ITEM 1. BUSINESS
General
Galaxy Nutritional Foods, Inc. develops and globally markets plant based cheese alternatives, organic dairy and other organic and natural food products to grocery and natural foods retailers, mass merchandisers and food service accounts. Our overall strategy is to enhance the value of our brands by developing nutritious and delicious food products made with high quality natural ingredients that exceed the expectations of today’s health conscious consumers. We are also committed to reducing our environmental impact as part of our Eat Green for Body & Earth™ program that offsets carbon emissions associated with product shipping and emphasizes the use of organic ingredients. In this report, the terms “Company,” “we,” “us,” or “our” mean Galaxy Nutritional Foods, Inc.
Galaxy Nutritional Foods Veggie®, the leading brand in the cheese alternative category of the grocery channel and our Company’s top selling product group, is primarily merchandised in the produce section and provides calcium and protein without cholesterol, saturated fat or trans fat. In the natural foods channel, our popular brands include: Galaxy Nutritional Foods Rice®, Veggy®, Vegan®, Rice Vegan®, and Wholesome Valley Organic®, which are primarily
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merchandised in the cheese alternative or dairy sections. We also have non-branded imitation and private label products sold in the grocery, mass market and food service channels.
We sell our products through leading grocery store chains including Publix, Kroger, Safeway, Albertson’s, Wakefern, H.E. Butt and natural foods stores including Whole Foods, Wild Oats and several independents. We seek to build core brand recognition and a broader consumer base through marketing efforts consisting of advertising, public relations and product sampling to educate consumers on the benefits of cheese alternatives as part of a healthy lifestyle. 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 foods low in cholesterol, saturated fat and trans fat. One of the leading contributors of cholesterol and saturated fat in the American diet is conventional cheese. By providing good tasting cheese alternatives in convenient forms and flavors, we believe that we will be able to attract an increasing number of consumers interested in improving their diet and eating habits.
Our Company was founded in 1972 under the original name of Fiesta Foods & Galaxy Foods in New Castle, Pennsylvania. In 1980, the name was changed to Galaxy Cheese Company and subsequently reincorporated under the laws of the State of Delaware in 1987. In June 1991, we moved from New Castle, Pennsylvania to Orlando, Florida and in November 2000 we changed our name to Galaxy Nutritional Foods, Inc. to more clearly define our position in the food category.
Change in Operations
During the fiscal year ended March 31, 2006, we determined that our manufacturing capacity was significantly in excess of our requirements and that it would be advantageous to outsource our manufacturing and distribution operations. On June 30, 2005, we entered into a Supply Agreement with Schreiber Foods, Inc., a Wisconsin corporation (“Schreiber”), whereby we agreed that Schreiber would become our sole source of supply for substantially all of our products. The term of the Supply Agreement, as amended, is for a period of fifteen years from June 30, 2005 to June 30, 2020. Schreiber uses our formulas and processes to manufacture our products for our customers. In November 2005, Schreiber began to deliver such products directly to our customers.
On December 8, 2005, we completed the sale of substantially all of our manufacturing and production equipment to Schreiber for $8,700,000 in cash pursuant to an Asset Purchase Agreement dated June 30, 2005. Our Company has now converted from a manufacturing company into a branded marketing company that will continue to develop, market and sell our products.
As a result of the above agreements, we have eliminated the need to carry large amounts of inventory in order to manufacture our products prior to distribution to our customers. With the exception of inventory for organic hummus and certain Canadian customers, we do not take possession of our inventory prior to its shipment from Schreiber to our customers.
Development of Business
While most companies place their dairy products in the supermarket dairy section, we adopted a sales and marketing strategy whereby Veggie products are merchandised in the produce section. In this section, Veggie brand products are sold next to other soy, natural and organic items.
The natural channel business began with soy-based cheese alternatives under the brand names Soyco and Soymage, now Veggy and Vegan respectively. To further develop the natural channel business, in fiscal 1996, we introduced a soy free rice-based line to meet the needs of consumers with soy allergies. In recent years, all three natural channel brands were repositioned under the Galaxy Nutritional Foods umbrella brand. The natural brands, previously sold only to natural foods retailers, are now distributed in the grocery channel with the introduction of natural foods sections in most supermarkets. In response to the growth in the organic food category, in fiscal 1997, we introduced the Wholesome Valley Organic brand in the natural channel, followed shortly by the grocery channel.
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Historically, our food service business consisted primarily of imitation cheese products. The food service business has since been expanded to include branded cheese alternatives similar to the retail products.
Principal Products Produced
We market a variety of cheese and dairy alternatives as well as processed organic cheese to grocery and natural foods retailers, mass merchandisers and food service accounts under the brands Veggie, Rice, Veggy, Vegan, Rice Vegan and Wholesome Valley Organic. Each brand’s corresponding nutritional benefits are noted below:
Veggie Brand - Leading Cheese Alternative in Grocery - Our flagship brand, sold in the produce section of supermarkets, is produced in a variety of forms including slices, shreds, chunks and grated toppings. Veggie cheese alternatives are an excellent source of calcium without cholesterol, saturated or trans fat.
Veggy Brand - Soy-based Cheese Alternatives - Similar to our grocery brand, Veggie, and preservative-free, Veggy branded products are an excellent source of calcium without cholesterol, saturated or trans fat. This soy-based alternative is primarily sold in natural foods stores and is available in a wide variety of individually wrapped slice flavors and a grated topping.
Rice Brand - Soy Free Cheese Alternatives - Our Rice products, sold primarily in natural foods stores, are a leading soy free cheese alternative without cholesterol or trans fat. Also, preservative and gluten free, this brand is available in a wide variety of flavors in slices, shreds, blocks and a grated topping.
Vegan Brand - Casein Free Dairy Alternatives - Our Vegan brand products are sold primarily in natural foods stores in individually wrapped slices, blocks and a grated topping. Vegan brand products are casein, preservative and gluten free.
Rice Vegan Brand - Casein Free and Soy Free Dairy Alternatives - Our Rice Vegan brand products are sold primarily in natural foods stores in individually wrapped slices. Rice Vegan slices were introduced in fiscal 2007 for vegans choosing to moderate or avoid soy or those with soy or dairy allergies.
Wholesome Valley Organic Brand - Organic Cheese Products and Hummus - Our Wholesome Valley Organic brand cheese product is made without the use of antibiotic growth hormones or undesirable pesticides and chemicals and is available in individually wrapped slices in both natural foods and grocery stores. Wholesome Valley Organic hummus was introduced in fiscal 2008 and is sold in the produce section of select stores. This convenient dip, topping or sandwich spread is preservative free, vegan and kosher.
Non-branded Products - Imitation and Processed Cheese Alternative Products - Our non-branded business includes value priced processed cheese slices sold primarily in the supermarket dairy section and imitation food service products.
For the fiscal years ended March 31, 2008, 2007 and 2006, the Company’s gross sales before discounts, returns and allowances were $27,001,717, $29,995,729 and $41,492,717, respectively. The following chart sets forth the percentage of gross sales derived from our product brands which exceeded 10% during the fiscal years ended March 31, 2008, 2007 and 2006:
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Percentage of Gross Sales
Fiscal Years Ended March 31,
Principal Markets
Our products are sold primarily in two commercial markets: retail and food service.
In the retail market, we sell our products to national and regional supermarket chains, mass merchandisers and natural foods 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 products appeal to a wide range of health conscious consumers seeking to minimize dairy, lactose, cholesterol and bad fats in their diets. In the retail market, where we believe taste and nutrition generally outweigh price considerations, we market our Veggie and natural brands 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 our less expensive non-branded imitation products to customers whose primary consideration is cost. The non-branded food service products are primarily sold to distributors who supply food to restaurants, cafeterias, hospitals, correctional institutions, and schools.
Beginning in fiscal 2006, coincidental with the outsourcing of our manufacturing to Schreiber, we began to de-emphasize sales of these lower margin products to the food service market to allow us to better allocate resources to the higher margin branded products sold in the retail market. This shift is demonstrated by the change in the mix percentages in the chart below.
The following chart sets forth the percentage of gross sales that the retail and food service markets represented for the fiscal years ended March 31, 2008, 2007 and 2006:
Percentage of Gross Sales
Fiscal Years Ended March 31,
Methods of Distribution
Pursuant to the Supply Agreement with Schreiber, beginning in November 2005, our products are primarily distributed from Schreiber’s distribution centers in Green Bay, Wisconsin; Carthage, Missouri; Logan, Utah; Shippensburg, Pennsylvania; and Gainesville, Georgia. In order to distribute to our Canadian customers quickly and efficiently, we store and distribute products through a public storage facility in Canada. We maintain a certain stock level at this facility and pay the Canadian facility a processing fee for its services.
Sources and Availability of Raw Materials
Since November 2005, pursuant to the Supply Agreement with Schreiber, we depend primarily on Schreiber to obtain the necessary ingredients, manufacture and distribute the majority of our products to our customers. The prices for such products are based on cost plus a processing fee as determined by the parties from time to time. Purchases
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from Schreiber accounted for 98%, 98% and 38% of our product purchases for the fiscal years ended March 31, 2008, 2007 and 2006, respectively.
Prior to November 2005, we purchased the ingredients used in our manufacturing operations, i.e., casein, vegetable proteins and oils, enzymes and other ingredients, from several sources. Purchases of casein, the principal raw material used to manufacture substantially all of our products, approximated $6,242,977 or 35% of our product purchases in the fiscal year ended March 31, 2006. The following table sets forth the name of each supplier along with the percentage they supplied of casein which either alone, or together with their affiliates, provided 10% or more casein to our Company, based on our dollar volume purchased:
Due to more cost effective conditions in other countries, suppliers from such countries were often able to supply casein, a dried skim milk protein, at prices lower than domestic suppliers. Accordingly, we purchased casein from foreign suppliers. Because our casein was imported, its availability was subject to a variety of factors, including strength of the United States Dollar, foreign production limitations and federal import regulations.
Working Capital Practices
The majority of our customers are required to make payment on goods within 30 days of invoicing. Our credit department makes calls on payments that are 10 to 15 days past due and then considers placing accounts on credit hold if they have not made arrangements for those payments that are 30 to 45 days past due. We typically average less than 1% of gross sales in credits related to bad debt.
We offer a right of return policy on certain products sold to certain retail customers in the conventional grocery stores channel. If the product is not sold during its shelf life, we will allow a credit for the unsold merchandise. Since the shelf life of our products ranges from 4 months to one year, we historically average less than 2% of gross sales in credits for unsold product.
Since November 2005, pursuant to the Supply Agreement with Schreiber, we depend primarily on Schreiber to manufacture and distribute the majority of our products to our customers. We are required to pay Schreiber for our products within 20 days of shipment to our customers. As a result of the Supply Agreement, we have eliminated the need to carry large amounts of inventory in order to manufacture our products prior to distribution to our customers. With the exception of inventory for hummus and certain Canadian customers, we do not take possession of our inventory prior to its shipment from Schreiber to our customers.
Customers
We sell to customers throughout the United States and 12 other countries. For the fiscal years ended March 31, 2008, 2007 and 2006, the Company’s gross sales before discounts, returns and allowances were $27,001,717, $29,995,729 and $41,492,717, respectively. Gross sales derived from foreign countries were approximately $3,516,000, $3,639,000 and $3,931,000 in the fiscal years ended March 31, 2008, 2007 and 2006, respectively. These sales represent 13%, 12% and 10% of gross sales in the fiscal years ended March 31, 2008, 2007 and 2006, respectively. Gross sales are attributed to individual countries based on the customer’s shipping address. We have no assets located outside of the United States.
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The following table sets forth the percentage of foreign gross sales to each country, which accounted for 5% or more of our foreign gross sales for the fiscal years ended March 31, 2008, 2007 and 2006:
Percentage of Gross Foreign Sales
Fiscal Years Ended March 31,
* The sales to foreign countries for the fiscal years ended March 31, 2007 and 2006, have been restated to remove sales to Puerto Rico and the US controlled Virgin Islands. Sales to Puerto Rico and the US controlled Virgin Islands are now considered domestic sales.
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 gross sales for the fiscal years ended March 31, 2008, 2007 and 2006:
Percentage of Gross Sales
Fiscal Years Ended March 31,
*Less than 5% of gross sales for the stated fiscal year.
Competitive Conditions
We operate in a highly competitive environment. In the retail cheese market, we compete with large national and regional manufacturers of conventional, organic, and imitation cheese products. Competitors such as Kraft, Borden, and Horizon Organic, among others are well established and have significantly more brand name recognition, marketing personnel, and cash resources at their disposal. Conventional “Lite” cheese generally has a lower fat content than regular cheese. But, unlike most of our products, it still contains cholesterol and saturated fat. Further, we believe that the perceived healthfulness, quality ingredients and excellent taste of our product lines provide a competitive advantage over many companies with more traditional products.
Within the retail cheese alternative niche market, there are a number of additional competitors such as Soya Kaas, Lisanatti, Follow Your Heart, Toffuti and Melissa’s. Like our product lines, these competitors offer dairy and cheese alternatives to grocery and natural foods stores. In addition, their offerings are similar to ours in that they have comparable perceived benefits and are distributed or positioned in the same retail shelf space as our products.
In the food service markets, our substitute and imitation cheese products compete with other numerous substitute and imitation cheese products, as well as with conventional cheeses.
We believe that we are superior to the competition in our cheese alternative niche market in the most important competitive factors, which are brand awareness, taste, nutritional value, product distribution, and overall consumer purchase interest. Finally, we believe that the breadth and depth of our product lines make it difficult for our smaller competitors to have a significant impact on our market leading share in the cheese alternative category.
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Trademarks and Other Intellectual Property
We own several registered and unregistered trademarks, which are used in the marketing and sale of our products. Our material product trademarks are those mentioned above under Principal Products Produced. The registrations of these trademarks in the United States and foreign jurisdictions are effective for varying periods of time, and may be renewed periodically, provided that we, as the registered owner of the trademarks, comply with all pertinent renewal requirements.
Trademarks include registered brand names, logos, symbols, or copyrights used to identify our products or services. As such, this prevents other manufacturers from using any words or symbols for which we hold the trademark. This is important as it helps provide competitive insulation around our products in the marketplace and enables consumers to identify with one particular brand or another. We will continue to market our trademarks in order to increase brand awareness for our products. Although our trademarks are valuable to our business, they are not individually, at this time, assets that are critical to our business. In the event that we would be prohibited from using one or more of our trademarks, we do not believe that this would have a material adverse affect on our continued operations.
Although we believe that our formulas and processes are proprietary and the key to our success, we have not sought and do not intend to seek patent protection for such technology. In not seeking patent protection, we are instead relying on the complexity of our technology, on trade secrecy laws, and on employee and inter-company confidentiality agreements. We believe that our technology has been independently developed and does not infringe on the patents or trade secrets of others.
Governmental Regulation
Our United States product labels are subject to regulation by the United States Food and Drug Administration (“FDA”). Such regulation includes standards for product descriptions, nutritional claims, label format, minimum type sizes, content and location of nutritional information panels, nutritional comparisons, and ingredient content panels. Our labels, ingredients, and manufacturing techniques and facilities are subject to inspection by the FDA. Labeling regulations require specific details of ingredients and their components along with nutritional information on labels and also impose restrictions on product claims that can be included on labels.
We have a team of individuals from our marketing and research and development departments who, along with outside legal counsel, review all new labels for compliance with our Company standards and current laws and regulations. We believe that we are in material compliance with all applicable governmental regulations regarding our current products and have obtained the necessary government permits, licenses, qualifications, and approvals, which are required for our operations.
Research and Development
Research and development expenditures were approximately $331,000 and $225,000 during the fiscal years ended March 31, 2008 and 2007, respectively.
Environmental Regulation
Prior to the outsourcing of our manufacturing and distribution operations in November 2005, our facility and manufacturing processes were subject to inspections by several agencies including the Florida Department of Agriculture and Consumer Services and our insurance providers. We were also required to comply with environmental regulations in connection with the development of our products and the operation of our business. We believe that we are in material compliance with the federal, state and local environmental laws and regulations applicable to our Company. We believe that continued compliance with any current or reasonably foreseeable future environmental laws and regulations will not have a material adverse effect on the capital expenditures, earnings, financial condition or competitive position of our Company.
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Employees
As of June 26, 2008, we have 23 full-time and 3 part-time employees. We employ all personnel directly. We are an affirmative action employer providing equal employment opportunity to all applicants. We consider our relations with employees to be satisfactory. No employee is a member of a trade union.
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ITEM 1A.
ITEM 1A. RISK FACTORS
Forward-Looking Information
Statements other than historical information contained in this Form 10-K are considered “forward-looking statements” as defined under the Private Securities Litigation Reform Act of 1995. These statements relate to future events or our future financial performance. These forward-looking statements are based on our current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by our Company. Words such as “anticipate,” “expect,” “intend,” “plan,” “believe,” “seek,” “project,” “estimate,” “may,” “will,” “could,” “should,” “potential,” or “continue” or the negative or variations of these words or similar expressions are intended to identify forward-looking statements. Although we believe that these forward-looking statements are reasonable at the time they are made, these statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially from our historical results and those expressed or forecasted in any forward-looking statement as a result of a variety of factors as set forth below and elsewhere in, or incorporated by reference into, this Form 10-K. We are not required and undertake no obligation to publicly update or revise any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.
In addition to the other information in this Form 10-K, the following are some of the factors as of June 26, 2008, that could cause our Company’s actual results to differ materially from the expected results described in or underlying our Company’s forward-looking statements. These factors should be considered carefully while evaluating our business and prospects. If any of the following risks actually occur, they could seriously harm our business, financial condition, results of operations or cash flows.
We may be required to repay our Convertible Note to Mr. DeLuca.
