NOTE AND WARRANT PURCHASE AGREEMENT

 

 

                       NOTE AND WARRANT PURCHASE AGREEMENT

 

      THIS NOTE AND WARRANT PURCHASE AGREEMENT (the "Agreement") is made as of

this 12th day of September, 2005, by and between Galaxy Nutritional Foods, Inc.,

a Delaware corporation (the "Company"), and Frederick A. DeLuca (the

"Investor").

 

      WHEREAS, the Company desires to issue and sell to selected "accredited

investors" as that term is defined in Regulation D promulgated under the

Securities Act of 1933, as amended, the Note and Warrant (as those terms are

defined below).

 

      WHEREAS, the Investor has agreed to loan to the Company the Loan Amount

(as defined below) (the "Loan") pursuant to the terms and conditions set forth

herein and in the Note.

 

      WHEREAS, the Investor acknowledges that the Company is offering notes and

warrants similar to the Note and Warrant issued pursuant to this Agreement to

other "accredited investors" making loans to the Company.

 

      NOW, THEREFORE, for good and valuable consideration, the receipt and

sufficiency of which are hereby acknowledged, the parties hereto hereby agree as

follows:

 

                                   ARTICLE I

 

                                TERMS OF THE LOAN

 

Section 1.1 The Loan.

 

      (a) Loan Amount. Subject to the terms and conditions herein and in the

Note, and subject to the provisions of Section 1.1(b) hereof, the Investor

agrees to loan to the Company $1,200,000.00 (the "Loan Amount"), which Loan

shall evidenced by a Promissory Note in favor of the Investor, in the form

attached hereto as Exhibit A (the "Note"), dated the date on which such funds

were received by the Company from the Investor. The Loan shall be made in

accordance with and subject to the terms and conditions of the Note.

 

      (b) Payment of the Loan Amount. The Loan Amount from the Investor shall be

paid to the Company upon or prior to the execution of this Agreement.

 

Section 1.2 Use of Proceeds. The proceeds of the Loan shall be used by the

Company primarily for general working capital and other general corporate

purposes for the Company and its affiliates, and as otherwise provided herein.

 

Section 1.3 Conditions Precedent. The Investor's obligation to make the Loan

shall be subject to the fulfillment to the Investor's satisfaction of the

following conditions:

 

      (a) Delivery of Note and Warrant. The Investor shall have received a fully

executed Note and a fully executed redeemable warrant certificate to purchase

such number of shares of common stock of the Company equal to 1 share per every

$4 of the Loan Amount in the form attached hereto as Exhibit B (the "Warrant").

 

<PAGE>

 

         (b) Delivery of Registration Rights Agreement. The Investor shall have

received a fully executed Registration Rights Agreement in the form attached

hereto as Exhibit C (the "Registration Rights Agreement").

 

         (c) Representations and Covenants. All of the representations and

warranties of the Company herein shall be true and correct and it shall have

fulfilled all of its obligations hereunder in all material respects.

 

         (d) Absence of Violation or Litigation. The consummation of the

transactions contemplated hereby shall not be in violation of any law or

regulation applicable to the Company. The Company shall not be subject to any

injunction, stay or restraining order nor shall it be required to make or to

obtain any filings, approvals or consents which shall not have been previously

made or obtained.

 

         (e) All Proceedings Satisfactory. All organizational and other

proceedings taken by the Company in connection with the transactions

contemplated by this Agreement, and all documents and instruments related

thereto, shall be reasonably satisfactory in form and substance to the Investor,

and the Investor shall have received copies thereof and other materials

(certified, if requested) as it may reasonably request in connection therewith.

The issuance and sale of the Note and the Warrant shall be made in conformity

with all applicable state and federal securities laws.

 

                                    ARTICLE II

                         REPRESENTATIONS AND WARRANTIES.

 

Section 2.1        Company Representations and Warranties.

 

(a) Organization and Company Power. The Company is a corporation duly organized,

validly existing and in good standing under the laws of the State of Delaware.

The Company has all required power and authority to carry on its business as

presently conducted, to enter into and perform this Agreement, the Note, the

Warrant, the Registration Rights Agreement and any other agreements contemplated

hereby to which it is a party and to carry out the transactions contemplated

hereby and thereby.

