U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
X Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
- --- of 1934 for the quarterly period ended July 3, 1999
- --- 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 August 3, 1999 the Issuer had 6,294,567 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 - July 3, 1999
(Unaudited) and December 26, 1998 3
Condensed Statements of Operations -
(Unaudited) - Thirteen and twenty-seven
week periods ended July 3, 1999 and
thirteen and twenty-six week periods ended
June 27, 1998 4
Condensed Statements of Cash Flows -
(Unaudited) - Twenty-seven week period ended
July 3, 1999 and twenty-six week period
ended June 27, 1998 5
Notes to Condensed Financial Statements -
(Unaudited) 6-7
Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-12
Part II - Other Information:
Item 4. Submission of Matters to a Vote
of Shareholders 13
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
2
<PAGE>
TOFUTTI BRANDS INC.
Condensed Balance Sheets
(Unaudited)
(000's omitted)
<TABLE>
<CAPTION>
July 3, December 26,
1999 1998
---- ----
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 995 407
Accounts receivable (net of allowance for doubtful
accounts of $158 in 1999 and $120 in 1998) 1,471 985
Inventories (Note 3) 579 613
Prepaid expenses 8 13
Deferred income taxes 108 335
----- -----
Total current assets 3,161 2,353
Deferred income taxes 180 180
Other assets 119 119
------ -----
Total assets $3,460 2,652
====== =====
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable - current portion $ 20 19
Accounts payable 354 85
Accrued expenses 204 240
Income taxes payable 83 19
--- -----
Total current liabilities 661 363
Note payable 19 29
--- -----
Total liabilities 680 392
Stockholders' equity:
Preferred stock -- --
Common stock 63 62
Paid-in capital 3,709 3,631
Accumulated deficit (992) (1,433)
---- ------
Total stockholders' equity 2,780 2,260
----- ------
Total liabilities and stockholders' equity $3,460 2,652
====== ======
</TABLE>
See accompanying notes to condensed financial statements.
3
<PAGE>
TOFUTTI BRANDS INC.
Condensed Statements of Operations
(Unaudited)
(000's omitted)
<TABLE>
<CAPTION>
Thirteen Thirteen Twenty-seven Twenty-six
weeks weeks weeks weeks
ended ended ended ended
7/3/99 6/27/98 7/3/99 6/27/98
------ ------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 3,412 2,324 6,074 4,075
Cost of sales 2,259 1,558 3,917 2,628
----- ----- ----- -----
Gross profit 1,153 766 2,157 1,447
----- --- ----- -----
Operating expenses:
Selling 368 281 662 505
Marketing and sales promotion 67 35 105 99
Research and development 94 82 169 164
General and administrative 272 258 484 460
---- --- ------ ---
801 656 1,420 1,228
--- --- ----- -----
Operating income 352 110 737 219
Interest expense 1 2 2 6
----- --- ----- ---
Income before income taxes 351 108 735 213
Income taxes 139 11 294 22
---- --- ---- ---
Net income $ 212 97 441 191
====== ==== ==== ====
Net income per share:
Basic $ .03 .02 .07 .03
Diluted $ .03 .01 .06 .03
Weighted average number of shares outstanding:
Basic 6,211 6,184 6,199 6,184
Diluted 7,392 6,752 7,056 6,717
</TABLE>
See accompanying notes to condensed financial statements.
4
<PAGE>
TOFUTTI BRANDS INC.
Condensed Statements of Cash Flows
(Unaudited)
(000's omitted)
Twenty-seven Twenty-six
weeks weeks
ended ended
7/3/99 6/27/98
------ -------
Cash flows from operating
activities, net $509 167
Cash flows from investing activities 79 --
Cash flows from financing activities -- --
---- ---
Net increase in cash and
cash equivalents 588 167
Cash and cash equivalents
at beginning of period 407 54
--- ---
Cash and cash equivalents
at end of period $995 221
==== ====
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest $ 3 6
Income taxes -- --
See accompanying notes to condensed financial statements.
