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 26, 1998
___ 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 Small Business Issuer 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, Including Area Code)
(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 6, 1998 the Issuer had 6,183,567 shares of Common Stock, par
value $.01, outstanding.
Transitional Small Business Disclosure Format (check one):
Yes __ No X
<PAGE>
TOFUTTI BRANDS INC.
INDEX
Page
----
Part I - Financial Information:
Condensed Balance Sheets - September 26, 1998
(Unaudited) and December 27, 1997 3
Condensed Statements of Operations -
(Unaudited) - Thirteen and thirty-nine
week periods ended September 26, 1998 and
September 27, 1997 4
Condensed Statements of Cash Flows -
(Unaudited) - Thirty-nine week periods
ended September 26, 1998 and
September 27, 1997 5
Notes to Condensed Financial Statements -
(Unaudited) 6
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 7-11
Part II - Other Information:
Item 4. Submission of Matters to a Vote
of Shareholders 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
2
<PAGE>
TOFUTTI BRANDS INC.
Condensed Balance Sheets
(Unaudited)
(000's omitted)
September 26, December 27,
1998 1997
---- ----
Assets
Current assets:
Cash and cash equivalents $ 170 54
Accounts receivable (net of allowance
for doubtful accounts of
$58 in 1998 and $458 in 1997) 1,422 919
Inventories (Note 2) 548 541
Prepaid expenses 10 7
Deferred income taxes 260 276
----- -----
Total current assets 2,410 1,797
Deferred income taxes 190 174
Other assets 97 97
------ -----
Total assets $2,697 2,068
====== =====
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable - current portion $ 18 17
Accounts payable 325 94
Accrued expenses 156 208
--- ---
Total current liabilities 499 319
Note payable 35 49
--- ---
Total liabilities 534 368
Stockholders' equity:
Preferred stock -- --
Common stock 62 62
Paid-in capital 3,631 3,631
Accumulated deficit (1,530) (1,993)
------ ------
Total stockholders' equity 2,163 1,700
------ ------
Total liabilities and stockholders'
equity $2,697 2,068
====== ======
See accompanying notes to condensed financial statements.
3
<PAGE>
TOFUTTI BRANDS INC.
Condensed Statements of Operations
(Unaudited)
(000's omitted)
<TABLE>
<CAPTION>
Thirty- Thirty-
Thirteen Thirteen nine nine
weeks weeks weeks weeks
ended ended ended ended
9/26/98 9/27/97 9/26/98 9/27/97
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales $2,634 1,921 6,709 5,458
Cost of sales 1,728 1,283 4,356 3,587
----- ----- ----- -----
Gross profit 906 638 2,353 1,871
----- ----- ----- -----
Operating expenses:
Selling 324 227 829 629
Marketing and sales promotion 64 26 163 121
Research and development 85 71 249 184
General and administrative 191 211 651 613
--- --- --- -----
664 535 1,892 1,547
--- --- ----- -----
Operating income 242 103 461 324
Interest expense 2 3 8 8
--- --- --- ---
Income before income
taxes (benefit) 240 100 453 316
Income taxes (benefit) (32) - (10) 1
---- ---- ---- ---
Net income $272 100 463 315
==== ==== ==== ====
Net income per share:
Basic $.04 .02 .07 .05
Diluted .04 .02 .07 .05
Weighted average number of shares outstanding:
Basic 6,184 6,062 6,184 6,056
Diluted 6,544 6,565 6,659 6,269
</TABLE>
See accompanying notes to condensed financial statements.
4
<PAGE>
TOFUTTI BRANDS INC.
Condensed Statements of Cash Flows
(Unaudited)
(000's omitted)
Thirty-nine Thirty-nine
weeks weeks
ended ended
9/26/98 9/27/97
------- -------
Cash flows from operating
activities, net $116 (23)
Cash flows from investing activities - -
Cash flows from financing activities - 86
--- ---
Net increase in cash and
cash equivalents 116 63
Cash and cash equivalents
at beginning of period 54 5
--- ---
Cash and cash equivalents
at end of period $170 68
===== ====
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest $ 7 8
Income Taxes - 1
See accompanying notes to condensed financial statements.
5
<PAGE>
TOFUTTI BRANDS INC.