 

(b) Authorization and Non-Contravention. This Agreement and all documents

executed pursuant hereto are valid and binding obligations of the Company,

enforceable in accordance with their terms. The execution, delivery and

performance of this Agreement and all agreements, documents and instruments

contemplated hereby, the issuance and delivery of the Note and Warrant and, upon

exercise of the Warrant, the issuance and delivery of the equity securities

purchasable upon exercise of the Warrant, have been duly authorized by all

necessary corporate or other action of the Company.

 

Section 2.2        Securities Law Compliance.

 

         (a) The Investor agrees that its Note, Warrant, and the securities

issuable upon exercise of the Warrant, are being acquired for investment and

that such Investor will not offer, sell or otherwise dispose of its Note,

Warrant, or any securities issuable upon exercise of the Warrant, except under

 

 

                                       2

<PAGE>

 

circumstances which will not result in a violation of the Securities Act of

1933, as amended (the "Securities Act"), or any applicable state securities

laws. Each Note, Warrant and all securities issued upon exercise of the Warrant

(unless registered under the Securities Act and any applicable state securities

laws) shall be stamped or imprinted with a legend in substantially the following

form:

 

"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS

AMENDED (THE "SECURITIES ACT"), OR ANY APPLICABLE STATE SECURITIES LAW AND MAY

NOT BE SOLD, OFFERED FOR SALE, MORTGAGED, PLEDGED, HYPOTHECATED OR OTHERWISE

TRANSFERRED EXCEPT PURSUANT TO (A) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE

SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR (B) AN EXEMPTION

THEREFROM, AND, IF REQUESTED BY THE COMPANY, THE COMPANY HAS RECEIVED AN OPINION

OF COUNSEL SATISFACTORY TO THE COMPANY THAT THE TRANSFER IS EXEMPT FROM THE

REGISTRATION PROVISIONS OF THE SECURITIES ACT AND APPLICABLE STATE SECURITIES

LAWS."

 

         (b) Restricted Securities. The Investor understands that its Note,

Warrant and the securities issuable upon exercise of the Warrant, will not be

registered at the time of their issuance under the Securities Act for the reason

that the sales provided for in this Agreement are exempt pursuant to Section

4(2) of the Securities Act based on the representations of the Investor set

forth herein. The Investor represents that it is experienced in evaluating

companies such as the Company, has such knowledge and experience in financial

and business matters as to be capable of evaluating the merits and risks of its

investment, and has the ability to suffer the total loss of the investment. The

Investor further represents that it has had the opportunity to ask questions of

and receive answers from the Company concerning the terms and conditions of its

Note, Warrant and the business of the Company, and to obtain additional

information to such Investor's satisfaction. All documents, records and books

pertaining to the Company and this investment have been made available to the

Investor and its representatives, including each Investor's attorney and

accountant, that the books and records of the Company will be available upon

reasonable notice for inspection by the Investor during reasonable business

hours at the Company's principal place of business, and the Investor have had

access to and the opportunity to request information from and ask questions of

the officers and a directors of the Company. The Investor further represents

that it is an "accredited investor" within the meaning of Regulation D under the

Securities Act, as presently in effect. The Investor further represents that the

Note and the Warrant are being acquired for the account of such Investor for

investment only and not with a view to, or with any intention of, a distribution

or resale thereof, in whole or in part, or the grant of any participation

therein. If an Investor is a corporation, business trust, partnership, limited

liability company or other entity, such Investor represents that it was not

formed for the specific purpose of acquiring the securities offered hereby and

has total assets of more than $5,000,000. If an Investor is an individual, such

Investor represents that (A) the Investor is a natural person whose individual

net worth, or joint net worth with spouse, exceeds $1 million at the time of

purchase (in this instance, the term "net worth" means the excess of assets at

fair market value, including home and personal property, over total liabilities,

including mortgages and income taxes on unrealized appreciation of assets); or

(B) the Investor is a natural person who has had individual income of more than

$200,000 in each of the two most recent years (2003 and 2004), or joint income

 

 

                                       3

<PAGE>

 

with that person's spouse of more than $300,000 in each of those years, and

reasonably expects to reach the same income level in the current year (2005).

