Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 26,
2009
[ ] Transition report pursuant to 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
(Registrant's Telephone Number, including area code)
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 has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).
YES [ ] 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 November 9, 2009 the Registrant had 5,176,678 shares of Common Stock, par
value $.01, outstanding.
TOFUTTI BRANDS INC.
INDEX
Page
----
Part I - Financial Information:
Item 1. Financial Statements
Condensed Balance Sheets - September 26, 2009
(Unaudited) and December 27, 2008 3
Condensed Statements of Income - (Unaudited)
Thirteen and Thirty-Nine Week Periods ended
September 26, 2009 and September 27, 2008 4
Condensed Statements of Cash Flows -
(Unaudited) - Thirty-Nine Week Period ended
September 26, 2009 and September 27, 2008 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
Item 4T. Controls and Procedures 15
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 17
Signatures 18
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
TOFUTTI BRANDS INC.
Condensed Balance Sheets
(in thousands, except share and per share figures)
September 26, December 27,
2009 2008
------------- ------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 819 $ 238
Accounts receivable, net of allowance for doubtful
accounts and sales promotion of $423 and $528,
respectively 1,953 1,574
Inventories 2,071 2,334
Prepaid expenses 8 19
Refundable income taxes 273 555
Deferred income taxes 324 324
--- ---
Total current assets 5,448 5,044
----- -----
Fixed assets, net of accumulated amortization of
$32 and $29 16 19
Other assets 16 16
-- --
$5,480 $5,079
====== ======
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 504 $ 398
Accrued expenses 543 565
Accrued officers' compensation 375 500
--- ---
Total current liabilities 1,422 1,463
----- -----
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 5,176,678 shares at September 26, 2009
and 5,189,343 shares at December 27, 2008 52 52
Retained earnings 4,006 3,564
----- -----
Total stockholders' equity 4,058 3,616
----- -----
Total liabilities and stockholders' equity $5,480 $5,079
====== ======
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. 26, 2009 Sept. 27, 2008 Sept. 26, 2009 Sept. 27, 2008
-------------- -------------- -------------- --------------
Net sales $ 4,730 $ 4,801 $14,137 $15,089
Cost of sales 3,211 3,427 9,812 10,715
------- ------- ------- -------
Gross profit 1,519 1,374 4,325 4,374
------- ------- ------- -------
Operating expenses:
Selling and warehouse 369 497 1,235 1,391
Marketing 136 137 328 432
Research and development 152 145 444 439
Stock compensation expense-G & A -- -- 6 3
General and administrative 546 498 1,579 1,462
------- ------- ------- -------
1,203 1,277 3,592 3,727
------- ------- ------- -------
Income before income taxes 316 97 733 647
Income tax expense 116 75 283 294
------- ------- ------- -------
Net income $ 200 $ 22 $ 450 $ 353
======= ======= ======= =======
Weighted average common shares
outstanding:
Basic 5,177 5,437 5,178 5,537
======= ======= ======= =======
Diluted 5,177 5,687 5,178 5,791
======= ======= ======= =======
Net income per common share:
Basic $ 0.04 $ 0.00 $ 0.09 $ 0.06
======= ======= ======= =======
Diluted $ 0.04 $ 0.00 $ 0.09 $ 0.06
======= ======= ======= =======
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. 26, 2009 Sept. 27, 2008
-------------- --------------
Cash flows provided by (used in) operating activities, net $595 $ (388)
Cash flows used in financing activities, net (14) (663)
--- ----
Net increase (decrease) in cash and cash equivalents 581 (1,051)
Cash and cash equivalents at beginning of period 238 1,499
--- -----
Cash and cash equivalents at end of period $819 $ 448
==== ======
Supplemental cash flow information:
Income taxes paid $ -- $ 4
==== =====
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 27, 2008 have been derived from
our audited financial statements for the year ended December 27, 2008.
