UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended March 29, 2008
[ ] 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.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-3094658
(State of Incorporation) (I.R.S. Employer Identification No.)
50 Jackson Drive, Cranford, New Jersey 07016
(Address of Principal Executive Offices)
(908) 272-2400
(Issuer's Telephone Number)
N/A
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 [ ]
Indicate by check mark whether the registrant is large accelerated filer, an
accelerated filer, or a non-accelerated filer. See of "accelerated filer and
large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
YES [ ] NO [X]
As of May 9, 2008 the Registrant had 5,585,267 shares of Common Stock, par value
$.01, outstanding.
TOFUTTI BRANDS INC.
INDEX
Page
----
Part I - Financial Information:
Item 1. Financial Statements
Condensed Balance Sheets - March 29, 2008
(Unaudited) and December 29, 2007 3
Condensed Statements of Income -
(Unaudited) - Thirteen Week Periods ended March 29, 2008
and March 31, 2007 4
Condensed Statements of Cash Flows -
(Unaudited) - Thirteen Week Periods ended March 29, 2008
and March 31, 2007 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
Item 4T. Controls and Procedures 16
Part II - Other Information:
Item 1. Legal Proceedings 17
Item 1A. Risk Factors 17
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 19
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
TOFUTTI BRANDS INC.
Condensed Balance Sheets
(in thousands, except share and per share figures)
March 29, December 29,
2008 2007
----------- -------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 596 $1,499
Accounts receivable, net of allowance for doubtful
accounts and sales promotion of $438 and $430,
respectively 1,862 1,991
Inventories 2,162 1,552
Prepaid expenses 23 46
Refundable income taxes 635 770
Deferred income taxes 298 298
--- ---
Total current assets 5,576 6,156
----- -----
Fixed assets, net of accumulated amortization of
$20 and $19 23 24
Other assets 16 16
-- --
$5,615 $6,196
====== ======
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 395 $633
Accrued expenses 556 566
Accrued officers' compensation 125 500
Total current liabilities 1,075 1,699
----- -----
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 5,593,867 shares at March 29, 2008
and 5,653,467 shares at December 29, 2007 56 57
Additional paid-in capital 65 225
Retained earnings 4,419 4,215
----- -----
Total stockholders' equity 4,540 4,497
----- -----
Total liabilities and stockholders' equity $5,615 $6,196
====== ======
See accompanying notes to condensed financial statements.
3
TOFUTTI BRANDS, INC.
Condensed Statements of Income
(Unaudited)
(in thousands, except per share figures)
Thirteen Thirteen
weeks weeks
ended ended
March 29, 2008 March 31, 2007
--------------- --------------
Net sales $4,655 $4,846
Cost of sales 3,128 3,150
----- -----
Gross profit 1,527 1,696
----- -----
Operating expenses:
Selling 435 440
Marketing 136 92
Stock compensation expense 3 288
Research and development 125 117
General and administrative 485 535
--- ---
1,184 1,472
----- -----
Income before income taxes 343 224
Income taxes 139 96
--- ---
Net income $204 $128
==== ====
Weighted average common shares outstanding:
Basic 5,619 5,543
===== =====
Diluted 5,869 5,813
===== =====
Net income per common share:
Basic $0.04 $0.02
===== =====
Diluted $0.03 $0.02
===== =====
See accompanying notes to condensed financial statements.
4
TOFUTTI BRANDS INC.
Condensed Statements of Cash Flows
(Unaudited)
(in thousands)
Thirteen Thirteen
weeks weeks
ended ended
March 29, 2008 March 31, 2007
-------------- --------------
Cash flows from operating activities, net $(740) $(335)
Cash flows from financing activities, net (163) 169
---- ---
Net decrease in cash and cash equivalents (903) (166)
Cash and cash equivalents at beginning of period 1,499 289
----- ---
Cash and cash equivalents at end of period $596 $123
==== ====
Supplemental cash flow information:
Income taxes paid $ 4 $400
====== ====
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 29, 2007 have been derived from
our audited financial statements for the year ended December 29, 2007.
