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 September 30, 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 November 13, 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 - September 30, 2006
(Unaudited) and December 31, 2005 3
Condensed Statements of Income -
Thirteen and Thirty-Nine Week Periods
ended September 30, 2006 and October 1, 2005 (Unaudited) 4
Condensed Statements of Cash Flows -
Thirteen and Thirty-Nine Week Periods
ended September 30, 2006 and October 1, 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 19
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 20
Item 6. Exhibits 20
Signatures 22
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
TOFUTTI BRANDS INC.
Condensed Balance Sheets
(in thousands)
September 30, December 31,
2006 2005
------------- ------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 24 $1,256
Accounts receivable (net of allowance for
doubtful accounts of $345 and $291, respectively) 2,234 2,643
Inventories 2,420 2,045
Prepaid expenses 15 51
Deferred income taxes 478 577
--- ---
Total current assets 5,171 6,572
Fixed assets (net of accumulated depreciation
of $18 and $10, respectively) 30 34
Other assets 16 16
-- --
Total assets $5,217 $6,622
====== ======
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $604 $1,442
Accrued expenses 86 479
Accrued officers' compensation 200 500
Income taxes payable 281 478
--- ---
Total current liabilities 1,171 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 September 30, 2006
and 5,542,267 shares at December 31, 2005 54 55
Additional paid-in capital 38 --
Retained earnings 3,954 3,668
----- -----
Total stockholders' equity 4,046 3,723
----- -----
Total liabilities and stockholders' equity $5,217 $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 Thirty-nine Thirty-nine
weeks ended weeks ended weeks ended weeks ended
Sept. 30, 2006 Oct. 1, 2005 Sept. 30, 2006 Oct. 1, 2005
-------------- ------------ -------------- ------------
Net sales $ 4,948 $ 4,115 $15,110 $13,446
Cost of sales 3,442 3,095 10,757 9,778
------- ------- ------- -------
Gross profit 1,506 1,020 4,353 3,668
------- ------- ------- -------
Operating expenses:
Selling 385 301 1,119 817
Marketing 90 117 443 502
Research and development 129 105 347 314
General and administrative 465 426 1,389 1,340
------- ------- ------- -------
1,069 949 3,298 2,973
------- ------- ------- -------
Operating income 437 71 1,055 695
Interest income -- 3 -- 6
------- ------- ------- -------
Income before income taxes 437 74 1,055 701
Income taxes 150 31 401 295
------- ------- ------- -------
Net income $ 287 $ 43 $ 654 $ 406
======= ======= ======= =======
Weighted average common shares
outstanding:
Basic 5,433 5,600 5,434 5,622
======= ======= ======= =======
Diluted 5,987 6,179 5,993 6,205
======= ======= ======= =======
Net income per share:
Basic $ 0.05 $ 0.01 $ 0.12 $ 0.07
======= ======= ======= =======
Diluted $ 0.05 $ 0.01 $ 0.11 $ 0.07
======= ======= ======= =======
See accompanying notes to condensed financial statements.
4
TOFUTTI BRANDS INC.
Condensed Statements of Cash Flows
(Unaudited)
(in thousands)
Thirty-nine Thirty-nine
weeks weeks
ended ended
Sept. 30, 2006 Oct. 1, 2005
-------------- ------------
Cash flows used in operating activities, net $ (884) $ (49)
Cash flows from investing activities -- --
Cash flows used in financing activities, net (348) (232)
------- -------
Net change in cash and cash equivalents (1,232) (281)
Cash and cash equivalents at beginning of period 1,256 2,199
------- -------
Cash and cash equivalents at end of period $ 24 $ 1,918
======= =======
Supplemental cash flow information:
Income taxes paid $ 436 $ 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 thirty-nine week periods ended
September 30, 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 September 30, 2006 from those in effect at December 31,
2005, except for the adoption of SFAS No. 123R - see Note 6. Certain
prior period amounts have been reclassified to conform to the present
period presentation.
