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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) Management's discussion and analysis of our financial condition and results of operations are based upon the condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. This discussion should be read in conjunction with our recent SEC filings, including Form 10-K and the amendment thereto on Form 10-K/A for the year ended May 31, 2013. The preparation of these financial statements requires us to make estimates and judgments about future events that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosures. Future events and their effects cannot be determined with absolute certainty. Therefore, management's determination of estimates and judgments about the carrying values of assets and liabilities requires the exercise of judgment in the selection and application of assumptions based on various factors, including historical experience, current and expected economic conditions and other factors believed to be reasonable under the circumstances. We routinely evaluate our estimates including those considered significant and discussed in detail in Form 10-K and the amendment thereto on Form 10-K/A for the year ended May 31, 2013. Actual results may differ from these estimates under different assumptions or conditions and such differences may be material. Overview The Company manufactures and distributes a full line of high quality salted snack items, such as potato chips, tortilla chips, corn chips, fried pork skins, baked and fried cheese curls, onion rings, and puff corn. The products are all packaged in flexible bags or other suitable wrapping material. The Company also sells canned dips, pretzels, peanut butter crackers, cheese crackers, dried meat products, and nuts packaged by other manufacturers using the Golden Flake label. No single product or product line accounts for more than 50% of the Company's sales, which affords some protection against loss of volume due to a crop failure of major agricultural raw materials or failure to procure an adequate supply of pork skin pellets. Raw materials used in manufacturing and processing the Company's snack food products are purchased on the open market and under contract through brokers and directly from growers. A large part of the raw materials used by the Company consists of farm commodities which are subject to precipitous changes in supply and price. Weather varies from season to season and directly affects both the quality and supply of farm commodities available. The Company has no control of the agricultural aspects and its profits are affected accordingly. The Company sells its products through its own sales organization and independent distributors to commercial establishments that sell food products primarily in the Southeastern United States. The products are distributed through the independent distributors and route representatives who are supplied with selling inventory by the Company's trucking fleet. All of the route representatives are employees of the Company and use the Company's direct-store delivery system. Liquidity and Capital Resources At November 29, 2013 and May 31, 2013, working capital was $5,266,622 and $4,276,373, respectively. The Company did not purchase shares of treasury stock this quarter. The Company's current ratio was 1.34 to 1.00 at November 29, 2013 compared to 1.30 to 1.00 at May 31, 2013. 10 -------------------------------------------------------------------------------- Accounts Receivable and Allowance for Doubtful Accounts At November 29, 2013 and May 31, 2013 the Company had accounts receivables in the amount of $10,954,908 and $10,459,706 respectively, net of an allowance for doubtful accounts of $70,000. Other Commitments Available cash, cash from operations and available credit under the line-of-credit are expected to be sufficient to meet anticipated cash expenditures and normal operating requirements for the foreseeable future. Operating Results For the thirteen weeks ended November 29, 2013, net sales increased 0.8% from the comparable period in fiscal 2013. For the twenty-six weeks ended November 29, 2013, net sales increased 1.1% from the comparable period in fiscal 2013. This year's second quarter cost of sales was 52.5% of net sales compared to 51.7% for last year's second quarter. This year's cost of sales year to date was 51.1% of net sales compared to 51.1% for last year's year to date. This year's second quarter, selling, general and administrative expenses were 47.0% of net sales compared to 45.6% for last year's second quarter. This year's selling, general and administrative expenses year to date were 46.6% of net sales compared to 45.8% for last year's year to date. The following tables compare manufactured products to resale products: Manufactured Products-Resale Products Thirteen Weeks Ended Thirteen Weeks Ended November 29, 2013 November 30, 2012 Sales % % Manufactured Products $ 26,514,465 79.2 % $ 28,033,747 84.4 % Resale Products 6,971,858 20.8 % 5,174,873 15.6 % Total $ 33,486,323 100.0 % $ 33,208,620 100.0 % Gross Margin % % Manufactured Products $ 12,957,119 48.9 % $ 14,839,670 52.9 % Resale Products 2,959,878 42.5 % 1,205,374 23.3 % Total $ 15,916,997 47.5 % $ 16,045,044 48.3 % Twenty-Six Weeks Ended Twenty-Six Weeks Ended November 29, 2013 November 30, 2012 Sales % % Manufactured Products $ 54,763,754 79.8 % $ 55,323,966 81.5 % Resale Products 13,864,407 20.2 % 12,568,109 18.5 % Total $ 68,628,161 100.0 % $ 67,892,075 100.0 % Gross Margin % % Manufactured Products $ 27,750,117 50.7 % $ 29,403,309 53.1 % Resale Products 5,839,631 42.1 % 3,768,751 30.0 % Total $ 33,589,748 48.9 % $ 33,172,060 48.9 % 11-------------------------------------------------------------------------------- The Company's loss on sale of assets for the thirteen weeks ended November 29, 2013 in the amount of $9,370 was from the sale of used transportation equipment. For last year's thirteen weeks, the gain on sale of assets in the amount of $31,000 was from the sale of used transportation equipment. The Company's effective tax rate for the thirteen weeks was 75.8% compared to 50.6% for the last year's thirteen weeks. The Company's effective tax rate for the twenty-six weeks ended November 29, 2013 was 46.4% and 46.2% for the comparable period last year. Market Risk The principal market risks (i.e., the risk of loss arising from adverse changes in market rates and prices), to which the Company is exposed, are interest rates on its cash equivalents and bank loans, fuel costs, and commodity prices affecting the cost of its raw materials. The Company is subject to market risk with respect to commodities because its ability to recover increased costs through higher pricing may be limited by the competitive environment in which it operates. The Company purchases its raw materials on the open market and under contract through brokers or directly from growers. Future contracts have been used occasionally to hedge immaterial amounts of commodity purchases, but none are presently being used. Inflation Certain costs and expenses of the Company are affected by inflation. The Company's prices for its products over the past several years have remained relatively flat. The Company will contend with the effect of further inflation to the extent possible through efficient purchasing, improved manufacturing methods, pricing, and by monitoring and controlling expenses. Environmental Matters Golden Flake's waste water treatment plant is an environmentally-friendly way to dispose of process water at the Birmingham plant. The treatment plant has allowed Golden Flake to release the processing water into a neighboring creek which has improved the flow of water in the creek and has positively impacted the environment in the area surrounding the plant. This treatment plant has also helped to reduce expenses associated with sewer charges by the elimination of the disposal of process water through the public sewer system. Subsequent Event Not applicable. Forward-Looking Statements This discussion contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those forward-looking statements. Factors that may cause actual results to differ materially include, but are not limited to, price competition, industry consolidation, raw material costs, and effectiveness of sales and marketing activities, as described in the Company's filings with the Securities and Exchange Commission. 12 -------------------------------------------------------------------------------- ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Pursuant to Item 305(e) of Regulation S-K (Section 229.305(e)) the Company is not required to provide the Information under this item, as it is a "Smaller Reporting Company" as defined by Rule 229.10(f)(1). ITEM 4 CONTROLS AND PROCEDURES The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), as of the end of the period covered by this report. Any controls and procedures, no matter how well designed and operated can provide only reasonable assurance of achieving the desired control objectives. Based on such evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company's disclosure controls and procedures provided reasonable assurance that the disclosure controls and procedures were effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act and in accumulating and communicating such information to management, including the Company's Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the Company's internal control over financial reporting to determine whether any changes occurred during the Company's second fiscal quarter ended November 29, 2013 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. Based on that evaluation, there has been no such change during the period covered by this report. |