UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 2005
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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)
Registrant's telephone number, including area code: (407) 855-5500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share American Stock Exchange
(Title of Class) (Name of exchange on which registered)
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes |_| No |X|
The aggregate market value of the common equity held by non-affiliates as of
September 30, 2004 (the last business day of the registrant's most recently
completed second fiscal quarter) was $9,041,667 based on the closing price of
such common equity of $1.27 per share on that date. All executive officers and
directors of the registrant and all persons filing a Schedule 13D or a Schedule
13G with the Securities and Exchange Commission in respect to the registrant's
common stock have been deemed, solely for the purpose of the foregoing
calculation, to be "affiliates" of the registrant.
The number of shares outstanding of the registrant's common stock as of July 12,
2005 was 20,043,474.
DOCUMENTS INCORPORATED BY REFERENCE: None
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PART I
FORWARD LOOKING STATEMENTS
THIS FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS. THESE STATEMENTS RELATE TO
FUTURE EVENTS OR OUR FUTURE FINANCIAL PERFORMANCE. THESE FORWARD-LOOKING
STATEMENTS ARE BASED ON OUR CURRENT EXPECTATIONS, ESTIMATES AND PROJECTIONS
ABOUT OUR INDUSTRY, MANAGEMENT'S BELIEFS AND CERTAIN ASSUMPTIONS MADE BY OUR
COMPANY. WORDS SUCH AS "ANTICIPATE," "EXPECT," "INTEND," "PLAN," "BELIEVE,"
"SEEK," "PROJECT," "ESTIMATE" AND VARIATIONS OF THESE WORDS OR SIMILAR
EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THESE
STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND ARE SUBJECT TO CERTAIN
RISKS, UNCERTAINTIES AND ASSUMPTIONS THAT ARE DIFFICULT TO PREDICT. THEREFORE,
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM OUR HISTORICAL RESULTS AND THOSE
EXPRESSED OR FORECASTED IN ANY FORWARD-LOOKING STATEMENTS AS A RESULT OF A
VARIETY OF FACTORS, INCLUDING THOSE SET FORTH IN "RISK FACTORS" AND ELSEWHERE
IN, OR INCORPORATED BY REFERENCE INTO, THIS FORM 10-K. WE UNDERTAKE NO
OBLIGATION TO PUBLICLY UPDATE OR REVISEANY FORWARD-LOOKING STATEMENTS FOR ANY
REASON, EVEN IF NEW INFORMATION BECOMES AVAILABLE OR OTHER EVENTS OCCUR IN THE
FUTURE.
ITEM 1. BUSINESS.
General
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. In this report, the terms
"Company," "we," "us," or "our" means Galaxy Nutritional Foods, Inc.
Our Company was founded by Angelo S. Morini in 1972 under the original name of
Fiesta Foods & Galaxy Foods in New Castle, Pennsylvania. In 1980, we changed our
name to Galaxy Cheese Company and subsequently reincorporated under the laws of
the State of Delaware in 1987. In June 1991, we moved from New Castle,
Pennsylvania to Orlando, Florida and in November 2000 changed our name to Galaxy
Nutritional Foods, Inc. to more clearly define ourselves in the healthy
nutritional foods market.
From our single manufacturing plant in Orlando, we produce and ship our products
directly to customers in each of our two principal markets around the world:
o Retail Stores - such as conventional grocery stores, mass
merchandisers, natural or health food stores and club stores; and
o Food Service Operations - such as restaurants, cafeterias, hospitals
and schools.
Our sales efforts are primarily directed to retailers, to take advantage of what
we perceive to be a continued consumer emphasis on nutrition. We offer a diverse
line of low and no fat, no saturated fat, no trans-fats, low and no cholesterol,
no lactose cheese and dairy-related products. These products include
individually wrapped cheese slices, shredded cheeses, block and chunk cheeses,
deli (unwrapped) cheese slices, grated toppings, soft cheeses like sour cream,
cream cheese and cheese sauces, and butter.
We also manufacture and market non-branded and private label process and blended
cheese products, as well as branded organic soy-based, rice-based and non-dairy
cheese products. Most of these products are made using our state-of-the-art
manufacturing equipment and our own formulas and processes, which we believe to
be proprietary.
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Our strategy for the future is to continue our marketing efforts primarily in
the retail market to capitalize on the continuing interest among consumers in
eating more nutritious natural foods in order to help reduce their cholesterol
levels and saturated fat intake. We believe that one of the leading contributors
of cholesterol and saturated fat in the American diet is conventional cheese. By
providing good tasting cheese alternatives in diverse forms and flavors, we
believe that we will be able to attract an increasing number of worldwide
consumers interested in improving their health and changing to more nutritious
eating habits. We intend to broaden this strategy for the future by creating
more widely accepted and broader appealing lines of great tasting, healthy dairy
related products.
Development Of Business
Over the past several years, we have developed several new marketing strategies
and product lines for the retail and food service markets. In retail, we
developed a unique marketing strategy for our product line of plant-based dairy
alternatives, called Veggie(TM). While most companies place their dairy products
for sale in the supermarket dairy section, we adopted a sales and marketing
strategy whereby we place our Veggie(TM) products for sale in the supermarket
produce section. In produce, our products are sold next to other nutritious
natural products, which allows targeted consumers to locate the products much
more easily instead of being sold in the dairy section of supermarkets where
targeted consumers may not look.
In health food stores, we significantly expanded our existing product lines and
introduced several new line extensions over the past few years. These product
line extensions also are plant-based dairy alternatives and are made from either
soy or rice. We believe our vegan (non-dairy) product line is the most extensive
in the world. With the addition of natural food sections to most supermarkets,
we also market these products to the mass consumer market. In the past, these
products were only sold to the health food industry.
In the past few years, we began offering these plant-based dairy alternatives to
the food service market so that consumers could also enjoy the taste and health
benefits of these products while eating away from home. Previously, we primarily
sold conventional-type products to the food service market.
Principal Products Produced
Our healthy cheese and dairy related products, sold under our Company's brand
names such as Veggie(TM), Veggie Nature's Alternative to Cheese(TM), Veggie
Slices(R), Soyco(R), Soymage(R), Wholesome Valley(R), Rice Slice(TM), and Veggy
Singles(R), are low or no fat, low or no cholesterol, no saturated fat, and
lactose (milk sugar) free, vitamin and mineral enriched, and contain one-third
fewer calories and typically more calcium than conventional cheese. These
healthy cheese and dairy related products mirror the flavor, appearance, aroma,
texture, and melt of conventional cheeses and products that use conventional
cheeses, and are nutritionally equal or superior to such cheeses and products.
Some of our cheese alternatives, which are marketed for their lower price points
and not for their nutritious components, are not nutritionally equivalent or
superior to conventional cheeses.
Veggie(TM)- Complete line of healthy dairy alternatives - Our flagship brand has
a complete line of nutritious dairy alternative products made with soy. All
Veggie(TM) products are reduced or low in fat, contain less calories than
conventional cheeses, and are saturated fat, trans fat, cholesterol and lactose
free. The Veggie(TM) product line includes Veggie Slices(R), Veggie Chunks,
Veggie Shreds, Veggie Cream Cheese, Veggie Sour Cream, Veggie Butter, and Veggie
Grated Toppings.
Dairy Free - Soymage(R) Vegan Dairy Alternatives - Soymage(R) products were
developed for health food and specialty stores. These products are intended for
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consumers who are allergic to dairy products, such as milk protein, or who are
practicing a Vegan lifestyle. The products in our Soymage(R) Vegan line are
completely dairy free, contain no animal fats and contain no casein (skim milk
protein). The Soymage(R) Vegan product line includes: cheese slices, grated
toppings, chunk cheeses, sour cream, cream cheese and cheese sauce alternatives.
We believe that our Soymage(R) line is the largest and most comprehensive vegan
line in the world.
Soy Free - Soy Free Dairy Alternatives made with Rice - We have developed a
dairy free alternative product line made with organic brown rice. The products
of this line are reduced or low in fat, cholesterol free, lactose free, soy free
and are fortified with essential vitamins and minerals. Additionally, these
products are formulated for people with soy allergy or who are just looking for
alternatives for conventional dairy products. The Rice product line includes
individual slices, shreds, chunks, grated toppings, cream cheese, sour cream,
butter and yogurt.
Veggy(TM) - Soy Nutritious - Soy Dairy Alternatives - The Veggy(TM) products
offer the taste of cheese, are available in many forms, and are made from soy.
Similar to the Veggie(TM) supermarket line, these products are low in fat or fat
free, and are preservative, lactose, cholesterol and saturated fat free. The
Veggy(TM) product line comes in several flavors and is available in individual
slices (Veggy Singles(R)), grated toppings and chunks. These products are
distributed to natural foods stores and produced specifically to meet the
discriminating taste and nutritional demands of the specialized nutritional
foods market.
Wholesome Valley(R) Organic - Products made from organic milk - The products of
the Wholesome Valley(R) Organic line are processed cheese foods made from
organic milk, contain up to 50% less fat than regular processed cheese food,
contain no artificial ingredients, no rBST hormone or antibiotics and are an
excellent source of calcium and protein. The farmland, cows and feed are free
from pesticides, antibiotics, growth hormones and chemicals.
Processed Cheese Products - Galaxy Sandwich Slices(TM) and Toppings - Our
processed cheese products are low in cholesterol and serve as an alternative to
conventional dairy cheeses. They are not nutritionally equivalent or superior to
conventional cheeses and may have more cholesterol than our branded cheeses.
These products include a variety of sandwich slices and shredded cheeses,
including shredded taco and pizza toppings, and a cheddar cheese sauce. They are
marketed as a lower cost alternative to conventional dairy cheeses.
Our only branded product line, which accounts for more than 10% of our gross
sales for the fiscal year ended March 31, 2005, is the Veggie(TM) line of
products. This line of products contributed approximately 48%, 60%, and 62% of
gross sales for the fiscal years ended March 31, 2005, 2004 and 2003,
respectively. Our non-branded imitation, private label and sandwich slice
business contributed approximately 36%, 23%, and 21% of gross sales for the
fiscal years ended March 31, 2005, 2004 and 2003, respectively.
The characteristics of our products vary according to the specific requirements
of individual customers within each market. In the retail market, our products
are formulated to meet the health concerns of today's consumers. In the food
service markets, our products are made according to the customer's
specifications as to color, texture, shred, melt, cohesiveness, stretch,
browning, fat retention, protein, vitamin and mineral content, and cost
parameters. Our products are manufactured in various forms, such as individual
slices, grated, shredded, salad toppings, deli loaves, and multi-pound blocks,
and are available in several flavors, including, but not limited to, mozzarella,
pepper-jack, cheddar, American, parmesan and Swiss.
Principal Markets
Our products are sold primarily in two commercial markets: retail and food
service.
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In the retail market, we sell our healthy products to national and regional
supermarket chains, mass merchandisers, natural food stores and club stores or
to distributors that sell and deliver to these retail establishments. These
sales are facilitated through our in-house sales managers and a nationwide
network of non-exclusive commissioned brokers. We believe our healthy products
appeal to a wide range of consumers interested in lower fat, lower cholesterol,
no lactose and other health-promoting aspects of these products. In the retail
market, where we believe taste and nutrition generally outweigh price
considerations, we market our Veggie(TM) and Soyco(R) products at prices
generally comparable to or higher than the prices of conventional cheeses.
In the food service market, we sell directly to food distributors and other
customers in the food service market through our in-house sales managers and a
nationwide network of non-exclusive commissioned brokers. In this market we
offer more expensive premium products such as our Veggie(TM) line to customers
who place importance on taste and nutrition and our less expensive branded,
non-branded and private label substitute and conventional-type cheese products
to customers whose primary consideration is cost. The food service products are
primarily sold to distributors who supply food to restaurants, cafeterias,
hospitals, correctional institutions, and schools. We also market our products
directly to franchisees of large national restaurant chains.
For the fiscal years ended March 31, 2005, 2004 and 2003, our net sales were
$44,510,487, $36,176,961 and $40,008,769, respectively. The following chart sets
forth the percentage of net sales that the retail and food service markets
represented for the fiscal years ended March 31, 2005, 2004 and 2003:
Percentage of Net Sales
Fiscal Years Ended March 31,
Category 2005 2004 2003
- -------------------------------------------------------------------------------
Retail sales 84% 86% 90%
Food service sales 16% 14% 10%
Methods of Distribution
We currently distribute all of our products by common carrier and customer
pick-up. We ship all our products from our shipping, warehouse and cooler
facilities in Orlando, Florida. In order to distribute to our Canadian customers
quickly and efficiently, we store and distribute products through a public
storage facility in Canada. We maintain a certain stock level at this facility
and pay the Canadian facility a processing fee for its services.
Sources and Availability of Raw Materials
We purchase the ingredients used in our manufacturing operations, i.e., casein,
vegetable proteins and oils, enzymes and other ingredients, from several
sources, and we believe that all of these ingredients are readily available from
numerous suppliers. Due to more cost effective conditions in other countries,
suppliers from such countries are often able to supply casein at prices lower
than domestic suppliers. Accordingly, we currently purchase our major
ingredient, casein, from foreign suppliers. Because our casein is imported, its
availability is subject to a variety of factors, including strength of the
United States Dollar, foreign production limitations and federal import
regulations. Our increased costs for casein throughout the fiscal year ended
March 31, 2005 had an adverse impact on our results of operations for such
fiscal year. We believe that casein prices will remain at historical highs at
least through September 30, 2005, as further discussed under "Cost of Goods
Sold" in Item 7.
For the fiscal years ended March 31, 2005, 2004 and 2003, we purchased
approximately $10,947,000, $6,134,000, and $7,911,000, respectively, of casein,
5
the principal raw material used to manufacture substantially all of our
products. The following table sets forth the name of each supplier along with
the percentage they supplied of casein which either alone, or together with
their affiliates, provided 10% or more casein to our Company, based on our
dollar volume purchased:
Percent of Casein Purchases
Fiscal Year Ended March 31,
Type of Raw Material Name of Supplier 2005 2004 2003
- -------------------------------- ---------------------------------------------- ----------- ------------ -----------
Casein Lactalis f/n/a Besnier-Scerma U.S.A. 30% 20% 24%
Glanbia f/n/a Avonmore Food Products 21% 29% 36%
Irish Dairy Board 15% 24% 22%
Bluegrass Dairy & Food, LLC 12% -- --
Eurial Poitouraine/Euro Proteins 4% 20% 18%
Working Capital Practices
The majority of our customers are required to make payment on goods within 30
days of invoicing. Our credit department makes calls on payments that are 10 to
15 days past due and then places accounts on credit hold if they have not made
arrangements for those payments that are 30 to 45 days past due. After all
efforts have been exhausted to contact the customer and collect the past due
balances, the credit manager will provide authorization to write off the past
due balance. We typically average less than 1% of gross sales in credits related
to bad debt.
We provide a guarantee of sale to many of our retail customers in natural food
stores, conventional grocery stores and mass merchandising industry. If the
product is not sold during its shelf life, we will allow a credit for the unsold
merchandise. Since the shelf life of our products range from 6 months to one
year, we historically average less than 2% of gross sales in credits for unsold
product.
Over the past three years, we have worked to create more inventory turns during
the year by keeping a minimal supply of inventory on hand consisting primarily
of the core items ordered by our customers. As a result, we have reduced our
inventory levels from $5,294,500 at March 31, 2003 to $4,632,843 at March 31,
2004 and then to $3,811,470 at March 31, 2005. We anticipate that inventory
levels will begin to increase in the future as sales volume increases.
Customers
We sell to customers throughout the United States and in 14 other countries. For
the fiscal years ended March 31, 2005, 2004 and 2003, our net sales were
$44,510,487, $36,176,961 and $40,008,769, respectively. Net sales derived from
foreign countries were approximately $3,800,000, $3,100,000, and $3,800,000 for
the fiscal years ended March 31, 2005, 2004 and 2003, respectively, which in
each case is less than 10% of total net sales. Net sales are attributed to
individual countries based on the customer's shipping address. We have no
long-term assets located outside of the United States. The following table sets
forth the percentage of foreign net sales to each country, which accounted for
5% or more of our foreign net sales for the fiscal years ended March 31, 2005,
2004, and 2003:
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Percentage of Net Foreign Sales (1)
Fiscal Years Ended March 31,
Country 2005 2004 2003
- --------------------------------------------------------------------------------
Canada 58% 55% 33%
Puerto Rico 22% 18% 36%
United Kingdom * 6% 6%
Israel * 8% 6%
Australia * * 8%
*Less than 5% of foreign net sales for the stated fiscal year
(1) Net sales by customer or country are determined with the assumption that the
amount of total sales returns, discounts and other deductions credited during
the period are taken in proportion to the gross sales by such customer or
country.
The following table sets forth the name of each customer, which either alone, or
together with its affiliates, accounted for 5% or more of our net sales for the
fiscal years ended March 31, 2005, 2004, and 2003:
Percentage of Net Sales (1)
Fiscal Year Ended March 31,
Customer Name 2005 2004 2003
- --------------------------------------------------------------------------------
Del Sunshine LLC 12.2% * *
DPI Food Products 7.7% 8.2% 9.5%
Kroger * 5.6% 5.8%
Publix 5.8% 6.8% 6.6%
United Natural Foods 8.3% 9.2% 9.9%
*Less than 5% of net sales for the stated fiscal year.
(1) Net sales by customer or country are determined with the assumption that
the amount of total sales returns, discounts and other deductions credited
during the period are taken in proportion to the gross sales by such
customer or country.
During the fiscal year ended March 31, 2005, we produced certain private label
products for Del Sunshine who then sold the products to Wal*Mart. In the fourth
quarter of fiscal 2005, we reserved nearly $1,760,000 in accounts receivable and
inventory related to Del Sunshine LLC that we believed collection thereon was
questionable (see Del Sunshine LLC under Recent Material Developments in Item 7
for further details). In fiscal 2006, we began selling these products directly
to Wal*Mart instead of through Del Sunshine. We anticipate that our direct sales
to Wal*Mart will increase from 2% of sales in fiscal 2005 to 10% to 15% of sales
in fiscal 2006.
Competitive Conditions
The food industry is highly competitive, and we face substantial competition in
the manufacturing, marketing and sale of our products. In the retail cheese
market, we compete with larger national and regional manufacturers of
conventional and imitation cheeses, such as Kraft (which produces products under
the Kraft Free(R) label), Borden's, and ConAgra (which produces products under
the Healthy Choice(R) label). Each of these competitors is well established and
has substantially greater marketing, financial and human resources than we do.
However, we believe our products are nutritionally superior, strategically
marketed, and positioned to a slightly different consumer base versus the
healthy cheese items offered by larger cheese manufacturers. Conventional "Lite"
cheese generally has a lower fat content than regular cheese but still contains
cholesterol and lactose, unlike our Veggie(TM) and Soyco(R) brand product lines,
which are soy-based, nutritious, contain no cholesterol and are lactose free.
We believe that the primary competition in our niche market are small companies
such as Tree of Life, White Wave, Tofutti Brands, Inc. ("Tofutti"), Yves, a
subsidiary of Hain Celestial Group, and Melissa's. Tree of Life is a wholly
owned subsidiary of Koninklijke Wessanen, NV, a multinational manufacturer of
dairy, natural and specialty foods and cereals. Like our products, Tree of
Life's Soya Kaas, Yves and Melissa's dairy alternatives are sold in mainstream
supermarkets. White Wave is a private company that primarily markets soy milk to
the retail markets (grocery and natural foods stores). Tofutti (AMEX:TOF) is a
public company that offers a wide range of soy based products including
alternative cheese slices, sour creams, cream cheese and frozen pizza made with
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alternative cheeses to the retail markets (primarily grocery). These parties are
considered competitors as they offer similar product lines in terms of product
form and consumer benefits, and are distributed or positioned in the same retail
shelf space as our products.
In the food service markets, our substitute and imitation cheese products
compete with other numerous substitute and imitation cheese products, as well as
with conventional cheeses.
We believe that we have the most complete line of alternative dairy products in
the industry and that our competitors' current products do not have all of the
same healthy characteristics as our products. Further, our branded products are
fortified and possess soy-based ingredients, reduced, low and no fat, low or no
cholesterol, no saturated fat, no transfat, no lactose, no artificial colorings
or flavorings. We further believe that we are superior to the competition in our
niche in the most important competitive factors, which are taste, nutritional
value, product appearance, and overall consumer purchase interest. Finally, we
believe that the breadth and depth of our product lines has made it difficult
for our smaller competitors to have a significant impact on our market share in
the alternative cheese category.
Trademarks And Other Intellectual Property
We own several registered and unregistered trademarks, which are used in the
marketing and sale of our products. Our material product trademarks are those
mentioned above under Principal Products Produced. The registrations of these
trademarks in the United States and foreign jurisdictions are effective for
varying periods of time, and may be renewed periodically, provided that we, as
the registered owner of the trademarks, comply with all pertinent renewal
requirements.
Trademarks include registered brand names, logos, symbols, or copyrights used to
identify our products or services. As such, this prevents other manufacturers
from using any words or symbols for which we hold the trademark. This is
important as it helps provide competitive insulation around our products in the
marketplace and enables consumers to identify with one particular brand or
another. We will continue to market our trademarks in order to increase brand
awareness for our products in order to improve demand and margins. Although our
trademarks are valuable to our business, they are not at this time, assets that
are critical to our business. In the event that we would be prohibited from
using one or more of our trademarks, we do not believe that this would have a
material adverse affect on our continued operations.
Although we believe that our formulas and processes are proprietary and the key
to our success, we have not sought and do not intend to seek patent protection
for such technology. In not seeking patent protection, we are instead relying on
the complexity of our technology, on trade secrecy laws, and on employee
confidentiality agreements. We believe that our technology has been
independently developed and does not infringe on the patents or trade secrets of
others.
Governmental Regulation
As a manufacturer of food products for human consumption, we are subject to
extensive regulation by federal, state and local governmental authorities
regarding the quality, purity, manufacturing, distribution and labeling of food
products.
Our United States product labels are subject to regulation by the United States
Food and Drug Administration ("FDA"). Such regulation includes standards for
product descriptions, nutritional claims, label format, minimum type sizes,
content and location of nutritional information panels, nutritional comparisons,
and ingredient content panels. Our labels, ingredients, and manufacturing
techniques and facilities are subject to inspection by the FDA. Labeling
regulations require specific details of ingredients and their components along
with nutritional information on labels and also impose restrictions on product
8
claims that can be included on labels. We believe the labeling regulations have
enhanced the marketability of our products and have resulted in increased sales
of our products because product labels make it easier for consumers to recognize
the nutritional benefits of our products compared to other products.
We have a team of individuals from our marketing, quality assurance, and
research and development departments who review all new labels for compliance
with our Company standards and current laws and regulations. We believe that we
are in material compliance with all applicable governmental regulations
regarding our current products and have obtained the necessary government
permits, licenses, qualifications, and approvals, which are required for our
operations.
Environmental Regulation
Our facility and manufacturing processes are subject to inspections by several
agencies including the Florida Department of Agriculture and Consumer Services
and our insurance providers. We are also required to comply with environmental
regulations in connection with the development of our products and the operation
of our business. We believe that we are in material compliance with the federal,
state and local environmental laws and regulations applicable to our Company. We
believe that continued compliance with any current or reasonably foreseeable
future environmental laws and regulations will not have a material adverse
effect on the capital expenditures, earnings, financial condition or competitive
position of our Company.
Employees
As of July 12, 2005, we had a total of 141 full-time employees and 2 temporary
employees. We employ all personnel directly. We are an affirmative action
employer providing equal employment opportunity to all applicants. We consider
our relations with employees to be satisfactory. No employee is a member of a
trade union.
ITEM 2. PROPERTIES.
We occupy two facilities, close in proximity, approximating a total of 119,000
square feet of industrial property in Orlando, Florida. Our first facility
contains the corporate headquarters and the manufacturing equipment. It is
approximately 55,000 square feet and is comprised of approximately 8,500 square
feet in office space, approximately 31,500 square feet in dock-height,
air-conditioned manufacturing space and approximately 15,000 square feet in
cooler space, which is situated on 2.4 acres of a 5.2 acre site in an industrial
park. We entered into a lease agreement for the corporate headquarters with Anco
Company, a Florida general partnership, on November 13, 1991. The lease was
renewed for a 5-year period in November 1996 and again in November 2001. The
lease expires in November 2006, unless renewed pursuant to terms mutually
agreeable to the landlord and our Company. In the event that the landlord elects
to sell or lease the remaining 2.8 acres of remaining land, we have a right of
first refusal to purchase or lease property upon 20 days notice to the landlord.
The lease is a "triple net" lease, which means that we are responsible for all
taxes, insurance, maintenance and repair of the facilities, in addition to
rental payments. The monthly base rent through the stated expiration of the
lease is $28,173.
We produce all of our products at our Orlando manufacturing facility. We
maintain production equipment for mixing, blending, cooking and heating
ingredients, and for production, shredding, dicing, slicing, chopping, grating,
packaging and labeling of our products. We also maintain cold storage areas for
cooling finished products and warehouse areas for storing supplies and finished
goods. We estimate that our production capacity utilization during the fiscal
years ended March 31, 2005, 2004 and 2003 were at approximately 15%, 10% and
11%, respectively, of our capacity.
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Our second facility is the primary receiving, storage and shipping facility for
our inventory. It includes office space, shipping and receiving docks, warehouse
and cooler space totaling approximately 64,000 square feet. We entered into a
lease agreement with Cabot Industrial Properties, a Florida limited partnership,
on July 28, 1999 for this second facility. In May 2004, we renegotiated and
renewed the lease until July 31, 2009. The lease provides for escalating rental
payments ranging from $18,225 to $22,942 per month through the end of the lease
period. The lease is a "triple net lease", which means we are responsible for
all taxes, insurance, maintenance, and repair of the facility, in addition to
rental payments.
We believe that our properties are adequately covered by casualty insurance. We
believe that our facilities and production equipment are adequate to meet the
current requirements and anticipated growth through the end of the fiscal year
ending March 31, 2006.
ITEM 3. LEGAL PROCEEDINGS.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders during the fourth
quarter of the fiscal year ended March 31, 2005.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information
Since August 1999, our common stock, $.01 par value per share, has been traded
on the American Stock Exchange ("AMEX") under the symbol "GXY". The following
table sets forth the high and low closing sales prices of our common stock
during each quarter as reported by AMEX for the fiscal years ended March 31,
2005 and 2004:
Period High Closing Sales Price Low Closing Sales Price
- ----------------------------------------------------------- ---------------------------- -------------------------------
2005 Fiscal Year, quarter ended:
June 30, 2004 $2.45 $1.90
September 30, 2004 $2.15 $1.24
December 31, 2004 $1.98 $1.16
March 31, 2005 $2.83 $1.80
2004 Fiscal Year, quarter ended:
June 30, 2003 $2.85 $1.65
September 30, 2003 $3.10 $2.55
December 31, 2003 $4.00 $2.36
March 31, 2004 $3.18 $1.90
Holders
On July 12, 2005, there were approximately 644 stockholders of record for our
common stock.
Dividends
We have not paid any dividends with respect to our common stock and do not
expect to pay dividends on our common stock in the foreseeable future. It is the
present policy of our Board of Directors to retain future earnings to finance
the growth and development of our business. Any future dividends will be
declared at the discretion of the Board of Directors and will depend upon, among
other things, the financial condition, capital requirements, earnings and
liquidity of our Company. Our credit facilities with Textron Financial
Corporation and Wachovia Bank (formerly SouthTrust Bank) require us to obtain
their approval prior to declaring or paying any dividends. See Management's
Discussion and Analysis of Financial Condition and Results of Operations for a
discussion of our current capital position.
Securities Authorized for Issuance under Equity Compensation Plans
Please see the section titled "Equity Compensation Plan Information" in Item 12
in Part III of this Form 10-K.
Recent Sales of Unregistered Securities
There were no sales of unregistered securities in the quarter ended March 31,
2005.
11
ITEM 6. SELECTED FINANCIAL DATA.
Fiscal Year Ended March 31,
(1) (1) (1) (2)
2005 2004 2003 2002 2001
-------------- ---------------- --------------- ---------------- ---------------
Net sales $44,510,487 $36,176,961 $40,008,769 $42,927,104 $45,085,937
Non-cash compensation
income(expense) (3) (834,746) (651,273) 2,906,762 (2,373,662) (1,116,444)
Employment contract expense (4) (444,883) (1,830,329) -- -- --
Income tax benefit (expense) -- -- -- (1,560,000) 240,000
Cumulative effect of change in
accounting policy -- -- -- -- (786,429)
Net income (loss) (4,366,549) (2,962,173) 1,034,128 (17,059,152) (6,485,763)
Net income (loss) to common
stockholders (4,652,726) (4,504,907) (601,077) (19,147,995) (6,485,763)
Net income (loss) per common share
- basic & diluted (0.27) (0.30) (0.05) (1.81) (0.69)
Total assets 27,769,666 29,887,087 33,255,842 36,115,051 48,083,126
Long-term obligations 8,000,627 9,740,094 10,170,195 12,511,461 14,720,875
Redeemable Convertible Preferred
Stock -- 2,573,581 2,324,671 2,156,311 --
(1) See Material Historical Events under Business Environment in Item 7 for a
summary of the major events during the fiscal years ended March 31, 2005,
2004 and 2003.
(2) In addition to the line items detailed above, the net loss for fiscal year
ended March 31, 2002 included approximately $5.4 million in accounts
receivable and inventory write-downs, a non-cash compensation charge of
approximately $2.4 million, approximately $1 million in fixed asset
disposals and unused trade credit write-offs, and approximately $818,974
in interest expense that was a non-cash related to debt discount.
(3) Non-cash compensation is calculated based on fluctuations in our stock
price, which are outside our control and typically do not reflect our
operations. Due to the volatility of the market price of our common stock,
we are incapable of predicting whether this expense will increase or
decrease in the future. Large swings in our stock price could result in
material changes to our Financial Statements as demonstrated in prior
years. See Valuation of Non-Cash Compensation under Critical Accounting
Policies in Item 7 below for further information.
(4) See Employment Contract Expense under Results of Operations in Item 7
below for further information.
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following information in this Management's Discussion and Analysis of
Financial Condition and Results of Operations ("MD&A") is intended to enhance a
reader's understanding of the financial condition, changes in financial
condition and results of operations of our Company. This MD&A is a supplement to
and should be read in conjunction with our Financial Statements and notes
thereto contained in Item 8.