Note 3: Inventories
The composition of inventories is as follows:
September 30, December 31,
2006 2005
---- ----
Finished products $1,590 $1,258
Raw materials and packaging 830 787
------ ------
$2,420 $2,045
====== ======
6
TOFUTTI BRANDS INC.
Notes to Condensed Financial Statements
(in thousands, except per share figures)
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: 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.
The following table sets forth the computation of basic and diluted earnings per
share:
Thirteen Weeks Thirteen Weeks Thirty-nine Weeks Thirty-nine Weeks
Ended Ended Ended Ended
Sept. 30, 2006 Oct. 1, 2005 Sept. 30, 2006 Oct. 1, 2005
-------------- ------------ -------------- ------------
Numerator
Net income-basic............................... $287 $43 $654 $406
==== === ==== ====
Net income-diluted............................. $287 $43 $654 $406
==== === ==== ====
Denominator
Denominator for basic earnings per share
weighted average shares .................... 5,433 5,600 5,434 5,622
Effect of dilutive securities
stock options............................... 554 579 559 583
--- --- --- ---
Denominator for diluted earnings per share 5,987 6,179 5,993 6,205
===== ===== ===== =====
Earnings per share
Basic........................................ $0.05 $0.01 $0.12 $0.07
===== ===== ===== =====
Diluted...................................... $0.05 $0.01 $0.11 $0.07
===== ===== ===== =====
7
TOFUTTI BRANDS INC.
Notes to Condensed Financial Statements
(in thousands, except per share figures)
Note 6: 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 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 thirty-nine
weeks ended September 30, 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 thirty-nine weeks ended September
30, 2006 was an additional $0 and $19, respectively, 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 thirty-nine weeks ended
October 1, 2005 is deminimus, therefore the pro forma impact of
stock-based compensation for the thirteen and thirty-nine week periods
ended October 1, 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.
8
TOFUTTI BRANDS INC.
Notes to Condensed Financial Statements
(in thousands, except per share figures)
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.
Thirty-Nine Weeks Ended
Sept. 30, Oct. 1,
2006 2005
------------ -----------
Dividend yield 0% 0%
Expected volatility 28% 28%
Risk-free interest rate 4.85% 3.89%
Expected life of options (in years) 5 5
Weighted-average grant-date fair value $ 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 employment termination behaviors,
expected future exercise patterns for these same homogeneous groups and
the implied volatility of our stock price.
At September 30, 2006, there was $11 of unrecognized compensation cost
related to share-based payments which is expected to be recognized over
a weighted-average period of 2.4 years.
The following table represents stock option activity for the
thirty-nine weeks ended September 30, 2006:
Weighted-
Weighted- Average
Average Contract
Number of Exercise Life
Shares Price (in years)
--------- --------- ----------
Outstanding options at beginning of period 855 $ 1.00 2.2
Granted 16 2.90 4.8
Exercised (20) 1.90 1.9
Forfeited -- -- --
-------- --------
Outstanding options at end of period 851 $ 1.02 1.9
======== ========
Outstanding exercisable options at end of period 833 $ 0.98 1.8
======== ========
Shares available for future stock option and restricted share grants to
employees and directors under existing plans were none and 84,
respectively, at September 30, 2006. The aggregate intrinsic value of
all options outstanding as of September 30, 2006 was $1,543, and the
aggregate intrinsic value of options exercisable was $1,547.
9
TOFUTTI BRANDS INC.
Notes to Condensed Financial Statements
(in thousands, except per share figures)
Stock Transactions
During the period January 1, 2006 through January 20, 2006, the Company
purchased and retired 129 shares at a cost of $386, and since that
time, no shares have been purchased. During the thirteen and
thirty-nine weeks ended September 30, 2006, the Company received $38
from the exercise of options to acquire 20 shares.
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. 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. However, we expect that
our inventory levels will be higher than our historical levels during the
remainder of the fiscal year, because 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.