The financial information should be read in conjunction with the
audited financial statements and notes thereto for the year ended
December 29, 2007 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 period ended March 29, 2008 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.
Note 3: Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements," or SFAS 157. Among other requirements, SFAS 157 defines
fair value and establishes a framework for measuring fair value and
also expands disclosure about the use of fair value to measure assets
and liabilities. SFAS 157 is effective beginning the first fiscal year
that begins after November 15, 2007. The adoption of the provisions of
SFAS No. 157 did not have a material impact on the Company's financial
position and results of operations.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities - Including an Amendment
of FASB Statement No. 115" (SFAS No. 159). SFAS No. 159 establishes a
fair value option permitting entities to elect the option to measure
eligible financial instruments and certain other items at fair value on
specified election dates. Unrealized gains and losses on items for
which the fair value option has been elected will be reported in
earnings. The fair value option may be applied on an
instrument-by-instrument basis, with a few exceptions, is irrevocable
and is applied only to entire instruments and not to portions of
instruments. SFAS No. 159 is effective as the beginning of the first
fiscal year beginning after November 15, 2007, and should not be
applied retrospectively to fiscal years beginning prior to the
effective date. On the adoption date, an entity may elect the fair
value option for eligible items existing at that date and the
adjustment for the initial remeasurement of those items to fair value
should be reported as a cumulative effect adjustment to the opening
balance of retained earnings. The adoption of the provisions of SFAS
No. 159 did not have a material impact on the Company's financial
position and results of operations.
6
TOFUTTI BRANDS INC.
Notes to Condensed Financial Statements
(in thousands, except per share figures)
In December 2007, the FASB issued SFAS No. 141(R), "Business
Combinations" (SFAS 141(R)). SFAS 141(R) expands the definition of
transactions and events that qualify as business combinations; requires
that the acquired assets and liabilities, including contingencies, be
recorded at the fair value determined on the acquisition date and
changes thereafter reflected in revenue, not goodwill; changes the
recognition timing for restructuring costs; and requires acquisition
costs to be expensed as incurred. Adoption of SFAS 141(R) is required
for combinations after December 15, 2008.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling
Interest in Consolidated Financial Statements" (SFAS 160). SFAS 160
re-characterizes minority interests in consolidated subsidiaries as
non-controlling interests and requires the classification of minority
interests as a component of equity. Under SFAS 160, a change in control
will be measured at fair value, with any gain or loss recognized in
earnings. The effective date for SFAS 160 is for annual periods
beginning on or after December 15, 2008. The adoption of the provisions
of SFAS No. 160 is not expected to have a material impact on the
Company's financial position and results of operations.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about
Derivative Instruments and Hedging Activities -- An Amendment of FASB
Statement No. 133" ("SFAS No. 161"), which amends and expands the
disclosure requirements of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" to require qualitative disclosure
about objectives and strategies in using derivatives, quantitative
disclosures about fair value amounts of gains and losses on derivative
instruments, and disclosures about the underlying credit-risk-related
contingent features in derivative agreements. SFAS No. 161 is intended
to improve financial reporting by requiring transparency about the
location and amounts of derivative instruments in an entity's financial
statements; how derivative instruments and related hedged items are
accounted for under SFAS No. 133; and how derivative instruments and
related hedged items affect its financial position, financial
performance and cash flows. SFAS No. 161 is effective for financial
statements issued for fiscal years beginning after November 15, 2008.
The Company is currently evaluating the potential impact, if any, the
adoption of SFAS No. 161 may have on its financial statements.
Note 4: Inventories
The composition of inventories is as follows:
March 29, 2008 December 29, 2007
-------------- -----------------
Finished products $1,600 $1,048
Raw materials and packaging 562 504
------ ------
$2,162 $1,552
====== ======
7
TOFUTTI BRANDS INC.
Notes to Condensed Financial Statements
(in thousands, except per share figures)
Note 5: 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.
