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GALAXY NUTRITIONAL FOODS
For Immediate Release: Contact:
November 14, 2005 Dawn M. Robert, Investor Relations
Galaxy Nutritional Foods, Inc.
(407) 854-0433
GALAXY NUTRITIONAL FOODS REPORTS
SECOND QUARTER OPERATING RESULTS
ORLANDO, Florida (November 14, 2005) Galaxy Nutritional Foods, Inc. (AMEX: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
second quarter and first half of FY2006.
Galaxy reported a net loss in the quarter ended September 30, 2005, as the
Company continued to incur significant expenses that were directly or indirectly
related to the pending sale of substantially all of its manufacturing equipment
and the transition to a production and distribution outsourcing relationship.
Although the Company recorded approximately $500,000 in disposal activity costs
in the most recent quarter, management expects to achieve significant and
recurring expense reduction benefits from the production and distribution
outsourcing relationship, beginning in the fourth quarter of FY2006.
For the quarter ended September 30, 2005, net sales approximated $10.4 million,
compared with net sales of $11.9 million in the second quarter of the previous
fiscal year. The 12% decline in net sales primarily reflects a 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. The Company reported a
net loss to common stockholders of ($1,416,138), or ($0.07) per share, in the
second quarter of FY2006, compared with restated net income to common
stockholders of $410,389, or $0.03 per share, in the prior-year quarter.
Approximately 35% of the net loss in the quarter ended September 30, 2005,
reflected costs associated with disposal activities related to the transition of
production to an outside manufacturer. Gross profit margin improved to 25.1% of
sales in the most recent quarter, versus 21.6% of sales in the prior-year
quarter, primarily due to a shift in overall sales mix to higher margin branded
sales as well as a reduction in overhead costs. General and administrative
expenses more than doubled in the second quarter, when compared with the
prior-year quarter ($921,934 vs. $444,796), primarily due to additional bad debt
costs related to a private label account as well as additional professional fees
incurred due to additional filing and correspondence requirements with the SEC.
EBITDA, as adjusted (a non-GAAP measure), approximated ($139,911) in the second
quarter of FY2006, compared with EBITDA, as adjusted, of approximately $294,002
in the second quarter of FY2005. 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.
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"Our second fiscal quarter net loss continued to reflect non-recurring costs
related to the pending sale of our manufacturing assets and the transition costs
related to the outsourcing of our production and distribution activities,"
stated Michael E. Broll, Chief Executive Officer of Galaxy Nutritional Foods,
Inc. "We are pleased with the progress to date, and have already outsourced the
majority of our slice, block, and shred products. We expect to outsource the
production of our remaining products during the third quarter of FY2006. As we
move into the fourth quarter of FY2006, we should begin to realize significant
benefits from this production outsourcing and distribution relationship."
"On a longer term basis, we believe that the benefits in transforming Galaxy
from a manufacturing company into a branded marketing company will far outweigh
the short-term challenges associated with the transition currently underway.
Without the cash-flow burden of carrying inventory and managing manufacturing
overhead and production issues, management can focus a substantially greater
amount of time and resources on the marketing and sale of our products. Of
particular importance is the fact that we will be able to take advantage of our
outsourcing partner's lower production costs relative to the high production
costs of our underutilized plant facilities, as well as their purchasing power
with raw materials suppliers. We also expect to realize substantial savings in
distribution expense after outsourcing in the third quarter of FY2006. Our
interest expense and cash requirements for debt service will decline
significantly once we pay down outstanding debt by approximately $8.7 million
from the proceeds of the asset sale, which should be completed by the end of our
third fiscal quarter. We continue to expect annualized savings from the
outsourcing and distribution relationship, as well as, interest expense
reductions from the debt reduction, will total approximately $4 million, and our
results should begin to reflect these benefits in the fourth quarter of the
current fiscal year."
"From a strategic perspective, we have begun testing a new consumer advertising
and promotional program in certain markets that highlights and communicates the
benefits of our healthy food products in terms of no cholesterol, low fat and an
excellent source of calcium," continued Broll. "Our goal is to increase the
presence of our products on retail store shelves and to increase household
penetration and build market share in specific markets. I am pleased to report
that we have experienced a sales lift ranging from 10% to 20%, in those markets
that were covered by our increased television marketing activities, and we look
forward to becoming even more pro-active in consumer marketing once the
outsourcing of our production is fully implemented."
"The final step, from a procedural perspective, will occur at our Special
Shareholders' Meeting on December 5, 2005, at which time our shareholders will
vote upon the proposed sale of substantially all of our manufacturing and
production equipment for $8.7 million in cash. We have already received the
necessary approvals from our lenders for this transaction, and if shareholders
approve as well, the transfer of our assets and production activities should be
fully completed by December 31, 2005."