5
<PAGE>
TOFUTTI BRANDS INC.
Notes to Condensed Financial Statements
(Unaudited)
(000's omitted)
(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.
(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 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 26, 1998 included
in the Company's Annual Report on Form 10-KSB filed with the Securities and
Exchange Commission. The results of operations for the twenty-seven week
period ended July 3, 1999 are not necessarily indicative of the results to
be expected for the full year.
The Company's fiscal year is usually the fifty-two week period which ends
on the last Saturday in December. The 1999 fiscal year is a fifty-three
week year which ends on January 1, 2000. The Company has included the extra
week in the 1999 fiscal year in the first quarter, resulting in a fourteen
week quarter, which ended on April 3, 1999.
Certain reclassifications have been made to the December 26, 1998 balance
sheet to conform to the July 3, 1999 presentation.
(3) Inventories
The composition of inventories is as follows:
July 3, Dec. 26,
1999 1998
---- ----
Raw materials and packaging
supplies $241 $382
Finished goods 338 231
--- ----
$579 $ 613
=== ====
6
<PAGE>
(4) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carry forwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
7
<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. In addition, difficulties in
completing remediation of the year 2000 issues by the Company's customers or
suppliers may have a material adverse affect on the Company and its operations.
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.
The Company has attempted to identify additional significant uncertainties and
other factors affecting forward-looking statements in Exhibit 99 to this
Quarterly Report ("Additional Information Regarding Forward Looking
Statements"). The Company will provide copies of Exhibit 99 to stockholders free
of charge upon receipt of a written request submitted to the Company's Secretary
at Tofutti Brands Inc., 50 Jackson Drive, Cranford, New Jersey 07016.
Stockholders may also obtain copies of Exhibit 99 for a nominal charge from the
Public Reference Section of the Securities and Exchange Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 or at the Commission's website:
http://www.sec.gov.
Results of Operations
Thirteen Weeks Ended July 3, 1999 Compared with Thirteen Weeks Ended June 27,
1998
The Company's fiscal year is usually the fifty-two week period which ends on the
last Saturday in December. The 1999 fiscal year is a fifty-three week year which
ends on January 1, 2000. The
8
<PAGE>
Company has included the extra week in the 1999 fiscal year in the first
quarter, resulting in a fourteen week quarter, which ended on April 3, 1999.
Net sales for the thirteen weeks ended July 3, 1999 were $3,412,000, an increase
of $1,088,000 or 47% from the sales level realized for the thirteen weeks ended
June 27, 1998. In the 1999 period, sales of hard pack Tofutti increased by
$810,000, while food product sales increased by $278,000. As a result of the
increase in sales, the Company's gross profit for the current quarter increased
by $387,000, and its gross profit percentage increased slightly to 34% compared
to 33% for the same period last year. Due to the increased expenses associated
with the introduction of new products, the Company did not achieve its
historical gross margins during this period and expects that its gross margins
during the remainder of 1999 will continue to be affected by these introductory
expenses.
The Company anticipates a continuing increase in sales during the third and
fourth quarters of the current fiscal year due to the introduction of new
products and expanded distribution. Such increases are dependent upon market
acceptance of these products, for which no assurance can be given.
Selling expenses increased to $368,000 for the current fiscal quarter compared
with $281,000 for the comparable period in 1998. This increase was due primarily
to higher outside warehouse rental, freight and commission expenses associated
with the higher sales level in 1999 and an increase in trade show costs.
Marketing and sales promotion increased to $67,000 in the 1999 period from
$35,000 in 1998 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, which consist principally of salary expenses,
increased slightly to $94,000 for the thirteen weeks ended July 3, 1999 compared
to $82,000 for the comparable 1998 period. The increase consisted mainly of
start-up costs incurred at new co-packing facilities, including additional
kosher supervision costs, during the second quarter of 1999.
General and administrative expenses increased slightly to $272,000 for the
current period compared with $258,000 for the comparable period in 1998, due
primarily to an increase in payroll costs.
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.
