SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act
of 1934
|X| Filed by the Registrant
|_| Filed by a Party other than the Registrant
Check the appropriate box:
|_| Preliminary Proxy Statement
|_| Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
|X| Definitive Proxy Statement
|_| Definitive Additional Materials
|_| Soliciting Material Pursuant to ss.240.14a-12
GALAXY NUTRITIONAL FOODS, INC., a Delaware corporation
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the approximate box)
|X| No fee required.
|_| Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
O-11.
1. Title of each class of securities to which transaction
applies:
2. Aggregate number of securities to which transaction applies:
3. Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule O-11 (Set forth the
amount on which the filing fee is calculated and state how it
was determined):
4. Proposed maximum aggregate value of transaction:
5. Total fee paid:
|_| Fee paid previously with preliminary materials.
|_| Check box if any part of the fee is offset as provided
by Exchange Act Rule O-11(a)(2) and identify the filing
for which the offsetting fee was paid previously.
Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its
filing.
1. Amount Previously Paid:
2. Form, Schedule or Registration Statement No.:
3. Filing Party:
4. Date Filed:
2
[GALAXY NUTRITIONAL FOODS LOGO]
GALAXY NUTRITIONAL FOODS, INC.
2441 Viscount Row
Orlando, Florida 32809
(407) 855-5500
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD WEDNESDAY, NOVEMBER 23, 2005
To the Stockholders:
A Special Meeting of Stockholders of Galaxy Nutritional Foods, Inc. (the
"Company"), will be held Wednesday, November 23, 2005 at 10:00 a.m. at the
Company's headquarters, located at 2441 Viscount Row, Orlando, Florida 32809 for
the following purpose:
1. To approve the sale of the Company's manufacturing equipment as
contemplated by the Asset Purchase Agreement, dated as of June 30, 2005, by and
between Schreiber Foods, Inc., a Wisconsin corporation, and the Company (the
"Proposed Asset Sale"), which may be deemed a sale of substantially all of the
assets of the Company pursuant to Delaware General Corporation Law ("DGCL"); and
2. To consider and act upon any other matters which may properly
come before the meeting or any adjournment thereof.
The Proposed Asset Sale is more fully described in the accompanying Proxy
Statement. Under the DGCL, stockholders do not have appraisal rights in
connection with the Proposed Asset Sale. Stockholders of record at the close of
business on September 26, 2005 will be entitled to notice of, and to vote at,
the meeting or any adjournment thereof. Following the formal business of the
meeting, we will report on the affairs of the Company and respond to questions
of general interest to stockholders.
By Order of the Board of Directors
/s/ LeAnn Hitchcock
-------------------
LeAnn Hitchcock
Corporate Secretary
Orlando, Florida
November 1, 2005
STOCKHOLDERS ARE REQUESTED TO VOTE YOUR SHARES BY PHONE, VIA THE INTERNET OR BY
SIGNING THE ENCLOSED PROXY CARD AND RETURNING IT IN THE ENCLOSED STAMPED
ENVELOPE. IF YOU ATTEND THE MEETING, YOU MAY REVOKE YOUR PROXY AND VOTE IN
PERSON.
GALAXY NUTRITIONAL FOODS, INC.
2441 Viscount Row
Orlando, Florida 32809
PROXY STATEMENT
FOR
A SPECIAL MEETING OF STOCKHOLDERS
to be held Wednesday, November 23, 2005
Proxies in the form enclosed with this proxy statement are solicited by the
Board of Directors of Galaxy Nutritional Foods, Inc., a Delaware corporation
(the "Company"), for the use at the Special Meeting of Stockholders to be held
Wednesday, November 23, 2005 at 10:00 a.m., or at any adjournments or
postponements thereof, for the purposes set forth in the accompanying Notice of
Special Meeting of Stockholders. The Special Meeting will be held at the
Company's headquarters, located at 2441 Viscount Row, Orlando, Florida 32809
This proxy statement and the enclosed proxy card are first being mailed on
or about November 2, 2005 to the Company's stockholders entitled to vote at
the meeting. References in this proxy statement to "Galaxy", "we", "us", "our',
or the "Company" refers to Galaxy Nutritional Foods, Inc.
SUMMARY TERM SHEET
At the Special Meeting, our stockholders will consider and vote upon a
proposal to approve the sale of our manufacturing equipment as contemplated by
the Asset Purchase Agreement, dated as of June 30, 2005, by and between
Schreiber Foods, Inc., a Wisconsin corporation ("Schreiber"), and our Company
(the "Proposed Asset Sale"), which may be deemed a sale of substantially all of
our assets pursuant to Delaware General Corporation Law ("DGCL"). For your
convenience, we have set forth below a summary of certain information relating
to the Proposed Asset Sale that is contained under Proposal No. 1 in this proxy
statement. This summary does not contain all of the information that you may
consider to be important in determining how to vote on the Proposed Asset Sale.
You should carefully read the entire proxy statement and the other documents to
which we refer. These will give you a more detailed description of the Proposed
Asset Sale. Each item in this summary refers to the pages where that subject is
discussed in greater detail elsewhere in this proxy statement.
Summary of Existing Operations (page 11)
Currently, our Company is principally engaged in developing, manufacturing
and marketing a variety of healthy cheese, cheese alternatives and dairy-related
products. Our products are formulated and developed by our research and
development department, manufactured in and shipped from our two Orlando,
Florida facilities, and marketed and sold in two principal markets: retail and
food service.
Background of the Proposed Asset Sale (page 15)
Our Board of Directors concluded that our manufacturing capacity was
significantly in excess of its requirements. We believe that we are currently
operating at 15% of our manufacturing capacity. After reviewing alternatives
available to us, our Board of Directors concluded that it would be advantageous
for us to outsource our manufacturing to Schreiber and to sell our manufacturing
equipment. We determined that Schreiber was a highly respected contract
manufacturer that could produce high quality products on a more cost effective
basis than our Company. Our Board of Directors realized that if we could
outsource our manufacturing, we could sell the manufacturing equipment and use
the proceeds from such sale to pay off indebtedness and improve our capital
structure. In addition, our Board of Directors recognized that the reduction in
our debt service obligations that would result from paying off such indebtedness
would enhance cash flow, and allow us to increase our focus on marketing and
product research and development.
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On June 10, 2005, our Board of Directors unanimously approved the Proposed
Asset Sale and an outsourcing arrangement with Schreiber pursuant to a Supply
Agreement (as described below). On June 30, 2005, our Company and Schreiber
executed the Asset Purchase Agreement and the Supply Agreement.
Information about the Buyer (page 16)
The purchaser of our assets will be Schreiber, which is a privately held
cheese manufacturing company with annual sales exceeding $2 billion. Schreiber's
main business is contract manufacturing cheese, cheese alternative and other
dairy products for many well-known companies and brands.
Reasons for the Proposed Asset Sale (page 16)
Our Board of Directors considered a number of factors before recommending
that our stockholders approve the Proposed Asset Sale, including the
underutilization of our manufacturing capacity, our debt service obligations and
our dependence on our asset-based financing. The Board of Directors did not
engage an independent financial advisor to determine the fairness of the
Proposed Asset Sale to our stockholders but determined, based on the factors
described above and others, that the asset sale under the terms and conditions
contemplated by the Asset Purchase Agreement is fair to our stockholders.
Further, based on the procedural safeguards provided under the DGCL, including
the required approval of our Board of Directors and the required approval of our
stockholders owning at least a majority of our outstanding common stock, our
Board of Directors believes that the asset sale is procedurally fair to our
stockholders.
Purchase Price (page 17)
Schreiber will pay us a total purchase price of $8,700,000 for the assets
to be acquired under the Asset Purchase Agreement (the "Purchased Assets").
Payment will be made in cash at the closing.
Indemnification (page 17)
Under the terms of the Asset Purchase Agreement, we have agreed to
indemnify Schreiber against, among other things, any pre-closing debts,
liabilities or obligations of our Company, and any losses, liabilities or
damages that Schreiber may incur by reason of our failure to discharge our
pre-closing liabilities. Schreiber has agreed to indemnify us against, among
other things, any post-closing debts, liabilities or obligations of Schreiber.
Except in connection with any fraudulent misrepresentation by either party,
rights of indemnification shall be the sole remedy of the parties after the
closing of the Proposed Asset Sale.
Alternative Transactions (page 18)
If, at the Special Meeting, our stockholders holding a majority of the
outstanding shares of our common stock do not approve the sale of the Purchased
Assets, then, as soon as is reasonably practicable thereafter, our Company and
Schreiber will consummate one of the following transactions:
1. We will sell to Schreiber, and Schreiber will purchase from us,
certain alternative assets (constituting lees than substantially all
of our assets) for an aggregate purchase price of $2,115,000,
subject to certain conditions.
2. In the event that the parties are unable to satisfy the conditions
with respect to the sale of the alternative assets as contemplated
by alternative 1 above, then the parties would negotiate in good
faith to make such alternative assets available for use by Schreiber
on a basis and for such period (not to exceed 180 days) that are
reasonably acceptable to each of our Company and Schreiber.
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Termination (page 18)
The Asset Purchase Agreement provides that it may be terminated at any
time prior to the closing of the Proposed Asset Sale or the consummation of an
alternative transaction, by mutual written agreement of our Company and
Schreiber, or automatically upon written notice of termination of the Supply
Agreement (as described below). In the event the Asset Purchase Agreement is
terminated for any reason other than pursuant to a default by either party, the
Asset Purchase Agreement shall become void and there will be no liability
thereunder on the part of our Company or Schreiber.
Conditions to Close (page 18)
The closing of the Proposed Asset Sale is scheduled to occur on November
1, 2005 or, if later, the date that is three (3) business days after the date on
which all conditions to closing, including the approval of our stockholders, are
satisfied or waived. Since we have scheduled the Special Meeting for November
23, 2005, the closing of the Proposed Asset Sale will not occur prior to
November 23, 2005.
Representations and Warranties (page 19)
The Asset Purchase Agreement contains various representations and
warranties of our Company to Schreiber, and also contains various
representations and warranties of Schreiber to our Company. The representations
and warranties survive the closing until twelve months after the closing date.
Other Transactions (page 19)
We also agreed that between the signing of the Asset Purchase Agreement
and the closing of the Proposed Asset Sale we would not, except in the ordinary
course of our business, (i) enter into discussions, and would discontinue all
pending discussions, relating to any of the Purchased Assets, or (ii) sell,
lease or grant any option to sell or lease, give a security interest in or
otherwise create any encumbrance on any of the Purchased Assets.
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Other Material Agreements between the Company and Schreiber (page 19)
On June 30, 2005, in connection with the Asset Purchase Agreement, we
entered into a Supply Agreement with Schreiber (the "Supply Agreement").
Pursuant to the Supply Agreement, we agreed that (i) as of September 1, 2005,
Schreiber will be our sole third-party source of supply of substantially all of
our products for the term of the Supply Agreement, meaning that we can continue
manufacturing our products ourselves, and (ii) as of November 1, 2005, Schreiber
will be our sole source of supply of substantially all of our products, and we
will purchase our requirements of substantially all of our products exclusively
from Schreiber. The initial term of the Supply Agreement is for a period of five
years from the effective date of September 1, 2005 and is renewable at our
option for up to two additional five-year periods (for a total term of up to
fifteen years). If the closing of the Proposed Asset Sale has occurred and we do
not exercise our first option to extend the term, then we will be obligated to
pay Schreiber $1,500,000. If the closing of the Proposed Asset Sale has occurred
and we have exercised the first option to extend the term, but we do not
exercise our second option to extend the term, then we will be obligated to pay
Schreiber $750,000. If our stockholders do not approve the Proposed Asset Sale
at the Special Meeting, then we may terminate the Supply Agreement upon not more
than 180 days' notice delivered to Schreiber within thirty days of the Special
Meeting. If we do not terminate the Supply 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 Supply Agreement upon at
least 180 days' notice delivered to us prior to February 1, 2006.
On May 17, 2002, Schreiber filed a lawsuit against our 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. On May 6, 2004, Schreiber and our Company executed a settlement
agreement pursuant to which all claims in the patent infringement lawsuit were
dismissed. Pursuant to this settlement agreement, we procured a worldwide, fully
paid-up, nonexclusive license to own and use all of our individually wrapped
slice equipment, which Schreiber alleged infringed on Schreiber's patents. The
term of the license extends through the life of all patents named in the lawsuit
(and all related patents) and is assignable by us in connection with the sale of
our business. Pursuant to the settlement agreement, if, during the term of the
license, we receive an offer to purchase our Company or our business, we must
notify Schreiber of the offer and Schreiber will have the option to match the
offer or make a better offer to purchase our Company or our business. We have
not received any such offer, and the decision by our Board of Directors to cause
our Company to enter into the Asset Purchase Agreement was not based upon
receipt of any offer to purchase our Company or our business.
Use of Proceeds from the Proposed Asset Sale (page 21)
As a result of the consummation of the sale of the Purchased Assets, we
will be entitled to receive a purchase price of $8,700,000 on the closing date.
After payment of the expenses related to the Proposed Asset Sale, the proceeds
from the sale will first be used to pay the Orange County Tax Collector for
tangible personal property taxes due primarily on the Purchased Assets and the
remainder will be used to pay in full our term loan with Beltway Capital
Partners LLC (successor by assignment of our loan from Wachovia Bank, N.A.) and
to pay off the remaining obligations under capital leases related to certain
assets in the Proposed Asset Sale. To the extent the proceeds are not sufficient
to pay all of the above-mentioned obligations, we expect that such shortfall
will be paid from our availability under our asset-based line of credit from
Textron Financial Corporation or out of our cash reserves.
Conduct of Business Following the Proposed Asset Sale (page 21)
If the Proposed Asset Sale is approved and the closing conditions set
forth in the Asset Purchase Agreement are satisfied or waived, we will sell the
Purchased Assets to Schreiber, which may be deemed to be a sale of substantially
all of our assets pursuant to the DGCL. Following the consummation of the
Proposed Asset Sale, we will hold only certain limited assets, including
retained cash and certain other miscellaneous assets. Regardless of whether the
Proposed Asset Sale is consummated, our Company will convert into a branded
marketing company that will continue to market and sell our products, but will
no longer manufacture these products. Instead, such products will be
manufactured by Schreiber pursuant to the Supply Agreement.
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If, at the Special Meeting, our stockholders holding a majority of the
outstanding shares of our common stock do not approve the Proposed Asset Sale,
then, as soon as is reasonably practicable thereafter, our Company and Schreiber
will consummate one of two alternative transactions subject to the satisfaction
of certain conditions. Since we anticipate that our Company will convert into a
branded marketing company that will continue to market and sell our products,
but will no longer manufacture these products, we do not anticipate any need for
any of this manufacturing equipment. We will review alternative options
involving the sale of any manufacturing equipment not sold to Schreiber. There
can be no assurance that any third party will offer to purchase our
manufacturing assets for a price equal to or greater than the price proposed to
be paid by Schreiber in the Proposed Asset Sale, or that such assets can
otherwise be sold at all.
Vote Required and Board Recommendation (page 43)
The approval of the Proposed Asset Sale requires the affirmative vote of
the stockholders holding at least a majority of the outstanding shares of our
common stock. The Board of Directors believes that the Proposed Asset Sale is in
the best interests of our Company and our stockholders and recommends a vote
"FOR" this proposal. It is intended that the shares represented by the enclosed
form of proxy will be voted in favor of this proposal unless otherwise specified
in such proxy.
QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING
What proposal will be voted on at the Special Meeting?
The proposal to be voted on at the Special Meeting is whether to approve
the sale of our manufacturing equipment as contemplated by the Asset Purchase
Agreement, dated as of June 30, 2005, by and between Schreiber Foods, Inc., a
Wisconsin corporation, and our Company (the "Proposed Asset Sale"), which may be
deemed a sale of substantially all of our assets pursuant to Delaware General
Corporation Law ("DGCL").
Who is the purchaser?
The purchaser of our assets will be Schreiber Foods, Inc., a Wisconsin
corporation ("Schreiber"). Schreiber is a privately held cheese manufacturing
company with annual sales exceeding $2 billion. Schreiber's main business is
contract manufacturing of cheese, cheese alternative and other dairy products.
See "Proposal No. 1 - To Approve the Proposed Asset Sale - Information about the
Buyer."
What is the purchase price for our Assets?
Schreiber will pay us a total purchase price of $8,700,000 for our
manufacturing equipment, all of which will be paid in cash at closing. See
"Proposal No. 1 - To Approve the Proposed Asset Sale - Purchase Price."
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What will happen if the Proposed Asset Sale is approved?
If the Proposed Asset Sale is approved, we will proceed to consummate the
sale of assets subject to the satisfaction of the closing conditions set forth
in the Asset Purchase Agreement. We anticipate the Proposed Asset Sale will
close shortly following the Special Meeting; however, the timing of the closing
is dependent upon the satisfaction of such closing conditions. There can be no
guarantee that we will satisfy these conditions, and, therefore, there can be no
guarantee that the Proposed Asset Sale will be consummated even with stockholder
approval. See "Proposal No. 1 - To Approve the Proposed Asset Sale - Summary
Terms of the Asset Purchase Agreement."
Will our Company continue to operate after consummation of the Proposed Asset
Sale?
Yes. Our Company will continue to operate after the consummation of the
Proposed Asset Sale. On June 30, 2005, we entered into an outsourcing
arrangement with Schreiber, pursuant to which Schreiber will become our sole
source of supply of substantially all of our products. Accordingly, we
anticipate that our Company will convert into a branded marketing company that
will continue to market and sell our products, but will no longer manufacture
these products. Instead, such products will be manufactured by Schreiber
pursuant to the supply agreement. This change in our focus will occur whether or
not the Proposed Asset Sale is consummated. See "Proposal No. 1 - To Approve the
Proposed Asset Sale - Business of the Company Following the Proposed Asset Sale"
and "Proposal No. 1 - To Approve the Proposed Asset Sale - Other Material
Arrangements Between the Company and Schreiber."
What will happen if the Proposed Asset Sale is not approved?
If, at the Special Meeting, our stockholders holding a majority of the
outstanding shares of our common stock do not approve the Proposed Asset Sale,
then, as soon as is reasonably practicable thereafter, our Company and Schreiber
will consummate one of two alternative transactions subject to the satisfaction
of certain conditions. Since we anticipate that our Company will convert into a
branded marketing company that will continue to market and sell our products,
but will no longer manufacture these products, we do not anticipate any need for
any of this manufacturing equipment. We will review alternative options
involving the sale of any manufacturing equipment not sold to Schreiber. See
"Proposal No. 1 - To Approve the Proposed Asset Sale - Business of the Company
Following the Proposed Asset Sale" and "Proposal No. 1 - To Approve the Proposed
Asset Sale - Summary of Terms of the Asset Purchase Agreement."
What is our Board of Director's recommendation with respect to the proposal to
approve the Proposed Asset Sale?
Our Board of Directors recommends a vote "FOR" approval of the Proposed
Asset Sale. See "Proposal No. 1 - To Approve the Proposed Asset Sale - Vote
Required and Board Recommendation."
Why does our Board of Directors believe the Proposed Asset Sale is in the best
interest of our Company's stockholders?
Our Board of Directors considered the risks and challenges facing our
Company in the future as compared to the opportunities available to our Company
in the future and concluded that the Proposed Asset Sale was the best
alternative for maximizing value to our stockholders. In particular, the
proceeds from the Proposed Asset Sale will be used to pay in full our term loan
with Beltway Capital Partners LLC (successor by assignment of Wachovia Bank,
N.A.), which will decrease our debt service obligations. The additional cash
flow available as a result of the decrease in our debt service obligations will
be used to enhance our marketing and product research and development efforts.
See "Proposal No. 1 - To Approve the Proposed Asset Sale - Background of the
Proposed Asset Sale" and "Proposal No. 1 - To Approve the Proposed Asset Sale -
Reasons for the Proposed Asset Sale."
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Do I have any appraisal rights in connection with the Proposed Asset Sale?
No.
What vote is required to approve the Proposed Asset Sale?
The proposal to approve the Proposed Asset Sale requires the affirmative
vote of our stockholders holding at least a majority of our outstanding shares
of common stock. See "Proposal No. 1 - To Approve the Proposed Asset Sale - Vote
Required and Board Recommendation."
What do I need to do now?
After carefully reading and considering the information contained in this
proxy statement, you should vote your shares, per the instructions on the
enclosed proxy card, by phone, via the Internet, or by completing and signing
the enclosed proxy card and returning it in the enclosed return envelope as soon
as possible so that your shares may be represented at the Special Meeting. A
majority of shares entitled to vote must be represented at the meeting to enable
our Company to conduct business at the Special Meeting. See "Information
Concerning Solicitation and Voting."
Can I change my vote after I have submitted my signed proxy?
Yes. You can change your vote at any time before proxies are voted at the
Special Meeting. You can change your vote in one of three ways. First, you can
send a written notice to our Corporate Secretary at our executive offices,
stating that you would like to revoke your proxy. Second, you can complete and
submit a new proxy. Third, you can attend the meeting and vote in person. See
"Information Concerning Solicitation and Voting."
If my broker holds my shares in "street name," will the broker vote the shares
on my behalf?
A broker will vote shares only if the holder of the shares provides the
broker with instructions on how to vote. Shares held in "street name" by brokers
or nominees who indicate on their proxies that they do not have discretionary
authority to vote such shares as to a particular matter, referred to as "broker
non-votes," will not be voted in favor of such matter. The proposal to approve
the Proposed Asset Sale is a proposal that requires the affirmative vote of our
stockholders holding at least a majority of our outstanding shares of common
stock. Accordingly, broker non-votes will have the effect of a vote against the
proposal. We encourage all stockholders whose shares are held in street name to
provide their brokers with instructions on how to vote. See "Information
Concerning Solicitation and Voting - Quorum; Voting Rights."
Who can help answer my questions?
If you have any questions or need assistance with regard to voting your
shares, please contact our investor relations department at:
Galaxy Nutritional Foods, Inc.
2441 Viscount Row
Orlando, Florida 32809
Attention: Investor Relations
Telephone No.: (407) 855-5500
Facsimile No.: (407) 855-1099
If you have any questions about the Special Meeting or the proposals to be
voted on at the Special Meeting, or if you need additional copies of this proxy
statement or copies of any of our public filings referred to in this proxy
statement, you should contact our Investor Relations Department at (407)
855-5500. Our public filings can also be accessed at the Securities and Exchange
Commission's website at www.sec.gov. See "Where You Can Find More Information."