The financial information should be read in conjunction with the
audited financial statements and notes thereto for the year ended
December 27, 2008 included in the Company's Annual Report on Form 10-K
filed with the Securities and Exchange Commission. The results of
operations for the thirteen and thirty-nine week periods ended
September 26, 2009 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 June 2009, the Financial Accounting Standards Board ("FASB") issued
its final Statement of Financial Accounting Standards (SFAS) No. 168,
"The FASB Accounting Standards Codification and the Hierarchy of
Generally Accepted Accounting Principles a replacement of FASB
Statement No. 162." SFAS No. 168 made the FASB Accounting Standards
Codification (the Codification) the single source of U.S. GAAP used by
nongovernmental entities in the preparation of financial statements,
except for rules and interpretive releases of the SEC under authority
of federal securities laws, which are sources of authoritative
accounting guidance for SEC registrants. The Codification is meant to
simplify user access to all authoritative accounting guidance by
reorganizing U.S. GAAP pronouncements into roughly 90 accounting topics
within a consistent structure; its purpose is not to create new
accounting and reporting guidance. The Codification supersedes all
existing non-SEC accounting and reporting standards and was effective
for the Company beginning September 26, 2009. Following SFAS No. 168,
the Board will not issue new standards in the form of Statements, FASB
Staff Positions, or Emerging Issues Task Force Abstracts; instead, it
will issue Accounting Standards Updates. The FASB will not consider
Accounting Standards Updates as authoritative in their own right; these
updates will serve only to update the Codification, provide background
information about the guidance, and provide the bases for conclusions
on the change(s) in the Codification. In the description of Accounting
Standards Updates that follows, references in "italics" relate to
Codification Topics and Subtopics, and their descriptive titles, as
appropriate.
6
TOFUTTI BRANDS INC.
Notes to Condensed Financial Statements
(in thousands, except per share figures)
In April 2009, the FASB issued "Interim Disclosures about Fair Value of
Financial Instruments." This update amends "Disclosures about Fair
Value of Financial Instruments," to require disclosures about fair
value of financial instruments for interim reporting periods of
publicly traded companies as well as in annual financial statements.
This update also amends Interim Financial Reporting, to require those
disclosures in summarized financial information at interim reporting
periods. This update became effective for the interim period ended June
27, 2009 and did not have a material impact on the Company's
consolidated financial statements.
In May 2009, the FASB issued "Subsequent Events." The objective of this
update is to establish general standards of accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. In
particular, this update sets forth the period after the balance sheet
date during which management of a reporting entity should evaluate
events or transactions that may occur for potential recognition or
disclosure in the financial statements, the circumstances under which
an entity should recognize events or transactions occurring after the
balance sheet date in its financial statements, and the disclosures
that an entity should make about the events or transactions that
occurred after the balance sheet date. The Company adopted this update
for the period ended June 27, 2009 and subsequent financial periods.
The Company evaluated its September 26, 2009 financial statements for
subsequent events through November 10, 2009, the date the financial
statements were filed. The Company is not aware of any subsequent
events which would require recognition or disclosure in the financial
statements.
Note 4: Inventories
The composition of inventories is as follows:
September 26, December 27,
2009 2008
------------ ------------
Finished products $1,231 $2,009
Raw materials and packaging 840 325
------ ------
$2,071 $2,334
====== ======
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. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those permanent 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.
7
TOFUTTI BRANDS INC.
Notes to Condensed Financial Statements
(in thousands, except per share figures)
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 (Loss) 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 (loss) 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 for September 26, 2009 were 61,000 non-qualified options to
directors that were antidilutive because the market price of our common
stock as of September 26, 2009 was less than the exercise prices of any
of these options.
