U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended July 1, 2006
[ ] Transition report under Section 13 or 15(d) of the Exchange Act for the
transition period from [ ] to [ ]
Commission file number: 1-9009
Tofutti Brands Inc.
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(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 13-3094658
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(State of Incorporation) (I.R.S. Employer
Identification No.)
50 Jackson Drive, Cranford, New Jersey 07016
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(Address of Principal Executive Offices)
(908) 272-2400
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(Issuer's Telephone Number)
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(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
As of August 11, 2006 the Issuer had 5,433,467 shares of Common Stock,
par value $.01, outstanding.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
TOFUTTI BRANDS INC.
INDEX
Page
----
Part I - Financial Information:
Item 1. Financial Statements
Condensed Balance Sheets - July 1, 2006
(Unaudited) and December 31, 2005 3
Condensed Statements of Income -
Thirteen and Twenty-Six Week Periods
ended July 1, 2006 and July 2, 2005 (Unaudited) 4
Condensed Statements of Cash Flows -
Thirteen and Twenty-Six Week Periods
ended July 1, 2006 and July 2, 2005 (Unaudited) 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 3. Controls and Procedures 18
Part II - Other Information:
Item 1. Legal Proceedings 20
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Shareholders 20
Item 5. Other Information 21
Item 6. Exhibits 21
Signatures 23
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
TOFUTTI BRANDS INC.
Condensed Balance Sheets
(in thousands)
July 1, 2006 December 31, 2005
------------ -----------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 737 $1,256
Accounts receivable (net of allowance
for doubtful accounts of $327 and $291, respectively) 1,982 2,643
Inventories 2,150 2,045
Prepaid expenses 6 51
Deferred income taxes 431 577
------ ------
Total current assets 5,306 6,572
Fixed assets (net of accumulated depreciation
of $16 and $10, respectively) 31 34
Other assets 16 16
------ ------
Total assets $5,353 $6,622
====== ======
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $1,157 $1,442
Accrued expenses 23 479
Accrued officers' compensation -- 500
Income taxes payable 413 478
------ ------
Total current liabilities 1,593 2,899
------ ------
Commitments and contingencies
Stockholders' equity:
Preferred stock - par value $.01 per share;
authorized 100,000 shares, none issued -- --
Common stock- par value $.01 per share;
authorized 15,000,000 shares, issued and
outstanding 5,433,467 shares at July 1, 2006
and 5,542,267 shares at December 31, 2005 54 55
Additional paid-in capital 38 --
Retained earnings 3,668 3,668
------ ------
Total stockholders' equity 3,760 3,723
------ ------
Total liabilities and stockholders' equity $5,353 $6,622
====== ======
See accompanying notes to condensed financial statements.
3
TOFUTTI BRANDS, INC.
Condensed Statements of Income
(Unaudited)
(in thousands, except per share figures)
Thirteen Thirteen Twenty-six Twenty-six
weeks ended weeks ended weeks ended weeks ended
July 1, 2006 July 2, 2005 July 1, 2006 July 2, 2005
------------ ------------ ------------ ------------
Net sales $ 5,575 $ 5,091 $10,162 $ 9,331
Cost of sales 4,022 3,656 7,415 6,684
------- ------- ------- -------
Gross profit 1,553 1,435 2,747 2,647
------- ------- ------- -------
Operating expenses:
Selling 357 271 709 516
Marketing 185 150 353 385
Research and development 110 90 219 209
General and administrative 415 430 849 914
------- ------- ------- -------
1,067 941 2,130 2,024
------- ------- ------- -------
Operating income 486 494 617 623
Interest income -- 1 -- 3
------- ------- ------- -------
Income before income taxes 486 495 617 626
Income taxes 190 208 251 263
------- ------- ------- -------
Net income $ 296 $ 287 $ 366 $ 363
======= ======= ======= =======
Weighted average common
shares outstanding:
Basic 5,418 5,635 5,435 5,636
======= ======= ======= =======
Diluted 5,972 6,219 5,993 6,219
======= ======= ======= =======
Net income per share:
Basic $ 0.05 $ 0.05 $ 0.07 $ 0.06
======= ======= ======= =======
Diluted $ 0.05 $ 0.05 $ 0.06 $ 0.06
======= ======= ======= =======
See accompanying notes to condensed financial statements.
4
TOFUTTI BRANDS INC.