(The term "individual income" means adjusted gross income as reported for

federal income tax purposes, less any income attributable to a spouse or to

property owned by a spouse, increased by the following amounts (excluding any

amount attributable to a spouse or to property owned by a spouse): (1) the

amount of any interest income received which is tax-exempt under Section 103 of

the Internal Revenue Code of 1986, as amended (the "Code"); (2) the amount of

losses claimed as a partner in a limited partnership (as reported on Schedule E

of Form 1040); and (3) any deduction claimed for depletion under Section 611 et

seq. of the Code).

 

         (c) State of Residence. The Investor represents that it is a legal

resident of, or, if such Investor is an entity, has its principal place of

business in, the state listed on the signature page of this Agreement.

 

Section 2.3 Advice of Consultants. The Investor has obtained the advice of

independent counsel and tax advisors of Investor's choice in entering into this

Agreement and the transactions contemplated hereby or has knowingly elected not

to receive such counsel.

 

                                  ARTICLE III

 

                              TRANSFER RESTRICTIONS

 

Section 3.1 Transfers Void. The Investor agrees that it may not sell, give,

transfer, assign or otherwise dispose of its Note or Warrant, except as

expressly permitted by Section 3.2 hereof. Any purported sale, gift, transfer,

assignment or other disposition, or pledge of or grant of security interest in,

any Note or Warrant in violation of this Article III shall be null and void.

 

Section 3.2 Transfers to Affiliates. The Investor may, at any time, transfer all

of such Investor's Note and Warrant (but not less than all, and not separately),

to any of its affiliates, provided such affiliate is an "accredited investor."

 

Section 3.3 Legend. The Note and the Warrant shall be stamped or imprinted with

a legend in substantially the following form:

 

"THIS NOTE/WARRANT IS SUBJECT TO THE PROVISIONS OF A NOTE AND WARRANT AGREEMENT,

INCLUDING THEREIN CERTAIN RESTRICTIONS ON TRANSFER. A COMPLETE AND CORRECT COPY

OF SUCH AGREEMENT IS AVAILABLE FOR INSPECTION AT THE PRINCIPAL OFFICE OF THE

COMPANY AND WILL BE FURNISHED UPON WRITTEN REQUEST AND WITHOUT CHARGE."

 

 

 

                                   ARTICLE IV

 

                                     DEFAULT

 

Section 4.1 Events of Default. With respect to the Investor, if, while any part

of the principal of the Investor's Note remains unpaid, any one of the following

"Events of Default" shall occur:

 

 

                                       4

<PAGE>

 

         (a) An order, judgment or decree shall be entered by any court of

competent jurisdiction, approving a petition seeking reorganization or

liquidation of the Company, or appointing a receiver, trustee or liquidator of

the Company of all or a substantial part of its assets, which such order,

judgment or decree has not been effectively stayed within sixty (60) days after

entry;

 

         (b) the Company shall (i) from this date forward, admit in writing to

its inability to pay its debts as they mature; (ii) make a general assignment

for the benefit of creditors; (iii) be adjudicated bankrupt or insolvent; (iv)

file a voluntary petition in bankruptcy or a petition or an answer seeking

reorganization or an arrangement with creditors to take advantage of any

insolvency law; (v) file any answer admitting the material allegations of a

petition filed against it in any bankruptcy, reorganization or insolvency

proceeding or fail to dismiss such petition within sixty (60) days after the

filing thereof; or (vi) take any action for the purpose of effecting any of the

foregoing;

 

         (c) the failure by the Company to observe and perform any material

covenant, condition and agreement under this Agreement which failure is not

cured within thirty (30) days, after written notice from the Investor or

discovery by the Company; and

 

         (d) the failure by the Company to observe and perform any material

covenant, condition and agreement under the Note or Warrant which failure is not

cured within the applicable cure period (or thirty (30) days if no cure period

is expressly provided for such failure), after written notice from the Investor

or discovery by the Company;

 

then and in every such event such Investor may, upon written notice to the

Company, declare the Note to be due and payable in full, whereupon the Note

shall become due and payable in full.

 

                                   ARTICLE V

 

                                   MISCELLANEOUS

 

Section 5.1 Notices. All necessary notices, demands and requests permitted or

required under this Agreement shall be in writing and shall be deemed effective

(a) if given by facsimile, when such facsimile is transmitted to the facsimile

number specified below, the appropriate answer back is received and a copy is

sent to such party by an express mail carrier at the address indicated below,

(b) three business days after being mailed by certified mail, return receipt

requested, postage prepaid to the applicable party at the address indicated

below or (c) one business day after being sent by an express mail carrier to the

applicable party at the address indicated below:

 

If to the Company:                   Galaxy Nutritional Foods, Inc.

