<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended January 3, 1998
------------------------------------------------------
-OR-
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------------- ----------------------
Commission file Number
----------------------------------------------------------
Tom's Foods Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 58-1516963
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization Number)
900 8th Street, Columbus, Georgia 31902
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (706) 323-2721
------------------------------
TOM'S FOODS INC.
(Exact name of registrant as specified in its charter)
DELAWARE 58-1516963
State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
900 8TH STREET
COLUMBUS, GEORGIA 31902
(706) 323-2721
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
- ---------------------------------- -------------------------------------
- ---------------------------------- -------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
- --------------------------------------------------------------------------------
(Title of class)
- --------------------------------------------------------------------------------
(Title of class)
1
<PAGE> 2
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
PART I
ITEM 1. BUSINESS
Tom's Foods is a regional snack food manufacturing and distribution
company. The Company has manufactured and sold snack food products since 1925
under the widely recognized "Tom's" brand name. The Company's distribution
network serves a variety of customers, including independent retailers, vending
machines, retail supermarket chains, convenience stores, mass merchandisers,
food service companies and military bases.
PRODUCTS AND PACKAGING
The Company sells a wide variety of products in five principal
categories: chips, sandwich crackers, baked goods, nuts and candy. The Company
sells its products under the "Tom's" brand name and also manufactures products
for delivery directly to national accounts and for other companies on a contract
sales basis. The Company also promotes the sale of certain snack foods,
confection products and hot and cold beverages of several companies for which it
receives promotional allowances.
DISTRIBUTION NETWORK
The Company's products are primarily marketed by the Company's network
of distributors: (i) directly to the public through vending machines; and (ii)
to retail outlets through a direct store delivery system. The Company ships
freshly-made merchandise each day directly to its distributor network located
throughout the United States. The network of distributors, in turn, delivers
products to small or independent retail outlets and vending machines in 43
states.
Retail Outlets. Distributor sales to independent retail outlets are
made via a direct store delivery system, route drivers bring product directly
into stores and provide merchandising services such as stocking and rotating
products and setting displays.
Vending Machines. Vending machines which dispense the Company's
products, the majority of which are owned by the Company's independent
distributors, are located principally in factories, schools, service stations,
office buildings, motels and rest areas.
Other Products. In addition to its name brand products, the Company has
authorized its distributors to sell affiliated products, which are not produced
by the Company but are complimentary to the Company's products and necessary
from a distribution perspective to appropriately serve customers.
CONTRACT SALES AND DIRECT SALES
The Company manufactures products for other snack food companies and
large retail customers under contract packaging agreements. The Company also
sells and ships selected products directly to certain retailers' warehouses.
2
<PAGE> 3
SALES AND MARKETING
The Company's field sales force, together with the Company's
distributor development department, are responsible for sourcing, selecting and
training new distributors. In addition, the field sales force assists
independent distributors in developing new routes, opening new accounts, running
promotions and is available to advise distributors on operational and management
issues that may arise. The Company also maintains a national accounts sales
organization to manage sales relationships with its chain store customers.
The Company has an in-house marketing department. The marketing
department is dedicated to: (i) developing new products, improving existing
products and coordinating all packaging changes; (ii) developing and evaluating
the Company's trade and consumer promotions, national accounts merchandising
programs, sales aids and display equipment and distributor programs; (iii)
assisting sales personnel with business reviews and forecasting; and (iv)
coordinating the sales and product activities with the Company's major contract
customers.
COMPETITION
The snack food industry is highly competitive. The Company competes on
the basis of overall customer satisfaction which includes price, flavor,
freshness and quality. The Company's major competitors include Frito-Lay and
Lance, Inc. ("Lance") both of which the Company views as "full-line" snack food
competitors in the salty snack segment. The Company defines a "full-line"
participant as a snack food company which has products in all the Company's
major snack categories, including nuts, candy, sandwich crackers, baked goods,
potato chips, corn/tortilla chips and extruded snacks, such as cheese puffs.
Other industry participants such as Golden Flake Snack Foods Inc., Wise Potato
Chip Co., Nabisco, and Interstate Bakeries Corporation (Dolly Madison/Hostess
brands) maintain a presence in the markets served by the Company in a limited
number of these product categories, such as chips or baked goods.
SOURCES AND AVAILABILITY OF RAW MATERIALS
The principal raw materials used in the production of the Company's
snack food products are: packaging materials; potatoes, nuts and other
agricultural products; and flour, corn, oils, and other milled or refined
products. These raw materials are generally available in adequate quantities in
the open market. In most cases, there are readily available alternative
suppliers for these raw materials.