The following table sets forth the computation of basic and diluted
earnings (loss) per share:
Thirteen Weeks Thirteen Weeks Thirty-nine Weeks Thirty-nine Weeks
Ended Ended Ended Ended
September 26, 2009 September 27, 2008 September 26, 2009 September 27, 2008
------------------ ------------------ ------------------ ------------------
Numerator
Net income-basic....................... $200 $22 $450 $353
==== === ==== ====
Net income-diluted..................... $200 $22 $450 $353
==== === ==== ====
Denominator
Denominator for basic earnings per
share weighted average shares ....... 5,177 5,437 5,178 5,537
Effect of dilutive securities stock
options.............................. -- 250 -- 254
----- ----- ----- -----
Denominator for diluted earnings per
share................................ 5,177 5,687 5,178 5,791
----- ----- ----- -----
Earnings per common share
Basic................................... $0.04 $0.00 $0.09 $0.06
===== ===== ===== =====
Diluted................................. $0.04 $0.00 $0.09 $0.06
===== ===== ===== =====
Note 8 - Treasury Stock Transactions
During the thirty-nine weeks ended September 26, 2009, the Company
repurchased 13 shares of its common stock for $14. The Company's Board
of Directors first instituted a share repurchase program in September
2000, and as of August 8, 2008, the Board of Directors authorized the
repurchase of up to 1,850 shares of the Company's common stock at
prevailing market prices. Such shares were retired by the Company, and
accordingly the funds expended by the Company were applied first
against common stock with amounts in excess of par applied first
against paid in capital, with amounts in excess of available additional
paid in capital applied against retained earnings.
8
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.
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, 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 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
9
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. We provide various promotional allowances to our
customers which are included in our reserves based on our estimated expense for
the period.
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. Our
federal and state tax returns are open to examination for the years 2006, 2007
and 2008.
Product Recall
At the beginning of the second quarter of 2009, we were notified by the FDA that
several consumers filed complaints claiming that they had experienced skin rash
symptoms after eating vanilla Cuties that were produced at an ancillary
production facility during July 2008. The suspect product was identified as
having been produced by our smaller ice cream novelty facility that only
produced vanilla Cuties. No illness or serious injury was reported and no
further reports have been received since early April 2009. While we were
investigating the complaints, 12 pallets shipped from the suspect lots were
recalled. The bulk of these 12 pallets were recalled from the New York City
metro area as well as from the Midwest, New England, the Mid Atlantic region and
California. No complaints from consumers were received from the Midwest or New
England regions. Investigation and reports from distributors and store visits
indicate that none of the suspect product remains in distribution, and it is not
currently being offered for sale. However, to make certain that there would be
no further issues with product made at this facility, we put on hold any vanilla
Cuties that were produced by them. Due to the decrease in sales, we stopped
making product at this facility in January 2009. We have reviewed our quality
control procedures at our remaining co-packing facilities to ensure compliance
with all food-processing safety rules and regulations.
On May 12, 2009, at the request of the FDA, we issued a recall notice for the
suspected lots. During the last week of June, we disposed of all remaining
product manufactured by this facility. The total cost of this recall was
approximately $350,000 broken down as follows:
Actual product destroyed $291,000 (cost of sales)
Cost of disposal 10,000 (sales)
Product returned 26,000 (sales)
Product testing 20,000 (research & development)
Freight 1,000 (cost of sales)
Legal 2,000 (general & administrative)
We have no insurance coverage for the actual product destroyed. However, there
is coverage for all costs related to the analysis, collection and physical
disposal of such product. We submitted a claim to our insurance carrier for
$59,000, and our insurance carrier has as of this date indicated that we will
receive
10
approximately $40,000 on our claim. However, we are holding the claim open until
the end of November because we are continuing to receive additional final bills
in from certain retail accounts, which may increase the amount to be reimbursed
by our insurance carrier. We are also in discussions with our former co-packer
regarding their repayment for the cost of the product that was destroyed. There
is no guarantee that we will be successful in our discussions. All costs
relating to this recall were expensed in the second quarter and we do not
anticipate any further charges. Any subsequent reimbursements will be credited
to the appropriate revenue and expense accounts referenced above if and when
they are received.
Results of Operations
Thirteen Weeks Ended September 26, 2009
Compared with Thirteen Weeks Ended September 27, 2008
-----------------------------------------------------
Net sales for the thirteen weeks ended September 26, 2009 were $4,730,000, a
slight decrease of $71,000, or 1%, from the sales level realized for the
thirteen weeks ended September 27, 2008. We do not believe that our sales were
negatively impacted by the product recall in the 2009 period.
