- ------
NET INCOME (LOSS) (241,596) (1,970,104) 1,728,508 (87.7%)
Non-cash compensation related to options and
warrants(2) 162,374 1,307,131 (1,144,757) (87.6%)
----------- ----------- ----------- ------
NET INCOME (LOSS), AS ADJUSTED (1) (a $ (79,222) $ (662,973) $ 583,751 88.1%
Interest Expense 259,816 495,385 (235,569) (47.6%)
Depreciation 546,041 558,125 (12,084) (2.2%)
----------- ----------- ----------- ------
EBITDA, AS ADJUSTED (1) (a non-GAAP measure) $ 726,635 $ 390,537 $ 336,098 86.1%
=========== =========== =========== ====
EBITDA % OF SALES 6.5% 4.5%
=========== ===========
(1) Management utilizes certain non-GAAP measures such as Operating
Income, as adjusted, Net Income, as adjusted and EBITDA, as
adjusted, because they provide useful information to management,
lenders and investors in order to accurately review the Company's
current on-going operations and business trends related to its
financial condition and results of operations. Additionally, these
measure are key factors upon which the Company prepares its budgets
and forecasts, calculates bonuses, and evaluates loan covenants.
These non-GAAP measures are not in accordance with, or an
alternative for, generally accepted accounting principles and may be
different from non-GAAP measures reported by other companies.
(2) In its determination of non-GAAP measures, management excludes the
non-cash compensation related to options and warrants because it
believes that this item does not accurately reflect the Company's
current on-going operations. Non-cash compensation is calculated
based on fluctuations in the Company's stock price, which can skew
the financial results dramatically up and down. The price of the
Company's common shares as traded on AMEX are outside the Company's
control and typically do not reflect the Company's current
operations.
The improvement in net income, as adjusted, is primarily the result of the
increase in gross margin from higher sales volume and decreases in interest
costs as well as general and administrative expenses as more fully detailed
above. The improvement in EBITDA, as adjusted, is primarily the result of the
increase in gross income from sales and decreases in general and administrative
expenses as more fully detailed above.
INTEREST expense decreased in the first quarter of fiscal 2005 compared to the
first quarter of fiscal 2004 due to lower principal balances and lower interest
rates on the Company's credit facilities after the refinancing in May 2003. See
"Debt Financing" below for further detail on the Company's outstanding debts and
interest rates thereon.
LIQUIDITY AND CAPITAL RESOURCES
PERCENTAGE
THREE MONTHS ENDED JUNE 30, 2004 2003 DIFFERENCE CHANGE
--------- --------- -------------------------
CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES $ 578,038 $(138,377) $ 716,415 517.7%
CASH USED IN INVESTING ACTIVITIES (74,525) (89,581) 15,056 16.8%
CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES (186,413) 226,360 (412,773) (182.4%)
--------- --------- -----------------------
NET INCREASE (DECREASE) IN CASH $ 317,100 $ (1,598) $ 318,698 199.4%
========= ========= =======================
18
OPERATING ACTIVITIES -The increase in cash provided by operations in the first
quarter of fiscal 2005 compared to the first quarter of fiscal 2004 is primarily
attributable to $310,000 less interest paid on credit facilities and additional
cash received from the increase in sales in the first quarter of fiscal 2005.
The Company anticipates that operating activities should continue to provide
positive cash for operations. Additionally, accounts receivable, inventories and
accounts payable balances will increase during fiscal 2005 with the increase in
sales.
INVESTING ACTIVITIES -The decrease in cash used for investing activities during
the first quarter of fiscal 2005 as compared to the first quarter fiscal of 2004
primarily resulted from less purchases of fixed assets during the period. The
Company currently has no plans for any major capital additions. Most current
period purchases of assets are for normal recurring asset upgrades and
replacements.
FINANCING ACTIVITIES - During the first quarter of fiscal 2005, the Company used
a portion of its cash provided from operations to make principal payments on its
note payable with SouthTrust Bank and for capital lease payments. During the
first quarter of fiscal 2004, the Company raised $3,850,000 through the issuance
of common stock and $2,000,000 from a new term loan with SouthTrust Bank. The
Company used $4,000,000 of these proceeds to pay in full the principal balance
owed to FINOVA Mezzanine. The remaining proceeds were used for operations and to
further reduce the Company's accounts payable and debt balances.