Condensed Statements of Cash Flows
(Unaudited)
(in thousands)
Twenty-six Twenty-six
weeks weeks
ended ended
July 1, 2006 July 2, 2005
------------ ------------
Cash flows from operating activities, net $(557) $(171)
Cash flows from investing activities -- --
Cash flows from financing activities, net 38 (18)
---- ----
Net change in cash and cash equivalents (519) (189)
Cash and cash equivalents at beginning of period 1,256 2,199
----- -----
Cash and cash equivalents at end of period $737 $2,010
==== ======
Supplemental cash flow information:
Income taxes paid $111 $170
==== ====
See accompanying notes to condensed financial statements.
5
TOFUTTI BRANDS INC.
Notes to Condensed Financial Statements
(in thousands, except per share figures)
Note 1: Description of Business
Tofutti Brands Inc. ("Tofutti" or the "Company") is engaged in one
business segment, the development, production and marketing of
non-dairy frozen desserts and other food products.
Note 2: Basis of Presentation
The accompanying financial information is unaudited, but, in the
opinion of management, reflects all adjustments (which include only
normally recurring adjustments) necessary to present fairly the
Company's financial position, operating results and cash flows for the
periods presented. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
accounting principles generally accepted in the United States of
America have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. The condensed
balance sheet amounts as of December 31, 2005 have been derived from
our audited financial statements for the year ended December 31, 2005.
The financial information should be read in conjunction with the
audited financial statements and notes thereto for the year ended
December 31, 2005 included in the Company's Annual Report on Form
10-KSB filed with the Securities and Exchange Commission. The results
of operations for the thirteen week and twenty-six week periods ended
July 1, 2006 are not necessarily indicative of the results to be
expected for the full year.
The Company operates on a fiscal year which ends on the Saturday
closest to December 31st.
There were no changes in the Company's accounting policies during the
period ended July 1, 2006 from those in effect at December 31, 2005,
except for the adoption of SFAS No. 123R - see Note 7.
6
TOFUTTI BRANDS INC.
Notes to Condensed Financial Statements
(in thousands, except per share figures)
Note 3: Inventories
The composition of inventories is as follows:
July 1, December 31,
2006 2005
---- ----
Finished products $1,205 $1,258
Raw materials and packaging 945 787
------ ------
$2,150 $2,045
====== ======
Note 4: Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carry forwards.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
Note 5: Market Risk
We invest our excess cash, should there be any, in bank certificates of
deposit and high rated money market funds. The bank certificates of
deposit are usually for a term of not more than six months and never
for more than $100 per account.
Note 6: Earnings Per Share
Basic earnings per common share has been computed by dividing net
income by the weighted average number of common shares outstanding.
Diluted earnings per common share has been computed by dividing net
income by the weighted average number of common shares outstanding
including dilutive effects of stock options.
7
TOFUTTI BRANDS INC.
Notes to Condensed Financial Statements
(in thousands, except per share figures)
The following table sets forth the computation of basic and diluted earnings per
share:
Thirteen Weeks Thirteen Weeks Twenty-six Weeks Twenty-six Weeks
Ended Ended Ended Ended
July 1, 2006 July 2, 2005 July 1, 2006 July 2, 2005
------------ ------------ ------------ ------------
Numerator
Net income-basic.............................. $296 $287 $366 $363
==== ==== ==== ====
Net income-diluted............................ $296 $287 $366 $363
==== ==== ==== ====
Denominator
Denominator for basic earnings per share
weighted average shares ................... 5,418 5,635 5,435 5,636
Effect of dilutive securities
stock options.............................. 554 584 558 583
--- --- --- ---
Denominator for diluted earnings per share.... 5,972 6,219 5,993 6,219
----- ----- ----- -----
Earnings per share
Basic....................................... $0.05 $0.05 $0.07 $0.06
===== ===== ===== =====
Diluted..................................... $0.05 $0.05 $0.06 $0.06
===== ===== ===== =====
Note 7: Stock Transactions
Stock-Based Compensation
On January 1, 2006, the Company adopted SFAS No. 123R, "Share-Based
Payment," which requires all companies to measure and recognize
compensation expense at fair value for all stock-based payments to
employees and directors with such fair value being recognized as an
expense over the estimated service period. SFAS No. 123R is being
applied on the modified prospective basis. Prior to the adoption of
SFAS No. 123R, the Company accounted for its stock-based compensation
plans for employees and directors under the recognition and measurement
principles of Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations.
Prior to January 1, 2006, the Company recognized no compensation
expense related to the stock-based plans for grants to employees or
directors. Grants to members of the Board of Directors under the
Company's stock option plans were recorded under SFAS
8
TOFUTTI BRANDS INC.
Notes to Condensed Financial Statements
(in thousands, except per share figures)
No. 123, which is a method similar to those for employees of the
Company.