To the extent the Company generates income for financial reporting purposes, it
will be required to provide for federal and state tax expense. Although the
Company will begin paying state income taxes in 1999, 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. Accordingly, income
tax expense for the thirteen week period ended July 3, 1999 was $139,000
compared to $11,000 for the comparable period in 1998.
9
<PAGE>
Twenty-Seven Weeks Ended July 3, 1999 Compared with Twenty-Six Weeks Ended June
27, 1998
Net sales for the twenty-seven weeks ended July 3, 1999 were $6,074,000, an
increase of $1,999,000 or 49% from the sales level realized for the twenty-six
weeks ended June 27, 1998. In the 1999 period sales of hard pack Tofutti
increased by $639,000, while food product sales increased by $1,360,000. As a
result of the increase in sales, the Company's gross profit for the current
period increased by $710,000, while its gross profit percentage was 36%,
unchanged from last year.
Selling expenses increased by $157,000 to $662,000 for the current fiscal period
compared with $505,000 for the comparable period last year. This increase was
due primarily to higher outside warehouse rental, freight and commission
expenses associated with the higher sales level in 1999 and an increase in trade
show costs. Marketing and sales promotion expenses increased slightly to
$105,000 from $99,000 in 1998. The Company is not currently engaged in any major
marketing programs.
Research and development costs, which consist principally of salary expenses,
increased slightly to $169,000 for the twenty-seven weeks ended July 3, 1999
compared to $164,000 for the comparable 1998 period.
General and administrative expenses increased slightly to $484,000 for the
current period compared with $460,000 for the comparable period in 1998, due
primarily to an increase in payroll costs.
Income tax expense for the twenty-seven week period ended July 3, 1999 was
$294,000 compared to $22,000 for the comparable period in 1998.
Liquidity and Capital Resources
The Company's working capital was $2,500,000 at July 3, 1999, an increase of
$510,000 from December 26, 1998. Accounts receivable increased to $1,471,000 at
July 3, 1999, an increase of $486,000 from December 26, 1998, reflecting the
Company's significantly higher sales. Inventories decreased by $34,000,
reflecting a net reduction in raw material and packaging inventories versus an
increase in finished goods inventory.
Prepaid expenses decreased from $13,000 at December 26, 1998 to $8,000 at July
3, 1999. Current deferred taxes decreased by $227,000 from December 26, 1998,
reflecting the current year's expense provision for federal income taxes.
Non-current deferred income taxes and other assets were unchanged at July 3,
1999 from December 26, 1998.
Accounts payable increased by $269,000 to $354,000 at July 3, 1999, reflecting
the higher sales level, while accrued liabilities decreased from December 26,
1998 by $36,000 to $204,000 at July 3, 1999. Income taxes payable increased by
$64,000 from December 26, 1998 to $83,000 at July 3, 1999 reflecting the current
year's provision for state income taxes.
10
<PAGE>
The Company's capital stock and paid in capital increased by $79,000 at July 3,
1999 due to the exercise of stock options during the second quarter.
The Company does not presently have any material capital commitments and
contemplates no material capital expenditures in the foreseeable future. The
Company believes it will be able to fund its operations 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 that if its operations for the
remainder of 1999 continue in a manner consistent with its results for the first
and second quarters of 1999, it will have sufficient financial resources to
continue its operations throughout the coming year.
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.
Substantially all of the Company's manufacturing is performed by third-party
co-packers, and the Company's financial systems are PC-based purchased software.
Consequently, 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.
Therefore, the Company to date has not nor does it expect to develop any
contingency plans relating to the Y2K issue. 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.
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 and co-packers will be Y2K compliant
and any non-compliance by its suppliers and co-packers will not have a
significant adverse effect upon the Company's operations.
The Company is in the process of developing business contingency plans to
mitigate the risk of a potential non-compliant vendor or system. The Company
will continue to assess its exposure to 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.