FASB Interpretation No. 48, or FIN 48, "Accounting for Uncertainty in
Income Taxes - an interpretation of FASB Statement No. 109," which
prescribes comprehensive guidelines for recognizing, measuring,
presenting and disclosing in the financial statements tax positions
taken or expected to be taken on tax returns was adopted by the Company
on December 31, 2006. The Company assessed the impact of adopting FIN
48 on its financial position and its impact was calculated to be
approximately $150, which was recorded as an adjustment to the
Company's December 31, 2006 retained earnings, in accordance with the
transitional rules of FIN 48. At March 29, 2008 and December 29, 2007,
the amount provided for such uncertainties was approximately $419. The
amount provided for primarily relates to the impact of the timing of
deducting certain expenses on the Company's corporate income tax return
and state nexus issues. The Company has at least three years of tax
returns potentially subject to audit by the Internal Revenue Service.
Note 6: Market Risk
We invest our excess cash, should there be any, in bank certificates of
deposit and high rated money market funds. The bank certificate of
deposits are usually for a term of not more than six months and never
for more than $100 per account.
Note 7: 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. Not included in the
calculation were 61,000 and 30,000 non-qualified options to directors
that were antidilutive because the market price of our common stock as
of March 29, 2008 and March 31, 2007, respectively, was less than the
exercise prices of any of these options.
8
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
Ended Ended
March 29, 2008 March 31, 2007
-------------- --------------
Numerator
Net income-basic and diluted................. $204 $128
==== ====
Denominator
Denominator for basic earnings per share
weighted average shares .................. 5,619 5,543
Effect of dilutive securities
stock options............................. 194 270
--- ---
Denominator for diluted earnings per share... 5,869 5,813
----- -----
Earnings per share
Basic...................................... $0.04 $0.02
===== =====
Diluted.................................... $0.03 $0.02
===== =====
Note 8: Stock-Based Compensation
The Company follows 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.
During the thirteen weeks ended March 31, 2007, the Company purchased
options to acquire 175 shares of common stock from an officer at a net
cost of $288. The expense was calculated as the difference between the
market price of the Company's common stock on the date of the
transaction (less an agreed 25% discount) minus the option exercise
price, multiplied by the 175 shares. For financial reporting and income
tax purposes, the $288 is considered additional compensation expense.
The officer in turn used some of the cash received to exercise other
options to acquire 220 shares at the stated terms of the option grant
(with a weighted average exercise price of $0.76 per share), resulting
in proceeds to the Company of $169.
As a result of these transactions, there are options outstanding under
the Company's stock option plan to acquire 471 shares of common stock
with a weighted average exercise price of approximately $1.30 at
December 29, 2007 and March 29, 2008. Substantially all of such options
are fully vested and have an intrinsic value of approximately $676 at
March 29, 2008.
9
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.
Transfer of Production Facilities
In August 2005, we moved all our frozen dessert manufacturing to Ellsworth Ice
Cream in Saratoga Springs, New York. Although Ellsworth was able to manufacture
all our frozen dessert products to our technical specifications and customer
demand, we became increasingly concerned about Ellsworth's financial situation.
We continued to look for alternative production sources for our frozen dessert
pints, Tofutti Cuties and stick novelties. During the fourth quarter of 2006, we
moved our frozen dessert pint production to Leiby's Dairy in Tamaqua,
Pennsylvania. In May 2007, Ellsworth unexpectedly and without warning ceased
manufacturing. Although we were able to move our ice cream novelty manufacturing
to Ice Cream Specialties in Lafayette, Indiana within four weeks of the
Ellsworth closing, this required us to postpone the shipment of certain large
orders that would have been shipped in the second quarter until the third
quarter of 2007 and to allocate existing inventory of novelty products among all
our customers, further negatively impacting our sales for the second and third
quarters. During the third and fourth quarters of 2007, we continued to expand
our ice cream novelty production at Ice Cream Specialties. We are also looking
for additional frozen dessert manufacturing facilities so that we will have the
capacity to support our future production needs.
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
10
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, returns 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 costs 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 expiration of product shelf life, 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.
Income Taxes. The carrying value of deferred tax assets 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. Upon
the adoption of FASB Interpretation No. 48, or FIN 48, "Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109,"
January 1, 2007, we recognized $150,000 as a liability including related
interest or penalties as a direct charge to retained earnings related to our
uncertain tax positions. At March 29, 2008 and December 29, 2007, the amount
provided for such uncertainties was approximately $419,000. The amount provided
for primarily relates to the impact of the timing of deducting certain expenses
on the Company's corporate income tax return and state nexus issues. The Company
has at least three years of tax returns potentially subject to audit by the
Internal Revenue Service.