GOVERNMENT REGULATION
As a manufacturer and marketer of food items, the Company is subject to
regulation by various government agencies, including the USDA and the United
States Food and Drug Administration. Under various statutes and regulations,
such agencies prescribe requirements and establish standards for quality and
purity. The finding of a failure to comply with one or more regulatory
requirements can result in a variety of sanctions, including monetary fines
and/or compulsory withdrawal of products from store shelves. The Company may
also be required to comply from time to time with state and local laws
regulating food handling and storage.
In addition to laws relating to food products, the Company is subject
to various federal, state and local environmental laws and regulations which
limit the discharge, storage, handling and disposal of a variety of substances.
The Company's operations are also governed by laws and regulations relating to
workplace safety and worker health, principally the Occupational Safety and
Health Administration Act and regulations and applicable state laws and
regulations thereunder.
The Company believes that it is in compliance in all material respects
with all presently applicable governmental laws and regulations and that the
cost of administration of compliance with existing laws and regulations does
3
<PAGE> 4
not have, and is not expected to have, a material adverse impact on the
Company's financial condition or results of operations.
INTELLECTUAL PROPERTY
The Company operates under the trademark, service mark and trade name
"TOM'S" and uses various marks and logos containing "TOM'S" (collectively, the
"Company Marks"). The Company's products are sold under a number of trademarks.
Most of these trademarks, including the widely recognized "TOM'S" brand name,
are owned by the Company.
Pursuant to distributorship agreements, distributors are granted a
non-exclusive license to use certain of the Company Marks. Such distributorship
agreements otherwise provide that distributors shall make no use of the Company
Marks, nor engage in any program or activity, which makes use of or contains any
reference to the Company, its products or the Company Marks, except with written
consent of the Company.
The Company has and will continue to maintain and vigorously defend its
intellectual property rights, including policing its trademark rights by
pursuing trademark infringers.
EMPLOYEES
As of the fiscal 1997 year end, the Company had approximately 1,594
full-time employees, including 934 in the manufacturing facilities, 422 in sales
and marketing and 238 in administration and support operations. None of the
Company's employees are subject to collective bargaining agreements. The Company
considers its employee relations to be good.
ITEM 2. PROPERTIES
The Company owns and operates seven plants in five states. Sandwich
crackers, baked goods, nuts and candy products are produced in three plants
located in Columbus, Georgia, which is also the location of the Company's
headquarters (the aggregate area of the Columbus facilities is approximately
548,000 SF). Chips are manufactured in four plants located in Fresno, California
(47,000 SF); Perry, Florida (111,000 SF); Knoxville, Tennessee (116,000 SF); and
Corsicana, Texas (84,000 SF). The key markets in the southeastern and
southwestern United States are served by the Perry, Columbus, Knoxville and
Corsicana plants. The Fresno plant primarily services Arizona, California and
Nevada and to a lesser extent Oregon and Washington. Products produced in
Columbus are cross-docked through the Fresno shipping facility. All of the
Company's facilities have sufficient additional capacity, some of which is used
to package products on a contract basis for other companies. The Company also
leases certain properties in connection with its field sales and Company-owned
routes.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to litigation from time to time in the ordinary
course of business. Although the amount of any liability with respect to any
such litigation cannot be determined, in the opinion of management, such
liability is not expected to have a material adverse effect on the Company's
financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Not applicable.
4
<PAGE> 5
ITEM 6. SELECTED FINANCIAL DATA
Set forth below are certain summary historical financial data for the
Company as of fiscal years 1997, 1996, 1995 and 1994, and for the period from
April 25, 1993 through January 1, 1994, as well as selected historical financial
data for the Company prior to the 1993 Refinancing (the "Predecessor") as of
April 24, 1993 and for the period from January 3, 1993 through April 24, 1993
(See "Certain Relationships and Related Transactions"). The selected historical
financial information for the Company and the Predecessor as of and for the full
fiscal years and periods indicated were derived from the financial statements
for the Company which were audited by Arthur Andersen LLP, independent public
accountants. The summary historical financial information set forth below should
be read in conjunction with the financial statements of the Company and the
notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included below. Financial data of the Company
subsequent to the 1993 Refinancing reflect the purchase accounting treatment of
the 1993 Refinancing. Accordingly, the financial data of the Predecessor and the
Company are not comparable in all material respects, since such data reflect the
financial positions and results of operations of these two separate entities.
Selected historical financial data on following page.