Notes to Condensed Financial Statements
(Unaudited)
(000's omitted)
(1) 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 generally accepted accounting
principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. The financial
information should be read in conjunction with the audited financial
statements and notes thereto for the year ended December 27, 1997 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 and
thirty-nine week periods ended September 26, 1998 and September 27, 1997
are not necessarily indicative of the results to be expected for the full
year.
Certain reclassifications have been made to the December 27, 1997 balance
sheet to conform to the September 26, 1998 presentation.
(2) Inventories
The composition of inventories is as follows:
Sept. 26, Dec. 27,
1998 1997
---- ----
Raw materials and packaging
supplies $233 199
Finished goods 315 342
--- ----
$548 541
==== ====
(3) 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 the dilutive effect
of stock options.
6
<PAGE>
TOFUTTI BRANDS INC.
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 the Company's financial position and operating
results during the periods included in the accompanying condensed financial
statements.
The discussion and analysis which follows in this Quarterly Report and in other
reports and documents of the Company and oral statements made on behalf of the
Company by its 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 the Company's current views with respect to
future events and financial results. These include statements regarding the
Company's earnings, projected growth and forecasts, and similar matters which
are not historical facts. The Company reminds 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 and growth in the food industry and general economies, 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 behalf
of the Company should be considered in light of these factors.
Results of Operations
Thirteen Weeks Ended September 26, 1998 Compared with Thirteen
Weeks Ended September 27, 1997
Net sales for the thirteen weeks ended September 26, 1998 were $2,634,000, an
increase of $713,000 or 37% from the sales level realized for the thirteen weeks
ended September 27, 1997. In the 1998 period, sales of hard pack Tofutti
increased by $445,000 and food product sales increased by $268,000 due to
expanded distribution and increased sales of recently introduced products. As a
result of the increase in sales, the Company's gross profit for the current
quarter increased by $268,000 and its gross profit percentage increased slightly
to 34% compared to 33% for the same period last year. This increase in gross
profit percentage was a result of an improved mix of products being sold, which
was mostly
7
<PAGE>
offset by increased expenses associated with the introduction of new products.
The Company anticipates a continuing increase in sales during the fourth quarter
of the current fiscal year and the first quarter of next year due to the
scheduled introduction of new products and expanded distribution. Such increases
are dependent upon market acceptance of these products, for which no assurance
can be given. The Company expects its gross profit percentage to continue to be
adversely affected by the introduction of its new products.
Selling expenses increased to $324,000 for the current fiscal quarter compared
with $227,000 for the comparable period in 1997. This increase was due primarily
to higher outside warehouse rental, freight, commission and bad debt expenses
associated with the higher sales level in 1998. Marketing and sales promotion
expenses increased to $64,000 in the 1998 period from $26,000 in 1997 due
primarily to an increase in spending for artwork and plates for new product
package designs and an increase in point-of-sale materials.
Research and development costs increased to $85,000 for the thirteen weeks ended
September 26, 1998 compared to $71,000 for the comparable period last year. This
increase was due to the hiring of two additional employees and additional
research and development expenses associated with the Company's new products.
These additional expenses consist mainly of start-up costs incurred at new
co-packing facilities, including additional Kosher supervision costs. Management
expects that research and development costs will continue at the same level for
the remainder of the year.
General and administrative expenses were $191,000 for the current period
compared with $211,000 for the comparable period in 1997. The decrease is
primarily the result of a $20,000 reduction in an accrual in the third quarter
of 1998, which was originally recorded in a prior quarter.
The Company recorded an income tax benefit of $32,000 for the thirteen weeks
ended September 26, 1998 as compared to zero for the comparable period last
year. The Company records its interim tax expense (benefit) based on the
difference between its cumulative tax expense (benefit) for the thirty-nine
weeks ended September 26, 1998 (which is calculated based on the Company's
estimated annual effective tax rate for the year ending December 26, 1998) and
the amounts that were provided for in previous quarters and any further
adjustments to its deferred tax valuation allowance.
