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TOF > SEC Filings for TOF > Form 10-K on 29-Mar-2013All Recent SEC Filings

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Annual Report

Item 7. 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 audited financial statements.

Critical Accounting Policies

Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The policies discussed below are considered by management to be critical to an understanding of our financial statements because their application places the most significant demands on management's judgment, with financial reporting results relying on estimation about the effect of matters that are inherently uncertain. Specific risks for these critical accounting policies are described in the following paragraphs. For all of these policies, management cautions that future events rarely develop exactly as forecast, and the best estimates routinely require adjustment.

Revenue Recognition. We recognize revenue when goods are shipped from our production facilities or outside warehouses and the following four criteria have been met: (i) the product has been shipped and we have no significant remaining obligations; (ii) persuasive evidence of an arrangement exists; (iii) the price to the buyer is fixed or determinable; and (iv) collection is probable. We record as deductions against sales all trade discounts, returns and allowances that occur in the ordinary course of business, when the sale occurs. To the extent we charge our customers for freight expense, it is included in revenues. The amount of freight costs charged to customers has not been material to date.

Accounts Receivable. The majority of our accounts receivables are due from distributors (domestic and international) and retailers. Credit is extended based on evaluation of a 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 bad debt expense account. We do not accrue interest on accounts receivable past due.

Inventory. Inventory is stated at lower of cost or market determined by first in first out (FIFO) method. Inventories in excess of future demand are written down and charged to the provision for inventories. At the point of which loss is recognized, a new, lower cost basis for that inventory is established and subsequent changes in facts and circumstances do not result in the restoration or increase in the newly established cost basis.

Income Taxes. The carrying value of deferred tax assets assumes that we will be able to generate sufficient future taxable income to realize the deferred tax assets based on estimates and assumptions. If these estimates and assumptions change in the future, we may be required to record a valuation allowance against deferred tax assets which could result in additional income tax expense. We will recognize a tax benefit in the financial statements for an uncertain tax position only if management's assessment is that the position is "more likely than not" (i.e., a likelihood greater than 50 percent) to be allowed by the tax jurisdiction based solely on the technical merits of the position. The term "tax position" refers to a position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilities for financial reporting purposes.

Deferred Revenue and Costs. Deferred revenue represents amounts from sales of our product that have been billed, but for which the transactions have not met our revenue recognition criteria. The cost of the related product has been recorded as deferred costs on our balance sheet.

Recent Accounting Pronouncements

Accounting Standards updates that became effective after December 29, 2012 are not expected to have a significant effect on our financial position or results of operations.

Results of Operations

Fiscal Year Ended December 29, 2012 Compared with Fiscal Year Ended December 31, 2011

We operate on a fiscal year ending on the Saturday closest to December
31. Fiscal years for the financial statements included in this report are the fifty-two week periods ended December 29, 2012 and December 31, 2011.

Net sales for the fiscal year ended December 29, 2012 were $14,343,000, a decrease of $1,583,000, or 10%, from net sales of $15,926,000 for the fiscal year ended December 31, 2011. The reduction in sales was primarily due to the determination of Trader Joe's, our largest customer, to cease selling branded goods. During fiscal 2012, there were no sales to Trader Joe's compared to sales of $1,420,000 in fiscal 2011. While we believe that we will recover some portion of these sales as our retail customers switch to other retail sources to purchase our products, this process is taking longer than expected. Sales were also impacted on the east coast during the fourth quarter due to Superstorm Sandy. The storm and its aftermath caused widespread disruptions of shipments, which resulted in lost sales. While our executive office was closed for a week because of the storm, our manufacturing operations were not affected and we were able to access our business records from a co-location site. We believe our sales will improve during fiscal year 2013 due to the introduction of new products and price increases that will be instituted in the second and third quarters of 2013.