Under the modified prospective approach, SFAS No. 123R applies to new
grants of options and awards of stock as well as to grants of options
that were outstanding on January 1, 2006 and that may subsequently be
repurchased, cancelled or materially modified. Under the modified
prospective approach, compensation cost recognized for the twenty-six
weeks ended July 1, 2006 includes compensation cost for all share-based
payments granted prior to, but not yet vested on, January 1, 2006,
based on fair value as of the prior grant-date and estimated in
accordance with the provisions of SFAS No. 123R. The compensation cost
recognized for the thirteen and twenty-six weeks ended July 1, 2006 was
an additional $13 of expense (recorded in general and administrative
expenses) related to the unvested portion of previously granted awards
that were outstanding as of the date of adoption and for those options
granted during fiscal 2006. The pro forma amount recorded under SFAS
123, "Accounting for Stock-Based Compensation" for the thirteen and
twenty-six weeks ended July 2, 2005 is deminimus, therefore the pro
forma impact of stock-based compensation for the thirteen and
twenty-six week periods ended July 2, 2005 is not presented.
SFAS 123R also requires companies to calculate an initial "pool" of
excess tax benefits available at the adoption date to absorb any tax
deficiencies that may be recognized under SFAS 123R. The pool includes
the net excess tax benefits that would have been recognized if the
Company had adopted SFAS 123R for recognition purposes on its effective
date.
Stock Options
We use the Black-Scholes option pricing model to estimate the fair
value of stock-based awards with the following weighted-average
assumptions for the indicated periods.
Thirteen Weeks Ended Twenty-Six Weeks Ended
July 1, July 2, July 1, July 2,
2006 2005 2006 2005
--------- --------- --------- ---------
Dividend yield 0% 0% 0% 0%
Expected volatility 28% 28% 28% 28%
Risk-free interest rate 4.85% 3.89% 4.85% 3.89%
Expected life of options (in years) 5 5 5 5
Weighted-average grant-date fair value $ 2.90 $ 3.15 $ 2.90 $ 3.15
The assumptions above are based on multiple factors, including
historical patterns of employees in relatively homogeneous groups with
respect to exercise and post-vesting
9
TOFUTTI BRANDS INC.
Notes to Condensed Financial Statements
(in thousands, except per share figures)
employment termination behaviors, expected future exercise patterns for
these same homogeneous groups and the implied volatility of our stock
price.
At July 1, 2006, there was $13 of unrecognized compensation cost
related to share-based payments which is expected to be recognized over
a weighted-average period of 2.6 years.
The following table represents stock option activity for the twenty-six
weeks ended July 1, 2006:
Weighted-
Weighted- Average
Average Contract
Number of Exercise Life
Shares Price (in years)
---------- --------- --------
Outstanding options at beginning of period 855 $ 1.00 2.4
Granted 16 2.90 5
Exercised (20) 1.90 --
Forfeited -- -- 1.9
---------- ---------
Outstanding options at end of period 851 $ 1.02
========== =========
Outstanding exercisable options at end of period 833.7 $ 0.98
========== =========
Shares available for future stock option and restricted share grants to
employees and directors under existing plans were none and 84,
respectively, at July 1, 2006. The aggregate intrinsic value of all
options outstanding as of July 1, 2006 was $1,602, and the aggregate
intrinsic value of options exercisable was $1,603.
Stock Transactions
During the period January 1, 2006 through January 20, 2006, the Company
purchased 129 shares at the cost of $386. During the thirteen and
twenty-six weeks ended July 1, 2006, the Company received $38 from the
exercise of 20 options.
10
TOFUTTI BRANDS INC.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following is management's discussion and analysis of certain significant
factors which have affected our financial position and operating results during
the periods included in the accompanying financial statements.
The discussion and analysis which follows in this Quarterly Report and in other
reports and documents and in oral statements made on our behalf by our
management and others may contain trend analysis and other forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934 which reflect our current views with respect to future events and financial
results. These include statements regarding our earnings, projected growth and
forecasts, and similar matters which are not historical facts. We remind
stockholders that forward-looking statements are merely predictions and
therefore are inherently subject to uncertainties and other factors which could
cause the actual future events or results to differ materially from those
described in the forward-looking statements. These uncertainties and other
factors include, among other things, business conditions in the food industry
and general economic conditions, both domestic and international; lower than
expected customer orders; competitive factors; changes in product mix or
distribution channels; and resource constraints encountered in developing new
products. The forward-looking statements contained in this Quarterly Report and
made elsewhere by or on our behalf should be considered in light of these
factors.