Pursuant to a Note Purchase Agreement dated July 19, 2006 as modified on March 14, 2007, we issued a new unsecured convertible note for $2,685,104 (the “Convertible Note”) to Mr. Frederick A. DeLuca. The Convertible Note together with any accrued and unpaid interest thereon, is convertible at the election of Mr. DeLuca, at any time on or prior to October 19, 2008 into shares of our common stock at a conversion price of $0.35 per share. The closing price of our common stock on June 26, 2008 as quoted on the OTC Bulletin Board was $0.19 per share. Unless the market price of our common stock increases between now and October 19, 2008, it is unlikely that Mr. DeLuca would choose to convert the Convertible Note and accrued interest thereon at his conversion price of $0.35 per share. If Mr. DeLuca does not choose to convert this Convertible Note into stock and does not extend the maturity date of the Convertible Note, then we will be required to pay principal plus accrued interest thereon in the amount of $3,451,478 on October 19, 2008. With our current cash balances and the ability to borrow additional funds on our Commercial Finance Agreement, we believe that we currently have the ability to repay this obligation. However, the payment of the entire balance would likely seriously and adversely impact our liquidity and put a cash strain on the Company without additional financing. Additionally, our ability to repay could be adversely affected by any negative changes in our cash position between now and the maturity date of such Convertible Note.
We are currently in discussions with Mr. DeLuca regarding options to extend the maturity date, refinance and/or convert all or a portion of the Convertible Note and accrued interest thereon into equity at a lower conversion price on or before its maturity on October 19, 2008. There can be no assurance that we will be successful in our negotiations with Mr. DeLuca and other parties or that the terms of any such refinancing or conversions will not result in the issuance, or potential issuance, of a significant amount of equity securities that will cause substantial dilution to our stockholders. In the event we are not successful, any collection actions by Mr. DeLuca could have a material adverse affect on the liquidity and financial condition of our Company and our ability to secure additional financing. The default rate of interest on our Convertible Note is 17.5%. Additionally, a default on our Convertible Note would trigger a cross default in our obligations under our Commercial Finance Agreement which would result in an acceleration of our obligations and subject us to a default rate of interest there under. To the extent we have any borrowings outstanding at such time, such a cross default would further exacerbate our liquidity position and have a material adverse affect on our financial condition and we may not be able to continue as a going concern.
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We may not be able continue as a going concern on a long-term basis.
We received a report from our independent accountants relating to our audited financial statements as of March 31, 2008 containing a paragraph stating that because we may be required to pay the Convertible Note and accrued interest thereon in full by October 19, 2008 which may leave us with insufficient cash funds to continue operations, there is substantial doubt as to our ability to continue as a going concern. Our ability to continue as a going concern depends upon the outcome of our discussions with Mr. Deluca regarding options to extend the maturity date, refinance and/or convert all or a portion of the Convertible Note and accrued interest thereon or successfully obtaining sufficient cash resources to pay $3,451,478 on October 19, 2008 and obtaining positive cash flow from operations to sustain normal business operations.
Our current business plan continues to eliminate low margin private label and Galaxy imitation business from our sales mix, which results in budgeted sales slightly lower in fiscal 2009 than in fiscal 2008. Additionally, the cost of goods sold is increasing due to higher ingredient costs, particularly casein, which will reduce the gross margins on a majority of our products. During fiscal 2008, we implemented several initiatives in an effort to at least partially minimize the negative effect of these casein price increases. These strategies include reducing promotional spending and consumer advertising and increasing customer pricing on certain affected product lines, as well as, proposing reformulations on existing products to reduce the amount of required casein and expanding and accelerating the roll-out of new products which do not require casein. We plan to continue these initiatives throughout fiscal 2009. With the further elimination of low margin items and the reduction of promotional spending, we anticipate continued positive cash flows from operations, but it may be lower than in recent fiscal years. With our current cash balances and the ability to borrow additional funds on our Commercial Finance Agreement, we believe that we currently have the ability to repay the Convertible Note and the accrued interest thereon by October 19, 2008. However, the payment of the entire balance of $3,451,478 would likely seriously and adversely impact our liquidity and put a cash strain on the Company without additional financing.
Management is currently in discussions with Mr. DeLuca regarding options to extend the maturity date, refinance and/or convert all or a portion of the Convertible Note and accrued interest thereon into equity at a lower conversion price on or before its maturity on October 19, 2008. In order to repay the Convertible Note and continue operating as a going concern, we may also need to quickly raise capital. To the extent that we issue any of our securities in connection with our efforts to raise capital, any such capital raised would not be registered under the Securities Act of 1933 and would not be offered or sold in the United States absent registration requirements. Further, due to the low trading price of our common stock, we would likely need to sell a significant amount of our securities.
There can be no assurance that we will be successful in our business plan, our negotiations with Mr. DeLuca and other parties or that the terms of any such refinancing or conversions will not result in the issuance, or potential issuance, of a significant amount of equity securities that will cause substantial dilution to our stockholders. If we are not successful in refinancing the Convertible Note or in otherwise entering into a financing, sale, or other business transaction that infuses sufficient cash resources into our Company in the near future, any collection actions by Mr. DeLuca or other parties could have a material adverse affect on the liquidity and financial condition of our Company and on our ability to secure additional financing, and we may not be able to continue as a going concern.
We depend on one primary supplier to manufacture and distribute the majority of our products to our customers.
Pursuant to a Supply Agreement dated June 30, 2005 between our Company and Schreiber Foods, Inc. (“Schreiber”), since November 2005, we depend primarily on Schreiber to manufacture and distribute the majority of our products to our customers. We will rely primarily on Schreiber to produce our products at prices that are competitive in the market, to maintain the quality of our products, and to supply our customers with the products they order on a timely basis. If Schreiber is unable to deliver its services according to the negotiated terms of the Supply Agreement for any reason, including the deterioration of its financial condition or over-commitment of its resources, we may lose
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customers and we may be required to purchase outsourcing services from another source at a higher price. Either of these occurrences will likely reduce our profits or result in a reduction in sales of our products.
We may be required to pay substantial penalties under our Supply Agreement and may not have the ability to do so.
On March 17, 2008, we entered into a Second Amendment to our Supply Agreement dated June 30, 2005 with Schreiber Foods, Inc. (“Schreiber”). The Supply Agreement, as originally amended, provided for a contingent shortfall payment obligation up to $8,700,000 by our Company if a specified production level was not met during the one-year period from September 1, 2009 to August 31, 2010. The Second Amendment eliminates this provision and replaces it with a provision that will require us to pay a shortfall payment should we terminate the Supply Agreement prior to a stated date, other than as a result of a breach by Schreiber or change of control in our Company. The shortfall payment starts at $5,100,000 as of March 17, 2008 and declines by $1,700,000 per contract year until March 17, 2011, at which time the shortfall payment is eliminated. If there is a change of control in either our Company or Schreiber, then the shortfall payment obligation will terminate and be extinguished as of the date of such change of control. However, if there is a change of control in our Company in connection with a sale of our Company where the purchase price exceeds $50 million, then our obligation to potentially remit a shortfall payment will not terminate. In such an event, our obligation to remit a shortfall payment to Schreiber would not terminate until March 17, 2011.
The Second Amendment to our Supply Agreement also changed the Initial Term to a period of fifteen years from June 30, 2005 to June 30, 2020 rather than a five year agreement with two, renewable five-year periods. Consequently, there is no longer a $1,500,000 or $750,000 termination fee for non-renewal during the first or second five-year periods, respectively. We may terminate this Supply Agreement prior to the end of the Initial Term, without penalty, upon provision of written notice to Schreiber issued at least six (6) months prior to such proposed termination date, provided that the effective date for such termination by our Company shall not be prior to December 31, 2012, unless a change of control in our Company shall have occurred, in which case the effective date for such termination by our Company shall not be prior to December 31, 2010.
We do not anticipate the need to terminate the Supply Agreement, as amended, prior to the termination date, and therefore do not expect to incur any shortfall payment. However, if such an event occurred, we may not have the ability to pay the required penalty and Schreiber may use its contractual rights in order to collect and may cease production and shipment of our products. Such an action would have a material adverse affect on the liquidity and financial condition of our Company.
The main ingredient in many of our products is subject to volatility and limited availability. Price increases for this commodity adversely affect our business.
Our Supply Agreement with Schreiber is based on cost plus a processing fee. Currently, the major cost ingredient in our products is casein, a dried skim milk protein that is purchased from foreign suppliers. Because casein is purchased from foreign suppliers, its availability is subject to a variety of factors, including but not limited to, trade regulations, foreign supply and exchange rate fluctuations. These factors could have an adverse effect on our business and our ability to compete with competitors that do not rely on foreign suppliers. We cannot assure you that we could obtain casein from U.S. sources if the foreign supply of casein were reduced or terminated. Even if we could obtain casein from U.S. sources, the prices for the casein would likely be significantly higher than we have paid historically. Any of these events would negatively affect our business, results of operations and cash flows.
Additionally, due to a current worldwide shortage and a weaker US Dollar in relation to the Euro, the average price of casein increased more than 96% in the fourth quarter of fiscal 2008 compared to fiscal 2007. The annual average was 33% higher in fiscal 2008 compared to fiscal 2007. We anticipate that the average price of casein will stabilize in the 1st quarter of fiscal 2009 and will decline slightly throughout the remainder of fiscal 2009.
We implemented several strategic plans of action in an effort to at least partially minimize the negative effect of these casein price increases. These strategies included reducing promotional spending and consumer advertising and increasing customer pricing on certain affected product lines, as well as, proposing reformulations on existing
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products to reduce the amount of required casein and expanding and accelerating the roll-out of new products which do not require casein. Although we implemented these strategic plans of action, we anticipate that gross margins on a majority of our products and as a whole will remain lower in fiscal 2009 compared to fiscal 2008. Additionally, we anticipate that our income from operations will continue to be adversely affected by the lower gross margins when comparing to prior years unless the cost of casein declines.
A private investor owns a large percentage of the outstanding shares, which could materially limit the ownership rights of investors.
As of June 26, 2008, Frederick DeLuca, a private investor, owned approximately 23% of our outstanding common stock and held warrants and a convertible note which, if exercised with accrued and unpaid interest on the convertible note as of such date and assuming the exercise of no other outstanding options or warrants, would give him ownership of approximately 51% of our outstanding common stock. Investors who purchase common stock in our Company may be unable to elect any specific members of the board of directors or exercise significant control over us or our business as a result of Mr. Deluca’s ownership of our common stock and our outstanding note obligations to Mr. DeLuca. Additionally, Mr. DeLuca may be able to exercise significant influence over our policies and Board composition.
Stockholders may experience further dilution.
We have a substantial number of outstanding options and warrants and the Convertible Note to acquire shares of common stock. As of June 26, 2008, we have a total of 15,265,992 shares reserved for future issuance upon exercise of options or warrants and conversion of the Convertible Note. None of these securities are “in the money,” as of such date. “In the money” generally means that the current market price of the common stock is above the exercise price of the shares subject to the option, warrant or note conversion. The issuance of common stock upon the exercise of these options and warrants or note conversion could adversely affect the market price of the common stock or result in substantial dilution to our existing stockholders. In addition, any future securities issuances by our Company, especially in connection with the refinancing of the Convertible Note, could result in the issuance, or potential issuance, of a significant amount of equity securities that will cause substantial dilution to our stockholders, particularly given the current low trading price of our common stock.
Trading on the OTC Bulletin Board may make it more difficult for investors to sell shares, may potentially lead to future market declines and may increase our costs related to registration statements.
Since May 8, 2006, our common stock has been traded in the Nasdaq over-the-counter market on what is commonly referred to as the OTC Bulletin Board. As a result, an investor could find it more difficult to dispose of or to obtain accurate quotations as to the market value of our securities. Listing on the OTC Bulletin Board may make trading our shares more difficult for investors, potentially leading to further declines in our share price and may cause difficulty in obtaining future financing.
Additionally, we are not eligible to use short form registration statements with the respect to the sale of our securities. This could substantially increase our costs of registering securities in the future and make it more expensive and difficult to maintain the effectiveness of certain currently effective registration statements involving selling stockholders of our Company. Although most of these stockholders would be eligible to sell their shares over the public markets pursuant to Rule 144, in the event we are not able to timely maintain the effectiveness of such registration statements, we may be held liable for damages suffered by such selling stockholders.
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Our common stock may become subject to certain “Penny Stock” rules which may make it a less attractive investment.
Since the trading price of our common stock is less than $5.00 per share, trading in our common stock would be subject to the requirements of Rule 15g-9 of the Exchange Act if our net tangible assets fall below $2 million. Under Rule 15g-9, brokers who recommend penny stocks to persons who are not established customers and accredited investors, as defined in the Exchange Act, must satisfy special sales practice requirements, including requirements that make and individualized written suitability determination for the purchaser and receive the purchaser’s written consent prior to the transaction. The Securities Enforcement Remedies and Penny Stock Reform Act of 1990 also requires additional disclosures in connection with any trades involving penny stock, including the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and the risks associated with that market. Such requirements may severely limit the market liquidity of our common stock and the ability of investors in our equity securities to sell their securities in the secondary market. For all of these reasons, an investment in our equity securities may not be attractive to our potential investors.
We are subject to borrowing restrictions under our primary credit facility.
On June 23, 2006, we entered into a Receivables Purchase Agreement with Commercial Finance Division, formerly known as Systran Financial Services Corporation, a subsidiary of Textron Financial Corporation (“Commercial Finance”), whereby Commercial Finance provides financing to our Company through advances against certain trade receivable invoices due to our Company (the “Commercial Finance Agreement”). The Commercial Finance Agreement is secured by our accounts receivable and all other assets. Generally, subject to a maximum principal amount of $3,500,000 which can be borrowed under the Commercial Finance Agreement, the amount available for borrowing is equal to 85% of our eligible accounts receivable invoices less a dilution reserve and any required fixed dollar reserves. The dilution and fixed dollar reserves are currently set at 7% and $100,000, respectively. Advances under the Commercial Finance Agreement bear interest at a variable rate equal to the prime rate plus 1.5% per annum (6.5% on June 26, 2008). However, the Commercial Finance Agreement requires a $4,500 minimum monthly interest charge to be assessed. We are also obligated to pay a $1,500 monthly service fee. A default in our obligations to Mr. DeLuca under the Convertible Note would trigger a cross default under our Commercial Finance Agreement.
The initial term of the Commercial Finance Agreement ends on June 23, 2009 and may renew automatically for consecutive twelve-month terms unless terminated sooner. The Commercial Finance Agreement may be accelerated in the event of certain defaults by our Company including among other things, a default in our payment and/or performance of any obligation to Commercial Finance or any other financial institution, creditor, or bank; and any change in the conditions, financial or otherwise, of our Company which reasonably causes Commercial Finance to deem itself insecure. In such an event, interest on our borrowings would accrue at the greater of twelve percent per annum or the variable rate of prime plus 1.5% and we would be liable for an early termination premium ranging from 1% to 3%, depending upon the timing of such termination, of the maximum principal amount available under the Commercial Finance Agreement.
There is no guarantee that Commercial Finance will maintain or lower the current reserves on our borrowing availability. Additionally, we may experience future credit tightening by Commercial Finance by virtue of reserves they may require, receivables they may deem ineligible or other rights they have under the Commercial Finance Agreement. Such restrictions would adversely affect our cash flows.
We may issue securities with rights superior to those of our common stock, which could materially limit the ownership rights of existing stockholders.
We may offer debt or equity securities in private and/or public offerings in order to raise working capital and to refinance our debt. The board of directors has the right to determine the terms and rights of any debt securities and preferred stock without obtaining further approval of the stockholders. It is likely that any debt securities or preferred stock that we sell would have terms and rights superior to those of our common stock and may be convertible into common stock. Any sale of securities could adversely affect the interests or voting rights and result
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in substantial dilution to the existing holders of our common stock. Additionally, a sale of securities could adversely affect the market price of our common stock.
Rising interest rates could negatively affect our results of operations.
The interest rate on our credit facility with Commercial Finance fluctuates based upon changes in the prime rate. Increases in the prime rate will result in an increase in our cost of funds, and would negatively affect our results of operations. We have not entered into any derivative instruments such as interest rate swap or hedge agreements to manage our exposure to rising interest rates.
Competition in our industry is intense.
Competition in the natural food segment of the food industry is intense. We believe that as consumers become more interested in healthy food alternatives, the competition in our markets will increase substantially. Therefore, the effectiveness of our marketing, advertising and promotional programs and the financial resources necessary for their implementation is an important part of our sales growth plan.
In the retail cheese market, we compete with large national and regional manufacturers of conventional, organic, and imitation cheese products. Competitors such as Kraft, Borden and Horizon Organic, among others are well established and have significantly more brand name recognition, marketing personnel, and cash resources at their disposal. Within the retail cheese alternative niche market, there are a number of additional competitors such as Soya Kaas, Lisanatti, Follow Your Heart, Toffuti, and Melissa’s. Like our product lines, these competitors offer dairy and cheese alternatives to grocery and natural foods stores. In addition, their offerings are similar to ours in that they have comparable perceived benefits and are distributed or positioned in the same retail shelf space as our products.
In the food service markets, our substitute and imitation cheese products compete with other numerous substitute and imitation cheese products, as well as with conventional cheeses.
While we believe that we are superior to the competition in our cheese alternative niche market and that the breadth and depth of our product lines make it difficult for our smaller competitors to have a significant impact on our market leading share in the cheese alternative category, our competitors may succeed in developing new or enhanced products, which are better than our products. These companies may also prove to be more successful than us in marketing and selling these products. We cannot assure you that we will be able to compete successfully with any of these companies or achieve a greater market share than we currently possess. Increased competition as to any of our products or services could result in price reductions, reduced margins, and loss of market share, which could negatively affect our business, prospects, results of operations and financial condition.
Consumer eating habits and shopping trends may change and negatively impact demand for our products.