11
Results of Operations
Thirteen Weeks Ended March 29, 2008 Compared
with Thirteen Weeks Ended March 31, 2007
- ----------------------------------------
Net sales for the thirteen weeks ended March 29, 2008 were $4,655,000, a
decrease of $191,000, or 4%, from the sales level realized for the thirteen
weeks ended March 31, 2007 due to a discontinuance of certain products in the
2008 period that were available for sale in the 2007 period. These products were
discontinued because they had a low profit margin.
Our gross profit in the current period decreased to $1,527,000 in the 2008
period from $1,696,000 in the 2007 period. Our gross profit percentage also
decreased to 33% for the period ending March 29, 2008 compared to 35% for the
period ending March 31, 2007. The decrease in our gross profit and gross profit
percentage for the period ended March 29, 2008 resulted primarily from
significant industry-wide increases to certain key ingredients and packaging,
increased freight expenses and increased costs of petroleum based products.
These increased costs were offset by sales of higher margin products and by a
decrease in freight out expense, a significant part of our cost of sales, which
decreased by $81,000, or 23%, to $279,000 for the thirteen weeks ended March 29,
2008 compared with $360,000 for the thirteen weeks ended March 31, 2007. The
decrease in freight out expense is attributable in part to the fact that
shipping our frozen dessert novelties from our new ice cream plant in Indiana to
the West Coast is more cost-effective than shipping them from our third-party
Mountville, Pennsylvania warehouse or from our former frozen dessert novelties
manufacturer's location, and in part because in some instances we increased the
minimum size of orders to customers where we paid the freight, which reduced our
shipping costs.
Selling expenses decreased by $5,000 to $435,000 for the current fiscal quarter
compared with $440,000 for the comparable period in 2007. This decrease was
partially due to a decrease in outside warehouse expense of $17,000 and a
decrease in meeting and convention expenses of $23,000, which were offset by an
increase in payroll expense of $35,000. The increase in payroll expense was the
result of adding another salesperson and by the additional provision of $25,000
for anticipated year-end bonuses. While we expect a slight decline in our
outside warehouse expense over the remainder of the fiscal year, it will still
be significantly higher than our historical levels expense due to the higher
inventory balances that we expect to maintain, because more of our customers are
picking up or having products shipped from our warehouses rather than having
products shipped directly from our co-packers.
Marketing expenses increased by $44,000 to $136,000 in the fiscal 2008 period
due principally to a $15,000 increase in television advertising expense and a
$40,000 increase in newspaper advertising expense. The increases were in part a
result of a special television and newspaper advertising campaign aimed at
Chinese consumers, one of our targeted lactose-intolerant ethnic groups.
Research and development costs, which consist principally of salary expenses and
laboratory costs, increased by $8,000 to $125,000 for the thirteen weeks ended
March 29, 2008 from $117,000 for the comparable period in 2007.
Stock compensation expense was $3 for the thirteen weeks ended March 29, 2008
compared to stock compensation expense of $288,000 for the thirteen weeks ended
March 31, 2007. In February 2007, we purchased 175,000 stock options from an
officer at a net cost of $288,000. The expense was calculated as the difference
between the market price of our common stock on the date of the transaction
(less an agreed
12
25% discount) minus the option exercise price, multiplied by the 175,000
options. For financial reporting and income tax purposes, the $288,000 is
considered additional compensation.
General and administrative expenses decreased by $50,000 to $485,000 for the
current quarter compared with $535,000 for the comparable period in 2007 due
primarily to a reduction in travel, entertainment and auto expense of $28,000
and outside fees and professional services of $15,000. We anticipate that the
current period's reduction in travel, entertainment, and auto expense will
continue on the same level for the balance of 2008.