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INFORMATION CONCERNING SOLICITATION AND VOTING
Record Date and Voting Securities
Stockholders of record as of September 26, 2005 are entitled to notice of
and to vote at the Special Meeting and any adjournment thereof. As of September
26, 2005, 20,051,077 shares of our common stock, par value $.01 per share, were
issued and outstanding.
Voting and Solicitation
Each share of common stock outstanding as of the record date will be
entitled to one vote, and stockholders may vote in person or by proxy. At the
Special Meeting, we will be asking our stockholders to vote on a proposal to
approve the sale of our manufacturing equipment as contemplated by the Asset
Purchase Agreement, dated as of June 30, 2005, by and between Schreiber Foods,
Inc., a Wisconsin corporation, and our Company (the "Proposed Asset Sale"),
which may be deemed a sale of substantially all of our assets pursuant to
Delaware General Corporation Law ("DGCL"). We are soliciting stockholders to
authorize proxies to vote with respect to this proposal. Our Board of Directors
knows of no other matters to be presented at the Special Meeting. If any other
matter should be presented at the Special Meeting upon which a vote may be
properly taken, shares represented by all proxies received by the Board of
Directors will be voted with respect thereto in accordance with the judgment of
the persons named as proxies.
The solicitation of proxies in the accompanying form is made by, and on
behalf of, our Board of Directors and our Company will bear the cost of
soliciting proxies. There will be no solicitation of proxies other than by mail
or personal solicitation by our officers, directors and employees, and no
additional compensation will be paid to such persons in connection with such
services. We will make arrangements with brokerage houses and other custodians,
nominees and fiduciaries for the forwarding of proxy materials to the beneficial
owners of shares held of record by such persons, and such person will be
reimbursed for reasonable expenses incurred by them.
Effect of Proxies
By submitting your proxy by phone or via the Internet or by signing and
returning the enclosed proxy card, a stockholder will be giving its proxy to our
Chairman of the Board of Directors and Chief Executive Officer and authorizing
them to vote its shares. Where a choice has been specified on the proxy with
respect to the foregoing matters, the shares represented by the proxy will be
voted in accordance with the specification, and will be voted FOR such proposal
if no specification is indicated.
A stockholder has the power to revoke its proxy at any time before the
convening of the Special Meeting. A stockholder may revoke its proxy by
delivering written notice of such revocation or by delivering a new proxy to the
attention of LeAnn C. Hitchcock, Corporate Secretary, on or before November 23,
2005. In addition, on the day of the Special Meeting, prior to the convening
thereof, revocations may be delivered to the tellers who will be seated at the
door of the meeting room.
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Quorum; Votes Required
Each share of issued and outstanding common stock entitles the holder
thereof to one vote. Votes cast by proxy or in person at the Special Meeting
will be tabulated by an inspector of election appointed by the Board of
Directors for the Special Meeting and will determine whether a quorum is
present. Where, as to any matter submitted to the stockholders for a vote,
proxies are marked as abstentions (or stockholders appear in person but abstain
from voting), such abstentions are included in the number of shares present or
represented at the Special Meeting for purposes of determining the presence of
quorum but as unvoted for purposes of determining the approval of any matter
submitted to the stockholders for a vote. If a broker indicates on the proxy
that it does not have discretionary authority as to certain shares to vote on a
particular matter and has not received instructions from the beneficial owner,
which is known as a "broker non-vote," those shares will be considered present
at the Special Meeting for purposes of determining a quorum but will not be
considered to be represented at the Special Meeting for purposes of calculating
the vote required for approval of such matter.
Therefore, since the proposal to approve the Proposed Asset Sale requires
the affirmative vote of stockholders holding at least a majority of the issued
and outstanding shares of our common stock, abstentions and broker non-votes
will have the same effect as votes against the Proposed Asset Sale. We encourage
all stockholders whose shares are held in street name to provide their brokers
with instructions on how to vote.
No Appraisal Rights
Under the DGCL, our stockholders do not have appraisal rights in
connection with the Proposed Asset Sale.
Special Note Regarding Forward-Looking Statements
CERTAIN STATEMENTS MADED IN THIS PROXY STATEMENT ARE "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995. FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY TERMINOLOGY SUCH AS
"MAY", "WILL", "SHOULD", "EXPECT", "INTEND", "ANTICIPATE", "BELIEVE",
"ESTIMATE", "PREDICT", OR "CONTINUE" OR THE NEGATIVE OF THESE TERMS OR OTHER
COMPARABLE TERMINOLOGY AND INCLUDE, WITHOUT LIMITATION, STATEMENTS BELOW
REGARDING: COMPLETION OF THE PROPOSED ASSET SALE, POSSIBLE ADJUSTMENTS TO THE
PURCHASE PRICE, ASSESSMENT OF PROSPECTS OF CONTINUING IN BUSINESS, EFFECTS OF
THE PROPOSED ASSET SALE OR OUR PLANS FOLLOWING COMPLETION OF THE PROPOSED ASSET
SALE. BECAUSE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, THERE
ARE IMPORTANT FACTORS THAT MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE EXPRESSED OR IMPLIED BY THESE FORWARD-LOOKING STATEMENTS. ALTHOUGH, WE
BELIEVE THAT EXPECTATIONS REFLECTED IN THE FORWARD-LOOKING STATEMENTS ARE
REASONABLE, WE CANNOT GUARANTEE FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS.
MOREOVER, NEITHER OUR COMPANY NOR ANY OTHER PERSON ASSUMES RESPONSIBILITY FOR
THE ACCURACY OR COMPLETENESS OF THESE FORWARD-LOOKING STATEMENTS. WE ARE UNDER
NO OBLIGATION OR DUTY TO UPDATE ANY FORWARD-LOOKING STATEMENTS AFTER THE DATE OF
THIS PROXY STATEMENT TO CONFORM SUCH STATEMENTS TO ACTUAL RESULTS.
10
PROPOSAL ONE: TO APPROVE THE PROPOSED ASSET SALE
At the Special Meeting, our stockholders will consider and vote upon a
proposal to approve the sale of our manufacturing equipment as contemplated by
the Asset Purchase Agreement, dated as of June 30, 2005, by and between
Schreiber Foods, Inc., a Wisconsin corporation, and our Company (the "Proposed
Asset Sale"), which may be deemed a sale of substantially all of our assets
pursuant to Delaware General Corporation Law ("DGCL"). The material terms of the
Asset Purchase Agreement are summarized below. A copy of the Asset Purchase
Agreement is attached as Annex A to this proxy statement. We encourage you to
read the Asset Purchase Agreement in its entirety.
Summary of Existing Operations
Currently, our Company is principally engaged in developing, manufacturing
and marketing a variety of healthy cheese, cheese alternatives and dairy-related
products. Our products are formulated and developed by our research and
development department, manufactured in and shipped from our two Orlando,
Florida facilities, and marketed and sold in two principal markets: retail and
food service.
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.
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.
On June 30, 2005, our Company and Schreiber executed a Supply Agreement.
Pursuant to the Supply Agreement, we agreed that (i) as of September 1, 2005,
Schreiber will be our sole third-party source of supply of substantially all of
our products for the term of the Supply Agreement, meaning that we can continue
manufacturing our products ourselves, and (ii) as of November 1, 2005, Schreiber
will be our sole source of supply of substantially all of our products, and we
will purchase our requirements of substantially all of our products exclusively
from Schreiber. Schreiber also has agreed to deliver such products directly to
our customers. The initial term of the Supply Agreement is for a period of five
years from the effective date of September 1, 2005 and is renewable at our
option for up to two additional five-year periods (for a total term of up to
fifteen years). See "Other Material Agreements between our Company and Schreiber
- - Supply Agreement" for more information concerning the Supply Agreement.
As a result of the above agreement, we are currently in the process of
transitioning all of our manufacturing operations to Schreiber. We will convert
our operations into a branded marketing company that will continue to market and
sell our products, but will no longer manufacture these products.
11
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 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.
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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.
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.
13
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.
Pursuant to the Supply Agreement with Schreiber entered into on June 30,
2005, we agreed that (i) as of September 1, 2005, Schreiber will be our sole
third-party source of supply of substantially all of our products for the term
of the Supply Agreement, meaning that we can continue manufacturing our products
ourselves, and (ii) as of November 1, 2005, Schreiber will be our sole source of
supply of substantially all of our products, and we will purchase our
requirements of substantially all of our products exclusively from Schreiber.
Schreiber also has agreed to deliver such products directly to our customers,
and thereafter, we will no longer be shipping any products from our facilities.
See "Other Material Agreements between our Company and Schreiber - Supply
Agreement" for more information concerning the Supply Agreement.
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:
14
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. 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 6% to
10% of sales in fiscal 2006.
Background of the Proposed Asset Sale
Our Board of Directors concluded that our manufacturing capacity was
significantly in excess of its requirements and we were also dealing with
increasing ingredient costs, particularly the cost of casein (one of the main
ingredients purchased by our Company). We believe that we are currently
operating at 15% of our manufacturing capacity. After reviewing alternatives
available to us, our Board of Directors concluded that it would be advantageous
for us to outsource our manufacturing to Schreiber and to sell our manufacturing
equipment. We determined that Schreiber was a highly respected contract
manufacturer that could produce high quality products on a more cost effective
basis than our Company. Our Board of Directors realized that if we could
outsource our manufacturing, we could sell the manufacturing equipment and use
the proceeds from such sale to pay off indebtedness and improve our capital
structure. In addition, our Board of Directors recognized that the reduction in
our debt service obligations that would result from paying off such indebtedness
would enhance cash flow, and allow us to increase our focus on marketing and
product research and development.
On June 10, 2005, our Board of Directors unanimously approved the Proposed
Asset Sale and designated individuals to sign on behalf of our Company. Between
June 10, 2005 and June 30, 2005, counsel for our Company and Schreiber continued
to refine the draft Asset Purchase Agreement. On June 30, 2005, our Company and
Schreiber executed the Asset Purchase Agreement and the Supply Agreement. On
July 6, 2005, we filed a Current Report on Form 8-K with the Securities and
Exchange Commission disclosing the execution of the Asset Purchase Agreement and
the Supply Agreement.
15
Information about the Buyer
The purchaser of our assets will be Schreiber Foods, Inc., a Wisconsin
corporation. Schreiber is a privately held cheese manufacturing company with
annual sales exceeding $2 billion. Schreiber's main business is contract
manufacturing cheese, cheese alternative and other dairy products for many
well-known companies and brands. Schreiber's principal executive offices are
located at 425 Pine Street, Green Bay, Wisconsin 54307, Telephone (800)
344-0333. For more information regarding Schreiber, you may visit Schreiber's
website at http://www.schreiberfoods.com.
Reasons for the Proposed Asset Sale
In approving the Proposed Asset Sale, our Board of Directors considered a
number of factors before recommending that our stockholders approve the Proposed
Asset Sale, including the following:
o Our manufacturing capacity is significantly in excess of its
requirements, so our manufacturing assets are being underutilized.
We believe that we are currently operating at 15% of our
manufacturing capacity.
o Proceeds from the sale of certain of our assets will pay in full our
loan from Beltway Capital Partners LLC (successor by assignment of
Wachovia Bank, N.A.), which will lower our debt service obligations
and enhance cash flow.
o The Beltway Capital Partners LLC loan will mature on July 31, 2006.
Without the proceeds from the Proposed Asset Sale, we will need to
find alternative financing to pay off this loan.
o Our dependence on asset-based financing will substantially decrease.
The foregoing discussion of the information and factors considered by our
Board of Directors is not intended to be exhaustive, but includes the material
factors considered. In view of the variety of factors considered in connection
with its evaluation of the Proposed Asset Sale and the purchase price, our Board
of Directors did not find it practicable to, and did not, quantify or otherwise
assign relative weight to the specific factors considered in reaching its
determination and recommendations, and individual directors may have given
different weight to different factors.
The Board of Directors did not engage an independent financial advisor to
determine the fairness of the Proposed Asset Sale to our stockholders but
determined, based on the factors set forth above, that the asset sale under the
terms and conditions contemplated by the Asset Purchase Agreement is fair to our
stockholders. Further, based on the procedural safeguards provided under the
DGCL, including the required approval of our Board of Directors and the required
approval of our stockholders owning at least a majority of our outstanding
common stock, our Board of Directors believes that the asset sale is
procedurally fair to our stockholders. A fairness opinion from an independent
financial advisor typically entails a substantial fee to the requesting company.
In the context of an asset sale, the financial advisor would typically review a
company's historical and projected revenues, and the operating results of the
company and those of comparable public companies, and make certain assumptions
regarding the value of the assets and liabilities of the associated business or
assets, which may be difficult to predict in order to render its opinion. In
addition to the speculative nature of such analysis, our Board of Directors
believes that undertaking these analyses would involve a significant unnecessary
expense that would reduce the amount of proceeds available to us from the
Proposed Asset Sale.
16
For the foregoing reasons, our Board of Directors believes that the asset
sale, as contemplated by the Asset Purchase Agreement, is fair to our
stockholders.
Summary of Terms of the Asset Purchase Agreement
The following set forth a summary of the material provisions of the Asset
Purchase Agreement. The summary description does not purport to be complete and
is qualified in its entirety by reference to the Asset Purchase Agreement, a
copy of which is attached as Annex A to this proxy statement. All stockholders
are encouraged to read the Asset Purchase Agreement in its entirety.
Assets to be Sold
The Asset Purchase Agreement provides that, subject to approval by our
stockholders and satisfaction of certain other conditions described below, we
will sell most of the assets we currently use to manufacture our products, which
are listed below, and all books and records related thereto (the "Purchased
Assets").
Description of Asset (Quantity if more than 1) Vendor/Manufacturer
- ---------------------------------------------- -------------------
CC - 1000# Cheese Cooker (2) Blentech Corp.
Hayssen Packaging Machine Hayssen Manufacturing
200 gal. Kettle w/t Agitator (4) Lee Process Systems
500 gal. Kettle w/t Agitator (2) Lee Process Systems
System 1, Kustner IWS Machine Kustner Industries
Wrapping Machine, WS-20 Series II Sasib
Blentech Hard Cheese System* Blentech Corp.
System 2, 1600 SPM IWS Machine (Hardware) Kustner Industries
System 5, Ribbon - Pullman Hart Design & Mfg., Inc.
System 5, Hart Casing Linc. Pullman Machine Hart Design & Mfg., Inc.
CC - 1000 Cheeztherm Cheese Cookers (3) Blentech Corp.
System 8, Chunk Line R.R. Pankratz, Inc.
System 9 and 11, Slice Lines Hart Design & Mfg., Inc.
System 12, Cup Line* Modern Packaging
System 10, Block Line/String Cheese Line Robert Reiser
System 13, Shred Line* Hayssen Manufacturing
Dixie Vac Machine Amplicon/Calfirst
Hayssen Shred Bagger* GE Capital
Purchase Price
Schreiber will pay us a total purchase price of $8,700,000 for the
Purchased Assets, all of which will be paid in cash at the closing.
Indemnification
Under the terms of the Asset Purchase Agreement, we have agreed to
indemnify Schreiber against, among other things, (i) any pre-closing debts,
liabilities or obligations of our Company, (ii) any losses, liabilities or
damages that Schreiber may incur by reason of any untrue representation or
breach of warranty or nonfulfillment of any covenant or agreement of our Company
contained in the Asset Purchase Agreement or in any certificate, document, or
instrument delivered in connection with the Proposed Asset Sale, and (iii) any
losses, liabilities or damages that Schreiber may incur by reason of our failure
to discharge our pre-closing liabilities. Schreiber has agreed to indemnify us
against, among other things, (i) any post-closing debts, liabilities or
obligations of Schreiber, and (ii) any losses, liabilities or damages that we
may incur by reason of any untrue representation or breach of warranty or
nonfulfillment of any covenant or agreement of Schreiber contained in the Asset
Purchase Agreement or in any certificate, document, or instrument delivered in
connection with the Proposed Asset Sale. Except in connection with any
fraudulent misrepresentation by either party, rights of indemnification shall be
the sole remedy of the parties after the closing of the Proposed Asset Sale.
17
Alternative Transactions
If, at the Special Meeting, our stockholders holding a majority of the
outstanding shares of our common stock do not approve the sale of the Purchased
Assets, then, as soon as is reasonably practicable thereafter, our Company and
Schreiber will consummate one of the following transactions:
1. We will sell to Schreiber, and Schreiber will purchase from us,
certain alternative assets (those marked with an "*" above in the
subsection entitled "Assets to be Sold", the "Alternative Assets")
for an aggregate purchase price of $2,115,000. The only conditions
to either party's obligations to consummate the sale of Alternative
Assets would be the release and termination of any liens with
respect to the Alternative Assets and obtaining any consents
required to be obtained from our lenders (collectively, the
"Releases and Consents").
2. In the event that the parties are unable to obtain the Releases and
Consents with respect to the sale of the Alternative Assets as
contemplated by alternative 1 above, then the parties would
negotiate in good faith to make such Alternative Assets available
for use by Schreiber on a basis and for such period (not to exceed
180 days) that are reasonably acceptable to each of our Company and
Schreiber; provided, however, that Schreiber will use its
commercially reasonable efforts to obtain equipment that serves the
same functions as the Alternative Assets prior to the expiration of
the agreed upon period of time.
Termination
The Asset Purchase Agreement provides that it may be terminated at any
time prior to the closing of the Proposed Asset Sale or the consummation of an
alternative transaction, by mutual written agreement of our Company and
Schreiber, or automatically upon written notice of termination of the Supply
Agreement (described below). In the event the Asset Purchase Agreement is
terminated for any reason other than pursuant to a default by either party, the
Asset Purchase Agreement shall become void and there will be no liability
thereunder on the part of our Company or Schreiber.
Conditions to Close
The closing of the Proposed Asset Sale is scheduled to occur on November
1, 2005 or, if later, the date that is three (3) business days after the date on
which all conditions to closing, including the approval of our stockholders, are
satisfied or waived. Since we have scheduled the Special Meeting for November
23, 2005, the closing of the Proposed Asset Sale will not occur prior to
November 23, 2005. The Asset Purchase Agreement contains closing conditions
related to the following: (i) Schreiber's representations and warranties remain
true; (ii) each party has complied with its covenants; (iii) there have been no
proceedings commenced against either party which may have the effect of
preventing or delaying the transactions contemplated by the Asset Purchase
Agreement or the Supply Agreement; (iv) any liens on the Purchased Assets shall
have been released and consents obtained from our lenders; (v) our stockholders
holding a majority of the outstanding shares of common stock shall have approved
the sale of the Purchased Assets; and (vi) each party shall have delivered
appropriate documents and certificates set forth in the Asset Purchase
Agreement.
18
Representations and Warranties
The Asset Purchase Agreement contains various representations and
warranties of our Company to Schreiber, including representations and warranties
regarding our corporate status, authorization and enforceability,
non-contravention of the Proposed Asset Sale or our organizational documents,
non-violation of laws and material contracts, compliance with certain laws,
absence of litigation, taxes, absence of brokers, insurance, and title to the
Purchased Assets. The Asset Purchase Agreement also contains representations and
warranties of Schreiber to our Company regarding Schreiber's corporate status,
authorization and enforceability, non-contravention of the Proposed Asset Sale
or its organizational documents, non-violation of laws and material contracts,
and absence of brokers. The representations and warranties survive the closing
until twelve months after the closing date.
Other Transactions
We also agreed that between the signing of the Asset Purchase Agreement
and the closing of the Proposed Asset Sale we would not, except in the ordinary
course of our business, (i) enter into discussions, and would discontinue all
pending discussions, relating to any of the Purchased Assets, or (ii) sell,
lease or grant any option to sell or lease, give a security interest in or
otherwise create any encumbrance on any of the Purchased Assets.
Other Material Agreements between our Company and Schreiber
Supply Agreement
On June 30, 2005, in connection with the Asset Purchase Agreement, we
entered into a Supply Agreement with Schreiber. Pursuant to the Supply
Agreement, we agreed that (i) as of September 1, 2005, Schreiber will be our
sole third-party source of supply of substantially all of our products for the
term of the Supply Agreement, meaning that we can continue manufacturing our
products ourselves, and (ii) as of November 1, 2005, Schreiber will be our sole
source of supply of substantially all of our products, and we will purchase our
requirements of substantially all of our products exclusively from Schreiber.
Schreiber also has agreed to deliver such products directly to our customers.
The prices for such products are based on cost conversions determined by the
parties from time to time, subject to adjustment in any renewal periods.
The initial term of the Supply Agreement is for a period of five years
from the effective date of September 1, 2005 and is renewable at our option for
up to two additional five-year periods (for a total term of up to fifteen
years). If the closing of the Proposed Asset Sale has occurred and we do not
exercise our first option to extend the term, then we will be obligated to pay
Schreiber $1,500,000. If the closing of the Proposed Asset Sale has occurred and
we have exercised the first option to extend the term but we do not exercise our
second option to extend the term, then we will be obligated to pay Schreiber
$750,000.
If our stockholders do not approve the Proposed Asset Sale at the Special
Meeting, then we may terminate the Supply Agreement upon not more than 180 days'
notice delivered to Schreiber within thirty days of the Special Meeting. If we
do not terminate the Supply 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 Supply Agreement upon at least 180 days'
notice delivered to us prior to February 1, 2006.
The Supply Agreement provides for a contingent short-fall payment
obligation by our Company if a specified production level is not met during the
one-year period beginning on September 1, 2006 and ending September 1, 2007. If
a contingent short-fall payment is accrued after such one-year period, it may be
reduced by the amount by which production in the one-year period beginning on
September 1, 2007 and ending September 1, 2008 exceeds the specified target
level of production, if any.
19
In connection with the transition of manufacturing to Schreiber, the
Supply Agreement also obligates Schreiber to purchase from us, on November 1,
2005, all of our raw materials, ingredients and operating supplies and packaging
supplies held by us at our cost. If the Supply Agreement is terminated, then
Schreiber shall return any such items remaining at cost.
