Galaxy Nutritional Foods Reports FY2005 Operating Results

ORLANDO, Fla., July 14, 2005 /PRNewswire-FirstCall via COMTEX/ -- Galaxy Nutritional Foods, Inc. (GXY), a leading producer and marketer of nutritious plant-based dairy alternatives for the retail and foodservice markets, today reported its operating results for FY2005.

For the twelve months ended March 31, 2005, net sales increased 23% to approximately $44.5 million, compared with approximately $36.2 million in FY2004. The increase in net sales primarily reflects higher contract manufacturing (private label) revenues and an increase in sales of Wholesome Valley(R) organic products. Gross profit margin decreased to 22% of sales in FY2005, from 31% in the previous fiscal year, due primarily to higher raw material costs and lower margins on private label business. The average price of casein, a key ingredient in most of the Company's products, increased an average of 32% in FY2005, which cost increase resulted in an increase of approximately $2.7 million in cost of goods sold.

Loss from operations totaled ($3,236,572) in FY2005, versus a loss from operations of ($1,600,567) in FY2004. Operating results for FY2005 included a bad debt provision and inventory write-off of approximately $1.8 million related to a single customer for which Galaxy manufactured private label products. The Company no longer does business with this customer, and in the future Galaxy will instead sell the same or similar products directly to the major mass merchandiser that was the ultimate purchaser of the products previously sold to the private label customer.

The Company reported a net loss to common stockholders of ($4,652,726), or ($0.27) per share, in FY2005, versus a net loss to common stockholders of ($4,504,907), or ($0.30) per share, in FY2004.

"Although our fiscal 2005 operating results suffered due to sharply higher raw materials costs and a large bad debt expense, I believe we have made tremendous progress in terms of positioning Galaxy for a return to profitability and a resumption in growth consistent with our market opportunity," commented Michael E. Broll, Chief Executive Officer of Galaxy Nutritional Foods, Inc. "Our accomplishments during the past twelve months include the elimination of a highly dilutive convertible preferred stock, operating cost reductions, and the recent announcement of an outsourcing agreement with Schreiber Foods that should result in additional cost savings of several million dollars annually."

"We look forward to fiscal 2006 with great optimism," continued Broll. "While the outsourcing of our manufacturing and distribution activities to Schreiber Foods will require some non-recurring expenses in the near term, I am optimistic that an earnings turnaround will be evident during the second half of fiscal 2006 and in future years. Without the cost burden associated with our current production facilities and with a much-strengthened balance sheet, we can focus upon marketing and other activities that can leverage Galaxy's strong brands in the healthy foods marketplace. The recent decision by a major mass merchandiser to purchase our alternative cheese products directly from our Company illustrates the power of our brands, and we intend to greatly expand our visibility within the growing universe of health- conscious consumers in future years."

Results for FY2005 included non-cash compensation expense of $834,746, whereas results for the previous year included non-cash compensation expense of $651,273. Additionally, FY2005 and FY2004 results included employment contract expense of $444,883 and $1,830,329, respectively. Excluding these non-cash compensation and employment contract items, the Company's operating loss, as adjusted (a non-GAAP measure), totaled ($1,956,943) in FY2005, compared with operating income, as adjusted, of $881,035 in FY2004. The decrease in non-GAAP operating income was primarily the result of the reduction in gross margin primarily due to the $2.7 million casein effect mentioned above

EBITDA, as adjusted (a non-GAAP measure), approximated $215,623 in FY2005, compared with EBITDA, as adjusted, of approximately $3.1 million in FY2004. EBITDA, as adjusted, is comprised of net income before interest, taxes, depreciation and amortization, and is exclusive of employment contract expense as well as non-cash compensation related to stock options and warrants.

Cash flow provided by operating activities during FY2005 totaled $779,746, compared with cash flow provided by operating activities of $2,236,350 in FY2004. The decrease in operating cash flow versus the prior-year period was primarily due to higher raw material costs and increased accounts receivables related to higher sales volumes.

In the fourth quarter of FY2005, the Company's sales increased 27% to approximately $10.8 million, compared with approximately $8.5 million in the fourth quarter of the previous fiscal year.

Loss from operations, excluding non-cash compensation and employment contract expense (a non-GAAP measure) totaled ($1,795,835) in the fourth quarter of FY2005, versus operating income, excluding non-cash compensation and employment contract expense, of $428,241 in the corresponding period of the previous fiscal year. The largest factors in the decrease in operating profitability in the fourth quarter of FY2005, when compared with the fourth quarter of FY2004, are the above-mentioned $1.8 million bad debt expense and inventory write-off as well as the higher casein costs in the current fiscal year.

The Company reported a net loss to common stockholders of ($2,545,790), or ($0.14) per share, in the fourth quarter of FY2005, versus net income available to common stockholders of $906,277, or $0.06 per share, in the fourth quarter of FY2004.

Business Outlook for FY2006

The following statements are forward-looking in nature, and actual results may differ materially. Please refer to Galaxy's quarterly and annual reports as filed with the Securities and Exchange Commission (SEC) for a more complete description of risks.

Given no change in the current business or economic environment, the Company expects:

* Double-digit percentage growth in sales in FY2006, primarily through
additional branded sales derived from an expansion in distribution to
specifically identified markets.
* To report positive operating profits, as adjusted (a non-GAAP measure)
for the fiscal year ending March 31, 2006.
* EBITDA, as adjusted, (a non-GAAP measure) to remain at positive levels
throughout FY2006.
* To report positive cash flow from operating activities for FY2006.

Footnote on non-GAAP Measures Presented Above

Management utilizes certain non-GAAP measures such as operating income, as adjusted, and EBITDA, as adjusted, because it provides useful information to management and investors in order to accurately review the Company's current on-going operations and business trends related to its financial condition and results of operations. Additionally, these measures are key factors upon which the Company prepares its budgets, forecasts and evaluates loan covenants. In its determination of non-GAAP measures, management excludes the non-cash compensation related to stock-based compensation as well as the employment contract expense from its analysis of operating income because it believes that these items do not accurately reflect the Company's current on- going operations. With respect to non-cash compensation, it is calculated based on fluctuations in the Company's stock price which are outside the Company's control and typically do not reflect the Company's operations. These non-GAAP measures are not in accordance with, or an alternative for, generally accepted accounting principles and may be different from non-GAAP measures reported by other companies.

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