The increase in income tax expense in the first quarter of 2008 to $139,000, or
41% of income before taxes, from $96,000, or 43% of taxable income, in the first
quarter of 2007 reflects an increase in our taxable income. Our tax rates
historically fall within a range of 40% to 44%.
Liquidity and Capital Resources
As of March 29, 2008, we had approximately $596,000 in cash and equivalents and
our working capital was approximately $4.5 million. Because we are now
maintaining larger finished goods inventories to improve customer service, we
established a $1,000,000 line of credit with Wachovia Bank in April 2006. 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. Although
management believes that we will be able to fund our operations during 2008 from
current resources, there is no guarantee that we will be able to do so, and
therefore, we established this facility to support short-term cash flow
constraints, if necessary. This agreement expired on April 30, 2008, but was
renewed for an additional one-year term with the consent of both parties. 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:
Thirteen Weeks Thirteen Weeks
ended March 29, 2008 ended March 31, 2007
-------------------- --------------------
Net cash used in operating
activities..................... $(740,000) $(335,000)
Net cash provided by (used
in)financing activities........ (163,000) 169,000
--------- -------
Net change in cash
and cash equivalents......... $(903,000) $(166,000)
========== ==========
Our net cash flows used in operating activities was the result of our continued
investment in building inventories to support the seasonal aspect of our
business and the change in production facilities. During the thirteen weeks
ending March 29, 2008, we paid bonuses to management of $500,000. 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.
Our net cash flows used in financing activities represents the repurchase of our
common stock. During the thirteen weeks ending March 29, 2008, we repurchased
59,600 shares of our common stock for $163,000. Our Board of Directors first
instituted a share repurchase program in September 2000 which has to date
13
authorized the repurchase of 1,500,000 shares of our common stock at prevailing
market prices. As of December 29, 2007, we have repurchased 1,342,100 shares
with a total cost of $4,171,000, or an average price of $3.11 per share. We made
no stock purchases in 2007. As of March 31, 2008, we repurchased 1,410,300
shares at a total cost of $4,360,000, or an average price of $3.09 per share. On
February 26, 2007, our Board of Directors authorized us to enter into a
transaction with Steven Kass, our Chief Financial Officer, whereby Mr. Kass
surrendered 175,000 of his stock options that were expiring that month, in
consideration for a purchase price of $2.3325 per share, reflecting a 25%
discount from the $3.11 closing price of the Common Stock on February 26, 2007.
After subtracting the underlying $.6875 per share exercise price of the options,
this resulted in a net buyback price to our company of $1.645 per share, or
$287,875. Concurrently, Mr. Kass exercised 150,000 options that were expiring on
February 27, 2007 at an exercise price of $0.6875 per share ($103,125) and
70,000 options that were expiring on July 30, 2007 at an exercise price of
$0.9375 per share ($65,625) (consistent with the original terms of the grants),
for a combined total purchase cost of $168,750, resulting in a net payment to
Mr. Kass of $119,125.
Inflation and Seasonality
We do not believe that our operating results have been materially affected by
inflation during the preceding two years. There can be no assurance, however,
that our operating results will not be affected by inflation in the future. 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.
Off-balance Sheet Arrangements
None.
Contractual Obligations
As of March 29, 2008, we did not have any contractual obligations or commercial
commitments, including obligations relating to discontinued operations.
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements," or
SFAS 157. Among other requirements, SFAS 157 defines fair value and establishes
a framework for measuring fair value and also expands disclosure about the use
of fair value to measure assets and liabilities. SFAS 157 is effective beginning
the first fiscal year that begins after November 15, 2007. The adoption of the
provisions of SFAS No. 157 did not have a material impact on our financial
position and results of operations.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - Including an Amendment of FASB
Statement No. 115" (SFAS No. 159). SFAS No. 159 establishes a fair value option
permitting entities to elect the option to measure eligible financial
instruments and certain other items at fair value on specified election dates.
