10QSB/A 1 secondq10qsba1.txt 2Q 2005 10-QSB/A1 U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB/A Amendment No. 1 [X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended July 2, 2005 [ ] 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 10, 2005 the Issuer had 5,631,167 shares of Common Stock, par value $.01, outstanding. Transitional Small Business Disclosure Format (check one): Yes [ ] No [X] EXPLANATORY NOTE This Amendment No. 1 on Form 10-QSB/A hereby amends Item 1.- Financial Statements and Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations of Part I and Item 1. - Legal Proceedings of Part II of Tofutti Brand Inc.'s Quarterly Report on Form 10-QSB for the quarter ended July 2, 2005, which was originally filed on May 17, 2005. This Amendment reflects the restatement of our financial statements to reclassify freight out expense from a selling expense to a component of cost of sales, provide a new Note 2 in the financial statements and additional information in Item 1 - Legal Proceedings. This Amendment is not intended to revise other information presented in our quarterly report on Form 10-QSB for the quarter ended July 2, 2005 as originally filed and all such other information in the original filing, which remains unchanged. Nor does this Amendment on Form 10-QSB/A reflect events occurring after the filing of the original Form 10-QSB or modify or update the disclosure therein in any way other than as required to reflect the amendments discussed above. As a result, this Amendment to the Quarterly Report on Form 10-QSB continues to speak as of August 16, 2005. 2 TOFUTTI BRANDS INC. INDEX Page ---- Part I - Financial Information: Item 1. Financial Statements Condensed Balance Sheets - July 2, 2005 (Unaudited) and January 1, 2005 4 Condensed Statements of Income - Thirteen and Twenty-Six Week Periods ended July 2, 2005 and June 26, 2004 (Unaudited) 5 Condensed Statements of Cash Flows - Thirteen and Twenty-Six Week Periods ended July 2, 2005 and June 26, 2004 (Unaudited) 6 Notes to Condensed Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3. Controls and Procedures 19 Part II - Other Information: Item 1. Legal Proceedings 21 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 21 Item 3. Defaults Upon Senior Securities 21 Item 4. Submission of Matters to a Vote of Shareholders 21 Item 5. Other Information 22 Item 6. Exhibits 22 Signatures 24 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS TOFUTTI BRANDS INC. CONDENSED BALANCE SHEETS (IN THOUSANDS)
July 2, 2005 January 1, 2005 ------------ --------------- (Unaudited) ASSETS Current assets: Cash and equivalents $2,010 $2,199 Accounts receivable (net of allowance for doubtful accounts of $255 and $219, respectively) 1,880 1,614 Inventories 995 792 Prepaid expenses 2 14 Deferred income taxes 296 593 ----- --- Total current assets 5,183 5,212 Fixed assets(net of accumulated depreciation of $12 and $10, respectively 36 38 Other assets 16 16 -- -- Total assets $5,235 $5,266 ====== ====== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $1,023 $691 Accrued officers' compensation -- 500 Income taxes payable 196 403 --- --- Total current liabilities 1,219 1,594 ----- ----- Commitments and contingencies -- -- Stockholders' equity: Preferred stock - par value $.01 per share; authorized 100,000 shares, none issued -- -- Common stock- par value $.01 per share; authorized 15,000,000 shares, issued and outstanding 5,631,167 shares at July 2, 2005 and 5,636,867 shares at January 1, 2005 56 56 Additional paid-in capital 144 162 Retained earnings 3,816 3,454 ----- ----- Total stockholders' equity 4,016 3,672 ----- ----- Total liabilities and stockholders' equity $5,235 $5,266 ====== ======
See accompanying notes to condensed financial statements. 4 TOFUTTI BRANDS, INC. Condensed Statements of Income (Unaudited) (in thousands, except per share figures)
Thirteen Thirteen Twenty-six Twenty-six weeks ended weeks ended weeks ended weeks ended July 2, 2005 June 26, 2004 July 2, 2005 June 26, 2004 ------------ ------------- ------------ ------------- (Restated) (Restated) (Restated) (Restated) Net sales $5,091 $5,149 $9,331 $9,141 Cost of sales 3,656* 3,709* 6,684* 6,776* ------ ------ ------ ------ Gross profit 1,435* 1,440* 2,647* 2,365* ------ ------ ------ ------ Operating expenses: Selling 271* 240* 516* 486* Marketing 150 142 385 264 Research and development 90 136 209 229 General and administrative 430 457 914 822 ------ ------ ------ ------ 941* 975* 2,024* 1,801* ------ ------ ------ ------ Operating income 494 465 623 564 Interest income 1 3 3 4 ------ ------ ------ ------ Income before income taxes 495 468 626 568 Income taxes 208 204 263 232 ------ ------ ------ ------ Net income $ 287 $ 264 $ 363 $ 336 ====== ====== ====== ====== Weighted average common shares outstanding: Basic 5,635 5,702 5,636 5,727 ====== ====== ====== ====== Diluted 6,219 6,296 6,219 6,313 ====== ====== ====== ====== Net income per share: Basic $ 0.05 $ 0.05 $ 0.06 $ 0.06 ====== ====== ====== ====== Diluted $ 0.05 $ 0.04 $ 0.06 $ 0.05 ====== ====== ====== ======