Terms such as "fiscal 2005", "fiscal 2004" or "fiscal 2003" refer to our fiscal
years ended March 31, 2005, 2004 and 2003, respectively.
This MD&A contains the following sections:
o Business Environment
o Critical Accounting Policies
o Recent Accounting Pronouncements
o Results of Operations
o Liquidity and Capital Resources
o Contractual Obligations
o Forward Looking Statements
Business Environment
General
Our 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.
Healthy Cheese and Alternative Cheese Industry
We are the market leader within our alternative cheese category niche, but in
being so, the category increases or decreases partly as a result of our
marketing efforts. We believe that the greatest source of future growth in the
cheese alternative category will come through customers shifting to cheese
alternatives from natural cheese. Rather than focusing primarily on consumers
with a preference or medical condition predisposing them to non-dairy cheese and
comparing our products to other cheese alternative brands, we intend to focus on
educating cheese consumers on the healthy attributes of cheese alternatives
versus traditional cheese.
We use several internal and external reports to monitor sales by brand, segment,
form and channel of sale to determine which items 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, we analyze trends in the
consumer marketplace and make decisions on which brands to promote.
In order to positively impact sales volume throughout fiscal 2006, we are
focusing on the following initiatives:
o Consumer focused advertising. We plan to increase consumer advertising
(in TV, magazine, and event sponsorship) and consumer promotions (for
example, on-pack "cents off" coupons, "cents off" coupons delivered via
newspapers, in-store product sampling, and product benefit
communication at the point of purchase/shelf) that highlight and
communicate the benefits of our products to meet the consumer demand
for low carbohydrate and high protein products.
13
o Increase retailer penetration and geographical distribution. By
increasing our presence on the store shelves, we seek to increase
household penetration and build market share in specific markets.
o Increase brand awareness. We seek to increase sales by generating
consumer awareness of new products or flavors through product trials
and generating more repeat purchases on our Veggie(TM) and Wholesome
Valley(R) brands through improved taste, color, aroma, texture and
packaging.
We believe that the combination of "healthy" product attributes, improved taste
and product functionality will lead to better than expected consumer experiences
with our products. Our focus is to transfer those improved consumer experiences
into enhanced market share and increased sales of our higher margin products.
Material Historical Events
During fiscal 2003, we achieved positive cash flows from operations on an annual
basis for the first time in our Company's history as a publicly-traded company.
We achieved this goal through efficiencies in production, purchase discounts,
realignment of the sales mix toward higher margin items, reduction in overall
number of items being sold and inventoried, improved customer fulfillment
levels, new terms of sale, new customer invoice promotion settlement processes,
new trade spending strategies and additional cost reductions through rigorous
management.
During fiscal 2004, we refinanced or paid in full all of our credit facilities
that were in existence at the end of fiscal 2003. This payoff and refinancing
was accomplished through a new asset based lender, renewing and increasing our
loans with our bank and through equity financings. This financial restructuring
improved our operations and financial position and reduced interest expense
nearly $1.6 million during fiscal 2004. Additionally, in fiscal 2004, we nearly
doubled the positive cash flow from operations due to the restructuring and
continued focus on producing only high margin items.
During fiscal 2005, we redeemed the remaining 30,316 Series A convertible
preferred shares that were outstanding as of October 6, 2004 for $2,279,688. The
cash for the redemption was obtained through an equity financing (see Equity
Financing under Liquidity and Capital Resources for further details).
In early fiscal 2005, we made the decision to take on a few additional
private-label manufacturing contracts at lower margins in order to utilize
some of our excess production capacity. One of the new contract customers
accounted for 12% of our sales during fiscal 2005, which attributed to 65%
of the increase in sales over fiscal 2004. In the fourth quarter of fiscal
2005, we reserved nearly $1,550,000 in accounts receivable and $210,000 in
inventory related to this customer for which we believed collection
thereon was questionable. See Del Sunshine LLC under Recent Material
Developments for further details.
Also during fiscal 2005, we experienced a 32% (or nearly $2.7 million) increase
in the prices of our primary ingredient used in production. Only a portion of
this overall increase could be passed on to our customers. Additionally, the
price increase cannot be implemented immediately.
Recent Material Developments
The Schreiber Transactions
Asset Purchase Agreement
On June 30, 2005, we entered into an Asset Purchase Agreement for the sale of
certain of our manufacturing and production equipment to Schreiber Foods, Inc.,
a Wisconsin corporation ("Schreiber"), for $8.7 million in cash.
14
Other key terms of the transaction are as follows:
o Since the transaction may constitute a sale of substantially all of our
assets, the transaction will be subject to obtaining approval from our
stockholders.
o The transaction is subject to other closing conditions, including obtaining
approval from our lenders, Textron Financial Corporation and Wachovia Bank
(formerly SouthTrust Bank).
o Subject to the satisfaction of the conditions described above and other
conditions as set forth in the Asset Purchase Agreement, the anticipated closing
date is November 1, 2005.
o If our stockholders do not approve the transaction, the Asset Purchase
Agreement provides for an alternative transaction whereby we would sell to
Schreiber a smaller portion of the assets, which would not constitute
substantially all of our assets and therefore would not require stockholder
approval. The purchase price for this alternative sale would be $2,115,000. This
alternative sale is subject to obtaining approval from our lenders.
o If we are unable to obtain approval from our lenders with respect to this
alternative sale, then we will negotiate in good faith with Schreiber to make
the smaller portion of the assets available for Schreiber's use on reasonably
acceptable terms, not to exceed a term of 180 days. This alternative arrangement
is also subject to obtaining approval from our lenders.
The Outsourcing Agreement
On June 30, 2005, our Company and Schreiber entered into a Supply Agreement (the
"Outsourcing Agreement"), whereby we will purchase all of our requirements for
products from Schreiber, and Schreiber will manufacture and distribute all of
our products.
Other key terms of the transaction are as follows:
o The initial term of the Outsourcing Agreement is for five years from the
effective date of September 1, 2005, and is renewable at our option for up to
two additional five-year periods.
o After November 1, 2005 and throughout the remainder of the Outsourcing
Agreement's term, Schreiber will be the sole source of supply of our products.
o If we do not exercise our option to renew the Outsourcing Agreement at the end
of the initial five-year period, there is a cancellation charge of $1.5 million.
If we do not exercise our option to renew the Outsourcing Agreement at the end
of the second five-year period, there is a cancellation charge of $750,000. If
the sale of the assets to Schreiber for $8,700,000 as contemplated by the Asset
Purchase Agreement described above is not consummated, then we will not be
required to pay any cancellation charge.
o On or before November 1, 2005, Schreiber will purchase our remaining usable
raw materials, ingredients and packaging at our cost.
o The Outsourcing Agreement provides for a contingent short-fall payment
obligation by our Company if a specified production level is not met during the
second year after the effective date. If a contingent short-fall payment is
accrued after the second year, it may be reduced at the end of the third year if
the production level during the third year exceeds the specified level of
15
production. If the sale of the assets to Schreiber for $8,700,000 as
contemplated by the Asset Purchase Agreement is not consummated, then we will
not be required to pay any such short-fall payment.
o Schreiber is required to deliver products to our Company or our customers that
are in compliance with our standards and specifications and all applicable laws.
Schreiber will deliver all products within 10 business days of the effective
date of such order, which is one business day after receipt of the order.
o After the transfer of all production responsibilities to Schreiber on November
1, 2005, we may not manufacture any products governed by the Outsourcing
Agreement during the term of the Outsourcing Agreement.
o Schreiber may not manufacture our products or use any of our intellectual
property other than pursuant to the terms of the Outsourcing Agreement.
o We may terminate the Outsourcing Agreement if our stockholders do not approve
the transaction contemplated by the Asset Purchase Agreement (as described
above), by providing notice to Schreiber within 30 days of the date that our
stockholders vote on, but do not approve, the transactions contemplated by the
Asset Purchase Agreement. The effectiveness of such termination may not be more
than 180 days after the date of such notice.
o If we do not terminate the Outsourcing Agreement and we are unable to
consummate an alternative transaction with Schreiber (as described above) prior
to January 1, 2006, then Schreiber may terminate the Outsourcing Agreement by
providing written notice to our Company prior to February 1, 2006. The
effectiveness of such termination may not be less than 180 days after the date
of such notice.
As indicated above, there are a number of conditions that must be met prior to
the consummation of these transactions. There can be no guarantee that we will
satisfy these conditions and, therefore, there can be no guarantee that the
transactions will be consummated.
Transition Challenges
The asset sale and outsourcing arrangement with Schreiber are subject to a
number of conditions that must be met prior to the consummation of these
transactions. In addition to the closing conditions described above, we will
face additional challenges during the transition. These challenges include, but
are not limited to, the following:
o Coordinating customer shipments while the inventory and production
equipment is in transit from our facilities to the Schreiber
facilities;
o Reserving enough inventory on-hand to fill customer orders while
production equipment is in transit;
o Maintaining consistent formulas and quality in our products after
the transition;
o Having enough cash to build inventory and pay any severance
arrangements during the transition;
o Reduction of production personnel and severance arrangements related
to these personnel; and
o In the event of a sale of the assets whereby we would not receive
enough sale proceeds to pay off our debt to our lenders in full, we
would need to negotiate with our lenders so that they would agree to
release their liens on the assets. If they will not agree to do so,
we may be required to raise additional funds to pay our lenders in
full prior to their maturity dates.
o We may be required to negotiate with the landlords of our leased
premises the possibilities of early lease termination or subleasing
our facilities.
Each one of these events must be carefully timed and coordinated in order to
avoid problems with cash flow, litigation, loss of customer sales, and other
16
tangible and intangible affects. However, we believe that the long-term benefits
in the transition from a manufacturing company to a branded marketing company
will far outweigh the short-term challenges of the transition. Without the
cash-flow burden of carrying inventory and managing manufacturing overhead and
production issues, we believe that we can focus a substantially greater amount
of time and resources on the sale of our products. Additionally, we plan to
enhance our marketing efforts in order to increase our consumer base and sales
volume.
Transaction Effect
Assuming that the sale of assets to Schreiber is completed in accordance with
the Asset Purchase Agreement and we continue to operate under the Outsourcing
Agreement with Schreiber, some of the effects of the transaction will be as
follows:
o We will no longer be a manufacturing company, but will be solely a
branded marketing company.
o We have two facilities that we lease in Orlando, Florida as
discussed in Item 2. After all production is moved completely to
Schreiber, we may be required to have discussions with our landlords
regarding the use of our facilities. We are still exploring our
options regarding the facilities, which include, but are not limited
to: 1) negotiating an early termination with the landlord; 2)
continuing to make lease payments until the end of the lease term;
or 3) subleasing the facilities.
o We will be eliminating 115 employee positions and creating 5 new
employee positions. Our anticipated total number of full-time
employees after November 1, 2005 will be 31.
o Upon the sale of the assets, we will be removing in excess of 87% of
the net book value of our equipment. The extent to which the
proceeds of $8,700,000 do not exceed the net book value of the
assets, will result in a substantial loss on sale of assets.
o It is likely that the majority, if not all, of the proceeds from the
sale of the assets will be paid to our lenders. In particular, our
debt to Wachovia Bank will be required to be paid in full. Repayment
of the Wachovia Bank debt will result in a reduction of annual debt
service payments in excess of $1,800,000.
o We will no longer have the carrying value of inventory nor need to
use asset based financing to support the production of inventory. In
the recent past, we averaged 50 to 60 days of sales in inventory.
o We will be able to take advantage of Schreiber's lower production
costs rather than the high production costs of our underutilized
production facility.
o We anticipate substantial savings on delivery charges related to the
distribution of our products to our customers.
Debt Maturities
We have incurred substantial debt in connection with the financing of our
business. The aggregate principal amount outstanding under our two credit
facilities is approximately $13,201,134 as of July 12, 2005. This amount
includes a revolving line of credit from Textron Financial Corporation
("Textron") in the amount of $5,399,149 and a note payable to Wachovia Bank
("Wachovia") in the amount of $7,801,985. We anticipate that the proceeds from
the sale of our assets to Schreiber will pay the Wachovia term loan in full.
However, in the event that the sale is not completed as anticipated, we will
need to refinance the Wachovia term loan on or before its maturity date of July
31, 2006. The initial term of the Textron loan ends on May 26, 2006, but this
loan automatically renews for additional one-year periods unless terminated by
our Company or Textron through a written notice 90-days prior thereto or as
otherwise provided in the loan agreement. If we are unable to refinance or renew
our existing credit facilities, or if additional financing is not available on
terms acceptable to us, we will be unable to satisfy such facilities by their
maturity dates. In such an event, Textron and Wachovia could exercise their
respective rights under their loan documents, which could include, among other
things, declaring defaults under the loans and pursuing foreclosure on our
assets that are pledged as collateral for such loans. If such an event occurred
with either Textron or Wachovia, it is unlikely that we would be able to
effectively continue the operation of our business.
Del Sunshine LLC
17
Pursuant to an oral contract manufacturing and distribution arrangement between
our Company, Del Sunshine LLC ("Del"), a Delaware limited liability company, and
Non-Dairy Specialty Foods, LLC ("Non-Dairy"), a Nevada limited liability company
and affiliate of Del, we began manufacturing certain private label products for
Del and delivering them directly to Del's customers, including Del's major
customer, Wal*Mart, Inc. in April 2004. These private label products were
produced using label and packaging trademarks owned by Del. Sales to Del
accounted for 12% of our sales during fiscal 2005, which attributed to 65% of
the increase in sales over fiscal 2004. The business with Del resulted in an
account receivable owed to our Company of approximately $1,550,000 as of April
11, 2005. In the fourth quarter of fiscal 2005, we reserved nearly $1,550,000 in
accounts receivable and wrote off $210,000 in inventory related to Del based
upon our determination in April 2005 that collection from Del was questionable
as of March 31, 2005.
On April 11, 2005, we executed with Del a Trademark License Agreement and an
Assignment of Accounts Receivable Agreement. Pursuant to the Trademark License
Agreement, Del licensed to us the rights in certain Del trademarks, which
allowed us to sell products directly to Del's customers, including Wal*Mart,
Inc. and other food retailers, using such trademarks. In consideration for the
license, we agreed to pay to Del a five percent (5%) royalty on the net sales of
such products. In accordance with the Trademark License Agreement, we can offset
any royalties that we may owe to Del under the agreement against our account
receivable and other amounts owed to us by Del.
Pursuant to the Assignment of Accounts Receivable Agreement, Del assigned to us
any and all accounts receivable owed to Del by Wal*Mart, Inc. and other food
retailers, plus monies owed to Del under current purchase orders. It was
intended that the assignment of the accounts receivable and purchase order
amounts would offset, in part, our account receivable from Del. We also agreed
not to commence any legal proceedings against Del or Non-Dairy to collect
amounts owed to us by them, excluding defenses and counterclaims against Del or
Non-Dairy made in any legal proceeding brought by them.
The effectiveness of the Trademark License Agreement and the Assignment of
Accounts Receivable Agreement was conditioned upon Del providing us with proof,
satisfactory to us, that (a) Del would be transferring to us under the
Assignment of Accounts Receivable Agreement accounts receivable and purchase
orders in excess of Four Hundred Thousand Dollars ($400,000) and (b) that
Wal*Mart, Inc. would consent to the transactions contemplated under both
agreements. Del has not satisfied either of the foregoing conditions and we do
not believe that it is likely that Del will be able to satisfy the conditions in
the future. Although we have waived the conditions as they relate to the
Trademark License Agreement, we have not waived them with respect to the
Assignment of Accounts Receivable Agreement. Currently, we are exploring our
options in addressing the issues with Del related to the effectiveness and
continuation of the Assignment of Accounts Receivable Agreement and Del's
payment of our account receivable. Since April 11, 2005, we have accrued
approximately $40,000 in royalties under the Trademark License Agreement and
offset them against the receivable owed to us by Del. On or about June 15, 2006,
we ceased selling products under Del's trademarks, although the Trademark
License Agreement will continue in effect until September 30, 2005 unless we
extend it for up to two additional 6-month periods or terminate it sooner.
Measurements of Financial Performance
We focus on several items in order to measure our performance. In the short term
(1 to 3 years), we are working towards obtaining positive trends in the
following areas:
o Operating cash flow
o Gross margin in dollars and % of gross 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 Net sales trends (as it relates to consumer demand)
o Key financial ratios (such as accounts receivable, accounts payable
and inventory turnover ratios)
o Other operating ratios and statistics
In the long term (over 3 years), we are striving to generate consistent and
predictable net sales growth with increased gross margins, while incrementally
enhancing net cash flow from operations.
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. Our significant estimates include the allowance for
doubtful accounts receivable, provision for obsolete inventory, valuation of
deferred taxes and valuation of compensation expense on options and warrants.
Although we believe that these estimates are reasonable, actual results could
differ from those estimates given a change in conditions or assumptions that
have been consistently applied.
The critical accounting policies used by management and the methodology for
estimates and assumptions are as follows:
Valuation of Accounts Receivable and Chargebacks
We record revenue upon shipment of products to our customers and reasonable
assurance of collection on the sale. We generally provide credit terms to
customers based on net 30-day terms. We perform ongoing credit evaluations of
our accounts receivable balances and based on historical experience, make
reserves for anticipated future customer credits for promotions, discounts,
spoils, and other reasons. In addition, we evaluate the accounts for potential
uncollectible amounts based on a specific identification methodology and record
a general reserve for all remaining balances.
Based on the age of the receivable, cash collection history and past dilution in
the receivables, we make an estimate of our 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
18
past invoices. Actual bad debt expense increased from 1% of gross sales during
fiscal 2004 to 3% of gross sales during fiscal 2005 due to the $1,550,000
reserve for Del Sunshine as described under Recent Material Developments. Based
on this analysis, we reserved $2,299,000 and $633,000 for known and anticipated
future credits and doubtful accounts at March 31, 2005 and 2004, respectively.
We believe that this estimate is reasonable, but there can be no assurance that
our estimate will not change given a change in economic conditions or business
conditions within the food industry, our individual customer base or our
Company.
Inventory
Inventories are valued at the lower of cost or market. Cost is determined using
a weighted average, first-in, first out method. We review our inventory
valuation each month and write off the inventory related to obsolete and damaged
inventory. In addition, we reduce the value of any finished good item to market
value when that value is believed to be 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
Prior to April 1, 2003, we accounted for our stock-based employee compensation
plans under the accounting provisions of Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," (APB No. 25).
Effective April 1, 2003, we elected to record compensation expense measured at
fair value for all stock-based payment award transactions on or after April 1,
2003, in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation." Additionally, we furnish the
pro forma disclosures required under SFAS No. 123 and apply SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure" on a
prospective basis for all stock-based awards on or after April 1, 2003. The fair
value of the stock-based award is determined on the date of grant using the
Black-Scholes pricing model and is expensed over the vesting period of the
related award. The negative impact on diluted earnings per share related to the
issuance of employee stock options during the years ended March 31, 2005, 2004
and 2003 was approximately $0.01, $0.03 and $0.55, respectively.
Several management estimates are needed to compute the fair value of the
stock-based transactions including anticipated life, risk free interest rates,
and volatility of our stock price. Currently, we estimate the life of all awards
granted assuming that the award will remain outstanding and not be exercised
until the end of its term. This results in the highest possible value of the
award. If we were to change our estimate of the anticipated 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 we were to change our estimate of
the volatility percentage, the fair value expense per share would change by
approximately $.02 per percentage change in the volatility. If we were to change
our estimate of the interest rate, the fair value expense per share would change
by approximately $.03 per percentage change in the interest rate.
SFAS No. 123 requires that we provide pro-forma information regarding net income
(loss) and earnings (loss) per share amounts as if compensation cost for our
employee and director stock-based awards had been determined in accordance with
the fair market value method prescribed in SFAS No. 123. We estimated the fair
value of each stock-based award at the grant date by using the Black-Scholes
pricing model with the following assumptions:
Year Ended March 31, 2005 March 31, 2004 March 31, 2003
--------------------- -------------------- --------------------
Dividend Yield None None None
Volatility 45% to 46% 41% to 45% 37% to 44%
Risk Free Interest Rate 3.38% to 4.12% 2.01% to 4.28% 1.71% to 5.03%
Expected Lives in Months 60 to 120 36 to 120 60 to 120
19
In addition to non-cash compensation expense related to new stock-based
transactions, we also record non-cash compensation expense in accordance with
the Financial Accounting Standards Board Interpretation No. 44 ("FIN 44")
related to modifications in stock-based transactions. FIN 44 only relates to
original stock-based transactions with our employees and directors that were
granted prior to April 1, 2003 that were accounted for under the accounting
provisions of APB No. 25.
FIN 44 states that when an option is repriced or there are items that
effectively reduce the price of an option, it is treated as a variable option
that is marked to market each quarter. Accordingly, any increase in the market
price of our 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 our common stock compared
to the prior reporting period, the reduction is recorded as compensation income
to reverse all or a portion of the expense recognized in prior periods.
Compensation income is limited to the original base exercise price (the
intrinsic value) of the options. Each period we record non-cash compensation
expense or income related to our analysis on approximately 6.4 million option
shares. Assuming that the stock price exceeds the Floor on all the variable
option shares, a $0.01 increase or decrease in our common stock price results in
an expense or income, respectively, of $64,000. Due to the volatility of the
market price of our common stock, we are incapable of predicting whether this
expense will increase or decrease in the future.
Recent Accounting Pronouncements
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an amendment
of Accounting Research Bulletin No. 43, Chapter 4." SFAS No. 151 requires that
abnormal amounts of idle facility expense, freight, handling costs and wasted
materials (spoilage) be recorded as current period charges and that the
allocation of fixed production overheads to inventory be based on the normal
capacity of the production facilities. SFAS No. 151 is effective during fiscal
years beginning after June 15, 2005, although earlier application is permitted.
We believe that the adoption of this Statement will not have a significant
impact on our financial position, results of operations or cash flows.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS No. 123R"), which addresses the accounting for share-based
payment transactions in which a company receives employee services in exchange
for (a) equity instruments of the company or (b) liabilities that are based on
the fair value of the company's equity instruments or that may be settled by the
issuance of equity instruments. SFAS No. 123R supercedes APB Opinion No. 25 and
amends SFAS No. 95, "Statement of Cash Flows." Under SFAS No. 123R, companies
are required to record compensation expense for all share-based payment award
transactions measured at fair value as determined by an option valuation model.
Currently, we use the Black-Scholes pricing model to calculate the fair value of
its share-based transactions. This statement is effective for fiscal years
beginning after June 15, 2005. Since we currently recognize compensation expense
at fair value for share-based transactions in accordance with SFAS No. 123, we
do not anticipate adoption of this standard will have a significant impact on
our financial position, results of operations, or cash flows. However, we are
still evaluating all aspects of the revised standard.
Results Of Operations
2005-2004 2004-2003 2005-2004 2004-2003 2005 2004 2003
$ $ % % % of % of % of
12 Months Ending March 31, 2005 2004 2003 Change Change Change Change Sales Sales Sales
- ----------------------------------------------------------------------------------------------------------------------------------
Net Sales 44,510,487 36,176,961 40,008,769 8,333,526 (3,831,808) 23.0% -9.6% 100.0% 100.0% 100.0%
Cost of Goods Sold 34,736,594 24,864,289 28,080,188 9,872,305 (3,215,899) 39.7% -11.5% 78.0% 68.7% 70.2%
---------------------------------------------------------------------------------------------------------
Gross Margin 9,773,893 11,312,672 11,928,581 (1,538,779) (615,909) -13.6% -5.2% 22.0% 31.3% 29.8%
=========================================================================================================
20
Net Sales
The following chart sets forth the percentage of net sales derived from our
product brands during the fiscal years ended March 31, 2005, 2004 and 2003:
Percentage of Net Sales
Fiscal Year Ended March 31,
Brand 2005 2004 2003
- --------------------------------------------------------------------------------
Veggie(TM) 47.5% 59.6% 61.5%
Private Label, Imitation & Other 36.2% 22.5% 20.9%
Rice(TM) 6.6% 8.1% 7.2%
Veggy (TM) 4.7% 6.2% 6.7%
Wholesome Valley(R) Organic 3.2% 1.1% 1.1%
Vegan(TM) 1.8% 2.5% 2.6%
Net sales for fiscal 2005 increased by 23% over net sales for fiscal 2004
primarily due to increased sales in private label and Wholesome Valley(R)
Organic products. During fiscal 2005, we had one new private label customer that
accounted for approximately 12% of net sales. This customer accounted for nearly
65% of the increase in fiscal 2005 sales. However, we are no longer selling to
this customer due to a shift in sales between customers (See Del Sunshine LLC
under Recent Material Developments for further details). Private label and
imitation sales consist primarily of products that generate high sales volumes
but lower gross margins.
Certain key initiatives and tactical actions implemented by our Company during
fiscal 2005 have helped counter some of the market factors that negatively
impacted the business in fiscal 2004 as described below. Such key initiatives
and tactical actions included, but were not limited to, the following:
o Created and communicated a new more meaningful brand position for
our flagship Veggie(TM) Brand and added new products. The recent
focus is to highlight the superior nutritional factors such as
cholesterol and trans-fat free, as well as targeting a broader
universe of consumers. We are attempting to attract incremental
users by convincing prior users and light users of conventional
cheese that the Veggie(TM) brand items can satisfy their needs with
great tasting nutrition. This is a departure from our past product
positioning where physiological and medical requirements were a key
driver in why consumers should buy the "healthy alternatives."
o Improved product quality in terms of taste, color, aroma, and
texture of our Veggie(TM) and Rice slices product line.
o Secured certain contract manufacturing opportunities, which we
previously turned away or did not pursue in prior years due to cash
constraints. This enabled us to better utilize some of our excess
production capacity. We increased our contract manufacturing
activities by nearly 331%, which resulted in a 19% increase in sales
during fiscal 2005 compared to fiscal 2004. Our contract
manufacturing activities relate primarily to products that generate
lower margins. As we added additional contract manufacturing
business to our product mix, our gross margin percentage has
decreased.
o Shifted the emphasis and resource allocation of our marketing
strategy from vendor promotions (retailer publications/flyers
featuring price reductions and on-shelf temporary price reductions)
to increase sales through consumer advertising (in TV, magazine, and
event sponsorship) 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). We saw an increase in sales through our
consumer advertising and promotions, which highlighted and
communicated the benefits of our products to meet the consumer
demand for low carbohydrate and high protein products. This was a
significant strategy shift from past fiscal years 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. We experienced an
average 17% increase in sales in those markets where there were
consumer- advertising promotions.
21
During fiscal 2004, sales declined from fiscal 2003 levels due to several market
factors that had a negative affect on our business. First, consumers' eating
habits changed with the publicly recognized trend toward low-carbohydrate meal
preparation during all meals (breakfast, lunch, snack, and dinner). This led to
decreased consumption of high-carbohydrate items such as bread and those
complimentary items such as our cheese slices. Second, the number of consumers
shopping in the retail grocery and natural food stores was down versus fiscal
2003 due to the further national emergence and presence of Wal*Mart superstores
and other similar superstores that include extensive grocery operations. Third,
the Veggie(TM) brand sales were down due to the Southern California retail
grocery labor strike that occurred during fiscal 2004, but has since been
resolved.
We anticipate that our direct sales to Wal*Mart will increase from 2% of sales
in fiscal 2005 to 10% to 15% of sales in fiscal 2006. This increase is due to a
shift in sales between customers rather than an increase in product sales. Prior
to fiscal 2006, we produced certain private label products for Del Sunshine who
then sold the product to Wal*Mart. Del Sunshine accounted for 12% of sales in
fiscal 2005. In fiscal 2006, we began selling these products directly to
Wal*Mart instead of through Del Sunshine (See Del Sunshine LLC under Recent
Material Developments for further details).
Based on our current projections, we anticipate continued double-digit growth in
sales through improved distribution and penetration of our core brands into the
mainstream consumer markets.
Cost of Goods Sold
Cost of goods sold increased from 70% and 69% of net sales in fiscal 2003 and
fiscal 2004 to 78% of net sales in fiscal 2005. This 9% increase in cost of
goods sold was primarily due to rising raw material costs. Of this 9% increase
in cost of goods sold in relation to net sales, 6% was a direct result of higher
key raw material costs (including primarily casein, and to a lesser extent
packaging and film supplies) and the balance of the increase was due to the
addition of certain private label items that were sold at a lower margin
resulting in a higher cost in relation to net sales.
The principal raw material used by our Company is casein, which accounted for
approximately 65% of our raw material purchases in fiscal 2005. As casein is a
significant component of our product formulation, we are vulnerable to
short-term and long-term changes in casein pricing, which at times has been
volatile.
We experienced a 32% increase in average casein prices in fiscal 2005 compared
to average casein prices in fiscal 2004, which resulted in an increase in cost
of goods of approximately $2.7 million. In fiscal 2006, we are continuing to
experience high casein prices, the averages of which are approximately 31%
higher than the average prices for fiscal 2005. Based on current pricing trends
with our suppliers, we believe that casein prices will remain at historical
highs at least through September 30, 2005. Every 10% increase in casein prices
over the fiscal 2005 average will result in an annual cost increase of
approximately $1,100,000 assuming the same amount of pounds purchased as in
fiscal 2005. Casein prices are still high due to greater worldwide demand, as
well as lower foreign government subsidies and the decline in the US Dollar
value versus the Euro. In order to offset the high casein costs, we are
incorporating alternative formula modifications that maintain the integrity of
our product benefits as well as reducing costs in several other raw materials
and operational labor categories. We have also passed along some of the
increased costs to our customers during fiscal 2005 and will implement
additional price increases as appropriate. However, these price increases often
cannot be passed on to the customers at the same time or in proportion to the
increase in our costs and therefore, we experience lower margins on the sales of
our products.
22
We monitor our costs and production efficiencies through various ratios
including pounds produced per hour and cost per pound sold and use these ratios
to make decisions in purchasing, production and setting sales prices.
In fiscal 2006, we expect our gross profit percentage to improve over the fiscal
2005 levels despite the continued increases in raw material costs because we
have implemented price increases on some of our products, additional sales
growth is expected in our higher margin products and we have eliminated certain
low margin private label manufacturing accounts.