Unrealized gains and losses on items for which the fair value option has been
elected will be reported in earnings. The fair value option
14
may be applied on an instrument-by-instrument basis, with a few exceptions, is
irrevocable and is applied only to entire instruments and not to portions of
instruments. SFAS No. 159 is effective as the beginning of the first fiscal year
beginning after November 15, 2007, and should not be applied retrospectively to
fiscal years beginning prior to the effective date. On the adoption date, an
entity may elect the fair value option for eligible items existing at that date
and the adjustment for the initial remeasurement of those items to fair value
should be reported as a cumulative effect adjustment to the opening balance of
retained earnings. The adoption of the provisions of SFAS No.159 did not have a
material impact on our financial position and results of operations.
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations" (SFAS
141(R)). SFAS 141(R) expands the definition of transactions and events that
qualify as business combinations; requires that the acquired assets and
liabilities, including contingencies, be recorded at the fair value determined
on the acquisition date and changes thereafter reflected in revenue, not
goodwill; changes the recognition timing for restructuring costs; and requires
acquisition costs to be expensed as incurred. Adoption of SFAS 141(R) is
required for combinations after December 15, 2008.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interest in
Consolidated Financial Statements" (SFAS 160). SFAS 160 re-characterizes
minority interests in consolidated subsidiaries as non-controlling interests and
requires the classification of minority interests as a component of equity.
Under SFAS 160, a change in control will be measured at fair value, with any
gain or loss recognized in earnings. The effective date for SFAS 160 is for
annual periods beginning on or after December 15, 2008. The adoption of the
provisions of SFAS No. 160 is not expected to have a material impact on our
financial position and results of operations.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities -- An Amendment of FASB Statement No. 133"
("SFAS No. 161"), which amends and expands the disclosure requirements of SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" to
require qualitative disclosure about objectives and strategies in using
derivatives, quantitative disclosures about fair value amounts of gains and
losses on derivative instruments, and disclosures about the underlying
credit-risk-related contingent features in derivative agreements. SFAS No. 161
is intended to improve financial reporting by requiring transparency about the
location and amounts of derivative instruments in an entity's financial
statements; how derivative instruments and related hedged items are accounted
for under SFAS No. 133; and how derivative instruments and related hedged items
affect its financial position, financial performance and cash flows. SFAS No.
161 is effective for financial statements issued for fiscal years beginning
after November 15, 2008. We are currently evaluating the potential impact, if
any, the adoption of SFAS No. 161 may have on our financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
We do not believe that our exposure to market risk related to the effect of
changes in interest rates, foreign currency exchange rates, commodity prices and
other market risks with regard to instruments entered into for trading or for
other purposes is material.
15
Item 4T. Controls and Procedures
-----------------------
We maintain disclosure controls and procedures designed to provide reasonable
assurance that information required to be disclosed in reports filed under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported within the time periods specified in the SEC's rules and forms, and
that such information is accumulated and communicated to our management,
including our Chief Executive Officer and our Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure.
In light of the discussion of material weaknesses discussed in our Form 10-KSB
for the fiscal year ended December 29, 2007, wherein our management concluded
that our internal control over financial reporting was ineffective because of
the following material weaknesses in internal controls over financial reporting:
o a lack of sufficient resources and an insufficient level of
monitoring and oversight, which may restrict our ability to
gather, analyze and report information relative to the financial
statement and income tax assertions in a timely manner.
o The limited size of the accounting department makes it
impracticable to achieve an optimum separation of duties.
Our chief executive officer and chief financial officer have concluded that, as
of the end of the period covered by this report the date, our disclosure
controls and procedures were not effective. Plan for Remediation of Material
Weaknesses
In response to these material weaknesses, our management intends to increase the
staffing level of the accounting department as demands on our accounting staff
increase.
Change in Internal Control over Financial Reporting
During the three months ended March 31, 2008, there were no changes in our
internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting, including any corrective actions with regard to material weaknesses.
16
PART II - OTHER INFORMATION
TOFUTTI BRANDS INC.
Item 1. Legal Proceedings
-----------------
We are not a party to any material litigation.
Item 1A. Risk Factors
------------
There have been no material changes to the Company's "Risk
Factors" set forth in its Annual Report on Form 10-KSB for the year ended
December 29, 2007.
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 and Reports on Form 8-K
--------------------------------
(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)
17
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.
(b) Reports on Form 8-K
18
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: May 13, 2008
19