----------- * Restated (see Note 2). See accompanying notes to condensed financial statements. 5 TOFUTTI BRANDS INC. CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS) Twenty-six Twenty-six weeks weeks ended ended July 2, 2005 June 26, 2004 ------------ ------------- Cash flows from operating activities, net $(171) $184 Cash flows from investing activities -- -- Cash flows from financing activities, net (18) (1,032) ---- -------- Net change in cash and equivalents (189) (848) Cash and equivalents at beginning of period 2,199 2,557 ----- ----- Cash and equivalents at end of period $2,010 $1,709 ====== ====== Supplemental cash flow information: Income taxes paid $170 $205 ==== ==== See accompanying notes to condensed financial statements. 6 TOFUTTI BRANDS INC. Notes to Condensed Financial Statements (in thousands) 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: Restatement of Previously Issued Financial Statements The Company has historically included freight out expense as a component of selling expenses, but has determined that such expense should be classified as a cost of sales in measuring its gross profit. During the thirteen weeks ended July 2, 2005, its freight out expense was $285 as compared to $265 in the thirteen weeks ended June 26, 2004. During the twenty-six weeks ended July 2, 2005, its freight out expense was $539 as compared to $493 in the twenty-six weeks ended June 26, 2004. There was no impact on operating income or net income as a result of this restatement. The impact of the aforementioned restatement with respect to the financial statements for the thirteen and twenty-six weeks ended July 2, 2005 and June 26, 2004 is summarized below:
Thirteen weeks ended Thirteen weeks ended July 2, 2005 June 26, 2004 ----------------------------------------------- ----------------------------------------------- (Previously (As (Previously (As Reported) (Adjustment) restated) Reported) (Adjustment) restated) -------------- ----------------- -------------- ---------------- ----------------- ------------ Cost of sales $3,371 $285 $3,656 $3,444 $265 $3,709 ====== ==== ====== ====== ==== ====== Gross profit 1,720 (285) 1,435 1,705 (265) 1,440 ===== ==== ===== ===== ==== ===== Selling expense 556 (285) 271 505 (265) 240 === ==== === === ==== === Total operating expenses 1,226 (285) 941 1,240 (265) 975 ===== ==== === ===== ==== ===
7 TOFUTTI BRANDS INC. Notes to Condensed Financial Statements (in thousands)
Twenty-six weeks ended Twenty-six weeks ended July 2, 2005 June 26, 2004 ----------------------------------------------- ----------------------------------------------- (Previously (As (Previously (As Reported) (Adjustment) restated) Reported) (Adjustment) restated) -------------- ----------------- -------------- ---------------- ----------------- ------------ Cost of sales $6,145 $539 $6,684 $6,283 $493 $6,776 ====== ==== ====== ====== ==== ====== Gross profit 3,186 (539) 2,647 2,858 (493) 2,365 ===== ==== ====== ===== ==== ===== Selling expense 1,055 (539) 516 979 (493) 486 ===== ==== === === ==== === Total operating expenses 2,563 (539) 2,024 2,294 (493) 1,801 ===== ==== ===== ===== ==== =====
Note 3: 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 sheets amounts as of January 1, 2005 have been derived from our audited financial statements. The financial information should be read in conjunction with the audited financial statements and notes thereto for the year ended January 1, 2005 included in the Company's Annual Report on Form 10-KSB/A filed with the Securities and Exchange Commission on the date of this filing. The results of operations for the thirteen week and twenty-six week periods ended July 2, 2005 are not necessarily indicative of the results to be expected for the full year. The Company operates on a fiscal year which ends on the Saturday closest to December 31st. There were no changes in the Company's accounting policies during the period ended July 2, 2005 from those in effect at January 1, 2005. Note that the Company has restated freight costs from a selling expense to a component of cost of sales for all periods. 