Debt Financing
On May 27, 2003, the Company obtained from Textron Financial Corporation
("Textron") a revolving credit facility (the "Textron Loan") with a maximum
principal amount of $7,500,000 pursuant to the terms and conditions of the
Textron Loan and Security Agreement. The Textron Loan is secured by the
Company's inventory, accounts receivable and all other assets. Generally,
subject to the maximum principal amount, which can be borrowed under the Textron
Loan and certain reserves that must be maintained during the term of the Textron
Loan, the amount available under the Textron Loan for borrowing by the Company
from time to time is equal to the sum of (i) eighty-five percent (85%) of the
net amount of its eligible accounts receivable plus (ii) sixty percent (60%) of
the Company's eligible inventory not to exceed $3,500,000. Advances under the
Textron Loan bear interest at a variable rate, adjusted on the first (1st) day
of each month, equal to the prime rate plus one and three-quarter percent
(1.75%) per annum (5.75% at June 30, 2004) calculated on the average cash
borrowings for the preceding month. The Textron Loan matures and all amounts are
due and payable in full on May 26, 2006. As of June 30, 2004, the outstanding
principal balance on the Textron Loan was $4,658,851.
Simultaneous with the closing of the Textron Loan in May 2003, SouthTrust Bank
extended the Company a new term loan in the principal amount of $2,000,000. This
loan was consolidated with the Company's March 2000 term loan with SouthTrust
Bank, which had a then outstanding principal balance of $8,131,985 for a total
term loan amount of $10,131,985. The revised term loan bears interest at
SouthTrust Bank's prime rate of interest plus 1% (5% at June 30, 2004), and is
due in increasing principal installments by June 2009. Each month, the Company
will pay the accrued interest on the loan plus principal amounts as follows:
$110,000 from July 2004 to June 2005, and $166,250 from July 2005 until maturity
in June 2009. In a Loan Modification letter dated May 21, 2004, beginning in
October 2004, interest may be adjusted quarterly from prime to prime plus 1.25%
according to the Company's performance ratios in prior quarters. This note is
secured by all of the Company's equipment and certain related assets. The
balance outstanding on the term loan as of June 30, 2004 was $9,231,985.
Equity Financing
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 from BH Capital Investments, L.P. and Excalibur Limited
Partnership (the "Series A Preferred Holders") 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 with a face value of $3,500,000
and warrants to purchase shares of the Company's common stock. The Series A
Preferred Holders have the right to receive on any outstanding Series A
convertible preferred stock a ten percent stock dividend on the shares, payable
one year after the issuance of such preferred stock, and an eight percent stock
dividend for the subsequent three years thereafter, payable in either cash or
shares of preferred stock. The Series A convertible preferred stock is subject
to certain designations, preferences and rights set forth in the Company's
Restated Certificate of Incorporation, including the right to convert such
shares into shares of common stock at any time, at a current conversion rate
(subject to appropriate adjustment for stock splits, stock dividends,
recapitalizations and other events) of the number of shares of common stock for
each share of Series A convertible preferred stock equal to the quotient of
$48.18, plus all accrued dividends that are then unpaid for each share of the
Series A convertible preferred stock divided by the lesser of (x) $1.75 or (y)
95% of the average of the two lowest closing bid prices of the Company's common
stock on the American Stock Exchange out of the fifteen trading days immediately
prior to conversion.
19
As of June 30, 2004, the Series A Preferred Holders had converted 30,652 shares
of the Series A convertible preferred stock plus accrued dividends, into
1,151,596 shares of common stock. The conversion prices ranged from $1.3633 to
$1.75 based on the above formula. From July 1, 2004 through August 12, 2004, the
Series A Preferred Holders converted 1,000 shares of the Series A convertible
preferred stock, plus accrued dividends, into 35,214 shares of common stock at a
conversion price of $1.75.