There could be a decrease in demand for our products as consumers’ tastes, preferences, shopping behavior, and overall evaluation of health benefits change over time. Historically, this was demonstrated in the change in consumer eating habits with the publicly recognized trend toward low-carbohydrate diets, which led to decreased consumption of items such as bread and our complementary product of cheese alternative slices. Additionally, the number of consumers shopping in the retail grocery and natural foods stores continues to shift with the national expansion of Wal-Mart superstores and other similar superstores which include extensive grocery operations. With the growth in the aging population of U.S. consumers, there could be price pressure on our products due to the fixed income nature of this population segment.
Demand for our products could be hindered due to changing conditions within the distribution channels through which we sell our products.
Our sales could suffer based upon market place abnormalities such as retailer, distributor, and/or food service operator labor strikes. Further, consolidation within the industry could result in store closings, store layouts, and operating strategies that are incompatible with our product requirements.
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We rely on the protection of our trademarks, and the loss of a trademark would negatively impact the products associated with the trademark.
We own several registered and unregistered trademarks, which are used in the marketing and sale of our products. We have invested a substantial amount of money in promoting our trademarked brands. However, the degree of protection that these trademarks afford us is unknown. Further, we may not have the money necessary to engage in actions to prevent infringement on our trademarks. A loss of a material trademark would negatively impact the products associated with it, and could negatively affect our business, prospects, results of operations, financial condition and cash flows related to this particular trademark. However, we do not believe that a prohibition from using one or more of our trademarks, would have a material adverse affect on our continued operations as a whole.
We do not have patent protection for our formulas and processes, and a loss of ownership of any of our formulas and processes would negatively impact our business.
We believe that we own our formulas and processes. However, we have not sought, and do not intend to seek, patent protection for our formulas and processes. Instead, we rely on the complexity of our formulas and processes, trade secrecy laws, and employee and inter-company confidentiality agreements. However, we cannot assure you that other companies will not acquire our confidential information or trade secrets or will not independently develop equivalent or superior products or technology and obtain patent or similar rights. Although we believe that our formulas and processes have been independently developed and do not infringe upon the patents or rights of others, a variety of components of our processes could infringe upon existing or future patents, in which event we may be required to modify our processes or obtain a license. We cannot assure you that we will be able to do so in a timely manner or upon acceptable terms and conditions. The failure to do either of the foregoing would negatively affect our business, results of operations, financial condition and cash flows.
Because we sell food products, we face the risk of exposure to product liability claims.
We, like any other seller of food products, face the risk of exposure to product liability claims in the event that our manufacturers’ quality control procedures fail and the consumption of our products causes injury or illness. With respect to product liability claims, our insurance may not continue to be available at a reasonable cost, or, if available, may not be adequate to cover liabilities. We generally seek contractual indemnification and insurance coverage from parties supplying us products, but this indemnification or insurance coverage is limited, as a practical matter, to the creditworthiness of the indemnifying party, and their carriers, if any, as well as the limits of any insurance provided by suppliers. If we do not have adequate insurance or contractual indemnification available, product liability claims relating to defective products could have a material adverse effect on our financial condition, results of operations and cash flows.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
ITEM 2. PROPERTIES
On October 3, 2006, we entered into a sublease agreement with Oracle Corporation whereby we moved our corporate headquarters to 11,514 square feet of office space at 5955 T.G. Lee Boulevard, Suite 201 in Orlando, Florida. The sublease agreement requires monthly pre-tax base rental payments of $12,333.33 through November 14, 2007, $12,706.67 from November 15, 2007 through November 14, 2008, and $13,086.67 from November 15, 2008 through January 31, 2009. We believe that our assets are adequately covered by casualty insurance.
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ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
We are currently a party to certain legal proceedings, claims, disputes and litigation arising in the ordinary course of business. We currently believe that the ultimate outcome of these proceedings, individually and in the aggregate, will not have a material adverse affect on our financial position, results of operations or cash flows. However, because of the nature and inherent uncertainties of litigation, should the outcome of these actions be unfavorable, our business, financial condition, results of operations and cash flows could be materially and adversely affected.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held our annual stockholder meeting on January 18, 2008. As of the record date on December 3, 2007, there were 17,110,016 shares of our common stock issued, outstanding and eligible to vote. In this meeting, the shareholders voted on and approved the following proposals:
1.
To elect four directors for a term of one year each, until the next annual meeting of stockholders and until their successors are elected and qualify. The board members were voted in with the following number of votes for their election:
2.
To ratify the retention of Cross, Fernandez and Riley, LLP as the independent registered public accounting firm of the Company for the fiscal year ending March 31, 2008. The vote tabulation for this proposal was as follows: VOTES CAST FOR - 13,433,438; VOTES CAST AGAINST - 104,609; ABSTENTIONS - 25,352; BROKER NON-VOTES - none.
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PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
From August 1999 to May 5, 2006, our common shares, $.01 par value per share, were traded on the American Stock Exchange (“AMEX”) under the symbol “GXY”. Commencing May 8, 2006, we began trading under the symbol “GXYF” in the Nasdaq over-the-counter market on what is commonly referred to as the OTC Bulletin Board. The following table sets forth the high and low closing sales prices of our common shares during each quarter as reported by AMEX or the OTC Bulletin Board, as applicable, for the fiscal years ended March 31, 2008 and 2007:
On April 20, 2006, we received a letter from AMEX, notifying us that it intended to proceed with the filing of an application with the Securities and Exchange Commission to strike our common stock from listing and registration on the Exchange. We did not appeal this determination by AMEX and on May 5, 2006, AMEX suspended trading in our common stock and submitted an application to the Securities and Exchange Commission to strike our common stock from listing and registration on AMEX. Commencing May 8, 2006, we began trading under the symbol “GXYF” on the OTC Bulletin Board. OTC market quotations reflect interdealer prices, without retail markup, markdown or commission and may not necessarily represent actual transactions.
Holders
On June 26, 2008, there were approximately 570 stockholders of record for our common stock. This does not reflect persons or entities that hold our common stock in nominee or “street” name through various brokerage firms.
Dividends
We have not paid any dividends with respect to our common stock and do not expect to pay dividends on our common stock in the foreseeable future. It is the present policy of our Board of Directors to retain future earnings to finance the growth and development of our business. Any future dividends will be declared at the discretion of the Board of Directors and will depend upon several things including the financial condition, capital requirements, earnings and liquidity of our Company. See Management's Discussion and Analysis of Financial Condition and Results of Operations for a discussion of our current capital position.
Securities Authorized for Issuance under Equity Compensation Plans
Please see the section titled “Equity Compensation Plan Information” under Item 12 in Part III of this Form 10-K.
Recent Sales of Unregistered Securities
There were no sales of unregistered securities in the quarter ended March 31, 2008.
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ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information in this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to enhance a reader’s understanding of the financial condition, changes in financial condition and results of operations of our Company. This MD&A is a supplement to and should be read in conjunction with our Financial Statements and notes thereto contained in Item 8.
ITEM 8. FINANCIAL STATEMENTS
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, 2008 and 2007 and the related statements of income, stockholders’ deficit and cash flows for the years then ended. 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 audits 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, 2008 and 2007 and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company may be required to pay its Convertible Note and accrued interest thereon in the amount of $3,541,478 on October 19, 2008 which may leave it with insufficient cash funds to continue operations and, therefore, raises substantial doubt as to the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Cross, Fernandez & Riley, LLP
Orlando, Florida
June 30,
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GALAXY NUTRITIONAL FOODS, INC.
Balance Sheets
See accompanying notes to financial statements
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GALAXY NUTRITIONAL FOODS, INC.
Statements of Income
See accompanying notes to financial statements
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GALAXY NUTRITIONAL FOODS, INC.
STATEMENTS OF STOCKHOLDERS’ DEFICIT
See accompanying notes to financial statements
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GALAXY NUTRITIONAL FOODS, INC.
Statements of Cash Flows
See accompanying notes to financial statements.
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GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
(1)
Summary of Significant Accounting Policies
Nature of Business and Going Concern
Galaxy Nutritional Foods, Inc. (the “Company”) develops and globally markets plant based cheese alternatives, organic dairy and other organic and natural food products to grocery and natural foods retailers, mass merchandisers and food service accounts. Galaxy Nutritional Foods Veggie®, the leading brand in the grocery cheese alternative category and the Company’s top selling product group, is primarily merchandised in the produce section and provides calcium and protein without cholesterol, saturated fat or trans-fat. Other popular brands include: Galaxy Nutritional Foods Rice®, Veggy®, Vegan®, Rice Vegan®, and Wholesome Valley Organic®. Galaxy Nutritional Foods, Inc. is dedicated to developing nutritious and delicious food products made with high quality natural ingredients that exceed the expectations of today’s health conscious consumers. The Company is also committed to reducing its environmental impact as part of its Eat Green for Body & Earth™ program that offsets carbon emissions associated with product shipping and emphasizes the use of organic ingredients. The Company headquarters are located in Orlando, Florida, and its common stock is quoted on the OTC Bulletin Board under the symbol “GXYF.”
During fiscal 2006, the Company transitioned its manufacturing and distribution operations to an outside supplier. In November 2005, Schreiber Foods, Inc., a Wisconsin corporation (“Schreiber”), began manufacturing and distributing substantially all of the Company’s products in accordance with a Supply Agreement that was signed on June 30, 2005 (See Note 7). Schreiber uses the Company’s formulas and processes to manufacture products for the Company’s customers. The prices for such products are based on cost plus a processing fee as determined by the parties from time to time. Additionally, in December 2005, the Company sold substantially all of its manufacturing and production equipment to Schreiber for $8,700,000 in cash pursuant to an Asset Purchase Agreement dated June 30, 2005.
The Company’s ability to continue as a going concern depends upon successfully obtaining sufficient cash resources to refinance or pay $3,451,478 on October 19, 2008 (See Note 5) and obtaining positive cash flow from operations to sustain normal business operations. The accompanying financial statements have been prepared on a going concern basis, which assumes continuity of operations and realization of assets and liabilities in the ordinary course of business. The financial statements do not include any adjustments that might result if the Company was forced to discontinue its operations.
The Company’s current business plan continues to eliminate low margin private label and Galaxy imitation business from its sales mix, which results in budgeted sales slightly lower in fiscal 2009 than in fiscal 2008. Additionally, the cost of goods sold is increasing due to higher ingredient costs, particularly casein, which will reduce the gross margins on a majority of the Company’s products. During fiscal 2008, management implemented several initiatives in an effort to at least partially minimize the negative effect of these casein price increases. These strategies include reducing promotional spending and consumer advertising and increasing customer pricing on certain affected product lines, as well as, proposing reformulations on existing products to reduce the amount of required casein and expanding and accelerating the roll-out of new products which do not require casein. The Company plans to continue these initiatives throughout fiscal 2009. With the further elimination of low margin items and the reduction of promotional spending, the Company anticipates continued positive cash flows from operations, but it may be lower than in recent fiscal years. With its current cash balances and the ability to borrow additional funds on its Commercial Finance Agreement, the Company believes that it currently has the ability to repay the Convertible Note and the accrued interest thereon by October 19, 2008. However, the payment of the entire balance of $3,451,478 would likely seriously and adversely impact its liquidity and put a cash strain on the Company without additional financing. Management is currently in discussions with Mr. DeLuca regarding options to extend the maturity date, refinance and/or convert all or a portion of the Convertible Note and accrued interest thereon into equity at a lower conversion price on or before its maturity on October 19, 2008. There can be no assurance that the Company will be successful in its business plan, its negotiations with Mr. DeLuca and other parties or that the terms of any such refinancing or conversions will not result in the issuance, or potential issuance, of a significant amount of equity securities that will cause substantial dilution to our stockholders. If the Company is not successful in refinancing the Convertible Note or in otherwise entering into a financing, sale, or other business transaction that infuses sufficient cash resources into the Company in the near future, any collection actions by Mr. DeLuca or other parties could have a material adverse affect on the liquidity and financial condition
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of the Company and on its ability to secure additional financing, and the Company may not be able to continue as a going concern.
Cash
The Company considers all highly liquid investments with a maturity of three months or less at the date of the purchase to be cash equivalents. Periodically, the Company maintains cash in financial institutions in excess of amounts insured by the federal government. The Company has not experienced any losses on such accounts.
Accounts Receivable
Accounts receivable are customer obligations due under normal trade terms. The Company evaluates the collectibility of its accounts receivable using 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 based on a specific identification methodology, 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, slotting fees and spoils that relate to current period sales. The Company estimates these future credits based on a specific identification methodology and a percentage method, which is determined based on historical experience, applied to all remaining balances. 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 only consist of direct material costs. Material costs consist of the cost of ingredients and packaging that go into the production of the item and any processing fee charged by the manufacturers, as applicable.
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.
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 ranges from 4 months to one year, the Company historically averages less than 2% of gross sales in credits for unsold product. The Company’s reserve on accounts receivable takes these potential future credits into consideration. Certain expenses such as returns, 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 direct response advertising costs in the period incurred. Advertising expense was approximately $452,000 and $325,000 during the fiscal years ended March 31, 2008 and 2007, 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.
Disposal Costs
The Company recorded accruals in connection with the asset sale and outsourcing of its manufacturing operations in fiscal 2006. The initial accruals included estimates pertaining to employee termination costs and abandonment of excess equipment and facilities and other potential costs. Given the significance and complexity of these activities, and the timing of the execution of such activities, the accrual process involved periodic reassessments of estimates made at the time the original decisions were made, including evaluating estimated employment terms, contract cancellation charges and real estate market conditions for sub-lease rents. Currently, there are no further
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costs that require estimates and any future disposal costs will be recorded as incurred in accordance with SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities.”
Non-Cash Compensation Related to Stock-Based Transactions
Effective April 1, 2006, the Company adopted SFAS No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123R”). SFAS 123R requires companies to measure the cost of employee services received in exchange for an award of equity instruments, including stock options, based on the grant-date fair value of the award and to recognize it as compensation expense over the period the employee is required to provide service in exchange for the award, usually the vesting period.
SFAS 123R applies to new awards and to awards modified, repurchased, or cancelled after the effective date, as well as to the unvested portion of awards outstanding as of the effective date. The Company uses the Black-Scholes option-pricing model to value its new stock option grants under SFAS 123R, applying the “modified prospective method” for existing grants which requires the Company to value stock options prior to its adoption of SFAS 123R under the fair value method and expense the value over the requisite service period. SFAS 123R also requires the Company to estimate forfeitures in calculating the expense related to stock-based compensation. In addition, SFAS 123R requires the Company to reflect cash flows resulting from excess tax benefits related to those options as a cash inflow from financing activities rather than as a reduction of taxes paid.
The Black-Scholes option-pricing model requires subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The risk-free rate is based on the U.S. Treasury zero-coupon rates with a remaining term equal to the expected term of the option. Expected volatilities are based on the historical volatility of the Company’s stock. The Company inputs the expected term of options granted based on information derived from historical data on employee exercises and post-vesting employment termination behavior. There is no expected dividend yield. These factors could change in the future, which may affect the stock-based compensation expense in future periods. SFAS 123R also requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period, which approximates the requisite service period. Stock-based compensation expense recognized in the Company's Statements of Income for the periods presented includes compensation expense for share-based payment awards granted prior to, but not yet vested as of March 31, 2006 based on the grant date fair value estimated in accordance with the pro forma provisions of SFAS 123 and compensation expense for the share-based payment awards granted subsequent to March 31, 2006 based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. As stock-based compensation expense recognized in the Statement of Income is based on awards ultimately expected to vest and to be exercised, it will be reduced for estimated forfeitures. There were no forfeiture rates applied to the stock-based compensation expense for the fiscal years ended March 31, 2008 and 2007 as all options were fully vested and were able to be exercised.
There were no issuances of stock awards during the fiscal year ended March 31, 2008. Therefore, the Company did not make any assumptions under the Black-Scholes option-pricing model during this period. For the fiscal year ended March 31, 2007, the Company estimated the fair value of each stock-based award using the Black-Scholes option-pricing model with the following assumptions:
Net Income per Common Share
Basic net income per common share is computed by dividing net income by the weighted average shares outstanding. Diluted net income per common share is computed on the basis of weighted average shares
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outstanding plus potential common shares which would arise from the exercise of stock options and warrants using the treasury stock method and conversion of convertible debt using the if-converted method.
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 trade receivables, inventory reserves, valuation of deferred taxes and valuation of non-cash compensation related to stock-based transactions. Actual results could differ from these 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 sells to customers throughout the United States and 12 other countries.
Recent Accounting Pronouncements
In May 2008, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 162, “The Hierarchy of Generally Accepted Accounting Principles,” (“SFAS 162”). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP in the United States. Any effect of applying the provisions of these Statements shall be reported as a change in accounting principle in accordance with SFAS No. 154, “Accounting Changes and Error Corrections and Error Corrections.” The Company is currently evaluating the impact of SFAS 162, but does not expect the adoption of this pronouncement will have an impact on its results of operations, financial position and cash flows.
In April 2008, the FASB issued FASB Staff Position (“FSP”) FAS 142-3, Determination of the Useful Life of Intangible Assets. This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142. The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141R and other GAAP. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The Company is in the process of determining the impact of adopting this new accounting position on its results of operations and financial position.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities - an Amendment of FASB Statement 133” (“SFAS 161”). SFAS 161 enhances required disclosures regarding derivatives and hedging activities, including enhanced disclosures regarding how: (a) an entity uses derivative instruments; (b) derivative instruments and related hedged items are accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”; and (c) derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008. The Company is currently evaluating the impact of SFAS 161, but does not expect the adoption of this pronouncement will have a material impact on its results of operations, financial position and cash flows.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements - An Amendment of ARB No. 51,” (“SFAS 160”). SFAS 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, SFAS 160 requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements that is presented separate from the parent’s equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. SFAS 160 clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, SFAS 160 requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling equity investment on the deconsolidation date. SFAS 160 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after
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December 15, 2008. Earlier adoption is prohibited. The Company is currently evaluating the impact of SFAS 160 on its results of operations, financial position and cash flows.