8 TOFUTTI BRANDS INC. Notes to Condensed Financial Statements (in thousands) Note 4: Inventories The composition of inventories is as follows: July 2, January 1, 2005 2005 ---- ---- Finished products $ 711 $550 Raw materials and packaging 284 242 --- ---- $995 $792 ==== ==== Note 5: Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Note 6: Market Risk We invest our excess cash, should there be any, in bank certificates of deposit and high rated money market funds. The bank certificate of deposits are usually for a term of not more than six months and never for more than $100 per account. Note 7: Earnings Per Share Basic earnings per common share has been computed by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per common share has been computed by dividing net income by the weighted average number of common shares outstanding including dilutive effects of stock options. 9 TOFUTTI BRANDS INC. Notes to Condensed Financial Statements (in thousands) The following table sets forth the computation of basic and diluted earnings per share:
Thirteen Thirteen Twenty-six Twenty-six Weeks Weeks Weeks Weeks Ended Ended Ended Ended July 2, 2005 June 26, 2004 July 2, 2005 June 26, 2004 ------------ ------------- ------------ ------------- Numerator Net income-basic........................... $287 $264 $363 $336 ==== ==== ==== ==== Net income-diluted......................... $287 $264 $363 $336 ==== ==== ==== ==== Denominator Denominator for basic earnings per share weighted average shares ................ 5,635 5,702 5,636 5,727 Effect of dilutive securities stock options........................... 584 594 583 586 --- --- --- --- Denominator for diluted earnings per share. 6,219 6,296 6,219 6,313 ----- ----- ----- ----- Earnings per share Basic.................................... $0.05 $0.05 $0.06 $0.06 ===== ===== ===== ===== Diluted.................................. $0.05 $0.04 $0.06 $0.05 ===== ===== ===== =====
Note 8: Stock-Based Compensation The Company follows the intrinsic method of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations in accounting for its employee stock options because, as discussed below, Financial Accounting Standards Board Statement No. 123, "Accounting for Stock-Based Compensation" (FAS 123) requires use of option valuation models that were not developed for use in valuing employee stock options. FAS 123 permits a company to elect to follow the intrinsic method of APB 25 rather than the alternative fair value accounting provided under FAS 123, but requires pro forma net income and earnings per share disclosures as well as various other disclosures not required under APB 25 for companies following APB 25. The Company has adopted the disclosure provisions required under Financial Accounting Standards Board Statement No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" (FAS 148). Under APB 25, because the exercise price of the Company's stock options equals the market price of the underlying stock on the date of grant, no compensation expense was recognized. 10 TOFUTTI BRANDS INC. Notes to Condensed Financial Statements (in thousands) Pro forma information regarding net income and earnings per share is required by FAS123 and FAS 148, and has been determined as if the Company had accounted for its employee stock options under the fair value method of those Statements. No options were granted during the thirteen and twenty-six weeks ended June 26, 2004 and July 2, 2005, other than in January 2005, options to purchase 10,000 shares were granted to a director (who subsequently resigned as of June 9, 2005). For purposes of pro forma disclosures, the estimated fair value of options is amortized to expense over the options' vesting period. The Company's pro forma information follows:
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED JULY 2, JUNE 26, JULY 2, JUNE 26, -------------------- ---------------------- 2005 2004 2005 2004 ---- ---- ---- ---- Net income, as reported $287 $264 $363 $336 Stock-based employee compensation expense under fair value method, net of related tax effects -- -- 30 -- ----- ----- ----- ----- Pro forma net income $287 $264 $333 $336 ===== ===== ===== ===== Earnings per share: Basic, as reported $0.05 $0.05 $0.06 $0.06 ===== ===== ===== ===== Basic, pro forma $0.05 $0.05 $0.06 $0.06 ===== ===== ===== ===== Diluted, as reported $0.05 $0.04 $0.06 $0.05 ===== ===== ===== ===== Diluted, pro forma $0.05 $0.04 $0.06 $0.05 ===== ===== ===== =====