For the six months ended September 30, 2005 sales approximated $20.3 million,
compared with net sales of $23.1 million in the first half of the previous
fiscal year. The 12% decline in net sales primarily reflects a 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. The Company reported a
net loss to common stockholders of ($10,560,252), or ($0.55) per share, in the
first half of FY2006, compared with a restated net loss to common stockholders
of ($654,258), or ($0.04) per share, in the corresponding period of the previous
fiscal year. Approximately 90% ($9.5 million) of the net loss in the first half
of FY2006, reflected costs associated with asset impairment charges and costs
associated with disposal activities, along with $870,837 in non-cash stock-based
compensation expense.
Business Outlook for FY2006
The statements throughout this release 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.
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Given no change in the current business or economic environment, the Company
expects:
>> Moderate decline in sales in FY2006, primarily due to the reduction
in private label products sold through Wal-Mart.
>> 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 FY2006.
>> 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.
Footnote on non-GAAP Measures Presented Above
Management utilizes certain non-GAAP measures such as 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, derivative expense and fair value of warrants, they are 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.
CONFERENCE CALL AND WEBCAST INFORMATION
The Company will host an investor conference call today at 11:00 a.m. EST;
shareholders and other interested parties may participate in the conference call
by dialing 800-322-0079 (international/local participants dial 973-409-9258),
and referencing the ID passcode 6689896, a few minutes before 11:00 am EST on
November 15, 2005. The call will also be broadcast live on the Internet at
http://phx.corporate-ir.net/playerlink.zhtml?c=102653&s=wm&e=1160211. The call
will be archived on the Internet through February 13, 2006 at
http://phx.corporate-ir.net/playerlink.zhtml?c=102653&s=wm&e=1160211.
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: 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.
(Financial statements follow)
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GALAXY NUTRITIONAL FOODS, INC.
Balance Sheets
SEPTEMBER 30, MARCH 31,
2005 2005
------------- ------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash -- $ 561,782
Trade receivables, net 6,026,258 4,644,364
Inventories 3,283,094 3,811,470
Prepaid expenses and other 371,547 219,592
------------- ------------
Total current assets 9,680,899 9,237,208
PROPERTY AND EQUIPMENT, NET 9,330,257 18,246,445
OTHER ASSETS 352,048 286,013
------------- ------------
TOTAL 19,363,204 $ 27,769,666
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Line of credit $ 4,275,221 $ 5,458,479
Book overdraft 130,834 --
Accounts payable 3,198,435 3,057,266
Accrued and other current liabilities 1,801,241 2,130,206
Current portion of accrued employment contracts 903,362 586,523
Current portion of term notes payable 8,670,985 1,320,000
Current portion of obligations under capital leases 114,792 194,042
------------- ------------
Total current liabilities 19,094,870 12,746,516
ACCRUED EMPLOYMENT CONTRACTS, less current portion 743,887 993,305
TERM NOTES PAYABLE, less current portion -- 6,921,985
OBLIGATIONS UNDER CAPITAL LEASES, less current portion 68,258 85,337
------------- ------------
Total liabilities 19,907,015 20,747,143
------------- ------------
COMMITMENTS AND CONTINGENCIES -- --
TEMPORARY EQUITY:
Common stock, subject to registration 2,680,590 2,220,590
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock 175,511 164,115
Additional paid-in capital 68,360,749 65,838,227
Accumulated deficit (58,868,000) (48,307,748)
------------- ------------
9,668,260 17,694,594
Less: Notes receivable arising from the exercise
of stock options (12,772,200) (12,772,200)
Treasury stock (120,461) (120,461)
------------- ------------
Total stockholders' equity (deficit) (3,224,401) 4,801,933
------------- ------------
TOTAL $ 19,363,204 $ 27,769,666
============= ============
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GALAXY NUTRITIONAL FOODS, INC.