The Series A Preferred Holders have the right to require the Company to redeem
their shares of Series A convertible preferred stock on April 6, 2005. 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 aggregate market price on the date of redemption
of common stock that would be then issuable upon conversion of the Series A
convertible preferred stock. The market price is based on a five-day average of
the closing bid prices for the five trading days prior to the date of
redemption. As of August 12, 2004, there are 40,994 shares of Series A
convertible preferred stock outstanding. Assuming that no further conversions
are made and the conversion price remains at $1.75, the redemption price of the
outstanding Series A convertible preferred stock would be the greater of (a)
$2,646,556 (100% of the preference amount plus accrued dividends through April
6, 2005 - $64.56 per share) or (b) the value of 1,512,318 shares of common stock
multiplied by the market price on the date of redemption (currently estimated at
$2,595,137 using the average of the closing market price of the Company's common
stock from August 6, 2004 - August 12, 2004). Any unpaid amount after April 6,
2005 shall bear interest at the rate of 3% per month until paid in full.
Summary
Management believes that with the proceeds available with its Textron credit
facilities together with cash flow from current operations, the Company will
have enough cash to meet its current liquidity needs for general operations
through March 31, 2005.
However as discussed under "Material Future Events" above, on April 6, 2005, the
Series A Preferred Holders have the right to require the Company to redeem the
outstanding shares of Series A convertible preferred stock for cash. Assuming
that no further conversions of the Series A convertible preferred stock are made
after the date hereof, the cost to the Company to redeem the outstanding Series
A convertible preferred stock could be in excess of $2,700,000.
The Company is considering a number of alternatives related to the redemption of
the Series A convertible preferred stock, which, individually or in combination,
could resolve the Series A redemption obligations. These alternatives include
procuring the necessary funds from operating activities and existing credit
facilities, or from additional equity financing, or identifying one or more
investors to buy out the Series A Preferred Holders directly, or negotiating an
extension of such date with the current Series A Preferred Holders. However,
there are no assurances that any of such alternatives will be viable or
available to the Company on terms that are acceptable to the Company, or that,
even if viable, that the Company will be successful in implementing any of such
alternatives.
If the Company is required to redeem the outstanding Series A convertible
preferred stock and does not have the funds to do so, the Company will be in
default of its obligations and the Series A Preferred Holders will be entitled
to pursue their remedies against the Company. In addition, any unpaid redemption
amount owed to the Series A Preferred Holders shall bear interest at the rate of
3% per month until paid in full.
A default by the Company in its obligations to redeem the Series A convertible
preferred stock will also result in a default by the Company under the Textron
Loan, which, in turn, will result in a default by the Company under the
SouthTrust Loan. In the cases of the Textron Loan and the SouthTrust Loan, the
lenders thereunder could exercise their respective rights under their loan
documents to, among other things, declare a default under the loans, accelerate
the outstanding indebtedness such that it would become immediately due and
payable, and pursue foreclosure of the Company's assets which are pledged as
collateral for such loans. In such event, it is unlikely that the Company would
be able to continue as a going concern. The issue related to the Series A
convertible preferred stock is a key item on the agenda of the Company's Board
of Directors and substantial attention is being focused on resolving this issue
during fiscal 2005.
CRITICAL ACCOUNTING POLICIES
The preparation of 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 and disclosure of contingent assets and liabilities at the date of
the financial statements and reported amounts of income and expense during the
reporting periods presented. The Company's significant estimates include the
allowance for doubtful accounts receivable, provision for obsolete inventory,
and valuation of deferred taxes and warrants. Although the Company believes that
these estimates are reasonable, actual results could differ from those estimates
given a change in conditions or assumptions that have been consistently applied.
20
The critical accounting policies used by the Company, and the methodology for
estimates and assumptions are as follows:
Valuation of Accounts Receivable and Chargebacks
The Company records revenue upon shipment of products to its customers and
reasonable assurance of collection on the sale. It provides credit terms to
customers usually based on net 30 days. The Company performs ongoing credit
evaluations of its accounts receivable and makes reserves for anticipated future
credits that will be issued to its customers for promotions, discounts, spoils,
etc., based on historical experience. In addition, the Company evaluates the
accounts for potential uncollectible amounts. The Company's accounts receivable
reserve estimate is based on a specific identification and a general reserve
methodology over the remaining items.