5
<PAGE> 6
<TABLE>
<CAPTION>
PREDECESSOR
-----------
FOR THE FOR THE
PERIOD FROM PERIOD FROM
JAN. 3, APRIL 25,
1993 1993 FISCAL YEAR ENDED
THROUGH THROUGH --------------------------------------------------------
APRIL 24, JAN. 1, DEC. 31, DEC. 31, DEC. 28, JAN. 3,
(DOLLARS IN THOUSANDS) 1993 1994 1994 1995 1996 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
NET SALES $ 67,073 $149,730 $ 215,650 $ 198,340 $ 205,856 $212,648
COSTS OF GOODS SOLD (39,675) (88,391) (130,774) (125,396) (133,624) (131,454)
--------- -------- --------- --------- --------- --------
GROSS PROFIT 27,398 61,339 84,876 72,944 72,232 81,194
EXPENSES AND OTHER INCOME:
SELLING AND
ADMINISTRATIVE EXPENSES (25,165) (52,060) (78,937) (75,783) (69,735) (75,954)
AMORTIZATION OF GOODWILL
AND INTANGIBLE ASSETS (835) (1,051) (1,678) (1,678) (1,678) (1,792)
OTHER INCOME, NET 379 1,958 1,890 3,296 1,309 1,138
RESTRUCTURING AND
NONRECURRING CHARGES (1,945) -- -- (9,570)(A) (3,793)(B) (500) (C)
--------- -------- ---------- --------- --------- --------
(27,566) (51,153) (78,725) (83,735) (73,897) (77,108)
--------- -------- --------- --------- --------- --------
INCOME (LOSS) FROM
OPERATIONS (168) 10,186 6,151 (10,791) (1,665) 4,086
INTEREST EXPENSE, NET (5,362) (3,859) (6,405) (7,870) (9,402) (9,978)
--------- -------- --------- --------- --------- --------
INCOME (LOSS) BEFORE
PROVISION (BENEFIT)
FOR INCOME TAXES (5,530) 6,327 (254) (18,661) (11,067) (5,892)
PROVISION FOR
(BENEFIT FROM) INCOME
TAXES -- 2,541 500 (400) -- 50
--------- -------- --------- --------- --------- --------
NET INCOME (LOSS) $ (5,530) $ 3,786 $ (754) $ (18,261) $ (11,067) $ (5,942)
========= ======== ========= ========= ========= ========
OTHER DATA:
OPERATING CASH FLOW $ 932 $ 3,242 $ 9,372 $ (4,825) $ 8,829 $ 10,506
INVESTING CASH FLOW (1,138) 5,259 (8,570) (7,304) (5,376) (3,213)
FINANCING CASH FLOW (64) 1,654 1,785 7,115 (3,047) (1,923)
EBITDA(D) 4,091 15,849 15,588 (1,196) 6,291 13,128
ADJUSTED EBITDA(E) 6,036 15,849 15,588 8,374 10,084 13,628
CASH INTEREST EXPENSE(F) 3,323 5,365 7,002 6,765 2,512 2,566
DEPRECIATION AND
AMORTIZATION 4,259 5,663 9,437 9,595 7,956 9,042
CAPITAL EXPENDITURES 1,794 4,625 9,006 7,304 5,798 3,419
RATIO OF ADJUSTED EBITDA
TO NET INTEREST EXPENSE(G) 1.13X 4.11X 2.43X 1.06X 1.07X 1.37X
RATIO OF ADJUSTED EBITDA
TO CASH INTEREST EXPENSE(G) 1.82 2.95 2.23 1.24 4.01 5.31
RATIO OF EARNINGS TO FIXED
CHARGES(H)(I) -- 1.85 -- -- -- 0.48
BALANCE SHEET DATA
(AS OF END OF PERIOD):
WORKING CAPITAL (DEFICIT) $(129,374) (J) $ 14,455 $ 13,161 $ (11,565) $ 7,362 $ 12,792
TOTAL ASSETS 145,559 161,629 162,403 138,500 139,790 141,045
TOTAL DEBT 136,845 72,906 70,054 75,297 88,981 70,324
CLASS A PREFERRED STOCK -- -- -- -- -- 7,167
TOTAL SHAREHOLDERS'
(DEFICIT) EQUITY (57,652) 46,601 45,130 27,586 16,519 32,832
</TABLE>
Footnotes on following page.
6
<PAGE> 7
Footnotes from previous page.
(a) During 1995, the Company recorded restructuring and non-recurring charges
totaling $9.6 million. The charges included the following: (i) a
non-recurring charge related to the reorganization of and reduction in
workforce and the administrative and sales functions ($4.2 million); (ii)
write-off of certain impaired assets ($8.6 million); (iii) a restructuring
charge related to its distribution system ($6.5 million); and (iv) the
reversal of the remainder of a prior restructuring reserve originally
established in 1991 ($9.7 million). See Note 2 of Notes to Financial
Statements included in Exhibit 14(a).