Litigation Settlement
On May 17, 2002, Schreiber filed a lawsuit against our 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 our machines for wrapping of individual
cheese slices, manufactured by Kustner Industries, S.A. of Switzerland, known as
models KE and KD, and our machines for producing individually wrapped slices
manufactured by Hart Design Mfg., Inc. of Green Bay, Wisconsin, infringe certain
claims of U.S. Patents Nos. 5,112,632, 5,440,860, 5,701,724 and 6,085,680.
Schreiber was seeking a preliminary and permanent injunction prohibiting us from
further infringing acts and was also seeking damages in the nature of either
lost profits or reasonable royalties.
On May 6, 2004, Schreiber and our Company executed a settlement agreement
pursuant to which all claims in the patent infringement lawsuit were dismissed.
Pursuant to this settlement agreement, we procured a worldwide, fully paid-up,
nonexclusive license to own and use all of our individually wrapped slice
equipment, which Schreiber alleged infringed on Schreiber's patents. We were 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 us from using the slicing equipment to co-pack product for
certain specified manufacturers, however, we are not currently engaged in any
co-packing business with any of the specified parties, and do not contemplate
engaging in the future in any co-packing business with the specified parties.
The term of the license extends through the life of all patents named in the
lawsuit (and all related patents) and is assignable by us in connection with the
sale of our 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 our Company in the year preceding the sale of our Company or our
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.
Pursuant to the settlement agreement, if, during the term of the license,
we receive an offer to purchase our Company or our business, we must notify
Schreiber of the offer and Schreiber will have the option to match the offer or
make a better offer to purchase our Company or our business. Acceptance of the
Schreiber offer is subject to the approval by our 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 our stockholders for approval.
We have not received any such offer, and the decision by our Board of Directors
to cause our Company to enter into the Asset Purchase Agreement was not based
upon receipt of any offer to purchase our Company or our business.
No Other Arrangements
Other than the Proposed Asset Sale and the transactions described above,
there are no present or proposed material agreements, arrangements,
understandings or relationships between Schreiber or any of its executive
officers, directors, controlling persons or subsidiaries and our Company or any
of our executive officers, directors, controlling persons or subsidiaries.
20
Regulatory Approvals
No United States Federal or state regulatory requirements must be complied
with or approvals obtained as a condition of the Proposed Asset Sale other than
federal securities laws.
Use of Proceeds from the Proposed Asset Sale
As a result of the consummation of the sale of the Purchased Assets, we
will be entitled to receive a purchase price of $8,700,000 on the closing date.
Of the proceeds, an estimated $250,000 will be used to pay expenses related to
the Proposed Asset Sale, including legal, accounting and printing costs and
fees. All remaining proceeds will first be used to pay approximately $1,300,000
to the Orange County Tax Collector for tangible personal property taxes due
primarily on the Purchased Assets and the remainder will be used to pay in full
our term loan with Beltway Capital Partners LLC (successor by assignment of
Wachovia Bank, N.A.), which balance is expected to be $7,471,985 at the time of
payoff. Additionally, we will need approximately $350,000 to pay off the
remaining obligations under capital leases related to certain assets in the
Proposed Asset Sale. To the extent the proceeds are not sufficient to pay all of
the above-mentioned obligations, we expect that such shortfall will be paid from
our availability under our asset-based line of credit from Textron Financial
Corporation or out of our cash reserves.
Conduct of Business Following the Proposed Asset Sale
If the Proposed Asset Sale is approved and the closing conditions set
forth in the Asset Purchase Agreement are satisfied or waived, we will sell the
Purchased Assets to Schreiber, which may be deemed to be a sale of substantially
all of our assets pursuant to the DGCL. Following the consummation of the
Proposed Asset Sale, we will hold only certain limited assets, including
retained cash and certain other miscellaneous assets. As noted above, regardless
of whether the Proposed Asset Sale is consummated, our Company will convert into
a branded marketing company that will continue to market and sell our products,
but will no longer manufacture these products. Instead, such products will be
manufactured by Schreiber pursuant to the Supply Agreement.
We anticipate certain challenges during and following the transition from
manufacturing our own products to operating strictly as a branded marketing
company. These challenges include, but are not limited to, the following:
o Coordinating customer shipments while the inventory and production
equipment are in transit from our facilities to the Schreiber
facilities;
o Reserving enough inventory in our facilities to fill customer orders
while production equipment is in transit;
o Maintaining consistent formulas and quality in our products after
the transition;
o Having sufficient cash to build inventory and pay any severance
arrangements during the transition;
o Reducing the number of our employees to 31 by December 1, 2005; and
o Negotiating with the landlords of our leased facilities in Orlando,
Florida to terminate or sublease one or both of such facilities.
If, at the Special Meeting, our stockholders holding a majority of the
outstanding shares of our common stock do not approve the Proposed Asset Sale,
then, as soon as is reasonably practicable thereafter, our Company and Schreiber
will consummate one of two alternative transactions subject to the satisfaction
of certain conditions. Since we anticipate that our Company will convert into a
branded marketing company that will continue to market and sell our products,
but will no longer manufacture these products, we do not anticipate any need for
any of this manufacturing equipment. We will review alternative options
involving the sale of any manufacturing equipment not sold to Schreiber. There
can be no assurance that any third party will offer to purchase our
manufacturing assets for a price equal to or greater than the price proposed to
be paid by Schreiber in the Proposed Asset Sale, or that such assets can
otherwise be sold at all.
21
Accounting Treatment of the Proposed Asset Sale
If the Proposed Asset Sale is approved by the stockholders, we will record
the proposed disposition in accordance with SFAS No. 146, "Accounting for Costs
Associate with an Exit or Disposal Activity," prior to and during the quarter in
which the Proposed Asset Sale closes.
Selected Financial Data
The following table summarizes our selected historical consolidated
financial data which should be read in conjunction with our financial
statements, and the notes thereto, included in Annex B for the fiscal year ended
March 31, 2005. The financial data for the five years ended March 31, 2005 has
been derived from our audited financial statements. The financial data as of and
for the three months ended June 30, 2005 and 2004 has been derived from our
unaudited condensed financial statements included in Annex C for the fiscal
quarter ended June 30, 2005. In the opinion of our management, all adjustments,
consisting of only normal recurring adjustments, necessary for a fair
presentation of the financial data for the three months ended June 30, 2005 and
2004 have been reflected therein. Operating results for the three months ended
June 30, 2005 are not necessarily indicative of the results that may be expected
for the full year.
The following table sets forth selected financial data for the years ended
March 31, 2005, 2004, 2003, 2002 and 2001:
Fiscal Year Ended March 31, 2005(1) 2004(1) 2003(1) 2002(2) 2001
------------ ------------ ------------ ------------ ------------
Net sales $44,510,487 $36,176,961 $40,008,769 $42,927,104 $45,085,937
Gross profit 9,773,893 11,312,672 11,928,581 7,650,742 12,244,189
Employment contract expense(3) (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) (3,859,783) (3,299,277) (957,221) (16,721,1494) (5,385,763)
Net income (loss) to common stockholders (4,261,855) (4,757,087) (2,530,390) (18,748,345) (5,385,763)
Net income (loss) per common share - basic & diluted (0.25) (0.32) (0.21) (1.78) (0.57)
Total assets 27,769,666 29,961,816 33,325,334 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 Management's Discussion and Analysis
of Financial Condition and Results of Operations 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, non-cash compensation expense of
approximately $400,000, approximately $1 million in fixed asset disposals
and unused trade credit write-offs, and approximately $2.4 in non-cash
interest, derivative and fair value expenses.
(3) See Employment Contract Expense under Management's Discussion and Analysis
of Financial Condition and Results of Operations for further information.
22
The following table sets forth selected financial data for the three
months ended June 30, 2005 and 2004:
Three Months Ended June 30, 2005 2004
------------ ------------
Net sales $9,851,153 $11,191,678
Gross profit 2,268,298 2,940,348
Impairment of fixed assets(1) 7,896,554 --
Cost of disposal activities(2) 255,011 --
Net income (loss) (9,144,114) (521,611)
Net income (loss) to common stockholders (9,144,114) (1,064,647)
Net income (loss) per common share - basic
& diluted (0.49) (0.07)
Total assets 20,350,416 31,002,320
Long-term obligations 923,123 9,275,585
Redeemable Convertible Preferred Stock -- 2,950,488
(1) In light of the Asset Purchase Agreement and the Supply Agreement with
Schreiber, we determined that it is more likely than not that a majority
of our fixed assets related to production activities will be sold or
disposed prior to the end of their useful life. These assets represent
approximately 98% of the value of property and equipment. Based on this
determination, SFAS No. 144, "Accounting for the Impairment of Disposal of
Long-Term Assets," requires that we write down the value of our assets to
their fair values as of June 30, 2005. We will continue to hold and use
the assets until they are sold. Therefore, all assets will continue to be
reported and depreciated under Property and Equipment in the Balance Sheet
until they are sold. We estimated the fair value based on the sales price
in the Asset Purchase Agreement and the anticipated sales price related to
any other assets plus future cash flows related to the assets from July 1,
2005 until the sale. Based on this estimate, we recorded an impairment of
property and equipment of $7,896,554 in the first quarter ended June 30,
2005.
(2) We are accounting for the costs associated with the Asset Purchase
Agreement and the Supply Agreement in accordance with SFAS No. 146,
"Accounting for Costs Associated with an Exit or Disposal Activity,"
because they are planned and controlled by management and materially
change the manner in which our business will be conducted. In accordance
with SFAS No. 146, costs associated with disposal activities should be
reported as a reduction of income from operations. For the three months
ended June 30, 2005, we incurred and reported $255,011 as Costs of
Disposal Activities in the Statement of Operations.
Financial Statements
The financial statements and notes thereto for the fiscal year ended March
31, 2005 are incorporated herein as Annex B. The financial statements and notes
thereto for the three months ended June 30, 2005 are incorporated herein as
Annex C.
Summary Unaudited Pro Forma Condensed Financial Information
The following summary unaudited pro forma condensed financial statements
illustrate the effects of the Proposed Asset Sale and the use of the proceeds
therefrom on our historical financial position and operating results and should
be read in conjunction with the Unaudited Pro Forma Condensed Financial
Information in Annex D. The following pro forma financial information for the
three months ended June 30, 2005 or the year ended March 31, 2005 is not
necessarily indicative of the operating results or financial position that would
have occurred had the transaction been consummated at the beginning of the
periods, nor are they necessarily indicative of future operating results.
Historical Pro Forma
June 30, June 30,
Unaudited Balance Sheet Data: 2005 2005
---------------- --------------
Total Assets $ 20,350,416 $ 10,839,999
Long Term Debt:
Accrued Employment Contract $ 846,240 $ 846,240
Obligations Under Capital Leases $ 76,883 $ 54,927
Stockholders' Deficit $ (1,807,312) $ (2,817,729)
Book Value Per Share $ (0.10) $ (0.16)
Shares Outstanding 17,543,474 17,543,474
Historical Pro Forma
June 30, June 30,
Unaudited Statement of Operations Data: 2005 2005
---------------- --------------
Net Sales $ 9,851,153 $ 9,851,153
Gross Profit $ 2,268,298 $ 2,740,353
Impairment of Property and Equipment $ 7,896,554 $ 7,896,554
Cost of Disposal Activities $ 255,011 $ 255,011
Net Income (Loss) $ (9,144,114) $ (8,446,653)
Basic And Diluted Net Loss Per Common Share $ (0.49) $ (0.45)
Basic And Diluted Weighted Average Common Shares
Outstanding 18,663,485 18,663,485
Historical Pro Forma
March 31, March 31,
Unaudited Statement of Operations Data: 2005 2005
---------------- --------------
Net Sales $ 44,510,487 $ 44,510,487
Gross Profit $ 9,773,893 $ 11,647,982
Employment Contract Expense $ 444,883 $ 444,883
Net Income (Loss) $ (3,859,783) $ (1,211,785)
Net Income (Loss) to Common Stockholders $ (4,261,855) $ (1,613,857)
Basic And Diluted Net Loss Per Common Share $ (0.25) $ (0.09)
Basic And Diluted Weighted Average Common Shares
Outstanding 17,007,971 17,007,971
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 Annex B. Terms such as "fiscal 2006", "fiscal 2005",
"fiscal 2004" or "fiscal 2003" refer to our fiscal years ending March 31, 2006,
2005, 2004 and 2003, respectively.
23
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
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.
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.
Additionally, on June 30, 2005, our Company and Schreiber executed a Supply
Agreement. Pursuant to the Supply Agreement, we agreed that (i) as of September
1, 2005, Schreiber will be our sole third-party source of supply of
substantially all of our products for the term of the Supply Agreement, meaning
that we can continue manufacturing our products ourselves, and (ii) as of
November 1, 2005, Schreiber will be our sole source of supply of substantially
all of our products, and we will purchase our requirements of substantially all
of our products exclusively from Schreiber. Schreiber also has agreed to deliver
such products directly to our customers. The initial term of the Supply
Agreement is for a period of five years from the effective date of September 1,
2005 and is renewable at our option for up to two additional five-year periods
(for a total term of up to fifteen years). See "Other Material Agreements
between our Company and Schreiber - Supply Agreement" for more information
concerning the Supply Agreement.
As a result of the above agreements, we are currently in the process of
transitioning all of our manufacturing operations to Schreiber. We will convert
our operations into a branded marketing company that will continue to market and
sell our products, but will no longer manufacture these products.
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.
24
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.
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.
25
Recent Material Developments
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 $10,314,778 as of October 24, 2005. This amount
includes a revolving line of credit from Textron Financial Corporation
("Textron") in the current outstanding amount of $2,732,793 and a note payable
to Beltway Capital Partners, LLC, successor by assignment of our loan from
Wachovia Bank ("Beltway"), in the amount of $7,581,985. We anticipate that the
proceeds from the sale of our assets to Schreiber will pay the Beltway term loan
in full. However, in the event that the sale is not completed as anticipated, we
will need to refinance the Beltway 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 pursuant to a written notice 90-days prior to the
expiration of the then current term or as otherwise provided in the loan
agreement. There can be no assurance that Textron will extend the loan beyond
the end of the initial term on May 26, 2006.
In June 2005 and October 2005, Textron reduced our borrowing availability
under our line by $200,000 and $400,000, respectively, until they have time to
review and approve our financial forecasts that reflect the asset sale and
outsourcing arrangements with Schreiber. There is no guarantee if or when they
will lift this restriction on our borrowing availability. Additionally, we may
experience further restrictions by Textron by virtue of reserves they may
require, receivables they may deem ineligible or other rights they have under
the Textron Loan Agreement.
Loan Defaults and Going Concern
In August 2005, due to the cost of disposal activities of $255,011 and the
impairment of property and equipment of $7,896,554, we determined that we fell
below the requirement for the fixed charge coverage ratio and the adjusted
tangible net worth requirements under the Textron Loan for the quarter ended
June 30, 2005. Although these covenant violations placed us in technical default
on the loan, we have not received a notice of an event of default from Textron.
We are currently discussing our financial forecasts that reflect the asset sale
and outsourcing arrangements with Schreiber and certain waivers and loan
modifications to the Textron Loan Agreement. Until such time as we have received
formal waivers and loan modifications, Textron is allowing us to operate in a
position of default. The existence of a default under the Textron Loan would
allow Beltway to declare an event of default under our existing term loan based
on a cross-default provision in their loan agreement. If an agreement cannot be
reached on the loan modifications, Textron and Beltway could exercise their
respective rights under their loan documents to, among other things, declare a
default under the loans, accelerate the outstanding indebtedness such that it
would become immediately due and payable, and pursue foreclosure of our assets,
which are pledged as collateral for such loans.
If any such events occur with either Textron or Beltway, and we are unable
to refinance or renew our existing credit facilities, or if additional financing
is not available on terms acceptable to us, it would be substantially more
difficult for us to effectively continue the operation of our business, and it
is unlikely that we would be able to continue as a going concern.
Del Sunshine LLC
Pursuant to an oral contract manufacturing and distribution arrangement
among 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.
26
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 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. However, the Trademark
License Agreement continued in effect until September 30, 2005, at which time it
terminated pursuant to its terms.
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 stock based transactions
o EBITDA excluding certain employment contract expenses and non-cash
compensation related to stock based transactions
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.
27
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 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 in deferred tax
assets and liabilities during the period.
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.
28
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 life 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
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 and 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 3.5 million option
shares. Assuming that the stock price exceeds the intrinsic value 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 $35,000. 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.
29
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
12 Months $ $ % % % of % of % of
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%
========== ========== ========== ========== ========== ========= ========= ===== ===== =====
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:
30
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.
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 a range between 10% and 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).
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 nine percentage point
increase in cost of goods sold was primarily due to rising raw material costs.
Of this nine percentage point increase in cost of goods sold in relation to net
sales, six percentage points were 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.
31
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.
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.
EBITDA, (a non-GAAP measure):
2005-2004 2004-2003 2005-2004 2004-2003
12 Months Ending March 31, 2005 2004 2003 $ Change $ Change % Change % Change
- ---------------------------------- ----------- ----------- ----------- ---------- ---------- --------- ---------
Gross Margin 9,773,893 11,312,672 11,928,581 (1,538,779) (615,909) -13.6% -5.2%
----------- ----------- ----------- ---------- ---------- --------- ---------
Operating Expenses:
Selling 5,148,426 4,981,996 4,958,272 166,430 23,724 3.3% 0.5%
Delivery 2,307,166 1,877,682 2,008,638 429,484 (130,956) 22.9% -6.5%
Employment contract expense 444,883 1,830,329 -- (1,385,446) 1,830,329 -75.7% 100.0%
General and administrative,
including $409,746, $651,273 and
$153,238 non-cash stock
compensation 4,380,436 3,954,303 3,724,127 426,133 230,176 10.8% 6.2%
(Gain)Loss on disposal of assets (4,500) 8,519 47,649 (13,019) (39,130) -152.8% -82.1%
Research and development 309,054 260,410 232,552 48,644 27,858 18.7% 12.0%
----------- ----------- ----------- ---------- ---------- --------- ---------
Total operating expenses 12,585,465 12,913,239 10,971,238 (327,774) 1,942,001 -2.5% 17.7%
----------- ----------- ----------- ---------- ---------- --------- ---------
Income (Loss) from Operations (2,811,572) (1,600,567) 957,343 (1,211,005) (2,557,910) 75.7% -267.2%
Other Income (Expense), Net
Interest expense, net (1,129,977) (1,361,606) (2,923,215) 231,629 1,561,609 -17.0% -53.4%
Derivative expense 62,829 (94,269) (105,704) 157,098 11,435 -166.6% -10.8%
Gain (Loss) on FV of warrants 18,937 (242,835) 1,174,355 261,772 (1,417,190) -107.8% -120.7%
Other -- -- (60,000) -- 60,000 0.0% -100.0%
----------- ----------- ----------- ---------- ---------- --------- ---------
Total (1,048,211) (1,698,710) (1,914,564) 650,499 215,854 -38.3% -11.3%
----------- ----------- ----------- ---------- ---------- --------- ---------
NET INCOME (LOSS) (3,859,783) (3,299,277) (957,221) (560,506) (2,342,056) 17.0% 244.7%
Interest expense, net 1,129,977 1,361,606 2,923,215 (231,629) (1,561,609) -17.0% -53.4%
Depreciation 2,172,566 2,205,053 2,273,349 (32,487) (68,296) -1.5% -3.0%
----------- ----------- ----------- ---------- ---------- --------- ---------
EBITDA, (a non-GAAP measure) (557,240) 267,382 4,239,343 (824,622) (3,971,961) -308.4% -93.7%
2005 2004 2003
12 Months Ending March 31, % of Sales % of Sales % of Sales
- ---------------------------------- ---------- ---------- ----------
Gross Margin 22.0% 31.3% 29.8%
---------- ---------- ----------
Operating Expenses:
Selling 11.6% 13.8% 12.4%
Delivery 5.2% 5.2% 5.0%
Employment contract expense 1.0% 5.1% 0.0%
General and administrative,
including $409,746, $651,273 and
$153,238 non-cash stock
compensation 9.8% 10.9% 9.3%
(Gain)Loss on disposal of assets 0.0% 0.0% 0.1%
Research and development 0.7% 0.7% 0.6%
---------- ---------- ----------
Total operating expenses 28.3% 35.7% 27.4%
---------- ---------- ----------
Income (Loss) from Operations -6.3% -4.4% 2.4%
Other Income (Expense), Net
Interest expense, net -2.5% -3.8% -7.3%
Derivative expense 0.1% -0.3% -0.3%
Gain (Loss) on FV of warrants 0.0% -0.7% 2.9%
Other 0.0% 0.0% -0.1%
---------- ---------- ----------
Total -2.4% -4.7% -4.8%
---------- ---------- ----------
NET INCOME (LOSS) -8.7% -9.1% -2.4%
Interest expense, net 2.5% 3.8% 7.3%
Depreciation 4.9% 6.1% 5.7%
---------- ---------- ----------
EBITDA, (a non-GAAP measure) -1.3% 0.7% 10.6%
========== ========== ==========
32
(1) We utilize certain GAAP measures such as Operating Income and Net
Income and certain non-GAAP measures such as EBITDA and exclude
non-cash compensation related to stock based transactions included
in general and administrative expenses and certain employment
contract expenses in order to compute our key financial measures
that are reviewed by management, lenders and investors in order to
effectively review our current on-going operations and analyze
trends related in 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 adjusted 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 calculation of key financial 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 calculation of key financial 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) Operating Income (Loss) 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 anticipated 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.
33
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 approximately $426,000 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
non-cash compensation income related to stock-based transactions, as detailed
below, 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.
Excluding the effects of non-cash compensation related to stock-based
transactions, which cannot be predicted, we anticipate that general and
administrative expenses will be higher than prior year levels for the first
three quarters of fiscal 2006 due to the higher insurance costs and increased
audit services required. However, we expect that general and administrative
expenses in the fourth quarter of fiscal 2006 will be significantly reduced due
to the non-recurrence of the $1.6 million in bad debt expense that occurred in
the fourth quarter of fiscal 2005.