We have attempted to identify additional significant uncertainties and other
factors affecting forward-looking statements in the "Risk Factors" section in
this quarterly report on Form 10-QSB.
Transfer of Production Facilities
In October 2004, H. P. Hood, the parent company of Kemps Foods, Inc., announced
it was closing the Kemps' Lancaster, Pennsylvania facility that had produced our
non-dairy frozen dessert products for the past twenty years. The Lancaster
facility ceased operations on July 21, 2005. As part of our arrangement with
Kemps and H. P. Hood, we initially agreed to move our production to the H. P.
Hood facility in Suffield, Connecticut. After some preliminary trial production,
we determined that the Suffield facility did not satisfy all of our
manufacturing requirements. Based on this conclusion, we relocated the
production of most of our frozen dessert products to the Ellsworth Ice Cream
Company facilities in New York and Vermont. We also began production of some of
our frozen dessert products at Kemps Foods' facility in Minnesota as well. To
date, we have not encountered any material problems in the transfer of
production to these new sites, which transfer was completed in February 2006. We
took steps to build inventory at our former facility prior to its close to
maintain our levels of sales service during this transition period, and
accordingly, our inventory levels were significantly higher than normal at
December 31, 2005 and July 1, 2006. We expect that our inventory levels will be
higher than our historical levels during the remainder of the fiscal year.
11
Critical Accounting Policies
Our financial statements have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. The
policies discussed below are considered by management to be critical to an
understanding of our financial statements because their application places the
most significant demands on management's judgment, with financial reporting
results relying on estimation about the effect of matters that are inherently
uncertain. Specific risks for these critical accounting policies are described
in the following paragraphs. For all of these policies, management cautions that
future events rarely develop exactly as forecast, and the best estimates
routinely require adjustment.
Revenue Recognition. We recognize revenue when goods are shipped from our
production facilities or outside warehouses and the following four criteria have
been met: (i) the product has been shipped and we have no significant remaining
obligations; (ii) persuasive evidence of an arrangement exists; (iii) the price
to the buyer is fixed or determinable; and (iv) collection is probable.
We record as deductions against sales all trade discounts and allowances that
occur in the ordinary course of business, when the sale occurs. To the extent we
charge our customers for freight expense, it is included in revenues. The amount
of freight expense charged to customers has not been material to date.
Accounts Receivable. The majority of our accounts receivables are due from
distributors (domestic and international) and retailers. Credit is extended
based on evaluation of a customers' financial condition and, generally,
collateral is not required. Accounts receivable are most often due within 30 to
90 days and are stated at amounts due from customers net of an allowance for
doubtful accounts. Accounts outstanding longer than the contractual payment
terms are considered past due. We determine whether an allowance is necessary by
considering a number of factors, including the length of time trade accounts
receivable are past due, our previous loss history, the customer's current
ability to pay its obligation, and the condition of the general economy and the
industry as a whole. We write off accounts receivable when they become
uncollectible, and payments subsequently received on such receivables are
credited to the allowance for doubtful accounts. We do not accrue interest on
accounts receivable past due.
Allowance for Inventory Obsolescence. We are required to state our inventories
at the lower of cost or market price. We maintain an allowance for inventory
obsolescence for losses resulting from inventory items becoming unsaleable due
to loss of specific customers or changes in customers' requirements. Based on
historical and projected sales information, we believe our allowance is
adequate. However, changes in general economic, business and market conditions
could cause our customers' purchasing requirements to change. These changes
could affect our ability to sell our inventory; therefore, the allowance for
inventory obsolescence is reviewed regularly and changes to the allowance are
updated as new information is received.
Valuation Allowance for Deferred Tax Assets. The carrying value of deferred
tax assets
12
assumes that we will be able to generate sufficient future taxable income to
realize the deferred tax assets based on estimates and assumptions. If these
estimates and assumptions change in the future, we may be required to record a
valuation allowance against deferred tax assets which could result in additional
income tax expense.
Results of Operations
Thirteen Weeks Ended July 1, 2006
Compared with Thirteen Weeks Ended July 2, 2005
- -----------------------------------------------
Net sales for the thirteen weeks ended July 1, 2006 were $5,575,000, an increase
of $484,000, or 9%, from the sales level realized for the thirteen weeks ended
July 2, 2005. Sales were up for all product and customer categories. Our gross
profit in the current period increased by $118,000 to $1,553,000 reflecting the
higher level of sales. Our gross profit percentage for the period ending July 1,
2006 was 28%, unchanged from the period ending July 2, 2005.
