Galaxy Nutritional Foods Reports 2nd Quarter 2004 Results and Revised Fiscal 2004 Forecast

ORLANDO, Fla., Nov 14, 2003 /PRNewswire-FirstCall via Comtex/ -- Galaxy Nutritional Foods, Inc. (Amex: GXY), a leading producer of nutritious plant-based dairy alternatives for the retail and foodservice markets, today reported results for its second quarter of fiscal 2004, ended September 30, 2003.

In the quarter ended September 30, 2003, the Company reported a net loss of $228,145 compared to a net income of $732,245 for the quarter ended September 30, 2002. Operating income for the quarter ended September 30, 2003 was $41,927 compared to $1,701,875 for the quarter ended September 30, 2002. The results for the quarter ended September 30, 2003 include a $128,258 expense for non-cash compensation compared to $1,348,089 income for non-cash compensation for the quarter ended September 30, 2002. Excluding the non-cash compensation charges, the $515,957 increase in net income was primarily the result of a substantial decrease in interest expense due to the debt refinancing and restructuring, which was completed in the first quarter of fiscal 2004.

Net loss available to common shareholders after non-cash preferred stock dividends and non-cash preferred stock accretion for estimated redemption value was $933,385, or $0.06 per diluted share for the quarter ended September 30, 2003 versus a net income of $541,545, or $0.04 per diluted share for the quarter ended September 30, 2002.

Net sales were $9,329,907 and $10,062,331 in the quarter ended September 30, 2003 and 2002, respectively, a decrease of $732,424 or 7%. However, the decrease in gross margin was only $15,171 in the quarter ended September 30, 2003 compared to the quarter ended September 30, 2002. The decrease in net sales is primarily due to a reduction in retail grocery sales from fiscal year 2003. Such reduction is mainly a result of management's previous decision to turn away lower margin private label and sandwich slice business in order to reallocate the Company's limited cash resources (prior to the financial restructuring that was completed on May 30, 2003) for production of higher margin "branded" items. While the effect of this decision caused gross sales to diminish, this approach was the key factor that enabled the Company's gross profit to improve 2% in fiscal 2004 compared to fiscal 2003.

Operating cash flow for the quarter ended September 30, 2003 was $949,081 compared to operating cash flow of $186,133 for the quarter ended September 30, 2002. This increase in cash flow in fiscal 2004 was primarily due to a substantial reduction in inventories, in accordance with our adjusted sales forecast.

Since the Company's refinancing is now complete, it has once again begun to pursue strategic private label business, which it previously turned away due to cash constraints. The Company's management has also identified several market factors, which have had a negative effect on the Company's business. First, consumers eating habits are changing with the recent trend toward low- carbohydrate meal preparation during all meals (breakfast, lunch, snack, and dinner). This has put downward pressure on consumption of items such as bread and complimentary products such as cheese slices. Secondly, the number of consumers shopping in the retail grocery stores is down versus the prior year due to the further emergence and presence of Wal*Mart. The Company's product selection is growing but still limited at Wal*Mart. Therefore, the Company's sales growth with this account has not been able to fully counter the decline in retail grocery trends. In response to this change in consumer shopping, the Company is redesigning its products and packaging formats to specifically target the "warehouse" club and mass merchandiser (such as Kmart, Target, and Wal*Mart) markets.

Christopher J, New, Galaxy's CEO, stated, "Our 2nd quarter fiscal 2004 performance was better than expected. We achieved net sales growth of 7% compared to the 1st quarter of fiscal 2004, delivered significant improvement in net income (excluding non-cash compensation), and provided close to $1 million of cash flow from operations. We expect net sales in the third quarter of fiscal 2004 (ending December 31, 2003) to be comparable to the second quarter of fiscal 2004 after incorporating the seasonal reduction on sales and merchandising due to several holidays."

Mr. New went on to say, "Looking forward, we anticipate that the annual net sales for fiscal 2004 will be equal to or up by 5% compared to net sales for fiscal 2003. This revised net sales forecast of a 0% to 5% increase compared to prior expectations of a 10% increase in net sales reflect (a) recent changes in consumers eating and shopping behavior; (b) slower than expected timing for securing private label opportunities; and (c) slower than expected placement of additional points of distribution of the Company's branded items.

"We are still on the right course and will continue implementation of our strategy to achieve greater availability and visibility of our higher margin branded products. Additionally, now that the Company has sufficient resources, management will also focus its efforts toward generating consumer awareness, product trials, and generating more repeat purchases for its brands. Finally, we are actively redeveloping relationships with strategic private-label customers, which will enable the Company to better utilize some of its excess production capacity. These efforts should result in greater operating cash flow and a higher return on invested capital."

About Galaxy Nutritional Foods, Inc.

Galaxy Nutritional Foods is the leading producer of great-tasting, health- promoting plant-based dairy and dairy-related alternatives for the retail and foodservice markets. These phytonutrient-enriched products, made from nature's best grains -- soy, rice and oats -- are low and no fat (no saturated fat and no trans-fatty acids), have no cholesterol, no lactose, are growth hormone and antibiotic free and have more calcium, vitamins and minerals than conventional dairy products. Because they are made with plant proteins, they are more environmentally friendly and economically efficient than dairy products derived solely from animal proteins. Galaxy's products are part of the nutritional or functional foods category, the fastest growing segment of the retail food market. Galaxy brand names include: Galaxy Nutritional Foods(R), Veggie(R), Veggie Nature's Alternative to Milk(R), Veggie Slices(R), Soyco(R), Soymage(R), Wholesome Valley(R), formagg(R), and Lite Bakery(R). For more information, please visit Galaxy's website at

This press release contains "forward-looking" statements within the meaning of the private securities litigation reform act of 1995. Such forward- looking statements involve known and unknown risks, uncertainties, or other factors which may cause actual results, performance or achievements of the company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Readers are cautioned not to place undue reliance on those forward-looking statements, which speak only as of the date hereof. The company undertakes no obligation to release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect unanticipated events or developments.

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