Based on the age of the receivable, cash collection history and past dilution in
the receivables, the Company makes an estimate of its anticipated bad debt,
anticipated future authorized deductions due to current period activity and
anticipated collections on non-authorized amounts that customers have currently
deducted on past invoices. Based on this analysis, the Company reserved $740,000
and $554,099 for known and anticipated future credits and doubtful accounts at
June 30, 2004 and 2003, respectively. Actual bad debt expense during the periods
is less than 1% of gross sales. We believe that this estimate is reasonable, but
there can be no assurance that the Company's estimate will not change given a
change in economic conditions or business conditions within the food industry or
the Company.
Inventory
Inventories are valued at the lower of cost or market. Cost is determined using
a weighted average, first-in, first out method. The Company reviews its
inventory valuation each month and writes down the inventory for potential
obsolete and damaged inventory. In addition, the finished goods inventory value
is reduced to market value when the known sales price is less than the cost of
the inventory.
Deferred Taxes
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. Income tax expense is the tax
payable or refundable for the period plus or minus the change during the period
in deferred tax assets and liabilities.
Valuation of Non-Cash Compensation
The Company accounts for its stock-based employee compensation plans under the
accounting provisions of Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees", furnishes the pro forma disclosures required
under Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation", and applies SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure" on a prospective basis for
options granted after March 31, 2003.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock Based
Compensation--Transition and Disclosure--an Amendment to SFAS 123." SFAS 148
provides two additional transition methods for entities that adopt the
preferable method of accounting for stock based compensation. Further, the
statement requires disclosure of comparable information for all companies
regardless of whether, when, or how an entity adopts the preferable, fair value
based method of accounting. These disclosures are now required for interim
periods in addition to the traditional annual disclosure. Effective April 1,
2003, the Company adopted the fair value method of recording compensation
expense related to all stock options granted after March 31, 2003, in accordance
with SFAS 123 and SFAS 148 (the prospective method, as defined by SFAS 148).
Accordingly, the fair value of stock options as determined on the date of grant
using the Black-Scholes option-pricing model, will be expensed over the vesting
period of the related stock options.
Several management estimates are needed to compute the fair value of the options
including anticipated life of the options, risk free interest rates, and
volatility of the Company's stock price. Currently, the Company estimates the
life of all options granted assuming that the option will remain outstanding and
not be exercised until the end of its term. This results in the highest possible
value of the option. If the Company were to change its estimate of the option
lives to something less than the maximum term, then the fair value expense per
share would decrease by approximately $.01 to $.02 per month. If the Company
changes its estimate of the volatility percentage, the fair value expense per
share would change by approximately $.02 per percentage change in the
volatility. If the Company changes its estimate of the interest rate, the fair
value expense per share would change by approximately $.04 per percentage change
in the interest rate.
21
Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting
for Stock Based Compensation", requires the Company to provide pro-forma
information regarding net income (loss) and earnings (loss) per share amounts as
if compensation cost for the Company's employee and director stock options had
been determined in accordance with the fair market value-based method prescribed
in SFAS No. 123. The Company estimates the fair value of each stock option at
the grant date by using a Black-Scholes option-pricing model. The following
assumptions were used for options issued during the periods:
Quarter Ended June 30, 2004 June 30, 2003
------------- --------------
Dividend Yield None None
Volatility NA 41% to 42%
Risk Free Interest Rate NA 2.01% to 3.77%
Expected Lives in Months NA 36 to 120
In addition to non-cash compensation expense related to new option issuances,
the Company also records non-cash compensation expense or income in accordance
with the Financial Accounting Standards Board Interpretation No. 44 ("FIN 44").