Our gross profit in the current period increased by $145,000 to $1,519,000. Our
gross profit percentage for the period ending September 26, 2009 was 32%,
compared to 29% for the period ending September 27, 2008. Freight out expense, a
significant part of our cost of sales, decreased by $75,000, or 24%, to $242,000
for the thirteen weeks ended September 26, 2009 compared with $317,000 for the
thirteen weeks ended September 27, 2008. The decrease in freight out expense was
a result of the decrease in sales for the thirteen weeks ended September 26,
2009 compared to the 2008 period, lower fuel costs compared to the 2008 period
and our arranging shipments in a more cost-effective manner by shipping our
frozen dessert novelties from our plant in Indiana to the West Coast rather than
shipping them from our third-party Pennsylvania warehouse.
Selling and warehouse expenses decreased to $369,000 for the current fiscal
quarter compared with $497,000 for the comparable period in 2008. This decrease
is due primarily to decreases in commission expense of $6,000, bad debt expense
of $45,000, payroll expense of $38,000 and outside warehouse rental expense of
$39,000.
Marketing expenses were $136,000 in the fiscal 2009 period compared to $137,000
in the fiscal 2008 period. An increase in newspaper advertising expense of
$30,000 was offset by reductions in artwork and plate expense of $8,000 and
promotion expense of $30,000. The reduction in promotion expense reflects the
lower level of sales in the 2009 period.
Research and development costs, which consist principally of salary expenses and
laboratory costs, increased slightly to $152,000 for the thirteen weeks ended
September 26, 2009 compared to $145,000 for the comparable period in 2008. This
increase was primarily due to an increase professional fees and outside services
of $5,000.
General and administrative expenses increased to $546,000 for the current
quarter compared with $498,000 for the comparable period in 2008, due primarily
to an increase in travel and entertainment expense of $16,000, public relations
expense of $16,000 and professional fees and outside services expense of
$15,000. We anticipate that the current period's general and administrative
expenses will continue on the same level, or increase slightly, for the balance
of 2009.
Income tax expense was $116,000 in the third quarter of 2009 compared to income
tax expense of $75,000 in the third quarter of 2008, reflecting the higher level
of operating income in the 2009 period. The effective tax rate was 42% for the
current period as compared to 77% for the 2008 period. The effective tax rate in
the 2008 period was affected by GAAP to tax differences present in 2008.
11
Thirty-Nine Weeks Ended September 26, 2009
Compared with Thirty-Nine Weeks Ended September 27, 2008
--------------------------------------------------------
Net sales for the thirty-nine weeks ended September 26, 2009 were $14,137,000, a
decrease of $952,000 or 6%, from the sales level realized for the thirty-nine
weeks ended September 27, 2008. Sales were negatively impacted due to the
elimination of certain products that were sold in the 2008 period and the
negative effects of the deteriorating economic climate. We do not believe that
our sales were negatively impacted by the product recall in the 2009 period.
(See Product Recall above.)
Our gross profit in the current period decreased by $49,000, or 1%, to
$4,325,000. Our gross profit percentage increased to 30% for the period ending
September 26, 2009 compared to 29% for the period ending September 27, 2008. Our
gross profit for the period ended September 26, 2009 was negatively impacted as
a result of costs we incurred as the result of the product recall that occurred
in the thirty-nine week period ended September 26, 2009. (See Product Recall
above.) Freight out expense, part of our cost of sales, decreased by $298,000,
or 28%, to $754,000 for the thirty-nine weeks ended September 26, 2009 compared
with $1,052,000 for the thirty-nine weeks ended September 27, 2008. The decrease
in freight out expense was a result of the decrease in sales for the thirty-nine
weeks ended September 26, 2009 compared to the 2008 period, lower fuel costs
compared to the 2008 period and our arranging shipments in a more cost-effective
manner by shipping our frozen dessert novelties from our plant in Indiana to the
West Coast rather than shipping them from our third-party Pennsylvania
warehouse. The negative impact of the product recall on our cost of sales was
mitigated by significant savings in freight out expense.
Selling and warehouse expenses decreased by 11% to $1,235,000 for the current
thirty-nine week period compared with $1,391,000 for the comparable period in
2008. This decrease is due primarily to decreases in commission expense of
$37,000, travel and entertainment expense of $23,000, bad debt expense of
$45,000 and outside warehouse expense of $40,000.