Thirty-Nine Weeks Ended September 26, 1998 Compared with Thirty-Nine
Weeks Ended September 27, 1996
Net sales for the thirty-nine weeks ended September 26, 1998 were $6,709,000, an
increase of $1,251,000 or 23% from the sales level
8
<PAGE>
realized for the thirty-nine weeks ended September 27, 1997. In the 1998 period,
sales of hard pack Tofutti increased by $784,000 and food product sales
increased by $467,000 due to expanded distribution and increased sales of
recently introduced products. As a result of the increase in sales, the
Company's gross profit for the current period increased by $482,000 and its
gross profit percentage increased slightly to 35% as compared to 34% for the
same period last year. The increase in gross profit percentage was principally
due to the larger increase in sales of the Company's frozen dessert products
than food products. The Company obtains a higher gross profit percentage on
frozen dessert products than on food products. This increase, however, was
mostly offset by increased expenses associated with the introduction of new
products.
Selling expenses increased by $200,000 to $829,000 for the current fiscal period
compared with $629,000 for the comparable period last year. This increase was
due primarily to higher outside warehouse rental, freight, commission and bad
debt expenses associated with the higher sales level in 1998. Marketing and
sales promotion expenses increased to $163,000 from $121,000 in 1997 due
primarily to increases in spending for artwork and plates for new product
package designs and an increase in point of sale materials. The Company is not
currently engaged in any major marketing programs.
Research and development expenses were $249,000 for the thirty-nine weeks ended
September 26, 1998 compared with $184,000 for the comparable period last year.
This increase was due to the hiring of two additional employees and additional
research and development expenses associated with the Company's new products.
These additional expenses consist mainly of start-up costs incurred at new
co-packing facilities, including additional Kosher supervision costs. Management
expects that research and development costs will continue at the same level for
the remainder of the year.
General and administrative expenses were $651,000 for the current period
compared with $613,000 for the comparable period in 1997, due primarily to an
increase in payroll costs and public relations expense.
The Company's tax benefit of $10,000 for the thirty-nine weeks ended September
26, 1998 is the result of management's decision in the third quarter of 1998 to
reverse its deferred tax valuation allowance (net of state tax expense) due to
the Company's continuing profitability and projections of future taxable income.
A portion of the benefit of this reversal is reflected in the effective tax rate
for the year ending December 26, 1998, with the remaining balance of the
valuation allowance credited to income tax benefit in the third quarter of 1998.
Management believes it is more likely than not that the Company will realize the
benefits of its deferred tax assets.
9
<PAGE>
Liquidity and Capital Resources
The Company's working capital was $1,911,000 at September 26, 1998, an increase
of $433,000 from December 27, 1997. Accounts receivable increased to $1,422,000
at September 26, 1998, an increase of $503,000 from December 27, 1997,
reflecting the Company's significantly higher sales. Inventories increased
slightly by $7,000.
Prepaid expenses increased slightly from $7,000 at December 27, 1997 to $10,000
at September 26, 1998, and other assets were unchanged at September 26, 1998
from December 27, 1997.
Accounts payable increased by $231,000 to $325,000 at September 26, 1998, while
accrued liabilities decreased from December 27, 1997 by $52,000 to $156,000 at
September 26, 1998 due primarily to the timing of cash payments.
The Company does not have any material capital commitments and contemplates no
material capital expenditures in the foreseeable future. Although the Company
has operated on a profitable basis in recent years, it has not had sufficient
funds to fully implement the marketing of its new products. Despite this lack of
financing, the Company has succeeded in increasing the sales of its products and
introducing new products. The Company believes it will be able to fund its
operations during the remainder of 1998 and in 1999 from its current resources,
however, any substantial increase in its operations may require additional
working capital. Although the Company has had discussions and intends to have
future ones with interested parties concerning additional financing for the
Company, no assurance can be given that such working capital will be available,
if required. Management believes the Company will have sufficient financial
resources to continue its operations through the end of 1999.
Bad Debt Write-off
During the third quarter of 1998, the Company wrote off against its allowance
for doubtful accounts $470,000 of accounts receivable it deemed to be
uncollectible. This amount represented old balances owed by some of the
Company's foreign customers, which had been reserved for in a prior year.
Income Taxes
The Company's tax year ends on July 31st, its former fiscal year. Due to the
timing difference between the end of the fiscal and tax year, the Company, on
its quarterly and year end reports, must make estimates as to its state and
federal tax liabilities.