FIN 44 states that when an option is repriced or there is an outstanding loan
related to the exercise of an option, it is treated as a variable option and is
marked to market each quarter. Accordingly, any increase in the market price of
the Company's common stock over the exercise price of the option that was not
previously recorded is recorded as compensation expense at each reporting
period. If there is a decrease in the market price of the Company's common stock
compared to the prior reporting period, the reduction is recorded as
compensation income. Compensation income is limited to the original base
exercise price (the "Floor") of the options. Each period the Company records
non-cash compensation expense or income related to its analysis on approximately
6.8 million option shares. Assuming that the stock price exceeds the Floor on
all the variable option shares, a $0.01 increase or decrease in the Company's
common stock price results in an expense or income, respectively, of $68,000.
Due to the volatility of the market price of its common stock, the Company is
incapable of predicting whether this expense will increase or decrease in the
future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk results primarily from fluctuations in
interest rates. The interest rates on the Company's outstanding debts to
SouthTrust Bank and Textron are 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% increase or decrease in market rates in effect on June 30, 2004
with respect to the Company's debt as of such date would increase or decrease
interest expense and hence reduce or increase net income of the Company by
approximately $139,000 per year or $35,000 per quarter.
The Company's sales during the three-month periods ended June 30, 2004 and 2003
which were denominated in a currency other than U.S. dollars were less than 5%
of gross sales and no net assets were maintained in a functional currency other
than U. S. dollars during such periods. Therefore, the effects of changes in
foreign currency exchange rates have not historically been, and are not
currently, significant to the Company's operations or net assets.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the fiscal quarter ended June 30, 2004, an evaluation was
performed under the supervision and with the participation of the Company's
management, including the Chief Executive Officer ("CEO"), and the Chief
Financial Officer ("CFO"), of the effectiveness of the design and operation of
the Company's disclosure controls and procedures to insure that the Company
records, processes, summarizes and reports in a timely and effective manner the
information required to be disclosed in reports filed with or submitted to the
Securities and Exchange Commission. Based on that evaluation, the Company's
management, including the CEO and CFO, concluded that the Company's disclosure
controls and procedures were effective in timely bringing to their attention
material information related to the Company required to be included in the
Company's periodic Securities and Exchange Commission filings. Since the date of
this evaluation, there have been no material changes in the Company's internal
controls or in other factors that are reasonably likely to materially affect
those controls.
22
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 17, 2002, Schreiber Foods, Inc. of Green Bay, Wisconsin, filed a lawsuit
against the Company in the federal district court for the Eastern District of
Wisconsin ("Wisconsin lawsuit"), being Case No. 02-C-0498, alleging various acts
of patent infringement. The Complaint alleged that the Company's machines for
wrapping of individual cheese slices, manufactured by Kustner Industries, S.A.
of Switzerland, known as models KE and KD, and the Company's machines for
producing individually wrapped slices manufactured by Hart Design Mfg., Inc. of
Green Bay, Wisconsin, infringe certain claims of U.S. Patents Nos. 5,112,632,
5,440,860, 5,701,724 and 6,085,680. Schreiber Foods was seeking a preliminary
and permanent injunction prohibiting the Company from further infringing acts
and was also seeking damages in the nature of either lost profits or reasonable
royalties.
On May 6, 2004, Schreiber Foods and the Company executed a settlement agreement
pursuant to which all claims in the patent infringement lawsuit were dismissed.
Pursuant to this settlement agreement, the Company procured a worldwide, fully
paid-up, nonexclusive license to own and use all of the Company's individually
wrapped slice equipment, which Schreiber alleged infringed on Schreiber's
patents. The Company was not obligated to make any cash payment in connection
with the settlement of the lawsuit or the license granted in the settlement
agreement. The settlement agreement restricts the Company from using the slicing
equipment to co-pack product for certain specified manufacturers, however, the
Company is not currently engaged in any co-packing business with any of the
specified parties, and does not contemplate engaging in the future in any
co-packing business with the specified parties.
Pursuant to the settlement agreement, if, during the term of the license, the
Company receives an offer to purchase the Company or its business, the Company
must notify Schreiber of the offer and Schreiber will have the option to match
the offer or make a better offer to purchase the Company or its business.
Acceptance of the Schreiber offer is subject to the approval by the Company's
Board of Directors, however, if the Board of Directors determines that the
Schreiber offer is equal to or better than the other offer, the Board of
Directors must take all permitted actions to accept the offer and recommend it
to the Company's shareholders for approval.