Our gross profit in the year ended December 29, 2012 decreased by $534,000 to $3,951,000 from $4,485,000, reflecting the lower level of sales. Our gross profit percentage for the year ended December 29, 2012 was 28% unchanged from the year ended December 31, 2011. Freight out expense decreased to $989,000 for the year ended December 29, 2012 compared with $1,033,000 for the year ended December 31, 2011. Freight out cost as a percentage of sales increased slightly from 6.5% in 2011 to 6.9% in 2012. The decrease in freight out expense in 2012 was a result of the lower level of sales for the year. Due to the expected continued high cost of fuel, we anticipate that our freight cost as a percentage of sales will approximate the 2012 percentages should fuel costs remain steady. Our gross profit was also impacted by price increases for certain key ingredients and packaging costs. We have begun to implement price increases for some of our products, which we expect will help improve our profit margin in 2013.

Selling and warehousing expenses increased by $154,000, or 10%, to $1,647,000 for fiscal 2012 from $1,493,000 in fiscal 2011. This increase was caused primarily by a $108,000 increase in outside warehouse rental expense, a $110,000 increase in payroll expense, a $31,000 increase in auto, travel and entertainment expense, a $42,000 increase in commission expense, a $10,000 increase in meetings and conventions expense, and an $8,000 increase in messenger expense. The increases in payroll and auto, travel and entertainment expense are due to the addition of three sales people during the latter part of 2012. The increase in outside warehouse expense was due to the increase in inventory. The increase in commission expense was due to the increase in several rates of commission for certain products and customers. These increases were offset by a decrease in bad debt expense of $152,000. The decrease in bad debt expense was due primarily to a decrease in the reserve for bad debts for certain accounts. We anticipate that with the exception of commission expenses and outside warehouse rental expense, which are variable to sales, all other selling expenses in 2013 should remain relatively consistent with our expenses in 2012.

Marketing expenses increased in fiscal 2012 by $125,000, or 24%, to $638,000 from $513,000 in fiscal 2011. Increases in public relations expense of $114,000, advertising expense of $36,000 and point of sale materials expense of $18,000 were offset by a decrease in promotion expense of $44,000. We expect marketing expenses to decline in fiscal 2013 due to certain marketing programs implemented in fiscal 2012 not being repeated.

Product development expenses increased by $97,000, or 18%, to $643,000 in fiscal 2012 from $546,000 in fiscal 2011. The increase was caused primarily by increases in payroll costs of $28,000, lab and supplies expense of $28,000, professional fees and outside services of $16,000 and equipment repairs of $29,000. We expect that product development costs to decline in fiscal 2013 due to certain one-time expenses incurred in fiscal 2012 not being repeated.

General and administrative expenses increased by $134,000, or 7%, to $1,935,000 for fiscal 2012 as compared with $1,801,000 for fiscal 2011. The increase was primarily due to a $45,000 increase in payroll expense, an increase of $30,000 in public relations expense and an increase in IT expense of $64,000. The increase in IT expense was due to certain one-time charges in fiscal 2012 that will not be repeated in fiscal 2013. We anticipate that professional fees and outside services, which include legal and accounting fees, will increase in fiscal 2013 primarily due to the costs associated with the mandatory implementation of the requirement to file our financial reports with the Securities and Exchange Commission in XBRL (eXtensible Business Reporting Language). Our management expects that general and administrative expenses in 2013 will remain consistent with fiscal 2012 expenses.

Overall, total operating expenses in fiscal 2012 increased to $4,863,000, an increase of $510,000, or 12%, from total operating expenses in fiscal 2011.

Income before income taxes decreased by $1,044,000 to a loss of $(912,000) in fiscal 2012 as compared with $132,000 in fiscal 2011, primarily as a result of our lower revenues, gross profit, and increased expenses.

Income tax benefit for the 2012 fiscal period was $88,000 compared to income tax expense of $89,000 in fiscal 2011, and our income tax rate was 10% for the 2012 fiscal year compared to 67% in the 2011 fiscal year. The high income tax rate for fiscal 2011 was due to the effect of certain deferred income tax expense items.