11
<PAGE>
Other Matters
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosure about
Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131
establishes standards for the way public business enterprises report information
about operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in financial
reports issued to shareholders. It also establishes standards for disclosures
about products and services, geographic areas and major customers. SFAS 131 is
effective for financial statements for fiscal years beginning after December 15,
1997. Financial statement disclosures for prior periods are required to be
restated. The adoption of SFAS 131 has had no impact on the Company's results of
operations, financial position or cash flows. The Company operates in one
business segment, the development, production and marketing of TOFUTTI brand
non-dairy frozen desserts and other food products. Management does not receive,
nor does the Company generate, discrete financial operating results for any
portion of the business other than for product sales.
12
<PAGE>
PART II - OTHER INFORMATION
TOFUTTI BRANDS INC.
Item 4. Submission of Matters to a Vote of Shareholders
During the thirteen week period ended July 3, 1999, the Company held its
Annual Meeting of Shareholders.
At the meeting, held on May 27, 1999, the Company's shareholders voted for:
1. The election of the following directors to hold office for a term
until their successors are duly elected and qualified at the
Company's 2000 Annual Meeting of Shareholders.
For Against Abstained Unvoted
--- ------- --------- -------
David Mintz 5,821,165 25,885 - -
Bernard Koster 5,821,214 25,836 - -
Reuben Rapoport 5,822,215 24,835 - -
Franklin Snitow 5,822,414 24,636 - -
Jeremy Wiesen 5,822,414 24,636 - -
2. The ratification of the appointment of Wiss & Company LLP to
examine the Company's accounts for 1999.
For Against Abstained Unvoted
--- ------- --------- -------
5,830,789 11,160 5,101 -
13
<PAGE>
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 Registrant's Amended 1993 Stock Option Plan.
27 Financial Data Schedule (filed via EDGAR only).
99 Additional Information Regarding Forward-Looking Statements.
(b) Reports on Form 8-K filed during the last quarter of the period covered by
this report:
On April 28, 1999, the Registrant filed with the Securities and
Exchange Commission a Form 8-K, dated April 26, 1999, reporting a change in
certifying accountant. On April 30, 1999, the Registrant filed Amendment No. 1
to Form 8-K, dated April 26, 1999, reporting a change in certifying accountant.
- ------------
* 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 Registrant's Form S-8 (Registration No.
333-79567) and hereby incorporated by reference thereto.
14
<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: August 5, 1999
15
<PAGE>
EXHIBIT INDEX
Exhibit Page
- ------- ----
3.1* Certificate of Incorporation, as amended through February 1986.
3.1.1** March 1986 Amendment to Certificate of Incorporation.
3.2* By-laws of the Registrant.
4.1*** Copy of the Registrant's Amended 1993 Stock Option Plan.
27 Financial Data Schedule (filed via EDGAR only).
99 Additional Information Regarding Forward-Looking Statements.
- ------------
* 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 Registrant's Form S-8 (Registration No.
333-48605) filed March 25, 1998 and hereby incorporated by reference
thereto.
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TOFUTTI
BRANDS INC.'S REPORT ON FORM 10-QSB FOR THE QUARTER ENDED JULY 3, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH REPORT.
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-END> JUL-03-1999
<CASH> 995,000
<SECURITIES> 0
<RECEIVABLES> 1,471,000
<ALLOWANCES> 158,000
<INVENTORY> 579,000
<CURRENT-ASSETS> 3,161,000
<PP&E> 59,000
<DEPRECIATION> 59,000
<TOTAL-ASSETS> 3,460,000
<CURRENT-LIABILITIES> 661,000
<BONDS> 0
0
0
<COMMON> 63,000
<OTHER-SE> 2,717,000
<TOTAL-LIABILITY-AND-EQUITY> 3,460,000
<SALES> 6,074,000
<TOTAL-REVENUES> 6,074,000
<CGS> 3,917,000
<TOTAL-COSTS> 3,917,000
<OTHER-EXPENSES> 1,420,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,000
<INCOME-PRETAX> 735,000
<INCOME-TAX> 294,000
<INCOME-CONTINUING> 441,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 441,000
<EPS-BASIC> .07
<EPS-DILUTED> .06
</TABLE>
EXHIBIT 99
ADDITIONAL INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
The Company's Quarterly Report on Form 10-QSB for the 13 and 27 week
periods ended July 3, 1999 (the "Quarterly Report") contains various
forward-looking statements which reflect the Company's current views with
respect to future events and financial results. Forward-looking statements
usually include the verbs "anticipates," "believes," "estimates," "expects,"
"intends," "plans," "projects," "understands" and other verbs suggesting
uncertainty. The Company reminds shareholders that forward-looking statements
are merely predictions which are inherently subject to uncertainties and other
factors which could cause the actual results to differ materially from the
forward-looking statement. Some of these uncertainties and other factors are
discussed in the Quarterly Report. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." In this Exhibit 99, the Company
has attempted to identify additional uncertainties and other factors which may
affect its forward-looking statements.