In December 2007, (“FASB”) issued SFAS No. 141 (revised), “Business Combinations,” (“SFAS 141(R)”). SFAS 141(R) changes the accounting for business combinations including the measurement of acquirer shares issued in consideration for a business combination, the recognition of contingent consideration, the accounting for pre-acquisition gain and loss contingencies, the recognition of capitalized in-process research and development, the accounting for acquisition-related restructuring cost accruals, the treatment of acquisition related transaction costs and the recognition of changes in the acquirer’s income tax valuation allowance. SFAS 141(R) is effective for fiscal years beginning after December 15, 2008, with early adoption prohibited. The Company is currently evaluating the impact of the pending adoption of SFAS 141(R) on its results of operations and financial condition.
In June 2007, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue No. 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards” (“EITF 06-11”). EITF 06-11 states that an entity should recognize a realized tax benefit associated with dividends on non-vested equity shares, non-vested equity share units and outstanding equity share options charged to retained earnings as an increase in additional paid in capital. The amount recognized in additional paid in capital should be included in the pool of excess tax benefits available to absorb potential future tax deficiencies on share-based payment awards. EITF 06-11 should be applied prospectively to income tax benefits of dividends on equity-classified share-based payment awards that are declared in fiscal years beginning after December 15, 2007. The adoption of EITF Issue No. 06-11 is not expected to have a significant impact on the Company’s financial statements.
In June 2007, the FASB ratified EITF Issue No. 07-03, "Accounting for Nonrefundable Advance Payments for Goods and Services Received for Use in Future Research and Development Activities." EITF 07-03 requires companies to defer nonrefundable advance payments for goods and services and to expense that advance payment as the goods are delivered or services are rendered. If the company does not expect to have the goods delivered or services performed, the advance should be expensed. EITF 07-03 is effective for fiscal years beginning after December 15, 2007. The Company is currently evaluating the impact of adopting EITF 07-03 on its financial statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities," (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS 159 is effective for fiscal years beginning after November 15, 2007, with early adoption permitted. The Company is currently evaluating the effect, if any, the adoption of SFAS 159 will have on its financial statements, results of operations and cash flows.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” (“SFAS 157”). SFAS 157 simplifies and codifies guidance on fair value measurements under generally accepted accounting principles. This standard defines fair value, establishes a framework for measuring fair value and prescribes expanded disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the effect, if any, the adoption of SFAS 157 will have on its financial statements, results of operations and cash flows.
Income Taxes and Recently Adopted Accounting Pronouncement
The Company adopted the provisions of FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109,” (“FIN 48”), on April 1, 2007. FIN 48 provides guidance on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company has not recognized a liability as a result of the implementation of FIN 48. A reconciliation of the beginning and ending amount of unrecognized tax benefits has not been provided since there is no unrecognized benefit as of and since the date of adoption. The Company has not recognized interest expense or penalties as a result of the implementation of FIN 48. If there were an unrecognized tax benefit, the Company would recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. The Company files income tax returns in the U.S. federal jurisdiction and in various states.
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,
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“Accounting for Income Taxes.” Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.
Financial Instruments
SFAS 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, 2008.
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 secured borrowings and related party note payable is estimated based upon the quoted market prices for the same or similar instruments or on the current rates offered to the Company for debt with the same remaining maturities.
(2)
Allowance for Trade Receivables
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, slotting fees and spoils that relate to current period sales. For the fiscal years ended March 31, 2008, and 2007, the Company recorded an expense of $3,500 and $91,029, respectively related to bad debt. For those years, the bad debt expense was approximately 0% and 0.3% of net sales, respectively.
(3) Inventories
Inventories are summarized as follows:
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(4) Property and Equipment
Property and equipment are summarized as follows:
(5) Line of Credit and Notes Payable
Line of Credit
On June 23, 2006, the Company entered into a Receivables Purchase Agreement with Commercial Finance Division, formerly known as Systran Financial Services Corporation, a subsidiary of Textron Financial Corporation (“Commercial Finance”), whereby Commercial Finance provides financing to the Company through advances against certain trade receivable invoices due to the Company (the “Commercial Finance Agreement”). The Commercial Finance Agreement is secured by the Company’s accounts receivable and all other assets. Generally, subject to a maximum principal amount of $3,500,000 which can be borrowed under the Commercial Finance Agreement, the amount available for borrowing is equal to 85% of the Company’s eligible accounts receivable invoices less a dilution reserve and any required fixed dollar reserves. The dilution and fixed dollar reserves are currently set at 7% and $100,000, respectively. Advances under the Commercial Finance Agreement bear interest at a variable rate equal to the prime rate plus 1.5% per annum (6.75% on March 31, 2008). However, the Commercial Finance Agreement requires a $4,500 minimum monthly interest charge to be assessed. The Company is also obligated to pay a $1,500 monthly service fee.
The initial term of the Commercial Finance Agreement ends on June 23, 2009 and may renew automatically for consecutive twelve-month terms unless terminated sooner. The Commercial Finance Agreement may be accelerated in the event of certain defaults by the Company including among other things, a default in the Company’s payment and/or performance of any obligation to Commercial Finance or any other financial institution, creditor, or bank; and any change in the conditions, financial or otherwise, of the Company which reasonably causes Commercial Finance to deem itself insecure. In such an event, interest on the Company’s borrowings would accrue at the greater of twelve percent per annum or the variable rate of prime plus 1.5% and the Company would be liable for an early termination premium ranging from 1% to 3%, depending upon the timing of such termination, of the maximum principal amount available under the Commercial Finance Agreement. Although the Company had approximately $1.9 million available to draw pursuant to this Commercial Finance Agreement as of March 31, 2008, there were no amounts advanced, because the Company did not need additional cash on such date.
In accordance with SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Debt,” the Company accounts for the Commercial Finance Agreement as a liability since it is a full-recourse agreement and the Company maintains effective control over the accounts receivable.
Related Party Notes Payable
Pursuant to a Note and Warrant Purchase Agreement dated September 12, 2005, the Company received $1,200,000 as a loan from Mr. Frederick A. DeLuca, a greater than 10% shareholder. In October 2005, pursuant to several Note and Warrant Purchase Agreements dated September 28, 2005, the Company 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. The combined total of these loans was $2,400,000. The loans were evidenced by unsecured promissory notes (the “Notes”) held by the above referenced parties (the “Note Holders”). The Notes required monthly interest-only payments at 3% above the bank prime rate of interest per the Federal Reserve Bank and matured 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, the Company issued to Mr. DeLuca, Conversion Capital Master, Ltd., SRB Greenway Capital (Q.P.), L.P., SRB Greenway Capital, L.P., and SRB Greenway Offshore Operating Fund,
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L.P., warrants to purchase up to 300,000 shares, 150,000 shares, 121,300 shares, 17,400 shares, and 11,300 shares, respectively, of the Company’s common stock at an exercise price equal to $1.53 (95% of the lowest closing price of the Company’s 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, the Company granted the Note Holders “piggy back” registration rights with respect to the shares underlying the warrants. These shares were registered on December 30, 2005. The Company recorded the $444,731 initial fair value of the warrants, upon their issuance, as a discount to debt. This discount was amortized from September 2005 through June 2006.
The Company did not have the short-term liquidity to pay its related party Note Holders on the $2.4 million Notes that matured on June 15, 2006 in accordance with their original terms. The Company received a letter on June 20, 2006 from all of the Note Holders, other than Mr. DeLuca, notifying the Company that its failure to pay the amounts due and owing on the maturity date constituted a default on $1.2 million of the Notes held by those Note Holders. Pursuant to the terms of the Notes, since the Company did not cure the default within 10 days after receipt of the notice of default, it was obligated to pay interest at the default rate of 8% above the Prime Rate beginning July 1, 2006.
Pursuant to a Note Purchase Agreement dated July 19, 2006, the Company issued a new unsecured convertible note for $2,685,104 (the “Convertible Note”) to Mr. DeLuca. The proceeds from the Convertible Note were used to repay or refinance several notes totaling $2.4 million that matured on June 15, 2006 and a $285,104 registration rights penalty owed to Mr. DeLuca. The Convertible Note accrues interest at 12.5% per annum. No interest or principal payments are required under the Convertible Note until its maturity. Principal, together with any accrued and unpaid interest, on the Convertible Note is convertible at any time prior to payment into shares of the Company’s common stock at a conversion price of $0.35 per share. The closing market price of the Company’s common stock as quoted on the OTC Bulletin Board on July 19, 2006 was $0.28. As additional consideration for making the loan, the Company issued Mr. DeLuca a warrant (the “Warrant”) to purchase up to 200,000 shares of the Company’s common stock at an exercise price equal to $0.35 per share. The Warrant is fully vested and can be exercised on or before the expiration date of July 19, 2009. In July 2006, the Company recorded the $18,000 fair value of the Warrant as a discount to debt that was amortized from July 2006 through October 2007.
Pursuant to a Note Modification Agreement dated March 14, 2007, Mr. DeLuca agreed to extend the maturity date of the Convertible Note from October 19, 2007 to October 19, 2008.
Pursuant to the Note Purchase Agreement dated July 19, 2006 and the Note Modification Agreement dated March 14, 2007, the Company’s Convertible Note together with any accrued and unpaid interest thereon, is convertible at any time prior to payment into shares of the Company’s common stock at a conversion price of $0.35 per share. As a result of the convertible features of the Convertible Note, Mr. DeLuca’s ownership in the Company may increase from approximately 23% to nearly 52% by October 2008. The calculation of ownership assumes, among other things, that Mr. DeLuca converts the entire amount of principal and all accrued interest on the Convertible Note through October 19, 2008 into an aggregate of 9,861,364 shares and exercises all of his currently outstanding warrants into 500,000 shares of the Company’s common stock. The closing price of the Company’s common stock on March 31, 2008 as quoted on the OTC Bulletin Board was $0.17 per share. Unless the market price of the Company’s common stock increases between now and October 19, 2008, it is unlikely that Mr. DeLuca would choose to convert the Convertible Note and accrued interest thereon at his conversion price of $0.35 per share. If Mr. DeLuca does not choose to convert this Convertible Note into stock and does not extend the maturity date of the Convertible Note, then the Company will be required to pay principal plus accrued interest thereon in the amount of $3,451,478 on October 19, 2008.
With its current cash balances and the ability to borrow additional funds on its Commercial Finance Agreement, the Company believes it currently has the ability to repay the Convertible Note and the accrued interest thereon by October 19, 2008. However, the payment of the entire balance of $3,451,478 would likely seriously and adversely impact its liquidity and put a cash strain on the Company without additional financing. Management is currently in discussions with Mr. DeLuca regarding options to extend the maturity date, refinance and/or convert all or a portion of the Convertible Note and accrued interest thereon into equity at a lower conversion price on or before its maturity on October 19, 2008. There can be no assurance that the Company will be successful in its business plan, its negotiations with Mr. DeLuca and other parties or that the terms of any such refinancing or conversions will not result in the issuance, or potential issuance, of a significant amount of equity securities that will cause substantial
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dilution to our stockholders. If the Company is not successful in refinancing the Convertible Note or in otherwise entering into a financing, sale, or other business transaction that infuses sufficient cash resources into the Company in the near future, any collection actions by Mr. DeLuca or other parties could have a material adverse affect on the liquidity and financial condition of the Company and on its ability to secure additional financing, and the Company may not be able to continue as a going concern.
The Company recorded interest expense related to the above related party notes of $341,232 and $321,245 in the fiscal years ended March 31, 2008 and 2007, respectively. Additionally, the Company amortized $7,960 and $137,019 of debt discount to interest expense in the fiscal years ended March 31, 2008 and 2007. As of March 31, 2008, the outstanding principal balance on the Convertible Note is $2,685,104.
(6) Accrued and Other Current Liabilities
Accrued and other current liabilities are summarized as follows:
(7) Commitments and Contingencies
Supply Agreement
In November 2005, Schreiber began manufacturing and distributing substantially all of the Company’s products in accordance with a Supply Agreement that was signed on June 30, 2005. Schreiber uses the Company’s formulas and processes to manufacture products for the Company’s customers. The prices for such products are based on cost plus a processing fee as determined by the parties from time to time. On March 17, 2008, the Company entered into a Second Amendment to the Supply Agreement that changed the following terms of the initial agreement:
·
The Initial Term of the Supply Agreement was changed to a period of fifteen years from June 30, 2005 to June 30, 2020 rather than a five year agreement with two, renewable five year periods. There is no longer a $1,500,000 or $750,000 termination fee for non-renewal during the first or second five-year period, respectively.
·
Schreiber may terminate this Supply Agreement prior to the end of the Initial Term, without penalty, upon provision of written notice to the Company issued at least six (6) months prior to such proposed termination date. In such an event, the Company will use its commercially reasonable efforts to transition production of its products to a new supplier. In the event the Company is unable to transition production for one or more of its products within such six (6) month period, upon the Company’s request, Schreiber will continue to provide such products to the Company, under the terms of this Supply Agreement, for an additional six (6) months after the date that would otherwise have been the effective date of such termination.
·
The Company may terminate this Supply Agreement prior to the end of the Initial Term, without penalty, upon provision of written notice to Schreiber issued at least six (6) months prior to such proposed termination date, provided that the effective date for such termination by the Company shall not be prior to December 31, 2012, unless a Change of Control of the Company shall have occurred, in which case the effective date for such termination by the Company shall not be prior to December 31, 2010.
·
Schreiber may increase the processing fee component of the price once in any twelve-month period to reflect changes in labor and benefits, materials, utilities and energy. If the proposed price exceeds the price at which the Company can obtain such item (either on its own or through another private labeling source), then the Company may elect such alternative source for such item.
·
The Supply Agreement originally provided for a contingent shortfall payment obligation up to $8,700,000 by the Company if a specified production level was not met during the one-year period from September 1, 2009 to August 31, 2010. The Second Amendment eliminates this provision and replaces it with a provision that will require the Company to pay a shortfall payment should it terminate the Supply Agreement prior to a stated date, other than as a result of a breach by Schreiber or change of control in the Company. The shortfall payment starts at $5,100,000 as of March 17, 2008 and declines by $1,700,000 per contract year until March 17, 2011, at which time the shortfall payment is eliminated. If there is a change of control of either the Company or Schreiber, then the shortfall payment obligation will terminate and be extinguished as of the date of such change of control. However, if there is a change of control of the Company in connection with a sale of the Company where the purchase price exceeds $50 million, then the Company's obligation to potentially remit a shortfall payment will not terminate. In such an event, the Company's obligation to remit a shortfall payment to Schreiber would not terminate until March 17, 2011.
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Stay, Severance, Sales Bonus Plan
On December 10, 2007, the Company adopted a Stay Bonus, Severance Bonus and Sales Bonus Plan (the “Plan”) to provide incentives and protections to certain key executives and directors in connection with a possible sale of the Company. The Plan provides for a stay bonus pool up to $475,000 to be paid following the Company’s receipt of a definitive purchase offer (as defined in the Plan) upon the earlier of the consummation of a sale of the Company pursuant to such purchase offer or the termination of the purchase offer (other than as a result of a breach by the Company). The stay bonus pool is to be paid $125,000 to David H. Lipka, the Company’s Chairman, and $100,000 to Michael E. Broll, the Company’s Chief Executive Officer. The remaining $250,000 of the stay bonus pool is currently unallocated and may be granted to other key executives at the discretion of Messrs Lipka and Broll. The Plan also provides for a severance bonus of $125,000 to be paid to David H. Lipka and $100,000 to be paid to Michael E. Broll in the event their positions are terminated other than for Cause (as defined in the Plan) or they resign within one year after the consummation of a sale of the Company. Finally, the Plan provides for a sales bonus pool to be determined based on a range of selling prices. The sales bonus pool will range from a minimum of $250,000 if the sale is in excess of a specified minimum sales target and will increase up to a maximum of 1.8% of the total sales price. The sales bonus pool will be allocated 55.5% to David H. Lipka and 44.5% to Michael E. Broll upon the consummation of a sale of the Company. The Plan was approved unanimously by the Board of Directors and separately by the two independent members of the Board.
Litigation
The Company is currently a party to certain legal proceedings, claims, disputes and litigation arising in the ordinary course of business. The Company currently believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not have a material adverse affect on the Company's financial position, results of operations or cash flows. However, because of the nature and inherent uncertainties of litigation, should the outcome of these actions be unfavorable, the Company's business, financial condition, results of operations and cash flows could be materially and adversely affected.
Leases
The Company leases its operating facilities and certain equipment under operating leases, expiring at various dates through its fiscal year 2010. The following schedule presents the Company’s obligations as of March 31, 2008, regarding future minimum rental payments required under operating leases that have initial or remaining terms in excess of one year:
The Company has no capital leases as of March 31, 2008.
Rental expense was approximately, $192,000 and $257,000 for the fiscal years ended March 31, 2008 and 2007, respectively.
On October 3, 2006, the Company entered into a sublease agreement with Oracle Corporation whereby the Company moved its corporate headquarters from its Viscount Row location to 5955 T.G. Lee Boulevard, Suite 201 in Orlando, Florida. The sublease agreement requires monthly pre-tax base rental payments of $12,333.33 through November 14, 2007, $12,706.67 from November 15, 2007 through November 14, 2008, and $13,086.67 from November 15, 2008 through January 31, 2009.
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Employment Agreements
·
Angelo S. Morini
In a Second Amended and Restated Employment Agreement effective October 13, 2003, Angelo S. Morini, the Company’s Founder, 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. Mr. Morini remained a director of the Company until his resignation on March 8, 2007. Mr. Morini continues to be a stockholder in the Company. 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 October 2003. The total estimated costs expensed under this agreement were $1,830,329 of which $195,017 remained unpaid but accrued as a current liability as of March 31, 2008. The obligation is being paid out in nearly equal monthly installments ending in October 2008.