The term of the license extends through the life of all patents named in the
lawsuit (and all related patents) and is assignable by the Company in connection
with the sale of its business. In the event the assignee uses the applicable
equipment to manufacture private label product, and such private label product
accounts for more than 50% of the total product manufactured on the applicable
equipment, the assignee will be required to pay Schreiber a royalty in an amount
to be agreed upon by Schreiber and the assignee, but in any event not more than
$.20 per pound of product for each pound of private label product manufactured
by the assignee in any year that exceeds the amount of private label product
manufactured by the Company in the year preceding the sale of the Company or its
business. In the event that the parties cannot agree upon a royalty rate, the
assignee retains the license rights but private label production must be
maintained at a level less than 50% of the total product manufactured on the
applicable equipment.
ITEM 5. OTHER INFORMATION
On July 8, 2004, Christopher J. New resigned from his position as Chief
Executive Officer in order to pursue other opportunities. In accordance with the
Separation and Settlement Agreement between the Company and Mr. New, Mr. New
will receive (1) a one-time settlement of $1,000; (2) two years of his base
salary, payable over two years; (3) coverage of health care costs for six
months; and (4) extension of the time for which he can exercise his employee
stock options under that certain Non-Qualified Stock Option Agreement dated
December 5, 2002 (for 25,000 shares at $1.67) and that certain Non-Qualified
Stock Option Agreement dated July 16, 2001 (for 100,000 shares at $2.05) from 60
days after leaving employment to the end of the option terms. The Company
recorded approximately $445,000 in costs related to this separation agreement as
employment contract expense in July 2004. This charge will be reflected in the
results for the Company's second quarter of fiscal 2005 ending September 30,
2004.
On July 8, 2004, Michael E. Broll was appointed as the new Chief Executive
Officer upon the resignation of Mr. New. The Company entered into a one-year
employment agreement whereby Mr. Broll is entitled to receive an annual base
salary of $200,000 plus a performance bonus at the discretion of the Board,
standard health benefits, a housing allowance of up to $500 per week for one
year and an auto allowance of $1,500 per month. The employment agreement renews
automatically for one-year periods unless cancelled by either party ninety days
prior to the end of the term. In the event Mr. Broll's employment is terminated
without cause, he will be entitled to receive one year of his base salary as
severance.
23
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 Restated Certificate of Incorporation of the Company as filed
with the Secretary of State of the State of Delaware on December
23, 2002 (Filed as Exhibit 3.2 on Form 10-Q for the fiscal quarter
ended December 31, 2002.)
* 3.2 By-laws of the Company, as amended (Filed as Exhibit 3.2 to
Registration Statement on Form S-18, No. 33-15893-NY.)
* 4.1 Stock Purchase Option Agreement and Stock Purchase Warrant by
and between Excalibur Limited Partnership and BH Capital
Investments, L.P. and Galaxy Nutritional Foods dated as of April
24, 2003 (Filed as Exhibit 10.52 on Form 10-Q for the fiscal
quarter ended June 30, 2003.)
* 4.2 Warrant to Purchase Securities of Galaxy Nutritional Foods,
Inc. dated as of May 29, 2003 in favor of SouthTrust Bank (Filed
as Exhibit 10.7 on Form 8-K filed June 2, 2003.)
* 4.3 Securities Purchase Agreement dated as of May 21, 2003 between
Galaxy Nutritional Foods, Inc. and Fromageries Bel S.A. (Filed as
Exhibit 10.8 on Form 8-K filed June 2, 2003.)
* 4.4 Registration Rights Agreement dated as of May 21, 2003 between
Galaxy Nutritional Foods, Inc. and Fromageries Bel S.A. (Filed as
Exhibit 10.9 on Form 8-K filed June 2, 2003.)
* 4.5 Securities Purchase Agreement dated as of May 21, 2003 between
Galaxy Nutritional Foods, Inc. and Frederick A. DeLuca (Filed as
Exhibit 10.10 on Form 8-K filed June 2, 2003.)
