Galaxy Nutritional Foods, Inc. (AMEX: GXY), a leading producer of nutritious and delicious health-promoting dairy and dairy related alternatives for the retail, foodservice and industrial markets, today reported financial results for its fiscal 2001 third quarter and nine-month periods ended December 31, 2000. The Company announced on January 5, 2001 that it expected sales for the third quarter to be between $11.2 and $11.5 million, and that fully-diluted earnings per share would be between $0.02 and $0.03 per share.

For the three months ended December 31, 2000, Galaxy’s net sales increased 11.2% to $11.3 million, versus $10.1 million in the comparable period of the prior year. Net income for the third quarter, excluding the effect of a charge related to a change in accounting method for prepaid assets, was $270,000, or $0.03 per diluted share, versus net income of $728,000, or $0.08 per diluted share in the third quarter of fiscal 2000, as previously reported. Giving effect to a charge related to a change in accounting method, which increased expenses by $2.8 million during the quarter, the Company reported a net loss for the third quarter of $2.5 million, or $0.27 per share.

Previously, Galaxy capitalized slotting and certain advertising fees paid to solidify product positioning and establish long-term relationships between the Company and retailers, therefore benefiting future periods. Due to supply-side issues over the past nine months, these expenses have been more focused on business retention rather than on future growth. Therefore, Galaxy believes it is not appropriate to burden future periods with such costs. As a result of this change in accounting policy, the Company incurred an aggregate non-recurring charge of $3.4 million, of which $728,000 related to the prior fiscal year, and $2.7 million related to the current year. The Company is adopting this change effective the beginning of fiscal year 2001 (April 1, 2000).

Galaxy achieved net sales growth of 12% to $34.7 million in the nine-month period ended December 31, 2000, up from $31.0 million in the first nine months of fiscal 2000. Net income for the nine months ended December 31, 2000, excluding the effects of the charge, was $1.7 million, or $0.18 per diluted share, compared to net income of $2.1 million, or $0.23 per diluted share for the first nine months of fiscal 2000. Giving effect to the one-time charge taken in the fiscal 2001 third quarter, the Company reported a net loss of $1.8 million, or $0.20 per diluted share for the first nine months of fiscal 2001.

Commenting on the results, Chief Financial Officer Keith Ewing, stated, “We faced several challenges in the third quarter including equipment failures and installation delays that impacted revenue growth, but we have taken steps to strengthen performance in future periods. Our new slice equipment was installed and completely integrated at the end of January, and should enhance production capacity in our highest-selling product, the Veggie line of individually-wrapped cheese slices. Additionally, we’ve reviewed our accounting principles regarding certain prepaid expenses, and elected to write-down approximately $3.4 million to better match revenues with expenses. Going forward, we expect that increased demand for our products driven by strategic marketing campaigns and foodservice partnerships, combined with enhanced production capacity and efficiency, will bolster financial results.”

President, Chairman and Chief Executive Officer Angelo Morini, commented, “The alternative cheese category grew by 46% last year, and we held 74% of the market share. With our production facility finally running on all cylinders, we’ll be able to meet the growing demand for our superior products. The timing is right for us to align ourselves with strategic partners and increase our marketing efforts to ramp up distribution of our products and enhance brand awareness.”

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About Galaxy Nutritional Foods, Inc.

Galaxy Nutritional Foods is a leading producer of health-promoting dairy and dairy related alternatives for the retail, foodservice and industrial markets. The Company manufactures plant-based products that are low or no fat (no saturated fat), have no cholesterol, contain no lactose and are growth hormone and anti-biotic free and have more vitamins and minerals than conventional dairy products through a safer proprietary hot-process. Galaxy products, available at health food stores and grocers, are part of the nutritional or functional food category, the fastest growing segment of the retail food market. Galaxy brand names include Veggie Milk(TM), Veggie Slices(TM), formagg®, Soyco®, Soymage®, Wholesome Valley(TM), Lite Bakery®, and Veggie Cafe(TM). For more information please visit the Company’s web site at

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.

                    Galaxy Nutritional Foods, Inc.
Summary Balance Sheet
(in thousands)

December 31, 2000 March 31, 2000
Current assets $ 21,842 $ 18,751
——– ——–
Total assets $ 47,678 $ 36,450
======== ========

Current liabilities $ 15,711 $ 11,773
——– ——–
Long-term debt $ 13,868 $ 7,083
——– ——–
Total liabilities & Stockholder’s Equity $ 47,678 $ 36,450
======== ========

(in thousands, except per share data)

Three Months Ended Nine Months Ended
December 31, December 31,
(unaudited) (unaudited)
——————- ——————-
2000 1999 2000 1999
——– ——– ——– ——–

Net Sales $ 11,258 $ 10,119 $ 34,729 $ 31,021
Cost of Goods Sold 7,462 6,151 22,403 19,463
——– ——– ——– ——–
Gross Margin 3,797 3,968 12,327 11,558

Operating expenses:
Selling (1) 3,688 1,399 8,361 4,348
Delivery 596 589 1,876 1,576
General and administrative 892 894 2,300 2,692
Research and development 71 72 195 167
——– ——– ——– ——–
Total operating expenses 5,247 2,954 12,732 8,784
——– ——– ——– ——–

Income (loss) from operations (1,450) 1,015 (406) 2,774
——– ——– ——– ——–

Other income (expense):
Interest expense (284) (255) (898) (581)
Interest income — — — —
Other income (expense) 34 (2) 49 (5)
——– ——– ——– ——–
Total (250) (257) (849) (586)
——– ——– ——– ——–

Net income (loss)
before taxes (1,700) 758 (1,255) 2,188
——– ——– ——– ——–

Income tax benefit (expense) — (30) 240 (60)
——– ——– ——– ——–

Net income (loss) before
cumulative effect of change
in accounting policy $ (1,700) $ 728 $ (1,015) $ 2,128

Cumulative effect of change
in accounting policy (1) (786) — (786) —

Net income (loss) applicable
to common stock (1) $ (2,487) $ 728 $ (1,801) $ 2,128
======== ======== ======== ========

Basic net earnings (loss)
per common share(1) $ (0.27) $ 0.08 $ (0.20) $ 0.23
======== ======== ======== ========

Diluted net earnings (loss)
per common share(1) $ (0.27) $ 0.08 $ (0.20) $ 0.23
======== ======== ======== ========

(1) Third quarter and nine-month results for fiscal 2001 include a
non-recurring charge of $0.30 per share relating to a write-down
due to a change in accounting method for certain prepaid
expenses. Without the effect of this charge, basic and diluted
earnings per share would have been $0.03.