Marketing expenses decreased by $104,000 to $328,000 in the current thirty-nine
week period due principally to a decrease in expenses for television advertising
of $33,000, artwork and plate expense of $10,000 and promotion expense of
$99,000, which were partially offset by an increase in newspaper advertising
expense of $50,000. The reduction in promotion expense reflects the lower level
of sales in the 2009 period.
Research and development costs, which consist principally of salary expenses and
laboratory costs, increased slightly to $444,000 for the thirty-nine weeks ended
September 26, 2009 compared to $439,000 for the comparable period in 2008.
General and administrative expenses increased to $1,579,000 for the current
thirty-nine week period compared with $1,462,000 for the comparable period in
2008 due primarily to an increase in payroll costs of $24,000, travel and
entertainment expense of $88,000 and professional fees and outside services of
$96,000.
Income tax expense in the 2009 thirty-nine week period decreased to $283,000
from $294,000 in the 2008 thirty-nine week period. The effective tax rate
decreased slightly in the 2009 period to 39% from 40% in the 2008 period.
Liquidity and Capital Resources
As of September 26, 2009, we had approximately $819,000 in cash and cash
equivalents and our working capital was approximately $4.0 million compared to
approximately $238,000 in cash and cash equivalents
12
and working capital of approximately $3.6 million at December 27, 2008. We
expect our cash and cash equivalents will increase during the remainder of 2009
as a result of suspending our stock repurchase program. We maintain a $1,000,000
line of credit with Wachovia Bank to support any short-term cash flow
constraints. 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. This agreement was renewed for an additional one-year term with the
consent of both parties on April 30, 2009. As of the date of this report, we
have not used the line of credit. We believe that our cash flow from operations,
working capital and borrowing capability will be sufficient to sustain our
current level of operations for the next twelve months.
The following table summarizes our cash flows for the periods presented:
Thirty-nine Weeks Thirty-nine Weeks
ended September 26, 2009 ended September 27, 2008
------------------------ ------------------------
Net cash provided by (used in)
operating activities........... $595,000 $(388,000)
Net cash (used in) financing
activities..................... (14,000) (663,000)
-------- ---------
Net change in cash
and cash equivalents......... $581,000 $(1,051,000)
======== ============
Our net cash flows provided by operating activities of $595,000 was the result
of our net income and the reduction in our inventory compared to the same period
last year, which had been built up as a result a change in our production
facilities. During the thirty-nine weeks ending September 26, 2009, we paid
bonuses to management of $500,000.
Our net cash used in financing activities represents the funds used to
repurchase shares of our common stock. During the thirty-nine weeks ending
September 26, 2009, we repurchased 12,665 shares of our common stock for $14,000
as compared to the purchase of 235,600 shares for $663,000 in the thirty-nine
weeks ended September 27, 2008. Our Board of Directors first instituted a share
repurchase program in September 2000 which has to date authorized the repurchase
of 1,850,000 shares of our common stock at prevailing market prices. We have not
repurchased any additional shares since March 28, 2009 in order to conserve our
cash position. From the institution of the share repurchase program through the
date of this quarterly report, the total number of shares cumulatively purchased
is 1,818,889 for a total cost of approximately $5,294,000, or an average price
of $2.91 per share.
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, if necessary. We believe that these sources will be sufficient to meet
our operating and capital requirements during the next twelve months.
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.
13
Off-balance Sheet Arrangements
None.
Contractual Obligations
As of September 26, 2009, we did not have any contractual obligations or
commercial commitments, including obligations relating to discontinued
operations.
Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board ("FASB") issued its final
Statement of Financial Accounting Standards (SFAS) No. 168, "The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles a replacement of FASB Statement No. 162." SFAS No. 168 made the FASB
Accounting Standards Codification (the Codification) the single source of U.S.