* 4.6 Registration Rights Agreement dated as of May 21, 2003 between
Galaxy Nutritional Foods, Inc. and Frederick A. DeLuca (Filed as
Exhibit 10.11 on Form 8-K filed June 2, 2003.)
* 4.7 Securities Purchase Agreement dated as of May 21, 2003 between
Galaxy Nutritional Foods, Inc. and Apollo Capital Management
Group, L.P. (Filed as Exhibit 10.12 on Form 8-K filed June 2,
2003.)
* 4.8 Registration Rights Agreement dated as of May 21, 2003 between
Galaxy Nutritional Foods, Inc. and Apollo Capital Management
Group, L.P. (Filed as Exhibit 10.13 on Form 8-K filed June 2,
2003.)
* 4.9 Securities Purchase Agreement dated as of May 21, 2003 between
Galaxy Nutritional Foods, Inc. and Apollo MicroCap Partners, L.P.
(Filed as Exhibit 10.14 on Form 8-K filed June 2, 2003.)
* 4.10 Registration Rights Agreement dated as of May 21, 2003
between Galaxy Nutritional Foods, Inc. and Apollo MicroCap
Partners, L.P. (Filed as Exhibit 10.15 on Form 8-K filed June 2,
2003.)
* 4.11 Securities Purchase Agreement dated as of May 21, 2003
between Galaxy Nutritional Foods, Inc. and Ruggieri of Windermere
Family Limited Partnership (Filed as Exhibit 10.16 on Form 8-K
filed June 2, 2003.)
* 4.12 Registration Rights Agreement dated as of May 21, 2003
between Galaxy Nutritional Foods, Inc. and Ruggieri of Windermere
Family Limited Partnership (Filed as Exhibit 10.17 on Form 8-K
filed June 2, 2003.)
* 4.13 Securities Purchase Agreement dated as of May 21, 2003
between Galaxy Nutritional Foods, Inc. and Ruggieri Financial
Pension Plan (Filed as Exhibit 10.18 on Form 8-K filed June 2,
2003.)
* 4.14 Registration Rights Agreement dated as of May 21, 2003
between Galaxy Nutritional Foods, Inc. and Ruggieri Financial
Pension Plan (Filed as Exhibit 10.19 on Form 8-K filed June 2,
2003.)
24
* 4.15 Securities Purchase Agreement dated as of May 21, 2003
between Galaxy Nutritional Foods, Inc. and David Lipka (Filed as
Exhibit 10.20 on Form 8-K filed June 2, 2003.)
* 4.16 Registration Rights Agreement dated as of May 21, 2003
between Galaxy Nutritional Foods, Inc. and David Lipka (Filed as
Exhibit 10.21 on Form 8-K filed June 2, 2003.)
* 4.17 Stockholder Agreement dated as of October 13, 2003 between
Galaxy Nutritional Foods, Inc. and Angelo S. Morini (Filed as
Exhibit 10.55 on Form 10-Q for the fiscal quarter ended September
30, 2003.)
* 10.1 Master Distribution and License Agreement dated as of May 22,
2003 between Galaxy Nutritional Foods, Inc. and Fromageries Bel
S.A. (Filed as Exhibit 10.22 on Form 8-K filed June 2, 2003.)
* 10.2 Loan and Security Agreement dated as of May 27, 2003 between
Galaxy Nutritional Foods, Inc. and Textron Financial Corporation
(Filed as Exhibit 10.1 on Form 8-K filed June 2, 2003.)
* 10.3 Patent, Copyright and Trademark Collateral Security Agreement
dated as of May 27, 2003 between Galaxy Nutritional Foods, Inc.
and Textron Financial Corporation (Filed as Exhibit 10.2 on Form
8-K filed June 2, 2003.)
* 10.4 Renewal Promissory Note in the principal amount of
$10.131,984.85 dated as of May 28, 2003 by Galaxy Nutritional
Foods, Inc. in favor of SouthTrust Bank (Filed as Exhibit 10.3 on
Form 8-K filed June 2, 2003.)
* 10.5 Renewal Promissory Note in the principal amount of
$501,000.00 dated as of May 28, 2003 by Galaxy Nutritional Foods,
Inc. in favor of SouthTrust Bank (Filed as Exhibit 10.4 on Form
8-K filed June 2, 2003.)