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 customer's 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 September 30, 2006
Compared with Thirteen Weeks Ended October 1, 2005
- --------------------------------------------------
Net sales for the thirteen weeks ended September 30, 2006 were $4,948,000, an
increase of $833,000, or 20%, from the sales level realized for the thirteen
weeks ended October 1, 2005. Sales were up for all product and customer
categories as a result of better inventory stocking position (during 2005, we
had been facing stock outs associated with the transfer of our production
facilities) and a more aggressive marketing and promotions program. Our gross
profit in the current period increased by $486,000 to $1,506,000 reflecting the
higher level of sales. Our gross profit percentage for the period ending
September 30, 2006 was 30%, compared to 25% for the period ending October 1,
2005. Our gross profit percentage increased because of price increases
instituted in fiscal 2006 and improvement in the production of certain products,
which resulted in better yields, less waste and lower material costs.
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 $126,000, or 47%, to $394,000 for the thirteen weeks ended
September 30, 2006 compared with $266,000 for the thirteen weeks ended October
1, 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 28% to $385,000 for the current fiscal quarter
compared with $301,000 for the comparable period in 2005. This increase is due
primarily to an increase in outside warehouse expense of $90,000 resulting from
the large increase in our finished goods inventory, which was partially offset
by modest decreases in travel, entertainment and commission expenses. We expect
our outside warehouse expense to remain significantly higher than our historical
levels due to the higher inventory balances that we are maintaining as the
result of changes in our frozen dessert co-packaging arrangements. We are now
responsible for maintaining the majority of our frozen dessert finished goods
inventory. Under the arrangement we had before we transferred our production
facilities, which was completed in the first quarter of 2006, the majority of
our frozen dessert finished goods inventory had been owned by the co-packer.
13
Marketing expenses decreased by $27,000 to $90,000 in the fiscal 2006 period due
principally to decreases of $31,000 and $15,000 in artwork and plates expense
(higher in 2005 due to package updating in the 2005 period) and promotions
expense, respectively, which were partially offset by an increase in television
and radio advertising expense of $25,000, as we began certain targeted marketing
programs in markets with higher concentrations of customers.
Research and development costs, which consist principally of salary expenses and
laboratory costs, increased to $129,000 for the thirteen weeks ended September
30, 2006 compared to $105,000 for the comparable period in 2005. This increase
was primarily due to an increase in payroll expense and lab costs and supplies.
General and administrative expenses increased to $465,000 for the current
quarter compared with $426,000 for the comparable period in 2005 due primarily
to increases in salaries and public relations expenses.
The increase in income tax expense in the third quarter of 2006 to $150,000 from
$31,000 in the third quarter of 2005 reflects the increase in operating profit
in 2006. The effective tax rate was 34% in the 2006 period compared to 44% in
the 2005 period. The decrease in the effective tax rate was caused primarily by
a decrease in certain permanent differences.
Thirty-Nine Weeks Ended September 30, 2006
Compared with Thirty-Nine Weeks Ended October 1, 2005
- -----------------------------------------------------
Net sales for the thirty-nine weeks ended September 30, 2006 were $15,110,000,
an increase of $1,664,000, or 12%, from the sales level realized for the
thirty-nine weeks ended October 1, 2005. Sales were up for all product and
customer categories as a result of better inventory stocking position (during
2005, we had been facing stock outs associated with the transfer of our
production facilities) and a more aggressive marketing and promotions program.
Partially as a result of the increase in sales, our gross profit in the current
period increased by $685,000, or 19%, to $4,353,000. Our gross profit percentage
was 29% for the period ending September 30, 2006 as compared to 27% for the
period ending October 1, 2005. Our gross profit percentage increased because of
price increases instituted in fiscal 2006 and improvement in the production of
certain products, which resulted in better yields, less waste and lower material
costs.
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 September 30, 2006
increased to $1,244,000 from $805,000 in the comparable thirty-nine 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.
14
Selling expenses increased by 37% to $1,119,000 for the current thirty-nine week
period compared with $817,000 for the comparable period in 2005. This increase
was due primarily to increases in outside warehouse rental expense of $268,000
resulting from the increase in finished goods inventory and commission expenses
of $29,000 due to the increase in sales for the current thirty-nine week period.