·
Christopher E. Morini
On June 1, 2007, Christopher E. Morini resigned from his position as Vice President of New Business Development in order to pursue other opportunities. In accordance with the Separation and General Release Agreement which became effective on June 9, 2007, between the Company and Mr. C. Morini, the Company accrued $346,447 for wages and payroll taxes and expensed them under Employment Contract Expense-General and Administrative in the Statement of Income in June 2007. After an initial lump sum payment of approximately $100,087, the remaining obligation is being paid out in nearly equal bi-weekly installments through February 2009. As of March 31, 2008, $87,582 remained unpaid but accrued as a current liability.
·
Michael E. Broll
On July 8, 2004, Michael E. Broll, a member of the Company’s Board of Directors, was appointed as the Company’s Chief Executive Officer. 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 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 subject to normal payroll deductions payable at the option of the Company in a lump sum or over a period of one year. Mr. Broll was awarded a discretionary cash bonus of $60,000 and $75,000 in the fiscal years ended March 31, 2008 and 2007. Effective April 1, 2007, the Board increased Mr. Broll’s annual base salary from $200,000 to $240,000 and effective April 1, 2008 from $240,000 to $249,600.
·
Other
The Company currently has employment agreements with several of its key employees that provide for up to three years severance in the event they are terminated without cause.
(8) Capital Stock
Non-Cash Compensation Related to Stock-Based Transactions
Effective April 1, 2006, SFAS 123R applies to new awards and to awards modified, repurchased, or cancelled after the effective date, as well as to the unvested portion of awards outstanding as of the effective date. The Company uses the Black-Scholes option-pricing model to value its new stock option grants under SFAS 123R, applying the “modified prospective method” for existing grants which requires the Company to value stock options prior to its adoption of SFAS 123R under the fair value method and expense the value over the requisite service period. For the fiscal year ended March 31, 2007, the Company’s total stock-based compensation expense was $108,160. There was no stock-based compensation expense in the fiscal year ended March 31, 2008.
Stock Options
On September 29, 2006, the shareholders approved the 2006 Stock Incentive Plan. This 2006 Stock Incentive Plan has up to 1,000,000 shares available for stock awards to employees and directors and expires on January 20, 2016. There were no issuances of stock options during the fiscal year ended March 31, 2008. During the fiscal year ended March 31, 2007, the Company granted options for 40,000 shares under this plan leaving 960,000 shares
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available for future issuance. Option awards are typically granted with an exercise price equal to the closing market price of the Company’s common stock on the date of issuance. The maximum and typical term of options granted is ten years. All options issued during the fiscal year ended March 31, 2007 vested immediately.
Prior to the 2006 Stock Incentive Plan, the Company had three employee or director stock option plans, which were adopted in 1987, 1991, and 1996. Under these stock option plans, qualified and nonqualified stock options to purchase up to 200,500 shares of the Company’s common stock were able to be granted to employees and members of the Board of Directors. The maximum and typical term of options granted under the plans was ten years. Generally, options vested immediately to three years. Except for the 2006 Stock Incentive Plan, all other employee stock option plans have expired and no further grants may be made pursuant to those plans. However, any options that were previously issued under these plans will remain outstanding until they are exercised or forfeited. As of March 31, 2008, there were 79,695 outstanding options that were issued in prior years pursuant to the 1987, 1991 or 1996 stock option plans. The Company also granted 3,523,268 non-plan stock options that are outstanding as of March 31, 2008 of which 2,553,268 were approved by the stockholders of the Company on September 30, 2003.
The following table summarizes the Company’s plan and non-plan stock options outstanding as of March 31, 2008 and 2007, as well as activity during the years then ended:
The per share weighted-average fair value computed on options granted during fiscal year ended March 31, 2007 was $0.19. At March 31, 2008, the aggregate intrinsic value of options outstanding and options exercisable was zero, because the market value of the underlying stock was below the average exercise price of all options. The closing price of the Company’s common stock on March 31, 2008 as quoted on the OTC Bulletin Board was $0.17 per share.
The following table provides additional information about plan and non-plan stock options outstanding and exercisable at March 31, 2008 according to their exercise price ranges:
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The following table summarizes nonvested plan and non-plan stock options as of March 31, 2008 and 2007, as well as activity for the years then ended:
Compensation cost arising from nonvested stock granted to employees and from non-employee stock awards is recognized as expense using the graded vesting attribution method over the vesting period. As of March 31, 2008 and 2007, there was no remaining unrecognized compensation cost related to nonvested stock.
The Company estimated the fair value of all options issued during the periods using the Black-Scholes option-pricing model with the assumptions disclosed in Note 1 under Non-Cash Compensation Related to Stock-Based Transactions. 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 Income. During the fiscal years ended March 31, 2008 and 2007, the Company recorded $0 and $108,160, respectively, as non-cash compensation expense related to options that were issued to and vested by employees and directors.
Stock Warrants
The following table summarizes the Company’s warrants outstanding as of March 31, 2008 and 2007, as well as activity during the years then ended:
The per share weighted-average fair value computed on warrants granted during fiscal year ended March 31, 2007 was $0.09. At March 31, 2008, the aggregate intrinsic value of warrants outstanding and warrants exercisable was zero, because the market value of the underlying stock was below the average exercise price of all warrants. The closing price of the Company’s common stock on March 31, 2008 as quoted on the OTC Bulletin Board was $0.17 per share.
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The Company estimated the fair value of all warrants issued during the periods using the Black-Scholes option-pricing model with the assumptions disclosed in Note 1 under Non-Cash Compensation Related to Stock-Based Transactions. The estimated fair value is generally recorded as a charge to non-cash compensation in the general and administrative line item in the Statement of Income, as a discount to the issued debt or as a charge to additional paid-in capital in Stockholders’ Deficit depending on the situation in which the warrant was issued. During the fiscal year ended March 31, 2007, the Company granted warrants totaling 200,000 shares to non-employees and non-directors.
Reserved
At March 31, 2008, the Company has reserved a total of 15,084,242 shares of common stock for future issuance under all of the above arrangements, including 9,323,278 potential shares under the Convertible Note discussed in Note 5. The Company issues shares out of its authorized but previously unissued common shares to satisfy share option exercises.
Common Stock Issuances
There were no issuances of common stock during the fiscal years ended March 31, 2008 and 2007.
(9) Disposal Activities
On December 8, 2005, the Company completed the sale of substantially all of its manufacturing and production equipment to Schreiber for $8,700,000 in cash pursuant to an Asset Purchase Agreement dated June 30, 2005. This sale was approved by the Company’s stockholders at a Special Meeting held on December 5, 2005. The $8,700,000 in proceeds was used to pay $1,319,583 for tangible personal property taxes due and $7,374,299 to Beltway Capital Partners LLC for a payoff of the Company’s term loan on the sold assets. The remaining proceeds balance of $6,118 was used to reduce the Company’s then asset-based line of credit from Textron Financial Corporation.
In connection with the Asset Purchase Agreement, the Company also entered into a Supply Agreement with Schreiber (the “Supply Agreement”) on June 30, 2005 pursuant to which, Schreiber became the Company’s sole source of supply and distribution for substantially all of its products in November 2005.
The Company accounted for the costs associated with these transactions in accordance with SFAS No. 146, “Accounting for Costs Associated with an Exit or Disposal Activity,” (“SFAS 146”) because the above arrangements were planned and controlled by management and materially changed the manner in which the Company’s business was conducted. In accordance with SFAS 146, costs associated with disposal activities were reported as a reduction of income from operations. The above transactions were communicated to the Company’s employees on July 6, 2005. During the fiscal year ended March 31, 2006, 104 employee positions related to the manufacturing and distribution of the Company’s products were eliminated. The majority of these employee termination costs were paid during fiscal 2006 with the remaining employee termination costs paid in fiscal 2007. In December 2005, the Company abandoned its distribution facility and the production portion of its administrative facility and accrued $396,197 related to abandonment of these facilities. This amount was calculated as the present value of the remaining lease rentals, reduced by the estimated market value of sublease rentals. The actual expense exceeded this estimate for the time that the Company did not sublease these facilities. Other exit costs consist primarily of legal and professional fees related to the disposal activities and maintenance costs on the abandoned facilities.
The Company reports its disposal costs for the period as Costs of Disposal Activities in the Statement of Income. A summary of the twelve months and total disposal costs incurred is as follows:
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The Company does not anticipate any additional disposal costs related to these activities, but if they do occur, the Company will expense them as incurred.
From April 15, 2006 through November 12, 2006, the Company received approximately $89,064 in rental income under a sublease agreement for a portion of its unused manufacturing facility and parking area. This rental income offset the Company’s lease payment obligations recorded in Cost of Disposal Activities during the fiscal year ended March 31, 2007.
Effective July 31, 2006, the Company entered into a lease termination agreement with its landlord, CLP Industrial Properties, regarding its unused distribution facilities whereby the landlord released the Company from $1,068,869 in future lease payment obligations from August 1, 2006 through July 31, 2009 under the terms of its operating lease, in exchange for a termination fee of $228,859.
(10) Income Taxes
The components of the net deferred tax assets consist of the following:
The valuation allowance decreased by $564,000 and $37,000 for the fiscal years ended March 31, 2008 and 2007, respectively. The Company has recorded a valuation allowance to state its deferred tax assets at estimated net realizable value due to the uncertainty related to realization of these assets through future taxable income.
The following summary reconciles differences from taxes at the federal statutory rate with the effective rate:
Unused net operating losses for income tax purposes, expiring in various amounts from 2009 through 2027, of approximately $53,102,000 are available at March 31, 2008 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.
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(11) Earnings Per Share
The following is a reconciliation of basic net income per share to diluted net income per share:
Options for 4,390,409 shares and warrants for 987,801 shares have not been included in the computation of diluted net income per common share for the fiscal year ended March 31, 2008 as their effects were antidilutive. Potential conversion of the related party note payable and accrued interest thereon for 7,671,726 shares, options for 4,802,599 shares and warrants for 1,110,560 shares have not been included in the computation of diluted net income per common share for the fiscal year ended March 31, 2007 as their effects were antidilutive.
(12) Supplemental Cash Flow Information
(13) Additional Related Party Transactions
Angelo S. Morini
In June 1999, in connection with an amended and restated employment agreement for Angelo S. Morini, the Company consolidated two full-recourse notes receivable ($1,200,000 from November 1994 and $11,572,200 from October 1995) related to his purchase of 2,914,286 shares of the Company’s common stock into a single stockholder note receivable in the amount of $12,772,200 that was due on June 15, 2006. This stockholder note receivable was non-interest bearing and non-recourse and was secured by the 2,914,286 shares of the Company’s common stock (the “Shares”).
For the fiscal year ended March 31, 2006, the Company reserved $10,120,200 against this stockholder note receivable under the assumption that it would not be able to collect proceeds in excess of the $2,652,000 value of
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the Shares as of such date. The value of the Shares was computed using the closing price of the Company’s common stock on March 31, 2006 of $0.91 multiplied by the 2,914,286 shares.
On June 16, 2006, Mr. Morini failed to repay the non-recourse note obligation to the Company. On June 20, 2006, the Company delivered notice to Mr. Morini that it intended to exercise its rights to the Shares and retain all the Shares in full satisfaction of his obligations under the stockholder note receivable. On July 6, 2006, Mr. Morini consented to the Company’s acceptance of the Shares in full satisfaction of his obligations under the stockholder note receivable. Based upon the $0.42 closing price of the Company’s common stock as quoted on the OTC Bulletin Board on June 16, 2006, the Shares had an approximate value of $1,224,000 on such date. Accordingly, the Company recorded an additional expense of $1,428,000 in the fiscal year ended March 31, 2007 in order to record the additional decline in the value of the Shares from its $2,652,000 value as of March 31, 2006. In July 2006, the Company cancelled the Shares along with 30,443 other treasury shares.
Although this expense resulted in a material loss to the Company’s operations, it did not have any effect on the balance sheet since the stockholder note receivable was already shown as a reduction to Stockholders’ Deficit.
Board of Directors
On August 7, 2006, the Board of Directors of the Company appointed two new independent directors, Mr. Peter J. Jungsberger and Mr. Robert S. Mohel. Upon their appointment, the Board of Directors granted to each Mr. Jungsberger and Mr. Mohel an option to purchase up to 100,000 shares of the Company’s common stock with an exercise price of $0.45 (110% of the $0.41 closing market price as quoted on the OTC Bulletin Board on August 7, 2006). The options were granted outside of any stock option plan, were immediately vested and expire on August 7, 2011. In accordance with the accounting provisions of SFAS 123R, the Company recorded a fair value expense of $38,000 upon the issuance of these options. In addition, the Board resolved that the entire Board should act as the audit committee of the Board and appointed Mr. Mohel to serve as chairman of the meetings of the audit committee. For his role as audit committee chairman, Mr. Mohel receives compensation of $3,000 per quarter. For the fiscal year ended March 31, 2008, Mr. Jungsberger and Mr. Mohel each received $10,000 as an annual retainer fee plus compensation of $1,500 per Board meeting.
On August 17, 2006, the Board of Directors approved a grant of options to purchase up to 100,000 shares of the Company’s common stock to each of David Lipka, Michael Broll and Angelo Morini, each a director of the Company. Each of these options has an exercise price of $0.44 (110% of the $.40 closing market price as quoted on the OTC Bulletin Board on August 17, 2006). The options were granted outside of any stock option plan, were immediately vested and expire on August 17, 2011. In accordance with the accounting provisions of SFAS 123R, the Company recorded a fair value expense of $54,000 upon the issuance of these options.
On August 17, 2006, in recognition of Mr. Lipka’s substantial efforts on behalf of the Company, the Board voted to increase his compensation, in his capacity as Chairman of the Board of Directors, from $60,000 per year to $120,000 per year. As a result of this increase, Mr. Lipka is no longer considered an “independent” director within the meaning of applicable securities regulations. Additionally, for the fiscal years ended March 31, 2008 and 2007, Mr. Lipka was awarded a bonus of $10,000 and $20,000, respectively.
(14) Economic Dependence and Segment Information
The Company sells to customers throughout the United States and 12 other countries. For the fiscal years ended March 31, 2008 and 2007, the Company’s gross sales before discounts, returns and allowances were $27,001,717 and $29,995,729, respectively. Gross sales derived from foreign countries were approximately $3,516,000 and $3,639,000 in the fiscal years ended March 31, 2008 and 2007, respectively. These sales represent 13% and 12% of gross sales in the fiscal years ended March 31, 2008 and 2007, respectively. Gross sales are attributed to individual countries based on the customer’s shipping address. The Company does not have assets located outside of the United States.
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The following table sets forth the percentage of foreign gross sales to each country, which accounted for 5% or more of the Company’s foreign gross sales for the fiscal years ended March 31, 2008 and 2007:
* The sales to foreign countries for the fiscal years ended March 31, 2007, have been restated to remove sales to Puerto Rico and the US controlled Virgin Islands. Sales to Puerto Rico and the US controlled Virgin Islands are now considered domestic sales.
For the fiscal year ended March 31, 2008, the Company had one customer that accounted for approximately 16% of gross sales. There were no customers whose balance outstanding was greater than 10% of gross trade receivables as of March 31, 2008.
For the fiscal year ended March 31, 2007, the Company had one customer that accounted for approximately 13% of gross sales. As of March 31, 2007, the customer owed the Company approximately $430,000 or 10% of the Company’s gross trade receivable balance.
The Company purchased $14,658,000 of products from one supplier totaling approximately 98% of total raw material purchases for the fiscal year ended March 31, 2008. For the fiscal year ended March 31, 2007, the Company purchased $15,579,000 of products from one supplier totaling approximately 98% of total 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. Currently, the Company matches 100% on the first 1% of an employee’s annual salary and 50% on the next 5% that is contributed by an employee to their 401(k) plan. There is no employer matching on the portion of employee contributions that exceed 6% of their annual salary. Company contributions to the plan amounted to $50,832 and $41,711 for the fiscal years ended March 31, 2008 and 2007, respectively.
(16) Quarterly Operating Results (Unaudited)
Unaudited quarterly operating results are summarized as follows:
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ITEM 9A(T).
ITEM 9A(T). CONTROLS AND PROCEDURES
Management is responsible for the preparation of our financial statements and related information. Management uses its best judgment to ensure that the financial statements present fairly, in material respects, our financial position and results of operations in conformity with generally accepted accounting principles.
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Under the supervision of management, including the Chief Executive Officer ("CEO") and the Chief Financial Officer ("CFO"), we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control -- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission published in 1992 and subsequent guidance prepared by the Commission specifically for smaller public companies. Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of March 31, 2008.
Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that accurately and fairly reflect, in reasonable detail, transactions and dispositions of assets; and provide reasonable assurances that: (1) transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States; (2) receipts and expenditures are being made only in accordance with authorizations of management and the directors of our Company; and (3) unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements are prevented or timely detected.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
This annual report does not include an attestation report of Cross Fernandez Riley LLP, our registered public accounting firm regarding internal control over financial reporting. Management's Report was not subject to attestation by the company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only Management's Report in this annual report.
There have been no changes in our internal control over financial reporting that occurred during our first fiscal quarter that have materially affected or are reasonably likely to affect our internal control over financial reporting.
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PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The following table sets forth the current directors, executive officers and significant employees of our Company as of June 26, 2008, as well as their respective ages and positions with our Company:
Name
Age
Positions
David H. Lipka
Director, Chairman of the Board of Directors
Michael E. Broll
Director, Chief Executive Officer
Peter J. Jungsberger
Director
Robert S. Mohel
Director, Chairman of the Audit Committee
Salvatore J. Furnari
Chief Financial Officer
John W. Jackson
Senior Vice President of Global Sales
Thomas J. Perno
Vice President of Contract Manufacturing
Kulbir Sabharwal
Vice President of Technical Services
Hilary Cullen
Vice President of Marketing
The Board of Directors (the “Board”) is comprised of the four members. Three of the four directors are non-employee directors. The Chairman of the Board and the directors hold office until the next Annual Meeting of Stockholders and until their successors have been duly elected and qualified. The executive officers of Galaxy are elected annually at the first Board meeting following the Annual Meeting of Stockholders, and hold office until their respective successors are duly elected and qualified, unless sooner displaced. There are no family relationships between any of our directors and executive officers. All of the executive officers devote their full time to the operations of Galaxy.