2005-2004 2004-2003 2005-2004 2004-2003 2005 2004 2003
$ $ % % % of % of % of
12 Months Ending March 31, 2005 2004 2003 Change Change Change Change Sales Sales Sales
- ----------------------------------------------------------------------------------------------------------------------------------
Gross Margin 9,773,893 11,312,672 11,928,581 (1,538,779) (615,909) -13.6% -5.2% 22.0% 31.3% 29.8%
--------------------------------------------------------------------------------------------------------
Operating Expenses:
Selling 5,148,426 4,981,996 4,958,272 166,430 23,724 3.3% 0.5% 11.6% 13.8% 12.4%
Deliver 2,307,166 1,877,682 2,008,638 429,484 (130,956) 22.9% -6.5% 5.2% 5.2% 5.0%
Non-cash compensation
related to stock based
transactions (2) 834,746 651,273 (2,906,762) 183,473 3,558,035 28.2% -122.4% 1.9% 1.8% -7.3%
Employment contract
expense (3) 444,883 1,830,329 -- (1,385,446) 1,830,329 -75.7% na 1.0% 5.1% 0.0%
General and
administrative 3,970,690 3,303,030 3,570,889 667,660 (267,859) 20.2% -7.5% 8.9% 9.1% 8.9%
(Gain)Loss on disposal
of assets (4,500) 8,519 47,649 (13,019) (39,130) -152.8% -82.1% 0.0% 0.0% 0.1%
Research and development 309,054 260,410 232,552 48,644 27,858 18.7% 12.0% 0.7% 0.7% 0.6%
--------------------------------------------------------------------------------------------------------
Total operating expenses 13,010,465 12,913,239 7,911,238 97,226 5,002,001 0.8% 63.2% 29.2% 35.7% 19.8%
--------------------------------------------------------------------------------------------------------
Income (Loss) from
Operations (3,236,572) (1,600,567) 4,017,343 (1,636,005) (5,617,910) 102.2% -139.8% -7.3% -4.4% 10.0%
Non-cash compensation
related to stock based
transactions (2) 834,746 651,273 (2,906,762) 183,473 3,558,035 28.2% -122.4% 1.9% 1.8% -7.3%
Employment contract
expense (3) 444,883 1,830,329 -- (1,385,446) 1,830,329 -75.7% na 1.0% 5.1% 0.0%
--------------------------------------------------------------------------------------------------------
Operating Income (Loss),
As Adjusted (1) (4) (a
non-GAAP measure) (1,956,943) 881,035 1,110,581 (2,837,978) (229,546) -322.1% -20.7% -4.4% 2.4% 2.8%
========================================================================================================
(1) We utilize 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 our current on-going operations and business
trends related to our financial condition and results of operations.
Additionally, these measures are key factors upon which we prepare our
budgets and forecasts, calculate bonuses, and evaluate 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 our determination of non-GAAP measures, we exclude the non-cash
compensation related to stock-based transactions because we believe
that this item does not accurately reflect our current on-going
operations. Many times non-cash compensation is calculated based on
fluctuations in our stock price, which can skew the financial results
dramatically up and down. The price of our common shares as traded on
AMEX is outside our control and typically does not reflect our current
operations. Additionally, this item is excluded by our lenders when
calculating compliance with loan covenants.
(3) In our determination of non-GAAP measures, we exclude the employment
contract expenses related to Angelo S. Morini and Christopher J. New
because we believe that these items do not reflect expenses related to
our current on-going operations. Additionally, these items are excluded
by our lenders when calculating compliance with loan covenants.
23
(4) Operating Income (Loss), as adjusted, has declined in the past two
years due to less dollars contributed by gross margin as discussed
above under sales and cost of goods sold and due to a large bad debt
expense in fiscal 2005 as discussed below under general and
administrative. We anticipate that operating income, as adjusted will
increase in the future so that current operations support our business
objectives and growth plans.
Selling
We have experienced higher selling expenses primarily due to the increase in
marketing efforts. During fiscal 2005, we increased our marketing costs by
approximately $190,000 over fiscal 2004, but shifted our marketing efforts from
trade promotions to consumer advertising. The large consumer advertising costs
were primarily related to a strategic television campaign, which was undertaken
to promote our Veggie(TM) products during the second and third quarter of fiscal
2005. During fiscal 2004, advertising costs also increased by approximately
$414,000, because these costs were limited in fiscal 2003 due to the prior
financial constraints of our Company. During fiscal 2004, we noted a decrease of
approximately $298,000 in brokerage costs and $117,000 in promotional costs,
which corresponded to the decrease in sales in fiscal 2004 from fiscal 2003. We
expect selling expenses for fiscal 2006 to be higher in dollars due to increased
sales, but stable or slightly lower as a percentage of net sales as the fixed
expenses of the selling category do not increase in direct proportion to sales.
We sell our products through our internal sales force and an independent broker
network.
Delivery
Delivery expense is primarily a function of sales, and has remained consistent
at approximately 5% of net sales. We anticipate that delivery costs will
increase in the future periods due to higher fuel prices and surcharges charged
by the transportation companies, but as sales continue to increase, we
anticipate that the delivery expense will remain between 5% and 6% of net sales.
After the transfer of all production and distribution of our products to
Schreiber by November 2005, we expect our delivery expenses to decrease
significantly as a result of an agreed upon delivery price per pound of product
with Schreiber that is lower than our current delivery cost per pound of
product.
2005-2004 2004-2003 2005 2004 2003
$ $ % of % of % of
12 Months Ending March 31, 2005 2004 2003 Change Change Sales Sales Sales
- ----------------------------------------------------------------------------------------------------------------------
Stock-based award
issuances(a) 619,097 643,272 153,238 (24,175) 490,034 1.4% 1.8% 0.4%
Option modifications under
APB 25 awards(b) 215,649 8,001 -- 207,648 8,001 0.5% 0.0% 0.0%
Notes receivable for common
stock(c) -- -- (3,060,000) -- 3,060,000 0.0% 0.0% -7.6%
--------------------------------------------------------------------------------------
Non-cash compensation
related to stock based
transactions 834,746 651,273 (2,906,762) 183,473 3,558,035 1.9% 1.8% -7.3%
======================================================================================
Non-Cash Compensation Related to Stock-Based Transactions
Effective April 1, 2003, we elected to record compensation expense measured at
fair value for all stock-based payment award transactions on or after April 1,
2003 under the provisions of FAS 123. Prior to April 1, 2003, we only recorded
the fair value of stock-based awards granted to non-employees or non-directors
under the provisions of FAS 123. The fair value of the stock-based award is
determined on the date of grant using the Black-Scholes pricing model and is
expensed over the vesting period of the related award. Prior to April 1, 2003,
we accounted for its stock-based employee and director compensation plans under
the accounting provisions of APB No. 25 as interpreted by FASB Interpretation
No. 44 ("FIN 44"). Any modifications of fixed stock options or awards granted to
employees or directors originally accounted for under APB No. 25 may result in
additional compensation expense under the provisions of FIN 44. FIN 44 covers
specific events that occurred after December 15, 1998 and was effective as of
July 1, 2000.
24
In accordance with the above accounting standards, we calculate non-cash
compensation related to its securities in our Statements of Operations on three
primary items:
a. Stock-Based Award Issuances
During the fiscal years ended March 31, 2005, 2004, and 2003, we recorded
$619,097, $643,272 and $153,238, respectively, as non-cash compensation
expense related to stock-based transactions that were issued to and vested
by employees, officers, directors and consultants. This expense was
computed in accordance with SFAS No. 123 only for stock-based transactions
awarded to consultants prior to April 1, 2003 and for all stock-based
transactions awarded on or after April 1, 2003.
b. Option Modifications for Awards granted to Employees or Directors under
APB No. 25
On October 11, 2002, we 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. Prior
to the repricing modification, the options were accounted for as a fixed
award under APB No. 25. In accordance with FIN 44, the repricing of the
employee stock options requires additional compensation expense to be
recognized and adjusted in subsequent periods for changes in the price of
our common stock that are in excess of the $2.05 stock price on the date of
modification (additional intrinsic value). If there is a decrease in the
market price of our common stock compared to the prior reporting period,
the reduction is recorded as compensation income to reverse all or a
portion of the expense recognized in prior periods. Compensation income is
limited to the original base exercise price (the intrinsic value) of the
options. This variable accounting treatment for these modified stock
options began with the quarter ended December 31, 2002 and such variable
accounting treatment will continue until the related options have been
cancelled, expired or exercised. There are 3,499,841 outstanding modified
stock options remaining as of March 31, 2005.
We recorded non-cash compensation expense of $193,649 and $8,001 related to
these modified options for the years ended March 31, 2005 and March 31,
2004. There was no non-cash compensation expense recorded for the year
ended March 31, 2003, as the market price of our stock at the end of the
period was less than the $2.05 intrinsic value of the modified options.
In connection with a Separation and Settlement Agreement dated July 8, 2004
between our Company and Mr. New (as further described under Item 11), we
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 an
exercise price of $1.67 per share) and that certain Non-Qualified Stock
Option Agreement dated July 16, 2001 (for 100,000 shares at an exercise
price of $2.05 per share) would continue in full force and effect as if he
were still employed by our Company. The stock price on the date of the
modification was $2.15. In accordance with FIN 44 for modifications that
renew or increase the life on existing options, we recorded $22,000 as
additional non-cash compensation expense in the fiscal year ended March 31,
2005.
c. Notes Receivable for Common Stock
In June 1999, in connection with an amended and restated employment
agreement for Angelo S. Morini, our Company's Founder, we consolidated two
full recourse notes receivable ($1,200,000 non-interest bearing from
November 1994 and $11,572,200 bearing interest at 7% from October 1995)
related to the exercise of 2,914,286 shares of our common stock into a
single non-recourse and non-interest bearing note receivable in the amount
of $12,772,200 that is due on June 15, 2006. This single consolidated note
is secured by the 2,914,286 shares that were exercised. Due to the
modification of the note terms from recourse to non-recourse, we account
for the note as if it was a newly issued option per EITF 95-16, "Accounting
for Stock Compensation Arrangements with Employer Loan Features under APB
Opinion No. 25," and due to the modification from interest bearing to
non-interest bearing, the option is treated as variable and marked to
market each period. The intrinsic value for the underlying shares is $4.38
per share. There was no non-cash compensation expense or reversal of
expense recorded for the years ended March 31, 2005 and 2004, as the market
price of our stock was less than the $4.38 intrinsic value of the shares at
the beginning and end of the periods. We recorded non-cash compensation
income of $3,060,000 for the year ended March 31, 2003 to reflect the
decrease in the market price of our common stock from $5.43 at March 31,
2002 to $1.87 at March 31, 2003. We did not record any further non-cash
compensation income once the stock price fell below the $4.38 intrinsic
value.
25
Employment Contract Expense
In connection with a Separation and Settlement Agreement dated July 8, 2004
between our Company and Christopher J. New (as further described under Item 11),
we accrued and expensed $444,883 as the two-year cost of this agreement under
employment contract expense in the second quarter of fiscal 2005. As of March
31, 2005, the remaining balance accrued was $287,253 ($220,218 in short-term
liabilities and $67,035 in long-term liabilities).
In October 2003, our Company and Angelo S. Morini entered into a Second Amended
and Restated Employment Agreement (as further described under Item 11). In
connection with this agreement, we accrued and expensed the five-year cost of
this agreement as employment contract expense in the third quarter of fiscal
2004. The total estimated costs expensed under this agreement are $1,830,329 of
which $1,292,575 remained unpaid but accrued ($366,305 as short-term liabilities
and $926,270 as long-term liabilities) as of March 31, 2005. The long-term
portion will be paid out in nearly equal monthly installments ending in October
2008.
General and administrative
During fiscal 2005, we noted an increase of nearly $670,000 in expenses compared
to fiscal 2004. This increase is the net effect of approximately a $1.6 million
increase in bad debt expense (see Del Sunshine LLC under Recent Material
Developments for further details) and decreases in personnel costs and
professional fees for legal and audit services. Personnel costs declined nearly
$250,000 due to the change in the employment status of Angelo S. Morini per the
amended employment agreement in October 2003. Additionally, legal fees decreased
in fiscal 2005 due to the settlement of the Schreiber lawsuit in May 2004 and
the completion of the financial restructuring in early fiscal 2004.
During fiscal 2004, there was an increase of approximately $132,000 in legal
fees due to the Schreiber lawsuit, refinancing activities and additional
reporting requirements during fiscal 2004. Additionally, we had an increase of
approximately $183,000 in director and related insurance expenses due to the
expanded Board of Directors and their activities in fiscal 2004. These increases
were offset by decreases of approximately $115,000 in consulting fees, $106,000
in personnel costs, $67,000 in bad debt write-offs, $50,000 in bank charges,
$44,000 in audit fees, and general allocation costs such as rent, depreciation
and telephone charges of approximately $200,000.
General and administrative expenses averaged 9% of net sales for the past three
years. We anticipate that in fiscal 2006 general and administrative expenses
will be lower both in dollars and as a percentage of sales due to the
non-recurrence of large bad debt write-offs and to increasing sales levels
without the need for an incremental increase in administrative costs.
Research and development
Research and development expenses increased each year primarily as a result of
an increase in research and development personnel costs. We anticipate that
there may be a significant increase in research and development expenses in
fiscal 2006 due to an increase in the number of personnel.
Interest
Interest expense decreased $231,629 or 17% in fiscal 2005. The decrease in
fiscal 2005 compared to fiscal 2004 resulted primarily due to the elimination of
interest on a mezzanine loan from FINOVA Mezzanine Capital that was recorded in
the first two months of fiscal 2004 and lower lender fees charged on our debt
facilities in fiscal 2005. We are incurring and anticipate increased interest
expense during fiscal 2006 compared to fiscal 2005 due to increases in the
floating interest used by our lenders which are based on prevailing market
interest rates.
26
Interest expense decreased $1,561,609 or 53% in fiscal 2004. During fiscal 2003,
we amortized to interest expense $614,230 related to debt discounts on its prior
mezzanine loan from FINOVA Mezzanine Capital, Inc. This non-cash amortization
ended in September 2002 and did not occur during fiscal 2004. We also noted a
decrease in loan costs of approximately $413,722 in fiscal 2004 due to the lower
fees charged under the Textron credit facility compared to the FINOVA credit
facility. The remaining decrease in interest expense was the result of lower
debt balances, and lower interest rates on the outstanding debt balances partly
due to a reduction in the average prime rate during fiscal 2004 compared to
fiscal 2003. See "Debt Financing" below for further detail on our outstanding
debts and interest rates thereon.
Assuming the consummation of the Asset Purchase Agreement as discussed under
Recent Material Developments, we expect that our debt to Wachovia Bank will be
paid in full and there will be a significant reduction in interest expense due
to lower debt balances in fiscal 2006 as compared to fiscal 2005.
EBITDA, As Adjusted:
2005-2004 2004-2003
$ $
12 Months Ending March 31, 2005 2004 2003 Change Change
- ------------------------------------------------------------------------------------------------------------------
Income (Loss) from Operations (3,236,572) (1,600,567) 4,017,343 (1,636,005) (5,617,910)
---------------------------------------------------------------------------
Other Income (Expense), Net
Interest expense, net (1,129,977) (1,361,606) (2,923,215) 231,629 1,561,609
Other -- -- (60,000) -- 60,000
---------------------------------------------------------------------------
Total (1,129,977) (1,361,606) (2,983,215) 231,629 1,621,609
---------------------------------------------------------------------------
NET INCOME (LOSS) (4,366,549) (2,962,173) 1,034,128 (1,404,376) (3,996,301)
Non-cash compensation related to stock
based transactions (2) 834,746 651,273 (2,906,762) 183,473 3,558,035
Employment contract expense (3) 444,883 1,830,329 -- (1,385,446) 1,830,329
---------------------------------------------------------------------------
NET INCOME (LOSS), As Adjusted (1)
(a non-GAAP measure) (3,086,920) (480,571) (1,872,634) (2,606,349) 1,392,063
Interest expense, net 1,129,977 1,361,606 2,923,215 (231,629) (1,561,609)
Depreciation and amortization 2,172,566 2,205,053 2,273,349 (32,487) (68,296)
---------------------------------------------------------------------------
EBITDA, As Adjusted (1) (a non-GAAP
measure) 215,623 3,086,088 3,323,930 (2,870,465) (237,842)
===========================================================================
EBITDA, As Adjusted:
2005-2004 2004-2003 2005 2004 2003
% % % % %
12 Months Ending March 31, Change Change of Sales of Sales of Sales
- ----------------------------------------------------------------------------------------------
Income (Loss) from Operations 102.2% -139.8% -7.3% -4.4% 10.0%
-------------------------------------------------------
Other Income (Expense), Net
Interest expense, net -17.0% -53.4% -2.5% -3.8% -7.3%
Other na -100.0% 0.0% 0.0% -0.1%
-------------------------------------------------------
Total -17.0% -54.4% -2.5% -3.8% -7.5%
-------------------------------------------------------
NET INCOME (LOSS) 47.4% -386.4% -9.8% -8.2% 2.6%
Non-cash compensation related to stock
based transactions (2) 28.2% -122.4% 1.9% 1.8% -7.3%
Employment contract expense (3) -75.7% na 1.0% 5.1% 0.0%
-------------------------------------------------------
NET INCOME (LOSS), As Adjusted (1)
(a non-GAAP measure) 542.3% -74.3% -6.9% -1.3% -4.7%
Interest expense, net -17.0% -53.4% 2.5% 3.8% 7.3%
Depreciation and amortization -1.5% -3.0% 4.9% 6.1% 5.7%
-------------------------------------------------------
EBITDA, As Adjusted (1) (a non-GAAP
measure) -93.0% -7.2% 0.5% 8.5% 8.3%
=======================================================
(1) We utilize 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 our current on-going operations and business
trends related to our financial condition and results of operations.
Additionally, these measures are key factors upon which we prepare our
budgets and forecasts, calculate bonuses, and evaluate 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 our determination of non-GAAP measures, we exclude the non-cash
compensation related to options and warrants because we believe that
this item does not accurately reflect our current on-going operations.
Non-cash compensation is calculated based on fluctuations in our stock
price, which can skew the financial results dramatically up and down.
The price of our common shares as traded on AMEX is outside our control
and typically does not reflect our current operations. Additionally,
these items are excluded by our lenders when calculating compliance
with loan covenants.
27
(3) In our determination of non-GAAP measures, we exclude the employment
contract expenses related to Angelo S. Morini and Christopher J. New
because we believe that these items do not reflect expenses related to
our current on-going operations. Additionally, these items are excluded
by our lenders when calculating compliance with loan covenants.
(4) EBITDA, as adjusted, has declined in the past two years due to less
dollars contributed by gross margin as discussed above under sales and
cost of goods sold and due to a large bad debt expense in fiscal 2005
as discussed above under general and administrative. We anticipate that
EBITDA, as adjusted, will increase in the future as margins improve and
general and administrative expense decreases.
Liquidity And Capital Resources
Cash Flows from Operating Activities and Investing Activities
2005-2004 2004-2003
12 Months Ending March 31, 2005 2004 2003 $ Change $ Change
- -------------------------------------------------------------------------------------------------------
Cash from operating activities 779,746 2,236,350 1,175,875 (1,456,604) 1,060,475
Cash used in investing activities (65,002) (231,778) (100,026) 166,776 (131,752)
Cash used in financing activities (602,641) (1,556,491) (1,074,419) 953,850 (482,072)
----------------------------------------------------------------
Net increase in cash 112,103 448,081 1,430 (335,978) 446,651
================================================================
During the past three fiscal years, we have achieved positive cash flow from
operations. This was achieved mainly through higher sales volumes in fiscal 2005
and improved margins on sales in fiscal 2003 and fiscal 2004 compared to fiscal
2002. In fiscal 2005, we noted a 65% decrease in cash from operating activities
compared to fiscal 2004. This was primarily attributable to an approximate 17%
increase in net accounts receivable associated with our increase in sales. This
increase in cash used was offset by further reductions in inventory levels and
increases in accounts payable. We are continually reviewing our collection
practices, payment terms to vendors and inventory levels in order to maximize
cash flow from operations.
Cash used in investing activities primarily relates to our purchase of office
and manufacturing equipment in each fiscal year. Additionally, we noted an
increase in cash from investing activities due to decreases in our deposits and
other assets in fiscal 2005. We do not anticipate any large capital expenditures
during fiscal 2006.
We expect to maintain positive cash flows from ongoing operations during fiscal
2006. However, we anticipate a decrease in cash flow as we begin to outsource
our production late in the second quarter of fiscal 2006. We will need
additional cash to build up finished good inventory levels to maintain standard
orders to customers and to pay one-time costs associated with the transition
such as severance arrangements, and contract and lease cancellation fees. Based
on current projections, we expect that much of the additional cash requirements,
if not all, will come from the sale of our usable raw materials and packaging
inventory and production equipment to Schreiber in the third quarter of fiscal
2006.
Cash Flows From Financing Activities
12 Months Ending March 31, 2005 2004 2003
- --------------------------------------------------------------------------------
Net borrowings (payments) on line of
credit and bank overdrafts 853,202 (1,485,893) (625,561)
Issuances of debt -- 2,000,000 500,000
Payments of debt and capital leases (1,417,103) (6,226,625) (2,434,741)
Issuances of stock 2,240,948 4,156,027 1,485,883
Redemption of preferred stock (2,279,688) -- --
------------------------------------------
Cash used in financing activities (602,641) (1,556,491) (1,074,419)
==========================================
28
During fiscal 2005, we increased our line of credit with Textron Financial
Corporation to primarily fund our business growth. Additionally, we issued
2,000,000 shares of our common stock for aggregate gross proceeds of $2,300,000.
These proceeds were then used to redeem the remaining 30,316 Series A
convertible preferred shares held by the holders of such Series A convertible
preferred shares for a total price of $2,279,688. See "Equity Financing" below
for further details.
During fiscal 2004, we refinanced all of our credit facilities that were in
existence at the end of fiscal 2003. This refinancing was accomplished through
the payment of $4,000,000 to FINOVA Mezzanine by renewing and increasing our
loan with Wachovia Bank by $2,000,000 and through $3,850,000 in private
placement equity financings. Additionally, we replaced FINOVA Capital
Corporation with Textron Financial Corporation as our new asset based lender.
This financial restructuring improved our operations and financial position and
reduced interest expense nearly $1.6 million during fiscal 2004. The remaining
proceeds from the refinancing were used for operations and to further reduce our
accounts payable and debt balances.
During fiscal 2003, we received loan proceeds from Excalibur Limited Partnership
in the amount of $500,000 in cash. The proceeds of which were used to pay down a
portion of our outstanding debt under our term loan from Wachovia Bank. In
addition, we raised $1,500,000 through the issuance of common stock to
Stonestreet Limited Partnership. These proceeds were used to pay off our term
loan from Excalibur Limited Partnership and for working capital purposes. We
used our cash from operating activities to reduce the balance of our outstanding
debt under our line of credit from FINOVA Capital and to pay down our term loan
with Wachovia Bank.
Debt Financing
On May 27, 2003, we 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 a Loan and Security
Agreement dated May 27, 2003 (the "Textron Loan Agreement"). The Textron Loan is
secured by our 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 our Company
from time to time is equal to the sum of (i) 85% of the net amount of its
eligible accounts receivable plus (ii) 60% of our 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 1.75% per annum (7.5% at March 31, 2005) calculated on the average cash
borrowings for the preceding month. The initial term of the Textron Loan ends on
May 26, 2006, but this loan automatically renews for additional one-year periods
unless terminated by our Company or Textron through a written notice 90-days
prior thereto or as otherwise provided in the loan agreement. As of March 31,
2005, the outstanding principal balance on the Textron Loan was $5,458,479.
The Textron Loan Agreement contains certain financial and operating covenants.
As of March 31, 2005, we failed to comply with certain requirements and
financial covenants in the Textron Loan Agreement. We fell below the fixed
charge ratio and the adjusted tangible net worth financial covenant ratios
primarily because of a large bad debt reserve and inventory write off related to
one of our customers in March 2005, as discussed under Del Sunshine LLC in
Recent Material Developments. On April 29, 2005, Textron also determined that
the credit risk increased substantially enough to downgrade our accounts
receivable with respect to such customer and deemed such accounts receivable as
ineligible for purposes of calculating our borrowing base under the Textron
Loan. This action by Textron placed our balance owed into an over-advance
position with respect to the Textron Loan. As a result, effective as of April
29, 2005, our interest rate on the Textron Loan was increased from Prime plus
1.75% to Prime plus 4.75%.
On June 3, 2005, we executed a fourth amendment to the Textron Loan that
provided a waiver of all the existing defaults for the fiscal quarters ended
December 31, 2004 and March 31, 2005 and amended the fixed charge coverage ratio
29
and the adjusted tangible net worth requirements for periods after March 31,
2005. Additionally, the fourth amendment allowed the Textron Loan to be in an
over-advance position not to exceed $750,000 until July 31, 2005. In exchange
for the waiver and amendments, our interest rate would remain at Prime plus
4.75% on the Textron Loan and we paid a fee of $50,000 in four weekly
installments of $12,500.
On June 16, 2005, we used a portion of the proceeds from the warrant exercises
by BH Capital Investments L.P., Excalibur Limited Partnership and Mr. Frederick
A. DeLuca (as described under Equity Financing below) to satisfy the $750,000
over-advance with Textron. In connection with the satisfaction of the
over-advance, we agreed to immediately terminate Textron's obligation to permit
any over-advances under the Textron Loan, which obligation was to expire on July
31, 2005. With the termination of the over-advance facility, the interest rate
on the Textron Loan returned to its prior level of Prime plus 1.75% (7.75% as of
June 16, 2005). In July 2005, Textron will review our financial forecasts that
reflect the outsourcing arrangement (as described under the Schreiber
Transactions in Recent Material Developments above) and will evaluate whether
any further amendments to our loan agreement will be required. Until such time,
they have reduced our borrowing availability under our line by $200,000.
However, there is no guarantee if or when they will lift this restriction on our
borrowing availability. Additionally, we may experience future credit tightening
by Textron by virtue of reserves they may require, receivables they may deem
ineligible or other rights they have under the Textron Loan Agreement.
Simultaneous with the closing of the Textron Loan in May 2003, Wachovia Bank,
N.A. successor by merger to SouthTrust Bank ("Wachovia"), extended our Company a
new term loan in the principal amount of $2,000,000. This loan was consolidated
with our March 2000 term loan with Wachovia, which had a then outstanding
principal balance of $8,131,985 for a total term loan amount of $10,131,985.
This term loan is secured by all of our equipment and certain related assets.
The balance outstanding on the term loan as of March 31, 2005 is $8,241,985.
On June 30, 2005, we entered into a Loan Modification Agreement with Wachovia
regarding our term loan. The agreement modified the following terms of the loan:
1) the loan will mature and be payable in full on July 31, 2006 instead of June
1, 2009; 2) the principal payments will remain at $110,000 per month with
accrued interest at Wachovia's Base Rate plus 1% instead of increasing to
$166,250 on July 1, 2005 as provided by the terms of the promissory note
evidencing the loan; and 3) all covenants related to our tangible net worth,
total liabilities to tangible net worth, and maximum funded debt to EBITDA
ratios are waived and our compliance with such covenants is not required through
the maturity of the loan on July 31, 2006. In connection with the agreement, we
agreed to pay $60,000, of which $30,000 was paid upon execution of the agreement
and $30,000 is due on August 1, 2005. As required by the terms of the agreement,
if we sell our equipment as discussed under the Schreiber Transactions in Recent
Material Developments above, the loan will be due and payable in full at the
time of sale.
The Wachovia term loan contains certain financial and operating covenants. We
fell below the requirement for the tangible net worth covenant for the quarter
ended March 31, 2005 and the requirement for the maximum funded debt to EBITDA
ratio for the year ended March 31, 2005. In accordance with the Loan
Modification Agreement referenced above, Wachovia agreed to waive compliance on
the covenants for the periods ended March 31, 2005 and through the maturity of
the loan on July 31, 2006.
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, we
received from BH Capital Investments L.P. and Excalibur Limited Partnership ("BH
Capital and Excalibur") proceeds of approximately $3,082,000 less costs of
$181,041 for the issuance of 72,646 shares of our Series A convertible preferred
stock with a face value of $3,500,000 and warrants to purchase up to 500,000
shares of our common stock. The holders of our Series A convertible preferred
stock had the right to receive on any outstanding Series A convertible preferred
stock a ten percent (10%) stock dividend on the shares, payable one year after
the issuance of such preferred stock, and an eight percent (8%) stock dividend
30
for the subsequent three years thereafter, payable in either cash or shares of
preferred stock. The Series A convertible preferred stock was subject to certain
designations, preferences and rights set forth in our 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 our common stock on the American Stock
Exchange out of the fifteen trading days immediately prior to conversion.
Prior to October 6, 2004, BH Capital and Excalibur had converted 32,052 shares
of the Series A convertible preferred stock plus accrued dividends, into
1,206,240 shares of common stock. The conversion prices ranged from $1.28 to
$1.75 based on the above formula.
On October 6, 2004, BH Capital and Excalibur converted 10,278 Series A
convertible preferred shares into approximately 600,000 shares of common stock.
Simultaneously, the remaining 30,316 Series A convertible preferred shares held
by BH Capital and Excalibur were acquired by our Company for a total price of
$2,279,688. All previously outstanding shares of the Series A convertible
preferred stock of our Company have now been cancelled. As part of the
transaction, BH Capital and Excalibur also received warrants to purchase up to
500,000 shares of common stock at an exercise price of $2.00 per share for a
period of five years. The market price of our common stock on October 6, 2004
was $1.30. The fair value of the warrants is $205,000. In June 2005, we agreed
to reduce the per share exercise price on all these warrants along with 530,000
other warrants issued to BH Capital and Excalibur in prior years to $1.10 in
order to induce them to exercise their warrants. All of these warrants were
exercised on June 16, 2005 for total proceeds of $1,133,000.
On October 6, 2004, we completed a private placement of our common stock,
whereby we issued a total of 2,000,000 shares to Mr. Fredrick DeLuca (an
existing stockholder of our Company) for aggregate gross proceeds to our Company
of $2,300,000. These proceeds were used to redeem our Series A convertible
preferred stock as discussed above. The purchase price of the shares was $1.15
per share (95% of the prior 5-day trading closing stock price average). Mr.