10
<PAGE>
Beginning in 1999, to the extent the Company generates future income for
financial reporting purposes, the Company will be required to provide federal
and state tax expense. However, the Company will not be required to pay federal
income tax until such time as it utilizes its remaining federal net operating
loss carryforwards and tax credits.
The Year 2000 Issue
The Company has completed a comprehensive review of its computer systems to
identify the systems that could be affected by the Year 2000 ("Y2K") issue.
Based upon this review, management presently believes that due to the lack of
date sensitive computer systems and applications currently in use, the Y2K issue
will not pose significant operational problems for the Company's computer
systems.
In addition, the Company has contacted its major suppliers and vendors seeking
information about their internal compliance efforts. Upon review, the Company
believes that most of its major suppliers will be Y2K compliant and any
non-compliance by its suppliers will not have a significantly adverse effect
upon the Company's operations.
The Company is beginning the process of developing business contingency plans to
mitigate the risk of the potential of a noncompliant vendor or system. The
Company will continue to assess its exposure to possible Y2K problems or
possible disruptions. Based upon the information it has developed to date,
management believes that no disruptions will occur in the Company's operations.
However, the Company is subject to risks should the Company or a third party
vendor or service provider be unable to resolve issues related to the Y2K. Costs
of addressing the Y2K issue have not been material to date and, based on
information gathered to date from the Company and its vendors, are not currently
expected to have a material adverse impact on the Company's financial position,
results of operations or cash flows.
Other Matters
In June 1997, the Financial Accounting Standards Board released Statement 131,
"Disclosures About Segments of an Enterprise and Related Information" ("SFAS
131"). This statement became effective for the Company beginning December 28,
1997 and requires disclosure of certain information about operating segments and
geographic areas of operation. The adoption of SFAS 131 does not require interim
reporting in the year of adoption. The Company is completing its evaluation of
the disclosure requirements of SFAS 131 and will begin such disclosure in its
Form 10-KSB for the year ending December 26, 1998. This statement does not have
any effect on the results of operations or financial position of the Company.
11
<PAGE>
PART II - OTHER INFORMATION
TOFUTTI BRANDS INC.
Item 4. Submission of Matters to a Vote of Shareholders
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1* Certificate of Incorporation, as amended through February 1986
3.1.1** March 1986 Amendment to Certificate of Incorporation
3.2* By-laws
4.1*** Copy of the Company's 1993 Stock Option Plan
10.1**** Copy of Legal Settlement between the Company and the NEMP Corporation
27 Financial Data Schedule
(b) Reports on Form 8-K filed during the last quarter of the period covered by
this report:
None
______________
* 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.
** 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.
*** Filed as an exhibit to the Company's Form 10-KSB for the fiscal year ended
January 1, 1994 and hereby incorporated by reference thereto.
**** Filed as an exhibit to the Registrant's Form 10-K for the fiscal year ended
December 28, 1991 and hereby incorporated by reference thereto.
12
<PAGE>
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 Financial Officer
Date: November 10, 1998
13
<PAGE>
EXHIBIT INDEX
Exhibit
No. Exhibit
--- -------
3.1* Certificate of Incorporation, as amended through February
1986
3.1.1** March 1986 Amendment to Certificate of Incorporation
3.2* By-laws
4.1*** Copy of the Company's 1993 Stock Option Plan
10.1**** Copy of Legal Settlement between the Company and the NEMP
Corporation
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000730349
<NAME> Tofutti Brands Inc.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-26-1998
<PERIOD-END> SEP-26-1998
<CASH> 170,000
<SECURITIES> 0
<RECEIVABLES> 1,480,000
<ALLOWANCES> 58,000
<INVENTORY> 548,000
<CURRENT-ASSETS> 2,410,000
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,697,000
<CURRENT-LIABILITIES> 499,000
<BONDS> 0
0
0
<COMMON> 3,693,000
<OTHER-SE> (1,530,000)
<TOTAL-LIABILITY-AND-EQUITY> 2,697,000
<SALES> 6,709,000
<TOTAL-REVENUES> 6,709,000
<CGS> 4,356,000
<TOTAL-COSTS> 4,356,000
<OTHER-EXPENSES> 1,892,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,000
<INCOME-PRETAX> 453,000
<INCOME-TAX> (10,000)
<INCOME-CONTINUING> 463,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 463,000
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>