                                    2441 Viscount Row

                                    Orlando, Florida 32809

                                    Facsimile: (407) 855-1099

                                    Attention: Michael E. Broll

 

 

                                        5

<PAGE>

 

With copies to:                      Baker & Hostetler LLP

                                    200 S. Orange Avenue, Suite 2300

                                    Orlando, Florida   32801

                                     Facsimile: (407) 841-0168

                                    Attn: Kenneth C. Wright, Esq.

 

If to the Investor:                  Frederick A. DeLuca

                                    c/o Doctor's Associates, Inc.

                                    325 Bic Drive

                                    Milford, CT 06460

                                    Facsimile:                            

                                               ---------------------------

 

 

or such other address or facsimile number as such party may hereafter specify

for the purpose of receiving notice hereunder. A copy of any notice to the

Investor shall be provided, as described above, to any counsel designated by the

Investor in writing to the Company as above provided.

 

Section 5.2 No Waiver. No failure to exercise, and no delay in exercising, on

the part of an Investor, any right, power or privilege hereunder shall operate

as a waiver thereof; nor shall any single or partial exercise of any right,

power or privilege hereunder preclude any other or further exercise thereof or

the exercise of any other right, power or privilege. The rights and remedies

herein provided are cumulative and not exclusive of any rights or remedies

provided by law.

 

Section 5.3 Governing Law; Construction. This Agreement, the Note, the Warrant

and the Registration Rights Agreement shall each be deemed to be a contract made

under the laws of the State of Florida, and shall be construed in accordance

with the laws of the State of Florida. The descriptive headings of the several

Sections hereof are for convenience only and shall not control or affect the

meaning or construction of any of the provisions hereof. This Agreement, the

Note, the Warrant and the Registration Rights Agreement together with the

Exhibits hereto and thereto and all documents, instruments and agreements

executed pursuant hereto, constitute the entire agreement and understanding

between the parties hereto with respect to the subject matter hereof, supersede

all prior agreements, understandings or representations pertaining to the

subject matter hereof, whether oral or written, and may not be contradicted by

evidence of any alleged oral agreement. Venue for any action brought under this

Agreement, the Note, the Warrant or the Registration Rights Agreement shall be

in Orange County, Florida.

 

Section 5.4 Amendments, Waivers and Consents. Any term, covenant or condition of

this Agreement may be amended, omitted or waived (either generally or in a

particular instance and either retroactively or prospectively) only by written

consent of all of the parties hereto.

 

Section 5.5 Expenses. Any expense incurred by either party (including, without

limitation, reasonable attorneys' fees and disbursements) in connection with the

negotiation, execution, administration or enforcement of this Agreement, the

Note, the Warrant, the Registration Rights Agreement and any other document

executed in connection with the obligations hereunder or thereunder and any

amendment hereto or thereto shall be the sole responsibility and shall be paid

such party.

 

 

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<PAGE>

 

Section 5.6 Counterparts. This Agreement may be executed in two or more

counterparts, each of which shall be deemed an original and all of which

together shall constitute but one and the same instrument. The signatures to

this Agreement need not all be on a single copy of this Agreement, and may be

facsimiles rather than originals, and shall be fully as effective as though all

signatures were originals on the same copy.

 

Section 5.7 Attorneys' Fees. In the event of a judicial or administrative

proceeding or action by one party against the other party with respect to the

interpretation or enforcement of this Agreement, the prevailing party shall be

entitled to recover reasonable costs and expenses including reasonable

attorneys' fees and expenses, whether at the investigative, pretrial, trial or

appellate level. The prevailing party shall be determined by the court based

upon an assessment of which party's major arguments or position prevailed.

 

Section 5.8 Construction of Agreement. This Agreement shall not be construed

more strictly against one party than against the other merely by virtue of the

fact that it may have been prepared primarily by counsel for one of the parties.

 

                                      * * *

 

 

                                       7

<PAGE>

 

         IN WITNESS WHEREOF, the parties hereto have executed this Agreement

under seal as of the date first above written.