* 10.6 Amendment of Loan Agreement dated as of May 28, 2003 between
Galaxy Nutritional Foods, Inc. and SouthTrust Bank (Filed as
Exhibit 10.5 on Form 8-K filed June 2, 2003.)
* 10.7 Amendment of Security Agreement dated as of May 28, 2003
between Galaxy Nutritional Foods, Inc. and SouthTrust Bank (Filed
as Exhibit 10.6 on Form 8-K filed June 2, 2003.)
* 10.8 Waiver Letter from Textron Financial Corporation to the
Company dated August 13, 2003 (Filed as Exhibit 10.53 on Form 10-Q
for the fiscal quarter ended June 30, 2003.)
* 10.9 Second Amended and Restated Employment Agreement dated as of
October 13, 2003 between Galaxy Nutritional Foods, Inc. and Angelo
S. Morini (Filed as Exhibit 10.1 on Form 8-K filed October 20,
2003.)
* 10.10 Settlement Agreement dated May 6, 2004 between Galaxy
Nutritional Foods, Inc. and Schreiber Foods, Inc. (Filed as
Exhibit 10.1 on Form 8-K filed May 11, 2004.)
* 10.11 Modification Letter on the Security Agreement dated as of
May 21, 2004 between Galaxy Nutritional Foods, Inc. and SouthTrust
Bank (Filed as Exhibit 10.11 on Form 10-K for the fiscal year
ended March 31, 2004.)
* 10.12 Second Amendment to Loan and Security Agreement dated June
25, 2004 between Galaxy Nutritional Foods, Inc. and Textron
Financial Corporation (Filed as Exhibit 10.12 on Form 10-K for the
fiscal year ended March 31, 2004.)
* 10.13 Third Amendment to Lease Agreement dated June 10, 2004
between Galaxy Nutritional Foods, Inc. and Cabot Industrial
Properties, L.P. (Filed as Exhibit 10.13 on Form 10-K for the
fiscal year ended March 31, 2004.)
* 10.14 Separation and Settlement Agreement dated July 8, 2004
between Galaxy Nutritional Foods, Inc. and Christopher J. New
(Filed as Exhibit 10.14 on Form 8-K filed July 13, 2004.)
* 10.15 Employment Agreement dated July 8, 2004 between Galaxy
Nutritional Foods, Inc. and Michael E. Broll (Filed as Exhibit
10.15 on Form 8-K filed July 13, 2004.)
25
* 20.1 Audit Committee Charter (Filed as Exhibit 20.1 on Form 10-Q
for the fiscal quarter ended September 30, 2003.)
* 20.2 Compensation Committee Charter (Filed as Exhibit 20.2 on Form
10-Q for the fiscal quarter ended September 30, 2003.)
31.1 Section 302 Certification of the Company's Chief Executive Officer
(Filed herewith.)
31.2 Section 302 Certification of the Company's Chief Financial Officer
(Filed herewith.)
32.1 Section 906 Certification of the Company's Chief Executive Officer
(Filed herewith.)
32.2 Section 906 Certification of the Company's Chief Financial Officer
(Filed herewith.)
* Previously filed and incorporated herein by reference.
REPORTS ON FORM 8-K
During the fiscal quarter ended June 30, 2004, the Company filed two
Current Reports on Form 8-K. On May 11, 2004, the Company filed a Current
Report on Form 8-K announcing the settlement of the litigation suit
between the Company and Schreiber Foods, Inc. On June 29, 2004, the
Company filed a Current Report on Form 8-K to disclose the press release
announcing the Company's financial results for its fiscal year ended March
31, 2004.
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GALAXY NUTRITIONAL FOODS, INC.
Date: August 16, 2004 /s/ Michael E. Broll
--------------------------------------
Michael E. Broll
Chief Executive Officer
(Principal Executive Officer)
Date: August 16, 2004 /s/ Salvatore J. Furnari
--------------------------------------
Salvatore J. Furnari
Chief Financial Officer
(Principal Accounting and Financial
Officer)
27