Galaxy Nutritional Foods Reports Third Quarter and Nine-Month Operating Results

ORLANDO, Fla., Feb 21, 2006 /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 the third quarter and first nine months of FY2006.

For the three months ended December 31, 2005, net sales decreased to approximately $9.1 million, compared with net sales of approximately $10.6 million in the third quarter of FY2005. The reduction in net sales primarily reflects a reduction in sales of private label products to Wal-Mart, along with some consumer resistance to the multiple price increases that were implemented by the Company in late fiscal 2005 and early fiscal 2006 to offset higher commodity and other production costs.

The Company reported a net loss to common stockholders of ($11,754,981), or ($0.59) per share, in the most recent quarter, compared with a restated net loss to common stockholders of ($1,061,807), or ($0.06) per share, in the prior-year quarter. Approximately 84% of the net loss in the quarter ended December 31, 2005 reflected costs associated with a reserve against a stockholder note receivable, disposal activities related to the transition of production to an outside manufacturer, and losses on the sale of assets. Gross profit margin approximated 21% of sales in the third quarter of FY2006, versus 22% of sales in the prior-year quarter, primarily due to inventory disposals and additional overhead costs during the abovementioned outsourcing transition. General and administrative expenses increased 81% in the most recent quarter, when compared with the prior-year quarter ($1,394,599 vs. $771,382), primarily due to professional fees related to evaluating strategic alternatives, additional bad debt costs and liquidated damages related to a registration rights agreement.
"Our third quarter financial results continued to be significantly impacted by non-recurring costs associated with the recent sale of our manufacturing assets and the transition of production and distribution activities to an outside manufacturer, along with a $9.1 million reserve against a non-recourse stockholder note receivable where the collateral value is significantly below the face value of the note," noted Michael E. Broll, Chief Executive Officer of Galaxy Nutritional Foods, Inc. "We expect to begin realizing benefits from the production outsourcing and distribution relationship in the current quarter, when profitability should improve significantly relative to the prior-year quarter and first three quarters of Fiscal 2006."

The Company's balance sheet has been transformed significantly since the sale of its manufacturing assets for $8,700,000 in December 2005. The proceeds allowed Galaxy to retire approximately $8,694,000 in bank debt and accrued property taxes. At December 31, 2005, the Company's long-term liabilities approximated $708,000, compared with over $8 million at the beginning of FY2006.

"We anticipate improved cash flows to fund operations as debt service costs decline sharply due to the repayment of the majority of our bank debt, and as we complete our transformation from a manufacturing company into a branded marketing company," continued Broll. "With significantly lower inventory and distribution costs, along with the elimination of manufacturing overhead, management can devote a substantially greater amount of time and resources to the marketing and sale of our products. Initial results from recent advertising and promotional initiatives in several cities have been encouraging, and we will continue to pursue the most effective means of communicating to consumers the benefits of our healthy food products in terms of no cholesterol, low fat and an excellent source of calcium."

For the nine months ended December 31, 2005, sales decreased to approximately $29.4 million, compared with net sales of $33.7 million in the first nine months of FY2005. The decline in net sales primarily reflects a reduction in private label sales to Wal-Mart. The Company reported a net loss to common stockholders of ($22,315,233), or ($1.14) per share, in the first nine months of FY2006, compared with a restated net loss to common stockholders of ($1,716,065), or ($0.10) per share, in the corresponding period of FY2005. Approximately 83% ($18.4 million) of the net loss in the first nine months of FY2006 reflected costs related to the transition of production to an outside manufacturer (e.g., asset impairment charges, losses on the sale of assets, disposal activities), along with a $9.1 million reserve against a stockholder note receivable.

About Galaxy Nutritional Foods, Inc.
Galaxy Nutritional Foods, Inc. (GXY) globally markets and distributes plant-based cheese alternatives and dairy alternatives, as well as processed organic cheese and cheese food to grocery and natural foods retailers, mass merchandisers and food service accounts. 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: Rice, Veggy, Vegan, and Wholesome Valley. Galaxy Nutritional Foods, Inc. is dedicated to developing nutritious products to meet the taste and dietary needs of today's increasingly health conscious consumers. For more information, visit http://www.galaxyfoods.com.

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 PUBLICLY RELEASE 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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