Galaxy Nutritional Foods Reports First Quarter Operating Results

ORLANDO, Fla., Aug 23, 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 the first quarter of FY2006.

Galaxy reported a significant net loss in the most recent quarter, primarily due to charges related to the impairment of property and equipment in anticipation of the Company's pending sale of its manufacturing equipment to Schreiber Foods, which will manufacture the Company's products in the future. While management expects to derive significant and recurring expense reduction benefits from the production outsourcing relationship with Schreiber, a non-recurring, non-cash charge of $7.9 million was recognized in the first quarter of FY2005 to reflect the difference between the carrying cost of production equipment on the Company's books and the amount to be received from Schreiber upon sale of the equipment.

For the three months ended June 30, 2005, net sales approximated $9.9 million, compared with net sales of $11.2 million in the first quarter of the previous fiscal year. The 12% decline in net sales primarily reflects a temporary reduction in sales due to the transition from indirect sales to Wal- Mart through a private label customer to direct sales to Wal-Mart in April 2005. Sales also decreased due to no significant promotions in the most recent quarter. The Company reported a net loss of ($9.1 million), or ($0.49) per share, in the first quarter of FY2006, compared with a net loss of ($0.9 million), or ($0.06) per share, in the prior-year period. Approximately 89% of the net loss in the quarter ended June 30, 2005, was comprised of asset impairment charges and costs associated with disposal activities, along with $527,518 in non-cash stock-based compensation expenses. First quarter operating results were also negatively impacted by a decrease in gross profit margin to 23% of sales, versus 26% of sales in the prior-year quarter, primarily due to higher raw materials costs (e.g., casein) and lower sales volumes.

EBITDA, as adjusted (a non-GAAP measure), approximated $431,267 in the quarter ended June 30, 2005, compared with EBITDA, as adjusted, of approximately $726,635 in the quarter ended June 30, 2004. EBITDA, as adjusted, is comprised of net income before interest, taxes, depreciation and amortization, and is exclusive of employment contract expense, non-cash compensation related to stock options and warrants, derivative expense, impairment of property and equipment as well as cost of disposal activities.

"Our first quarter results were quite unusual and were dominated by non-recurring charges related to the pending sale of our manufacturing assets and outsourcing of our production activities, along with inefficiencies related to the transformation of Wal-Mart into a direct customer," stated Michael E. Broll, Chief Executive Officer of Galaxy Nutritional Foods, Inc. "As the year progresses, we should begin to realize significant benefits from the production outsourcing and distribution relationship with Schreiber Foods, and we are expecting Wal-Mart's business to return to normal levels. Of particular importance is the fact the we will be able to take advantage of Schreiber's lower production costs relative to the high production costs of our underutilized plant facilities, as well as their much greater purchasing power with raw materials suppliers. We also expect to realize substantial savings in distribution expense when Schreiber takes over this function later in the year. Our interest expense and cash requirements for debt service will decline significantly once we pay down outstanding debt by approximately $7.4 million from the proceeds of the asset sale, which should be completed by the end of our third fiscal quarter. We expect to realize annualized savings from the outsourcing relationship and interest expense reductions totaling more than $4 million, and our operating results should begin to reflect these benefits in the fourth quarter of the current fiscal year. The transfer of our production activities to Schreiber is scheduled to be fully completed by December 31, 2005."

"Going forward, we will focus upon 'building our brands' in the healthy foods category," continued Broll. "We plan to significantly increase our spending on consumer advertising and consumer promotions that highlight and communicate the benefits of our products, in order to meet the consumer demand for healthier foods. We will also seek to increase our presence on retailer store shelves, thereby expanding household penetration and building market share in specific markets. Finally, we plan to increase our customer base and generate consumer awareness of new products and/or flavors through new product trials, while increasing repeat purchases of our Veggie(TM) and Wholesome Valley(R) brands through improved taste, color, aroma, texture and packaging initiatives."

"In summary, I believe that Galaxy Nutritional Foods is well-positioned to realize the potential of its strong brands in the healthy foods category and to improve its financial performance significantly in coming years, and such trends should become evident in the fourth quarter of fiscal 2006. We have spent much of the past two years cleaning up our balance sheet, rationalizing product lines, and battling high casein prices. The final and very significant phases of the repositioning of the Company -- the sale of our manufacturing assets and implementation of the outsourcing program -- will be completed in the next four months. I can say with confidence that the future looks bright, for both the Company and its shareholders."

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:

* Moderate 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, excluding non-cash stock
compensation charges, the cost of disposal activities and impairment or
loss on the sale of assets, for the fiscal year ending March 31, 2006.

* To report positive EBITDA, as adjusted (a non-GAAP measure), excluding
non-cash stock compensation charges, the cost of disposal activities and
impairment or loss on the sale of assets, for 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, the cost of disposal activities, impairment or loss on the sale of assets, 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(R) is the leading producer of health-promoting plant-based dairy and dairy-related alternatives for the retail and foodservice markets. An exclusive, new and technologically advanced, safer "hot process" is used to produce these phytonutrient-enriched products, made from nature's best grains -- soy, rice and oats. Veggie products are low fat and fat free (saturated fat and trans-fatty acid free), cholesterol and lactose free, are growth hormone and antibiotic free, and have more calcium, vitamins and other minerals than conventional dairy products. Because they are made with plant proteins, the products are more environmentally friendly and economically efficient than dairy products derived solely from animal proteins. Galaxy's products are part of the healthy and natural 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(TM); Veggie Slices(R); Soyco(R); Soymage(R); Wholesome Valley(R); Lite Bakery(R); and Galaxy Nutritional Foods Smart Choice Cheese Products(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 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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