Since January 2006, the Board has been fulfilling the function of the audit committee, compensation committee and nominating committee. Any issues that arise are addressed by the independent directors or the entire Board, as necessary.
Directors
David H. Lipka spent forty years (1955-1995) with DCA Food Industries Inc., an international manufacturer of food ingredients and equipment with combined sales in excess of $1 billion per annum, holding positions of President, Chief Executive Officer, and Chief Operating Officer. Since 2001, Mr. Lipka served on the Board of Directors of Doctor's Associates Inc. (Subway Stores) and has served on numerous boards including Corinthian Capital Partners LLC (2006-current), Dunkin Donuts Inc. (1989-1994), Allied-Lyons Inc. (1988-1994), and Kerry Group PLC (1995-1996). Mr. Lipka has also been Chairman and Chief Executive Officer of Pennant Foods and Leons Baking Company. He obtained a B.S. degree from Brooklyn College and attended the Graduate School of Business at New York University. Since December 2002, Mr. Lipka has agreed to serve as a director of Galaxy at the request of Frederick A. DeLuca, a beneficial owner of more than 50% of our common stock. Both Mr. Lipka and Mr. DeLuca are members of the Board of Directors of Doctor’s Associates Inc.
Michael E. Broll was appointed as a director of Galaxy in December 2003 and as Chief Executive Officer of Galaxy in July 2004. Mr. Broll has been a private investor and consultant in the food industry, and was President and Chief Executive Officer, from 1999 to 2002, of Chef Solutions Inc., a subsidiary of Lufthansa Service Group (“LSG”). Chef Solutions Inc specialized in providing convenient baked foods and prepared meals to food service and retail segments of the food industry. As an executive of SCIS/Sky Chef’s a subsidiary of ONEX Corporation, a Canadian based private equity group, Mr. Broll assembled a group of six companies in the bakery and prepared food business to ultimately form and merge into a one new entity called Chef Solutions Inc., an ONEX controlled company. Chef Solutions Inc. was subsequently sold to LSG in 2001. Mr. Broll's career also includes major executive assignments with Allied-Domecq Retailing as the head of its total supply chain for North America from 1997 to 1999, Ready Pac Produce, Inc. as President and Chief Operating Officer
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from 1995 to 1997, Nestle USA as the head of all supply chains for the chilled food group in North America from 1993 to 1995, and Pillsbury Company as Vice President of Operations for the bakery group supply chain from 1991 to 1993. Mr. Broll received his B.S. in Economics from the University of Illinois in 1978.
Peter J. Jungsberger is an independent investor, consultant and entrepreneur with many years of experience in the food industry. From October 2003 to November 2004, he worked with the management of Fresh Pack Foods, Inc. in product development, the restructuring of deli departments, and obtaining contracts with a major grocery chain and manufacturers involving fresh food and whole meal replacement products. From May 2003 to January 2006, Mr. Jungsberger developed and marketed whole meal products to Winn Dixie under a contract with Futuristic Foods, Inc. He served as Senior Vice President of Sales at SCIS Food Services, Inc. / Chef Solutions, Inc. from May 2002 through January 2003, where he increased revenues and realized significant savings through a realignment of the sales force, route consolidation, the implementation of second-tier distribution networks, and the facilitation of a national presence. Mr. Jungsberger was also founder and Chief Executive Officer of Landau Foods, an innovative company producing high quality meal solution products for the retail and food service markets, from 1984 until the company was sold to SCIS Food Services in 2002. Mr. Jungsberger was appointed as a director of Galaxy in August 2006.
Robert S. Mohel, C.P.A., has been a practicing accountant since September 1975. He has been a partner with the Certified Public Accounting firm of Mohel, Elliott, Bauer & Gass CPA’s, P.A. since 1980. He has extensive experience in auditing, tax, structural finance and general accounting. Mr. Mohel is a member of the American Institute of Certified Public Accountants and the New Jersey Society of Certified Public Accountants. Mr. Mohel received his B.S. in Business Administration from Babson College in Wellesley, MA in 1975. Mr. Mohel was appointed as a director of Galaxy in August 2006.
Executive Officers
Salvatore J. Furnari, CPA was appointed as our Chief Financial Officer in July 2002. From November 2001 until July 2002, Mr. Furnari served as our Controller. Prior to joining Galaxy, Mr. Furnari was Corporate Controller and Treasurer of Pritchard Industries, Inc., a national commercial cleaning company. From 1998 through 1999, he served as Chief Financial Officer and Vice President of Finance for Garage Management Corporation; and from 1993 until 1998, he was Chief Financial Officer of American Asset Corporation. Mr. Furnari received his B.S. in Accounting from Queens College in New York City in May 1987.
John W. Jackson has worked in our sales department since 1993 and is currently the Senior Vice President of Global Sales for Galaxy. From 1985 through 1992, Mr. Jackson was director of sales for H.J. Heinz Company. Mr. Jackson received his B.S. in Business Administration and Accounting from Mars Hill College in 1980.
Significant Employees
Thomas J. Perno has worked for Galaxy since 1983. He began as a Shipping and Receiving Supervisor, he was later promoted to Plant Manager and then to Vice President of Operations. In December 2006, his position changed to Vice President of Contract Manufacturing. Mr. Perno received his M.S. in Electrical Engineering from Penn State University in 1976.
Kulbir Sabharwal has been Vice President of Technical Services for Galaxy since 1991. Dr. Sabharwal worked as the Director of Research and Quality Control for Gilardies Frozen Foods from 1987 to 1990 and for Fisher Cheese Company from 1972 to 1986. Dr. Sabharwal received his Ph.D. in Food Science and Nutrition from Ohio State University in 1972.
Hilary Cullen was named Vice President of Marketing in May 2007. Ms. Cullen has worked for Galaxy since 2005. Previously, she was Product Manager in the Kitchen Division at The Holmes Group, based in Massachusetts, where she managed a variety of new product development projects for brand re-launch and
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spearheaded packaging, sales collateral and marketing activities related to the repositioning of key brands. Ms. Cullen has extensive experience with market research, including focus groups and one-on-one interviews. Before joining The Holmes Group, she was Product Manager at Webster Industries. Ms. Cullen obtained a B.S. in Business Management and Marketing from Cornell University in 1995 and earned an M.B.A from the F.W. Olin Graduate School of Business at Babson College in 2001.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our executive officers, directors and persons who own more than 10% of a registered class of our equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission (“SEC”). Officers, directors and stockholders owning more than 10% of our common stock are required by SEC regulations to provide our Company with copies of all the reports they file pursuant to Section 16(a).
Based solely upon our review of those reports required by Section 16(a) and filed by or on behalf of our officers, directors and stockholders owning greater than 10% of our common stock, or written representations that no such reports were required to be submitted by such persons, we believe that during the fiscal year ended March 31, 2007, all of the officers, directors and stockholders owning greater than 10% of our common stock complied with all applicable Section 16(a) filing.
Code of Ethics
We have adopted a Code of Ethics as defined in Item 406 of Regulation S-K promulgated under the Securities Act of 1933, as amended, which code applies to all of our directors and employees, including our principal executive officer, principal financial officer, principal accounting officer and persons performing similar functions. Additionally, we have adopted corporate governance guidelines and charters for our Audit and Compensation Committees. All of these materials are available free of charge on our website at www.galaxyfoods.com or by requesting a copy by writing to: Corporate Secretary, Galaxy Nutritional Foods, Inc. 5955 T.G. Lee Boulevard, Suite 201, Orlando, FL 32822.
Committees of the Board
Since January 2006, the Board maintains no separate standing committees. The functions of the audit committee, compensation committee and nominating committee are being carried out by the entire Board. Any issues that arise are addressed by the independent directors or the entire Board, as necessary. All directors were present for at least 75% of any meetings requiring functions of the committees.
On November 15, 2004, the Board determined that it would not establish a formal nominating committee and it adopted certain procedural guidelines for director nominations. All directors participate in the consideration and selection of director nominees. There have been no material changes to these procedures since their adoption in fiscal 2005.
The Board has adopted corporate governance guidelines and charters for its audit and compensation committee functions and a code of business conduct and ethics that applies to the members of its Board. All of these materials may be acquired free of charge by requesting a copy by writing to: Corporate Secretary, Galaxy Nutritional Foods, Inc. 5955 T.G. Lee Blvd., Suite 201, Orlando, FL 32822 or visiting Galaxy’s website at www.galaxyfoods.com.
Audit Committee
The functions of the audit committee are being carried out by the entire Board. Any issues that arise are addressed by the independent directors or the entire Board, as necessary. On August 17, 2006, the Board resolved that when the Board acts in the capacity of the audit committee, Mr. Robert S. Mohel, an independent
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director, would serve as the Audit Committee Chairman. Mr. Mohel was determined to be an "audit committee financial expert" within the meaning of the SEC regulations based on his experience as a practicing Certified Public Accountant.
Compensation Committee
Since January 2006, the Board has been operating without a formal compensation committee. Any issues that arise are addressed by the independent directors or the entire Board, as necessary. The Board evaluates and determines compensation for the Chief Executive Officer and then grants the Chief Executive Officer discretionary authority to evaluate and determine compensation for the other employees of Galaxy.
Nominating Committee
On November 15, 2004, the Board determined that it would not establish a formal nominating committee and it adopted certain procedural guidelines for director nominations. All directors participate in the consideration and selection of director nominees. There have been no material changes to these procedures since their adoption in fiscal 2005.
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ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
As of June 26, 2008, we do not have a compensation committee, and as such, our Board is responsible for determining our compensation program.
Compensation Program Objectives
Our Board determines the compensation program provided to our Chief Executive Officer in its sole discretion. The Chief Executive Officer then determines the compensation provided to other executive officers and employees of Galaxy. Our executive compensation program is designed to attract and retain talented executives to meet our short-term and long-term business objectives with a package that is fair and equitable to all parties involved. In doing so, we attempt to align our executives' interests with the interests of our stockholders by providing an adequate compensation package to such executives. This executive compensation package typically includes a (i) base salary, which we believe is competitive with other companies of our relative size; (ii) performance bonuses, (iii) stock options or stock awards; (iv) auto allowances; and (v) other standard employee benefits. In December 2007, the Board also adopted a 2007 Stay, Severance and Sales Bonus Plan (“the Plan”).
Base Salary
The base salary component of our compensation program is intended to compensate our senior executives for their job responsibilities and allows us to attract and retain top talent, consistent with our objectives. Base salaries are reviewed annually by the Board. Adjustments are made based on the qualifications and experience of the executive, the performance of the executive, recommendations from the Chief Executive Officer for all executives except himself and the performance of Galaxy. The Board separately reviews the performance of the Chief Executive Officer, as described above, and makes adjustments as warranted.
Performance Bonuses
Annual bonuses are largely based on Galaxy’s and executive performance. Currently, there are no specific strategic, financial and operating performance measures upon which the performance bonus is calculated. Rather the Board reviews the financial condition of Galaxy along with the performance of the executive during the year and recommends a bonus amount or pool that can be distributed among the employees. The Board recommended a bonus pool up to $300,000 for the fiscal year ended March 31, 2008. After all performance reviews were complete, the actual amount distributed was $223,470.
Stock Options or Stock Awards
We grant certain options to our executive and non-executive employees and directors as part of our compensation package. This package may include short-term and long-term stock-based compensation to certain executives which is intended to align the performance of our executives with our short and long-term business strategies. Typically, stock options are issued with an exercise price at or above the current market value of our common stock. Accordingly, they have minimal current value. However, there is consideration related to the fact that the option has the potential for an appreciated future value. As such, the future value may be the most significant factor of the option. We value the future value of our option and stock awards in accordance with SFAS 123R using the Black-Scholes option-pricing model. We believe that the direct or potential ownership of stock will also provide incentive to our executives to be mindful of the perspective of Galaxy’s stockholders. There were no options issued during the fiscal year ended March 31, 2008.
Auto Allowances
We often grant standard auto allowances to our executive and non-executive employees as part of our compensation package. These allowances are to cover the executive’s auto expenses related to their job function, but may entail a personal use element which is reported as taxable income at year-end.
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Other Standard Employee Benefits
Galaxy offers competitive health, dental, life and disability insurance packages to all our employees. Additionally, we offer 100% employer matching on the first 1% of an employee’s annual salary and 50% employer matching on the next 5% that is contributed by an employee to their 401(k) plan. There is no employer matching on the portion of employee contributions that exceed 6% of their annual salary. We offer these employee benefits to all of our employees to provide security and a level of protection that will enable the employees to work without having the distraction of having to manage undue risk. The health insurance also provides access to preventative medical care which may contribute to the overall well being of the employee by helping the employee function at a high energy level and manage job related stress. We believe these employee benefits lead to enhanced job performance by our employees.
Additionally, our executive and certain non-executive employees receive other de-minimus employee benefits such as cell phones and computers that are directly related to job functions but may contain a personal use element. These de-minimus benefits are considered to be a goodwill gesture that contributes to enhanced job performance.
2007 Stay, Severance and Sales Bonus Plan
Galaxy has a Plan to provide incentives and protections to certain key executives and directors in connection with a possible sale of Galaxy. The Plan provides for a stay bonus pool up to $475,000 to be paid following Galaxy’s receipt of a definitive purchase offer (as defined in the Plan) upon the earlier of the consummation of a sale of Galaxy pursuant to such purchase offer or the termination of the purchase offer (other than as a result of a breach by Galaxy). The stay bonus pool is to be paid $125,000 to David H. Lipka (our Chairman) and $100,000 to Michael E. Broll (our Chief Executive Officer). The remaining $250,000 of the stay bonus pool is currently unallocated and may be granted to other key executives at the discretion of Messrs Lipka and Broll. The Plan also provides for a severance bonus of $125,000 to be paid to Mr. Lipka and $100,000 to be paid to Mr. Broll in the event their positions are terminated other than for Cause (as defined in the Plan) or they resign within one year after the consummation of a sale of Galaxy. Finally, the Plan provides for a sales bonus pool to be determined based on a range of selling prices and paid upon the consummation of a sale of Galaxy. The minimum sales bonus pool will be $250,000 if the sale is in excess of a specified minimum sales target and will increase up to a maximum of 1.8% of the total sales price. The sales bonus pool will be allocated 55.5% to Mr. Lipka and 44.5% to Mr. Broll.
Compensation of Management
Employment Agreements
Michael E. Broll. On July 8, 2004, Michael E. Broll was appointed as our Chief Executive Officer. We entered into a one-year employment agreement with Mr. Broll pursuant to which Mr. Broll is entitled to receive an annual base salary plus a performance bonus at the discretion of the Board, standard health benefits, a housing allowance up to $3,500 per month and an auto allowance of $1,500 per month. Mr. Broll was awarded a discretionary cash bonus of $60,000 and $75,000 in the fiscal years ended March 31, 2008 and 2007. Effective April 1, 2007, the Board increased Mr. Broll’s annual base salary from $200,000 to $240,000. Effective April 1, 2008, the Board increased Mr. Broll’s annual base salary to $249,600. 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 subject to normal payroll deductions payable at the option of Galaxy in a lump sum or over a period of one year. Upon a merger or sale of Galaxy, we may assign our rights and obligations under the agreement to the successor or purchaser. Pursuant to a third amendment to Mr. Broll’s employment agreement, if he resigns within six months after a sale of Galaxy, he would also be entitled to receive one year of his base salary subject to normal payroll deductions payable at the option of Galaxy in a lump sum or over a period of one year. We estimate that a termination obligation for Mr. Broll would be approximately $249,600 plus the employer portion of payroll taxes using the current salary rates in effect as of April 1, 2008. In accordance with a 2007 Stay, Severance and Sales Bonus Plan, Mr. Broll is entitled to receive (1) a stay bonus of $100,000 to be paid
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following Galaxy’s receipt of a definitive purchase offer (as defined in the Plan) upon the earlier of the consummation of a sale of Galaxy pursuant to such purchase offer or the termination of the purchase offer (other than as a result of a breach by Galaxy);(2) a $100,000 severance bonus in the event his position is terminated or he resigns within one year after the consummation of a sale of Galaxy; and (3) 44.5% of a sales bonus pool to be determined based on a range of selling prices to be paid upon the consummation of a sale of Galaxy. The minimum sales bonus pool will be $250,000 if the sale is in excess of a specified minimum sales target and will increase up to a maximum of 1.8% of the total sales price.
Salvatore J. Furnari. On November 11, 2001, Mr. Furnari was appointed as Controller and on July 8, 2002, he was appointed as our Chief Financial Officer. Under the terms of his employment agreement, which has no stated end, he will receive an annual base salary plus standard health benefits and an auto allowance of $1,500 per month. Mr. Furnari was awarded a discretionary cash bonus of $20,000 and $29,500 in the fiscal years ended March 31, 2008 and 2007. Effective April 1, 2007, Mr. Furnari’s annual base salary increased to $149,350. Effective April 1, 2008, Mr. Furnari’s annual base salary increased to $155,324. In the event Mr. Furnari’s employment is terminated without cause or his position as Chief Financial Officer and responsibilities change without his consent, he will be entitled to receive one year of his base salary, vacation pay, auto allowance and health benefits as severance subject to normal payroll deductions over a period of one year. Additionally, if there is a change of control, any unvested stock options would become immediately and fully vested. We estimate that a termination obligation for Mr. Furnari would be approximately $203,371 plus the employer portion of payroll taxes using the current salary, auto and benefit rates in effect as of April 1, 2008.