11 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 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 our behalf should be considered in light of these factors. We have attempted to identify additional significant uncertainties and other factors affecting forward-looking statements in the "Risk Factors" section in this quarterly report on Form 10-QSB. Status of Transfer of Production Facilities In October 2004, H. P. Hood, the parent company of Kemps Foods, Inc., announced it was closing the Kemps' Lancaster, PA facility that had produced our non-dairy frozen dessert products for the past twenty years. The Lancaster facility ceased operations on July 21, 2005. We have relocated the production of most of our frozen dessert products to the H. P. Hood facility in Connecticut. To date, we have not encountered any material problems in the transfer of production to the new site. We had taken steps to build inventory at our former facility prior to its close to maintain our current levels of sales service during this transition period. Although we may incur some non-recurring transitional expenses, we do not presently expect them to have a material impact on our operations. 12 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. Revenue is recognized when goods are shipped from production facilities or outside warehouses to customers. Revenue is recognized when the following four criteria under Staff Accounting Bulletin No. 104 have been met: the product has been shipped and we have has no significant remaining obligations; persuasive evidence of an arrangement exists; the price to the buyer is fixed or determinable; and collection is probable. Deductions from sales for promotional programs, manufacturers' charge-backs, co-operative advertising programs and other programs are recorded as reductions of revenues and are provided for at the time of initial sale of product. To the extent we charge our customers for freight expense, it is included in revenues. The amount of freight expense charged to customers has not been material to date. Freight Out Expense. We record freight out expense as a cost of sales. During the thirteen and twenty-six weeks ended July 2, 2005, our freight out expense was $285,000 and $539,000 as compared to $265,000 and $493,000 in the thirteen and twenty-six weeks ended June 26, 2004. Accounts Receivable. The majority of our accounts receivables are due from distributors (domestic and international) and retailers. Credit is extended based on evaluation of a customers' financial condition and, generally, collateral is not required. Accounts receivable are most often due within 30 to 90 days and are stated at amounts due from customers net of an allowance for doubtful accounts. Accounts outstanding longer than the contractual payment terms are considered past due. We determine whether an allowance is necessary by considering a number of factors, including the length of time trade accounts receivable are past due, our previous loss history, the customer's current ability to pay its obligation, and the condition of the general economy and the industry as a whole. We write off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. We do not accrue interest on accounts receivable past due. Allowance for Inventory Obsolescence. We maintain an allowance for inventory obsolescence for losses resulting from inventory items becoming unsaleable due to loss of specific customers 13 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 inventory saleability; therefore, the allowance for inventory obsolescence is reviewed regularly and changes to the allowance are updated as new information is received. Valuation Allowance for Deferred Tax Assets. The carrying value of deferred tax assets 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. New Accounting Pronouncements Accounting Changes and Error Corrections. In May 2005, the FASB issued Statement 154, "Accounting Changes and Error Corrections--a replacement of APB Opinion No. 20 and FASB Statement No. 3," or FAS 154. FAS 154 changes the accounting for and reporting of a change in accounting principle. The provisions of FAS 154 require, unless impracticable, retrospective application to prior periods' financial statements of (1) all voluntary changes in accounting principles and (2) changes required by a new accounting pronouncement, if a specific transition is not provided. FAS 154 also