These increases were partially offset by a decrease in travel and entertainment
expense of $45,000. We expect our outside warehouse expense to remain
significantly higher than our historical levels due to the higher inventory
balances that we are maintaining as the result of changes in our frozen dessert
co-packaging arrangements. We are now responsible for maintaining the majority
of our frozen dessert finished goods inventory. Under the arrangement we had
before we transferred our production facilities, which was completed in the
first quarter of 2006, the majority of our frozen dessert finished goods
inventory had been owned by the co-packer.
Marketing expenses decreased by $59,000 to $443,000 in the current thirty-nine
week period due principally to decreases in expenses for magazine advertising of
$48,000, point of sale materials of $38,000, artwork and plates of $27,000 and
promotions of $32,000, which were partially offset by an increase in television
and radio advertising of $77,000.
Research and development costs, which consist principally of salary expenses and
laboratory costs, increased to $347,000 for the thirty-nine weeks ended
September 30, 2006 compared to $314,000 for the comparable period in 2005. This
increase was mainly attributable to an increase in payroll expense.
General and administrative expenses increased to $1,389,000 for the current
thirty-nine week period compared with $1,340,000 for the comparable period in
2005. These cost increases were the result of an increase in payroll costs of
$10,000 and stock option compensation costs of $19,000. These costs were
partially offset by a decrease in travel and entertainment expenses of $51,000
and a decrease in professional fees and outside services of $75,000, (higher in
2005 due to the settlement of litigation we had been involved in during fiscal
2005).
There was no interest income for the thirty-nine weeks ended September 30, 2006
as compared with $6,000 for the comparable period in 2005.
The increase in income tax expense in the 2006 thirty-nine week period to
$401,000 from $295,000 in the 2005 thirty-nine week period reflects the higher
operating profit in 2006. The effective tax rate was relatively consistent in
both periods.
Liquidity and Capital Resources
As of September 30, 2006, we had approximately $24,000 in cash and cash
equivalents and our working capital was approximately $3.9 million. We used
$884,000 of cash from operating activities during the thirty-nine weeks ended
September 30, 2006 as compared to using $49,000 in the comparable 2005 period,
due to the growth of our inventories and the reduction of our accounts payable
and accrued compensation. We used $384,000 net cash from financing activities
during the thirty-nine weeks ended September 30, 2006, primarily attributable to
stock bought back in January 2006 as described below.
15
The following table summarizes our cash flows for the periods presented:
Thirty-nine Thirty-nine
Weeks ended Weeks ended
September 30, 2006 October 1, 2005
------------------ ---------------
Net cash flows from
operating activities......... $(884) $(49)
Cash flows from
investing activities......... -- --
Net cash from
financing activities......... (348) (232)
------- -----
Net change in cash
and cash equivalents......... $(1,232) $(281)
======= =====
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.
We believe that we will be able to fund our operations with cash generated from
operations and from borrowings on our line of credit.
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 and retired 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.
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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 September 30, 2006, we did not have any contractual obligations or
commercial commitments.
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 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.
In September 2006, the FASB issue SFAS No. 157, "Fair Value Measurement" ("SFAS
157"). SFAS 157 defines fair value, establishes a framework for measuring fair
value and expands disclosures about fair value measurements. SFAS 157 is
effective for financial statements issued for fiscal years beginning after
November 17, 2007 and interim periods within those fiscal years.
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We are evaluating the impact of adopting SFAS 157 on our consolidated financial
position, results of operations and cash flows.
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. The following provides an update to our previously disclosed risk
factors.
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
thirty-nine week period ended September 30, 2006, Trader Joe's, a health food
supermarket chain, accounted for 20% and 19%, respectively, of our net sales.
The loss of a substantial portion of our sales to Trader Joe's would have a
material adverse affect on our company.
Dependence on Key Suppliers. During the year ended December 31, 2005 and the
thirty-nine week period ended September 30, 2006, we purchased approximately 47%
and 11%, 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 thirty-nine week period
ended September 30, 2006, we purchased approximately 5% and 17%, 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.
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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 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.
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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
None.
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)
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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.
- --------------------
(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: November 14, 2006
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