Liquidity and Capital Resources

Our recent operating history has resulted in a decrease in our capital resources.

At December 29, 2012, we had approximately $471,000 in cash and cash equivalents, and our working capital was $3,609,000, a decrease of $835,000 from December 31, 2011. Our current and quick acid test ratios, both measures of liquidity, were 4.4 and 2.7, respectively, at December 29, 2012 compared to 5.7 and 3.7, respectively, at December 31, 2011. We do not have a line of credit or other approved borrowing facility.

At December 29, 2012, our accounts receivable decreased by $56,000 to $1,880,000 from December 31, 2011, reflecting the reduction of sales in fiscal 2012. The average number of days outstanding for accounts receivable in fiscal 2012 was 55 days as compared to 47 days in fiscal 2011.

At December 29, 2012, our inventories increased to $1,750,000 from $1,441,000 at December 31, 2011, due to the introduction of new products in fiscal 2012. Refundable and deferred income taxes increased from $307,000 at the end of fiscal 2011 to $331,000 at December 31, 2012 due to the income tax benefit associated with our operating loss. Accounts payable and accrued expenses increased by $109,000 to $1,065,000 at December 29, 2012, from $956,000 at December 31, 2011, due to the increase in inventory.

Cash Flows                                              Fiscal Year ended
                                                  December 29,      December 31,
                                                      2012              2011
                                                          (In thousands)

Net cash used in operating activities            $       (1,107 )   $        (910 )
Net cash used in financing activities                       (16 )             (24 )
Net decrease in cash and cash equivalents                (1,123 )            (934 )
Cash and cash equivalents at beginning of year            1,594             2,528
Cash and cash equivalents at end of year         $          471     $       1,594

Cash used in operating activities was $1,107,000 for the fiscal year ended December 29, 2012 compared with cash used in operating activities of $910,000 for the fiscal year ended December 31, 2011. In the fiscal year ended December 29, 2012, our cash flow from operating activities reflected net loss of $824,000, a $56,000 increase in accounts receivable, a $309,000 increase in inventories, a $120,000 increase in prepaid expenses, and a $289,000 increase in income taxes refundable, offset by a $109,000 increase in accounts payable and accrued expenses.

We used $16,000 in financing activities in the fiscal year ended December 29, 2012 for the repurchase of common stock, compared to $24,000 used in the fiscal year ended December 31, 2011 for the repurchase of common stock.

As a result of the foregoing, our cash and cash equivalents decreased to $471,000 at December 29, 2012 from $1,594,000 at December 31, 2011.

We believe our existing cash and cash equivalents on hand at December 29, 2012, the cash flows expected from operations, and a $289,000 increase in income taxes refundable payable in 2013 will be sufficient to support our operating and capital requirements during the next twelve months. However, we may require additional financing in order to accomplish or exceed our business plans for future periods.

Our Board of Directors first instituted a share repurchase program in September 2000 which, after several amendments, has to date authorized the repurchase of 2,200,000 shares of our common stock at prevailing market prices. While we may purchase an additional 360,000 shares of common stock based on such authorization, we did not purchase any shares of our common stock from the first quarter of fiscal 2009 until December 2011. During December 2011, we repurchased 14,492 shares at a cost of $24,115. We repurchased an additional 8,480 shares in January and February 2012 at a cost of $16,000. Cumulatively, from the beginning of our share repurchase program, we have purchased 1,829,000 shares at a cost of $5,318,000.

Contractual Obligations

We have no material contractual obligations at December 29, 2012.

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 will invest our excess cash, should there be any, in highly rated money market funds which are subject to changes in short-term interest rates. We do not believe that our foreign currency exposure is significant as our export sales are transacted in U.S. dollars. We did not enter into any foreign exchange contracts in the year ended December 29, 2012.

Off-Balance Sheet Arrangements


Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

Not applicable.

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