requires that a change in depreciation, amortization, or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate, which requires prospective application of the new method. FAS 154 is effective for all accounting changes made in fiscal years beginning after December 15, 2005. Results of Operations Thirteen Weeks Ended July 2, 2005 Compared with Thirteen Weeks Ended June 26, 2004 ------------------------------------------------ Net sales for the thirteen weeks ended July 2, 2005 were $5,091,000, a decrease of $58,000, or 1%, from the sales level realized for the thirteen weeks ended June 26, 2004. Our gross profit in the current period decreased slightly by $5,000 to $1,435,000. Our gross profit percentage for both the period ending July 2, 2005 and the period ending June 26, 2004 was 28%. Our cost of sales during the quarter continued to be adversely impacted by significant industry-wide price increases to certain key ingredients and packaging, due mainly to supply shortages as a result of political events in certain foreign countries, the relatively stagnant economic situation in the United States, increased freight expenses and increased cost of petroleum based products. Our freight out expense increased by $20,000, or 8%, to $285,000 in the current period. In addition to increasing our shipping costs, the high cost of fuel affects the cost of many inventory components we use, particularly packaging. To offset these significant cost increases, during 2005 we continue to, without compromising quality and taste, replace higher cost ingredients with functionally similar items at significant cost savings. 14 Selling expenses increased by 13% to $271,000 for the current fiscal quarter compared with $240,000 for the comparable period in 2004. This increase was due primarily to increases in warehouse rental and commission expenses. Marketing expenses increased by $8,000 to $150,000 in the fiscal 2005 period due principally to increases in magazine advertising of $22,000, which was partially offset by a reduction in promotion expenses. Research and development costs, which consist principally of salary expenses and laboratory costs, decreased to $90,000 for the thirteen weeks ended July 2, 2005 compared to $136,000 for the comparable period in 2004. This decrease was mainly attributable to a reduction in payroll expense. General and administrative expenses decreased to $430,000 for the current quarter compared with $457,000 for the comparable period in 2004 due primarily to decreased payroll costs. Interest income was $1,000 for the current fiscal quarter as compared with $3,000 for the comparable period in 2004. The increase in income tax expense in the second quarter of 2005 to $208,000 from $204,000 in the second quarter of 2004 reflects our greater operating profit in 2005. The effective tax rate was relatively consistent in both periods. Twenty-Six Weeks Ended July 2, 2005 Compared with Twenty-Six Weeks Ended June 26, 2004 -------------------------------------------------- Net sales for the twenty-six weeks ended July 2, 2005 were $9,331,000, an increase of $190,000, or 2%, from the sales level realized for the twenty-six weeks ended June 26, 2004. Partially as a result of the increase in sales, our gross profit in the current period increased by $282,000, or 12%, to $2,647,000. Our gross profit percentage also increased to 28% for the period ending July 2, 2005 compared to 26% for the period ending June 26, 2004. Most of our sales increase this period was in frozen dessert products, which have a higher gross margin than our refrigerated and other food products. In the 2004 period, we disposed of certain discontinued products at prices below their normal prices, which negatively impacted our gross profit in 2004. In the 2005 twenty-six week period, we benefited from the price increases instituted throughout 2004, which are now in full effect. Our cost of sales during the twenty-six week period continued to be adversely impacted by significant industry-wide price increases to certain key ingredients and packaging, due mainly to supply shortages as a result of political events in certain foreign countries, the relatively stagnant economic situation in the United States, and the cost of fuel. Our freight out expense for the period ending July 2, 2005 increased to $539,000 from $493,000 in the comparable twenty-six week period in 2004. In addition to increasing our shipping costs, the high cost of fuel affects the cost of many inventory components we use, particularly