Our cost of sales during the quarter continued to be adversely and consistently
impacted by significant industry-wide increases to certain key ingredients and
packaging, due mainly to supply shortages as a result of political events in
certain foreign countries and the general economic situation in the United
States, increased freight expenses and increased cost of petroleum based
products. Freight out expense, a significant part of our cost of sales,
increased by $152,000, or 53%, to $437,000 for the thirteen weeks ended July 1,
2006 compared with $285,000 for the thirteen weeks ended July 2, 2005. We
anticipate that freight out expense will remain at its current high level or
increase further during the foreseeable future. In addition to increasing our
shipping costs, the high cost of fuel affects the cost of many inventory
components we use, particularly packaging. To offset these significant cost
increases, we continue to, without compromising quality and taste, replace
higher cost ingredients with functionally similar items at significant cost
savings. However, there is no assurance that such substitutions will ever fully
offset the significant cost increases that we continue to incur.
Selling expenses increased by 31% to $357,000 for the current fiscal quarter
compared with $271,000 for the comparable period in 2005. This increase is due
primarily to an increase in commission expense of $16,000 and an increase in
outside warehouse expense of $85,000 resulting from the large increase in our
finished goods inventory. We expect our outside warehouse expense to remain
significantly higher than our historical levels due to the higher inventory
balances that we expect to maintain. The higher level of inventory balances are
also the result of changes in our frozen dessert co-packaging arrangements. We
are now responsible for maintaining the majority of the frozen dessert finished
goods inventory. Under our prior arrangement, the majority of our frozen dessert
finished goods inventory was owned by the co-packer.
Marketing expenses increased by $35,000 to $185,000 in the fiscal 2006 period
due principally to a $33,000 increase in television and radio advertising
expense.
Research and development costs, which consist principally of salary expenses and
laboratory costs, increased to $110,000 for the thirteen weeks ended July 1,
2006 compared to $90,000 for the comparable period in 2005. This increase was
primarily due to an increase in payroll expense.
13
General and administrative expenses decreased to $415,000 for the current
quarter compared with $430,000 for the comparable period in 2005 due primarily
to a decrease in professional fees and outside services.
There was no interest income for the current fiscal quarter as compared with
$1,000 for the comparable period in 2005.
The decrease in income tax expense in the second quarter of 2006 to $190,000
from $208,000 in the second quarter of 2005 reflects a slight decrease in
operating profit in 2006. The effective tax rate was relatively consistent in
both periods.
Twenty-Six Weeks Ended July 1, 2006
Compared with Twenty-Six Weeks Ended July 2, 2005
- -------------------------------------------------
Net sales for the twenty-six weeks ended July 1, 2006 were $10,162,000, an
increase of $831,000, or 9%, from the sales level realized for the twenty-six
weeks ended July 2, 2005. Sales were up for all product and customer categories.
Partially as a result of the increase in sales, our gross profit in the current
period increased by $100,000, or 4%, to $2,747,000. Our gross profit percentage
decreased to 27% for the period ending July 1, 2006 compared to 28% for the
period ending July 2, 2005.
Our cost of sales during the period continued to be adversely and consistently
impacted by significant industry-wide increases to certain key ingredients and
packaging, due mainly to supply shortages as a result of political events in
certain foreign countries and the general economic situation here in the United
States, increased freight expenses and increased cost of petroleum based
products. Our freight out expense for the period ending July 1, 2006 increased
to $850,000 from $539,000 in the comparable twenty-six week period in 2005. In
addition to increasing our shipping costs, the high cost of fuel affects the
cost of many inventory components we use, particularly packaging. To offset
these significant cost increases, we continue to, without compromising quality
and taste, replace higher cost ingredients with functionally similar items at
significant cost savings. However, there is no assurance that such substitutions
will ever fully offset the significant cost increases that we continue to incur.
Selling expenses increased by 37% to $709,000 for the current twenty-six week
period compared with $516,000 for the comparable period in 2005. This increase
was due primarily to increases in outside warehouse rental expense of $177,000
resulting from the increase in finished goods inventory and commission expenses
of $35,000 due to the increase in sales for the current twenty-six week period.
These increases were partially offset by a decrease in travel and entertainment
expense of $31,000. We expect our outside warehouse expense to remain
significantly higher than our historical levels due to the higher inventory
balances that we expect to maintain. The higher level of inventory balances are
also the result of changes in our frozen dessert co-packaging arrangements. We
are now responsible for maintaining the majority of the frozen dessert finished
goods inventory. Under our prior arrangement, the majority of our frozen dessert
finished goods inventory was owned by the co-packer.