Shareholders should understand that the uncertainties and other factors
identified in the Quarterly Report and this Exhibit 99 do not constitute a
comprehensive list of all the uncertainties and other factors which may affect
forward-looking statements. The Company has merely attempted to identify those
uncertainties and other factors which, in its view at the present time, have the
highest likelihood of significantly affecting its forward-looking statements. In
addition, the Company does not undertake any obligation to update or revise any
forward-looking statements or the list of uncertainties and other factors which
could affect such statements.
* * *
Dependence on Independent Distributors. Historically, we have been
dependent on maintaining satisfactory relationships with our various health food
distributors, Mattus Ice Cream Company, our frozen dessert distributor in the
New York Metropolitan area ("Mattus"), and the other independent distributors
that have acted as our distributors. Our health food distributors accounted for
47% of our sales. While we believe that our relationships with our distributors
have been satisfactory and have been instrumental in the Company's growth, we
have at times experienced difficulty in maintaining such relationships to our
satisfaction. Since available distribution alternatives are limited, there can
be no assurance that difficulties in maintaining satisfactory relationships with
our distributors will not have a material adverse effect on our business in the
future.
Recent Growth in Sales and Earnings. In the first six months of 1999, our
net sales increased 49% to $6,074,000 from $4,075,000 in the comparable 1998
period. The successful introduction of innovative products on a periodic basis
has become increasingly important to our sales growth. Accordingly, the future
degree of market acceptance of any of our new products, which may be accompanied
by significant promotional expenditures, is likely to have an important impact
on our future financial results.
<PAGE>
Competitive Environment. The frozen dessert and health food markets are
highly competitive. The ability to successfully introduce innovative products on
a periodic basis that are accepted by the marketplace is a significant
competitive factor. In addition, many of our principal competitors are large,
diversified companies with resources significantly greater than ours. We expect
strong competition to continue, including competition for adequate distribution
and competition for the limited shelf space for the frozen dessert category in
supermarkets and other retail food outlets.
Our Operating Results Vary Quarterly And Seasonally. We have often
recognized a substantial portion of our revenues in the second and third quarter
of the year and in the last month, or even weeks, of a quarter. Our expense
levels are substantially based on our expectations for future revenues and are
therefore relatively fixed in the short-term. If revenue levels fall below
expectations, our quarterly results are likely to be disproportionately
adversely affected because a proportionately smaller amount of our expenses
varies with its revenues. Our operating results reflect seasonal trends and we
expect to continue to be affected by such trends in the future. We expect to
continue to experience relatively higher sales in the second and third quarters,
and relatively lower sales in the fourth and first quarters, as a result of
reduced sales of frozen non-dairy desserts. Due to the foregoing factors, in
some future quarter our operating results may be below the expectations of
public market analysts and investors. In such event, it is likely that the price
of our common stock would be materially adversely affected.
Reliance on a Limited Number of Key Personnel. Our success is significantly
dependent on the services of David Mintz, Chief Executive Officer, Mr. Steven
Kass, Chief Financial Officer, and Reuben Rapoport, Director of Product
Development. The loss of the services of any of these persons could have a
material adverse effect on our business.
