Galaxy Nutritional Foods Reports Third Quarter Operating Results

ORLANDO, Fla., Feb 14, 2005 /PRNewswire-FirstCall via COMTEX/ -- Galaxy Nutritional Foods, Inc. (GXY), a leading producer 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 FY2005.

For the three months ended December 31, 2004, net sales increased 10% to approximately $10.6 million, compared with approximately $9.6 million in the third quarter of FY2004. The increase in net sales was primarily due to higher contract manufacturing revenues. While contract manufacturing sales generate lower gross profit margins than sales of branded products, the higher sales volume allows the Company to spread its fixed manufacturing costs across a larger revenue base. However, the Company has also continued to incur a substantial increase in the cost of certain key food ingredients and raw materials, which caused gross margin to decline $579,495 in the most recent quarter, when compared with the prior-year period. A portion of such increased costs will be passed through to customers via price increases through the end of the current fiscal year.

The Company reported a net operating loss of ($450,845) in the third quarter of FY2005, versus a net operating loss of ($1,124,420) in the quarter ended December 31, 2003.

"Since the beginning of our second fiscal quarter, Galaxy has been operating in an environment of rapidly escalating raw materials and ingredients costs," noted Michael E. Broll, Chief Executive Officer of Galaxy Nutritional Foods, Inc. "Casein, packaging, film and transportation costs account for the largest percentage of these increases. Higher casein costs alone accounted for approximately one million dollars of our margin decline in the third quarter, when compared with the prior-year period. Through the first nine months of the current fiscal year, the increase in casein costs was responsible for approximately two million dollars in margin decline relative to the prior-year period."

"Management has been aggressively reducing non-essential spending and costs in other areas, including corporate overhead, and we have responded by raising finished goods prices," continued Broll. "As a result, the Company generated a positive operating profit and cash flow during the last half of our fiscal third quarter, and I am confident that this positive trend will continue for the balance of the fiscal year."

Results for the third quarter of FY2005 included non-cash compensation expense of ($361,186), whereas results for the prior-year quarter included non-cash compensation income of $255,712. Additionally, results for the third quarter of FY2005 and FY2004 included employment contract expense of $0 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 ($89,659) in the quarter ended December 31, 2004, compared with operating income, as adjusted, of $450,197 in the quarter ended December 31, 2003. The $539,856 decrease in non-GAAP operating income was primarily the result of the narrowing in gross margin mentioned above.

Net loss for the third quarter of FY2005 totaled ($739,401), versus a net loss of ($1,378,354) in the quarter ended December 31, 2003. Excluding the non-cash compensation and employment contract items noted above, the Company incurred a net loss, as adjusted (a non-GAAP measure), of ($378,215) for the quarter ended December 31, 2004, compared with net income, as adjusted, of $196,263 in the year-earlier period. The $574,478 decrease in non-GAAP net income was primarily due to the decrease in gross margin, as mentioned above.

After non-cash preferred stock dividends and non-cash preferred stock accretion for estimated redemption value, the Company reported a net loss available to common shareholders of ($739,401), or ($0.04) per diluted share, for the quarter ended December 31, 2004, versus a net loss available to common shareholders of ($1,557,986), or ($0.10) per diluted share, for the quarter ended December 31, 2003.

EBITDA, as adjusted (a non-GAAP measure), for the quarter ended December 31, 2004, declined to $451,511, or 4.3% of net sales, compared with EBITDA, as adjusted, for the quarter ended December 31, 2003 of $998,829, or 10.4% of net sales. EBITDA, as adjusted, is comprised of net income before interest, taxes, depreciation and amortization, and is exclusive of employment contract expense and non-cash compensation related to stock options and warrants.

Cash flow provided by operating activities during the quarter ended December 31, 2004 totaled $443,570, compared with cash flow provided by operating activities of $1,157,359 in the third quarter of FY2004. The decrease in operating cash flow versus the prior-year period was primarily due to increased accounts receivable and inventory levels resulting from higher sales volumes.

For the nine months ended December 31, 2004, net sales increased 22% to a record $33.7 million, compared with approximately $27.7 million in the corresponding period of the previous fiscal year. The Company reported a net loss of ($1,820,759) in the first nine months of FY2005, versus a net loss of ($3,576,603) in the prior-year period. After the deduction of non-cash preferred stock dividends and non-cash preferred stock accretion for estimated redemption value, the Company's net loss available to common shareholders totaled ($2,106,936), or ($0.13) per share, in the nine months ended December 31, 2004, compared with a net loss available to common shareholders of ($5,411,184), or ($0.37) per share, in the first nine months of FY2004.

Footnote on non-GAAP Measures Presented Above

Management utilizes certain non-GAAP measures such as operating income, as adjusted, net 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 options and warrants 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.

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 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 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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