Marketing expenses decreased by $32,000 to $353,000 in the current twenty-six
week period due principally to decreases in expenses for magazine advertising of
$47,000, point of sale materials
14
of $36,000 and promotions of $16,000, which were partially offset by an increase
in television and radio advertising of $52,000.
Research and development costs, which consist principally of salary expenses and
laboratory costs, increased to $219,000 for the twenty-six weeks ended July 1,
2006 compared to $209,000 for the comparable period in 2005. This increase was
mainly attributable to an increase in payroll expense.
General and administrative expenses decreased to $849,000 for the current
twenty-six week period compared with $914,000 for the comparable period in 2005
due primarily to a decrease in travel and entertainment expenses of $36,000 and
a decrease in professional fees and outside services of $75,000. These cost
decreases were partially offset by an increase in payroll costs of $15,000 and
stock option compensation costs of $13,000.
There was no interest income for the twenty-six weeks ended July 1, 2006 as
compared with $3,000 for the comparable period in 2005.
The decrease in income tax expense in the 2006 twenty-six week period to
$251,000 from $263,000 in the 2005 twenty-six week period reflects the slightly
lower operating profit in 2006. The effective tax rate was relatively consistent
in both periods.
Liquidity and Capital Resources
As of July 1, 2006, we had approximately $737,000 in cash and cash equivalents
and our working capital was approximately $3.7 million.
Because we are now purchasing more of the ingredients and packaging used in the
production of our frozen dessert products and maintaining larger finished goods
inventories to improve customer service, we have established a $1,000,000 line
of credit with Wachovia Bank, N. A. Any money borrowed under the line of credit
will be at the prime rate of borrowing and any such loans will be secured by the
assets of our company. The loan agreement contains certain covenants and
restrictions. The loan documents were signed as of April 13, 2006 and the credit
line expires one year from such date. As of the date of this report, we have not
used the line of credit.
The following table summarizes our cash flows for the periods presented:
Twenty-six Weeks Twenty-six Weeks
ended July 1, 2006 ended July 2, 2005
------------------ ------------------
Net cash flows from operating
activities..................... $(557,000) $(171,000)
Cash flows from
investing activities......... -- --
Net cash from
financing activities......... 38,000 (18,000)
Net change in cash
and cash equivalents......... $519,00 $(189,000)
15
We believe that we will be able to fund our operations during the next twelve
months with cash generated from operations and from borrowings on our line of
credit. We believe that these sources will be sufficient to meet our
operating and capital requirements during the next twelve months.
Stock Repurchase Program
Our Board of Directors first instituted a share repurchase program in September
2000 which has been increased from time to time. The total number of shares of
common stock eligible for purchase under this program is 1,500,000 shares, which
may be purchased from time to time in compliance with Rule 10b-18 of the
Securities Exchange Act of 1934. Through December 31, 2005, we purchased
1,213,300 shares for $3,785,000, or $3.12 per share. During the period January
1, 2006 through January 20, 2006, we purchased an additional 128,800 shares at
the cost of $386,000 bringing the cumulative totals to 1,342,100 shares for a
total cost of $4,171,000 or $3.11 per share. There have been no additional stock
purchases since January 20, 2006.
Inflation and Seasonality
Our business is subject to minimal seasonal variations with slightly increased
sales historically in the second and third quarters of the fiscal year. We
expect to continue to experience slightly higher sales in the second and third
quarters, and slightly lower sales in the fourth and first quarters, as a result
of reduced sales of nondairy frozen desserts during those periods.
Market Risk
We invest our excess cash, should there be any, in highly rated money market
funds which are subject to changes in short-term interest rates.
Off-balance Sheet Arrangements
None.
Contractual Obligations
As of July 1, 2006, we did not have any contractual obligations or commercial
commitments, including obligations relating to discontinued operations.
Recent Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes-an
interpretation of FASB Statement No. 109" ("FIN 48"), which clarifies the
accounting for uncertainty in income tax positions. This Interpretation requires
that we recognize in our financial statements the impact of a tax position that
is more likely than not to be sustained upon examination based on the technical
merits of the position. The provisions of FIN 48 will be effective for us as of
the beginning of our 2007 fiscal year, with the cumulative effect of the change
in accounting principle recorded as an adjustment to opening retained earnings.
We are currently evaluating the impact of adopting FIN 48 on our
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financial statements.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections - replacement of APB Opinion No. 20 and FASB Statement No. 3."