 

                                       "COMPANY"

 

                                      GALAXY NUTRITIONAL FOODS, INC., a

Delaware corporation

 

 

                                      By:       /s/ Michael E. Broll        

                                         ----------------------------------

                                               Michael E. Broll

                                               Chief Executive Officer

 

 

                                      "INVESTOR"

 

 

 

 

                                      /s/ Frederick A. DeLuca

                                      -------------------------------------

                                      FREDERICK A. DELUCA, an individual

 

 

                                       8

<PAGE>

 

                                    EXHIBIT A

 

THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS

AMENDED (THE "ACT"), OR ANY APPLICABLE STATE LAW, AND MAY NOT BE SOLD,

DISTRIBUTED, ASSIGNED, OFFERED, PLEDGED OR OTHERWISE TRANSFERRED UNLESS (A)

THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE

SECURITIES LAWS COVERING ANY SUCH TRANSACTION OR (B) SUCH TRANSACTION IS EXEMPT

FROM REGISTRATION AND, IF REQUESTED BY THE MAKER, THE MAKER HAS RECEIVED AN

OPINION OF COUNSEL SATISFACTORY TO THE MAKER THAT THE TRANSFER IS EXEMPT FROM

THE REGISTRATION PROVISIONS UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES

LAWS.

 

THIS NOTE IS SUBJECT TO THE PROVISIONS OF A NOTE AND WARRANT AGREEMENT,

INCLUDING THEREIN CERTAIN RESTRICTIONS ON TRANSFER. A COMPLETE AND CORRECT COPY

OF SUCH AGREEMENT IS AVAILABLE FOR INSPECTION AT THE PRINCIPAL OFFICE OF THE

COMPANY AND WILL BE FURNISHED UPON WRITTEN REQUEST AND WITHOUT CHARGE

 

 

                                 PROMISSORY NOTE

 

$______________    September __, 2005

 

         FOR VALUE RECEIVED, the undersigned, GALAXY NUTRITIONAL FOODS, INC., a

Delaware corporation ("Maker"), promises to pay to the order of _______________,

a _______________ ("Payee"; Payee and any subsequent holder[s] hereof are

hereinafter referred to collectively as "Holder"), at the office of Payee at

__________________________________, or at such other place as Holder may

designate to Maker in writing from time to time, the principal sum of

______________________________ AND NO/100THS DOLLARS ($_________.00), together

with interest on the outstanding principal balance hereof from the date hereof

at the Interest Rate, in lawful money of the United States. Amounts payable

hereunder shall be paid, at Payee's option as specified by Payee in writing from

time to time, either by (i) check delivered to the office of Payee or (ii) wire

transfer of immediately available funds to an account specified by Payee in

writing from time to time. This Note is referred to in and issued pursuant to

that certain Note and Warrant Purchase Agreement, dated as of September ___,

2005, by and between Payee and Maker (as amended from time to time, the

"Agreement").

 

         The Interest Rate shall be a floating rate calculated at an annual rate

equal to three percent (3.0%) per annum in excess of the Bank Prime Rate of

Interest per the Federal Reserve Bank in effect from time to time, calculated on

the basis of a 360-day year, actual days elapsed, upon the principal balance

hereof from time to time outstanding, but in no event to exceed the Maximum Rate

(as defined below). Each adjustment in the Interest Rate shall be effective on

the day the change in the Bank Prime Rate occurs.

 

         Interest only on the outstanding principal balance hereof shall be due

and payable monthly, in arrears, with the first installment being payable on the

fifteenth (15th) day of October, 2005, and subsequent installments being payable

on the fifteenth (15th) day of each succeeding month thereafter until June 15,

2006 (the "Maturity Date"), at which time the entire outstanding principal

balance, together with all accrued and unpaid interest, shall be immediately due

 

<PAGE>

 

and payable in full. If any such day is not a business day, such payment shall

be made on the next succeeding day which is a business day and interest shall

continue to accrue thereon until paid. As used herein, "business day" means a

day, other than a Saturday, Sunday or legal holiday, on which commercial banks

in Orlando, Florida are open for the general transaction of business.