The change in non-cash compensation related to stock-based transactions
that are included in general and administrative expenses are detailed as
follows:
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 194,097 643,272 153,238 (449,175) 490,034 0.4% 1.8% 0.4%
Option modifications under
APB 25 awards 215,649 8,001 -- 207,648 8,001 0.5% 0.0% 0.0%
------- ------- ------- ---------- ---------- ----- ----- -----
Non-cash compensation
related to stock based
transactions 409,746 651,273 153,238 (241,527) 498,035 0.9% 1.8% 0.4%
======= ======= ======= ========== ========== ===== ===== =====
34
Effective April 1, 2003, we elected to record compensation expense
measured at fair value for all stock-based award transactions on or after April
1, 2003 under the provisions of SFAS 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 SFAS 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 our 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, we calculate and record
non-cash compensation related to our securities in the general and
administrative line item in our Statements of Operations based on two primary
items:
a. Stock-Based Award Issuances
During the fiscal years ended March 31, 2005, 2004, and 2003, we recorded
$194,097, $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.
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.
35
Other Income and Expense
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.
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.
Derivative expense represents the adjustment for the change in the fair
value of the embedded derivative in our Series A convertible preferred stock,
which met the criteria for bifurcation and separate accounting under SFAS No.
133. The fair value of the embedded derivative was computed using the
Black-Scholes pricing model based on several factors including the underlying
value of our common stock at the end of each period. This benefit/(expense) was
$62,829, ($94,269) and ($105,704) in fiscal 2005, 2004 and 2003, respectively.
Since the conversion of our Series A convertible preferred stock could
have resulted in a conversion into an indeterminable numbers of commons shares,
we determined that under the guidance in paragraph 24 of EITF 00-19, we were
prohibited from concluding that we had sufficient authorized and unissued shares
to net-share settle any warrants or options issued to non-employees. Therefore,
we reclassified the fair value of all warrants and options issued to
non-employees that were outstanding during the period that the Series A
convertible preferred stock was outstanding from April 2001 to October 2004 as a
liability. Additionally, in accordance with EITF 00-19, if a contract requires
settlement in registered shares, then it may be required to record the value of
the securities as a liability and/or temporary equity. Any changes in the fair
value of the securities based on the Black-Scholes pricing model after the
initial valuation are marked to market during reporting periods. During the
fiscal years ended March 31, 2005, 2004, and 2003, we recorded a gain/(loss) on
the fair value of warrants of $443,937, ($242,835) and $1,174,355, respectively,
related to the change in the fair values of the warrants.
Assuming the consummation of the Proposed Asset Sale, as proposed in this
Proposal No. 1, we expect that our debt to Beltway 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.
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
======== ========== ========== ========== ==========
36
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
will come from our debt financing, as described below, 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)
========== ========== ==========
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.
37
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 pursuant
to a written notice 90-days prior to the expiration of the then current term or
as otherwise provided in the loan agreement. There can be no assurance that
Textron will extend the loan beyond the end of the initial term on May 26, 2006.
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 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, 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). Textron is currently reviewing our financial forecasts that
reflect the effects of the Proposed Asset Sale and Supply Agreement with
Schreiber 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 $600,000. 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.
38
In August 2005, due to the cost of disposal activities of $255,011 and an
impairment of property and equipment of $7,896,554, we determined that we fell
below the requirement for the fixed charge coverage ratio and the adjusted
tangible net worth requirements under the Textron Loan for the quarter ended
June 30, 2005. Although these covenant violations placed us in technical default
on the loan, we have not received a notice of an event of default from Textron.
We are currently discussing our financial forecasts that reflect the asset sale
and outsourcing arrangements with Schreiber and certain waivers and loan
modifications to the Textron Loan Agreement. Until such time as we have received
formal waivers and loan modifications, Textron is allowing us to operate in a
position of default. The existence of a default under the Textron Loan would
allow Beltway Capital Partners, LLC, successor by assignment of our loan from
Wachovia Bank ("Beltway"), another one of our lenders, as described below, to
declare an event of default under our existing term loan based on a
cross-default provision in their loan agreement. If an agreement cannot be
reached on the loan modifications, Textron and Beltway could exercise their
respective rights under their loan documents to, among other things, declare a
default under the loans, accelerate the outstanding indebtedness such that it
would become immediately due and payable, and pursue foreclosure of our assets,
which are pledged as collateral for such loans. If such an event occurred with
either Textron or Beltway and additional financing is not available on terms
acceptable to us, it would be substantially more difficult for us to effectively
continue the operation of our business, and it is unlikely that we would be able
to continue as a going concern.
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 compliance is not required by us 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 was paid on August 1, 2005. As required by the terms of the
agreement, if we sell our equipment to Schreiber as discussed in this Proposal
No. 1, 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.
On September 27, 2005, the Company received a notice that Wachovia had
assigned our loan to Beltway Capital Partners, LLC ("Beltway").
Pursuant to a Note and Warrant Purchase Agreement dated September 12,
2005, we received a $1,200,000 loan from Frederick A. DeLuca, which loan was
evidenced by an unsecured promissory note. The Note requires monthly interest
only payments at 3% above the bank prime rate of interest per the Federal
Reserve Bank and matures on June 15, 2006. In consideration for the Note and in
accordance with an exemption from registration provided by Section 4(2) of the
Securities Act of 1933, as amended, we issued to Mr. DeLuca a warrant to
purchase up to 300,000 shares of our common stock at an exercise price equal to
$1.53 (95% of the lowest closing price of our common stock in the sixty calendar
days immediately preceding October 17, 2005). The warrant fully vested on
October 17, 2005 and can be exercised on or before the expiration date of
October 17, 2008. Also in consideration for the Note, we granted Mr. DeLuca
"piggy back" registration rights with respect to the shares underlying the
warrant.
39
Pursuant to several Note and Warrant Purchase Agreements dated September
28, 2005, we received a $600,000 loan from Conversion Capital Master, Ltd., a
$485,200 loan from SRB Greenway Capital (Q.P.), L.P., a $69,600 loan from SRB
Greenway Capital, L.P., and a $45,200 loan from SRB Greenway Offshore Operating
Fund, L.P. These loans were evidenced by unsecured promissory notes (the
"Notes"). The Notes require monthly interest only payments at 3% above the bank
prime rate of interest per the Federal Reserve Bank and mature on June 15, 2006.
In consideration for the Notes and in accordance with an exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as amended,
we issued to Conversion Capital Master, Ltd., SRB Greenway Capital (Q.P.), L.P.,
SRB Greenway Capital, L.P., and SRB Greenway Offshore Operating Fund, L.P.,
warrants to purchase up to 150,000 shares, 121,300 shares, 17,400 shares, and
11,300 shares, respectively, of our common stock at an exercise price equal to
$1.53 (95% of the lowest closing price of our common stock in the sixty calendar
days immediately preceding October 17, 2005). The warrants fully vested on
October 17, 2005 and can be exercised on or before the expiration date of
October 17, 2008. Also in consideration for the Notes, we granted Conversion
Capital Master, Ltd., SRB Greenway Capital (Q.P.), L.P., SRB Greenway Capital,
L.P., and SRB Greenway Offshore Operating Fund, L.P. "piggy back" registration
rights with respect to the shares underlying the warrants.
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
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.
40
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 the accounting provisions of SFAS No. 123, we recorded
$1,024,500 in non-cash compensation expense related to the reduction in the
exercise price of the above mentioned warrants in June 2005.
We 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 under Debt Financing and the
remaining proceeds from the warrant exercises were used for working capital
purposes.
In accordance with a registration rights agreement dated October 6, 2004
with Mr. Frederick DeLuca, we agreed that within 180 days we would file with the
Securities and Exchange Commission and obtain effectiveness of a registration
statement that included 2,000,000 shares issued in a private placement and
500,000 shares related to a stock purchase warrant. Per the terms of the
agreement, if a registration statement was not filed, or did not become
effective within 180 days, then in addition to any other rights Mr. DeLuca may
have, we would be required to pay certain liquidated damages. We filed a
registration statement on Form S-3 on March 14, 2005. However, this registration
statement has not yet been declared effective. We 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 damages and
remedies for failure to have an effective registration statement until September
1, 2005. In the event that the registration statement is not effective by
September 1, 2005, we will be liable to pay $71,875 (2.5% times the product of
2,500,000 registerable shares and the share price of $1.15 per share) every
thirty days until the registration statement becomes effective unless an
additional extension is granted.
Summary
We believe that with the cash available on our credit facilities and
proceeds received from the debt and 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.
Based on current projections, we expect that much 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:
41
Payments due by fiscal period
---------------------------------------------------------------
Contractual Obligations Total 2006 2007-2008 2009-2010 Thereafter
- --------------------------------- ----------- ---------- ---------- --------- -----------
Textron credit facility (1) $5,458,479 $5,458,479 $ -- $ -- $ --
Beltway term loan 8,241,985 1,320,000 6,921,985 -- --
Interest on debt facilities (2) 1,088,000 922,000 166,000 -- --
Contractual employment agreements 1,579,828 586,523 799,644 193,661
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 $18,344,623 $9,235,495 $8,531,587 $577,541 $ --
=========== ========== ========== ========= ===========
(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 Beltway 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. Pursuant to
a Termination, Settlement and Release Agreement signed on July 22, 2005 and
effective February 15, 2005 (the "Termination Agreement"), the parties have
mutually agreed to cancel the Prior Agreement and to terminate the distribution
relationship. In consideration for our time, effort and expenses incurred during
the distribution relationship, Bel paid our Company $150,000 within 10 business
days after execution of the Termination Agreement.
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 Beltway 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.
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.
42
Certain Federal Income Tax Consequences of the Proposed Asset Sale
The Proposed Asset Sale should have no direct income tax consequences to
our stockholders. The Proposed Asset Sale will be reported by our Company as a
sale of assets for federal income tax purposes in the fiscal year ending March
31, 2006. The Proposed Asset Sale will be a taxable transaction for United
States federal income tax purposes. Accordingly, our Company will recognize a
gain or loss with respect to the Proposed Asset Sale in an amount equal to the
difference between the amount of the consideration received for each asset over
the adjusted tax basis in the asset sold. Although the Proposed Asset Sale will
result in a taxable gain to our Company, we believe that a substantial portion
of the taxable gain will be offset by current year losses from operations and
available net operating loss carryforwards.
Vote Required and Board Recommendation
The approval of the Proposed Asset Sale requires the affirmative vote of
the stockholders holding at least a majority of the outstanding shares of our
common stock. The Board of Directors believes that the Proposed Asset Sale is in
the best interests of our Company and our stockholders and recommends a vote
"FOR" this proposal. It is intended that the shares represented by the enclosed
form of proxy will be voted in favor of this proposal unless otherwise specified
in such proxy.
43
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table describes the beneficial ownership of our common stock by
each person or entity known to us to be the beneficial owner of more than 5% of
the outstanding shares of our capital stock outstanding as of October 24, 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 4,169,842 (4) 20.5%
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%
(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 October
24, 2005 is 20,051,327. 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 October 24, 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
September 27, 2005. Mr. Frederick A. DeLuca has direct beneficial
ownership of and has sole voting and investment dispositive power over all
the reported shares. Includes a warrant to purchase 300,000 shares of our
common stock exercisable at a price per share equal to 95% of the lowest
closing sales price of our common stock during the sixty (60) days
immediately preceding October 17, 2005, beginning on October 17, 2005
until its expiration on October 17, 2008.
(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.
44
(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.
SECURITY OWNERSHIP OF MANAGEMENT
The following table describes the beneficial ownership of our common stock by
(i) the Chief Executive Officer, (ii) each of our four other most highly
compensated executive officers who were serving as executive officers as of
March 31, 2005, (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, (iv) each director, and (v) all of our directors and
executive officers as a group, outstanding as of October 24, 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. "*" indicates less than one percent.
Amount and Nature of
Name of Beneficial Owner Beneficial Ownership (1) Percent of Class (2)
- -------------------------- ------------------------ --------------------
David H. Lipka 259,353 (3) 1.3%
Joanne R. Bethlahmy 150,286 (4) *
Thomas R. Dyckman 200,797 (3) 1.0%
Charles L. Jarvie 200,797 (3) 1.0%
Angelo S. Morini 6,462,806 (5) 28.1%
Patrice M.A. Videlier 668 (6) *
Michael E. Broll 201,114 (7) 1.0%
Christopher J. New 131,588 (8) *
Salvatore J. Furnari 103,500 (9) *
John W. Jackson 107,366 (10) *
Christopher E. Morini 97,429 (11) *
------------------------ --------------------
All executive officers and
directors as a group 7,915,704 32.4%
======================== ====================
45
(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 October
24, 2005 is 20,051,327. 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 October 24, 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, currently
exercisable options to acquire 286 shares of our common stock at $1.20 per
share, which expire on October 1, 2014, and currently exercisable options
to acquire 286 shares of our common stock at $1.75 per share, which expire
on October 3, 2015.
(4) Includes currently exercisable options to acquire 150,000 shares of our
common stock at $1.56 per share, which expire on October 1, 2009, and
currently exercisable options to acquire 286 shares of our common stock at
$1.75 per share, which expire on October 3, 2015.
(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, and currently exercisable options
to acquire 286 shares of our common stock at $1.75 per share, which expire
on October 3, 2015.
(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.
46
LEGAL PROCEEDINGS
To our knowledge, none of our executive officers or directors is a party adverse
to our Company or has material interest adverse to our Company in any legal
proceeding.
OTHER BUSINESS
The Board of Directors knows of no business which will be presented for
consideration at the meeting other than that which is stated above. If any other
business should come before the meeting, votes may be cast pursuant to proxies
in respect to any such business in the best judgment of the person or persons
acting under the proxies.
STOCKHOLDER PROPOSALS
It is anticipated that our next annual meeting of stockholders will be held on
or about January 20, 2006. Stockholders interested in presenting a proposal to
be considered for inclusion in the proxy statement and form of proxy may do so
by following the procedures prescribed in Rule 14a-8 under the Securities
Exchange Act of 1934, as amended. To be considered for inclusion, stockholder
proposals must be submitted in writing to the Corporate Secretary at our
Company's principal executive offices before November 20, 2005. It is suggested
that proponents submit their proposals by Certified Mail-Return Receipt
Requested.
In addition, Rule 14a-4 under the Securities Exchange Act of 1934, as amended,
limits the circumstances under which the proxy card distributed by registered
companies to their stockholders may permit those companies to cast the votes
represented by the proxy voting cards in their sole discretion. As applied to
our Company, the most important limitation is that for proposals made by a
stockholder at the 2005 annual meeting that are not properly submitted by the
stockholder for inclusion in our own proxy materials, we may vote proxies in our
discretion with respect to those proposals only if we have not received notice
from the stockholder by November 20, 2005 at the latest that the stockholder
intends to make those proposals at the next annual meeting.
INCORPORATION BY REFERENCE
The Securities and Exchange Commission (the "SEC") allows us to "incorporate by
reference" certain the information we file with it, which means that we can
disclose important information to you by referring you to the documents in which
such information is contained. We incorporate by reference our Annual Report on
Form 10-K/A for the fiscal year ended March 31, 2005 and our Quarterly Report on
Form 10-Q/A for the fiscal quarter ended June 30, 2005. Additionally, we
incorporate by reference our Current Reports on Form 8-K dated as of May 5, June
8, June 22, July 6, July 14, July 26, August 23, September 16, September 21,
September 30, October 4 and October 11, 2005.
We will provide without charge to each person to whom a Proxy is delivered, upon
written or oral request of such person, a copy of the information incorporated
by reference in this Proxy (not including exhibits to the information that is
incorporated by reference unless the exhibits are themselves specifically
incorporated by reference), by first class mail or other equally prompt means
within one business day of receipt of such request. Such a request should be
directed to Galaxy Nutritional Foods, Inc., 2441 Viscount Row, Orlando, Florida
32809, Attention: Investor Relations, or if by telephone, (407) 855-5500.
47
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements, and other
information with the SEC. You may read and copy any document filed by our
Company at the SEC's public reference room at 100 F Street, N.E., Washington,
D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the
public reference room. You can review our electronically filed reports, proxy
statements and other information on the SEC's website at http://www.sec.gov. Our
common stock is traded on the American Stock Exchange under the symbol "GXY".
48
ANNEX A
ASSET PURCHASE AGREEMENT
This ASSET PURCHASE AGREEMENT ("Agreement") dated June 30, 2005, by and
between SCHREIBER FOODS, INC., a Wisconsin corporation ("Purchaser") and GALAXY
NUTRITIONAL FOODS, INC., a Delaware corporation ("Seller").
WHEREAS, Seller produces certain imitation dairy products at a facility
located in Orlando, Florida (the "Facility"); and
WHEREAS, Seller desires to sell to Purchaser and Purchaser desires to
purchase from Seller the Purchased Assets, according to the terms and conditions
set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual representations,
warranties, covenants, and agreements contained herein, the parties hereto agree
as follows:
A. Definitions.
1. Agreement. This Asset Purchase Agreement.
2. Bill of Sale. The document delivered by the Seller to the Purchaser
under which Seller shall convey to Purchaser title to the Purchased
Assets in the form of Exhibit A.2 hereto.
3. Closing. The consummation of the transactions contemplated hereby as
set forth in Section D hereof.
4. Closing Date. November 1, 2005, effective as of 12:01 a.m., Central
Standard Time, or, if later, the date that is three (3) business
days after the date on which all conditions to closing specified in
Sections D.2 and D.3 have been satisfied or waived.
5. Fixed Assets. Those assets set forth on Exhibit A.5.
6. Governmental Approvals. Any order, permission, consent, approval,
license, authorization, registration, or validation of, or filing
with, or exemption by any governmental agency, commission, board or
public authority in connection with the sale of the Purchased Assets
from Seller to Purchaser, or the execution, delivery or performance
by the Seller of this Agreement or any other agreement or instrument
to be executed or delivered by Seller hereunder.
7. Material Adverse Effect. An effect that is reasonably likely to
result in a material diminution in value of the Purchased Assets
(excluding, however, any such Material Adverse Effect which results
from any announcement of the transactions contemplated by this
Agreement, which includes the effect of any announcement on any
customers, suppliers or employees, and general economic conditions).
8. Ordinary Course. With respect to the Seller's operations at the
Facility, the ordinary course of commercial operations customarily
engaged in by the Seller.
9. OSHA. The Federal Occupational Safety and Health Act of 1970.
10. Purchase Price. Eight Million Seven Hundred Thousand Dollars
($8,700,000.00).
11. Purchased Assets. The Fixed Assets and all books and records related
thereto.
49
12. Removal Plan. The Asset Removal Agreement in the form of Exhibit
A.12 hereto describing the process and procedures for removing the
Fixed Assets from the Facility.
13. Seller Liabilities. As defined in Section H.2(a).
14. Supply Agreement. The Supply Agreement between Seller and Purchaser
dated as of the date hereof.
B. Purchase and Sale of Assets.
1. Assets Being Purchased and Sold. Pursuant to the terms and
conditions provided herein, and in consideration of the covenants,
conditions and agreement of Purchaser contained herein, Seller shall
sell, convey, assign, and transfer to Purchaser, and Purchaser shall
purchase and acquire from Seller, the Purchased Assets.
2. Assumed Liabilities. The Purchaser shall not assume or be obligated
for any liability, obligation or commitment of Seller, direct or
indirect, known or unknown, absolute or contingent (the "Pre-Closing
Liabilities").
C. Purchase Price/Payment.
1. Amount. In reliance on the representations and warranties made
herein by Seller, subject to the terms and conditions of Section I,
Purchaser agrees to pay Seller the Purchase Price.
2. Payment. At the Closing, Purchaser shall pay to Seller, by wire
transfer of funds, the Purchase Price.
D. Closing
1. Closing/Transfer of Title. The Closing shall commence at 8:00 A.M.,
CST on the Closing Date. Title and risk of loss to the individual
Purchased Assets shall pass to Purchaser at the Closing.
2. Conditions Precedent to Purchaser's Obligation to Close. Purchaser's
obligation to consummate the purchase of the Purchased Assets and to
take the other actions required to be taken by Purchaser on the
Closing Date are subject to the satisfaction, at or prior to the
Closing Date, of each of the following conditions (any of which may
be waived by Purchaser, in whole or in part).
(a) Seller's Performance. All of the covenants and obligations
that the Seller is required to perform or to comply with
pursuant to this Agreement and the Supply Agreement at or
prior to the Closing Date, including delivery to Purchaser of
all items described in Section D.4, must have been duly
performed and complied with in all material respects.
(b) No Proceedings. Since the date of this Agreement, there must
not have been commenced against Purchaser or Seller any
proceeding involving any challenge to, or seeking damages or
other relief in connection with, or which may have the effect
of preventing or delaying any of the transactions contemplated
in, this Agreement or the Supply Agreement.
(c) Release of Existing Liens. Any liens on the Purchased Assets
shall have been released and terminated at or prior to the
Closing, and Seller shall have received any consents required
to be obtained from the Seller's lenders.
(d) Stockholder Approval. The Seller's stockholders holding a
majority of the outstanding shares of common stock shall have
approved the sale of the Purchased Assets contemplated hereby.
For purposes of clarification, the accuracy of the Seller's
representations and warranties shall not be a condition to the
Purchaser's obligations to consummate the purchase of the
Purchased Assets, and Purchaser's sole remedy for any breach
of any representation or warranty by Seller hereunder shall be
pursuant to Section H.
50
3. Conditions Precedent to Seller's Obligation to Close. Seller's
obligation to consummate the sale of the Purchased Assets and to
take the other actions required to be taken by Seller on the Closing
Date is subject to the satisfaction, at or prior to the Closing
Date, of each of the following conditions (any of which may be
waived by Seller, in whole or in part).
(a) Accuracy of Representations. All of Purchaser's
representations and warranties in this Agreement must have
been accurate in all material respects as of the date of this
Agreement and as of the Closing Date as if made on the Closing
Date.
(b) Purchaser's Performance. All of the covenants and obligations
that the Purchaser is required to perform or to comply with
pursuant to this Agreement at or prior to the Closing Date,
including delivery to Seller of all items described in Section
D.5, must have been duly performed and complied with in all
material respects.
(c) No Proceedings. Since the date of this Agreement, there must
not have been commenced against Seller or Purchaser any
proceeding involving any challenge to, or seeking damages or
other relief in connection with, or which may have the effect
of preventing or delaying any of the transactions contemplated
in, this Agreement or the Supply Agreement.