DeLuca also received a warrant to purchase up to 500,000 shares of our common
stock at an exercise price of $1.15 per share for a period of five years. In
June 2005, we agreed to reduce the per share exercise price on this warrant to
$0.92 and reduced the per share exercise price on a warrant issued in a prior
year to purchase up to 100,00 shares to $1.36 to induce him to exercise his
warrants. All of these warrants were exercised on June 16, 2005 for total
proceeds of $596,000.
In accordance with a registration rights agreement with Mr. DeLuca, we agreed to
file and obtain effectiveness of a registration statement with the Securities
and Exchange Commission within 180 days of closing to register the shares issued
in the private placement and to include the shares underlying the warrants
described above. We agreed that if a registration statement was not filed, or
did not become effective within the defined period of time, then in addition to
any other rights the investor may have, we would be required to pay a penalty of
$57,500 per month. We filed a registration statement on Form S-3 on March 14,
2005. However, this registration statement has not yet been declared effective.
We have received from Mr. DeLuca an extension of time until September 1, 2005 to
have the registration statement declared effective by the SEC. Additionally, Mr.
DeLuca waived all penalties and remedies for failure to have an effective
registration statement until September 1, 2005.
Summary
We believe that with the cash available on our credit facilities and proceeds
received from the equity financings together with cash flow from current
operations, we will have enough cash to meet our current liquidity needs for
general operations through March 31, 2006.
31
Based on current projections, we expect that much, if not all, of the additional
cash requirements for the transition charges will come from the sale of our
usable raw materials and packaging inventory and production equipment to
Schreiber in the third quarter of fiscal 2006.
Contractual Obligations
We lease our operating facilities and certain equipment under operating and
capital leases, expiring at various dates through fiscal year 2010. In addition,
we have several loan obligations as described in detail above. The table below
summarizes the principal balances of our obligations for indebtedness and lease
obligations as of March 31, 2005 in accordance with their required payment
terms:
Payments due by fiscal period
----------------------------------------------------------------------------------
Contractual Obligations Total 2006 2007-2008 2009-2010 Thereafter
- ----------------------------------------------------------------------------------------------------------------------------
Textron credit facility (1) $ 5,458,479 $ 5,458,479 $ -- $ -- $ --
Wachovia Bank term loan 8,241,985 1,320,000 6,921,985 -- --
Interest on debt facilities (2) 1,088,000 922,000 166,000 -- --
Capital Lease Obligations (3) 497,117 400,756 76,984 19,377 --
Operating Lease Obligations 1,479,214 547,737 566,974 364,503 --
----------------------------------------------------------------------------------
Total $ 16,764,795 $ 8,648,972 $ 7,731,943 $ 383,880 $ --
==================================================================================
(1) 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 $5,458,479
balance owed to Textron is reflected as current on the balance sheet and
in the above schedule. However, per the Textron Loan Agreement, the
initial term of the loan does not end until May 26, 2006.
(2) The Wachovia Bank term loan bears interest at prime plus 1% and the
Textron credit facility bears interest at prime plus 1.75%. Interest is
estimated assuming that the credit facility balance will remain unchanged
and that the prime rate will remain at its current level of 5.75%.
(3) Includes the principal and interest portion of capital lease payments to
be paid and an additional $197,000 in fiscal 2006 related to the purchase
option on a piece of equipment at the end of its lease term.
On May 22, 2003, we entered into a Master Distribution and Licensing Agreement
with Fromageries Bel S.A., ("Bel") a leading branded cheese company in Europe
who is a greater than 5% stockholder in our Company. Under the agreement, we
granted Bel exclusive distribution rights for our products in a territory
comprised of the European Union States and to more than 21 other European
countries and territories (the "Territory"). We also granted Bel the exclusive
option during the term of the agreement to elect to manufacture the products
designated by Bel for distribution in the Territory. The term of the agreement
is ten years, provided that either of the parties may elect to terminate the
agreement by delivery of notice to the other between March 24, 2007 and May 22,
2007, which termination shall be effective as of the first anniversary of the
date of the notice of termination. Alternatively, the parties may mutually agree
to continue operating under the agreement, to convert the agreement to a
manufacturing and license agreement, or to terminate the agreement. We have come
to an understanding with Bel whereby we mutually agreed to terminate the
licensing agreement. We anticipate that this understanding will be formalized in
an agreement in the near future.
Forward-Looking Information
Statements other than historical information contained in this Form 10-K are
considered "forward-looking statements" as defined under the Private Securities
Litigation Reform Act of 1995. These statements relate to future events or our
future financial performance. These forward-looking statements are based on our
32
current expectations, estimates and projections about our industry, management's
beliefs and certain assumptions made by our company. Words such as "anticipate,"
"expect," "intend," "plan," "believe," "seek," "project," "estimate" and
variations of these words or similar expressions are intended to identify
forward-looking statements. These statements are not guarantees of future
performance and are subject to certain risks, uncertainties and assumptions that
are difficult to predict. Therefore, actual results could differ materially from
our Company's historical results and those expressed or forecasted in any
forward-looking statement as a result of a variety of factors as set forth
below. We believe that these forward-looking statements are reasonable at the
time they are made. However, we undertake no obligation to publicly update or
revise any forward-looking statements for any reason, even if new information
becomes available or other events occur in the future.
In addition to the other information in this Form 10-K, the following are some
of the factors that could cause our Company's actual results to differ
materially from the expected results described in or underlying our Company's
forward-looking statements. These factors should be considered carefully while
evaluating our business and prospects. If any of the following risks actually
occur, they could seriously harm our business, financial condition, results of
operations or cash flows.
We are in the process of outsourcing the production of our products and
selling our major production assets.
The asset sale and outsourcing arrangement with Schreiber Foods, Inc are subject
to a number of conditions that must be met prior to the consummation of these
transactions. In addition to the closing conditions as described above under the
Schreiber Transactions in Recent Material Developments, we will face additional
challenges during the transition. These challenges include, but are not limited
to, the following:
o Coordinating customer shipments while the inventory and production
equipment is in transit from our facilities to the Schreiber
facilities;
o Reserving enough inventory on-hand to fill customer orders while
production equipment is in transit;
o Maintaining consistent formulas and quality in our products after
the transition;
o Having enough cash to build inventory and pay any severance
arrangements during the transition;
o Reduction of production personnel and severance arrangements related
to these personnel
o In the event of a sale of the assets whereby we would not receive
enough sale proceeds to pay off our debt to our lenders in full, we
would need to negotiate with our lenders so that they would agree to
release their liens on the assets. If they will not agree to do so,
we may be required to raise additional funds to pay our lenders in
full prior to their maturity dates;
o We may be required to negotiate with the landlords of our leased
premises the possibilities of early lease termination or subleasing
our facilities.
Each one of these events must be carefully timed and coordinated in order to
avoid problems with cash flow, litigation, loss of customer sales, and other
tangible and intangible affects.
We have previously been in technical default of our credit facilities.
We have a revolving line of credit from Textron Financial Corporation and a note
payable to Wachovia Bank that require us to comply with certain financial and
reporting requirements. During the fiscal years ended March 31, 2005, 2004 and
2003, we were in violation of the financial and other covenants, but the lenders
routinely waived such violations and amended the covenants in return for the
payment of waiver fees, increases in interest rates, acceleration of maturity
dates and other considerations.
In July 2005, Textron will review our financial forecasts that reflect the
subsequent events described under Material Future Events above and will evaluate
whether any further amendments to our loan agreement will be required. Pursuant
to the above Loan Modification Agreement dated June 30, 2005, Wachovia Bank
agreed to waive compliance on our three main financial covenants for the periods
ended March 31, 2005 and through the maturity of the loan on July 31, 2006. In
33
the event that we are in future violations of the covenants under the Textron
revolving line of credit or non-financial covenants under the Wachovia Bank loan
and we cannot amend the covenants or obtain waivers for these covenant failures,
Textron and Wachovia Bank could exercise their respective rights under their
loan documents to, among other things, declare a default under the loans,
accelerate their indebtedness such that they would become immediately due and
payable, and pursue foreclosure on our assets which are pledged as collateral
for such loans. In either event, it is unlikely that we would be able to
continue the operation of our business.
We will need additional financing and such financing may not be available.
We have incurred substantial debt in connection with the financing of our
business. The aggregate principal amount outstanding under our two credit
facilities is approximately $13,201,134 as of July 12, 2005. This amount
includes a revolving line of credit from Textron Financial Corporation
("Textron") in the amount of $5,399,149 and a note payable to Wachovia Bank
("Wachovia") in the amount of $7,801,985. We anticipate that the proceeds from
the sale of our assets to Schreiber will pay the Wachovia term loan in full.
However, in the event that the sale is not completed as anticipated, we will
need to refinance the Wachovia term loan on or before its maturity date of July
31, 2006. The initial term of the Textron loan ends on May 26, 2006, but this
loan automatically renews for additional one-year periods unless terminated by
our Company or Textron through a written notice 90-days prior thereto or as
otherwise provided in the loan agreement. If we are unable to refinance or renew
our existing credit facilities, or if additional financing is not available on
terms acceptable to us, we will be unable to satisfy such facilities by their
maturity dates. In such an event, Textron and Wachovia could exercise their
respective rights under their loan documents, which could include, among other
things, declaring defaults under the loans and pursuing foreclosure on our
assets that are pledged as collateral for such loans. If such an event occurred
with either Textron or Wachovia, it is unlikely that we would be able to
effectively continue the operation of our business.
We may issue securities with rights superior to those of the common stock,
which could materially limit the ownership rights of existing stockholders.
We may offer debt or equity securities in private and/or public offerings in
order to raise working capital and to refinance our debt. The board of directors
has the right to determine the terms and rights of any debt securities and
preferred stock without obtaining further approval of the stockholders. It is
likely that any debt securities or preferred stock that we sell would have terms
and rights superior to those of the common stock and may be convertible into
common stock. Any sale of securities could adversely affect the interests or
voting rights of the holders of common stock, result in substantial dilution to
existing stockholders, or adversely affect the market price of our common stock.
Our founder and a private investor own a large percentage of the
outstanding shares, which could materially limit the ownership rights of
investors.
As of July 12, 2005, Angelo S. Morini, our founder, beneficially owned
approximately 17% of our issued and outstanding common stock and held options
and warrants which, if exercised and assuming the exercise of no other
outstanding options or warrants, would give him approximately 28% of our issued
and outstanding common stock. As of July 12, 2005, Frederick DeLuca, a private
investor, owned approximately 19% of our issued and outstanding common stock.
Investors who purchase common stock in our Company may be unable to elect any
specific members of the board of directors or exercise significant control over
us or our business as a result of Mr. Morini's and Mr. Deluca's ownership.
Forgiveness of or foreclosure on our note receivable will result in a
material affect to our reported earnings.
In June 1999, in connection with an amended and restated employment agreement
for Angelo S. Morini, our Founder, we 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 our common stock into a single
note receivable in the amount of $12,772,200 that is due on June 15, 2006. This
single consolidated note is non-interest bearing and non-recourse and is secured
by the 2,914,286 underlying shares of our common stock. Per the terms of the
June 1999 Employment Agreement that was amended and restated by the October 2003
Second Amended and Restated Employment Agreement between our Company and Mr.
Morini, 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 stockholder.
In the event that the $12,772,200 loan is forgiven, we would show this amount as
a forgiveness of debt in our Statement of Operations. In the event that Mr.
Morini is unable to pay the loan when due and we foreclose on the shares, we
will show a loss on collection for the amount, if any, that the value of the
2,914,286 underlying collateral shares are below the value of the note. Assuming
the market price on July 12, 2005 of $2.03, we would show a loss of
approximately $6,850,000 in the Statement of Operations. Although both of these
scenarios will result in material losses to our operations, it will not have any
affect on the balance sheet since the $12,772,200 loan amount is already shown
as a negative amount in Stockholders' Equity.
Stockholders may experience further dilution.
We have a substantial number of outstanding options and warrants to acquire
shares of common stock. As of July 12, 2005, we have a total of 5,715,165 shares
reserved for issuance upon exercise of options and warrants that we have granted
or may grant in the future. Of this total, there are 2,388,135 exercisable
options and warrants that are "in the money." "In the money" generally means
that the current market price of the common stock is above the exercise price of
the shares subject to the warrant or option. The issuance of common stock upon
the exercise of these options and warrants could adversely affect the market
price of the common stock or result in substantial dilution to our existing
stockholders.
34
If we lose key foreign suppliers on whom we depend, we may be unable to
obtain adequate supplies to manufacture our products.
Currently, we purchase our major ingredient, a milk protein called casein, from
several foreign suppliers. We purchase casein from foreign suppliers because
they have lower prices than domestic suppliers. However, their lower prices are
generally the result of governmental export supports or subsidies. We do have
contractual arrangements with our principal suppliers for terms up to one-year
subject to quarterly price adjustments. Because we purchase casein from foreign
suppliers, its availability is subject to a variety of factors, including
federal import regulations. If the export supports or subsidies are reduced or
eliminated or the United States takes retaliatory action or otherwise
establishes trade barriers with any of the countries in which our casein
suppliers are located, our business and results of operations would be
negatively affected. Moreover, exchange rate fluctuations or the imposition of
import quotas or tariffs could have an adverse effect on our business and our
ability to compete with competitors that do not rely on foreign suppliers. We
cannot assure you that we could obtain casein from U.S. sources if the foreign
supply of casein were reduced or terminated. Even if we could obtain casein from
U.S. sources, our production may be reduced during the time it takes to change
suppliers and the prices for the casein would likely be significantly higher
than we are paying now. Any of these events would negatively affect our
business, results of operations and cash flows.
We experienced a 32% increase in average casein prices in fiscal 2005 compared
to the average casein prices in fiscal 2004. In fiscal 2006, we are continuing
to experience high casein prices, the averages of which are approximately 31%
higher than the average prices for fiscal 2005. Based on current pricing trends
with our suppliers, we believe that casein prices will remain at historical
highs at least through September 30, 2005. Every 10% increase in casein prices
over the fiscal 2005 average will result in an annual cost increase of
approximately $1,100,000 assuming the same amount of pounds purchased as in
fiscal 2005. Casein prices are still high due to greater worldwide demand, as
well as lower foreign government subsidies and the decline in the US Dollar
value versus the Euro. In order to offset the high casein costs, we are
incorporating alternative formula modifications that maintain the integrity of
our product benefits as well as reducing costs in several other raw materials
and operational labor categories. Finally, we have passed along some of the
increased costs to our customers during fiscal 2005 and will propose additional
price increases as appropriate.
Competition in our industry is intense.
Competition in the natural food segment of the food industry is intense. We
believe that as consumers become more interested in healthy food alternatives
the competition in our markets will increase substantially. Therefore, the
effectiveness of our advertising, marketing and promotional programs and the
financial resources necessary for their implementation is an important part of
our sales growth plan. Our primary competition consists of equally matched sized
companies such as Tree of Life, White Wave, Yves and Tofutti Brands that
manufacture soy-based products, such as alternative cheese slices, sour creams,
cream cheese and related products. In addition, we compete with major companies
such as Kraft, which produces products under the Kraft Free(R) label, Borden's,
and ConAgra, which produces products under the Healthy Choice(R) label. Each of
these companies has substantially greater name recognition and greater research
and development, marketing, financial and human resources than we have. These
advantages have led to a substantially greater market penetration and product
acceptance than we have developed. In addition, our competitors may succeed in
developing new or enhanced products, which are better than our products. These
companies may also prove to be more successful than us in marketing and selling
these products. We cannot assure you that we will be able to compete
successfully with any of these companies or achieve a greater market share than
we currently possess. Increased competition as to any of our products or
services could result in price reductions, reduced margins, and loss of market
share, which could negatively affect our business, prospects, results of
operations and financial condition.
35
Consumer eating habits and shopping trends may change and negatively
impact demand for our products.
There could be a decrease in demand for our products as consumers' tastes,
preferences, shopping behavior, and overall evaluation of health benefits change
over time. This is demonstrated in the recent change in consumer eating habits
with the publicly recognized trend toward low-carbohydrate meal preparation
during all meals (breakfast, lunch, snack, and dinner), which has led to
decreased consumption of items such as bread and our primary complementary
product of cheese slices. Additionally, the number of consumers shopping in the
retail grocery and natural food stores is down due to the further national
emergence and presence of Wal*Mart superstores and other similar superstores
which include extensive grocery operations. Our product selection is growing but
is still limited at Wal*Mart. Therefore, our sales growth with this account may
not be able to fully counter the decline in retail grocery trends. In response
to this change in consumer shopping, we are redesigning our products and
packaging formats to specifically target growth opportunities in the superstore,
warehouse club and mass merchandiser markets (such as Wal*Mart, Costco, Kmart,
Target, and Sam's Club). With the growth in the aging population of U.S.
consumers, there could be price pressure on our products due to the fixed income
nature of this population segment.
Demand for our products could be hindered due to changing conditions
within the distribution channels through which we sell our products.
Our sales could suffer based upon market place abnormalities such as retailer,
distributor, and/or food service operator labor strikes. Further, consolidation
within the industry could result in store closings, store layouts, and operating
strategies that are incompatible with our product requirements.
We rely on the protection of our trademarks, and the loss of a trademark
would negatively impact the products associated with the trademark, which could
materially adversely affect our business.
We own several registered and unregistered trademarks, which are used in the
marketing and sale of our products. We have invested a substantial amount of
money in promoting our trademarked brands. However, the degree of protection
that these trademarks afford us is unknown. Further, we may not have the money
necessary to engage in actions to prevent infringement on our trademarks. A loss
of a material trademark would negatively impact the products associated with it,
and could negatively affect our business, prospects, results of operations,
financial condition and cash flows.
We do not have patent protection for our formulas and processes, and a
loss of ownership of any of our formulas and processes would negatively impact
our business.
We believe that we own our formulas and processes. However, we have not sought,
and do not intend to seek, patent protection for our formulas and processes.
Instead, we rely on the complexity of our formulas and processes, trade secrecy
laws, and employee confidentiality agreements. However, we cannot assure you
that other companies will not acquire our confidential information or trade
secrets or will not independently develop equivalent or superior products or
technology and obtain patent or similar rights. Although we believe that our
formulas and processes have been independently developed and do not infringe the
patents or rights of others, a variety of components of our processes could
infringe existing or future patents, in which event we may be required to modify
our processes or obtain a license. We cannot assure you that we will be able to
do so in a timely manner or upon acceptable terms and conditions. The failure to
do either of the foregoing would negatively affect our business, results of
operations, financial condition and cash flows.
Because we sell food products, we face the risk of exposure to product
liability claims.
We, like any other seller of food products, face the risk of exposure to product
liability claims in the event that our quality control procedures fail and the
consumption of our products causes injury or illness. With respect to product
liability claims, our insurance may not continue to be available at a reasonable
cost, or, if available, may not be adequate to cover liabilities. We generally
seek contractual indemnification and insurance coverage from parties supplying
us products, but this indemnification or insurance coverage is limited, as a
practical matter, to the creditworthiness of the indemnifying party, and their
carriers, if any, as well as the limits of any insurance provided by suppliers.
If we do not have adequate insurance or contractual indemnification available,
product liability claims relating to defective products could have a material
adverse effect on our financial condition, results of operations and cash flows.
36
Government regulation could increase our costs of production and increase
our legal and regulatory expenses.
We are subject to extensive regulation by federal, state, and local governmental
authorities regarding the quality, purity, manufacturing, distribution, and
labeling of food products. We cannot assure that you that we will be able to
continue to comply with these or future regulations, without inordinate cost or
interruption of our operations. Failure to comply with applicable laws and
regulations could subject us to civil remedies, including fines, injunctions,
recalls or seizures, as well as possible criminal sanctions, which could have a
material adverse effect on our business.
Rising interest rates could negatively affect our results of operations.
The interest rates of most of our outstanding debts fluctuate based upon changes
in our lenders' prime rate. Increases in the prime rate will result in an
increase in our cost of funds, and would negatively affect our results of
operations. We are anticipating future increases in interest rates during the
fiscal year ending March 31, 2006. We have not entered into any derivative
instruments such as interest rate swap or hedge agreements to manage our
exposure to rising interest rates.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our exposure to market risk results primarily from fluctuations in interest
rates. The interest rates on our outstanding debts to Wachovia 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 March 31, 2005 with respect to our debt as of such
date would increase or decrease interest expense and hence reduce or increase
the net income of our Company by approximately $137,000 per year or $34,250 per
quarter.
37
Our sales during the years ended March 31, 2005, 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. However, further declines in the U.S. Dollar on
the international market, may cause our foreign suppliers of raw materials,
particularly casein, to increase their U.S. Dollar prices on future orders from
our Company. Therefore, while we believe that the effects of changes in foreign
currency exchange rates have not historically been significant to our operations
or net assets, we are unable to forecast the effects that foreign currency
exchange rates may have on our future operations.
38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Report of Registered Public Accounting Firm
To the Board of Directors and Stockholders
Galaxy Nutritional Foods, Inc.
Orlando, Florida
We have audited the accompanying balance sheets of Galaxy Nutritional Foods,
Inc. as of March 31, 2005 and 2004 and the related statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended March 31, 2005. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Galaxy Nutritional Foods, Inc.
as of March 31, 2005 and 2004 and the results of its operations and its cash
flows for each of the three years in the period ended March 31, 2005 in
conformity with accounting principles generally accepted in the United States of
America.
/s/ BDO Seidman, LLP
Atlanta, Georgia
July 12, 2005
39
GALAXY NUTRITIONAL FOODS, INC.
Balance Sheets
MARCH 31, MARCH 31,
Notes 2005 2004
----- ------------ ------------
ASSETS
CURRENT ASSETS:
Cash $ 561,782 $ 449,679
Trade receivables, net of allowance for
doubtful accounts of $2,299,000 and $633,000 2 4,644,364 3,964,198
Inventories 3 3,811,470 4,632,843
Prepaid expenses and other 4 219,592 266,301
------------ ------------
Total current assets 9,237,208 9,313,021
PROPERTY AND EQUIPMENT, NET 5 18,246,445 20,232,089
OTHER ASSETS 286,013 416,706
------------ ------------
TOTAL $ 27,769,666 $ 29,961,816
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit 6 $ 5,458,479 $ 4,605,277
Accounts payable 3,057,266 1,266,346
Accrued and other current liabilities 7 2,130,206 2,452,300
Current portion of accrued employment contract 8 586,523 366,305
Current portion of term notes payable 6 1,320,000 1,140,000
Current portion of obligations under capital leases 8 194,042 231,432
------------ ------------
Total current liabilities 12,746,516 10,061,660
ACCRUED EMPLOYMENT CONTRACT, less current portion 8 993,305 1,293,142
TERM NOTES PAYABLE, less current portion 6 6,921,985 8,241,985
OBLIGATIONS UNDER CAPITAL LEASES, less current portion 8 85,337 204,967
------------ ------------
Total liabilities 20,747,143 19,801,754
------------ ------------
COMMITMENTS AND CONTINGENCIES 8 -- --
REDEEMABLE CONVERTIBLE PREFERRED STOCK 9 -- 2,573,581
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, authorized 85,000,000 shares; 18,411,474
and 15,657,321 shares issued 184,115 156,573
Additional paid-in capital 67,655,133 63,880,084
Accumulated deficit (47,924,064) (43,557,515)
------------ ------------
19,915,184 20,479,142
Less: Notes receivable arising from the exercise of
stock options and sale of common stock 8 (12,772,200) (12,772,200)
Treasury stock, 30,443 shares, at cost (120,461) (120,461)
------------ ------------
Total stockholders' equity 7,022,523 7,586,481
------------ ------------
TOTAL $ 27,769,666 $ 29,961,816
============ ============
See accompanying notes to financial statements
40
GALAXY NUTRITIONAL FOODS, INC.
Statements of Operations
Years ended March 31, 2005 2004 2003
------------ ------------ ------------
NET SALES $ 44,510,487 $ 36,176,961 $ 40,008,769
COST OF GOODS SOLD 34,736,594 24,864,289 28,080,188
------------ ------------ ------------
Gross margin 9,773,893 11,312,672 11,928,581
------------ ------------ ------------
OPERATING EXPENSES:
Selling 5,148,426 4,981,996 4,958,272
Delivery 2,307,166 1,877,682 2,008,638
Non-cash compensation related to stock-based
transactions-general and administrative (Note 9) 834,746 651,273 (2,906,762)
Employment contract expense-general and administrative
(Note 8) 444,883 1,830,329 --
General and administrative 3,970,690 3,303,030 3,570,889
(Gain) Loss on asset disposals (4,500) 8,519 47,649
Research and development 309,054 260,410 232,552
------------ ------------ ------------
Total operating expenses 13,010,465 12,913,239 7,911,238
------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS (3,236,572) (1,600,567) 4,017,343
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense (1,129,977) (1,361,606) (2,923,215)
Other expense -- -- (60,000)
------------ ------------ ------------
(1,129,977) (1,361,606) (2,983,215)
------------ ------------ ------------
NET INCOME (LOSS) $ (4,366,549) $ (2,962,173) $ 1,034,128
Less:
Preferred Stock Dividends (Note 9) 82,572 201,791 264,314
Preferred Stock Accretion to Redemption Value (Note 9) 203,605 1,340,943 1,370,891
------------ ------------ ------------
NET LOSS TO COMMON STOCKHOLDERS $ (4,652,726) $ (4,504,907) $ (601,077)
============ ============ ============
BASIC AND DILUTED NET LOSS PER COMMON SHARE (Note 11) $ (0.27) $ (0.30) $ (0.05)
============ ============ ============
See accompanying notes to financial statements
41
GALAXY NUTRITIONAL FOODS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Notes
Common Stock Receivable
---------------------------- Additional Accumulated for Common Treasury
Shares Par Value Paid-In Capital Deficit Stock Stock Total
--------------------------------------------------------------------------------------------------------------
Balance at March 31,
2002 11,540,041 $ 115,400 $ 60,717,914 $(41,629,470) $(12,772,200) $ (120,461) $ 6,311,183
Exercise of options 1,000 10 4,240 -- -- -- 4,250
Issuance of common
stock under
employee stock
purchase plan 9,880 99 19,564 -- -- -- 19,663
Issuance of common
stock 585,828 5,859 2,295,269 -- -- -- 2,301,128
Conversion of
preferred stock 624,936 6,249 845,726 -- -- -- 851,975
Fair value of
stock-based
transactions -- -- 146,000 -- -- -- 146,000
Non-cash compensation
related to variable
securities -- -- (3,060,000) -- -- -- (3,060,000)
Dividends on
preferred stock -- -- (264,314) -- -- -- (264,314)
Accretion of discount
on preferred stock (903,667) -- -- -- (903,667)
Net income -- -- -- 1,034,128 -- -- 1,034,128
-----------------------------------------------------------------------------------------------------------
Balance at March 31,
2003 12,761,685 127,617 59,800,732 (40,595,342) (12,772,200) (120,461) 6,440,346
Exercise of options 7,911 79 16,138 -- -- -- 16,217
Exercise of warrants 200,000 2,000 358,000 -- -- -- 360,000
Issuance of common
stock under
employee stock
purchase plan 16,339 163 28,364 -- -- -- 28,527
Issuance of common
stock 2,211,478 22,115 3,929,242 -- -- -- 3,951,357
Conversion of
preferred stock 459,908 4,599 794,921 -- -- -- 799,520
Fair value of
stock-based
transactions -- -- 685,308 -- -- -- 685,308
Non-cash compensation
related to variable
securities -- -- 8,001 -- -- -- 8,001
Dividends on
preferred stock -- -- (201,791) -- -- -- (201,791)
Accretion of discount
on preferred stock -- -- (1,538,831) -- -- -- (1,538,831)
Net loss -- -- -- (2,962,173) -- -- (2,962,173)
-----------------------------------------------------------------------------------------------------------
Balance at March 31,
2004 15,657,321 156,573 63,880,084 (43,557,515) (12,772,200) (120,461) 7,586,481
Exercise of options 13,893 139 18,717 -- -- -- 18,856
Issuance of common
stock under
employee stock
purchase plan 18,894 189 23,813 -- -- -- 24,002
Issuance of common
stock 2,000,000 20,000 1,863,090 -- -- -- 1,883,090
Conversion of
preferred stock 721,366 7,214 840,215 -- -- -- 847,429
Fair value of
stock-based
transactions -- -- 177,263 -- -- -- 177,263
Non-cash compensation
related to variable
securities -- -- 215,649 -- -- -- 215,649
Dividends on
preferred stock -- -- (82,572) -- -- -- (82,572)
Accretion of discount
on preferred stock -- -- 718,874 -- -- -- 718,874
Net loss -- -- -- (4,366,549) -- -- (4,366,549)
-----------------------------------------------------------------------------------------------------------
Balance at March 31,
2005 18,411,474 $ 184,115 $ 67,655,133 $(47,924,064) $(12,772,200) $ (120,461) $ 7,022,523
===========================================================================================================
See accompanying notes to financial statements
42
GALAXY NUTRITIONAL FOODS, INC.
Statements of Cash Flows
Years Ended March 31, 2005 2004 2003
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES: (Note 12)
Net Income (Loss) $(4,366,549) $(2,962,173) $ 1,034,128
Adjustments to reconcile net income (loss) to net cash from (used
in) operating activities:
Depreciation and amortization 2,172,566 2,205,053 2,273,349
Amortization of debt discount and financing costs 116,522 236,321 1,264,273
Provision for losses on trade receivables (Note 2) 1,666,000 (221) (177,245)
Non-cash compensation related to stock-based transactions
(Note 9) 834,746 651,273 (2,906,762)
(Gain) Loss on disposal of assets (4,500) 8,519 47,649
(Increase) decrease in:
Trade receivables (2,346,166) 999,049 364,907
Inventories 821,373 661,657 454,152
Prepaid expenses and other 46,709 189,012 (67,369)
Increase (decrease) in:
Accounts payable 1,790,920 (1,426,143) (1,520,021)
Accrued and other liabilities 48,125 1,674,003 408,814
----------- ----------- -----------
NET CASH FROM (USED IN) OPERATING ACTIVITIES 779,746 2,236,350 1,175,875
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (104,339) (221,585) (214,003)
Proceeds from sale of equipment 4,500 -- --
(Increase) decrease in other assets 34,837 (10,193) 113,977
----------- ----------- -----------
NET CASH FROM (USED IN) INVESTING ACTIVITIES (65,002) (231,778) (100,026)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in book overdrafts -- (1,151,276) (41,580)
Net borrowings (payments) on line of credit 853,202 (334,617) (583,981)
Borrowings on term notes payable -- 2,000,000 500,000
Repayments on term notes payable (1,140,000) (1,572,760) (1,763,265)
Repayments on subordinated note payable -- (4,000,000) --
Financing costs for long term debt (37,500) (288,230) (239,539)
Principal payments on capital lease obligations (239,603) (365,635) (431,937)
Proceeds from exercise of common stock options 18,856 16,217 4,250
Proceeds from exercise of common stock warrants, net of costs -- 360,000 --
Proceeds from issuance of common stock under employee stock
purchase plan 24,002 28,527 19,663
Proceeds from issuance of common stock, net of offering costs 2,198,090 3,751,283 1,461,970
Redemption of preferred stock (2,279,688) -- --
----------- ----------- -----------
NET CASH FROM (USED IN) FINANCING ACTIVITIES (602,641) (1,556,491) (1,074,419)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH 112,103 448,081 1,430
CASH, BEGINNING OF YEAR 449,679 1,598 168
----------- ----------- -----------
CASH, END OF YEAR $ 561,782 $ 449,679 $ 1,598
=========== =========== ===========
See accompanying notes to financial statements.