 

          The indebtedness evidenced hereby may be prepaid in whole or in part,

at any time and from time to time, without premium or penalty. Any such

prepayments shall be credited first to any accrued and unpaid interest and then

to the outstanding principal balance hereof.

 

         The failure of Maker to pay any principal, interest or any other sums

required hereunder when due under this Note shall constitute a default. If (i) a

default shall occur hereunder and such default shall continue for ten (10) days

after notice thereof is delivered by Holder to Maker, or (ii) an Event of

Default shall occur under the Agreement, which Event of Default is not cured

following the giving of any applicable notice and within any applicable cure

period set forth in the Agreement, then, and in such event, the entire

outstanding principal balance of the indebtedness evidenced hereby, together

with any other sums advanced hereunder and/or under any other instrument or

document now or hereafter evidencing, securing or in any way relating to the

indebtedness evidenced hereby, together with all unpaid interest accrued

thereon, shall, at the option of Holder and without notice to Maker, at once

become due and payable and may be collected forthwith, regardless of the

stipulated date of maturity. Upon the occurrence of a default as set forth

herein or in the Agreement, which default is not cured following the giving of

any applicable notice and within any applicable cure period set forth herein, at

the option of Holder and without notice to Maker, all accrued and unpaid

interest, if any, shall be added to the outstanding principal balance hereof,

and the entire outstanding principal balance, as so adjusted, shall bear

interest thereafter until paid at an annual rate (the "Default Rate") equal to

the lesser of (i) the rate that is five percentage points (5.0%) in excess of

the above-specified Interest Rate on the date of such default, or (ii) the

maximum rate of interest allowed to be charged under applicable law (the

"Maximum Rate"), regardless of whether or not there has been an acceleration of

the payment of principal as set forth herein.

 

         In the event this Note is placed in the hands of an attorney for

collection, or if Holder incurs any costs incident to the collection of the

indebtedness evidenced hereby, Maker and any endorsers hereof agree to pay to

Holder an amount equal to all such costs, including, without limitation, all

reasonable attorneys' fees and all court costs.

 

         Presentment for payment, demand, protest and notice of demand, protest

and nonpayment are hereby waived by Maker and all other parties hereto. No

failure to accelerate the indebtedness evidenced hereby by reason of a default

hereunder, acceptance of a past-due installment or other indulgences granted

from time to time, shall be construed as a novation of this Note or as a waiver

of such right of acceleration or of the right of Holder thereafter to insist

upon strict compliance with the terms of this Note or to prevent the exercise of

such right of acceleration or any other right granted hereunder or by applicable

 

 

                                       2

<PAGE>

 

law. No extension of the time for payment of the indebtedness evidenced hereby

or any installment due hereunder, made by agreement with any person now or

hereafter liable for payment of the indebtedness evidenced hereby, shall operate

to release, discharge, modify, change or affect the original liability of Maker

hereunder or that of any other person now or hereafter liable for payment of the

indebtedness evidenced hereby, either in whole or in part, unless Holder agrees

otherwise in writing. This Note may not be changed orally, but only by an

agreement in writing signed by the party against whom enforcement of any waiver,

change, modification or discharge is sought.

 

         All agreements herein made are expressly limited so that in no event

whatsoever, whether by reason of advancement of proceeds hereof, acceleration of

maturity of the unpaid balance hereof or otherwise, shall the amount paid or

agreed to be paid to Holder for the use of the money advanced or to be advanced

hereunder exceed the Maximum Rate. If, from any circumstances whatsoever, the

fulfillment of any provision of this Note or any other agreement or instrument

now or hereafter evidencing, securing or in any way relating to the indebtedness

evidenced hereby shall involve the payment of interest in excess of the Maximum

Rate, then, ipso facto, the obligation to pay interest hereunder shall be

reduced to the Maximum Rate; and if from any circumstance whatsoever, Holder

shall ever receive interest, the amount of which would exceed the amount

collectible at the Maximum Rate, such amount as would be excessive interest

shall be applied to the reduction of the principal balance remaining unpaid

hereunder and not to the payment of interest. This provision shall control every

other provision in any and all other agreements and instruments existing or

hereafter arising between Maker and Holder with respect to the indebtedness

evidenced hereby.

 

         This Note is intended as a contract under and shall be construed and

enforceable in accordance with the laws of the State of Florida, and shall be

enforceable in a court of competent jurisdiction in the State of Florida,

regardless of in which state this Note is being executed.