Control of the Company. Our Chairman of the Board and Chief Executive
Officer, David Mintz, holds shares representing approximately 49% of the
outstanding common stock, permitting him as a practical matter to elect all
members of the Board of Directors and thereby effectively control the business,
policies and management of our company.
We May Be Affected By Year 2000 Issues. We are in the process of addressing
the Year 2000 problem. Although we believe that we have identified and upgraded
or replaced all of the computers, software applications and related equipment
used in connection with our internal operations that must be modified, upgraded,
or replaced to minimize the possibility of a material disruption to our business
because of the Year 2000 problem, we cannot provide any assurance to this
effect. We believe the Year 2000 problem does not pose a significant operational
or financial risk. We have a broad base of customers with no customer
responsible more than 10% of net sales. We also have a broad base of suppliers
with multiple sourcing possibilities for many of our purchases.
Our assessment of the Year 2000 problem is based upon certain assumptions
that may later prove to be inaccurate. We believe that the greatest potential
risks relate to those situations beyond
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our control, particularly the inability of suppliers and customers to be Year
2000 compliant, causing disruptions in the manufacturing and distribution
network. Additionally, customer's inability to pay in a timely manner and the
disruption of electronic invoicing and payment systems could cause financial
risk and losses to our company.
We Are Subject To Risks Associated With International Operations. In 1998
approximately 12% of our revenues were from international sales. Although we
continue to expand our international operations, we cannot be certain that we
will be able to maintain or increase international market demand for our
products. To the extent that we cannot do so in a timely manner, our business,
operating results and financial condition will be adversely affected.
International operations are subject to inherent risks, including the
following:
o the impact of possible recessionary environments in multiple foreign
markets;
o longer receivables collection periods and greater difficulty in
accounts receivable collection;
o unexpected changes in regulatory requirements;
o potentially adverse tax consequences; and
o political and economic instability.
We may be adversely affected by fluctuations in currency exchange rates. We
do not currently engage in any currency hedging transactions intended to reduce
the effect of fluctuations in foreign currency exchange rates on our results of
operations. Although exposure to currency fluctuations to date has not had a
material adverse effect on our business, there can be no assurance such
fluctuations in the future will not have a material adverse effect on revenues
from international sales and, consequently our business, operating results and
financial condition.
We May Require Additional Capital In The Future. Our working capital
requirements and the cash flow provided by our operating activities are likely
to vary greatly from quarter to quarter, depending on the timing of orders and
deliveries, the build-up of inventories, and the payment terms offered to
customers. We anticipate that our existing capital resources, will be adequate
to satisfy our working capital and capital expenditure requirements for at least
12 months. No assurance can be given that we will not consume an unexpected and
significant amount of our available resources. Our future capital requirements
will depend on many factors, including continued progress in our expansion plans
and the success of new product introductions. To the extent that the funds
generated from our operations are insufficient to fund our operating and
financial requirements, we may be required to raise additional funds through
public or private financings or other sources. Any equity or debt financings, if
available at all, may cause dilution to our then-existing shareholders. If
additional funds are raised through the issuance of equity securities, the net
tangible book value per
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share of our common shares may decrease and the percentage ownership of then
current shareholders may be diluted. We do not have any committed sources of
additional financing, and there can be no assurance that additional financing,
if necessary, will be available on commercially reasonable terms, if at all. If
adequate funds are not available, our business, financial condition and results
of operations would be materially and adversely affected.
Our Stock Price Is Subject To Volatility. The market price of our common
stock may be subject to wide fluctuations in response to announcements
concerning us or our competitors, quarterly variations in operating results, the
introduction of new products or changes in product pricing policies by us or our
competitors, general market conditions in the industry, developments in the
financial markets and other factors.
We Do Not Intend To Pay Cash Dividends. Our policy is to retain earnings,
if any, for use in our business and, for this reason, we do not intend to pay
cash dividends on the common shares in the foreseeable future.
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