SFAS No. 154 changes the accounting for and reporting of a change in
accounting principle by requiring retrospective application to prior periods'
financial statements of changes in accounting principle unless impracticable.
SFAS No. 154 is effective for accounting changes made in fiscal years
beginning after December 15, 2005. The required adoption of SFAS No. 154 had no
effect on our financial condition or results of operations.
On November 24, 2004, the FASB issued SFAS No. 151, "Inventory Costs," which is
an amendment to Accounting Research Bulletin (ARB) No. 43, Chapter 4. It
clarifies the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material (spoilage). Under this Statement, such costs
should be expensed as incurred and not included in overhead. Further, SFAS No.
151 requires that allocation of fixed production overheads to conversion costs
should be based on normal capacity of the production facilities. The required
adoption of SFAS No. 151 had no effect on our financial condition or results of
operations.
Risk Factors
Investing in our common stock involves a high degree of risk and uncertainty.
You should carefully consider the risks and uncertainties described below in
addition to the risk factors contained in our Annual Report on Form 10-KSB for
the year ended December 31, 2005 before investing in our common stock. If any of
the following risks actually occurs, our business, prospects, financial
condition and results of operations could be harmed. In that case, the value of
our common stock could decline, and you could lose all or part of your
investment.
Reliance on Independent Distributors. The success of our business depends, in
large part, upon the establishment and maintenance of a strong distribution
network. Although we believe that the business associated with any of our
primary distributors can be readily transferred to other distributors if
necessary, no assurance can be given that a change in distributors would not be
disruptive to our business, which could have a material adverse effect on our
business and results of operations.
Dependence on Key Customers. During the year ended December 31, 2005 and the
twenty-six week period ended July 1, 2006, Trader Joe's, a West Coast based
health food supermarket chain, accounted for 20% and 22%, respectively, of our
net sales. In addition, a significant portion of our sales are to several key
distributors, which are large distribution companies with numerous divisions and
subsidiaries who act independently. Such distributors as a group accounted for
38% of our net sales for the year ended December 31, 2005 and 37% of our net
sales for the twenty-six week period ended July 1, 2006. The loss of a
substantial portion of our sales to Trader Joe's or these key distributors would
have a material adverse affect on our company.
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Dependence on Key Suppliers. During the year ended December 31, 2005 and the
twenty-six weeks ended July 1, 2006, we purchased approximately 47% and 13%,
respectively, of our finished goods from Kemps Foods, our frozen dessert
co-packer, and during the same periods, we purchased 14% of our finished goods
from Franklin Foods, our Better Than Cream Cheese and Sour Supreme co-packer.
During year ended December 31, 2005 and the twenty-six weeks ended July 1, 2006,
we purchased approximately 5% and 16%, respectively, of our finished goods
from Ellsworth Ice Cream Company. We expect the percentage of finished goods
purchased from Ellsworth to increase and from Kemps to decrease during 2006,
because we have moved a large part of our production requirements to Ellsworth
from Kemps. As a result of these changes, we increased our responsibilities for
purchasing certain raw materials during 2005 and 2006 on the behalf of our
suppliers, and we also increased our stocking of certain finished goods. We
expect these inventories to remain at higher levels during 2006, because of
changes in our frozen dessert co-packaging arrangements. Although we believe
that there will be no problem in continuing to obtain these finished goods from
these companies or alternative sources in the future, any disruption in supply
could have a material adverse affect on our company.
Reliance on a Limited Number of Key Personnel. Our success is significantly
dependent on the services of David Mintz (age 75), Chief Executive Officer and
Steven Kass (age 55), Chief Financial Officer. The loss of the services of
either of these persons could have a material adverse effect on our business.
Control of the Company. Our Chairman of the Board and Chief Executive Officer,
David Mintz, holds 2,630,440 shares of our common stock representing
approximately 49% of the outstanding shares, permitting him as a practical
matter to elect all members of the Board of Directors and thereby effectively
control the business, policies and management of our company.
Item 3. Controls and Procedures
Our management, including our chief executive officer and chief financial
officer, evaluated the effectiveness of our disclosure controls and procedures
(as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered
by this quarterly report on Form 10-QSB. Based upon that evaluation, our chief
executive officer and chief financial officer have concluded that, as of such
date, our disclosure controls and procedures were effective to ensure that
information required to be disclosed by our company in reports that we file
under the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms and that such information was made known
to them by others within the company, as appropriate to allow timely decisions
regarding required disclosure.