43
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
Business
Galaxy Nutritional Foods, Inc. (the "Company") is principally engaged
in the development, manufacturing and marketing of a variety of healthy
cheese and dairy related products, as well as other cheese
alternatives. These healthy cheese and dairy related products include
low, reduced or no fat, low or no cholesterol and lactose-free
varieties. These products are sold throughout the United States and
internationally to customers in the retail, food service and industrial
markets. The Company's headquarters and manufacturing facilities are
located in Orlando, Florida.
Accounts Receivable
Accounts receivable are customer obligations due under normal trade
terms. The Company evaluates the collectibility of its accounts
receivable on a combination of factors. In circumstances where it is
aware of a specific customer's inability to meet its financial
obligations, it records a specific allowance to reduce the amounts
recorded to what it believes will be collected. In addition to
reserving for potential uncollectible accounts, the Company uses its
allowance for trade receivables account to estimate future credits that
will be issued to customers for items such as rebates, sales
promotions, coupons, and spoils that relate to current period sales.
The Company also records these additional reserves for potential
uncollectible amounts and future credits based on certain percentages,
which are determined based on historical experience and its assessment
of the general financial conditions affecting its customer base. After
all attempts to collect a receivable have been exhausted and failed,
the receivable is written off against the allowance.
Inventories
Inventories are valued at the lower of cost (weighted average, which
approximates FIFO) or market. The cost elements included in inventories
are direct material cost, direct labor and overhead allocations.
Material cost consists of the cost of ingredients and packaging that go
into the production of the item. Labor consists of the wages for those
employees directly making the item. Overhead is applied to inventory
units based on the normal capacity of the production facilities and
consists of factory overhead costs such as indirect labor, benefits,
supplies, repairs, depreciation and utilities expended during the
production process.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed
over the estimated useful lives of the assets by the straight-line
method for financial reporting and by accelerated methods for income
tax purposes. Capital leases are recorded at the lower of fair market
value or the present value of future minimum lease payments. Assets
under capital leases are amortized by the straight-line method over
their useful lives.
Revenue Recognition
Sales are recognized upon shipment of products to customers. The
Company offers a right of return policy on certain products sold to
certain retail customers in the conventional grocery stores and mass
merchandising industry. If the product is not sold during its shelf
life, the Company will allow a credit for the unsold merchandise. Since
the shelf life of the Company's products range from 6 months to one
year, the Company historically averages less than 2% in credits for
unsold product. The Company's reserve on accounts receivable takes
these potential future credits into consideration. Certain expenses
such as slotting fees, rebates, coupons and other discounts are
accounted for as a reduction to Revenues.
Marketing and Advertising
The Company expenses the production costs of advertising the first time
the advertising takes place and expenses slotting fees and direct
response advertising costs in the period incurred. Advertising expense
was approximately $1,539,000, $910,000, and $224,000 during the years
ended March 31, 2005, 2004, and 2003, respectively.
Shipping and Handling Costs
The Company accounts for certain shipping and handling costs related to
the acquisition of goods from its vendors as Cost of Goods Sold.
However, shipping and handling costs related to the shipment of goods
to customers is classified as Delivery expense.
44
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
Stock Based Compensation
Prior to April 1, 2003, the Company accounted for its stock-based
employee compensation plans under the accounting provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," (APB No. 25).
Effective April 1, 2003, the Company elected to record compensation
expense measured at fair value for all stock-based payment award
transactions on or after April 1, 2003, in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation." Additionally, the Company furnishes the pro
forma disclosures required under SFAS No. 123 and applies SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure"
on a prospective basis for all stock-based awards on or after April 1,
2003. The fair value of the stock-based award is determined on the date
of grant using the Black-Scholes pricing model and is expensed over the
vesting period of the related award. The negative impact on diluted
earnings per share related to the issuance of employee stock options
during the years ended March 31, 2005, 2004 and 2003 was approximately
$0.01, $0.03 and $0.55, respectively.
SFAS No. 123 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-based
awards had been determined in accordance with the fair market value
method prescribed in SFAS No. 123. The Company estimated the fair value
of each stock-based award at the grant date by using the Black-Scholes
pricing model with the following assumptions:
Year Ended March 31, 2005 March 31, 2004 March 31, 2003
-------------------- ------------------- --------------------
Dividend Yield None None None
Volatility 45% to 46% 41% to 45% 37% to 44%
Risk Free Interest Rate 3.38% to 4.12% 2.01% to 4.28% 1.71% to 5.03%
Expected Lives in Months 60 to 120 36 to 120 60 to 120
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:
Year Ended March 31, 2005 March 31, 2004 March 31, 2003
-------------------- ------------------- --------------------
Net income (loss) to common stockholders as
reported $ (4,652,726) $ (4,504,907) $ (601,077)
Add: Stock-based compensation expense included
in reported net income 834,746 651,273 (2,906,762)
Deduct: Stock-based compensation expense
determined under fair value based method for
all awards (944,024) (1,070,997) (3,728,592)
------------ ------------ ------------
Pro forma net income (loss) to common
stockholders (4,762,004) $ (4,924,631) $ (7,236,431)
============ ============ ============
Net income (loss) per common share:
Basic - as reported $ (0.27) $ (0.30) $ (0.05)
============ ============ ============
Basic - pro forma $ (0.28) $ (0.33) $ (0.60)
============ ============ ============
Diluted - as reported $ (0.27) $ (0.30) $ (0.05)
============ ============ ============
Diluted - pro forma $ (0.28) $ (0.33) $ (0.60)
============ ============ ============
Income Taxes
Deferred income taxes are recognized for the tax consequences of
temporary differences between the financial reporting bases and the tax
bases of the Company's assets and liabilities in accordance with SFAS
No. 109. 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.
45
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
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.
Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," requires disclosure of fair value
information about financial instruments. Fair value estimates discussed
herein are based upon certain market assumptions and pertinent
information available to management as of March 31, 2005.
The respective carrying value of certain on-balance-sheet financial
instruments approximated their fair values. These financial instruments
include cash, trade receivables, accounts payable and accrued
liabilities. Fair values were assumed to approximate carrying values
for these financial instruments since they are short term in nature and
their carrying amounts approximate fair values or they are receivable
or payable on demand. The fair value of the Company's line of credit,
long-term debt, and capital leases is estimated based upon the quoted
market prices for the same or similar issues or on the current rates
offered to the Company for debt of the same remaining maturities.
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.
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.
Reclassifications
Certain items in the financial statements of prior periods have been
reclassified to conform to current period presentation.
Recent Accounting Pronouncements
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an
amendment of Accounting Research Bulletin No. 43, Chapter 4." SFAS No.
151 requires that abnormal amounts of idle facility expense, freight,
handling costs and wasted materials (spoilage) be recorded as current
period charges and that the allocation of fixed production overheads to
inventory be based on the normal capacity of the production facilities.
SFAS No. 151 is effective during fiscal years beginning after June 15,
2005, although earlier application is permitted. The Company believes
that the adoption of this Statement will not have a significant impact
on the financial position, results of operations or cash flows of the
Company.
In December 2004, the FASB issued SFAS No. 123 (revised 2004),
"Share-Based Payment" ("SFAS No. 123R"), which addresses the accounting
for share-based payment transactions in which a company receives
employee services in exchange for (a) equity instruments of the company
or (b) liabilities that are based on the fair value of the company's
equity instruments or that may be settled by the issuance of equity
instruments. SFAS No. 123R supercedes APB Opinion No. 25 and amends
SFAS No. 95, "Statement of Cash Flows." Under SFAS No. 123R, companies
are required to record compensation expense for all share-based payment
46
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
award transactions measured at fair value as determined by an option
valuation model. Currently, the Company uses the Black-Scholes pricing
model to calculate the fair value of its share-based transactions. This
statement is effective for fiscal years beginning after June 15, 2005.
Since the Company currently recognizes compensation expense at fair
value for share-based transactions in accordance with SFAS No. 123, it
does not anticipate adoption of this standard will have a significant
impact on its financial position, results of operations, or cash flows.
However, the Company is still evaluating all aspects of the revised
standard.
(2) Schedule of Valuation Account
Balance at Charged to Write-Offs,
Beginning of Costs and Retirements and Balance at
Year Expenses Collections End of Year
----------------------------------------------- -------------- ----------------- ------------------ --------------
Year Ended March 31, 2003:
Allowance for trade receivables $ 810,466 $ 2,159,891 $ (2,337,136) $ 633,221
Year Ended March 31, 2004:
Allowance for trade receivables $ 633,221 $ 2,433,458 $ (2,433,679) $ 633,000
Year Ended March 31, 2005:
Allowance for trade receivables $ 633,000 $ 2,477,931 $ (811,931) $ 2,299,000
In addition to reserving for potential uncollectible accounts, the
Company uses its allowance for trade receivables account to estimate
future credits that will be issued to customers for items such as
discounts, rebates, sales promotions, coupons, slotting fees and spoils
that relate to current period sales. For the years ended March 31,
2005, 2004 and 2003, the Company recorded an expense of $1,609,134,
$59,908, and $127,389, respectively related to bad debt. For the year
ended March 31, 2005 the bad debt expense was approximately 3.3% of
gross sales and for the years ended March 31, 2004 and 2003, it was
less than 0.5% of gross sales.
(3) Inventories
Inventories are summarized as follows:
March 31, 2005 March 31, 2004
-------------- --------------
Raw materials $1,451,588 $1,786,586
Finished goods 2,359,882 2,846,257
---------- ----------
Total $3,811,470 $4,632,843
========== ==========
(4) Prepaid Expenses and Other
Prepaid expenses are summarized as follows:
March 31, 2005 March 31, 2004
-------------- --------------
Employee advances $ 9,695 $ 10,195
Prepaid commissions -- 47,322
Prepaid insurance 109,198 49,786
Other 100,699 158,998
-------- --------
Total $219,592 $266,301
======== ========
47
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
(5) Property and Equipment
Property and equipment are summarized as follows:
Useful Lives March 31, 2005 March 31, 2004
------------------ ------------------ ------------------
Leasehold improvements 10-25 years $ 3,254,805 $ 3,215,260
Machinery and equipment 5-20 years 28,139,177 27,113,145
Equipment under capital leases 7-10 years 923,255 1,808,810
Construction in progress 112,649 112,649
--------------- ---------------
32,429,886 32,249,864
Less accumulated depreciation and amortization 14,183,441 12,017,775
--------------- ---------------
Property and equipment, net $ 18,246,445 $ 20,232,089
=============== ===============
(6) 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 a Loan and Security Agreement dated May 27,
2003 (the "Textron Loan 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) 85% of the net amount of its eligible
accounts receivable plus (ii) 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 1.75% per annum (7.5% at March 31, 2005)
calculated on the average cash borrowings for the preceding month. The
initial term of the Textron loan ends on May 26, 2006, but this loan
automatically renews for additional one-year periods unless terminated
by our Company or Textron through a written notice 90-days prior
thereto or as otherwise provided in the loan agreement. 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 March 31, 2005, the
outstanding principal balance on the Textron Loan was $5,458,479.
The Textron Loan Agreement contains certain financial and operating
covenants. Due to the $444,883 charge to operations related to the
Separation and Settlement Agreement between the Company and Christopher
J. New, its former Chief Executive Officer, the Company fell below the
requirement for the adjusted tangible net worth and the fixed charge
coverage ratio covenants for the quarter ended September 30, 2004. In a
third amendment to the Textron Loan Agreement dated November 10, 2004,
Textron agreed to change a definition in the loan covenants, the effect
of which brought the Company back into compliance with both ratios.
As of March 31, 2005, the Company failed to comply with certain
requirements and financial covenants in the Textron Loan Agreement. The
Company fell below the fixed charge coverage ratio and the adjusted
tangible net worth financial ratios primarily because of a large bad
debt reserve and inventory write off related to one of its customers in
March 2005 as detailed in Notes 2 and 16. On April 29, 2005, Textron
also determined that the credit risk increased substantially enough to
downgrade the Company's accounts receivable with respect to such
customer and deemed such accounts receivable as ineligible for purposes
of calculating the Company's borrowing base under the Textron Loan.
This action by Textron placed the Company into an over-advance position
with respect to the Textron Loan. As a result, effective as of April
29, 2005, the Company's interest rate on the Textron Loan was increased
from Prime plus 1.75% to Prime plus 4.75%.
On June 3, 2005, the Company executed a fourth amendment to the Textron
Loan that provided a waiver on all the Existing Defaults for the fiscal
quarters ended December 31, 2004 and March 31, 2005 and amended the
fixed charge coverage ratio and the adjusted tangible net worth
requirements for periods after March 31, 2005. Additionally, the fourth
amendment allowed the Textron Loan to be in an over-advance position
not to exceed $750,000 until July 31, 2005. In exchange for the waiver
and amendments, the Company's interest rate would remain at Prime plus
4.75% on the Textron Loan and the Company paid a fee of $50,000 in four
weekly installments of $12,500.
48
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
On June 16, 2005, the Company used a portion of the proceeds from the
warrant exercises described in Note 18 to satisfy the $750,000
over-advance with Textron. In connection with the satisfaction of the
over-advance, the Company agreed to immediately terminate Textron's
obligation to permit any over-advances under the Textron Loan, which
obligation was to expire on July 31, 2005. With the termination of the
over-advance facility, the interest rate on the Textron Loan returned
to its prior level of Prime plus 1.75% (7.75% as of June 16, 2005). In
July 2005, Textron will review the Company's financial forecasts that
reflect the subsequent events described in Note 18 and will evaluate
whether any further amendments to the Textron Loan Agreement will be
required.
Simultaneous with the closing of the Textron Loan in May 2003, Wachovia
Bank, N.A. successor by merger to SouthTrust Bank ("Wachovia") 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
Wachovia Bank, which had a then outstanding principal balance of
$8,131,985 for a total term loan amount of $10,131,985. This term loan
is secured by all of the Company's equipment and certain related
assets. The balance outstanding on the term loan as of March 31, 2005
is $8,241,985.
On June 30, 2005, the Company entered into a Loan Modification
Agreement with Wachovia Bank, N.A. regarding its loan. The agreement
modified the following terms of the loan: 1) the loan will mature and
be payable in full on July 31, 2006 instead of June 1, 2009; 2) the
principal payments will remain at $110,000 per month with accrued
interest at Wachovia's Base Rate plus 1% instead of increasing to
$166,250 on July 1, 2005 as provided by the terms of the promissory
note evidencing the loan; and 3) all covenants related to the Company's
tangible net worth, total liabilities to tangible net worth, and
maximum funded debt to EBITDA ratios are waived and compliance is not
required by the Company through the maturity of the loan on July 31,
2006. In connection with the agreement, the Company agreed to pay
$60,000, of which $30,000 was paid upon execution of the agreement and
$30,000 is due on August 1, 2005. As required by the terms of the
agreement, if the Company sells the equipment, the loan will be due and
payable in full at the time of sale. Aggregate maturities of the
Wachovia term loan payable over future years are as follows: 2006 -
$1,320,000 and 2007 - $6,921,985.
The Wachovia term loan contains certain financial and operating
covenants. The Company fell below the requirement for the tangible net
worth covenant for the quarter ended March 31, 2005 and the requirement
for the maximum funded debt to EBITDA ratio for the year ended March
31, 2005. Per the above Loan Modification Agreement, Wachovia agreed to
waive compliance on the covenants for the periods ended March 31, 2005
and through the maturity of the loan on July 31, 2006.
In October 2000, the Company obtained a $1.5 million bridge loan from
Wachovia Bank, which was guaranteed by Angelo S. Morini, the Company's
founder, and secured by the pledge of one million shares of the
Company's common stock owned by him. Interest on this note was at the
prime rate. The loan was paid in full in February 2004 and the
collateral shares were returned to the Company.
In March 2002, Angelo S. Morini, the Company's founder, loaned $330,000
to the Company in order for it to pay down certain notes payable that
were coming due. This loan bore interest at the prime rate and was due
on or before June 15, 2006. In connection with a Second Amended and
Restated Employment Agreement effective October 13, 2003 between Mr.
Morini and the Company, the Company offset $167,603 of unreimbursed
advances owed to it by Mr. Morini and certain family members against
the balance of the loan and issued an aggregate of 55,087 shares of the
Company's common stock (valued at approximately $2.95 per share) as
payment in full.
On August 15, 2002, the Company executed and delivered to Target
Container, Inc. a $347,475 promissory note in satisfaction of its
accounts payable obligation to this vendor. This note bore interest at
7% per annum and was due in twelve equal monthly installments of
$30,066. This note was paid in full by September 30, 2003.
On September 30, 1999, the Company obtained a $4 million subordinated
loan from FINOVA Mezzanine to finance additional working capital and
capital improvement needs. This loan was paid in full as of May 30,
2003 by the proceeds from the new loan from Wachovia Bank, as discussed
above, and from the equity proceeds raised in the private placements in
May 2003, as discussed in Note 9.
49
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
(7) Accrued and Other Current Liabilities
Accrued and other current liabilities are summarized as follows:
March 31, 2005 March 31, 2004
-------------- --------------
Tangible personal property taxes $1,049,841 $ 918,282
Warrant liability 740,000 --
Derivative liability -- 640,000
Accrued dividends on preferred stock -- 549,838
Other 340,365 344,180
---------- ----------
Total $2,130,206 $2,452,300
========== ==========
(8) Commitments and Contingencies
Leases
The Company leases its operating facilities and certain equipment under
operating and capital leases, expiring at various dates through its
fiscal year 2009. The following schedule presents the Company's
obligations as of March 31, 2005, regarding (1) future minimum lease
payments under capital leases, together with the present value of the
net minimum lease payments and (2) future minimum rental payments
required under operating leases that have initial or remaining terms in
excess of one year:
Capital Operating
Leases Leases
------------ ------------
2006 $ 203,756 547,737
2007 40,775 300,196
2008 36,209 266,778
2009 19,377 272,734
2010 91,769
------------ ------------
Total net minimum lease payments 300,117 1,479,214
============
Less amount representing interest (20,738)
------------
Present value of the net minimum lease payments 279,379
Less current portion (194,042)
------------
Long-term obligations under capital leases $ 85,337
============
The total capitalized cost for equipment under capital lease is
$923,255 with accumulated depreciation of $328,364 as of March 31,
2005.
Rental expense was approximately, $1,055,000, $1,088,000, and
$1,190,000 for the fiscal years ended March 31, 2005, 2004, 2003,
respectively.
Employment Agreements
o Angelo S. Morini
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 he is no longer be involved in the daily operations
of the Company. He retains the title of Founder and has been named
Chairman Emeritus. Mr. Morini continues to be an employee and 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. Other material
provisions of the agreement are as follows:
50
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
1. For the term of Mr. Morini's employment, the Company shall cause Mr.
Morini to be nominated for election to the Company's Board of Directors
as a member of the slate of directors proposed by the Company in its
proxy statement for any meeting of the Company's stockholders whereby
directors shall be elected. Notwithstanding the foregoing, in the event
Mr. Morini is not elected to the Board of Directors by the stockholders
at any meeting of the Company's stockholders for which the proxy
statement indicates Mr. Morini is nominated for election as a member of
the slate of directors proposed by the Company, such obligations shall
immediately cease.
2. The Company will obtain, and maintain in effect during the term of
Mr. Morini's employment, for the benefit of Mr. Morini (or reimburse
Mr. Morini for the cost of) a two million dollar ($2,000,000) term life
insurance policy insuring Mr. Morini's life, the beneficiaries of which
shall be designated by Mr. Morini.
3. Mr. Morini and the Company agreed that Mr. Morini and certain family
members received advances from the Company of which $167,603 was
unreimbursed as of October 13, 2003, and (ii) the Company owed $330,000
to Mr. Morini pursuant to a loan on March 28, 2002 to the Company. Mr.
Morini and the Company agreed to offset the unreimbursed advances
against the amounts owed by the Company, and, in repayment of the
remainder of the amounts owed by the Company, the Company issued an
aggregate of 55,087 shares of the Company's common stock to Mr. Morini
(valued at approximately $2.95 per share based on the average of the
closing prices for the five trading days preceding the effective date
of the Agreement).
4. Mr. Morini has agreed that during the term of his employment, and
for a period of one (1) year following his termination of employment
for any reason other than pursuant to termination without cause, a
material breach of the agreement, or a change of control (as defined in
the agreement) in the Company for which he did not vote, he will not,
directly or indirectly, either as an employee, employer, consultant,
agent, principal, partner, stockholder (other than owning fewer than
one percent (1%) of the outstanding shares of a public corporation),
corporate officer, director, or any other individual or representative
capacity, engage or participate in any business that directly competes
with the Company within those areas in the United States in which the
Company is doing business as of the date of termination.
5. If the agreement is terminated by the Company without cause, Mr.
Morini shall: (a) be entitled to continued payment of his annual
compensation, health insurance benefits, club dues, auto allowance and
life insurance benefits for the remainder of the term of the agreement,
(b) become fully "vested" under the terms of any stock option
agreements executed and delivered prior to, along with, or after the
agreement and (c) be released from the terms of the $12,772,200 Loan
Agreement dated June 15, 1999 (See Note 9c) and all monies outstanding
thereunder will be forgiven by the Company. The provisions of the
agreement related to the forgiveness of the $12,772,200 loan remain
unchanged from the first Amended and Restated Employment Agreement
dated June 15, 1999. Mr. Morini acknowledges that his change in role
does not constitute a termination of Mr. Morini by the Company, under
the First Amended and Restated Employment Agreement.
6. If Mr. Morini terminates his employment in any manner other than in
connection with a material breach of the agreement by the Company, he
shall not be entitled to receive any further compensation or benefits.
However, if he terminates his employment in connection with a material
breach of the agreement or with a change of control (as defined in the
Agreement) in the Company for which he did not vote, he will be
released from the terms of the $12,772,200 Loan Agreement dated June
15, 1999 and all monies outstanding thereunder will be forgiven by the
Company. The provisions of the Agreement related to the forgiveness of
the $12,772,200 loan remain unchanged from the first Amended and
Restated Employment Agreement dated June 15, 1999.
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 $1,292,575
remained unpaid but accrued ($366,305 as short-term liabilities and
$926,270 as long-term liabilities) as of March 31, 2005. The long-term
portion will be paid out in nearly equal monthly installments ending in
October 2008.
In the event that the $12,772,200 loan is forgiven, the Company would
show this amount as a forgiveness of debt in our Statement of
Operations. In the event that Mr. Morini is unable to pay the loan when
51
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
due and the Company forecloses on the shares, the Company will show a
loss on collection for the amount, if any, that the value of the
2,914,286 underlying collateral shares are below the value of the note.
Assuming the market price on July 12, 2005 of $2.03, the Company would
show a loss of approximately $6,850,000 in the Statement of Operations.
Although both of these scenarios will result in material losses to the
Company's operations, it will not have any affect on the balance sheet
since the $12,772,200 loan amount is already shown as a contra-equity
item in Stockholders' Equity.
o 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 recorded $444,883 related to the employment
contract expense in July 2004. This settlement will be paid out in
nearly equal installments over two years payable on the Company's
regular payroll dates. 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 an exercise price of $1.67 per share) and that certain
Non-Qualified Stock Option Agreement dated July 16, 2001 (for 100,000
shares at an exercise price of $2.05 per share) will continue in full
force and effect as if he was still employed by the Company. As of
March 31, 2005, the remaining balance accrued was $287,253 ($220,218 in
short-term liabilities and $67,035 in long-term liabilities).
In connection with the modification of the stock options as described
above, the Company recorded $22,000 as additional non-cash compensation
expense in the fiscal year ended March 31, 2005 pursuant to FIN 44 for
modifications that renew or increase the life on existing options. The
stock price on the date of the modification was $2.15.
o Michael E. Broll
On July 8, 2004, Michael E. Broll, a member of the Company's Board of
Directors, was appointed as the Chief Executive Officer upon the
resignation of Mr. New. The Company entered into a one-year employment
agreement with Mr. Broll pursuant to which 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 $3,500 per month 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. Mr. Broll received a discretionary cash bonus of $25,000 in
the quarter ended March 31, 2005.
The Company currently has employment agreements with several of its key
employees that provide for up to five-year severance in the event they
are terminated without cause.
Litigation
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 producing individually wrapped
slices infringed 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.
52
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
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 stockholders 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.
(9) Capital Stock
Non-Cash Compensation Related to Stock-Based Transactions
Effective April 1, 2003, the Company elected to record compensation
expense measured at fair value for all stock-based payment award
transactions on or after April 1, 2003 under the provisions of FAS 123.
Prior to April 1, 2003, the Company only recorded the fair value of
stock-based awards granted to non-employees or non-directors under the
provisions of FAS 123. The fair value of the stock-based award is
determined on the date of grant using the Black-Scholes pricing model
and is expensed over the vesting period of the related award. Prior to
April 1, 2003, the Company accounted for its stock-based employee and
director compensation plans under the accounting provisions of APB No.
25 as interpreted by FASB Interpretation No. 44 ("FIN 44"). Any
modifications of fixed stock options or awards granted to employees or
directors originally accounted for under APB No. 25 may result in
additional compensation expense under the provisions of FIN 44. FIN 44
covers specific events that occurred after December 15, 1998 and was
effective as of July 1, 2000.
In accordance with the above accounting standards, the Company
calculates non-cash compensation related to its securities in the
Company's Statements of Operations on three primary items:
a. Stock-Based Award Issuances
During the fiscal years ended March 31, 2005, 2004, and 2003, the
Company recorded $619,097, $643,272 and $153,238, respectively, as
non-cash compensation expense related to stock-based transactions
that were issued to and vested by employees, officers, directors
and consultants. This expense was computed in accordance with SFAS
No. 123 only for stock-based transactions awarded to consultants
prior to April 1, 2003 and for all stock-based transactions
awarded on or after April 1, 2003.
b. Option Modifications for Awards granted to Employees or
Directors under APB No. 25
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. Prior to the repricing modification, the
options were accounted for as a fixed award under APB No. 25. In
accordance with FIN 44, the repricing of the employee stock
options requires additional compensation expense to be recognized
and adjusted in subsequent periods for changes in the price of the
Company's common stock that are in excess of the $2.05 stock price
on the date of modification (additional intrinsic value). 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 to reverse all or a portion of the expense
recognized in prior periods. Compensation income is limited to the
original base exercise price (the intrinsic value) of the options.
This variable accounting treatment for these modified stock
options began with the quarter ended December 31, 2002 and such
variable accounting treatment will continue until the related
options have been cancelled, expired or exercised. There are
3,499,841 outstanding modified stock options remaining as of March
31, 2005.
53
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
The Company recorded non-cash compensation expense of $193,649 and
$8,001 related to these modified options for the years ended March
31, 2005 and March 31, 2004. There was no non-cash compensation
expense recorded for the year ended March 31, 2003, as the market
price of the Company's stock at the end of the period was less
than the $2.05 intrinsic value of the modified options.
In connection with a Separation and Settlement Agreement dated
July 8, 2004 between the Company and Mr. New, 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 an exercise price of $1.67 per share) and that
certain Non-Qualified Stock Option Agreement dated July 16, 2001
(for 100,000 shares at an exercise price of $2.05 per share) would
continue in full force and effect as if he were still employed by
the Company. The stock price on the date of the modification was
$2.15. In accordance with FIN 44 for modifications that renew or
increase the life on existing options, the Company recorded
$22,000 as additional non-cash compensation expense in the fiscal
year ended March 31, 2005.
c. Notes Receivable for Common Stock
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 non-interest bearing from November 1994 and
$11,572,200 bearing interest at 7% from October 1995) related to
the exercise of 2,914,286 shares of the Company's common stock
into a single non-recourse and non-interest bearing note
receivable in the amount of $12,772,200 that is due on June 15,
2006. This single consolidated note is secured by the 2,914,286
shares that were exercised. Due to the modification of the note
terms from recourse to non-recourse, the Company accounts for the
note as if it was a newly issued option per EITF 95-16,
"Accounting for Stock Compensation Arrangements with Employer Loan
Features under APB Opinion No. 25," and due to the modification
from interest bearing to non-interest bearing, the option is
treated as variable and marked to market each period. The
intrinsic value for the underlying shares is $4.38 per share.
There was no non-cash compensation expense or reversal of expense
recorded for the years ended March 31, 2005 and 2004, as the
market price of the Company's stock was less than the $4.38
intrinsic value of the shares at the beginning and end of the
periods. The Company recorded non-cash compensation income of
$3,060,000 for the year ended March 31, 2003 to reflect the
decrease in the market price of the Company's common stock from
$5.43 at March 31, 2002 to $1.87 at March 31, 2003. The Company
did not record any further non-cash compensation income once the
stock price fell below the $4.38 intrinsic value.