packaging. To offset these 15 significant cost increases, during 2005 we continue to, without compromising quality and taste, replace higher cost ingredients with functionally similar items at significant cost savings. Selling expenses increased by 6% to $516,000 for the current twenty-six week period compared with $486,000 for the comparable period in 2004. This increase was due primarily to increases outside warehouse rental and commission expenses due to the increase in sales for the current twenty-six week period. Marketing expenses increased by $121,000 to $385,000 in the fiscal 2005 period due principally to increases in expenses for artwork and plates of $27,000 resulting from recently introduced new packaging, product promotions of $18,000, point of sale materials of $38,000 and magazine advertising of $51,000. Research and development costs, which consist principally of salary expenses and laboratory costs, decreased to $209,000 for the twenty-six weeks ended July 2, 2005 compared to $229,000 for the comparable period in 2004. This decrease was mainly attributable to a decrease in payroll expense. General and administrative expenses increased to $914,000 for the current twenty-six week period compared with $822,000 for the comparable period in 2004 due primarily to an increase in payroll costs of $62,000 and professional fees and outside services of $75,000. These cost increases were partially offset by a reduction in travel and entertainment expenses of $41,000. Interest income was $3,000 for the current fiscal quarter as compared with $4,000 for the comparable period in 2004. The increase in income tax expense in the 2005 twenty-six week period to $263,000 from $232,000 in the 2004 twenty-six week period reflects our greater operating profit in 2005. The effective tax rate was relatively consistent in both periods. Restatement of Previously Issued Financial Statements We have historically included freight out expense as a component of selling expenses, but we determined that such expense should be classified as a cost of sales in measuring our gross profit. During the thirteen weeks ended July 2, 2005, our freight out expense was $285,000 as compared to $265,000 in the thirteen weeks ended June 26, 2004. During the twenty-six weeks ended July 2, 2005, our freight out expense was $539,000 as compared to $493,000 in the twenty-six weeks ended June 26, 2004. As a result of the restatement, our gross profit decreased to $1,435,000 and $2,647,000 in the thirteen and twenty-six weeks ended July 2, 2005 and decreased to $1,440,000 and $2,365,000 in the thirteen and twenty-six weeks ended June 26, 2004. The restatement did not impact our operating income in any period. The impact of the aforementioned restatement with respect to the financial statements for the 16 thirteen and twenty-six weeks ended July 2, 2005 and June 26, 2004 is summarized below:
Thirteen weeks ended Thirteen weeks ended July 2, 2005 June 26, 2004 ----------------------------------------------- ----------------------------------------------- (Previously (As (Previously (As Reported) (Adjustment) restated) Reported) (Adjustment) restated) -------------- ----------------- -------------- ---------------- ----------------- ------------ (in thousands) Cost of sales $3,371 $285 $3,656 $3,444 $265 $3,709 ====== ==== ====== ====== ==== ====== Gross profit 1,720 (285) 1,435 1,705 (265) 1,440 ===== ==== ===== ===== ==== ===== Selling expense 556 (285) 271 505 (265) 240 === ==== === === ==== === Total operating expenses 1,226 (285) 941 1,240 (265) 975 ===== ==== === ===== ==== ===
Twenty-six weeks ended Twenty-six weeks ended July 2, 2005 June 26, 2004 ----------------------------------------------- ----------------------------------------------- (Previously (As (Previously (As Reported) (Adjustment) restated) Reported) (Adjustment) restated) -------------- ----------------- -------------- ---------------- ----------------- ------------ (in thousands) Cost of sales $6,145 $539 $6,684 $6,283 $493 $6,776 ====== ==== ====== ====== ==== ====== Gross profit 3,186 (539) 2,647 2,858 (493) 2,365 ===== ==== ====== ===== ==== ===== Selling expense 1,055 (539) 516 979 (493) 486 ===== ==== === === ==== === Total operating expenses 2,563 (539) 2,024 2,294 (493) 1,801 ===== ==== ===== ===== ==== =====