(d) Release of Existing Liens. Any liens on the Purchased Assets
shall have been released and terminated at or prior to the
Closing, and Seller shall have received any consents required
to be obtained from the Seller's lenders.
(e) Stockholder Approval. The Seller's stockholders holding a
majority of the outstanding shares of common stock shall have
approved the sale of the Purchased Assets contemplated hereby.
4. Deliveries of Seller. At Closing, Seller shall deliver to Purchaser,
in form and content reasonably satisfactory to Purchaser, the
following:
(a) copies of resolutions adopted by Seller's Board of Directors,
certified by the Secretary or Assistant Secretary of Seller,
authorizing the execution, delivery and performance of this
Agreement by Seller and authorizing and approving all other
transactions contemplated by this Agreement;
(b) the Bill of Sale;
(c) the Supply Agreement;
(d) the Removal Plan; and
(e) all such other resolutions, certifications, documents or
instruments as Purchaser or its counsel may reasonably request
to carry out the intent of this Agreement.
5. Deliveries of Purchaser. At Closing, Purchaser shall deliver to
Seller, in form and content reasonably satisfactory to Seller, the
following:
(a) payment by wire transfer of the Purchase Price;
51
(b) copies of resolutions adopted by Purchaser's board of
directors, certified by the Secretary of Purchaser,
authorizing the execution, delivery and performance of this
Agreement by Purchaser and authorizing and approving all other
transactions contemplated by this Agreement;
(c) the Supply Agreement;
(d) the Removal Plan; and
(e) all such other resolutions, certifications, documents or
instruments as Seller or its counsel may reasonably request to
carry out the intent of this Agreement.
E. Covenants and Agreements
1. Access to Books and Records. After Closing, Seller and Purchaser
each will permit the other party and their representatives, upon
receipt of a written request a reasonable time in advance, including
but not limited to lawyers and accountants, during normal business
hours, to have access to and examine and make copies of the books
and records related to the Purchased Assets.
2. Liabilities. Subject to the terms of this Agreement, Seller agrees
to pay and shall discharge when due all Pre-Closing Liabilities.
Purchaser shall not assume, and Seller shall remain responsible for
all other Pre-Closing Liabilities and obligations of Seller.
3. Payment of Taxes. Seller shall be responsible for and shall pay all
federal, state, and local taxes, including, but not limited to, all
income, earnings, and property taxes, relating to Seller and the
Purchased Assets prior to the Closing Date. Purchaser shall be
responsible for and pay all such taxes relating to the Purchased
Assets payable for any period from and subsequent to the Closing
Date.
4. Sales Taxes. Seller shall report and pay all sales taxes, if any,
payable to the State of Florida in connection with the transactions
contemplated by this Agreement.
5. Bulk Sales Laws. Purchaser hereby agrees to waive Seller's
obligation to comply with any notification requirements of the bulk
sales law of Florida.
6. Removal of Assets. Seller shall comply with the provisions of the
Removal Agreement.
7. Employee Matters. Purchaser shall not be obligated to extend job
offers to any employees employed by Seller as of the Closing Date.
Seller shall be responsible for any notification and/or liability
under the Worker Adjustment and Retraining Notification Act and/or
any similar state statute or local laws in connection with the
consummation of the transactions contemplated hereunder.
8. Conduct of Business Until Closing. Except as the Purchaser may
otherwise consent to or approve in writing on and after the date
hereof and prior to the Closing Date, the Seller agrees:
(a) not to enter into discussions, and to discontinue all pending
discussions, relating to the disposition of any of the
Purchased Assets, other than in the Ordinary Course;
(b) except in the Ordinary Course, not to sell, lease or grant any
option to sell or lease, give a security interest in or
otherwise create any encumbrance on any of the Purchased
Assets;
(c) not to enter into any agreement (conditional or otherwise) to
do any of the foregoing.
52
9. Further Assurances. From time to time after the Closing Date, at the
request of the other party hereto, and without further
consideration, each party hereto shall execute and deliver such
other instruments of conveyance and transfer and take such other
action as the other party hereto may reasonably request so as to
effectuate the transactions contemplated by this Agreement.
F. Representations and Warranties of Seller. Seller represents and warrants
to Purchaser that, except as set forth in the various Schedules provided
as a part of this Section F and attached hereto:
1. Organization. Seller is a corporation duly formed and validly
existing under the laws of the State of Delaware and has the power
and authority to carry on its business as now conducted, to own and
operate the Purchased Assets, to execute this Agreement and the
other agreements and instruments referred to in this Agreement that
it is executing and delivering, and, subject to the Seller obtaining
the approval of its stockholders holding a majority of the
outstanding shares of its common stock (the "Stockholder Approval"),
the Seller shall have the power and authority to carry out the
transactions contemplated hereby and thereby.
2. Enforceability. Subject to the Seller obtaining the Stockholder
Approval, the execution and delivery by Seller of this Agreement and
the other agreements and instruments referred to in this Agreement
have been duly authorized by the Seller's board of directors and
constitute legal, valid, binding, and enforceable agreements and
instruments of Seller, except as the enforceability thereof may be
affected by the laws of bankruptcy, insolvency, reorganization, or
similar laws affecting the rights of creditors generally.
3. No Violations. Except as set forth in Schedule F.3, neither the
execution, delivery, nor performance of this Agreement or any other
agreement or instrument executed and delivered by or on behalf of
Seller in connection herewith, nor the consummation of the
transactions herein or therein contemplated, nor compliance with the
terms and provisions hereof or thereof, (i) contravenes Seller's
certificate of incorporation or by-laws, (ii) to Seller's knowledge,
violates any statute, rule or regulation of any governmental
authority to which Seller is subject, (iii) contravenes any
judgment, decree or order applicable to Seller, (iv) conflicts or is
inconsistent with or will result in any breach of or constitute a
default under any contract, commitment, agreement, understanding,
arrangement, or instrument so as to have a Material Adverse Effect
on the Purchased Assets, or (v) will result in the creation or
imposition of (or the obligation to create or impose) any lien or
encumbrance on any of the Purchased Assets, or will increase any
such lien or encumbrance.
4. Litigation. There are no actions, suits, grievances, arbitrations or
proceedings pending, or, to Seller's knowledge, threatened or
anticipated before any court or governmental or administrative body
or agency affecting the Purchased Assets and that are reasonably
likely to have a Material Adverse Effect. There are no outstanding
judgments, orders, writs, injunctions or decrees of any court,
governmental agency or arbitration tribunal against, involving or
affecting the Purchased Assets.
5. Compliance with Laws; Licenses; Governmental Approvals. Except as
set forth in Schedule F.5, the Seller is not required to obtain any
Governmental Approvals to operate the Purchased Assets, except where
the failure to obtain such Governmental Approval would not have a
Material Adverse Effect. Since January 1, 2004, and except as set
forth in Schedule F.5, there have been no inspections of the
Purchased Assets by any OSHA authority and no citations have been
issued under OSHA laws or regulations with respect to the Purchased
Assets.
6. Taxes. There are no tax liens or similar encumbrances of any type on
the Purchased Assets.
7. Contracts and Other Commitments. Schedule F.7 sets forth all
material contracts and other agreements that Seller is a party to
(written or oral) that affect or relate to the Purchased Assets.
Except as set forth in Schedule F.7, neither Seller nor, to Seller's
knowledge, the other party or parties thereto are in default under
any such agreement.
53
8. Title to Purchased Assets. Seller has and shall transfer to
Purchaser good and valid title to all of the Purchased Assets.
Except as disclosed on Schedule F.8, and except for taxes and
assessments not yet due and payable, none of the Purchased Assets is
subject to any lien, pledge, encumbrance, or charge of any kind.
Except as disclosed on Schedule F.8, no production assets at the
Facility are leased.
9. Restrictions on Purchased Assets or Premises. Seller is not a party
to, subject to, or bound by any contract, commitment or agreement
that prevents the use of any of the Purchased Assets for the
purposes currently used. To the knowledge of Seller, there are no
existing laws prohibiting the use of any Purchased Asset for its
current use.
10. Insurance Inspection. Schedule F.10 contains a copy of each
inspection report received by Seller within the last twenty
four (24) months from insurance underwriters or carriers
regarding the Purchased Assets.
11. No Broker. No broker, finder, agent or similar intermediary has
acted for or on behalf of Seller in connection with this Agreement
or the transactions contemplated hereby.
12. Knowledge. As of the Closing Date, Seller is not aware of any claim
for indemnity it may have against Purchaser under Section H below.
G. Representations and Warranties of Purchaser. Purchaser represents and
warrants to Seller that:
1. Organization. Purchaser is a Wisconsin corporation, duly organized,
validly existing, and in good standing under the laws of the State
of Wisconsin and has the power and authority to carry on its
business, as now conducted, to own and operate its properties and
assets, to execute this Agreement and the other agreements and
instruments referred to in this Agreement that it is executing and
delivering, and to carry out the transactions contemplated hereby
and thereby.
2. Enforceability. The execution and delivery by Purchaser of this
Agreement and the other agreements and instruments referred to in
this Agreement have been duly authorized and constitute legal,
valid, binding, and enforceable agreements and instruments of
Purchaser, except as the enforceability thereof may be affected by
the laws of bankruptcy, insolvency, reorganization, moratorium, or
similar laws affecting the rights of creditors generally.
3. No Violations. Neither the execution, delivery, nor performance of
this Agreement or any other agreement or instrument executed and
delivered by or on behalf of Purchaser in connection herewith, nor
the consummation of the transactions herein or therein contemplated,
nor compliance with the terms and provisions hereof or thereof, (i)
contravenes Purchaser's Articles of Incorporation or any provision
of law, (ii) violates any statute, rule, regulation, or order of any
court or governmental authority to which Purchaser is subject, (iii)
contravenes any judgment, decree, franchise, order, or permit
applicable to Purchaser, (iv) conflicts or is inconsistent with or
will result in any breach of or constitute a default under any
contract, commitment, agreement, understanding, arrangement, or
instrument, or (v) will result in the creation of or imposition of
(or the obligation to create or impose) any lien, encumbrance, or
liability on any of the property or assets of Purchaser, or will
increase any such lien, encumbrance, or liability.
4. No Broker. No broker, finder, agent or similar intermediary has
acted for or on behalf of Purchaser in connection with this
Agreement or the transactions contemplated hereby. No broker,
finder, agent or similar intermediary is entitled to any fee or
commission relating to the transactions contemplated by this
Agreement.
5. Knowledge. As of the Closing Date, Purchaser is not aware of any of
Seller's representations and warranties under the Agreement being
untrue or inaccurate, in whole or in part. In addition, as of the
Closing Date, Purchaser is not aware of any claim for indemnity it
may have against Seller under Section H below.
54
H. Indemnification
1. Survival of Representations and Warranties. Seller's representations
and warranties (and the indemnities under Section H.2 relating
thereto) shall survive the Closing Date for twelve (12) months.
2. Indemnification by Seller. Seller indemnifies and agrees to hold
Purchaser harmless from, against and in respect of the following:
(a) Except with regard to the Assumed Liabilities, and except as
otherwise provided in this Agreement, all debts, liabilities,
or obligations of Seller, direct or indirect, fixed,
contingent, or otherwise existing before the Closing,
including, but not limited to, liabilities arising out of any
of the acts, transactions, circumstances, statement of facts,
or violation of law that occurred or existed before the
Closing, including without limitation, the Pre-Closing
Liabilities and Seller's obligations under applicable bulk
sales laws, whether or not then known, due, or payable and
irrespective of whether the existence thereof is disclosed to
Purchaser in this Agreement or any schedule hereto (the
"Seller Liabilities");
(b) Any and all losses, liabilities, deficiencies, or damages
suffered or incurred by Purchaser by reason of any untrue
representation or breach of warranty, or nonfulfillment of any
covenant or agreement by Seller contained in this Agreement or
in any certificate, document, or instrument delivered to
Purchaser hereunder or in connection herewith;
(c) Any and all losses, liabilities, deficiencies, or damages
suffered or incurred by Purchaser as a result of Seller's
failure to discharge the Seller Liabilities;
(d) Any claim for a finder's fee or brokerage or other commission
by any person or entity for services alleged to have been
rendered at the instance of Seller with respect to this
Agreement or any of the transactions contemplated hereby and
any and all losses, liabilities, deficiencies, or damages
suffered or incurred by Purchaser by reason of nonfulfillment
of any covenant or agreement by Seller contained in this
Agreement or in any other agreement delivered in connection
herewith;
(e) Any and all actions, suits, proceedings, claims, demands,
assessments, judgments, costs, and expenses, including,
without limitation, reasonable legal fees and expenses,
incident to any of the foregoing or incurred in enforcing this
indemnity.
3. Indemnification by Purchaser. Purchaser hereby agrees to indemnify
and hold Seller harmless from, against, and in respect of:
(a) Any and all debts, liabilities, or obligations of Purchaser,
direct or indirect, fixed, contingent, or otherwise accruing
on or after the Closing Date, including, without limitation,
the Assumed Liabilities;
(b) Any and all losses, liabilities, deficiencies, or damages
suffered or incurred by Seller resulting from any untrue or
inaccurate representation, breach of warranty, or
nonfulfillment of any covenant or agreement by Purchaser
contained in this Agreement or in any certificate, document,
or instrument delivered to Seller pursuant hereto or in
connection herewith;
(c) Any and all losses, liabilities, deficiencies, or damages
suffered or incurred by Seller as a result of Purchaser's
failure to discharge the Assumed Liabilities;
55
(d) Any claim for a finder's fee or brokerage or other commission
by any person or entity for services alleged to have been
rendered at the instance of Purchaser with respect to this
Agreement or any of the transactions contemplated hereby;
(e) Any and all actions, suits, proceedings, claims, demands,
assessments, judgments, costs, and expenses, including,
without limitation, reasonable legal fees and expenses,
incident to any of the foregoing or incurred in enforcing this
indemnity.
4. Third-Party Claims.
(a) In respect of, arising out of, or involving a claim made by
any person, firm, governmental authority, or corporation other
than the Purchaser or Seller against the indemnified party
("Third-Party Claim"), the indemnified party must notify the
indemnifying party in writing of this Third-Party Claim
promptly after receipt by the indemnified party of written
notice of the Third-Party Claim. Thereafter, the indemnified
party shall promptly deliver to the indemnifying party copies
of all notices relating to the Third-Party Claim.
(b) If a Third-Party Claim is made against an indemnified party,
the indemnifying party shall assume the defense thereof with
counsel selected by the indemnifying party, provided such
counsel is not reasonably objected to by the indemnified
party. The indemnified party shall cooperate fully with the
indemnifying party in connection with such defense.
(c) In no event will the indemnified party admit any liability
with respect to, or settle, compromise, or discharge, any
Third-Party Claim without the indemnifying party's prior
written consent, and the indemnified party will agree to any
settlement, compromise, or discharge of a Third-Party Claim
that the indemnifying party may recommend that releases the
indemnified party completely in connection with the
Third-Party Claim.
(d) The indemnified party shall be entitled to participate in, but
not control, the defense with its own counsel at its own
expense. If the indemnifying party does not assume the defense
of any such Third-Party Claim, the indemnified party may
defend the claim in a manner as it may deem appropriate,
including, but not limited to, settling the claim or
litigation after giving notice of it to the indemnifying party
on such terms as the indemnified party may deem appropriate,
and the indemnifying party will reimburse the indemnified
party promptly in accordance with the provisions of this
Section H.
(e) The failure of either party to provide timely notice hereunder
shall not defeat the right to indemnification if the late
notice does not result in prejudice, and if so, only to the
extent of the prejudice.
5. Sole Remedy. Except in connection with any fraudulent
misrepresentation by either party proven by the other in a court of
competent jurisdiction, or with respect to Third Party Claims, to
which the limitations of this subparagraph do not apply, Purchaser
and Seller agree that their sole remedy after Closing, whether in
respect to a breach of warranty, representation or covenant by
Seller or Purchaser hereunder, shall be limited to rights of
indemnification pursuant to Sections H.2 and H.3. Purchaser and
Seller shall use commercially reasonable efforts to mitigate the
losses, costs, expenses and damages to which either may become
entitled to indemnification hereunder.
6. Direct Damages. The indemnification obligations of the parties
pursuant to this Section H shall be limited to direct damages, loss,
claims, liabilities, demands, charges, suits, penalties, costs and
expenses and shall not include incidental, consequential, indirect,
punitive or exemplary damages.
I. Alternative Transactions. If, at the stockholders meeting held for the
purpose of approving of the sale of the Purchased Assets to Purchaser
pursuant to the terms hereof, Seller's stockholders holding a majority of
the outstanding shares of common stock do not approve the sale of the
Purchased Assets contemplated hereby, then, as soon as is reasonably
practicable thereafter, the Seller and Purchaser shall consummate one of
the following transactions (each, an "Alternative Transaction"):
56
1. Seller shall sell to Purchaser, and Purchaser shall purchase from
Seller, the Alternative Assets listed on Exhibit I.1 for an
aggregate purchase price of $2,115,000. The only conditions to
either Party's obligations to consummate the sale of Alternative
Assets pursuant to this Section I.1 (other than payment of the
purchase price therefore) shall be the release and termination of
any liens with respect to the Alternative Assets and Seller's
receipt of any consents required to be obtained from the Seller's
lenders (collectively, the "Releases and Consents").
2. In the event that the parties are unable to obtain the Releases and
Consents with respect to the sale of the Alternative Assets as
contemplated by Section I.1, then the parties shall negotiate in
good faith to make such Alternative Assets available for use by the
Purchaser on a basis and for such period (not to exceed 180 days)
that are reasonably acceptable to each of the Seller and Purchaser;
provided, however, that Purchaser shall use its commercially
reasonable efforts to obtain equipment that serves the same
functions as the Alternative Assets prior to the expiration of the
agreed upon period of time. The only additional conditions to either
Party's obligations to consummate the arrangements contemplated by
this Section I.2 shall be the Releases and Consents.
J. Termination. This Agreement may be terminated at any time prior to the
Closing or the consummation of an Alternative Transaction:
1. by mutual written agreement of Seller and Purchaser;
2. automatically upon written notice of termination of the Supply
Agreement given pursuant to Section VII.C thereof.
K. Miscellaneous.
1. Expenses. Except as specifically set forth in this Agreement to the
contrary, all fees and expenses incurred by Seller in connection
with this Agreement will be borne by Seller and all fees and
expenses incurred by Purchaser in connection with this Agreement
will be borne by Purchaser.
2. Parties In Interest. This Agreement will be binding on and inure to
the benefit of the parties hereto. Neither this Agreement, nor the
parties' rights and obligations hereunder, may be assigned by any
party to any third party without the other party's prior written
consent, provided, however, consent to assignment shall not be
required with respect to an assignment to a purchaser of all or
substantially all of the assets of either Seller or Purchaser, as
the case may be.
3. Entire Agreement; Amendments. This Agreement and the agreements and
schedules referred to in this Agreement contain the entire
understanding of the parties with respect to the subject matter of
this Agreement. There are no restrictions, agreements, promises,
warranties, covenants, or undertakings other than those expressly
set forth herein or therein. This Agreement supersedes all prior
agreements and understandings between the parties with respect to
its subject matter. This Agreement may be amended only by a written
instrument duly executed by the parties or their successors or
assigns.
4. No Waiver. No waiver of any breach or default hereunder shall be
considered valid unless in writing and signed by the party giving
such waiver, and no such waiver shall be deemed a waiver of any
subsequent breach or default of the same or a similar nature.
5. Headings. The section and paragraph headings contained herein are
for the convenience of the parties only and are not intended to
define or limit the contents of their sections and paragraphs.
57
6. Applicable Law. This Agreement and all amendments thereof shall be
governed by and construed in accordance with the laws of the State
of Wisconsin applicable to contracts made and to be performed
therein.
7. Notices. All notices, claims, certificates, requests, demands, and
other communications under this Agreement will be in writing and
notices will be deemed to have been duly given if delivered or
mailed, registered or certified mail, postage prepaid, return
receipt requested, or for overnight delivery, by a nationally
recognized overnight mail service, as follows:
If to Purchaser to: Schreiber Foods, Inc.
Attn: Ron Dunford
425 Pine Street
Green Bay, Wisconsin 54307
Ron.Dunford@SchreiberFoods.com
If to Seller to: Galaxy Nutritional Foods, Inc.
2441 Viscount Row
Orlando, FL 32809-6217
Attention: Michael Broll
e-mail: mebroll@galaxyfoods.com
with a copy (which shall not constitute
notice)to:
Proskauer Rose LLP
1585 Broadway
New York, New York 10036
Attention: Arnold J. Levine, Esquire
e-mail: alevine@proskauer.com
or to such other address as the party to whom notice is to be given
previously may have furnished to the other party in writing in the
manner set forth in this section.
8. Joint Announcement. The Seller and Purchaser shall agree on the form
and substance of all joint press releases or other public
announcements of matters related to this Agreement or any of the
transactions contemplated hereby that shall be released on or after
the Closing; provided, however, that nothing in this Section J.8
shall be deemed to prohibit any party hereto from making any
disclosure required by law.
9. Severability. If any term, condition, or provision of this Agreement
shall be declared invalid or unenforceable, the remainder of the
Agreement, other than such term, condition, or provision, shall not
be affected thereby and shall remain in full force and effect and
shall be valid and enforceable to the fullest extent permitted by
law.
10. Definition of Knowledge. For purposes of this Agreement, the phrases
"to the best of the Seller's knowledge," "to the Seller's
knowledge," "to the knowledge of the Seller," "know," or similar
words and phrases referring to facts or other information known by
the Seller shall be deemed to mean and refer to facts and
information within the actual knowledge of those individuals listed
on Exhibit K.10.
58
IN WITNESS WHEREOF, the parties hereto have caused this Asset Purchase
Agreement to be duly executed as of the day and year first above written.
SELLER PURCHASER
GALAXY NUTRITIONAL FOODS, INC. SCHREIBER FOODS, INC.