There were no changes to our internal control over financial reporting that
occurred during the period covered by this quarterly report on Form 10-QSB that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
All internal control systems no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective may not
prevent or detect misstatements and can provide only reasonable assurance with
respect to financial statement preparation and presentation. Also, projections
of any evaluation of effectiveness to future periods are subject to
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the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
Compliance with Section 404 of Sarbanes-Oxley Act
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (the Act), beginning
with our Annual Report on Form 10-KSB for our 2007 fiscal year, we will be
required to furnish a report by our management on our internal control over
financial reporting. This report will contain, among other matters, an
assessment of the effectiveness of our internal control over financial reporting
as of the end of our fiscal year, including a statement as to whether or not our
internal control over financial reporting is effective. This assessment must
include disclosure of any material weaknesses in our internal control over
financial reporting identified by management. If we identify one or more
material weaknesses in our internal control over financial reporting, we will be
unable to assert our internal control over financial reporting is effective.
This report will also contain a statement that our independent registered public
accountants have issued an attestation report on management's assessment of such
internal controls and a conclusion on the operating effectiveness of those
controls.
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PART II - OTHER INFORMATION
TOFUTTI BRANDS INC.
Item 1. Legal Proceedings
We are not a party to any material litigation.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Default Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Shareholders
During the thirteen week period ended July 1, 2006, we held
our Annual Meeting of Shareholders.
At the meeting, held on June 8, 2006, our shareholders voted for:
1. The election of the following directors to hold office for a
term until their successors are duly elected and qualified at
the Company's 2007 Annual Meeting of Shareholders.
For Withheld % For
--- -------- -----
David Mintz 5,229,468 101,541 92.77
Joseph Fischer 5,223,243 97,666 92.84
Aron Forem 5,250,108 80,901 93.14
Philip Gotthelf 5,233,308 97,701 92.84
Reuben Rapoport 5,249,368 81,641 93.13
Franklyn Snitow 5,232,568 98,441 92.83
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2. The ratification of the selection of Amper, Politziner &
Mattia, P.C. as the Company's independent registered public
accounting firm for the fiscal year ending December 30, 2006.
For Against Abstained % For
--- ------- --------- -----
5,262,666 51,974 16,368 93.36
Item 5. Other Information
None.
Item 6. Exhibits
(a) Exhibits
3.1 Certificate of Incorporation, as amended through February 1986.(1)
3.1.1 March 1986 Amendment to Certificate of Incorporation.(2)
3.1.2 June 1993 Amendment to Certificate of Incorporation.(3)
3.2 By-laws.(1)
4.1 Copy of the Registrant's Amended 1993 Stock Option Plan.(4)
4.2 Tofutti Brands Inc. 2004 Non-Employee Directors' Stock Option Plan.(5)
10.1 Form of Loan Agreement between the Registrant and
Wachovia Bank, N. A.(6)
10.2 Form of Promissory Note between the Registrant and
Wachovia Bank, N. A.(6)
10.3 Form of Security Agreement between the Registrant and
Wachovia Bank, N. A.(6)
31.1 Certification by Chief Executive Officer pursuant to Rule 13a-14(a)
and Rule 15d-14(a) of the Securities Exchange Act, as amended.
31.2 Certification by Chief Financial Officer pursuant to Rule 13a-14(a) and
Rule 15d-14(a) of the Securities Exchange Act, as amended.
32.1 Certification by Chief Executive Officer Pursuant to 18 U.S.C. Section
1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
32.2 Certification by Chief Financial Officer Pursuant to 18 U.S.C. Section
1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
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- --------------------
(1) Filed as an exhibit to the Registrant's Form 10-K for the fiscal year
ended July 31, 1985 and hereby incorporated by reference thereto.
(2) Filed as an exhibit to the Registrant's Form 10-K for the fiscal year
ended August 2, 1986 and hereby incorporated by reference thereto.
(3) Filed as an exhibit to the Registrant's Form 10-KSB for the fiscal year
ended January 1, 2005 and hereby incorporated by reference thereto.
(4) Filed as an exhibit to the Registrant's Form S-8 (Registration
No. 333-79567) filed May 28, 1999 and hereby incorporated by
reference thereto.
(5) Filed as Appendix B to the Registrant's Schedule 14A filed May 10, 2004
and hereby incorporated by reference thereto.
(6) Filed as an exhibit to the Registrant's Form 8-K bearing a cover date
of April 13, 2006 and hereby incorporated by reference thereto.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
TOFUTTI BRANDS INC.
(Registrant)
/s/David Mintz
--------------
David Mintz
President
/s/Steven Kass
--------------
Steven Kass
Chief Accounting and Financial Officer
Date: August 15, 2006
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