Liquidity and Capital Resources As of July 2, 2005, we had approximately $2.0 million in cash and equivalents and our working capital was approximately $4.0 million. On March 23, 2004, our Board of Directors ratified certain purchases and brought the aggregate number of shares subject to our repurchase program up to 1,250,000 shares. During the period December 28, 2003 through January 1, 2005, we purchased an additional 258,000 shares at a cost of $887,000, bringing cumulative totals at January 1, 2005 to 1,118,700 shares at a total cost of $3,483,000 or $3.05 per share. During the thirteen week period ended July 2, 2005, we purchased an additional 5,700 shares at a cost of $18,000, bringing cumulative totals through July 2, 2005 to 1,124,400 shares at a total cost of $3,501,000 or $3.11 per share. All of the above shares were retired to treasury, with a resultant reduction in additional paid-in capital. 17 Our capital requirements are dependent on many factors, including market acceptance of our products, as well as our marketing and sales activities. We anticipate that our cash resources will be used primarily to fund our operating activities. We do not presently have any material capital commitments and contemplate no material capital expenditures in the foreseeable future. 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. Market Risk We invest our excess cash, should there be any, in highly rated money market funds which are subject to changes in short-term interest rates. Off-Balance Sheet Arrangements None. Contractual Obligations As of July 2, 2005, we did not have any contractual obligations or commercial commitments, including obligations of discontinued operations. Risk Factors Investing in our common stock involves a high degree of risk and uncertainty. You should carefully consider the risks and uncertainties described below in addition to the Risk Factors contained in our Annual Report on Form 10-KSB for the fiscal year ended January 1, 2005 before investing in our common stock. If any of the following risks actually occurs, our business, prospects, financial condition and results of operations could be harmed. In that case, the value of our common stock could decline, and you could lose all or part of your investment. Reliance on Independent Distributors. The success of our business depends, in large part, upon the establishment and maintenance of a strong distribution network. Although we believe that the business associated with any of our primary distributors can be readily transferred to other distributors if necessary, no assurance can be given that a change in distributors would not be 18 disruptive to our business, which could have a material adverse effect on our business and results of operations. Dependence on Key Customers. During the years ended January 1, 2005 and December 27, 2003, Trader Joe's, a West Coast based health food supermarket chain, accounted for 21% and 22% of our net sales, respectively, and Eskimo Pie, our East Coast frozen dessert distributor, accounted for 11% and 14% of our net sales, respectively. During the twenty-six week period ended July 2, 2005, Trader Joe's and Eskimo Pie accounted for 22% and 11% of our net sales, respectively. The loss of a substantial portion of our sales to either of these customers would have a material adverse affect on our company. Dependence on Key Suppliers. During the years ended January 1, 2005 and December 27, 2003, we purchased approximately 64% and 66% of our finished goods, respectively, from Kemps Foods and we purchased 15% and 13% of our finished goods, respectively, from Franklin Foods. During the twenty-six week period ended July 2, 2005 we purchased approximately 65% and 14% of our finished goods from Kemps Foods and Franklin Foods, respectively. Although we believe that there will be no problem in continuing to obtain these finished goods from these companies or alternative sources in the future, any disruption in supply could have a material adverse affect on our company. Reliance on a Limited Number of Key Personnel. Our success is significantly dependent on the services of David Mintz (age 74), Chief Executive Officer and Steven Kass (age 54), Chief Financial Officer. The loss of the services of either 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 2,630,440 shares of common stock representing approximately 47% of the outstanding shares, permitting him as a practical matter to elect all members of the Board of Directors and thereby effectively control the business, policies and management of our company. Item 3. Controls and Procedures Our management, including our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this quarterly report on Form 10-QSB. Based upon that evaluation, our chief executive officer and chief financial officer have concluded that, as of such date, our disclosure controls and procedures were effective to ensure that information required to be disclosed by our company in reports that we file under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information was made known to them by others within the company, as appropriate to allow timely decisions regarding required disclosure. 