By: /s/ David H. Lipka By: /s/ Ron Dunford
--------------------------- -----------------------------
Name: David H. Lipka Name: Ron Dunford
Its: Chairman Its: President and COO of
Schreiber Chain Sales
59
Exhibit A.5
FIXED ASSETS
DESCRIPTION VENDOR/MANUFACTURER Asset #
- ------------------------------------------------- ----------------------- ----------
(2) CC - 1000# cheese cookers Blentech Corp. 193
Hayssen packaging machine Hayssen Manufacturing 194
(4) 200 gal. & (2) 500 gal. Kettles w/t agitators Lee Process Systems 199
System 1, Kustner IWS machine Kustner Industries 377,393
Wrapping machine, WS-20 Series II Sasib 378
Blentech Hard Cheese System Blentech Corp. 466
System 2, 1600 SPM IWS Machine (Hardware) Kustner Industries 480,492
System 5, Ribbon - Pullman Hart Design & Mfg. Inc. 1179
System 5, Hart Casing Linc. Pulman Machine Hart Design & Mfg. Inc. 1418
3 CC-1000 Cheeztherm cheese cookers Blentech Corp. 1674
System 8, Chunk Line R.R. Pankratz, Inc. 1937
Systems 9 and 11, Slice Lines Hart Design & Mfg. Inc. 1938
System 12, Cup Line Modern Packaging 1939
System 10, Block Line/String Cheese Line Robert Reiser 2048
System 13, Shred Line Hayssen Manufacturing 2049
Dixie Vac Machine Amplicon/Calfirst 2,159,2186
Hayssen Shred Bagger GE Capital 2068
Exhibit I.1
ALTERNATIVE ASSETS
DESCRIPTION VENDOR/MANUFACTURER Asset #
- --------------------------- --------------------- ---------
Blentech Hard Cheese System Blentech Corp. 466
System 12, Cup Line Modern Packaging 1939
System 13, Shred Line Hayssen Manufacturing 2049
Hayssen Shred Bagger GE Capital 2068
60
ANNEX B
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FOR THE YEAR ENDED MARCH 31, 2005
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.
As discussed in Note 17 to the accompanying financial statements, the Company
has restated its 2001 through 2005 financial statements.
/s/ BDO Seidman, LLP
Atlanta, Georgia
July 12, 2005, except in Note 17 as to which the date is September 28, 2005.
61
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 3,284,191
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 10,893,551
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 20,633,645
------------ ------------
COMMITMENTS AND CONTINGENCIES 8 -- --
TEMPORARY EQUITY:
Series A redeemable convertible preferred stock, $.01 par value;
authorized 200,000 shares; 43,894 shares outstanding 9 -- 2,573,581
Common stock, subject to registration, $.01 par value; 2,000,000
shares issued and outstanding 9 2,220,590 --
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; authorized 85,000,000 shares; 16,411,474
and 15,657,321 shares issued 164,115 156,573
Additional paid-in capital 65,838,227 63,938,643
Accumulated deficit (48,307,748) (44,447,965)
------------ ------------
17,694,594 19,647,251
Less: Notes receivable arising from the exercise of stock options 8 (12,772,200) (12,772,200)
Treasury stock, 30,443 shares, at cost (120,461) (120,461)
------------ ------------
Total stockholders' equity 4,801,933 6,754,590
------------ ------------
TOTAL $27,769,666 $29,961,816
============ ============
See accompanying notes to financial statements
62
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
Employment contract expense-general and administrative (Note 8) 444,883 1,830,329 --
General and administrative, including $409,746,
$651,273 and $153,238 non-cash charges related to
stock transactions (Note 9) 4,380,436 3,954,303 3,724,127
(Gain) Loss on asset disposals (4,500) 8,519 47,649
Research and development 309,054 260,410 232,552
------------ ------------ ------------
Total operating expenses 12,585,465 12,913,239 10,971,238
------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS (2,811,572) (1,600,567) 957,343
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense (1,129,977) (1,361,606) (2,923,215)
Derivative income (expense) 62,829 (94,269) (105,704)
Gain (loss) on fair value of warrants 18,937 (242,835) 1,174,355
Other expense -- -- (60,000)
------------ ------------ ------------
Total other income (expense) (1,048,211) (1,698,710) (1,914,564)
------------ ------------ ------------
NET INCOME (LOSS) $(3,859,783) $(3,299,277) $(957,221)
Less:
Preferred Stock Dividends (Note 9) 82,572 201,791 264,314
Preferred Stock Accretion to Redemption Value (Note 9) 319,500 1,256,019 1,308,855
------------ ------------ ------------
NET LOSS TO COMMON STOCKHOLDERS $(4,261,855) $(4,757,087) $(2,530,390)
============ ============ ============
BASIC AND DILUTED NET LOSS PER COMMON SHARE (Note 11) $(0.25) $(0.32) $(0.21)
============ ============ ============
See accompanying notes to financial statements
63
GALAXY NUTRITIONAL FOODS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Additional Notes
------------------------ Paid-In Accumulated Receivable for Treasury
Shares Par Value Capital Deficit Common Stock Stock Total
----------- --------- ------------ ------------ -------------- --------- -----------
Balance at March 31, 2002 11,540,041 $115,400 $56,439,191 $(40,191,467) $(12,772,200) $(120,461) $3,470,463
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 -- -- 18,200 -- -- -- 18,200
Dividends on preferred
stock -- -- (264,314) -- -- -- (264,314)
Accretion of discount on
preferred stock (339,446) -- -- -- (339,446)
Net loss -- -- -- (957,221) -- -- (957,221)
----------- --------- ------------ ------------ -------------- --------- -----------
Balance at March 31, 2003 12,761,685 127,617 59,018,430 (41,148,688) (12,772,200) (120,461) 5,104,698
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 -- -- 491,308 -- -- -- 491,308
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 -- -- (503,970) -- -- -- (503,970)
Net loss -- -- -- (3,299,277) -- -- (3,299,277)
----------- --------- ------------ ------------ -------------- --------- -----------
Balance at March 31, 2004 15,657,321 156,573 63,938,643 (44,447,965) (12,772,200) (120,461) 6,754,590
Exercise of options 13,893 139 18,717 -- -- -- 18,856
Costs associated with
issuance of common stock -- -- (22,500) -- -- -- (22,500)
Issuance of common stock
under employee stock
purchase plan 18,894 189 23,813 -- -- -- 24,002
Conversion of preferred
stock 721,366 7,214 840,215 -- -- -- 847,429
Fair value of stock-based
transactions -- -- 83,224 -- -- -- 83,224
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 -- -- 823,038 -- -- -- 823,038
Net loss -- -- -- (3,859,783) -- -- (3,859,783)
----------- --------- ------------ ------------ -------------- --------- -----------
Balance at March 31, 2005 16,411,474 $164,115 $65,838,227 $(48,307,748) $(12,772,200) $(120,461) $4,801,933
=========== ========= ============ ============ ============== ========= ===========
See accompanying notes to financial statements
64
GALAXY NUTRITIONAL FOODS, INC.
Statements of Cash Flows
Years Ended March 31, 2005 2004 2003
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES: (Note 12)
Net Loss $(3,859,783) $(3,299,277) $(957,221)
Adjustments to reconcile net 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)
Derivative (income) expense (62,829) 94,269 105,704
(Gain) Loss on fair value of warrants (18,937) 242,835 (1,174,355)
Non-cash compensation related to stock-based transactions (Note 9) 409,746 651,273 153,238
(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 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.
65
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.
66
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 loss
and net 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 loss to common stockholders as reported $(4,261,855) $(4,757,087) $(2,530,390)
Add: Stock-based compensation expense included
in reported net income 409,746 651,273 (1,021,117)
Deduct: Stock-based compensation expense
determined under fair value based method for
all awards (519,024) (1,070,997) (5,614,237)
-------------- -------------- --------------
Pro forma net loss to common stockholders (4,371,133) $(5,176,811) $(9,165,744)
============== ============== ==============
Net loss per common share:
Basic & diluted - as reported $ (0.25) $ (0.32) $ (0.21)
============== ============== ==============
Basic & diluted - pro forma $ (0.26) $ (0.35) $ (0.76)
============== ============== ==============
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.
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.
67
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 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.
68
(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
============== ==============
(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.
69
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.
On June 16, 2005, the Company used a portion of the proceeds from the
warrant exercises described in Note 19 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 19 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.
70
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.
(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 740,000 664,898
Derivative liability -- 806,993
Accrued dividends on preferred stock -- 549,838
Other 340,365 344,180
-------------- --------------
Total $2,130,206 $3,284,191
============== ==============
(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:
71
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 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 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:
1. For the term of the agreement, 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 agreement, 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 agreement, and for a
period of one (1) year following his termination of the agreement 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.
72
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 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 agreement 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 agreement 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.
Because Mr. Morini is no longer performing ongoing services for the
Company, 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 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 reduction to 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.
73
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.
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 award transactions on
or after April 1, 2003 under the provisions of SFAS 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 SFAS
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.
74
In accordance with the above accounting standards, the Company calculates
and records non-cash compensation related to its securities in the general
and administrative line item in the Statements of Operations on two
primary items:
a. Stock-Based Award Issuances
During the fiscal years ended March 31, 2005, 2004, and 2003, the
Company recorded $194,097, $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.
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.
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.
75
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.
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 general and administrative line item 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:
76
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 --
========== ================
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- Weighted-
Range of Average Average Average Average
Exercise Options Remaining Exercise Options Remaining Exercise
Prices Outstanding Life Price Exercisable Life 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:
77
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
==================
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 general and administrative line item 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.
Since the conversion of the Company's Series A convertible preferred stock
could have resulted in a conversion into an indeterminable numbers of
commons shares, the Company has determined that under the guidance in
paragraph 24 of EITF 00-19, it was prohibited from concluding that it had
sufficient authorized and unissued shares to net-share settle any warrants
or options issued to non-employees. Therefore, the Company has
reclassified the fair value of all warrants and options issued to
non-employees that were outstanding during the period that the Series A
convertible preferred stock was outstanding from April 2001 to October
2004 as a liability. Any changes in the fair value of the securities after
the initial valuation in April 2001 are marked to market during reporting
periods. During the fiscal years ended March 31, 2005, 2004, and 2003, the
Company recorded a loss/(gain) on the fair value of warrants of
($443,937), $242,835 and ($1,174,355), respectively, related to the change
in the fair value of the underlying warrants.
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.
78
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.
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 straight-line
method, which approximates the effective interest method. For the years
ended March 31, 2005, 2004 and 2003, the Company recorded $319,500,
$1,256,019, and $1,308,855, respectively, related to the accretion of the
redemption value of preferred stock.
Common Stock Issuances
See Note 19 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 ("SEC") 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 certain
liquidated damages 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 damages and remedies for failure to have an effective
registration statement until September 1, 2005.
79
The Emerging Issues Task Force ("EITF") is currently reviewing the
accounting for securities with liquidated damages clauses as stated in
EITF 05-04, "The Effect of a Liquidated Damages Clause on a Freestanding
Financial Instrument Subject to EITF 00-19." There are currently several
views as to how the account for this type of transaction and the EITF has
not yet reached a consensus. In accordance with EITF 00-19, "Accounting
for Derivative Financial Instruments Indexed To, and Potentially Settled
in the Company's Own Stock," and EITF 05-04, because the maximum potential
liquidated damages as described above may be greater than the difference
in fair values between registered and unregistered shares, the value of
the common stock subject to registration should be classified as temporary
equity until the registration statement becomes effective. Based on the
above determination, the Company has reclassified the $2,220,590 value of
common stock subject to registration out of permanent equity and into
temporary equity as of March 31, 2005.
Additionally, in accordance with EITF 00-19, 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 loss in the fair
value of warrants line item 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; 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.
80
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.
(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. In accordance
with EITF 05-08, "Income Tax Consequences of Issuing Convertible Debt with
a Conversion Feature," it is expected that temporary differences will
arise for the differences in accounting for convertible debt with
beneficial conversion features for book and tax purposes. Prior to EITF
05-08, the Company considered the bifurcated features to not result in
bases differences. The Company believes that the adoption of this standard
in fiscal 2006 will not have a significant impact on the financial
position, results of operations or cash flows of the Company.
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 -- -- --
==== ==== ====
81
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.
(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 $(4,261,855) $(4,757,087) $(2,530,390)
=========== =========== ===========
Weighted average shares outstanding - basic & diluted 17,007,791 14,937,005 12,110,349
=========== =========== ===========
Basic & Diluted net loss per common share $ (0.25) $ (0.32) $ (0.21)
=========== =========== ===========
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
Accretion of discount on preferred stock 319,500 1,256,019 1,308,855
Cash paid for:
Interest 767,001 1,396,419 2,349,002
Income taxes -- -- 51,037
82
(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.
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.
83
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.
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.
(17) Restatement
The Company originally concluded under EITF 00-19, "Accounting for
Derivative Financial Instruments Indexed To, and Potentially Settled in
the Company's Own Stock," that the conversion feature was conventional and
that there was no need to bifurcate the conversion right during the period
the Series A convertible preferred shares were outstanding. Subsequent to
the redemption of the remaining preferred shares, it has been determined
that certain features of the conversion option resulted in treatment
different from that historically reflected.
84
The preferred stock was a fixed-income security with no participating
rights and the dividend was 10% per annum in the first year and 8% per
annum in the second, third and fourth years. Therefore, consistent with
paragraph 61(l) of SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," the Company has concluded that the conversion
option was not clearly and closely related to the host instrument.
Ordinarily, an issuer does not need to bifurcate a conversion right from a
convertible instrument. However, in accordance with paragraph 4 of EITF
00-19, the Company has determined that due to the fact that the embedded
conversion option contained a provision that could have resulted in a
conversion into an indeterminable numbers of commons shares, that the
conversion feature was in fact "unconventional". Further, since the
conversion right embedded in the preferred stock has been considered a
derivative, the related dividends are also considered derivative
instruments. As a result, the embedded derivative was a liability that was
required to be bifurcated from the preferred stock and this liability
should have been marked to market during reporting periods. The fair value
of the derivative instruments was determined using the Black-Scholes
pricing model.
Based on this determination, the Company has reflected an increase in
additional paid-in-capital and accumulated deficit in the amount of
$1,703,246 as of March 31, 2005 and a derivative liability of $806,993 for
the year ended March 31, 2004 (See Note 7). For the years ended March 31,
2005, 2004, 2003 and 2002 the Company has restated net income to record a
derivative benefit/(expense) of $62,829, ($94,269), ($105,704) and
($1,504,455), respectively related to the change in the fair value of the
embedded derivative instruments.
Additionally, since the conversion of the Series A convertible preferred
stock could have resulted in a conversion into an indeterminable numbers
of commons shares, the Company has determined that under the guidance in
paragraph 24 of EITF 00-19, it was prohibited from concluding that it had
sufficient authorized and unissued shares to net-share settle any warrants
or options issued to non-employees. Therefore, the Company has
reclassified the fair value of all warrants and options issued to
non-employees that were outstanding during the period that the Series A
convertible preferred stock was outstanding from April 2001 to October
2004 as a liability. Any changes in the fair value of the securities after
the initial valuation in April 2001 should have been marked to market
during reporting periods.
Based on this determination, the Company has reflected a decrease in
additional paid-in-capital and accumulated deficit in the amount of
($1,319,562) as of March 31, 2005 and a warrant liability of $806,993 for
the year ended March 31, 2004 (See Note 7). For the years ended March 31,
2005, 2004, 2003 and 2002, the Company has restated net income to record a
gain/(loss) on the fair value of warrants of $443,937, ($242,835),
$1,174,355 and ($55,895), respectively, related to the change in the fair
values of the warrants.
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 its 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 accounted 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 was treated as
variable and marked to market each period. The Company has now concluded
that the interest and recourse features of the note receivable from Mr.
Morini issued in June 1995 were non-substantive, and that the notes
executed by Mr. Morini in favor of the Company in connection with the
exercise of Mr. Morini's options embodied the same attributes as those of
the original option award. Although the 1999 note consolidation triggered
a new measurement date, the award continued to include the same attributes
associated with the original option, other than the term extension.
Therefore, the revised consolidated note in June 1999 represented a fixed
option award and should not have been marked to market during the
reporting periods. For the years ended March 31, 2003, 2002 and 2001, the
Company has restated net income to record a gain/(loss) related to
non-cash compensation expense of ($3,060,000), $1,960,000, and $1,100,000.
All of the above issues relate to accounting for securities that are
reflected as income or expense through earnings as non-cash charges. These
non-cash charges do not affect the Company's revenues, cash flows from
past or future operations, or its liquidity.
85
The following table summarizes the changes in the Statement of Operations
as of March 31, 2005:
As Previously
Reported Adjustment As Restated
------------- ---------- -----------
Income (Loss) From Operations (3,236,572) 425,000 (2,811,572)
Interest Expense (1,129,977) -- (1,129,977)
Gain/(Loss) on FV of Warrants -- 18,937 18,937
Derivative (Expense)/Benefit -- 62,829 62,829
------------- ---------- -----------
Net Loss (4,366,549) 506,766 (3,859,783)
Less:
Preferred Stock Dividends 82,572 -- 82,572
Preferred Stock Accretion to
Redemption Value 203,605 115,895 319,500
------------- ---------- -----------
Net Loss to Common Stockholders (4,652,726) 390,871 (4,261,855)
============= ========== ===========
Basic and Diluted Net Loss per
Common Share (0.27) 0.02 (0.25)
============= ========== ===========
The following table summarizes the changes in the Statement of Operations
as of March 31, 2004:
As Previously
Reported Adjustment As Restated
------------- ---------- -----------
Income (Loss) From Operations (1,600,567) -- (1,600,567)
Interest Expense (1,361,606) -- (1,361,606)
Gain/(Loss) on FV of Warrants -- (242,835) (242,835)
Derivative (Expense)/Benefit -- (94,269) (94,269)
------------- ---------- -----------
Net Loss (2,962,173) (337,104) (3,299,277)
Less:
Preferred Stock Dividends 201,791 -- 201,791
Preferred Stock Accretion to
Redemption Value 1,340,943 (84,924) 1,256,019
------------- ---------- -----------
Net Loss to Common Stockholders (4,504,907) (252,180) (4,757,087)
============= ========== ===========
Basic and Diluted Net Loss per
Common Share (0.30) (0.02) (0.32)
============= ========== ===========
The following table summarizes the changes in the Statement of Operations
as of March 31, 2003:
As Previously
Reported Adjustment As Restated
------------- ---------- -----------
Income (Loss) From Operations 4,017,343 (3,060,000) 957,343
Interest Expense (2,923,215) -- (2,923,215)
Other (60,000) -- (60,000)
Gain/(Loss) on FV of Warrants -- 1,174,355 1,174,355
Derivative (Expense)/Benefit -- (105,704) (105,704)
------------- ---------- -----------
Net Income (Loss) 1,034,128 (1,991,349) (957,221)
Less:
Preferred Stock Dividends 264,314 -- 264,314
Preferred Stock Accretion to
Redemption Value 1,370,891 (62,036) 1,308,855
------------- ---------- -----------
Net Loss to Common Stockholders (601,077) (1,929,313) (2,530,390)
============= ========== ===========
Basic and Diluted Net Loss per
Common Share (0.05) (0.16) (0.21)
============= ========== ===========
86
The following table summarizes the changes in the Statement of Operations
as of March 31, 2002:
As Previously
Reported Adjustment As Restated
------------- ----------- ------------
Income (Loss) From Operations $(11,847,541) $1,960,000 $(9,887,541)
Interest Expense (3,594,091) -- (3,594,091)
Other (57,520) -- (57,520)
Gain/(Loss) on FV of Warrants -- (55,895) (55,895)
Derivative (Expense)/Benefit -- (1,566,102) (1,566,102)
------------- ----------- ------------
Loss before Taxes (15,499,152) 338,003 (15,161,149)
Income Tax Expense (1,560,000) -- (1,560,000)
------------- ----------- ------------
Net Income (Loss) (17,059,152) 338,003 (16,721,149)
Less:
Preferred Stock Dividends 709,400 -- 709,400
Preferred Stock Accretion to
Redemption Value 1,379,443 (61,647) 1,317,796
------------- ----------- ------------
Net Loss to Common Stockholders $(19,147,995) $ 399,650 $(18,748,345)
============= =========== ============
Basic and Diluted Net Loss per
Common Share $ (1.81) $ 0.03 $ (1.78)
============= =========== ============
The following table summarizes the changes in the Statement of Operations
as of March 31, 2001:
As Previously
Reported Adjustment As Restated
------------- ------------ -----------
Income (Loss) From Operations $(3,867,237) $1,100,000 $(2,767,237)
Interest Expense (2,047,097) -- (2,047,097)
Other (25,000) -- (25,000)
Income Tax Benefit 240,000 -- 240,000
Cumulative Effect of Change in
Accounting Policy (786,429) -- (786,429)
------------- ------------ -----------
Net Income (Loss) to Common
Stockholders $(6,485,763) $1,100,000 $(5,385,763)
============= ============ ===========
Basic and Diluted Net Loss per
Common Share $ (0.69) $ 0.12 $ (0.57)
============= ============ ===========
87
(18) 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), as previously stated (2,545,790) (739,401) (839,762) (241,596)
Adjustment -- (276,072) 1,062,853 (280,015)
------------ ------------ ------------ ------------
Net income (loss), as restated (2,545,790) (1,015,473) 223,091 (521,611)
============ ============ ============ ============
Net income (loss) for common stockholders,
as previously stated (2,545,790) (739,401) (571,372) (796,163)
Adjustment -- (322,406) 981,761 (268,484)
------------ ------------ ------------ ------------
Net income (loss) for common stockholders,
as restated (2,545,790) (1,061,807) 410,389 (1,064,647)
============ ============ ============ ============
Basic & diluted net income (loss) per common
share, as previously stated (0.14) (0.04) (0.04) (0.05)
Adjustment -- (0.02) 0.07 (0.02)
------------ ------------ ------------ ------------
Basic & diluted net income (loss) per common
share, as restated (0.14) (0.06) 0.03 (0.07)
============ ============ ============ ============
Stockholders' equity, as previously stated 7,022,523 9,363,062 7,162,551 7,726,530
Adjustment (2,220,590) (2,233,866) (634,332) (1,711,854)
------------ ------------ ------------ ------------
Stockholders' equity, as restated 4,801,933 7,129,196 6,528,219 6,014,676
============ ============ ============ ============
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), as previously stated 614,430 (1,378,354) (228,145) (1,970,104)
Adjustment 1,167,909 1,043,584 (244,532) (2,304,065)
------------ ------------ ------------ ------------
Net income (loss), as restated 1,782,339 (334,770) (472,677) (4,274,169)
============ ============ ============ ============
Net income (loss) for common stockholders, )
as previously stated 906,277 (1,557,986) (933,385) (2,919,813
Adjustment 1,173,926 1,064,838 (211,984) (2,278,960)
------------ ------------ ------------ ------------
Net income (loss) for common stockholders,
as restated 2,080,203 (493,148) (1,145,369) (5,198,773)
============ ============ ============ ============
Basic & diluted net income (loss) per common
share, as previously stated 0.06 (0.10) (0.06) (0.21)
Adjustment 0.07 0.07 (0.02) (0.17)
------------ ------------ ------------ ------------
Basic & diluted net income (loss) per common
share, as restated 0.13 (0.03) (0.08) (0.38)
============ ============ ============ ============
Stockholders' equity, as previously stated 8,226,481 7,497,656 8,404,579 9,191,983
Adjustment (1,471,891) (2,721,236) (4,001,393) (3,770,658)
------------ ------------ ------------ ------------
Stockholders' equity, as restated 6,754,590 4,776,420 4,403,186 5,421,325
============ ============ ============ ============
88
(19) 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.