GAAP used by nongovernmental entities in the preparation of financial
statements, except for rules and interpretive releases of the SEC under
authority of federal securities laws, which are sources of authoritative
accounting guidance for SEC registrants. The Codification is meant to simplify
user access to all authoritative accounting guidance by reorganizing U.S. GAAP
pronouncements into roughly 90 accounting topics within a consistent structure;
its purpose is not to create new accounting and reporting guidance. The
Codification supersedes all existing non-SEC accounting and reporting standards
and was effective for us beginning September 26, 2009. Following SFAS No. 168,
the Board will not issue new standards in the form of Statements, FASB Staff
Positions, or Emerging Issues Task Force Abstracts; instead, it will issue
Accounting Standards Updates. The FASB will not consider Accounting Standards
Updates as authoritative in their own right; these updates will serve only to
update the Codification, provide background information about the guidance, and
provide the bases for conclusions on the change(s) in the Codification. In the
description of Accounting Standards Updates that follows, references in
"italics" relate to Codification Topics and Subtopics, and their descriptive
titles, as appropriate.
In April 2009, the FASB issued "Interim Disclosures about Fair Value of
Financial Instruments." This update amends "Disclosures about Fair Value of
Financial Instruments," to require disclosures about fair value of financial
instruments for interim reporting periods of publicly traded companies as well
as in annual financial statements. This update also amends Interim Financial
Reporting, to require those disclosures in summarized financial information at
interim reporting periods. This update became effective for the interim period
ended June 27, 2009 and did not have a material impact on our consolidated
financial statements.
In May 2009, the FASB issued "Subsequent Events." The objective of this update
is to establish general standards of accounting for and disclosure of events
that occur after the balance sheet date but before financial statements are
issued or are available to be issued. In particular, this update sets forth the
period after the balance sheet date during which management of a reporting
entity should evaluate events or transactions that may occur for potential
recognition or disclosure in the financial statements, the circumstances under
which an entity should recognize events or transactions occurring after the
balance sheet date in its financial statements, and the disclosures that an
entity should make about the events or transactions that occurred after the
balance sheet date. We adopted this update for the period ended June 27, 2009
and subsequent financial periods. We evaluated ours September 26, 2009 financial
statements for subsequent events through November 10, 2009, the date the
financial statements were filed. We are not aware of any subsequent events which
would require recognition or disclosure in the financial statements.
14
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.
Item 4T. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. As of September 26, 2009, our
company's chief executive officer and chief financial officer conducted an
evaluation regarding the effectiveness of our company's disclosure controls and
procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act.
Based upon the evaluation of these controls and procedures, our chief executive
officer and chief financial officer concluded that our disclosure controls and
procedures were not effective as of the end of the thirteen weeks ended
September 26, 2009.
Disclosure Controls and Internal Controls. As provided in Rule 13a-14 of the
General Rules and Regulations under the Securities and Exchange Act of 1934, as
amended, Disclosure Controls are defined as meaning controls and procedures that
are designed with the objective of insuring that information required to be
disclosed in our reports filed under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), is recorded, processed, designed and reported
within the time periods specified by the SEC's rules and forms. Disclosure
Controls include, within the definition under the Exchange Act, and without
limitation, controls and procedures to insure that information required to be
disclosed by us in our reports is accumulated and communicated to our
management, including our chief executive officer and principal financial
officer, as appropriate to allow timely decisions regarding disclosure. Internal
Controls are procedures which are designed with the objective of providing
reasonable assurance that (1) our transactions are properly authorized; (2) our
assets are safeguarded against unauthorized or improper use; and (3) our
transactions are properly recorded and reported, all to permit the preparation
of our financial statements in conformity with generally accepted accounting
principles.
Management's Report on Internal Control Over Financial Reporting. Our management
is responsible for establishing and maintaining adequate internal control over
financial reporting. Internal control over financial reporting is a process
designed by, or under the supervision of the Chief Executive Officer and Chief
Financial Officer and effected by our board of directors, management and other
personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. 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.
Management's evaluation of internal control over financial reporting includes
using the COSO framework, an integrated framework for the evaluation of internal
controls issued by the Committee of Sponsoring Organizations of the Treadway
Commission, to identify the risks and control objectives related to the
evaluation of our control environment.
15
Based on their evaluation under the frameworks described above, our chief
executive officer and chief financial officer have concluded that our internal
control over financial reporting was ineffective as of September 26, 2009
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 statements 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.
Remediation Plan
We are seeking to develop a remediation plan consistent with our scope of
activity and resources.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting
during the period covered by this report on Form 10-Q that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
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-K for the year ended
December 27, 2008.
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
--------
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.
17
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 10, 2009
18