Employee Stock Purchase Plan
In January 1992, the Company's stockholders approved the 1991 Employee
Stock Purchase Plan (the "1991 Purchase Plan"). The 1991 Purchase Plan
provides for the sale of up to an aggregate of 85,714 shares of common
stock to eligible employees. Up to 500 shares may be purchased by each
eligible employee at the lesser of 85% of the fair market value of the
shares on the first or last business day of the six-month purchase
periods ending August 31 and February 28. Substantially all full-time
employees are eligible to participate in the plan. During the year
ended March 31, 2005, 18,894 shares were issued under this plan at
prices of $1.31 and $1.23 per share. During the year ended March 31,
2004, 16,339 shares were issued under this plan at prices of $1.49 and
$1.96 per share. During the year ended March 31, 2003, 9,880 shares
were issued under this plan at prices of $1.55 and $2.80 per share. The
weighted average exercise price of the shares issued were $1.27, $1.75,
and $1.99 per share for the fiscal years ended March 31, 2005, 2004 and
2003, respectively. As of March 31, 2005, there were 10,901 shares
available for purchase under the 1991 Purchase Plan.
Stock Options
At March 31, 2005, the Company has three employee stock option plans,
which were adopted in 1987, 1991, and 1996 and has granted additional
non-plan stock options. Under the Company's stock option plans,
qualified and nonqualified stock options to purchase up to 200,500
shares of the Company's common stock may be granted to employees and
members of the Board of Directors. The maximum and typical term of
options granted under the plans is ten years. Generally, options vest
from zero to three years.
54
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
The Company estimated the fair value of all options issued during the
periods using the Black-Scholes option-pricing model. This model uses
the assumptions listed in Note 1 under Stock Based Compensation for
each period. The estimated fair value is then recorded as a charge to
non-cash compensation in the Statement of Operations. During the fiscal
years ended March 31, 2005 and 2004, the Company recorded $150,763 and
$347,158, respectively, as non-cash compensation expense related to
options that were issued to and vested by employees and directors.
There was no non-cash compensation expense recorded during the year
ended March 31, 2003, because the Company accounted for its stock-based
employee and director compensation plans under the accounting
provisions of APB No. 25 and all options were issued at market price on
the date of the grant.
The following table summarizes information about activity under all
stock option plans:
Weighted-Average Weighted-Average
Exercise Price Fair Value of
Shares per Share Options Granted
------------ ------------------- -------------------
Balance, March 31, 2002 103,544 $ 4.54 --
Granted - at market 25,858 4.37 $2.51
Exercised (1,000) 4.25 --
Forfeited or Expired (23,096) 2.43 --
------- -------------
Balance, March 31, 2003 105,306 2.66 --
Granted - at market 914 2.90 $1.65
Exercised (7,911) 2.05 --
Forfeited or Expired (2,948) 4.96 --
------- -------------
Balance, March 31, 2004 95,361 2.64 --
Granted - at market 63,930 1.28 $0.77
Exercised (13,893) 1.36 --
Forfeited or Expired (429) 19.25 --
------- -------------
Balance, March 31, 2005 144,969 $ 2.11 --
======= =============
The Company has also made individual issuances of non-qualified,
non-plan options. The following table summarizes information about
non-plan stock option activity:
Weighted-Average Weighted-Average
Exercise Price Fair Value of
Shares per Share Options Granted
------------ ------------------- -------------------
Balance, March 31, 2002 2,705,840 3.93 --
Granted - at market 3,907,041 3.51 $1.72
Forfeited or Expired (2,066,041) 2.06 --
---------- -------------
Balance, March 31, 2003 4,546,840 3.17 --
Granted - at market 400,000 2.73 $0.77
Forfeited or Expired (300,000) 2.24 --
---------- -------------
Balance, March 31, 2004 4,646,840 3.19 --
Granted - at market 270,000 1.69 $0.48
---------- -------------
Balance, March 31, 2005 4,916,840 $ 3.02 --
========== =============
55
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
On September 30, 2003, the stockholders of the Company approved the
issuance of 4,375,411 of these non-plan options of which 4,275,411 are
still outstanding as of March 31, 2005.
The following table summarizes information about plan and non-plan
stock options outstanding and exercisable at March 31, 2005:
Weighted- Weighted- Weighted-
Average Average Average Weighted-
Range of Exercise Options Remaining Exercise Options Remaining Average
Prices Outstanding Life Price Exercisable Life Exercise Price
--------------------- ------------------ ------------- ------------ ------------- -------------- ----------------
$1.20 - 1.99 383,573 6.3 years $ 1.60 283,573 6.9 years $ 1.62
2.00 - 2.99 1,745,333 3.9 years 2.11 1,739,333 3.9 years 2.11
3.00 - 3.99 1,921,198 4.4 years 3.41 1,921,198 4.4 years 3.41
4.00 - 4.99 576,716 4.9 years 4.29 501,716 4.7 years 4.27
5.00 - 5.99 432,797 2.3 years 5.20 432,797 2.3 years 5.20
6.00 -10.28 2,192 3.2 years 8.39 2,192 3.2 years 8.39
--------- ---------
5,061,809 4,880,809
========= =========
Stock Warrants
At March 31, 2005, the Company had outstanding warrants to purchase the
Company's common stock, which were issued in connection with sales
consulting, financial consulting, and financing arrangements.
Information relating to these warrants is summarized as follows:
Expiration Date Number of Warrants Exercise Price
-------------------------------------------------- -------------------- --------------------
August 2005 7,143 2.05
December 2005 81,500 3.90
January 2006 33,571 2.05
April 2006 100,000 1.70
July 2006 500,000 2.00
July 2006 10,000 5.00
January 2007 42,592 5.74
June 2007 30,000 2.05
June 2007 122,549 5.52
May 2008 50,000 2.05
August 2008 1,429 2.05
January 2009 1,429 2.05
June 2009 100,000 1.97
June 2009 153,000 2.05
October 2009 500,000 1.15
October 2009 50,000 1.20
October 2009 500,000 2.00
June 2012 2,143 2.05
---------
2,285,356
=========
56
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
The Company estimates the fair value of all warrants issued during the
periods using the Black-Scholes option-pricing model. This model uses
the assumptions listed in Note 1 under Stock Based Compensation for
each period. The estimated fair value is then recorded as a charge to
non-cash compensation in the Statement of Operations or as a charge to
additional paid-in capital in Stockholders' Equity depending on the
situation in which the warrant was issued. During the fiscal years
ended March 31, 2005, 2004, and 2003, the Company granted warrants
totaling 1,050,000, 700,000, and 264,692 shares, respectively, to
non-employees and non-directors. During the fiscal years ended March
31, 2005, 2004, and 2003, the Company recorded $468,334, $296,114 and
$153,238, respectively, as non-cash compensation expense related to
warrants that were issued to and vested by non-employees and
non-directors.
Reserved
At March 31, 2005, the Company has reserved common stock for future
issuance under all of the above arrangements totaling 7,372,702 shares.
Series A Convertible Preferred Stock
In connection with a Stock Repurchase Agreement dated October 6, 2004,
BH Capital Investments, LP and Excalibur Limited Partnership, the
holders of the Company's Series A convertible preferred stock (the
"Series A Preferred Holders"), converted 10,278 Series A convertible
preferred shares into approximately 600,000 shares of common stock. The
value of these converted Series A convertible preferred shares
including accrued dividends was $644,068. Simultaneously, the remaining
30,316 Series A convertible preferred shares held by the Series A
Preferred Holders were acquired by the Company for a total price of
$2,279,688. All previously outstanding shares of the Series A
convertible preferred stock of the Company have now been cancelled. As
part of the transaction, the each former Series A Preferred Holder also
received a warrant to purchase up to 250,000 shares of common stock at
an exercise price of $2.00 per share for a period of five years. The
market price of the Company's common stock on October 6, 2004 was
$1.30. The fair value of the warrants is $205,000.
On April 6, 2001, the Company received from 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 were 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 was equal to the quotient of $48.18, plus all
accrued and unpaid dividends for each share of the Series A convertible
preferred stock, ($62.66 at October 6, 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.
In total, the Series A Preferred Holders converted 13,578, 13,490 and
15,262 shares of the Series A convertible preferred stock plus accrued
dividends, into 721,366, 459,908 and 624,936 shares of common stock,
respectively, during the years ended March 31, 2005, 2004 and 2003,
respectively. The conversion prices ranged from $1.07 to $1.75 based on
the above formula.
In accordance with EITF 00-19,"Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock," the fair value of the conversion right was bifurcated and
classified as a current liability of $640,000 for the year ended March
31, 2004 (See Note 7).
The Series A Preferred Holders had 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 years ended March 31, 2005, 2004 and 2003, the Company recorded
preferred dividends of $82,572, $201,791 and $264,314, 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 calculated an
estimated redemption value of the remaining preferred stock and then
calculated the difference between the initial carrying value and this
estimated redemption value. The difference was then accreted over the
redemption period (48 months beginning April 2001) using the
57
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
straight-line method, which approximates the effective interest method.
For the years ended March 31, 2005, 2004 and 2003, the Company recorded
$203,605, $1,340,943, and $1,370,891, respectively, related to the
accretion of the redemption value of preferred stock and the beneficial
conversion feature of accrued dividends.
Common Stock Issuances
See Note 18 for additional information on stock issuances subsequent to
March 31, 2005.
On October 6, 2004, the Company completed a private placement of its
common stock, whereby it issued a total of 2,000,000 shares to an
existing stockholder of the Company for aggregate gross proceeds to the
Company of $2,300,000. These proceeds were used to redeem the Company's
Series A convertible preferred stock as discussed above. The purchase
price of the shares was $1.15 per share (95% of the prior 5-day trading
closing stock price average). The stockholder also received a warrant
to purchase up to 500,000 shares of the Company's common stock at an
exercise price of $1.15 per share for a period of five years. The
shares are restricted securities that have not been registered under
the Securities Act and may not be offered or sold in the United States
absent registration or applicable exemptions and registration
requirements.
In accordance with a registration rights agreement with the investor,
the Company agreed to file and obtain effectiveness of a registration
statement with the Securities and Exchange Commission within 180 days
of closing to register the shares issued in the private placement and
to include the shares underlying the warrant described above. The
Company agreed that if a registration statement was not filed, or did
not become effective within the defined period of time, then in
addition to any other rights the investor may have, it would be
required to pay a penalty of $57,500 per month. The Company filed a
registration statement on Form S-3 on March 14, 2005. However, this
registration statement has not yet been declared effective. The Company
has received from the investor an extension of time until September 1,
2005 to have the registration statement declared effective by the SEC.
Additionally, the investor waived all penalties and remedies for
failure to have an effective registration statement until September 1,
2005.
In accordance with EITF 00-19, "Accounting for Derivative Financial
Instruments Indexed To, and Potentially Settled in the Company's Own
Stock," and the terms of the above warrants, the fair value of the
warrants were accounted for as a liability, with an offsetting
reduction to the carrying value of the common stock. The warrant
liability will be reclassified to equity upon the effective date of the
registration statement.
The fair value of the warrant on October 6, 2004, was estimated at
$315,000. On March 31, 2005, the fair value of the warrant was
re-measured and estimated at $740,000 (see Note 7). The increase of
$425,000 was reflected as a charge to non-cash compensation in the
Statement of Operations during the year ended March 31, 2005.
In October 2003, pursuant to an employment contract, the Company issued
17,500 shares of its common stock with a total value of $37,650 to a
former employee for his services from January 2003 to July 2003. This
expense was recorded as non-cash compensation during the fiscal year
ended March 31, 2004.
In March 2002, Angelo S. Morini, the Company's founder, loaned $330,000
to the Company in order for it to pay down certain notes payable that
were coming due. This loan bore interest at the prime rate and was due
on or before June 15, 2006. In connection with a Second Amended and
Restated Employment Agreement effective October 13, 2003 between Mr.
Morini and the Company, the Company offset $167,603 of unreimbursed
advances owed to it by Mr. Morini and certain family members against
the balance of the loan and issued an aggregate of 55,087 shares of the
Company's common stock (valued at approximately $2.95 per share) as
payment in full.
Pursuant to seven Securities Purchase Agreements dated May 21, 2003,
the Company issued a total of 2,138,891 shares of its common stock at a
price per share equal to $1.80 for aggregate gross proceeds to the
Company of $3,850,000. Sales to related parties under the Securities
Purchase Agreements include: 555,556 shares of common stock sold at an
aggregate sales price of $1,000,000 to Frederick DeLuca, a greater than
5% stockholder; 55,556 shares of common stock sold at an aggregate
sales price of $100,000 to David H. Lipka, a Director of the Company;
58
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
83,333 and 55,556 shares of common stock sold at an aggregate sales
price of $150,000 and $100,000, respectively, to Ruggieri of Windermere
Family Limited Partnership and Ruggieri Financial Pension Plan,
respectively, each an affiliate of John Ruggieri, the Company's former
Vice President of Manufacturing; 1,111,112 shares of common stock sold
at an aggregate sales price of $2,000,000 to Fromageries Bel S.A., a
leading branded cheese company in Europe which signed a Master
Distribution and Licensing Agreement effective May 22, 2003 with the
Company. Sales to non-related parties under the Securities Purchase
Agreements totaled 277,778 shares of common stock sold at an aggregate
sales price of $500,000.
The Company used $2,000,000 of the proceeds generated from these May
2003 private placements to pay down the balance of the Company's
mezzanine loan from FINOVA Mezzanine Capital, Inc. The Company then
applied the additional proceeds from the new loan from Wachovia Bank,
as discussed in Note 6, to pay the remaining $2,000,000 on the FINOVA
Mezzanine loan. The Company utilized the remainder of the private
placement proceeds for working capital and general corporate purposes.
In accordance with a warrant agreement dated September 30, 1999, the
exercise price on 200,000 warrants still held by FINOVA Mezzanine on
May 30, 2003, was reduced from $3.41 to $1.80 per share based on the
sales price of the Company's common stock in May 2003. FINOVA Mezzanine
exercised these warrants to purchase 200,000 shares of the Company's
common stock on June 2, 2003. The Company received net proceeds of
$119,000 after a deduction of $241,000 due to FINOVA Capital
Corporation for waiver fees pursuant to a certain Amendment and Limited
Waiver to Security Agreement dated June 26, 2002.
In accordance with Section 4(2) of the Securities Act of 1933, as
amended, and pursuant to a Securities Purchase Agreement dated August
27, 2002, the Company issued 65,404 shares of common stock for $4.08
per share in settlement of an outstanding payable to Hart Design and
Manufacturing, Inc. in the amount of $266,848.
In accordance with Regulation D and pursuant to a certain common stock
and Warrants Purchase Agreement dated June 28, 2002, the Company sold
367,647 shares of common stock on June 28, 2002 for $4.08 (85% of an
average market price) and issued warrants to purchase 122,549 shares of
common stock at a price equal to $5.52 per share to Stonestreet Limited
Partnership. In connection with such sale, the Company issued 7,812
shares of common stock to Stonestreet Corporation and 4,687 shares of
common stock to H&H Securities Limited in exchange for their services
as finders. Per the terms of the agreement, the Company received net
proceeds of $930,000, after the repayment of a $550,000 promissory note
dated June 26, 2002 in favor of Excalibur Limited Partnership and
payment of $20,000 for Stonestreet Limited Partnership's costs and
expenses related to the purchase of these shares of common stock.
In accordance with Section 4(2) of the Securities Act of 1933, as
amended, and pursuant to a Food Service Brokerage Agreement dated June
25, 2002, the Company issued 140,273 shares of common stock for $4.08
per share on September 9, 2002 to certain food brokers in consideration
for prior services rendered valued at $572,310.
59
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
(10) Income Taxes
The components of the net deferred tax assets consist of the following:
March 31, 2005 2004
-------------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Net operating loss carry forwards $ 14,732,000 $ 14,207,000
Non-deductible reserves 1,033,000 198,000
Investment, alternative minimum and general business tax credits 80,000 86,000
Accrued employment contract 520,000 596,000
Other 983,000 635,000
-------------------------------------------------------------------------------------------------------------------
Gross deferred income tax assets 17,348,000 15,722,000
Valuation allowance (13,191,000) (11,816,000)
-------------------------------------------------------------------------------------------------------------------
Total deferred income tax assets 4,157,000 3,906,000
Deferred income tax liabilities:
Depreciation and amortization (4,157,000) (3,906,000)
-------------------------------------------------------------------------------------------------------------------
Net deferred income tax assets -- --
===================================================================================================================
The valuation allowance increased by $1,375,000, $787,000, and
$1,037,000 for the years ended March 31, 2005, 2004, and 2003,
respectively. The Company has recorded a valuation allowance to state
its deferred tax assets at estimated net realizable value due to the
uncertainty related to realization of these assets through future
taxable income.
The following summary reconciles differences from taxes at the federal
statutory rate with the effective rate:
--------------------------------------------------------------------------------------------
Years ended March 31, 2005 2004 2003
--------------------------------------------------------------------------------------------
Federal income taxes at statutory rates (34.0%) (34.0%) (34.0%)
Change in deferred tax asset valuation allowance 31.5% 26.6% (93.4%)
Non deductible expenses:
Non deductible compensation -- -- 93.7%
Imputed interest on note receivable 4.8% 7.0% (18.8%)
Other (2.3%) 0.4% 52.5%
--------------------------------
Income taxes (benefit) at effective rates -- -- --
================================
Unused net operating losses for income tax purposes, expiring in
various amounts from 2008 through 2025, of approximately $39,100,000
are available at March 31, 2005 for carry forward against future years'
taxable income. Under Section 382 of the Internal Revenue Code, the
annual utilization of this loss may be limited in the event there are
changes in ownership.
60
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
(11) Earnings Per Share
The following is a reconciliation of basic net earnings (loss) per
share to diluted net earnings (loss) per share:
Years ended March 31, 2005 2004 2003
-------------------------------------------------------------------------------------------------------------------------
Net loss to common stockholders $ (4,652,726) $ (4,504,907) $ (601,077)
============== ============== ==============
Weighted average shares outstanding - basic & diluted 17,007,791 14,937,005 12,110,349
============== ============== ==============
Basic & Diluted net loss per common share $ (0.27) $ (0.30) $ (0.05)
============== ============== ==============
Options for 5,061,809 shares and warrants for 2,285,356 shares have not
been included in the computation of diluted net income (loss) per
common share for the year ended March 31, 2005 as their effects were
antidilutive. Potential conversion of the Series A convertible
preferred stock for 1,522,658 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 year ended March
31, 2004 as their effects were antidilutive. Potential conversion of
the Series A convertible preferred stock for 2,013,831 shares, options
for 4,652,146 shares and warrants for 742,856 shares have not been
included in the computation of diluted net income (loss) per common
share for the year ended March 31, 2003 as their effects were
antidilutive.
(12) Supplemental Cash Flow Information
Years ended March 31, 2005 2004 2003
-------------------------------------------------------------------------------------------------------------------
Non-cash financing and investing activities:
Purchase of equipment through capital lease obligations and term
notes payable $ 82,583 $ 55,672 $ 94,763
Amortization of consulting and directors fees paid through
issuance of common stock warrants 619,097 643,272 153,238
Reduction in accounts payable through issuance of notes payable -- -- 347,475
Reduction in accounts payable through issuance of common stock -- 37,650 839,158
Reduction in notes payable through issuance of common stock -- 162,424 --
Accrued preferred stock dividends 82,572 201,791 264,314
Beneficial conversion feature related to preferred stock dividends 14,491 84,923 62,035
Accretion of discount on preferred stock 189,114 1,256,020 1,308,856
Cash paid for:
Interest 767,001 1,396,419 2,349,002
Income taxes -- -- 51,037
(13) 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 single consolidated note is non-interest bearing and
non-recourse and is secured by the 2,914,286 underlying shares of the
Company's common stock. Per the October 2003 Second Amended and
Restated Employment Agreement between the Company and Mr. Morini (as
detailed in Note 8), 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
stockholder.
61
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
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 $1,292,575
remained unpaid but accrued ($366,305 as short-term liabilities and
$926,270 as long-term liabilities) as of March 31, 2005. The long-term
portion will be paid out in nearly equal monthly installments ending in
October 2008.
In connection with the October 2003 Second Amended and Restated
Employment Agreement, the Company issued an aggregate of 55,087 shares
of the Company's common stock to Mr. Morini (valued at approximately
$2.95 per share based on the average of the closing prices for the five
trading days preceding the effective date of the Agreement) in order to
repay $162,397 of net advances that he had provided to the Company.
In October 2000, the Company obtained a $1.5 million bridge loan from
Wachovia Bank (as discussed in Note 6), which was guaranteed by Angelo
S. Morini and secured by one million of his above-mentioned 2,914,286
shares of the Company's common stock. These one million shares were
returned to the Company when the loan was paid in full in February
2004.
On October 24, 2002, the Company entered into a special services
agreement with Angelo S. Morini, authorizing him to author and promote
"Veggiesizing, the stealth/health diet" book, which promotes the
Company's products. In consideration of these services and for his
continued personal pledges, the Company granted him 900,000 shares at
the market price of $2.05 on October 24, 2002. On December 4, 2002, as
a result of discussions and negotiations with certain major
stockholders, Mr. Morini cancelled these options with the Company and
accepted new options to acquire 510,060 shares of common stock -
200,000 options were granted at an exercise price of $4.08 per share
and 310,060 were granted at an exercise price of $2.05 per share. These
options expire on December 4, 2007. As a result of the cancellation and
reissuance of options, the Company will account for these options in
accordance with variable accounting standards.
On July 1, 2002, in consideration of his pledge of 250,000 shares of
the Company's common stock to secure a $550,000 promissory note by the
Company in favor of Excalibur Limited Partnership, the Company granted
Mr. Morini stock options to acquire 289,940 shares of common stock at
an exercise price of $5.17 (which price was 110% of the then market
price) per share. These options expire on July 1, 2007.
Other Related Party Transactions
Beginning January 13, 2003, the Company entered into a vendor
arrangement with one of its employees pursuant to which the employee
purchased raw materials for the Company approximating $500,000. The
amounts paid for the purchased materials, plus interest at the rate of
15% per annum on such amounts, was due and paid in full by May 31,
2003.
On April 10, 2003, the Company entered into a credit arrangement with
one of its greater than 5% stockholders pursuant to which the
stockholder purchased raw materials for the Company in an aggregate
amount that did not exceed $500,000. The amounts paid for the purchased
materials, plus interest at the rate of 15% per annum on such amounts,
was due and payable in full on July 9, 2003. In consideration of the
credit arrangement, the Company issued to the stockholder a warrant to
purchase 100,000 shares of the Company's common stock at an exercise
price of $1.70. The fair value of this warrant was estimated at $63,000
and was recorded as non-cash compensation expense in the quarter ended
June 30, 2003. All amounts owed under the credit arrangement were
repaid in full and such credit arrangement was terminated on June 27,
2003.
On May 22, 2003, the Company entered into a Master Distribution and
Licensing Agreement with Fromageries Bel S.A. ("Bel"), a leading
branded cheese company in Europe who is a greater than 5% stockholder
in the Company. Under the agreement, the Company granted Bel exclusive
distribution rights for the Company's products in a territory comprised
of the European Union States and to more than 21 other European
countries and territories (the "Territory"). The Company also granted
Bel the exclusive option during the term of the agreement to elect to
manufacture the products designated by Bel for distribution in the
Territory. The term of the agreement is ten years, provided that either
of the parties may elect to terminate the agreement by delivery of
notice to the other between March 24, 2007 and May 22, 2007, which
termination shall be effective as of the first anniversary of the date
of the notice of termination. Alternatively, the parties may mutually
agree to continue operating under the agreement, to convert the
agreement to a manufacturing and license agreement, or to terminate the
agreement.
62
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
A director of the Company was paid consulting fees totaling $32,300 and
$77,520 for introductions into several large food service companies
during the fiscal years ended March 31, 2004 and 2003, respectively.
Another director of the Company was paid $59,000 for his consulting
services on marketing issues during each of the fiscal years ended
March 31, 2005 and 2004.
(14) Economic Dependence
For the fiscal year ended March 31, 2005, the Company had one customer
that accounted for approximately 12% of net sales. As of March 31,
2005, the customer owed the Company approximately $1,550,000 or 22% of
the Company's gross trade receivable balance. Additionally, the Company
had approximately $210,000 of inventory in stock as of March 31, 2005
related to this customer. Based on information that arose in April 2005
after the products were shipped, the Company determined that collection
of the outstanding receivable balance and inventory amounts were in
question as of March 31, 2005 and therefore, reserved 100% of these
amounts in its reserve for trade receivables and inventory at year-end.
We do not expect further sales to this customer after April 2005, but
do expect that we will have another customer that will exceed 10% of
our net sales in the fiscal year ending March 31, 2006.
For the fiscal years ended March 31, 2004 and 2003, the Company did not
have any customer that comprised more than 10% of net sales.
For the fiscal year ended March 31, 2005, the Company purchased
$9,193,000 of products from four suppliers totaling approximately 55%
of total raw material purchases for the fiscal year. For the fiscal
year ended March 31, 2004, the Company did not have any supplier that
comprised more than 10% of total raw material purchases. For the fiscal
year ended March 31, 2003, the Company purchased approximately
$2,238,000 from one supplier totaling approximately 13% of raw material
purchases for the fiscal year.
(15) Employee Benefit Plan
The Company has a 401(k) defined contribution plan covering all
employees meeting certain minimum age and service requirements. The
Company's matching contributions to the plan are determined by the
Board of Directors. On August 1, 2003, the Company match was raised
from 25% to a maximum of 50% of the employee's contribution up to 6% of
the employee's compensation. Company contributions to the plan amounted
to $56,170, $35,807 and $21,820 for the fiscal years ended March 31,
2005, 2004 and 2003, respectively.
(16) Fourth Quarter Adjustments
During the fourth quarter of fiscal 2005, the Company recorded the
following adjustments:
Bad debt on accounts receivable $1,605,783
Inventory write-offs 676,181
See Note 14 for a further explanation on the cause of a large portion
of the large fourth quarter adjustments. In March 2005, the Company
reviewed its inventory and wrote off the value of unsalable items that
it would no longer use in production due to low margins, low volume,
change in inventory formulas or loss of customer.
There were no significant or unusual adjustments in the fourth quarter
of fiscal 2004 and 2003.
63
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
(17) Quarterly Operating Results (Unaudited)
Unaudited quarterly operating results are summarized as follows:
Three Months Ended (Unaudited)
--------------------------------------------------------------------------
2005 March 31 December 31 September 30 June 30
---- ----------------- ------------------ ---------------- ----------------
Net sales $ 10,785,379 $ 10,632,877 $ 11,900,553 $ 11,191,678
Gross margin 1,909,635 2,343,326 2,580,584 2,940,348
Net income (loss) (2,545,790) (739,401) (839,762) (241,596)
Net income (loss) for common stockholders (2,545,790) (739,401) (571,372) (796,163)
Basic net income (loss) per common share (0.14) (0.04) (0.04) (0.05)
Diluted net income (loss) per common share (0.14) (0.04) (0.04) (0.05)
Stockholders' equity 7,022,523 9,363,062 7,162,551 7,726,530
Three Months Ended (Unaudited)
--------------------------------------------------------------------------
2004 March 31 December 31 September 30 June 30
---- ----------------- ------------------ ---------------- ----------------
Net sales $ 8,512,702 $ 9,638,571 $ 9,329,907 $ 8,695,781
Gross margin 2,745,256 2,922,821 2,999,930 2,644,665
Net income (loss) 614,430 (1,378,354) (228,145) (1,970,104)
Net income (loss) for common stockholders 906,277 (1,557,986) (933,385) (2,919,813)
Basic net income (loss) per common share 0.06 (0.10) (0.06) (0.21)
Diluted net income (loss) per common share 0.06 (0.10) (0.06) (0.21)
Stockholders' equity 8,226,481 7,497,656 8,404,579 9,191,983
(18) Subsequent Events
Warrant Exercises
In accordance with a warrant agreement dated April 10, 2003, the
Company issued to Mr. Frederick DeLuca a warrant to purchase up to
100,000 shares of common stock of the Company at an exercise price of
$1.70 per share. Additionally, in accordance with a warrant agreement
dated October 6, 2004, the Company issued to Mr. DeLuca a warrant to
purchase up to 500,000 shares of common stock of the Company at an
exercise price of $1.15 per share. Subsequently, the Company agreed to
reduce the per share exercise price on these warrants to $1.36 and
$0.92, respectively, in order to induce Mr. DeLuca to exercise his
warrants. All of the warrants were exercised on June 16, 2005 for total
proceeds of $596,000.
On each of April 24, 2003 and October 6, 2004, BH Capital Investments,
LP and Excalibur Limited Partnership each received warrants to purchase
up to 250,000 shares of common stock at an exercise price of $2.00 per
share. Also, Excalibur Limited Partnership received a warrant to
purchase up to 30,000 shares at an exercise price of $2.05 per share on
June 26, 2002. Subsequently, the Company agreed to reduce the per share
exercise price on all such warrants to $1.10 in order to induce BH
Capital Investments, LP and Excalibur Limited Partnership to exercise
their warrants. All of the warrants were exercised on June 16, 2005 for
total proceeds of $1,133,000.
The Company used a portion of the proceeds from the warrant exercises
to satisfy the $750,000 over-advance provided by Textron under the
Fourth Amendment and Waiver to the Textron Loan Agreement, as described
in Note 6 and the remaining proceeds from the warrant exercises will be
used for working capital purposes as needed in the future.
64
GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
Asset Sale and Outsourcing Arrangements
On June 30, 2005, the Company entered into an Outsourcing Supply
Agreement (the "Outsourcing Agreement") with Schreiber Foods, Inc.
("Schreiber") whereby Schreiber will manufacture and distribute all of
the Company's products. The Company simultaneously entered into an
Asset Purchase Agreement with Schreiber whereby Schreiber will purchase
substantially all of the Company's production machinery and equipment
for a total of $8,700,000.
The Asset Purchase Agreement is scheduled to close on or about November
1, 2005. The closing is subject to the satisfaction of various
conditions, including approval of the sale by the Company's
stockholders and approval by the Company's lenders.
The Outsourcing Agreement is for an initial five-year period from the
effective date of September 1, 2005 and is renewable at the Company's
option for up to two additional five-year periods. On or before
November 1, 2005, Schreiber will purchase the Company's remaining raw
materials, ingredients and packaging at the Company's cost. Schreiber
will bill the Company when it ships each order of finished products to
the Company or its customers, based on a pre-determined price matrix.
The Outsourcing Agreement provides for a contingent short-fall payment
obligation by the Company if a specified production level is not met
during the second year of the Outsourcing Agreement. If a contingent
short-fall payment is accrued after the second year, it may be reduced
at the end of the third year if the production level during the third
year exceeds the specified level of production. If the sale of the
assets to Schreiber for $8,700,000 as contemplated by the Asset
Purchase Agreement is not consummated, then the Company will not be
required to pay any such short-fall payment.