John W. Jackson. In August 1993, Mr. Jackson was appointed as Senior Vice President of Global Sales. Mr. Jackson’s employment agreement has no stated end and provides for a base salary plus an auto allowance of $1,500 per month. Mr. Jackson is also entitled to a bonus that shall not exceed 40% of his base salary based on certain personal and Galaxy goals as established by our Chief Executive Officer. Mr. Jackson was awarded a discretionary cash bonus of $12,000 and $15,000 in the fiscal years ended March 31, 2008 and 2007. Effective April 1, 2007, Mr. Jackson’s annual base salary increased to $149,247. Effective April 1, 2008, Mr. Jackson’s annual base salary increased to $155,217. In the event of a change in ownership of Galaxy which results in his termination, Mr. Jackson will be entitled to receive three years of his base salary as severance. In the event Mr. Jackson’s employment is otherwise terminated, he is entitled to receive one year of his base salary as severance. We estimate that a termination by Galaxy, other than relating to a change of ownership, would result in a termination obligation for Mr. Jackson of approximately $155,217 plus the employer portion of payroll taxes using the current salary rates in effect as of April 1, 2008. In the event of a change of ownership that results in a termination, we estimate that a termination obligation for Mr. Jackson would be approximately $465,651 plus the employer portion of payroll taxes using the current salary rates in effect as of April 1, 2008.
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation during the fiscal years ended March 31, 2008 and 2007 paid to the following individuals (each, a “Named Executive Officer”): (i) all individuals serving as our Principal Executive Officer (“PEO”) during the last fiscal year (ii) our two other most highly compensated executive officers who were serving as executive officers as of March 31, 2008; and (iii) up to two additional individuals for whom disclosure would have been provided pursuant to clause (ii) above, but for the fact that the individual was not serving as an executive officer at the end of the last completed fiscal year. However, in the cases of clauses (ii) and (iii) above, no disclosure is provided for any individual whose total annual compensation does not exceed $100,000.
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(1)On July 8, 2004, Michael E. Broll, a member of our Board, was appointed as our Chief Executive Officer. We entered into a one-year employment agreement with Mr. Broll pursuant to which Mr. Broll is entitled to receive an annual base salary plus a performance bonus at the discretion of the Board, standard health benefits, a housing allowance up to $3,500 per month and an auto allowance of $1,500 per month. Mr. Broll was awarded a discretionary cash bonus of $60,000 and $75,000 in the fiscal years ended March 31, 2008 and 2007, respectively. Effective April 1, 2007, the Board increased Mr. Broll’s annual base salary from $200,000 to $240,000. Effective April 1, 2008, the Board increased Mr. Broll’s annual base salary to $249,600.
(2)On August 17, 2006, we granted Mr. Broll an option to purchase 100,000 shares of our common stock at an exercise price of $0.44 per share, which is equal to 110% of the closing market price on the date of grant. This option is fully vested and exercisable with an expiration date of August 17, 2011. This option was not issued under any stockholder approved Equity Incentive Plan. We estimated the fair value of the option award to be $18,000 in accordance with SFAS 123R using the assumptions disclosed in Note 1 of our Financial Statements.
(3)During the fiscal year ended March 31, 2008, Mr. Broll received an auto allowance of $18,000 plus a housing allowance of $19,437 plus an employer match on his 401(k) contributions in the amount of $3,572. During the fiscal year ended March 31, 2007, Mr. Broll received an auto allowance of $18,000 plus a housing allowance of $31,946.
(4)On July 8, 2002, Salvatore J. Furnari was appointed Chief Financial Officer of our Company. From November 2001 to July 8, 2002, he worked as our Controller. Mr. Furnari is entitled to receive an annual base salary plus an auto allowance of $1,500 per month. Effective April 1, 2007, Mr. Furnari’s annual base salary increased from $145,000 to $149,350. Effective April 1, 2008, Mr. Furnari’s annual base salary increased to $155,324. Mr. Furnari was awarded a discretionary cash bonus of $20,000 and $29,500 in the fiscal years ended March 31, 2008 and 2007, respectively.
(5)During the fiscal year ended March 31, 2008, Mr. Furnari received an auto allowance of $18,000 plus an employer match on his 401(k) contributions in the amount of $4,972 plus compensation for unused vacation time of $3,446. During the fiscal year ended March 31, 2007, Mr. Furnari received an auto allowance of $18,000 plus compensation for unused vacation time of $4,740.
(6)Effective April 1, 2004, John W. Jackson’s employment agreement provides for an annual base salary plus an auto allowance of $1,500 per month. Effective April 1, 2007, Mr. Jackson’s annual base salary increased from $144,900 to $149,247. Effective April 1, 2008, Mr. Jackson’s annual base salary increased to $155,217. Mr. Jackson was awarded a discretionary cash bonus of $12,000 and $15,000 in the fiscal years ended March 31, 2008 and 2007, respectively.
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(7)During the fiscal year ended March 31, 2007, Mr. Jackson allowed an option to purchase 7,143 shares at an exercise price of $2.05 expire, unexercised on its expiration date of May 16, 2006. There was no compensation expense previously calculated on the award that was granted in 1996, since awards made to employees were valued under the recognition and measurement principles of APB 25 as further detailed in Note 1 of our Financial Statements.
(8)During the fiscal year ended March 31, 2008, Mr. Jackson received an auto allowance of $18,000 plus an employer match on his 401(k) contributions in the amount of $5,486 plus compensation for unused vacation time of $2,583. During the fiscal year ended March 31, 2007, Mr. Jackson received an auto allowance of $18,000 plus an employer match on his 401(k) contributions in the amount of $4,351.
(9)Other than the information described in the footnotes above, there were no other annual compensation, perquisites or other personal benefits, securities or property greater than $10,000 paid to or on behalf of the Named Executive Officers. The employer portion of health benefits paid on behalf of the Named Executive Officers are not included in the Summary Compensation Table as they are generally available to all salaried employees.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
(1)These options were not issued under any stockholder approved Equity Incentive Plan.
(2)These options were not issued under any stockholder approved Equity Incentive Plan, but were later individually approved by the stockholders on September 30, 2003.
(3)These options were issued under our Company’s 1996 Stock Plan, as amended, that was approved by the stockholders in 1996 and 2001.
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DIRECTOR COMPENSATION
The following table sets forth the compensation paid to directors during the fiscal year ended March 31, 2008:
(1)Mr. David H. Lipka’s receives $120,000 per year as compensation in his capacity as Chairman of the Board. Due to the amount of compensation paid, Mr. Lipka is no longer considered an “independent” director within the meaning of applicable securities regulations. Additionally, Mr. Lipka was awarded a bonus of $10,000 for the fiscal year ended March 31, 2008.
(2)Each independent director who served on the Board during the fiscal year ended March 31, 2008 was entitled to receive an annual retainer of $10,000 plus $1,500 for each in-person Board meeting day they attended plus expenses. There were two in-person Board meetings during the fiscal year ended March 31, 2008. The independent directors who served during the fiscal year ended March 31, 2008 were Mr. Jungsberger and Mr. Mohel.
(3)Mr. Robert S. Mohel receives $3,000 per quarter for his services as chairman of the audit committee.
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ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Equity Compensation Plan Information
The following table describes our compensation plans under which our common stock is authorized for issuance as of March 31, 2008:
Equity Compensation Plan Information Table
(1)
These securities were issued pursuant to individual compensation arrangements prior to July 2, 1997 or after December 15, 2003 and have not been approved by security holders.
Security Ownership of Certain Beneficial Owners
The following table describes the beneficial ownership of our common stock by each person or entity known to our Company to be the beneficial owner of more than 5% of the outstanding shares of our capital stock outstanding as of June 26, 2008. 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.
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(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 June 26, 2008 is 17,110,016. 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 such date.
(3)
Pursuant to a Note Purchase Agreement dated July 19, 2006 as amended on March 14, 2007, we issued a new unsecured convertible note for $2,685,104.17 (the “Note”) to Mr. DeLuca. No interest or principal payments are required under the Note until its maturity on October 19, 2008. Principal, together with any accrued and unpaid interest, on the Note is convertible at any time into shares of our common stock at a conversion price of $0.35 per share. Assuming Mr. DeLuca converted the Note and the accrued but unpaid interest thereon as of June 26, 2008, he would be entitled to receive 9,555,028 shares of our common stock. Includes a warrant to acquire 200,000 shares of our common stock at $0.35 per share, expiring on July 19, 2009. Includes a warrant to acquire 300,000 shares of our common stock at $1.53 per share, expiring on October 17, 2008. The information is based on a Schedule 13D/A filed with the SEC on February 28, 2008. Mr. DeLuca has direct beneficial ownership of and has sole voting and investment dispositive power over all the reported shares.
(4)
Includes options to acquire 2,175,125 shares of our common stock, which are currently exercisable at prices ranging from $0.44 to $4.40 per share. Options expire as to 1,357,000 shares on June 15, 2009, as to 343,125 on December 15, 2010, as to 375,000 on April 19, 2011 and as to 100,000 on August 17, 2011. 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.
(5)
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) each Named Executive Officer, (ii) each director, and (iii) all of our directors and executive officers as a group, outstanding as of June 26, 2008. 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:
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(1)
The inclusion herein of any shares deemed beneficially owned does not constitute an admission of beneficial ownership of these shares. Each of these persons may be contacted at our Company address of 5955 T.G. Lee Boulevard, Suite 201, Orlando, Florida 32822.
(2)
The total number of shares of our common stock outstanding as of June 26, 2008 is 17,110,016. 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 such date.
(3)
Includes currently exercisable options to acquire (a) 100,000 shares of our common stock at $0.44 per share, expiring on August 17, 2011; (b) 225 shares of our common stock at $2.90 per share, expiring on October 1, 2013; (c) 286 shares of our common stock at $1.20 per share, expiring on October 1, 2014; and (d) 286 shares of our common stock at $1.75 per share, expiring on October 1, 2015.
(4)
Includes currently exercisable options to acquire (a) 100,000 shares of our common stock at $0.44 per share, expiring on August 17, 2011; and (b) 200,000 shares of our common stock at $3.29 per share, expiring on December 17, 2008.
(5)
Includes a currently exercisable option to acquire 100,000 shares of our common stock at $0.45 per share, expiring on August 7, 2011.
(6)
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 a currently exercisable option to acquire 70,000 shares of our common stock at $2.05 per share, expiring on October 1, 2014.
(7)
Includes a currently exercisable option to acquire 7,000 shares of our common stock at $1.28 per share, expiring on October 1, 2014. Also, includes currently exercisable options to acquire 89,286 shares of our common stock at $2.05 per share. These options had original exercise prices ranging from $2.84 to $4.40 per share, but were repriced to $2.05 on October 11, 2002. Options expire as to 14,286 shares on September 24, 2008 and as to 75,000 shares on April 19, 2011.
Change in Control
Pursuant to a Note Purchase Agreement dated July 19, 2006, we issued a new unsecured convertible note for $2,685,104 (the “Convertible Note”) to Mr. Frederick DeLuca. The Convertible Note accrues interest at 12.5% per annum. No interest or principal payments are required under the Convertible Note until its maturity. Principal, together with any accrued and unpaid interest, on the Convertible Note is convertible at any time prior to payment into shares of our common stock at a conversion price of $0.35 per share. Pursuant to a Note Modification Agreement dated March 14, 2007, Galaxy and Mr. DeLuca agreed to extend the maturity date of the Convertible Note from October 19, 2007 to October 19, 2008. All other terms of the Convertible Note remain the same.
Mr. DeLuca’s total “beneficial ownership” in our Company, within the meaning of the Securities Exchange Act of 1934 is approximately 52%. The calculation of “beneficial ownership” assumes, among other things, that Mr. DeLuca converts the entire amount of principal and all accrued interest on the Note through October 19, 2008 into an aggregate of 9,861,364 shares and exercises all of his currently outstanding warrants into 500,000 shares of our common stock.
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ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Transactions with Related Persons
Transactions with Officers and Directors
There are no transactions with Officers and Directors other than as a result of their employment or Board service relationship with our Company.
Indebtedness of Management
In June 1999, in connection with an amended and restated employment agreement for Angelo S. Morini, we consolidated two full-recourse notes receivable ($1,200,000 from November 1994 and $11,572,200 from October 1995) related to his purchase of 2,914,286 shares of our common stock into a single stockholder note receivable in the amount of $12,772,200 that was due on June 15, 2006. This stockholder note receivable was non-interest bearing and non-recourse and was secured by the 2,914,286 shares of our common stock (the “Shares”).
For the fiscal year ended March 31, 2006, we reserved $10,120,200 against this stockholder note receivable under the assumption that we would not be able to collect proceeds in excess of the $2,652,000 value of the Shares as of such date. The value of the Shares was computed using the closing price of our common stock on March 31, 2006 of $0.91 multiplied by the 2,914,286 shares.
On June 16, 2006, Mr. Morini failed to repay the non-recourse note obligation to Galaxy. On June 20, 2006, we delivered notice to Mr. Morini that we intended to exercise our rights to the Shares and retain all the Shares in full satisfaction of his obligations under the stockholder note receivable. On July 6, 2006, Mr. Morini consented to our acceptance of the Shares in full satisfaction of his obligations under the stockholder note receivable. Based upon the $0.42 closing price of our common stock as quoted on the OTC Bulletin Board on June 16, 2006, the Shares had an approximate value of $1,224,000 on such date. Accordingly, we recorded an additional expense of $1,428,000 in the fiscal year ended March 31, 2007 in order to record the additional decline in the value of the Shares from its $2,652,000 value as of March 31, 2006. In July 2006, we cancelled the Shares along with 30,443 other treasury shares.
Transactions with Others
Frederick A. DeLuca, greater than 20% Common Stockholder
Pursuant to a Note Purchase Agreement dated July 19, 2006, we issued a new unsecured convertible note for $2,685,104 (the “Convertible Note”) to Mr. Frederick DeLuca. The proceeds from the Convertible Note were used to repay or refinance $2.4 million in notes that matured on June 15, 2006 and a $285,104 registration rights penalty owed to Mr. DeLuca. The Convertible Note accrues interest at 12.5% per annum. No interest or principal payments are required under the Convertible Note until its maturity. Principal, together with any accrued and unpaid interest, on the Convertible Note is convertible at any time prior to payment into shares of our common stock at a conversion price of $0.35 per share. The closing market price of our common stock as quoted on the OTC Bulletin Board on July 19, 2006 was $0.28. As additional consideration for making the loan, we issued Mr. DeLuca a warrant (the “Warrant”) to purchase up to 200,000 shares of our common stock at an exercise price equal to $0.35 per share. The Warrant is fully vested and can be exercised on or before the expiration date of July 19, 2009. In July 2006, we recorded the $18,000 fair value of the Warrant as a discount to debt that is being amortized to interest expense from July 2006 through October 2007.
Pursuant to a Note Modification Agreement dated March 14, 2007, Galaxy and Mr. DeLuca agreed to extend the maturity date of the Convertible Note from October 19, 2007 to October 19, 2008. All other terms of the Convertible Note remain the same.
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Pursuant to the Note Purchase Agreement dated July 19, 2006 and the Note Modification Agreement, our Convertible Note together with any accrued and unpaid interest thereon, is convertible at any time prior to payment into shares of our common stock at a conversion price of $0.35 per share. As a result of the convertible features of the Convertible Note, Mr. DeLuca’s ownership in Galaxy may increase from approximately 23% to nearly 52% by October 2008. The calculation of ownership assumes, among other things, that Mr. DeLuca converts the entire amount of principal and all accrued interest on the Convertible Note through October 19, 2008 into an aggregate of 9,861,364 shares and exercises all of his currently outstanding warrants into 500,000 shares of our common stock. The closing price of our common stock on June 26, 2008 as quoted on the OTC Bulletin Board was $0.19 per share. Unless the market price of our common stock increases between now and October 19, 2008, it is unlikely that Mr. DeLuca would choose to convert the Convertible Note and accrued interest thereon at his conversion price of $0.35 per share. If Mr. DeLuca does not choose to convert this Convertible Note into stock and does not extend the maturity date of the Convertible Note, then we will be required to pay principal plus accrued interest thereon in the amount of $3,451,478 on October 19, 2008.
Mr. DeLuca’s has 100% interest in the above transaction. Since December 2002, Mr. Lipka, our Chairman of the Board, has agreed to serve as a director of Galaxy at the request of Mr. DeLuca. Mr. DeLuca has no other transactions with Galaxy other than those described above. Additionally, Mr. DeLuca has no other relationships with Galaxy other than as a note holder and a stockholder.
BC Advisors LLC, greater than 5% Common Stockholder
In October 2005, pursuant to several Note and Warrant Purchase Agreements dated September 28, 2005, we received 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. The combined total of these loans was $600,000. The loans were evidenced by unsecured promissory notes (the “Notes”) held by the above referenced parties (the “Note Holders”). The Notes required monthly interest-only payments at 3% above the bank prime rate of interest per the Federal Reserve Bank and matured 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 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 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 the Note Holders “piggy back” registration rights with respect to the shares underlying the warrants. These shares were registered on December 30, 2005.
We received a letter on June 20, 2006, from all of the Note Holders notifying Galaxy that our failure to pay the amounts due and owing on the maturity date constitutes a default under the Notes held by those Note Holders. Pursuant to the terms of the Notes, since we did not cure the default within 10 days after receipt of the notice of default, we were obligated to pay interest at the default rate of 8% above the Prime Rate beginning July 1, 2006.
Pursuant to a Note Purchase Agreement dated July 19, 2006, we issued the Convertible Note for $2,685,104 to Mr. DeLuca and used the proceeds to repay the Notes during the fiscal year ended March 31, 2007.
BC Advisors LLC has direct beneficial ownership of and has sole voting and dispositive power over all the reported shares of the above referenced Note Holders. Steven R. Becker is the sole principal of BC Advisors LLC. BC Advisors LLC has no other relationships with Galaxy other than as a former note holder and a stockholder.