Statements of Operations
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
RESTATED RESTATED
NET SALES $ 10,438,225 $ 11,900,553 $ 20,289,378 $ 23,092,231
COST OF GOODS SOLD 7,817,351 9,319,969 15,400,206 17,571,299
------------ ------------ ------------ ------------
Gross margin 2,620,874 2,580,584 4,889,172 5,520,932
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Selling 1,557,547 1,572,470 2,493,792 3,032,870
Delivery 726,078 615,257 1,341,549 1,208,583
Employment contract expense - general
and administrative -- 444,883 -- 444,883
General and administrative, including
$3,319, ($121,172), $870,837 and
$41,202 non-cash compensation
related to stock based transactions 921,934 444,796 2,523,464 1,240,512
Research and development 89,052 78,932 180,094 151,618
Cost of disposal activities 499,556 -- 754,567 --
Impairment of property and equipment -- -- 7,896,554 --
Loss on sale of assets 6,242 -- 5,606 --
------------ ------------ ------------ ------------
Total operating expenses 3,800,409 3,156,338 15,195,626 6,078,466
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS (1,179,535) (575,754) (10,306,454) (557,534)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense (293,603) (264,008) (650,798) (523,824)
Derivative income -- 442,606 -- 321,487
Gain/(loss) on fair value of warrants 57,000 620,247 397,000 461,351
------------ ------------ ------------ ------------
Total other income (expense) (236,603) 798,845 (253,798) 259,014
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (1,416,138) $ 223,091 $(10,560,252) $ (298,520)
Less:
Preferred stock dividends -- 38,006 -- 80,398
Preferred stock accretion to
redemption value -- (225,304) -- 275,340
------------ ------------ ------------ ------------
NET INCOME (LOSS) TO COMMON
STOCKHOLDERS $ (1,416,138) $ 410,389 $(10,560,252) $ (654,258)
============ ============ ============ ============
BASIC AND DILUTED NET INCOME (LOSS)
PER COMMON SHARE $ (0.07) $ 0.03 $ (0.55) $ (0.04)
============ ============ ============ ============
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GALAXY NUTRITIONAL FOODS, INC.
Statements of Cash Flows
(UNAUDITED)
Six Months Ended September 30, 2005 2004
------------ ------------
RESTATED
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(10,560,252) $ (298,520)
Adjustments to reconcile net loss to net cash from (used in)
operating activities:
Depreciation and amortization 1,075,852 1,092,086
Amortization of debt discount and financing costs 105,718 49,615
Provision for losses on trade receivables 754,451 164,000
Impairment of property and equipment and (gain)/loss on sale
of assets 7,902,161 --
Change in fair value of derivative instrument -- (321,487)
(Gain) Loss on fair value of warrants (397,000) (461,351)
Non-cash compensation related to stock-based transactions 870,837 41,202
(Increase) decrease in:
Trade receivables (2,136,345) (2,019,628)
Inventories 528,376 (339,254)
Prepaid expenses and other (151,955) (47,802)
Increase (decrease) in:
Accounts payable 141,169 1,173,240
Accrued and other liabilities 301,456 343,691
------------ ------------
NET CASH FROM (USED IN) OPERATING ACTIVITIES (1,565,532) (624,208)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (82,525) (77,207)
Proceeds from sale of equipment 20,700 22,482
------------ ------------
NET CASH FROM (USED IN) INVESTING ACTIVITIES (61,825) (54,725)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in book overdrafts 130,834 --
Net borrowings (payments) on line of credit (1,183,258) 1,276,485
Borrowing on term notes payable 1,200,000 --
Repayments on term notes payable (550,000) (480,000)
Principal payments on capital lease obligations (96,329) (133,731)
Financing costs for long term debt (179,093) --
Costs associated with issuance of common stock -- (22,500)
Proceeds from issuance of common stock under employee stock
purchase plan 11,861 12,480
Proceeds from exercise of common stock options 2,560 --
Proceeds from exercise of common stock warrants 1,729,000 --
------------ ------------
NET CASH FROM (USED IN) FINANCING ACTIVITIES 1,065,575 652,734
------------ ------------
NET INCREASE (DECREASE) IN CASH (561,782) (26,199)
CASH, BEGINNING OF PERIOD 561,782 449,679
------------ ------------
CASH, END OF PERIOD $ -- $ 423,480
============ ============
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GALAXY NUTRITIONAL FOODS, INC.
EBITDA, as adjusted, (a non-GAAP measure) Reconciliation
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2005 2004 2005 2004
------------ ------------ ------------ ------------
NET SALES $ 10,438,225 $ 11,900,553 $ 20,289,378 $ 23,092,231
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (1,416,138) $ 223,091 $(10,560,252) $ (298,520)
Plus:
Non-cash compensation (income)
expense 3,319 (121,172) 870,837 41,202
Employment contract expense -- 444,883 -- 444,883
Cost of disposal activities 499,556 -- 754,567 --
Impairment of property and
equipment -- -- 7,896,554 --
Derivative expense -- (442,606) -- (321,487)
(Gain)/loss on fair value of
warrants (57,000) (620,247) (397,000) (461,351)
Interest expense 293,603 264,008 650,798 523,824
Depreciation and amortization
expense 536,749 546,045 1,075,852 1,092,086
------------ ------------ ------------ ------------
EBITDA, as adjusted (139,911) 294,002 291,356 1,020,637
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
As a % of Net Sales (1.3%) 2.5% 1.4% 4.4%
============ ============ ============ ============
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