If the Company does not exercise its option to renew the Outsourcing
Agreement at the end of the initial five-year period, there is a
cancellation charge of $1.5 million. If the Company does not exercise
its option to renew the Outsourcing Agreement at the end of the second
five-year period, there is a cancellation charge of $750,000. If the
sale of the assets to Schreiber for $8,700,000 as contemplated by the
Asset Purchase Agreement is not consummated, then the Company will not
be required to pay any such cancellation charge.
The Company is currently reviewing the costs associated with these
anticipated transactions and believes that they will have a material
impact on the Company's financial position, results of operations, and
cash flows during its fiscal year ending March 31, 2006.
Bank Loan Modification
On June 30, 2005, the Company entered into a Loan Modification
Agreement with Wachovia Bank, N.A. regarding its loan. The agreement
modified the following terms of the loan: 1) the loan will mature and
be payable in full on July 31, 2006 instead of June 1, 2009; 2) the
principal payments will remain at $110,000 per month with accrued
interest at Wachovia's Base Rate plus 1% instead of increasing to
$166,250 on July 1, 2005 as provided by the terms of the promissory
note evidencing the loan; and 3) all covenants related to the Company's
tangible net worth, total liabilities to tangible net worth, and
maximum funded debt to EBITDA ratios are waived and compliance is not
required by the Company through the maturity of the loan on July 31,
2006. In connection with the agreement, the Company agreed to pay
$60,000, of which $30,000 was paid upon execution of the agreement and
$30,000 is due on August 1, 2005. As required by the terms of the
agreement, if the Company sells the equipment as discussed above, the
loan will be due and payable in full at the time of sale.
65
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES.
As of March 31, 2005, an evaluation was performed under the supervision and with
the participation of our management, including the Chief Executive Officer
("CEO"), and the Chief Financial Officer ("CFO"), of the effectiveness of the
design and operation of our 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,
our management, including the CEO and CFO, concluded that our disclosure
controls and procedures were effective in timely bringing to their attention
material information related to the Company required to be included in our
periodic Securities and Exchange Commission filings. Since the date of this
evaluation, there have been no changes in our internal controls or in other
factors that are reasonably likely to materially affect those controls.
ITEM 9B. OTHER INFORMATION.
Not applicable.
66
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth the current directors and executive officers of
our Company as of July 12, 2005, as well as their respective ages and positions
with our Company:
Name Age Positions
- -------------------------------------------------------------------------------------------------------------
David H. Lipka 75 Director, Chairman of the Board of Directors
Joanne R. Bethlahmy(1) (2) 50 Director
Michael E. Broll 56 Director, Chief Executive Officer
Thomas R. Dyckman (1) (2) 73 Director, Chairman of the Audit Committee
Charles L. Jarvie (2) 68 Director, Chairman of the Compensation Committee
Angelo S. Morini 62 Director
Patrice M.A. Videlier (1) 62 Director
Salvatore J. Furnari 40 Chief Financial Officer
John W. Jackson 47 Vice President of Sales
Christopher E. Morini 49 Vice President of New Business Development and Key Accounts
Thomas J. Perno 50 Vice President of Operations
Kulbir Sabharwal 62 Vice President of Technical Services
(1) Audit Committee Member
(2) Compensation Committee Member
The Board of Directors is currently comprised of the seven directors of which
five are non-employee directors. The Chairman of the Board and the directors
hold office until the next annual meeting of stockholders and until their
successors have been duly elected and qualified. The executive officers of our
Company are elected annually at the first Board of Directors meeting following
the annual meeting of stockholders, and hold office until their respective
successors are duly elected and qualified, unless sooner displaced.
Directors
David H. Lipka spent forty years (1955-1995) with DCA Food Industries Inc., an
international manufacturer of food ingredients and equipment with combined sales
in excess of $1 billion per annum, holding positions of president, chief
executive officer, and chief operating officer. Since 2001, Mr. Lipka served on
the board of directors of Doctor's Associates Inc. (Subway Stores) and has
served on numerous boards including Dunkin Donuts Inc. (1989-1994), Allied-Lyons
Inc. (1988-1994), and Kerry Group PLC (1995-1996). Mr. Lipka has also been
chairman and chief executive officer of Pennant Foods and Leons Baking Company.
He obtained a B.S. degree from Brooklyn College and attended the Graduate School
of Business at New York University. Since December 2002, Mr. Lipka has agreed to
serve as a director of our Company at the request of Frederick A. DeLuca, a
beneficial owner of more than ten percent (10%) of our common stock. Both Mr.
Lipka and Mr. DeLuca are members of the Board of Directors of Doctor's
Associates Inc.
Joanne R. Bethlahmy was appointed as a director of our Company and a member of
the audit committee on October 1, 2004 to fill the vacancy created upon the
resignation of Christopher J. New in July 2004. Ms. Bethlahmy has been the
Managing Partner of Illuminate Consulting, a management consulting firm
specializing in market strategy for consumer-oriented industries since 2000. She
worked with Chef Solutions Inc., a subsidiary of LSG Lufthansa, a business
specializing in providing convenient baked foods and prepared meals to food
service and retail, as a consultant and interim Senior Vice President of
Marketing from 2000-2002. Ms. Bethlahmy's twenty years of experience in strategy
development, general management and marketing includes major executive
assignments with Andersen Consulting (now Accenture 1993-1999), Maybelline
(1992-1993), the Quaker Oats Company (1988-1991) and Frito-Lay (1984-1988). She
obtained an M.B.A. in Marketing from U.C. Berkeley, a J.D. from Hastings College
of Law (both in 1981) and a B.A. in History from U.C. Davis in 1976.
67
Michael E. Broll was appointed as a director of our Company in December 2003 and
as Chief Executive Officer ("CEO") of our Company in July 2004 upon the
resignation of Christopher J. New. Mr. Broll is a private investor and
consultant in the food industry, and most recently was President and Chief
Executive Officer, from 1999 to 2002, of Chef Solutions Inc., a subsidiary of
Lufthansa Service Group ("LSG"), a business specializing in providing convenient
baked foods and prepared meals to food service and retail segments of the food
industry. As an executive of SCIS/Sky Chef's a subsidiary of ONEX Corporation, a
Canadian based private equity group, Mr. Broll assembled a group of six
companies in the bakery and prepared food business to ultimately form and merge
into a one new entity called Chef Solutions Inc., an ONEX controlled company.
Chef Solutions Inc. was subsequently sold to LSG in 2001. Mr. Broll's career
also includes major executive assignments with Allied-Domecq Retailing as the
head of its total supply chain for North America from 1997 to 1999, Ready Pac
Produce, Inc. as President and Chief Operating Officer from 1995 to 1997, Nestle
USA as the head of all supply chains for the chilled food group in North America
from 1993 to 1995, and Pillsbury Company as Vice President of Operations for the
bakery group supply chain from 1991 to 1993. Mr. Broll received his B.S. in
Economics from the University of Illinois in 1978.
Thomas R. Dyckman is currently the Ann Whitney Olin Professor of Accounting at
the S.C. Johnson Graduate School of Management at Cornell University, Ithaca,
New York, and has been a professor at Cornell University since 1964. Dr. Dyckman
also served as Acting Vice President of the University for Information
Technology (1998-1999) at Cornell University. He has conducted management
executive programs for Goodyear, IBM, Gould Pump, New England Telephone, Ocean
Spray, Columbia University, G.T.E. and Sylvania. Dr. Dyckman served as a
consultant on research issues to the Financial Accounting Standards Board (FASB)
from 1977 to 1988. During the mid 1990's he was acting dean of the S.C. Johnson
Graduate School of Management at Cornell University. He is a member of the
American Accounting Association and the Accounting Researchers International
Association, and completed terms with the Financial Accounting Standards
Advisory Committee (1984-1987) and the Financial Accounting Foundation
(1989-1993). Dr. Dyckman has more than sixty published articles and is the
author of ten books. He received his B.A., M.B.A. and Ph.D. from the University
of Michigan. Dr. Dyckman has been a director of our Company since December 2002.
Charles L. Jarvie, a partner with Beta Capital Group, LLC, has had an
illustrious business career. After twenty years with the Proctor and Gamble
Company (1959-1979), he was President of Dr. Pepper Company (1980-1983), and
Fidelity Investments Marketing Corp. (1983-1984), and Chief Executive Officer of
Schenley Industries, Inc. (1984-1988). He has also served as a director of
Guinness America, Inc. (1988-1992), chief executive officer of New Era Beverage
Company (1990-1992), chairman of Universal Sports America (1995-2000), president
of Host Communications, Inc. (1992-2000), chairman of Streetball Partners, Inc.
(1990-2000) and chairman of J/P Management Associates, Inc. (1990-present). His
accomplishments include the acquisition of Canada Dry Corporation, and the sale
of Schenley Industries, Host Communications and New Era Beverage Company. Mr.
Jarvie has helped generate and implement and still enforces strategic plans for
many successful turnarounds. Mr. Jarvie has numerous civic and business
associations serving as a director or member of many prestigious organizations
and companies. He is a graduate of Cornell University where he received both his
B.S. and M.B.A. Mr. Jarvie has been a director of our Company since December
2002.
Angelo S. Morini was the Founder and inventor of our Company's healthier dairy
alternative formula and was our Company's President since its inception in 1980
until October 2003. On December 17, 2002, Mr. Morini resigned from his positions
as Chief Executive Officer and Chairman of the Board of our Company and became
the Vice-Chairman of the Board. Effective October 13, 2003, Mr. Morini resigned
from his positions as Vice-Chairman and President of our Company and he is no
longer involved in the daily operations of the Company. He retains the title of
Founder and was named Chairman Emeritus. Between 1972 and 1980, Mr. Morini was
the general manager of Galaxy Cheese Company, which operated as a sole
proprietorship until its incorporation in May 1980. Prior to 1974, he was
associated with the Food Service Division of Pillsbury Company and the Post
Division of General Foods Company. In addition, he worked in Morini Markets, his
68
family-owned and operated chain of retail grocery stores in the New Castle,
Pennsylvania area. Mr. Morini received a B.S. degree in Business Administration
from Youngstown State University in 1968. Mr. Morini's brother, Christopher E.
Morini, works for our Company as Vice President of New Business Development and
Key Accounts. Prior to November 2003, Angelo S. Morini's wife, Julie Morini, was
employed by our Company in the marketing and public relations departments. Mr.
Morini's brother, Ronald Morini, worked for our Company until October 31, 2003
as an engineering consultant and was paid $61,310 in consulting fees and
benefits during the fiscal year ended March 31, 2004.
Patrice M.A. Videlier was a director of Fromageries Bel S.A., a company
organized under the laws of France for 14 years until October 2003. Mr. Videlier
has held since 1990 numerous vice presidential positions in charge of
International, Europe, and Natural Cheese Divisions and more recently Senior
Vice President of Marketing-World. From 1969 to 1989, Mr. Videlier was a senior
marketing executive with Unilever Co. Mr. Videlier received his Masters in
Business Administration from Indiana University in 1968. Since May 2003, Mr.
Videlier agreed to serve as a director of our Company at the request of
Fromageries Bel S.A., a beneficial owner of more than five percent (5%) of our
common stock.
Executive Officers
Salvatore J. Furnari, CPA was appointed as our Chief Financial Officer in July
2002. From November 2001 until July 2002, Mr. Furnari served as our Controller.
Prior to joining our Company, Mr. Furnari was Corporate Controller and Treasurer
of Pritchard Industries, Inc. From 1998 through 1999, he served as Chief
Financial Officer and Vice President of Finance for Garage Management
Corporation; and from 1993 until 1998, he was Chief Financial Officer of
American Asset Corporation. Mr. Furnari received his B.S. in Accounting from
Queens College in New York City in May 1987.
John W. Jackson has been Vice President of Sales for our Company since 1993.
From 1985 through 1992, Mr. Jackson was director of sales for H.J. Heinz
Company. Mr. Jackson received his B.S. in Business Administration and Accounting
from Mars Hill College in 1980.
Christopher E. Morini has been the Vice President of New Business Development
and Key Accounts since September 2001, having formerly served as Vice President
of Marketing and International Sales for our Company since 1993. From 1986
through 1993, Mr. Morini was a Vice President of our Company, where he has been
responsible for various sales and marketing divisions of our Company, including
the Food Service, International Sales and Retail Sales divisions. Mr. Morini
started with our Company as an area salesman in 1983 and became sales manager in
1984. Mr. Morini received a B.S. in Economics from Slippery Rock University in
1978. Christopher E. Morini's brother, Angelo S. Morini, is the Founder of our
Company.
Thomas J. Perno has worked for our Company since 1983. He began as a Shipping
and Receiving Supervisor, he was later promoted to Plant Manager and then to
Vice President of Operations. Mr. Perno received his M.S. in Electrical
Engineering from Penn State University in 1976.
Kulbir Sabharwal has been Vice President of Technical Services for our Company
since 1991. Dr. Sabharwal worked as the Director of Research and Quality Control
for Gilardies Frozen Foods from 1987 to 1990 and for Fisher Cheese Company from
1972 to 1986. Dr. Sabharwal received his Ph.D. in Food Science and Nutrition
from Ohio State University in 1972.
69
Audit Committee
We maintain a separately designated standing audit committee in accordance with
Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended. From
April 1, 2004 until July 8, 2004, the audit committee members were Thomas R.
Dyckman, Michael E. Broll and Patrice M.A. Videlier. On October 1, 2004, Joanne
R. Bethlahmy was appointed to fill the vacancy created when Michael E. Broll was
appointed as our Chief Executive Officer.
The Board of Directors has determined that all members of the audit committee
are financially capable and that Thomas R. Dyckman, the audit committee
chairman, is an "audit committee financial expert" within the meaning of the
regulations of the Securities and Exchange Commission. Mr. Dyckman is considered
an audit committee financial expert related to his significant and relevant
accounting and financial experience disclosed above. We have determined that all
audit committee members are currently "independent" as that term is defined in
Item 7(d)(3)(iv) of Schedule 14A promulgated under the Exchange Act. During the
fiscal year ended March 31, 2005, Joanne R. Bethlahmy received a $10,000 payment
to a company she controls that provided marketing services for our Company.
According to Section 803.01(b)(1)(ii) of the AMEX Company Guide, audit committee
members cannot receive any payments other than compensation received for their
service as a director or a committee member of the Company. Upon discovery of
the violation, Ms. Bethlahmy promptly repaid the funds to our Company and was
still determined by the Board to be independent. No other member of the audit
committee received any payments from our Company other than compensation
received for their service as a director of our Company.
Nominating Committee
On November 15, 2004 the Board of Directors determined that it will not
establish a formal nominating committee, but has adopted certain procedural
guidelines for director nominations. The directors resolved that
o each nominee to our Board of Directors shall be selected, or
recommended for the Board of Director's selection, by a majority of
our independent directors, and a person may not become a nominee
unless such person is selected, or recommended for selection, by a
majority of our independent directors;
o the Board of Directors shall determine the desired skills and
characteristics for Board members as well as the composition of the
Board as a whole, which determination shall include a consideration
of the need for directors that are independent under the AMEX
listing standards, as well as diversity, age, skill and experience
in the context of the needs of the Board;
o the Board of Directors, subject to the selections or recommendations
by a majority of our independent directors, shall determine the
slate of nominees to be presented to our stockholders for election
at each annual meeting of stockholders;
o when deemed necessary by the Board of Directors to complete the
slate of nominees or to fill a vacancy or otherwise, the Board of
Directors shall conduct searches for prospective Board members who
possess skills and characteristics that are consistent with the
skills and characteristics sought by the Board of Directors; and
o when selecting the slate of nominees to be presented to our
stockholders for election at an annual meeting of the stockholders,
or when considering candidates to fill a vacancy or otherwise, the
Board of Directors will consider recommendations forwarded by
stockholders concerning qualified candidates for election as
directors; provided that such recommendations are timely submitted
in writing to our Secretary at our principal executive offices and
such recommendations include the candidate's name, address and
telephone number and qualifications for serving as a director of our
Company.
70
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our
executive officers, directors and persons who own more than 10% of a registered
class of our equity securities, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission and the American Stock
Exchange. Officers, directors and stockholders owning more than 10% of our
common stock are required by SEC regulations to provide our Company with copies
of all the reports they file pursuant to Section 16(a).
Based solely upon our review of those reports required by Section 16(a) and
filed by or on behalf of our officers, directors and stockholders owning greater
than 10% of our common stock, or written representations that no such reports
were required to be submitted by such persons, we believe that during the fiscal
year ended March 31, 2005, all of the officers, directors and stockholders
owning greater than 10% of our common stock complied with all applicable Section
16(a) filing requirements except for Michael E. Broll, our Chief Executive
Officer and director, and Kulbir Sabharwal, our Vice President of Technical
Services. Each named individual filed one Form 4 report containing one
transaction related to the acquisition of stock on the open market after the
required two-day reporting period.
Code of Ethics
We have adopted a code of ethics as defined in Item 406 of Regulation S-K
promulgated under the Securities Act of 1933, as amended, which code applies to
all of our directors and employees, including our principal executive officer,
principal financial officer, principal accounting officer and persons performing
similar functions. Additionally, we have adopted corporate governance guidelines
and charters for our Audit and Compensation Committees. All of these materials
are available free of charge on our website at www.galaxyfoods.com or by
requesting a copy by writing to: Corporate Secretary, Galaxy Nutritional Foods,
Inc. 2441 Viscount Row, Orlando, FL 32809.
71
ITEM 11. EXECUTIVE COMPENSATION.
Summary Compensation Table
The following table sets forth the compensation during the fiscal years ended
March 31, 2005, 2004 and 2003 paid to the following individuals (each, a "Named
Executive Officer"): (i) all individuals serving as our Chief Executive Officer
during the last fiscal year, (ii) our four other most highly compensated
executive officers who were serving as executive officers as of March 31, 2005,
and (iii) up to two additional individuals for whom disclosure would have been
provided pursuant to clause (ii) above, but for the fact that the individual was
not serving as an executive officer at the end of the last completed fiscal
year. However, in the cases of clauses (ii) and (iii) above, no disclosure is
provided for any individual whose total annual salary and bonus does not exceed
$100,000:
SUMMARY COMPENSATION TABLE
Long Term Compensation
-----------------------------------------
Annual Compensation Awards Payouts
------------------------------------- --------------------------- ----------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Securities
Name and Other Annual Restricted Underlying All Other
Principal Compensation Stock Options/SARs LTIP Compensation
Position Year Salary ($) Bonus($) ($) Award(s) ($) (#) Payouts ($) ($)(20)
- ------------------------------------------------------------------------------------------------------------------------------------
Michael E. Broll (1)
CEO 2005 143,846 25,000 32,310(2) -- -- -- --
2004 -- -- -- -- 200,000(3) -- --
Christopher J. New (4)
Former CEO 2005 56,539 -- 9,450(5) -- -- -- 444,883(4)
2004 188,539 -- 26,601(5) -- -- -- --
2003 165,673 -- 16,564(5) -- 125,000(6) -- --
Salvatore J. Furnari (7)
CFO 2005 145,000 -- 28,516(5) -- 70,000(8) -- --
2004 134,577 -- 25,600(5) -- -- -- --
2003 116,923 -- -- -- 30,000(9) -- --
John W. Jackson (10)
VP of Sales 2005 144,820 -- 17,500(5) -- 7,000(11) -- --
2004 138,000 -- 11,510(5) -- -- -- --
2003 138,000 -- 10,250(5) -- 96,429(12) -- --
Angelo S. Morini (13)
Founder and 2005 300,000 -- 39,000(14) -- -- -- 16,937(13)
Director 2004 300,000 -- 38,512(14) -- -- -- --
2003 300,000 53,706 33,349(14) -- 800,000(15) -- --
Christopher E. Morini (16)
VP of New 2005 155,000 -- 21,747(17) -- 1,000(18) -- --
Business 2004 155,000 -- 18,135(17) -- -- -- --
Development 2003 155,000 -- 17,626(17) -- 97,143(19) -- --
72
(1) On July 8, 2004, Michael E. Broll, a member of our Board of Directors,
was appointed as our Company's Chief Executive Officer upon the
resignation of Mr. New. We entered into a one-year employment agreement
with Mr. Broll pursuant to which 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 $3,500 per month 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. In March 2005, Mr. Broll received a discretionary bonus of
$25,000.
(2) "Other Annual Compensation (e)" represents $12,000 received for an auto
allowance and $20,310 received for a housing allowance during the
fiscal year ended March 31, 2005.
(3) Upon appointment to our Board of Directors on December 17, 2003, we
granted Mr. Broll an option to acquire 200,000 shares of our common
stock at an exercise price of $3.29 per share, which is equal to 130%
of the market price on the date of grant. Such options are fully
exercisable and expire December 17, 2008.
(4) On September 4, 2001, Christopher J. New was appointed Chief Marketing
Officer and Vice President of Strategy. In December 2001, the Board
appointed Mr. New as Chief Operating Officer and on December 17, 2002,
the Board appointed Mr. New as Chief Executive Officer. Effective
January 1, 2004, the Board approved an increase in his annual
compensation from $180,000 to $210,000.
On July 8, 2004, Mr. New resigned from his position as Chief Executive
Officer in order to pursue other opportunities. In accordance with the
Separation and Settlement Agreement between our Company and Mr. New, we
agreed to pay Mr. New $444,883. This settlement will be paid out in
nearly equal installments over two years payable on our regular payroll
dates. As of March 31, 2005, the remaining amount due was $287,253.
In addition to the separation compensation, we 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 an exercise
price of $1.67 per share) and that certain Non-Qualified Stock Option
Agreement dated July 16, 2001 (for 100,000 shares at an exercise price
of $2.05 per share) would continue in full force and effect as if he
was still employed by our Company.
(5) Amounts in "Other Annual Compensation (e)" represent the amounts paid
by our Company during the fiscal years ended March 31, 2005, 2004 and
2003 for auto allowances including auto leases and insurance.
(6) In consideration for his continued employment with our Company, on
December 5, 2002, we granted Mr. New an option to acquire 25,000 shares
of our common stock at an exercise price of $1.67 per share, the market
price on such date. This option is fully exercisable with an expiration
date of December 5, 2012. On October 11, 2002, we repriced 100,000
options, which were granted during the fiscal year ended March 31,
2002. Due to the repricing, these are included again in the total
securities issued during the fiscal year ended March 31, 2003.
(7) On July 8, 2002, Salvatore J. Furnari was appointed Chief Financial
Officer of the Company. From November 2002 to July 8, 2002, he worked
as our Controller. Effective January 1, 2004, our Board of Directors
approved an increase in his annual compensation from $130,000 to
$145,000.
(8) In consideration for past performance and continued employment, on
October 1, 2004, we granted Mr. Furnari an option to acquire 70,000
shares of our common stock at an exercise price of $2.05 per share. The
market price on the date of grant was $1.20 per share. This option is
fully exercisable with an expiration date of October 1, 2014.
(9) In consideration for his continued employment with our Company, on July
8, 2002, we granted Mr. Furnari an option to acquire 20,000 shares of
our common stock at an exercise price of $4.55 per share, the market
price on such date. This option is fully exercisable with an expiration
date of July 8, 2012. On October 11, 2002, we repriced this option from
$4.55 per share to the then-market price of $2.05 per share. On October
11, 2002, we also repriced 10,000 options, which were granted during
the fiscal year ended March 31, 2002. These options were repriced from
$5.60 per share to $2.05 per share and are fully exercisable with an
expiration date of November 12, 2011. Due to the repricing, these are
included again in the total securities issued during the fiscal year
ended March 31, 2003.
73
(10) Effective April 1, 2004, Mr. John W. Jackson's employment agreement
provides for an annual base salary of $144,900. Previously, his annual
base salary was $138,000.
(11) In consideration for past performance and continued employment, on
October 1, 2004, we granted to Mr. Jackson an option to acquire 7,000
shares of our common stock at an exercise price of $1.28 per share. The
market price on the date of grant was $1.20 per share. This option is
fully exercisable with an expiration date of October 1, 2014.
(12) On October 11, 2002, we repriced all 96,429 outstanding options held by
Mr. Jackson from their original exercise price to the then-market price
of $2.05 per share. The original exercise prices of the options were
equal to the market price on the date of grant as follows: 7,143
options at $8.47 expiring on May 16, 2006; 14,286 options at $2.84
expiring on September 24, 2008; and 75,000 options at $4.40 expiring on
April 19, 2011. These options are fully exercisable.
(13) In a Second Amended and Restated Employment Agreement effective October
13, 2003, Angelo S. Morini our Founder, Vice-Chairman and President
resigned from his positions with our Company as Vice-Chairman and
President and he is no longer be involved in the daily operations of
our Company. He retains the title of Founder and has been named
Chairman Emeritus. Mr. Morini continues to be an employee and a member
of our Board of Directors. The agreement is for a five-year period
beginning October 13, 2003 and provides for an annual base salary of
$300,000, plus life insurance, standard health insurance benefits, club
dues and an auto allowance. For the fiscal year ended March 31, 2003,
we accrued bonuses of $53,706 to Mr. Morini. These bonuses were used to
pay down the employee advances due from Mr. Morini at the end of fiscal
2003. For the fiscal year ended March 31, 2005, we paid $7,170 for life
insurance and $9,767 for health insurance for Mr. Morini.
(14) For the fiscal year ended March 31, 2005, we paid $23,400 for auto
allowance and $15,600 for club dues for Mr. Morini. For the fiscal year
ended March 31, 2004, we paid $24,584 in auto lease and auto allowance
payments and $13,928 for club dues for Mr. Morini. For the fiscal year
ended March 31, 2003, we paid $21,081 in auto lease payments, $1,670
for automobile insurance, and $10,598 for club dues for Mr. Morini.
(15) On July 1, 2002, the Board of Directors granted Mr. Morini options to
acquire 289,940 shares of common stock at an exercise price of $5.17
per share (which price was 110% of the then market price) in
consideration of Mr. Morini's pledge of 250,000 of his shares of our
common stock to secure a $550,000 bridge loan to our Company from
Excalibur Limited Partnership. Such options are fully exercisable and
shall expire on July 1, 2007. Effective as of December 4, 2002, the
Board of Directors granted Mr. Morini options to acquire 510,060 shares
of common stock in accordance with the terms of a special services
agreement between our Company and Mr. Morini for writing a
comprehensive diet and recipe book about our Company and its products
and for the potential distribution of this book worldwide. Of these
510,060 options, 200,000 have an exercise price of $4.08 per share and
310,060 have an exercise price of $2.05 per share. Such options are
fully exercisable and shall expire on December 4, 2007. The market
price on the date of grant was $1.67.
(16) Mr. C. Morini's employment agreement provides for an annual base salary
of $155,000.
(17) For the fiscal year ended March 31, 2005, we paid $14,452 for auto
lease payments, $1,368 for automobile insurance, and $4,172 for club
dues for Mr. C. Morini. For the fiscal year ended March 31, 2004, we
paid $12,595 for auto lease payments, $1,368 for automobile insurance,
and $4,172 for club dues for Mr. C. Morini. For the fiscal year ended
March 31, 2003, we paid $12,595 for auto lease payments, $1,368 for
automobile insurance, and $3,663 for club dues for Mr. C. Morini.
(18) In consideration for past performance and continued employment, on
October 1, 2004, we granted Mr. C. Morini an option to acquire 1,000
shares of our common stock at an exercise price of $1.28 per share. The
market price on the date of grant was $1.20 per share. This option is
fully exercisable with an expiration date of October 1, 2014.
(19) On October 11, 2002, we repriced all 97,143 outstanding options held by
Mr. C. Morini from their original exercise price to the then-market
price of $2.05 per share. The original exercise prices of the options
were equal to the market price on the date of grant as follows: 714
options at $3.50 expired on August 31, 2003; 7,143 options at $8.47
expiring on May 16, 2006; 14,286 options at $2.84 expiring on September
24, 2008; and 75,000 options at $4.40 expiring on April 19, 2011. The
remaining 96,429 options are fully exercisable.
(20) Other than the information described in the footnotes above, there were
no other annual compensation, perquisites or other personal benefits,
securities or property equal to the lesser of $50,000 or 10% of the
total annual salary and bonus reported for such Named Executive
Officer.
74
Option/SAR Grants Table
The following table sets forth the individual grants of stock options and
freestanding SARs made during the fiscal year ended March 31, 2005 to any Named
Executive Officer:
Option/SAR Grants in Last Fiscal Year
Percent of
Number of Total
Securities Options/SARs Exercise
Underlying Granted to or Base Grant Date
Options/SARs Employees in Price Present Value(1)
Name Granted (#) Fiscal Year(1) ($/Sh) Expiration Date ($)
- ---------------------------------------------------------------------------------------------------------------------
Salvatore J. Furnari(2) 70,000 21% $2.05 October 1, 2014 $ 41,300
John W. Jackson(3) 7,000 2% $1.28 October 1, 2014 $ 5,040
Christopher E. Morini(4) 1,000 * $1.28 October 1, 2014 $ 720
- ----------
*Less than 1%
(1) We granted a total of 333,930 options during the fiscal year ended
March 31, 2005 and estimated the fair value of the stock options at the
date of grant, using a Black-Scholes option-pricing model with the
following assumptions: (i) no dividend yield, (ii) 44.9% volatility,
(iii) risk-free interest rate of 4.12%, and (iv) expected life of 10
years.
(2) In consideration for past performance and continued employment, on
October 1, 2004, we granted Mr. Furnari an option to acquire 70,000
shares of our common stock at an exercise price of $2.05 per share. The
market price on the date of grant was $1.20 per share. This option is
fully exercisable with an expiration date of October 1, 2014.
(3) In consideration for past performance and continued employment, on
October 1, 2004, we granted Mr. Jackson an option to acquire 7,000
shares of our common stock at an exercise price of $1.28 per share. The
market price on the date of grant was $1.20 per share. This option is
fully exercisable with an expiration date of October 1, 2014.
(4) In consideration for past performance and continued employment, on
October 1, 2004, we granted Mr. C. Morini an option to acquire 1,000
shares of our common stock at an exercise price of $1.28 per share. The
market price on the date of grant was $1.20 per share. This option is
fully exercisable with an expiration date of October 1, 2014.