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Director Independence
Our Board is responsible for overseeing and interacting with senior management with respect to key aspects of our business, including strategic planning, management development and succession, operating performance, compliance and stockholder returns. It is the responsibility of the Board to select and evaluate a well-qualified Chief Executive Officer of high integrity, and to approve the appointment of other members of the senior management team. The Board provides general advice and counsel to our Chief Executive Officer and other senior executives.
As of June 26, 2008, the Board is comprised of the four positions. The current members of the Board are David H. Lipka, Michael E. Broll, Peter J. Jungsberger and Robert S. Mohel.
The Board typically holds regular meetings throughout the year and special meetings are held when necessary. We do not have a policy with regard to directors' attendance at Annual Meetings of Stockholders. However, the members of the Board typically attend the Annual Meeting of Stockholders, unless an emergency prevents them from doing so, and an organizational meeting follows immediately thereafter. All Board members attended the last Annual Meeting of Stockholders held on January 18, 2008. The Board of Directors met eight times during the fiscal year ended March 31, 2008, and each director attended at least 75% of these meetings.
As a company quoted on the OTC Bulletin Board, we are not subject to any independence standards. However, we strive to have a Board comprised of at least 50% independent directors, within the meaning of the applicable NASDAQ rules.
The Board evaluated the relationships and the compensation paid to its directors as detailed above and under ITEM 11. EXECUTIVE COMPENSATION in accordance with its independence standards. Based on this evaluation, the Board considers Mr. Jungsberger and Mr. Mohel to be independent directors. Mr. Broll is not an independent director due to his status as an employee of Galaxy and Mr. Lipka is not an independent director due to his annual compensation of $120,000 for his service as Chairman of the Board.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
On July 18, 2006, the Board selected Cross, Fernandez & Riley, LLP (“CFR”), an independent member of the BDO Seidman Alliance network of firms, as the new independent accountant to audit the registrant’s financial statements. Certain employees of CFR were previously contracted by BDO Seidman, LLP (our former independent accountant) to perform audit work on our Company for the fiscal years ended March 31, 2006 and prior. Other than communications in connection with the audit work performed by CFR for these periods and prior to July 18, 2006, there were no discussions between our Company and CFR regarding the application of accounting principles to specific completed or contemplated transactions, or the type of audit opinion that might be rendered on our financial statements. Furthermore, other than communications in connection with the audit work performed by CFR, no written or oral advice was provided by CFR that was an important factor considered by our Company in reaching a decision as to any accounting, auditing or financial reporting issue. We have not consulted with CFR regarding any matter that was either the subject of a disagreement (as defined in paragraph (a)(1)(iv) of Item 304 of Regulation S-K and the related instructions to this item) or a reportable event (as described in paragraph (a)(1)(v) of Item 304 of Regulation S-K).
Audit Fees
With respect to the fiscal years ended March 31, 2008 and 2007, the aggregate fees (including expenses) charged to our Company by CFR for auditing the annual financial statements and reviewing interim financial statements were $120,650 and $102,690, respectively. Audit fees consist of those fees incurred in connection with statutory and regulatory filings or engagements; fees necessary to perform an audit or review in accordance
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with Generally Accepted Auditing Standards; and services that generally only an independent accountant reasonably can provide, such as comfort letters, statutory audits, attest services, consents and assistance with and review of documents filed with the Securities and Exchange Commission (“SEC”). These fees also include charges for the review and responses to SEC comment letters, accounting research in connection with the audit and audit committee meeting attendance.
Audit-Related Fees
Audit-related fees consist of the fees for auditing our 401k plan, due diligence procedures and research and consultation on proposed transactions. There were no fees for audit-related services charged to our Company by CFR during the fiscal year ended March 31, 2008. During the fiscal year ended March 31, 2007, CFR charged our Company $10,500 for audit-related fees.
Tax Fees
CFR prepared our annual federal and state income tax returns and assisted our Company in some additional tax research. During each of the fiscal years ended March 31, 2008 and 2007, CFR charged our Company $6,750 and $8,767, respectively for these services.
All Other Fees
There were no fees for other services charged to our Company by CFR during the fiscal years ended March 31, 2008 and 2007.
Audit Committee Pre-Approval Policies and Procedures
The Audit Committee's pre-approval policy is as follows:
·
The Audit Committee will review and pre-approve on an annual basis any known audit, audit-related, tax and all other services, along with acceptable cost levels, to be performed by any audit firm. The Audit Committee may revise the pre-approved services during the period based on subsequent determinations. Pre-approved services typically include: statutory audits, quarterly reviews, regulatory filing requirements, consultation on new accounting and disclosure standards, employee benefit plan audits, reviews and reporting on our internal controls and specified tax matters.
·
Any proposed service that is not pre-approved on an annual basis requires a specific pre-approval by the Audit Committee, including cost level approval.
·
The Audit Committee may delegate pre-approval authority to the Audit Committee chairman. The chairman must report to the Audit Committee, at the next Audit Committee meeting, any pre-approval decisions made.
Since January 2006, the Board has been fulfilling the function of the audit committee. On August 17, 2006, the Board resolved that when the Board acts in the capacity of the audit committee, Mr. Robert S. Mohel would serve as the Audit Committee Chairman. Mr. Mohel was determined to be an "audit committee financial expert" within the meaning of the regulations of the Securities and Exchange Commission based on his experience as a practicing Certified Public Accountant. It is the Board's intent that if issues arise that require action be taken by independent directors, those issues will be addressed by the independent directors of the Board as necessary.
The Audit Committee is responsible for approving all engagements to perform audit or non-audit services prior to Company engaging CFR. All of the services under the headings Audit Fees, Audit-Related Fees, Tax Fees,
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and All Other Fees were approved by the Audit Committee pursuant to Rule 2-01 paragraph (c)(7)(i)(C) of Regulation S-X of the Exchange Act.
The Audit Committee considered and determined that CFR’s provision of non-audit services to our Company during the fiscal years ended March 31, 2008 and 2007 is compatible with maintaining their independence.
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PART IV
ITEM 15.
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Financial Statements
The following financial statement documents are filed as part of this Form 10-K:
Balance Sheets at March 31, 2008 and 2007
Statements of Income for the fiscal years ended March 31, 2008 and 2007
Statements of Stockholders’ Deficit for the fiscal years ended March 31, 2008 and
Statements of Cash Flows for the fiscal years ended March 31, 2008 and 2007
Notes to Financial Statements
Exhibits
The following Exhibits are filed as part of this Form 10-K:
Exhibit No Exhibit Description
*3.1
Restated Certificate of Incorporation of the Company as filed with the Secretary of State of the State of Delaware on December 23, 2002 (Filed as Exhibit 3.2 on Form 10-Q for the fiscal quarter ended December 31, 2002.)
*3.2
Amended and Restated Bylaws of Galaxy Nutritional Foods, Inc. dated February 6, 2008 (Filed as Exhibit 3.2 on Form 10-Q for the fiscal quarter ended December 31, 2007.)
*4.26
Asset Purchase Agreement dated June 30, 2005 between Galaxy Nutritional Foods, Inc. and Schreiber Foods, Inc. (Filed as Exhibit 4.25 on Form 8-K filed July 6, 2005.)
*4.27
Warrant to Purchase Securities of Galaxy Nutritional Foods, Inc. dated July 19, 2006 in favor of Frederick A. DeLuca (Filed as Exhibit 4.27 on Form 8-K filed July 25, 2006.)
*10.1
Loan and Security Agreement dated as of May 27, 2003 between Galaxy Nutritional Foods, Inc. and Textron Financial Corporation (Filed as Exhibit 10.1 on Form 8-K filed June 2, 2003.)
*10.2
Patent, Copyright and Trademark Collateral Security Agreement dated as of May 27, 2003 between Galaxy Nutritional Foods, Inc. and Textron Financial Corporation (Filed as Exhibit 10.2 on Form 8-K filed June 2, 2003.)
*10.3
Second Amended and Restated Employment Agreement dated as of October 13, 2003 between Galaxy Nutritional Foods, Inc. and Angelo S. Morini (Filed as Exhibit 10.1 on Form 8-K filed October 20, 2003.)
*10.12
Second Amendment to Loan and Security Agreement dated June 25, 2004 between Galaxy Nutritional Foods, Inc. and Textron Financial Corporation (Filed as Exhibit 10.12 on Form 10-K for the fiscal year ended March 31, 2004.)
*10.13
Third Amendment to Lease Agreement dated June 10, 2004 between Galaxy Nutritional Foods, Inc. and Cabot Industrial Properties, L.P. (Filed as Exhibit 10.13 on Form 10-K for the fiscal year ended March 31, 2004.)
*10.15
Employment Agreement dated July 8, 2004 between Galaxy Nutritional Foods, Inc. and Michael E. Broll (Filed as Exhibit 10.15 on Form 8-K filed July 13, 2004.)
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*10.16
Third Amendment to Loan and Security Agreement dated November 10, 2004 between Galaxy Nutritional Foods, Inc. and Textron Financial Corporation (Filed as Exhibit 10.16 on Form 10-Q for the fiscal quarter ended December 31, 2004.)
*10.17
Fourth Amendment to Loan and Security Agreement dated June 3, 2005 between Galaxy Nutritional Foods, Inc. and Textron Financial Corporation (Filed as Exhibit 10.17 on Form 8-K filed June 22, 2005.)
*10.18
Letter Agreement dated June 17, 2005 between Galaxy Nutritional Foods, Inc. and Textron Financial Corporation (Filed as Exhibit 10.18 on Form 8-K filed June 22, 2005.)
*10.19
Supply Agreement dated June 30, 2005 between Galaxy Nutritional Foods, Inc. and Schreiber Foods, Inc. Portions of the Supply Agreement have been omitted as indicated by asterisks pursuant to a request for confidential treatment in accordance with Section 552(b)(4) of the Freedom of Information Act ("FOIA"), 5 U.S.C. 552(b)(4) (Filed as Exhibit 10.19 on Form 8-K filed July 6, 2005.)
*10.22
Note and Warrant Purchase Agreement dated September 12, 2005 between Galaxy Nutritional Foods, Inc. and Frederick A. DeLuca (Filed as Exhibit 10.22 on Form 8-K filed September 16, 2005.)
*10.23
Note and Warrant Purchase Agreement dated September 28, 2005 between Galaxy Nutritional Foods, Inc. and Conversion Capital Master, Ltd. (Filed as Exhibit 10.23 on Form 8-K filed October 4, 2005.)
*10.24
Note and Warrant Purchase Agreement dated September 28, 2005 between Galaxy Nutritional Foods, Inc. and SRB Greenway Capital, L.P. (Filed as Exhibit 10.24 on Form 8-K filed October 4, 2005.)
*10.25
Note and Warrant Purchase Agreement dated September 28, 2005 between Galaxy Nutritional Foods, Inc. and SRB Greenway Capital (Q.P.), L.P. (Filed as Exhibit 10.25 on Form 8-K filed October 4, 2005.)
*10.26
Note and Warrant Purchase Agreement dated September 28, 2005 between Galaxy Nutritional Foods, Inc. and SRB Greenway Offshore Operating Fund, L.P. (Filed as Exhibit 10.26 on Form 8-K filed October 4, 2005.)
*10.27
First Amendment to Note and Warrant Purchase Agreement dated October 7, 2005 between Galaxy Nutritional Foods, Inc. and Frederick A. DeLuca (Filed as Exhibit 10.27 on Form 10-Q for the fiscal quarter ended September 30, 2005.)
*10.28
Fifth Amendment to Loan and Security Agreement dated November 14, 2005 between Galaxy Nutritional Foods, Inc. and Textron Financial Corporation (Filed as Exhibit 10.28 on Form 10-Q for the fiscal quarter ended September 30, 2005.)
*10.29
Sixth Amendment to Loan and Security Agreement dated May 26, 2006 between Galaxy Nutritional Foods, Inc. and Textron Financial Corporation (Filed as Exhibit 10.29 on Form 8-K filed June 1, 2006.)
*10.30
Receivables Purchase Agreement, together with Addendum, dated June 23, 2006 between Galaxy Nutritional Foods, Inc. and Systran Financial Services Corporation (Filed as Exhibit 10.30 on Form 8-K filed June 29, 2006.)
*10.31
Convertible Note in the principal amount of $2,685,104.17 dated as of July 19, 2006 by Galaxy Nutritional Foods, Inc. in favor of Frederick A. DeLuca (Filed as Exhibit 4.26 on Form 8-K filed July 25, 2006.)
*10.32
Termination Agreement dated July 31, 2006 between Galaxy Nutritional Foods, Inc. and CLP Industrial Properties (Filed as Exhibit 10.32 on Form 8-K filed August 3, 2006.)
*10.33
Non-plan Option to Purchase Securities of Galaxy Nutritional Foods, Inc. dated August 7, 2006 in favor of Peter J. Jungsberger (Filed as Exhibit 10.33 on Form 10-Q for the fiscal quarter ended June 30, 2006.)
Index
*10.34
Non-plan Option to Purchase Securities of Galaxy Nutritional Foods, Inc. dated August 7, 2006 in favor of Robert S. Mohel (Filed as Exhibit 10.34 on Form 10-Q for the fiscal quarter ended June 30, 2006.)
*10.35
Non-plan Option to Purchase Securities of Galaxy Nutritional Foods, Inc. dated August 17, 2006 in favor of David H. Lipka (Filed as Exhibit 10.35 on Form 8-K filed August 21, 2006.)
*10.36
Non-plan Option to Purchase Securities of Galaxy Nutritional Foods, Inc. dated August 17, 2006 in favor of Michael E. Broll (Filed as Exhibit 10.36 on Form 8-K filed August 21, 2006.)
*10.37
Non-plan Option to Purchase Securities of Galaxy Nutritional Foods, Inc. dated August 17, 2006 in favor of Angelo S. Morini (Filed as Exhibit 10.37 on Form 8-K filed August 21, 2006.)
*10.38
Sublease Agreement dated October 3, 2006 between Galaxy Nutritional Foods, Inc. and Oracle Corporation (Filed as Exhibit 10.38 on Form 8-K filed October 10, 2006.)
*10.39
Letter Agreement accepted November 9, 2006 between Galaxy Nutritional Foods, Inc. and Schreiber Foods, Inc. amending the Supply Agreement dated June 30, 2005 between the parties. Portions of the Letter Agreement have been omitted as indicated by asterisks pursuant to a request for confidential treatment in accordance with Section 552(b)(4) of the Freedom of Information Act ("FOIA"), 5 U.S.C. 552(b)(4) (Filed as Exhibit 10.39 on Form 10-Q for the fiscal quarter ended September 30, 2006.)
*10.40
Note Modification Agreement dated March 14, 2007 between Galaxy Nutritional Foods, Inc. and Frederick A. DeLuca (Filed as Exhibit 10.40 on Form 8-K filed March 20, 2007.)
*10.41
Second Amendment to the Employment Agreement dated May 3, 2007 between Galaxy Nutritional Foods, Inc. and Michael E. Broll. (Filed as Exhibit 10.41 on Form 8-K filed May 9, 2007.)
*10.42
First Amendment to Receivables Purchase Agreement dated March 28, 2007 between Galaxy Nutritional Foods, Inc. and Systran Financial Services Corporation (Filed as Exhibit 10.42 on Form 10-K for the fiscal year ended March 31, 2007.)
*10.43
Separation and General Release Agreement dated June 1, 2007 between Galaxy Nutritional Foods, Inc. and Christopher Morini (Filed as Exhibit 10.43 on Form 10-K for the fiscal year ended March 31, 2007.)
*10.44
Third Amendment to the Employment Agreement dated December 10, 2007 between Galaxy Nutritional Foods, Inc. and Michael E. Broll (Filed as Exhibit 10.44 on Form 10-Q for the fiscal quarter ended December 31, 2007.)
*10.45
Stay, Severance and Sales Bonus Plan effective December 10, 2007 (Filed as Exhibit 10.45 on Form 10-Q for the fiscal quarter ended December 31, 2007.)
*10.46
Second Amendment to Supply Agreement dated March 17, 2008 between Schreiber Foods, Inc. and Galaxy Nutritional Foods, Inc (Filed as Exhibit 10.46 on Form 8-K filed March 21, 2008)
*14.1
Code of Ethics (Filed as Exhibit 14.1 on Form 10-K for the fiscal year ended March 31, 2007.)
*20.1
Audit Committee Charter (Filed as Exhibit 20.1 on Form 10-Q for the fiscal quarter ended September 30, 2003.)
*20.2
Compensation Committee Charter (Filed as Exhibit 20.2 on Form 10-Q for the fiscal quarter ended September 30, 2003.)
31.1
Section 302 Certification of our Chief Executive Officer (Filed herewith.)
Index
31.2
Section 302 Certification of our Chief Financial Officer (Filed herewith.)
32.1
Section 906 Certification of our Chief Executive Officer (Filed herewith.)
32.2
Section 906 Certification of our Chief Financial Officer (Filed herewith.)
*
Previously filed and incorporated herein by reference.
Index
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
GALAXY NUTRITIONAL FOODS, INC.
(Registrant)
Date: June 30, 2008 /s/ Michael E. Broll
Michael E. Broll
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: June 30, 2008 /s/ Michael E. Broll
Michael E. Broll
Chief Executive Officer & Director
(Principal Executive Officer)
Date: June 30, 2008 /s/ Salvatore J. Furnari
Salvatore J. Furnari
Chief Financial Officer & Vice President of Finance
(Principal Financial & Accounting Officer)
Date: June 30, 2008 /s/ David H. Lipka
David H. Lipka
Director and Chairman of the Board
Date: June 30, 2008 /s/ Peter J. Jungsberger
Peter J. Jungsberger
Director
Date: June 30, 2008 /s/ Robert S. Mohel
Robert S. Mohel
Director and Chairman of the Audit Committee
Index