 

         HOLDER AND MAKER HEREBY KNOWINGLY AND VOLUNTARILY WITH THE BENEFIT OF

COUNSEL WAIVE TRIAL BY JURY IN ANY ACTIONS, PROCEEDINGS, CLAIMS OR

COUNTER-CLAIMS, WHETHER IN CONTRACT OR TORT OR OTHERWISE, AT LAW OR IN EQUITY,

ARISING OUT OF OR IN ANY WAY RELATING TO THIS NOTE.

 

         As used herein, the terms "Maker" and "Holder" shall be deemed to

include their respective successors, legal representatives and assigns, whether

by voluntary action of the parties or by operation of law.

 

                                    MAKER:

 

                                    GALAXY NUTRITIONAL FOODS, INC.

                                    a Delaware corporation

 

 

                                    By:                                  

                                       ---------------------------------

                                             Michael E. Broll

                                             Chief Executive Officer

 

 

                                       3

<PAGE>

 

                                    EXHIBIT B

 

         THIS WARRANT AND THE SECURITIES ISSUABLE UPON THE EXERCISE HEREOF HAVE

         NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE

         "SECURITIES ACT"), OR ANY APPLICABLE STATE SECURITIES LAWS AND MAY NOT

         BE SOLD, OFFERED FOR SALE, MORTGAGED, PLEDGED, HYPOTHECATED OR

         OTHERWISE TRANSFERRED EXCEPT PURSUANT TO (A) AN EFFECTIVE REGISTRATION

         STATEMENT UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES

         LAWS, OR (B) AN EXEMPTION THEREFROM AND, IF REQUESTED BY THE COMPANY,

         THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL SATISFACTORY TO THE

         COMPANY TO THE EFFECT THAT THE TRANSFER IS EXEMPT FROM THE REGISTRATION

          PROVISIONS OF THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS.

 

 

         THIS WARRANT IS SUBJECT TO THE PROVISIONS OF A NOTE AND WARRANT

         AGREEMENT, INCLUDING THEREIN CERTAIN RESTRICTIONS ON TRANSFER. A

         COMPLETE AND CORRECT COPY OF SUCH AGREEMENT IS AVAILABLE FOR INSPECTION

         AT THE PRINCIPAL OFFICE OF THE COMPANY AND WILL BE FURNISHED UPON

         WRITTEN REQUEST AND WITHOUT CHARGE.

 

 

 

 

                         WARRANT TO PURCHASE SECURITIES

                                        OF

                         GALAXY NUTRITIONAL FOODS, INC.

 

                           Void after October 17, 2008

 

            This Warrant is issued to _____________, or its registered assigns

(the "Holder") by Galaxy Nutritional Foods, Inc., a Delaware corporation (the

"Company"), as of October 17, 2005 (the "Warrant Issue Date"). This Warrant is

issued pursuant to the terms of a Note and Warrant Purchase Agreement dated of

September __, 2005 (the "Purchase Agreement") in connection with a loan by the

Holder to the Company. Capitalized terms used herein, but not otherwise defined,

shall have the meaning ascribed to them in the Purchase Agreement.

 

            1. Number of Shares Subject to Warrant. Subject to the terms and

conditions hereinafter set forth, the Holder is entitled, upon surrender of this

Warrant at the principal office of the Company, to purchase from the Company, at

a price equal to the Exercise Price (as defined in Section 2 below), shares of

the Warrant Stock.

 

            For purposes of this Warrant:

 

            (A)    "Common Stock" shall mean the Company's common stock, $0.01

                  par value.

 

            (B)    "Expiration Date" shall mean October 17, 2008.

 

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            (C)    "Warrant Stock" shall mean __________ shares of the Company's

                  Common Stock, subject to adjustment as described in Section 7

                  below.

 

            (D)    "Shares" shall mean fully paid and non-assessable shares of

                  Common Stock.

 

             2. Exercise Price. The per share purchase price for the Shares shall

be 95% of the lowest closing sale price of the Common Stock on the AMEX Stock

Exchange (or any successor exchange or quotation system on which the Common

Stock is listed or quoted) during the 60 calendar days immediately preceding the

Warrant Issue Date (the "Exercise Price"). T