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.
89
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.
90
ANNEX C
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FOR THE THREE MONTHS ENDED JUNE 30, 2005
GALAXY NUTRITIONAL FOODS, INC.
Balance Sheets
JUNE 30, MARCH 31,
Notes 2005 2005
----- ------------ ------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash $ -- $ 561,782
Trade receivables, net 12 5,553,245 4,644,364
Inventories 4,018,049 3,811,470
Prepaid expenses and other 492,078 219,592
------------ ------------
Total current assets 10,063,372 9,237,208
PROPERTY AND EQUIPMENT, NET 7 9,872,074 18,246,445
OTHER ASSETS 414,970 286,013
------------ ------------
TOTAL $ 20,350,416 $ 27,769,666
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit 2 $ 4,736,456 $ 5,458,479
Book overdraft 541,317 --
Accounts payable 3,072,601 3,057,266
Accrued and other current liabilities 3 1,660,631 2,130,206
Current portion of accrued employment contract 11 586,523 586,523
Current portion of term notes payable 2 7,801,985 1,320,000
Current portion of obligations under capital leases 154,502 194,042
------------ ------------
Total current liabilities 18,554,015 12,746,516
ACCRUED EMPLOYMENT CONTRACT, less current portion 11 846,240 993,305
TERM NOTES PAYABLE, less current portion 2 -- 6,921,985
OBLIGATIONS UNDER CAPITAL LEASES, less current portion 76,883 85,337
------------ ------------
Total liabilities 19,477,138 20,747,143
------------ ------------
COMMITMENTS AND CONTINGENCIES 4 -- --
TEMPORARY EQUITY:
Common stock, subject to registration 4 2,680,590 2,220,590
STOCKHOLDERS' EQUITY:
Common stock 175,435 164,115
Additional paid-in capital 68,361,776 65,838,227
Accumulated deficit (57,451,862) (48,307,748)
------------ ------------
11,085,349 17,694,594
Less: Notes receivable arising from the exercise of stock options 11 (12,772,200) (12,772,200)
Treasury stock (120,461) (120,461)
------------ ------------
Total stockholders' equity (deficit) (1,807,312) 4,801,933
------------ ------------
TOTAL $ 20,350,416 $ 27,769,666
============ ============
See accompanying notes to financial statements
91
GALAXY NUTRITIONAL FOODS, INC.
Statements of Operations
(UNAUDITED)
THREE MONTHS ENDED
JUNE 30,
----------------------------
Notes 2005 2004
----- ------------ ------------
NET SALES $ 9,851,153 $11,191,678
COST OF GOODS SOLD 7,582,855 8,251,330
------------ ------------
Gross margin 2,268,298 2,940,348
------------ ------------
OPERATING EXPENSES:
Selling 936,245 1,460,400
Delivery 615,471 593,326
General and administrative, including $867,518 and 6
$162,374 non-cash compensation related to stock
based transactions 1,601,530 795,716
Research and development 91,042 72,686
Impairment of property and equipment 7 7,896,554 --
Cost of disposal activities 8 255,011 --
(Gain)/Loss on sale of assets (636) --
------------ ------------
Total operating expenses 11,395,217 2,922,128
------------ ------------
INCOME (LOSS) FROM OPERATIONS (9,126,919) 18,220
OTHER INCOME (EXPENSE):
Interest expense (357,195) (259,816)
Derivative expense 5 -- (121,119)
Gain/(loss) on fair value of warrants 340,000 (158,896)
------------ ------------
Total other income (expense) (17,195) (539,831)
------------ ------------
NET LOSS $(9,144,114) $ (521,611)
Less:
Preferred Stock Dividends 5 -- 42,392
Preferred Stock Accretion to Redemption Value 5 -- 500,644
------------ ------------
NET LOSS TO COMMON STOCKHOLDERS $(9,144,114) $(1,064,647)
============ ============
BASIC AND DILUTED NET LOSS PER COMMON SHARE 9 $ (0.49) $ (0.07)
============ ============
See accompanying notes to financial statements.
92
GALAXY NUTRITIONAL FOODS, INC.
Statements of Stockholders' Equity
(UNAUDITED)
Common Stock Additional Notes
---------------------- Paid-In Accumulated Receivable for Treasury
Shares Par Value Capital Deficit Common Stock Stock Total
---------- --------- ------------ ------------ -------------- --------- -----------
Balance at March 31, 2005 16,411,474 $ 164,115 $ 65,838,227 $(48,307,748) $ (12,772,200) $(120,461) $ 4,801,933
Exercise of warrants 1,130,000 11,300 1,257,700 -- -- -- 1,269,000
Exercise of options 2,000 20 2,540 -- -- -- 2,560
Fair value of stock-based
transactions -- -- 1,432,750 -- -- -- 1,432,750
Non-cash compensation related
to variable securities -- -- (169,441) -- -- -- (169,441)
Net loss -- -- -- (9,144,114) -- -- (9,144,114)
---------- --------- ------------ ------------ -------------- --------- -----------
Balance at June 30, 2005 17,543,474 $ 175,435 $ 68,361,776 $(57,451,862) $ (12,772,200) $(120,461) $(1,807,312)
========== ========= ============ ============ ============== ========= ===========
See accompanying notes to financial statements.
93
GALAXY NUTRITIONAL FOODS, INC.
Statements of Cash Flows
(UNAUDITED)
Three Months Ended June 30, Notes 2005 2004
----- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(9,144,114) $ (521,611)
Adjustments to reconcile net loss to net cash from (used in)
operating activities:
Depreciation and amortization 539,103 546,041
Amortization of debt discount and financing costs 27,422 33,349
Provision for losses on trade receivables 313,000 107,000
Impairment of property and equipment and (gain)/loss on sale
of assets 7 7,895,919 --
Change in fair value of derivative instrument 5 -- 121,119
(Gain) Loss on fair value of warrants (340,000) 158,896
Non-cash compensation related to stock-based transactions 1,6 867,518 162,374
(Increase) decrease in:
Trade receivables (1,221,881) (976,993)
Inventories (206,579) (80,798)
Prepaid expenses and other (272,486) (281,686)
Increase (decrease) in:
Accounts payable 15,335 1,297,022
Accrued and other liabilities 123,360 13,325
----------- -----------
NET CASH FROM (USED IN) OPERATING ACTIVITIES (1,403,403) 578,038
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (68,851) (74,525)
Proceeds from sale of equipment 8,200 --
----------- -----------
NET CASH FROM (USED IN) INVESTING ACTIVITIES (60,651) (74,525)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES: 10
Increase in book overdrafts 541,317 --
Net borrowings (payments) on line of credit (722,023) 53,574
Repayments on term notes payable (440,000) (150,000)
Principal payments on capital lease obligations (47,994) (67,487)
Financing costs for long term debt (160,588) --
Costs associated with issuance of common stock -- (22,500)
Proceeds from exercise of common stock options 2,560 --
Proceeds from exercise of common stock warrants 5 1,729,000 --
----------- -----------
NET CASH FROM (USED IN) FINANCING ACTIVITIES 902,272 (186,413)
----------- -----------
NET INCREASE (DECREASE) IN CASH (561,782) 317,100
CASH, BEGINNING OF PERIOD 561,782 449,679
----------- -----------
CASH, END OF PERIOD $ -- $ 766,779
=========== ===========
See accompanying notes to financial statements.
94
GALAXY NUTRITIONAL FOODS, INC.
Notes To Financial Statements
(UNAUDITED)
(1) Summary of Significant Accounting Policies
The unaudited financial statements have been prepared by Galaxy
Nutritional Foods, Inc. (the "Company"), under the rules and regulations
of the Securities and Exchange Commission. The accompanying financial
statements contain all normal recurring adjustments which are, in the
opinion of management, necessary for the fair presentation of such
financial statements. Certain information and disclosures normally
included in the financial statements prepared in accordance with generally
accepted accounting principles have been omitted under such rules and
regulations although the Company believes that the disclosures are
adequate to make the information presented not misleading. The March 31,
2005 balance sheet data was derived from the audited financial statements,
but does not include all disclosures required by accounting principles
generally accepted in the United States of America. These unaudited
financial statements should be read in conjunction with the financial
statements and notes included on Form 10-K/A for the fiscal year ended
March 31, 2005. Interim results of operations for the three-month period
ended June 30, 2005 may not necessarily be indicative of the results to be
expected for the full year.
Impairment of Long-Lived Assets
In accordance with SFAS No. 144, "Accounting for the Impairment of
Disposal of Long-Lived Assets," the Company evaluates the carrying value
of long-lived assets when circumstances indicate the carrying value of
those assets may not be fully recoverable. The Company evaluates
recoverability of long-lived assets held for use by comparing the net
carrying value of an asset group to the estimated undiscounted cash flows
(excluding interest) during the remaining life of the asset group. If such
an evaluation indicates that the future undiscounted cash flows of certain
long-lived asset groups are not sufficient to recover the carrying value
of such asset groups, the assets are then adjusted to their fair values.
The Company recorded an impairment of property and equipment in the first
quarter of fiscal 2006 as discussed more fully in Note 7.
Stock Based Compensation
The Company has three stock-based employee compensation plans. Prior to
April 1, 2003, the Company accounted for those plans under the recognition
and measurement provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," (APB No. 25), and related
Interpretations.
Effective April 1, 2003, the Company adopted the fair value recognition
provisions of Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-Based Compensation," and applies SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure,"
prospectively to all employee awards granted on or after April 1, 2003.
These standards require the Company to provide pro-forma information
regarding net income (loss) and earnings (loss) per share amounts as if
compensation cost for all the Company's employee and director stock-based
awards had been determined in accordance with the fair value method
prescribed in SFAS No. 123. Awards from the Company's plans vest over
periods ranging from immediate to five years. Therefore, the cost related
to stock-based compensation included in the determination of net income
for the periods is less than that which would have been recognized if the
fair value based method had been applied to all awards since the original
effective date of SFAS No. 123.
The Company estimated the fair value of each stock-based award during the
periods presented by using the Black-Scholes pricing model with the
following assumptions:
Three Months Ended: June 30, 2005 June 30, 2004
------------- -------------
Dividend Yield None None
Volatility 46.00% 47.80%
Risk Free Interest Rate 3.45% 2.07%
Expected Lives in Months 1 9
95
Under the accounting provisions of SFAS No. 123, the Company's net loss
and net loss per basic and diluted share would have been reduced to the
pro forma amounts indicated below:
THREE MONTHS ENDED
JUNE 30,
--------------------------
2005 2004
----------- -----------
Net loss to common stockholders as
reported $(9,144,114) $(1,064,647)
Add: Stock-based compensation
expense included in reported net loss 867,518 162,374
Deduct: Stock-based compensation
expense determined under fair value
based method for all awards (877,593) (192,581)
----------- -----------
Pro forma net loss to common
stockholders $(9,154,189) $(1,094,854)
=========== ===========
Net loss per common share:
Basic & Diluted - as reported $ (0.49) $ (0.07)
Basic & Diluted - pro forma $ (0.49) $ (0.07)
Net Income (Loss) per Common Share
Net income (loss) per common share is computed by dividing net income or
loss by the weighted average shares outstanding. Diluted income (loss) per
common share is computed on the basis of weighted average shares
outstanding plus potential common shares which would arise from the
exercise of stock options, warrants and conversion of the Series A
convertible preferred stock.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and reported amounts
of revenues and expense during the reporting period. The Company's
significant estimates include the allowance for doubtful accounts
receivable, which is made up of reserves for promotions, discounts and bad
debts, provision for inventory obsolescence, valuation of deferred taxes,
and valuation of stock options and warrants. Actual results could differ
from those estimates.
Reclassifications
Certain items in the financial statements of the prior period have been
reclassified to conform to current period presentation.
Segment Information
The Company does not identify separate operating segments for management
reporting purposes. The results of operations are the basis on which
management evaluates operations and makes business decisions. The
Company's sales are generated primarily within the United States of
America.
Recent Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board ("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 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.
96
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets an Amendment of APB Opinion No. 29." SFAS No. 153 amends APB
Opinion No. 29 to eliminate the exception for nonmonetary exchanges of
similar productive assets from being measured based on the fair value of
the assets exchanged. SFAS No. 153 now provides a general exception for
exchanges of nonmonetary assets that do not have commercial substance.
SFAS No. 153 is effective for fiscal periods beginning after June 15,
2005. The Company believes that the adoption of this Statement will not
have a significant impact on its financial position, results of operations
or cash flows.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections - a replacement of APB Opinion No. 20 and SFAS No. 3." SFAS
No. 154 changes the requirements for the accounting for and reporting of a
change in accounting principle and a change required by an accounting
pronouncement when the pronouncement does not include specific transition
provisions. SFAS No. 154 requires retrospective application of changes as
if the new accounting principle had always been used. SFAS No. 154 is
effective for fiscal years beginning after December 15, 2005. The Company
is still evaluating all aspects of the revised standard in order to
evaluate the impact on its financial position and results of operations.
(2) Line of Credit, Notes Payable and Going Concern
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 (8.0% at June 30,
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. In accordance with EITF
95-22, "Balance Sheet Classification of Borrowings Outstanding under
Revolving Credit Agreements that involve both a Subjective Acceleration
Clause and a Lock-Box Arrangement," the balance is reflected as current on
the balance sheet. As of June 30, 2005, the outstanding principal balance
on the Textron Loan was $4,736,456.
The Textron Loan Agreement contains certain financial and operating
covenants. 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 on the Textron Loan was set at
Prime plus 4.75% and the Company paid a fee of $50,000 in four weekly
installments of $12,500.
On June 16, 2005, the Company used a portion of the proceeds from the
warrant exercises described in Note 5 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%. On June 30, 2005, Textron reduced the Company's borrowing
availability under the line by $200,000 until they have time to review and
approve the Company's financial forecasts that reflect the asset sale and
outsourcing arrangements (as discussed in Note 8). However, there is no
guarantee if or when they will lift this restriction on the Company's
borrowing availability. Additionally, the Company may experience further
restrictions by Textron by virtue of reserves they may require,
receivables they may deem ineligible or other rights they have under the
Textron Loan Agreement.
97
In August 2005, due to the cost of disposal activities and impairment of
property and equipment (as discussed in Notes 7 and 8), the Company
determined that it fell below the requirement for the fixed charge
coverage ratio and the adjusted tangible net worth requirements under the
Textron Loan for the quarter ended June 30, 2005. Although these covenant
violations placed the Company in technical default on the loan, the
Company has not received a notice of an event of default from Textron. The
Company is currently discussing its financial forecasts that reflect the
asset sale and outsourcing arrangements and certain waivers and loan
modifications to the Textron Loan Agreement. Until such time as the
Company has received formal waivers and loan modifications, Textron is
allowing the Company to operate in a position of default. The existence of
a default under the Textron Loan would allow Wachovia, another one of the
Company's lenders, as described below, to declare an event of default
under the existing term loan based on a cross-default provision in their
loan agreement. If an agreement cannot be reached on the loan
modifications, Textron and Wachovia could exercise their respective rights
under their loan documents to, among other things, declare a default under
the loans, accelerate the outstanding indebtedness such that it would
become immediately due and payable, and pursue foreclosure of the
Company's assets, which are pledged as collateral for such loans. If such
an event occurred with either Textron or Wachovia, it would be
substantially more difficult for the Company to effectively continue the
operation of its business, and it is unlikely that the Company would be
able to continue as a going concern.
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
term loan was consolidated with the Company's 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 the Company's equipment and certain related assets. Additionally, the
term loan bears interest at Wachovia's Base Rate plus 1% (7.25% at June
30, 2005). As a result of the cross-default provision, the Wachovia term
loan balance of $7,801,985 is classified as a current liability as of June
30, 2005.
On June 30, 2005, the Company entered into a Loan Modification Agreement
with Wachovia regarding its 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 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 was paid on August 1, 2005. As required by the terms
of the agreement, if the Company sells the equipment securing the loan,
the loan will be due and payable in full at the time of sale.
(3) Accrued and Other Current Liabilities
Accrued and other current liabilities are summarized as follows:
June 30, 2005 March 31, 2005
------------- -------------
Tangible personal property taxes $ 1,132,083 $ 1,049,841
Warrant liability -- 740,000
Other 528,548 340,365
------------- -------------
Total $ 1,660,631 $ 2,130,206
============= =============
(4) Commitments and Contingencies
In accordance with a registration rights agreement dated October 6, 2004,
the Company agreed that within 180 days it would file with the Securities
and Exchange Commission and obtain effectiveness of a registration
statement that included 2,000,000 shares issued in a private placement and
500,000 shares related to a stock purchase warrant. Per the terms of the
agreement, if a registration statement was not filed, or did not become
effective within 180 days, then in addition to any other rights the
investor may have, the Company would be required to pay certain liquidated
damages. 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 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 damages and
remedies for failure to have an effective registration statement until
September 1, 2005. In the event that the registration statement is not
effective by September 1, 2005, the Company will be liable to pay $71,875
(2.5% times the product of 2,500,000 registerable shares and the share
price of $1.15 per share) every thirty days until the registration
statement becomes effective unless an additional extension is granted.
The Emerging Issues Task Force ("EITF") is currently reviewing the
accounting for securities with liquidated damages clauses as stated in
EITF 05-04, "The Effect of a Liquidated Damages Clause on a Freestanding
Financial Instrument Subject to EITF 00-19." There are currently several
views as to how the account for this type of transaction and the EITF has
not yet reached a consensus. In accordance with EITF 00-19 and 05-04,
because the maximum potential liquidated damages as described above may be
greater than the difference in fair values between registered and
unregistered shares, the value of the common stock subject to registration
should be classified as temporary equity until the registration statement
becomes effective. Based on the above determination, the Company has
reclassified the $2,680,590 value of common stock subject to registration
out of permanent equity and into temporary equity as of June 30, 2005.
98
(5) Capital Stock
Common Stock Issuances
In accordance with a warrant agreement dated April 10, 2003, the Company
issued to Mr. Frederick DeLuca, a greater than 10% shareholder, 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 in June 2005, 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.
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 warrant for 500,000 shares of common
stock, the fair value of the warrant was accounted for as a liability,
with an offsetting reduction to the carrying value of the common stock. On
March 31, 2005, the fair value of the warrant was estimated using the
Black-Scholes pricing model to be $740,000 and on June 16, 2005, the fair
value was estimated to be $400,000. The $340,000 change in fair value was
reflected as a gain on the fair value of warrants line item in the
Statement of Operations during the three months ended June 30, 2005. The
warrant liability was moved to equity upon the exercise of the warrant as
described above.
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 of common stock at an exercise price of $2.05 per share on
June 26, 2002. Subsequently in June 2005, 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 2
and the remaining proceeds from the warrant exercises were used for
working capital purposes.
In accordance with the accounting provisions of SFAS No. 123, the Company
recorded $1,024,500 in non-cash compensation expense related to the
reduction in the exercise price of the warrants in June 2005.
Preferred Stock Issuances and Restatement
On April 6, 2001, the Company received from BH Capital Investments, LP and
Excalibur Limited Partnership (the "Series A Preferred Holders") proceeds
of approximately $3,082,000 less costs of $181,041 for the issuance of
72,646 shares of the Company's Series A convertible preferred stock with a
face value of $3,500,000 and warrants to purchase shares of the Company's
common stock. The shares 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, 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 42,330 shares of the
Series A convertible preferred stock plus accrued dividends, into
1,806,210 shares of common stock prior to the redemption of the Series A
convertible preferred stock on October 6, 2004. The conversion prices
ranged from $1.07 to $1.75 based on the above formula.
In connection with a Stock Repurchase Agreement dated October 6, 2004, the
Company redeemed the remaining 30,316 Series A convertible preferred
shares held by the Series A Preferred Holders 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.
The Company originally concluded under EITF 00-19, "Accounting for
Derivative Financial Instruments Indexed To, and Potentially Settled in
the Company's Own Stock," that the conversion feature was conventional and
that there was no need to separate the conversion right during the period
the Series A convertible preferred shares were outstanding. Subsequent to
the redemption of the remaining preferred shares, it has been determined
that certain features of the conversion option resulted in treatment
different from that historically reflected.
99
The preferred stock was a fixed-income security with no participating
rights and the dividend was 10% per annum in the first year and 8% per
annum in the second, third and fourth years. Therefore, consistent with
paragraph 61(l) of SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," the Company has concluded that the conversion
option was not clearly and closely related to the host instrument.
Ordinarily, an issuer does not need to separate a conversion right from a
convertible instrument. However, in accordance with paragraph 4 of EITF
00-19, the Company has determined that due to the fact that the embedded
conversion option contained a provision that could have resulted in a
conversion into an indeterminable number of common shares, that the
conversion feature was in fact "unconventional". Further, since the
conversion right embedded in the preferred stock has been considered a
derivative, the related dividends are also considered derivative
instruments. As a result, the embedded derivative was a liability that was
required to be separated from the preferred stock and this liability
should have been marked to market during reporting periods. The fair value
of the derivative instruments was determined using the Black-Scholes
pricing model. Based on this determination, the Company has reflected an
increase in paid-in-capital and accumulated deficit in the amount of
$1,703,246 as of March 31, 2005 and a derivative liability of $888,060 as
of June 30, 2004. For the three months ended June 30, 2004, the Company
has restated to record a derivative expense of $121,119 related to the
change in the fair value of the embedded derivative instruments.