19 There were no changes to our internal control over financial reporting that occurred during the period covered by this quarterly report on Form 10-QSB that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. All internal control systems no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective may not prevent or detect misstatements and can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. 20 PART II - OTHER INFORMATION TOFUTTI BRANDS INC. Item 1. Legal Proceedings Our company was served with a complaint by a candy manufacturer in June 2003. The plaintiff alleged that we breached our obligations in connection with the sale of certain candy bars manufactured by the candy manufacturer that were to be distributed by us within the United States. The candy manufacturer was seeking damages in the amount of $308,798, plus interest. We counterclaimed, asserting among other things, that the candy manufacturer breached its obligations to us and caused us damages. The trial for this matter began on April 4, 2005 and during the trial both parties agreed to a settlement that did not have an immediate expense exposure for our company. The settlement called for our company to physically take possession of certain disputed inventory as of April 1, 2005. Although we will continue to sell the candy covered by our original agreement, there is no assurance that we will be able to sell all of the candy in our possession. Management does not believe that the inability to sell such candy will have a material adverse effect on our company since the value of such inventory has been written down substantially. The majority of the legal costs associated with this legal matter were provided for in the first quarter of 2005. 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 During the thirteen week period ended July 2, 2005, we held our Annual Meeting of Shareholders. At the meeting, held on June 9, 2005, our shareholders voted for: 21 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 2006 Annual Meeting of Shareholders. For Withheld % For --- -------- ----- David Mintz 5,329,311 44,461 99.54 Joseph Fischer 5,349,581 24,491 94.90 Aron Forem 5,349,865 24,407 94.91 Reuben Rapoport 5,347,415 26,657 94.87 Franklyn Snitow 5,349,481 24,591 94.90 2. The ratification of the appointment of Amper, Politziner & Mattia, P.C. to examine the Company's accounts for the fiscal year ending December 31, 2005. For Against Abstained % For --- ------- --------- ----- 6,354,967 7,140 11,965 95.00 Item 5. Other Information None. Item 6. Exhibits (a) Exhibits 3.1 Certificate of Incorporation, as amended through February 1986.(1) 3.1.1 March 1986 Amendment to Certificate of Incorporation.(2) 3.1.2 June 1993 Amendment to Certificate of Incorporation.(3) 3.2 By-laws.(1) 4.1 Copy of the Registrant's Amended 1993 Stock Option Plan.(4) 4.2 Tofutti Brands Inc. 2004 Non-Employee Directors' Stock Option Plan.(5) 22 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended. 31.2 Certification by Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended. 32.1 Certification by Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification by Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. -------------------- (1) Filed as an exhibit to the Registrant's Form 10-K for the fiscal year ended July 31, 1985 and hereby incorporated by reference thereto. (2) Filed as an exhibit to the Registrant's Form 10-K for the fiscal year ended August 2, 1986 and hereby incorporated by reference thereto. (3) Filed as an exhibit to the Registrant's Form 10-KSB for the fiscal year ended January 1, 2005 and hereby incorporated by reference thereto. (4) Filed as an exhibit to the Registrant's Form S-8 (Registration No. 333-79567) filed May 28, 1999 and hereby incorporated by reference thereto. (5) Filed as Appendix B to the Registrant's Schedule 14A filed May 10, 2004 and hereby incorporated by reference thereto. 23 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this amended 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: March 21, 2006 24