Aggregate Option/SAR Exercises and Fiscal Year-End Option/SAR Value Table
The following table summarizes for each Named Executive Officer each exercise of
stock options during the fiscal year ended March 31, 2005 and the fiscal
year-end value of unexercised options:
Aggregate Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End
Option/SAR Values
Shares Number of Securities Value of
Acquired Underlying Unexercised Unexercised
on Value Options/SARS at In-the-Money Options/SARS
Exercise Realized Fiscal Year-End at Fiscal Year-End
Name (#) ($) (#) ($)
- ----------------------------------------------------------------------------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
-------------- ----------------- -------------- -----------------
Michael E. Broll -- -- 200,000 -- -- --
Christopher J. New -- -- 126,318 -- $ 40,750 --
Salvatore J. Furnari -- -- 100,000 -- $ 25,000 --
John W. Jackson -- -- 103,429 -- $ 31,247 --
Angelo S. Morini -- -- 2,963,447 75,000 $ 77,515 --
Christopher E. Morini -- -- 97,429 -- $ 25,127 --
75
The value of unexercised in-the-money options at March 31, 2005 is calculated as
the difference between the per share exercise price and the market value of
$2.30, the closing price of our common stock on March 31, 2005 as reported by
the American Stock Exchange ("AMEX").
Compensation of Directors
Standard Arrangements
Each non-employee director who served on the Board of Directors during the
fiscal year ended March 31, 2005 was entitled to receive a fee of $1,500 plus
expenses for each Board of Directors meeting in which they attended in person.
Additionally, each of our non-employee directors is entitled to receive, on
October 1 of each year, options to purchase a number of shares of common stock
equal to (i) 286 shares, if such director served for a full year prior to the
October 1 anniversary date, or (ii) a pro rated amount equal to 24 shares for
each full month served during the year prior to such anniversary date, if such
director did not serve for a full year prior to the anniversary date. Such
options are granted pursuant to our 1991 Non-Employee Director Stock Option
Plan, which was adopted by the Board of Directors on October 1, 1991, and
approved by the stockholders of our Company on January 31, 1992, and was amended
by that certain 1996 Amendment and Restatement of the 1991 Non-Employee Director
Stock Option Plan (as amended, the "Director Plan").
Other Arrangements
David H. Lipka received $59,000 for his service as Chairman of the Board during
the fiscal year ended March 31, 2005. On October 1, 2004, we granted Joanne R.
Bethlahmy an option to purchase up to 200,000 shares of common stock at an
exercise price of $1.56 per share (130% of the closing price of the common stock
as reported by AMEX) in consideration of her appointment as a member of the
Board of Directors. Ms. Bethlahmy also received a $10,000 payment to a company
she controls who provided marketing services for our Company during the fiscal
year ended March 31, 2005. However, she returned this compensation to our
Company in order to remain an independent director on our audit committee.
During the fiscal year ended March 31, 2005, Charles L. Jarvie received total
compensation of $59,000 for his marketing consulting services to our Company.
Compensation of Management
Employment Agreements
Michael E. Broll. On July 8, 2004, Michael E. Broll, a member of our Board of
Directors, was appointed as the Chief Executive Officer upon the resignation of
Mr. New. We entered into a one-year employment agreement with Mr. Broll pursuant
to which 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 $3,500 per month 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.
Christopher J. New. On July 8, 2004, Mr. New resigned from his position as Chief
Executive Officer in order to pursue other opportunities. In accordance with the
Separation and Settlement Agreement between our Company and Mr. New, we agreed
to pay Mr. New $444,883. This settlement will be paid out in nearly equal
installments over two years payable on our regular payroll dates. In addition to
the compensation, we 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 an exercise price of $1.67 per share) and that certain Non-Qualified
Stock Option Agreement dated July 16, 2001 (for 100,000 shares at an exercise
price of $2.05 per share) will continue in full force and effect as if he was
still employed by our Company. As of March 31, 2005, the remaining amount due
was $287,253.
76
Salvatore J. Furnari. On November 11, 2001, Mr. Furnari was appointed as
Controller and on July 8, 2002, he was appointed as our Chief Financial Officer.
Under the terms of his current employment agreement, he will receive an annual
base salary of $145,000. Mr. Furnari is entitled to standard health benefits and
an auto allowance of $1,500 per month. In the event Mr. Furnari's employment is
terminated without cause, he will be entitled to receive one year of his base
salary, vacation pay, auto allowance and health benefits as severance.
Angelo S. Morini. In a Second Amended and Restated Employment Agreement
effective October 13, 2003, Angelo S. Morini our Founder, Vice-Chairman and
President resigned from his positions with our Company as Vice-Chairman and
President and he is no longer be involved in the daily operations of our
Company. He retains the title of Founder and has been named Chairman Emeritus.
Mr. Morini continues to be an employee and a member of our Board of Directors.
The agreement is for a five-year period beginning October 13, 2003 and provides
for an annual base salary of $300,000, plus life insurance, standard health
insurance benefits, club dues and an auto allowance. Other material provisions
of the Agreement are as follows:
o For the term of Mr. Morini's employment, we shall cause Mr. Morini
to be nominated for election to our Board of Directors as a member
of the slate of directors proposed by our Company in its proxy
statement for any meeting of our stockholders whereby directors
shall be elected. Notwithstanding the foregoing, in the event Mr.
Morini is not elected to the Board of Directors by the stockholders
at any meeting of our stockholders for which the proxy statement
indicates Mr. Morini is nominated for election as a member of the
slate of directors proposed by our Company, such obligations shall
immediately cease.
o If the agreement is terminated by our Company without cause, Mr.
Morini shall: (a) be entitled to continued payment of his annual
compensation, health insurance benefits, club dues, auto allowance
and life insurance benefits for the remainder of the term of the
Agreement, (b) become fully "vested" under the terms of any stock
option agreements executed and delivered prior to, along with, or
after the agreement and (c) be released from the terms of the
$12,772,200 Loan Agreement dated June 15, 1999 and all monies
outstanding thereunder will be forgiven by our Company. The
provisions of the agreement related to the forgiveness of the
$12,772,200 loan remain unchanged from the first Amended and
Restated Employment Agreement dated June 15, 1999. Mr. Morini
acknowledges that his change in role does not constitute a
termination of Mr. Morini by our Company, under the First Amended
and Restated Employment Agreement.
o If Mr. Morini terminates his employment in any manner other than in
connection with a material breach of the agreement by our Company,
he shall not be entitled to receive any further compensation or
benefits, except that if he terminates his employment in connection
with a change of control (as defined in the agreement) in our
Company for which he did not vote, he will be released from the
terms of the $12,772,200 Loan Agreement dated June 15, 1999 and all
monies outstanding thereunder will be forgiven by our Company. The
provisions of the agreement related to the forgiveness of the
$12,772,200 loan remain unchanged from the first Amended and
Restated Employment Agreement dated June 15, 1999.
We accrued and expensed the five-year cost of this agreement in during the
fiscal year ended March 31, 2004. The total estimated costs expensed under this
agreement are $1,830,329 of which $1,292,575 remained unpaid but accrued
($366,305 as short-term liabilities and $926,270 as long-term liabilities) as of
March 31, 2005. The long-term portion will be paid out in nearly equal monthly
installments ending in October 2008.
In the event that the $12,772,200 loan is forgiven, we would show this amount as
a forgiveness of debt in our Statement of Operations. In the event that Mr.
Morini is unable to pay the loan when due and we foreclose on the shares, we
will show a loss on collection for the amount, if any, that the value of the
2,914,286 underlying collateral shares are below the value of the note. Assuming
the market price on July 12, 2005 of $2.03, we would show a loss of nearly
$6,850,000 in the Statement of Operations. Although both of these scenarios will
result in material losses to our operations, it will not have any affect on the
balance sheet since the $12,772,200 loan amount is already shown as a
contra-equity item in Stockholders' Equity.
77
John W. Jackson. In August of 1993, Mr. Jackson was appointed as Vice President
of Sales. Mr. Jackson's current employment agreement provides for a base salary
of $144,900 and an auto allowance of $1,500 per month. Mr. Jackson will also be
entitled to a bonus that shall not exceed 40% of his base salary based on
certain personal and Company goals as established by our Chief Executive
Officer. In the event of a change in ownership of our Company which results in
his termination, Mr. Jackson will be entitled to receive three years of his base
salary as severance. In the event Mr. Jackson's employment is otherwise
terminated, he is entitled to receive one year of his base salary as severance.
Christopher E. Morini. Angelo S. Morini's brother, Christopher E. Morini, works
for our Company as Vice President of New Business Development and Key Accounts.
From February of 1993 until October 2001, Mr. C. Morini served as Vice President
of Marketing. Mr. C. Morini's current employment agreement provides for a base
salary of $155,000 per year, an auto allowance of $1,500 per month and monthly
country club dues. Mr. C. Morini will also be entitled to a bonus that shall not
exceed 40% of his base salary based on certain personal and Company goals as
established by our Chief Executive Officer. In the event Mr. C. Morini's
employment is terminated without cause, Mr. C. Morini will be entitled to
receive five years of his base salary, club dues and auto allowance as
severance.
Compensation Committee Interlocks and Insider Participation
During the fiscal year ended March 31, 2005, the Compensation Committee members
consisted of Charles L. Jarvie (chairman), Thomas R. Dyckman and Joseph J.
Juliano, who resigned for personal reasons on March 23, 2005.
None of the members of the Compensation Committee is or has been an officer or
employee of our Company. All members were independent within the meaning of the
listing standards of the AMEX except for Mr. Juliano, who in fiscal 2002,
received compensation in excess of $60,000 for his services in developing and
maintaining business relationships with prospective and existing customers and
suppliers on behalf of our Company. During the fiscal year ended March 31, 2002,
Mr. Juliano, received cash or benefits totaling $77,520.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
Equity Compensation Plan Information
The following table describes our compensation plans under which our common
stock is authorized for issuance as of March 31, 2005:
78
Equity Compensation Plan Information Table
(a) (b) (c)
Plan Category Number of securities Weighted-average Number of securities
to be issued upon exercise price of remaining available
exercise of outstanding options, for future issuance
outstanding options, warrants and rights under equity
warrants and rights compensation plans
(excluding securities
reflected in column
(a))
Equity compensation plans approved by
security holders 4,420,380 $ 3.09 25,537
Equity compensation plans not
approved by security holders (1) 641,429 $ 3.00 N/A
-----------------------------------------------
Total 5,061,809 $ 3.08
===============================================
(1) These securities were issued pursuant to individual compensation
arrangements prior to July 2, 1997 or after September 30, 2003 and have
not been approved by security holders.
- --------------------------------------------------------------------------------
Security Ownership of Certain Beneficial Owners
The following table describes the beneficial ownership of our common stock by
each person or entity known to our Company to be the beneficial owner of more
than 5% of the outstanding shares of our capital stock outstanding as of July
12, 2005. Beneficial ownership has been determined in accordance with the rules
of the Securities and Exchange Commission to include securities that a named
person or entity has the right to acquire within sixty (60) days.
Name and Address Amount and Nature of
of Beneficial Owner Beneficial Ownership (1) Percent of Class (2)
--------------------------------------------------------------------------------------------------
Angelo S. Morini
2441 Viscount Row
Orlando, Florida 32809 6,462,806 (3) 28.1%
Frederick A. DeLuca
c/o Doctor's Associates, Inc.
325 Bic Drive
Milford, Connecticut 06460 3,869,842 (4) 19.3%
John Hancock Advisors, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199 1,441,348 (5) 7.2%
Fromageries Bel S.A.
4 rue d Anjou
75008 Paris, France 1,111,112 (6) 5.5%
79
(1) The inclusion herein of any shares deemed beneficially owned does not
constitute an admission of beneficial ownership of these shares.
(2) The total number of shares of our common stock outstanding as of July
12, 2005 is 20,043,474. The percentages are calculated on the basis of
the amount of shares outstanding plus shares which may be acquired
through the exercise of options, warrants, rights or conversion
privileges by such holder within sixty (60) days of July 12, 2005.
(3) Includes options to acquire 2,963,197 shares of our common stock, which
are currently exercisable at prices ranging from $2.05 to $5.25 per
share. Options expire as to 13,072 shares on October 1, 2006, as to
432,797 on July 1, 2007, as to 517,203 shares on December 4, 2007, as
to 1,357,000 shares on June 15, 2009, as to 343,125 on December 15,
2010, and as to 300,000 on April 19, 2011. Also includes a warrant to
purchase 250 shares at an exercise price of $5.744 per share, which
expires on January 17, 2007. With the exception of the options, 10,500
shares held in a nominee name, 286 shares held in joint tenancy and 714
shares held individually, all of Mr. Morini's shares and warrant are
held by Morini Investments Limited Partnership, a Delaware limited
partnership, of which Mr. Morini is the sole limited partner and Morini
Investments LLC, a Delaware limited liability company, is the sole
general partner. Mr. Morini is the sole member of Morini Investments
LLC.
(4) The information is based solely on a Schedule 13D/A filed with the SEC
on June 27, 2005. Mr. Frederick A. DeLuca has direct beneficial
ownership of and has sole voting and investment dispositive power over
all the reported shares.
(5) The information is based solely on a Schedule 13G filed with the SEC on
February 7, 2005 by each of the reporting persons listed below. John
Hancock Advisers, LLC has direct beneficial ownership of and has sole
voting and dispositive power over all the reported shares pursuant to
Advisory Agreements for the following: Manulife Financial Corporation
("MFC"), and MFC's indirect, wholly-owned subsidiary, John Hancock
Financial Services ("JHFS"), JHFS's direct, wholly-owned subsidiary
John Hancock Life Insurance Company ("JHLICO"), JHLICO's direct,
wholly-owned subsidiary John Hancock Subsidiaries, LLC ("JHS"), JHS's
direct, wholly-owned subsidiary The Berkeley Financial Group ("TBFG"),
and TBFG's direct, wholly-owned subsidiary John Hancock Advisers, LLC.
Each of MFC, JHFS, JHLICO, JHS and TBFG report that they do not
beneficially own any of the reported shares except through their
indirect, wholly-owned subsidiary, John Hancock Advisers, LLC.
(6) The information is based solely on a Schedule 13D filed with the SEC on
June 9, 2003, by Fromageries Bel S.A. Fromageries Bel S.A. has direct
beneficial ownership of all the reported shares. Unibel, a French
limited partnership, is deemed to beneficially own the reported shares
by reason of the provisions of Rule 13d-3 promulgated under the
Securities Exchange Act of 1934, as amended. Each of Fromageries Bel
S.A. and Unibel, a French limited partnership, has shared voting power
and shared dispositive power over all the reported shares of our common
stock.
80
Security Ownership of Management
The following table describes the beneficial ownership of our common stock by
(i) each Named Executive Officer, (ii) each director, and (iii) all of our
directors and executive officers as a group, outstanding as of July 12, 2005.
Beneficial ownership has been determined in accordance with the rules of the
Securities and Exchange Commission to include securities that a named person has
the right to acquire within sixty (60) days:
Amount and Nature of
Name of Beneficial Owner Beneficial Ownership (1) Percent of Class (2)
--------------------------------------------------------------------------------------------------
David H. Lipka 259,067 (3) 1.3%
Joanne R. Bethlahmy 100,000 (4) *
Thomas R. Dyckman 200,511 (3) 1.0%
Charles L. Jarvie 200,511 (3) 1.0%
Angelo S. Morini 6,462,806 (5) 28.1%
Patrice M.A. Videlier 382 (6) *
Michael E. Broll 201,114 (7) 1.0%
Christopher J. New 131,588 (8) *
Salvatore J. Furnari 103,000 (9) *
John W. Jackson 106,866 (10) *
Christopher E. Morini 97,429 (11) *
------------------------------------------------------------
All executive officers and
directors as a group 7,863,274 32.3%
============================================================
* Less than 1%.
(1) The inclusion herein of any shares deemed beneficially owned does not
constitute an admission of beneficial ownership of these shares.
(2) The total number of shares of our common stock outstanding as of July 12,
2005 is 20,043,474. The percentages are calculated on the basis of the
amount of shares outstanding plus shares which may be acquired through the
exercise of options, warrants, rights or conversion privileges by such
holder within sixty (60) days of July 12, 2005.
(3) Includes currently exercisable options to acquire 200,000 shares of our
common stock at $2.17 per share, which expire on December 17, 2007. Also,
includes currently exercisable options to acquire 225 shares of our common
stock at $2.90 per share, which expire on October 1, 2013, and currently
exercisable options to acquire 286 shares of our common stock at $1.20 per
share, which expire on October 1, 2014.
(4) Includes currently exercisable options to acquire 100,000 shares of our
common stock at $1.56 per share, which expire on October 1, 2009.
81
(5) Includes options to acquire 2,963,197 shares of our common stock, which are
currently exercisable at prices ranging from $2.05 to $5.25 per share.
Options expire as to 13,072 shares on October 1, 2006, as to 432,797 on
July 1, 2007, as to 517,203 shares on December 4, 2007, as to 1,357,000
shares on June 15, 2009, as to 343,125 on December 15, 2010, as to 300,000
on April 19, 2011. Also includes a warrant to purchase 250 shares at an
exercise price of $5.744 per share, which expires on January 17, 2007. With
the exception of the options, 10,500 shares held in a nominee name, 286
shares held in joint tenancy and 714 shares held individually, all of Mr.
Morini's shares and warrant are held by Morini Investments Limited
Partnership, a Delaware limited partnership, of which Mr. Morini is the
sole limited partner and Morini Investments LLC, a Delaware limited
liability company, is the sole general partner. Mr. Morini is the sole
member of Morini Investments LLC.
(6) Includes currently exercisable options to acquire 96 shares of our common
stock at $2.90 per share, which expire on October 1, 2013 currently
exercisable options to acquire 286 shares of our common stock at $1.20 per
share, which expire on October 1, 2014.
(7) Includes currently exercisable options to acquire 200,000 shares of our
common stock at $3.29 per share, which expire on December 17, 2008.
(8) Includes currently exercisable options to acquire 100,000 shares of our
common stock at $2.05 per share, which expire on July 16, 2011. These
options had an original exercise price of $4.98 per share, but were
repriced to $2.05 on October 11, 2002. Also, includes currently exercisable
options to acquire 25,000 shares of our common stock at $1.67 per share,
which expire on December 5, 2012. Includes a warrant to purchase 1,318
shares of our common stock at an exercise price of $5.744 per share, which
expires on January 17, 2007.
(9) Includes currently exercisable options to acquire 20,000 and 10,000 shares
of our common stock at $2.05 per share, which expire on November 12, 2011
and July 8, 2012, respectively. These options had an original exercise
price of $5.60 and $4.55 per share, respectively, but were repriced to
$2.05 on October 11, 2002. Also, includes currently exercisable options to
acquire 70,000 shares of our common stock at $2.05 per share, which expire
on October 1, 2014.
(10) Includes currently exercisable options to acquire 96,429 shares of our
common stock at $2.05 per share. These options had an original exercise
prices ranging from $2.84 to $8.47 per share, but were repriced to $2.05 on
October 11, 2002. Options expire as to 7,143 shares on May 16, 2006, as to
14,286 shares on September 24, 2008, and as to 75,000 shares on April 19,
2011. Also, includes currently exercisable options to acquire 7,000 shares
of our common stock at $1.28 per share, which expire on October 1, 2014.
(11) Includes currently exercisable options to acquire 96,429 shares of our
common stock at $2.05 per share. These options had an original exercise
prices ranging from $2.84 to $8.47 per share, but were repriced to $2.05 on
October 11, 2002. Options expire as to 7,143 shares on May 16, 2006, as to
14,286 shares on September 24, 2008, and as to 75,000 shares on April 19,
2011. Also, includes currently exercisable options to acquire 1,000 shares
of our common stock at $1.28 per share, which expire on October 1, 2014.
82
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Transactions with Management and Others
Transactions with Officers and Directors
Please see "ITEM 11. EXECUTIVE COMPENSATION."
Transactions with Others
Frederick A. DeLuca, greater than 5% Common Stockholder
On October 6, 2004, we completed a private placement of our common stock,
whereby we issued a total of 2,000,000 shares to Mr. Fredrick DeLuca (an
existing stockholder of our Company) for aggregate gross proceeds to our Company
of $2,300,000. These proceeds were used to redeem our Series A convertible
preferred stock. The purchase price of the shares was $1.15 per share (95% of
the prior 5-day trading closing stock price average). Mr. DeLuca also received a
warrant to purchase up to 500,000 shares of our common stock at an exercise
price of $1.15 per share for a period of five years. In June 2005, we agreed to
reduce the per share exercise price on this warrant to $0.92 and reduced the per
share exercise price on a warrant issued in a prior year to purchase up to
100,00 shares to $1.36 to induce him to exercise his warrants. All of these
warrants were exercised on June 16, 2005 for total proceeds of $596,000.
In accordance with a registration rights agreement with Mr. DeLuca, we agreed to
file and obtain effectiveness of a registration statement with the Securities
and Exchange Commission within 180 days of closing to register the shares issued
in the private placement and to include the shares underlying the warrants
described above. We agreed that if a registration statement was not filed, or
did not become effective within the defined period of time, then in addition to
any other rights the investor may have, we would be required to pay a penalty of
$57,500 per month. We filed a registration statement on Form S-3 on March 14,
2005. However, this registration statement has not yet been declared effective.
We have received from Mr. DeLuca an extension of time until September 1, 2005 to
have the registration statement declared effective by the SEC. Additionally, Mr.
DeLuca waived all penalties and remedies for failure to have an effective
registration statement until September 1, 2005.
Indebtedness of Management
In June 1999, in connection with an amended and restated employment agreement
for Angelo S. Morini, our Company's Founder, we 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 our common stock into a
single note receivable in the amount of $12,772,200 that is due on June 15,
2006. This single consolidated note is non-interest bearing and non-recourse and
is secured by the 2,914,286 underlying shares of our common stock. Per the
October 2003 Second Amended and Restated Employment Agreement between our
Company and Mr. Morini, 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 stockholder.
83
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Audit Fees
With respect to the fiscal years ended March 31, 2005 and 2004, the aggregate
fees (including expenses) charged to our Company by BDO Seidman, LLP for
auditing the annual financial statements and reviewing interim financial
statements were $154,447 and $132,732, respectively. Audit fees consist of those
fees incurred in connection with statutory and regulatory filings or
engagements; fees necessary to perform an audit or review in accordance with
Generally Accepted Auditing Standards; and services that generally only an
independent accountant reasonably can provide, such as comfort letters,
statutory audits, attest services, consents and assistance with and review of
documents filed with the Securities and Exchange Commission ("SEC").
Approximately 75% and 74% of the total hours spent by the auditors in carrying
out the audit of our financial statements for the year ended March 31, 2005 and
2004, respectively were spent by Cross, Fernandez and Riley LLP ("CFR"), an
independent member of the BDO Seidman Alliance network of firms. CFR and its
employees are not full-time, permanent employees of BDO Seidman, LLP.
Audit-Related Fees
During the fiscal years ended March 31, 2005 and 2004, BDO Seidman, LLP charged
our Company $21,869 and $16,805 for audit-related fees. These fees related to
the review and responses to SEC comment letters, accounting research and audit
committee meeting attendance.
Tax Fees
BDO Seidman, LLP did not render any tax services during the fiscal years ended
March 31, 2005 and 2004.
All Other Fees
There were no fees for other services charged to our Company by BDO Seidman, LLP
during the fiscal years ended March 31, 2005 and 2004.
The Audit Committee has considered and determined that BDO Seidman, LLP's
provision of non-audit services to our Company during the fiscal years ended
March 31, 2005 and 2004 is compatible with maintaining their independence.
Audit Committee Pre-Approval Policies and Procedures
The Audit Committee's pre-approval policy is as follows:
o The Audit Committee will review and pre-approve on an annual basis
any known audit, audit-related, tax and all other services, along
with acceptable cost levels, to be performed by any audit firm. The
Audit Committee may revise the pre-approved services during the
period based on subsequent determinations. Pre-approved services
typically include: statutory audits, quarterly reviews, regulatory
filing requirements, consultation on new accounting and disclosure
standards, employee benefit plan audits, reviews and reporting on
our internal controls and specified tax matters.
o Any proposed service that is not pre-approved on the annual basis
requires a specific pre-approval by the Audit Committee, including
cost level approval.
84
o The Audit Committee may delegate pre-approval authority to the Audit
Committee chairman. The chairman must report to the Audit Committee,
at the next Audit Committee meeting, any pre-approval decisions
made.
The Audit Committee is responsible for approving all engagements to perform
audit or non-audit services prior to Company engaging BDO Seidman, LLP or Cross,
Fernandez and Riley, LLP. All of the services under the headings Audit Fees,
Audit-Related Fees, Tax Fees, and All Other Fees were approved by the Audit
Committee pursuant to Rule 2-01 paragraph (c)(7)(i)(C) of Regulation S-X of the
Exchange Act.
85
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
Financial Statements
The following financial statement documents are filed as part of this Form 10-K:
Balance Sheets at March 31, 2005 and 2004
Statements of Operations for the years ended March 31, 2005,
2004, and 2003
Statement of Stockholders' Equity for the years ended March
31, 2005, 2004, and 2003
Statements of Cash Flows for the years ended March 31, 2005,
2004, and 2003
Notes to Financial Statements
Exhibits
The following Exhibits are filed as part of this Form 10-K:
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 Wachovia 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.)
86
* 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.)
* 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.)
* 4.18 Securities Purchase Agreement dated as of October 6, 2004
between Galaxy Nutritional Foods, Inc. and Frederick A. DeLuca
(Filed as Exhibit 4.18 on Form 8-K filed October 8, 2004.)
* 4.19 Registration Rights Agreement dated as of October 6, 2004
between Galaxy Nutritional Foods, Inc. and Frederick A. DeLuca
(Filed as Exhibit 4.19 on Form 8-K filed October 8, 2004.)
* 4.20 Warrant to Purchase Securities of Galaxy Nutritional Foods,
Inc. dated as of October 6, 2004 in favor of Frederick A.
DeLuca (Filed as Exhibit 4.20 on Form 8-K filed October 8,
2004.)
* 4.21 Stock Repurchase Agreement dated as of October 6, 2004 by and
among Galaxy Nutritional Foods, Inc., BH Capital Investments
L.P. and Excalibur Limited Partnership (Filed as Exhibit 4.21
on Form 8-K filed October 8, 2004.)
* 4.22 Registration Rights Agreement dated as of October 6, 2004 by
and among Galaxy Nutritional Foods, Inc., BH Capital
Investments L.P. and Excalibur Limited Partnership (Filed as
Exhibit 4.22 on Form 8-K filed October 8, 2004.)
* 4.23 Warrant to Purchase Securities of Galaxy Nutritional Foods,
Inc. dated as of October 6, 2004 in favor of BH Capital
Investments L.P. (Filed as Exhibit 4.23 on Form 8-K filed
October 8, 2004.)
* 4.24 Warrant to Purchase Securities of Galaxy Nutritional Foods,
Inc. dated as of October 6, 2004 in favor of Excalibur Limited
Partnership (Filed as Exhibit 4.24 on Form 8-K filed October
8, 2004.)
* 4.25 Asset Purchase Agreement dated June 30, 2005 between Galaxy
Nutritional Foods, Inc. and Schreiber Foods, Inc. (Filed as
Exhibit 4.25 on Form 8-K filed July 6, 2005.)
* 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.)
87
* 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 Wachovia 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 Wachovia 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 Wachovia 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 Wachovia 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 Wachovia
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.)
* 10.16 Third Amendment to Loan and Security Agreement dated November
10, 2004 between Galaxy Nutritional Foods, Inc. and Textron
Financial Corporation (Filed as Exhibit 10.16 on Form 10-Q for
the fiscal quarter ended December 31, 2004.)
* 10.17 Fourth Amendment to Loan and Security Agreement dated June 3,
2005 between Galaxy Nutritional Foods, Inc. and Textron
Financial Corporation (Filed as Exhibit 10.17 on Form 8-K
filed June 22, 2005.)
* 10.18 Letter Agreement dated June 17, 2005 between Galaxy
Nutritional Foods, Inc. and Textron Financial Corporation
(Filed as Exhibit 10.18 on Form 8-K filed June 22, 2005.)
88
* 10.19 Supply Agreement dated June 30, 2005 between Galaxy
Nutritional Foods, Inc. and Schreiber Foods, Inc. (Filed as
Exhibit 10.19 on Form 8-K filed July 6, 2005.)
* 10.20 Loan Modification Agreement June 30, 2005 between Galaxy
Nutritional Foods, Inc. and Wachovia Bank N.A (formerly
SouthTrust Bank). (Filed as Exhibit 10.19 on Form 8-K filed
July 6, 2005.)
14.1 Code of Ethics (Filed herewith.)
* 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.)
23.1 BDO Seidman, LLP Consent Letter (Filed herewith.)
31.1 Section 302 Certification of our Chief Executive Officer
(Filed herewith.)
31.2 Section 302 Certification of our Chief Financial Officer
(Filed herewith.)
32.1 Section 906 Certification of our Chief Executive Officer
(Filed herewith.)
32.2 Section 906 Certification of our Chief Financial Officer
(Filed herewith.)
* Previously filed and incorporated herein by reference.
89
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
GALAXY NUTRITIONAL FOODS, INC.
(Registrant)
Date: July 14, 2005 /s/ Michael E. Broll
-----------------------------------
Michael E. Broll
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Date: July 14, 2005 /s/ Michael E. Broll
-----------------------------------
Michael E. Broll
Chief Executive Officer & Director
(Principal Executive Officer)
Date: July 14, 2005 /s/ Salvatore J. Furnari
-----------------------------------
Salvatore J. Furnari
Chief Financial Officer & Vice
President of Finance
(Principal Financial & Accounting
Officer)
Date: July 14, 2005 /s/ David H. Lipka
-----------------------------------
David H. Lipka
Director and Chairman of the Board
Date: July 14, 2005 /s/ Joanne R. Bethlahmy
-----------------------------------
Joanne R. Bethlahmy
Director
Date: July 14, 2005 /s/ Thomas R. Dyckman
-----------------------------------
Thomas R. Dyckman
Director
Date: July 14, 2005 /s/ Charles L. Jarvie
-----------------------------------
Charles L. Jarvie
Director
Date: July 14, 2005 /s/ Angelo S. Morini
-----------------------------------
Angelo S. Morini
Director
Date: July 14, 2005 /s/ Patrice M.A. Videlier
-----------------------------------
Patrice M.A. Videlier
Director
90