Additionally, since the conversion of the Series A convertible preferred
stock could have resulted in a conversion into an indeterminable number of
common shares, the Company has determined that under the guidance in
paragraph 24 of EITF 00-19, it was prohibited from concluding that it had
sufficient authorized and unissued shares to net-share settle any warrants
or options issued to non-employees. Therefore, the Company has
reclassified to a liability the fair value of all warrants and options
issued to non-employees that were outstanding during the period that the
Series A convertible preferred stock was outstanding from April 2001 to
October 2004. The fair value of the warrants were determined using the
Black-Scholes pricing model. Any changes in the fair value of the
securities after the initial valuation in April 2001 should have been
marked to market during reporting periods. Based on this determination,
the Company has reflected a decrease in additional paid-in-capital and
accumulated deficit in the amount of ($1,319,562) as of March 31, 2005 and
a warrant liability of $823,794 as of June 30, 2004. For the three months
ended June 30, 2004, the Company has restated to record a loss on the fair
value of warrants of $158,896.
The following table summarizes the changes in the Statement of Operations
as of June 30, 2004:
As Previously
Reported Adjustment As Restated
------------- ---------- -----------
Income From Operations $ 18,220 $ -- $ 18,220
Interest Expense (259,816) -- (259,816)
Derivative Expense -- (121,119) (121,119)
Gain (loss) on fair value of warrants -- (158,896) (158,896)
------------- ---------- -----------
Net Loss (241,596) (280,015) (521,611)
Less:
Preferred Stock Dividends 42,392 -- 42,392
Preferred Stock Accretion to
Redemption Value 512,175 (11,531) 500,644
------------- ---------- -----------
Net Loss to Common Stockholders $ (796,163) $ (268,484) $(1,064,647)
============= ========== ===========
Basic and Diluted Net Loss per
Common Share $ (0.05) $ (0.02) $ (0.07)
============= ========== ===========
The Series A Preferred Holders had the right to receive on any outstanding
share of Series A convertible preferred stock a ten percent dividend,
payable one year after the issuance of such preferred stock, and an eight
percent dividend for the subsequent three years thereafter, payable in
either cash or shares of preferred stock. For the three months ended June
30, 2004, the Company recorded preferred dividends of $42,392, 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 straight-line
method, which approximates the effective interest method. For the three
months ended June 30, 2004, the Company recorded $500,644, related to the
accretion of the redemption value of preferred stock.
100
(6) 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 award transactions
(including, but not limited to, restricted stock awards, stock option
grants, and warrant issuances) on or after April 1, 2003 under the
provisions of SFAS No. 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 SFAS No. 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.
In accordance with the above accounting standards, the Company calculates
and records non-cash compensation related to its securities in the general
and administrative expense line item in the Statements of Operations based
on two primary items:
a. Stock-Based Award Issuances
During the three months ended June 30, 2005 and 2004, the Company recorded
$1,036,959 and $4,208, respectively, in non-cash compensation expense
related to stock-based transactions that were issued to and vested by
employees, officers, directors and consultants.
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 June 30,
2005. The Company recorded non-cash compensation expense/(income) of
($169,441) and $158,166 for the three months ended June 30, 2005 and 2004,
respectively, related to the modified options described above.
(7) Impairment of Property and Equipment
In light of the Asset Sale and Outsourcing Arrangements discussed in Note
8, the Company determined that it is more likely than not that a majority
of its fixed assets related to production activities will be sold or
disposed prior to the end of their useful life. These assets represent
approximately 98% of the value of Property and Equipment. Based on this
determination, SFAS No. 144, "Accounting for the Impairment of Disposal of
Long-Term Assets," requires that the Company write down the value of its
assets to their estimated fair values as of June 30, 2005. The Company
will continue to hold and use the assets until they are sold. Therefore,
all assets will continue to be reported and depreciated under Property and
Equipment in the Balance Sheet until they are sold. The Company estimated
the fair value based on the sales price discussed below and the
anticipated sales price related to any other assets plus future cash flows
related to the assets from July 1, 2005 until the sale. Based on this
estimate, the Company recorded an impairment of property and equipment of
$7,896,554 in order to reflect a net fair value for Property and Equipment
of $9,872,074 at June 30, 2005.
(8) 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.
101
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 above transactions were communicated to the employees on July 6, 2005.
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. The Company will
account for the costs associated with these transactions in accordance
with SFAS No. 146, "Accounting for Costs Associated with an Exit or
Disposal Activity," because the above arrangements are planned and
controlled by management and materially change the manner in which the
Company's business will be conducted. In accordance with SFAS No. 146,
costs associated with disposal activities should be reported as a
reduction of income from operations. For the three months ended June 30,
2005, the Company incurred and reported $255,011 as Costs of Disposal
Activities in the Statement of Operations.
(9) Earnings Per Share
The following is a reconciliation of basic net earnings (loss) per share
to diluted net earnings (loss) per share:
THREE MONTHS ENDED
JUNE 30,
--------------------------
2005 2004
----------- -----------
Net loss to common stockholders $(9,144,114) $(1,064,647)
=========== ===========
Weighted average shares outstanding -
basic and diluted 18,663,485 15,666,399
Basic and diluted net loss per common
share $ (0.49) $ (0.07)
=========== ===========
Options for 5,059,809 shares and warrants for 655,356 shares have not been
included in the computation of diluted net income (loss) per common share
for the three months ended June 30, 2005, as their effect would be
antidilutive. Potential conversion of Series A convertible preferred stock
for 1,478,815 shares, options for 4,742,201 shares and warrants for
1,242,856 shares have not been included in the computation of diluted net
income (loss) per common share for the three months ended June 30, 2004,
as their effect would be antidilutive.
102
(10) Supplemental Cash Flow Information
For purposes of the statement of cash flows, all highly liquid investments
with a maturity date of three months or less are considered to be cash
equivalents.
Three months ended June 30, 2005 2004
-------------------------------------------- -------- --------
Non-cash financing and investing activities:
Accrued preferred stock dividends $ -- $ 42,392
Accretion of discount on preferred stock -- 500,644
Cash paid for:
Interest 403,347 221,350
(11) Related Party Transactions
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 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 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.
Because Mr. Morini is no longer performing ongoing services for the
Company, 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 were $1,830,329 of which $1,201,399
remained unpaid but accrued ($366,305 as short-term liabilities and
$835,094 as long-term liabilities) as of June 30, 2005. The long-term
portion will be paid out in nearly equal monthly installments ending in
October 2008.
In June 1999, in connection with an amended and restated employment
agreement for Mr. Morini, 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 terms of the June 1999 Employment
Agreement that was amended and restated by the October 2003 Second Amended
and Restated Employment Agreement between the 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, the Company would
reflect this amount as a forgiveness of debt in the Statement of
Operations. In the event that Mr. Morini is unable to pay the loan when
due and the Company forecloses on the shares, the Company will reflect 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 June 30, 2005 of $2.08, the Company would reflect a loss
of approximately $6,710,000 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 reduction to Stockholders'
Equity.
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. As of June 30, 2005, the remaining unpaid but accrued balance was
$231,364 ($220,218 in short-term liabilities and $11,146 in long-term
liabilities).
(12) Economic Dependence
The Company had one customer that accounted for nearly 12% of sales in the
quarter ended June 30, 2005. As of June 30, 2005, the amount due from this
customer is approximately 10% of the balance of accounts receivable. The
Company had one customer that accounted for nearly 11% of sales in the
quarter ended June 30, 2004. As of June 30, 2004, the amount due from this
customer is approximately 16% of the balance of accounts receivable.
103
ANNEX D
Unaudited Pro Forma Condensed Financial Information
Following the closing of the Proposed Asset Sale, we will maintain our
corporate existence and operate as a branded marketing company that will
continue to market and sell our products. However, we will no longer manufacture
these products. Instead, such products will be manufactured by Schreiber Foods,
Inc. ("Schreiber") pursuant to the Supply Agreement dated June 30, 2005 (the
"Supply Agreement").
The following unaudited pro forma condensed financial statements
illustrate the effects of the Proposed Asset Sale and the use of the proceeds
therefrom on our historical financial position and operating results.
The unaudited pro forma condensed balance sheet set forth below as of June
30, 2005 gives effect to the Proposed Asset Sale as if it had occurred on June
30, 2005. The unaudited pro forma condensed balance sheet as of June 30, 2005
has been derived from and should be read in conjunction with the unaudited
interim condensed balance sheet of the Company at June 30, 2005, which is
included herein as Annex C to this proxy statement.
The unaudited pro forma condensed statement of operations set forth below
for the year ended March 31, 2005 and for the three months ended June 30, 2005
gives effect to the Proposed Asset Sale as if it occurred on April 1, 2004.
These have been derived from and should be read in conjunction with our audited
financial statements for the year ended March 31, 2005 and our interim
historical condensed statement of operations for the three months ended June 30,
2005, which are included herein as Annex B and Annex C, respectively, to this
proxy statement.
The unaudited pro forma condensed financial statements do not purport to
be indicative of the results of operations or financial position which would
have actually been reported if the Proposed Asset Sale had been consummated on
the date indicated, or which may be reported in the future.
Pro forma adjustments for the sale give effect to:
o The sale of machinery and equipment for $8,700,000 in cash and
removal of assets sold.
o The payoff of tangible property taxes, capital leases and term notes
that are secured by certain assets in the Proposed Asset Sale.
o The removal of expenses related to the assets sold and liabilities
that will be satisfied as a result of the transaction, such as
depreciation and interest.
Pursuant to the Supply Agreement, we may be required to make payments to
Schreiber up to $1,500,000, as described below. The initial term of the Supply
Agreement is for a period of five years from the effective date of September 1,
2005 and is renewable at our option for up to two additional five-year periods
(for a total term of up to fifteen years). If the closing of the Proposed Asset
Sale has occurred and we do not exercise our first option to extend the term
after September 1, 2010, then we will be obligated to pay Schreiber $1,500,000.
If the closing of the Proposed Asset Sale has occurred and we have exercised the
first option to extend the term, but we do not exercise our second option to
extend the term after September 1, 2015, then we will be obligated to pay
Schreiber $750,000. These potential payments have not been reflected in
calculation of the net gain or proceeds to be received.We will evaluate our
options to extend in 2010 and 2015. At this time, it is too early to predict
what the ultimate outcome may be.
The following pro forma financial information is not necessarily
indicative of the operating results or financial position that would have
occurred had the transaction been consummated at the beginning of the year, nor
are they necessarily indicative of future operating results.
104
GALAXY NUTRITIONAL FOODS, INC.
Pro Forma Balance Sheet
(Unaudited)
Historical Pro Forma
June 30, Pro Forma June 30,
2005 Adjustments Notes 2005
------------ ------------ ----- ------------
ASSETS
CURRENT ASSETS:
Cash $ -- $ -- $ --
Trade receivables, net 5,553,245 -- 5,553,245
Inventories 4,018,049 -- 4,018,049
Prepaid expenses and other 492,078 -- 492,078
------------ ------------ ------------
Total current assets 10,063,372 -- 10,063,372
PROPERTY AND EQUIPMENT, NET 9,872,074 (9,510,417) 361,657
OTHER ASSETS 414,970 -- 414,970
------------ ------------ ------------
TOTAL $ 20,350,416 $ (9,510,417) A $ 10,839,999
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 4,736,456 $ 791,236 C $ 5,527,692
Book overdraft 541,317 -- 541,317
Accounts payable 3,072,601 -- 3,072,601
Accrued and other current liabilities 1,660,631 (1,337,713) B 322,918
Current portion of accrued employment contract 586,523 -- 586,523
Current portion of term notes payable 7,801,985 (7,801,985) B --
Current portion of obligations under capital leases 154,502 (129,582) B 24,920
------------ ------------ ------------
Total current liabilities 18,554,015 (8,478,044) 10,075,971
ACCRUED EMPLOYMENT CONTRACT, less current portion 846,240 -- 846,240
OBLIGATIONS UNDER CAPITAL LEASES, less current portion 76,883 (21,956) B 54,927
------------ ------------ ------------
Total liabilities 19,477,138 (8,500,000) 10,977,138
------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES -- -- --
TEMPORARY EQUITY:
Common stock, subject to registration 2,680,590 -- 2,680,590
STOCKHOLDERS' EQUITY:
Common stock 175,435 -- 175,435
Additional paid-in capital 68,361,776 -- 68,361,776
Accumulated deficit (57,451,862) (1,010,417) D (58,462,279)
------------ ------------ ------------
11,085,349 (1,010,417) 10,074,932
Less: Notes receivable arising from the exercise of stock
options (12,772,200) -- (12,772,200)
Treasury stock (120,461) -- (120,461)
------------ ------------ ------------
Total stockholders' equity (1,807,312) (1,010,417) (2,817,729)
------------ ------------ ------------
TOTAL $ 20,350,416 $ (9,510,417) $ 10,839,999
============ ============ ============
105
GALAXY NUTRITIONAL FOODS, INC.
Pro Forma Statement of Operations
(Unaudited)
Historical Pro Forma
June 30, Pro Forma June 30,
2005 Adjustments Notes 2005
------------ --------- ----- -----------
NET SALES $ 9,851,153 $ -- $ 9,851,153
(441,915) E
COST OF GOODS SOLD 7,582,855 (30,140) F 7,110,800
------------ --------- -----------
Gross margin 2,268,298 472,055 2,740,353
------------ --------- -----------
OPERATING EXPENSES:
Selling 936,245 (26,323) E 909,922
Delivery 615,471 -- 615,471
General and administrative, including $867,518 non-cash compensation
related to stock based transactions 1,601,530 (7,019) E 1,594,511
Research and development 91,042 (13,161) E 77,881
Impairment of property and equipment 7,896,554 -- 7,896,554
Cost of disposal activities 255,011 -- 255,011
(Gain)/loss on sale of assets (636) -- (636)
------------ --------- -----------
Total operating expenses 11,395,217 (46,503) 11,348,714
------------ --------- -----------
INCOME (LOSS) FROM OPERATIONS (9,126,919) 518,558 (8,608,361)
OTHER INCOME (EXPENSE):
Interest expense (357,195) 178,903 (178,292)
Gain/(loss) on fair value of warrants 340,000 -- 340,000
------------ --------- -----------
Total other income (expense) (17,195) 178,903 G,H 161,708
------------ --------- -----------
NET INCOME (LOSS) $ (9,144,114) $ 697,461 $(8,446,653)
============ ========= ===========
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.49) $ (0.45)
============ ===========
BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 18,663,485 18,663,485
============= ===========
106
GALAXY NUTRITIONAL FOODS, INC.
Pro Forma Statement of Operations
(Unaudited)
Historical Pro Forma
March 31 Pro Forma March 31,
2005 Adjustments Notes 2005
------------ ----------- ----- ------------
NET SALES $ 44,510,487 $ -- $ 44,510,487
(1,832,489) E
COST OF GOODS SOLD 34,736,594 (41,600) F 32,862,505
------------ ----------- ------------
Gross margin 9,773,893 1,874,089 11,647,982
------------ ----------- ------------
OPERATING EXPENSES:
Selling 5,148,426 (85,820) E 5,062,606
Delivery 2,307,166 -- 2,307,166
Employment contract expense - general and administrative 444,883 -- 444,883
General and administrative, including $409,746
non-cash compensation related to stock based transactions 4,380,436 (8,605) E 4,371,831
Research and development 309,054 (42,910) E 266,144
(Gain)/loss on sale of assets (4,500) -- (4,500)
------------ ----------- ------------
Total operating expenses 12,585,465 (137,335) 12,448,130
------------ ----------- ------------
INCOME (LOSS) FROM OPERATIONS (2,811,572) 2,011,424 (800,148)
OTHER INCOME (EXPENSE):
Interest expense (1,129,977) 636,574 G,H (493,403)
Derivative expense 62,829 -- 62,829
Gain/(loss) on fair value of warrants 18,937 -- 18,937
------------ ----------- ------------
Total other income (expense) (1,048,211) 636,574 (411,637)
------------ ----------- ------------
NET INCOME (LOSS) $ (3,859,783) $ 2,647,998 $ (1,211,785)
Less:
Preferred Stock Dividends 82,572 -- 82,572
Preferred Stock Accretion to Redemption Value 319,500 -- 319,500
------------ ----------- ------------
NET INCOME (LOSS) TO COMMON STOCKHOLDERS $ (4,261,855) $ 2,647,998 $ (1,613,857)
============ =========== ============
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.25) $ (0.09)
============ ============
BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 17,007,971 17,007,971
============ ============
107
GALAXY NUTRITIONAL FOODS, INC.
Notes to Pro Forma Financial Information
(Unaudited)
(A) To write off the $9,510,417 net book value of the assets to be sold
or disposed as a result of the Proposed Asset Sale.
(B) To remove the liabilities to be satisfied with the $8,700,000 in
proceeds from the Proposed Asset Sale and our line of credit with
Textron Financial Corporation (see (C) below). The payment of these
liabilities is mandatory in order to remove liens or rights of the
holder on certain assets to be sold. The entry reflects the payment
of $1,132,083 for tangible personal property taxes on the equipment,
$7,801,985 for the repayment of the term loan from Beltway Capital
Partners LLC (successor by assignment of our loan from Wachovia
Bank, N.A.), $151,538 for remaining obligations under capital leases
related to certain assets in the Proposed Asset Sale, $200,000 to
exercise the purchase option under certain capital leases, and
$205,630 in legal expenses accrued during the sale.
(C) To reflect the funding from our asset based line of credit with
Textron Financial Corporation of the $791,236 difference by which
the liabilities exceed the $8,700,000 in proceeds from the Proposed
Asset Sale.
(D) To record the loss on the sale of the assets.
(E) To remove the depreciation expense on the assets, which were sold or
disposed as a result of the Proposed Asset Sale. This expense was
$488,418 in the three months ended June 30, 2005 and $1,969,824 in
the year ended March 31, 2005.
(F) To remove the tangible personal property tax on the assets, which
were sold or disposed as a result of the Proposed Asset Sale. This
expense was $30,140 in the three months ended June 30, 2005 and
$41,600 in the year ended March 31, 2005.
(G) To remove the interest expense on the Beltway Capital Partners LLC
term loan, to be paid-in-full as a result of the Proposed Asset
Sale, in the amount of $140,984 and $508,047 in the three months
ended June 30, 2005 and the year ended March 31, 2005, respectively.
(H) To remove the interest expense related to capital leases, to be
paid-in-full as a result of the Proposed Asset Sale, in the amount
of $37,919 and $128,527 in the three months ended June 30, 2005 and
the year ended March 31, 2005, respectively.
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[GALAXY LOGO]
FOLD AND DETACH HERE AND READ THE REVERSE SIDE
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PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
GALAXY NUTRITIONAL FOODS, INC.
The undersigned hereby appoints DAVID H. LIPKA and MICHAEL E. BROLL, and
each of them, as proxies, each with the power to appoint his substitute, and
authorizes each of them to represent and to vote, as designated on the reverse
hereof, all of the shares of common stock of Galaxy Nutritional Foods, Inc. (the
"Company") held of record by the undersigned at the close of business on
September 26, 2005, at the Special Meeting of Stockholders of the Company to be
held at the Company's headquarters, 2441 Viscount Row, Orlando, Florida 32809,
at 10:00 a.m., local time, on Wednesday, November 23, 2005, or at any
adjournment thereof.
(Continued, and to be marked, dated, and signed, on the other side)
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VOTE BY TELEPHONE OR INTERNET
QUICK *** EASY *** IMMEDIATE
Galaxy Nutritional Foods, Inc.
Voting by telephone or Internet is quick, easy and immediate. As a Galaxy
Nutritional Foods, Inc. stockholder, you have the option of voting your shares
electronically through the Internet or on the telephone, eliminating the need to
return the proxy card. Your electronic vote authorizes the named proxies to vote
your shares in the same manner as if you marked, signed, dated and returned the
proxy card. Votes submitted electronically over the Internet or by telephone
must be received by 6:00 p.m., Eastern Standard Time, on November 22, 2005.
To Vote Your Proxy by Internet
- ------------------------------
www.continentalstock.com
Have your proxy card available when you access the above website. Follow the
prompts to vote your shares.
To Vote Your Proxy by Phone
- ---------------------------
1 (866) 894-0537
Use any touch-tone telephone to vote your proxy. Have your proxy card available
when you call. Follow the voting instructions to vote your shares.
PLEASE DO NOT RETURN THE CARD BELOW IF YOU ARE VOTING ELECTRONICALLY OR BY
PHONE.
To Vote Your Proxy by Mail
- --------------------------
Mark, sign, and date your proxy card below, detach it, and return it in the
postage-paid envelope provided.
FOLD AND DETACH HERE AND READ THE REVERSE SIDE
- --------------------------------------------------------------------------------
PROXY Please mark
your votes |X|
like this
THIS PROXY WILL BE VOTED AS DIRECTED, OR IF NO DIRECTION IS INDICATED, WILL BE
VOTED "FOR" PROPOSAL 1. THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF
DIRECTORS, WHICH RECOMMENDS A VOTE FOR THE PROPOSAL.
1. PROPOSAL TO APPROVE THE SALE OF THE COMPANY'S MANUFACTURING EQUIPMENT AS
CONTEMPLATED BY THE ASSET PURCHASE AGREEMENT, DATED JUNE 30, 2005, BY AND
BETWEEN SCHREIBER FOODS, INC. AND THE COMPANY, WHICH MAY BE DEEMED A SALE
OF SUBSTANTIALLY ALL OF THE ASSETS OF THE COMPANY PURSUANT TO DELAWARE
GENERAL CORPORATION LAW.
FOR AGAINST ABSTAIN
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2. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting.
COMPANY ID:
PROXY NUMBER:
ACCOUNT NUMBER:
Signature ____________________ Signature _____________________ Date ___________
NOTE: Please sign exactly as name appears hereon. When shares are held by joint
owners, each owner should sign. When signing as attorney, executor,
administrator, trustee or guardian, please give title as such. If a corporation,
please sign in full corporate name by President or other authorized officer. If
a partnership, please sign in partnership name by authorized person.
110