(b) In 1996, the Company recorded a non-recurring charge ($3.8 million) for
expenses associated with the refinancing of the Company's debt. See the
Liquidity and Capital Resources section under Item 7.
(c) In 1997, the Company recorded a non-recurring charge ($500,000) for
expenses associated with the refinancing of the Company's debt. See Note 4
of Notes to Financial Statements included in Exhibit 14(a).
(d) Earnings before interest, taxes, depreciation and amortization ("EBITDA")
represents the sum of income (loss) before income taxes plus interest
expense, depreciation and amortization. EBITDA is a widely accepted
measure of a Company's ability to incur and service debt, to undertake
capital expenditures, and to meet working capital requirements. EBITDA is
not a measure of financial performance under generally accepted accounting
principles ("GAAP") and should not be considered an alternative either to
net income as an indicator of the Company's operating performance or as an
indicator of the Company's liquidity.
(e) "Adjusted EBITDA" is EBITDA excluding restructuring and non-recurring
charges of $1.9 million for the period from January 3, 1993 through April
24, 1993, $9.6 million for fiscal 1995, $3.8 million for fiscal 1996 and
$500,000 for fiscal 1997.
(f) Cash interest expense is net interest expense less amounts not paid in
cash for the period indicated including, among other things, interest
accrued on the TFH Debt of $7.8 million in fiscal 1996 and $6.4 million in
fiscal 1997.
(g) Ratio of Adjusted EBITDA to interest expense or cash interest expense
represents Adjusted EBITDA divided by net interest expense or cash
interest expense.
(h) For the purpose of computing the ratio of earnings to fixed charges,
"earnings" consists of operating income (loss) before income taxes plus
fixed charges, and "fixed charges" consists of net interest expense and
the portion of rental expense deemed representative of the interest factor
of $300,000 for the period from January 3, 1993 through April 24, 1993,
$600,000 for the period from April 25, 1993 through January 1, 1994, $1.0
million for fiscal 1994, $900,000 for fiscal 1995, $800,000 for fiscal
1996 and $1.4 million for fiscal 1997.
(i) The deficiency of the earnings to fixed charges was $5.5 million,
$700,000, $18.3 million, and $11.1 million for the period from January 3,
1993 through April 24, 1993, for the years ended December 31, 1994,
December 30, 1995 and December 28, 1996, respectively.
(j) Includes debt classified in current liabilities of $136.0 million at
April 24, 1993.
7
<PAGE> 8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FISCAL YEAR ENDED JANUARY 3, 1998 COMPARED TO FISCAL YEAR ENDED
DECEMBER 28, 1996
The following table sets forth certain historical income statement data
for the periods indicated derived from the Company's statements of operations
expressed in dollars and as a percentage of net sales.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------
December 28, 1996 January 3, 1998
--------------------- ---------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales $205,856 100.0% $212,648 100.0%
Cost of goods sold (133,624) (64.9) (131,454) (61.8)
--------- ------- -------- -----
Gross profit 72,232 35.1 81,194 38.2
Selling and administrative
expenses (69,735) (33.9) (75,954) (35.7)
Amortization of goodwill and
intangible assets (1,678) (0.8) (1,792) (0.8)
Other income (expense) 1,309 0.6 1,138 0.5
Restructuring and non-recurring
charges (3,793) (1.8) (500) (0.3)
--------- -------- -------- -------
Income (loss) from operations (1,665) (0.8) 4,086 1.9
Interest expense, net (9,402) (4.6) (9,978) (4.7)
--------- -------- -------- -----
Loss before income taxes (11,067) (5.4) (5,892) (2.8)
Provision (benefit) for income
taxes 0 0.0 50 0.0
--------- ------- -------- -----
Net loss $ (11,067) (25.4)% $ (5,942) (2.8%)
========= ======= ======== =====
Adjusted EBITDA $ 10,084 4.9% $ 13,628 6.4%
Depreciation and amortization 7,956 3.9% 9,042 4.3%
</TABLE>
Net Sales
Net sales for fiscal 1997 were $212.6 million, an increase of $6.7
million or 3.3%, compared to $205.9 million reported for the 1996 comparable
period. The sales increase was due to higher sales to distributors, retail
accounts, and contract customers.
Gross Profit
Higher net sales were a large contributor to the increase in gross
profit to $81.2 million, or 38.2% of net sales, for fiscal 1997 from $72.2
million, or 35.1% of net sales, for the comparable 1996 period. Positive raw
material purchase price variances and more efficient manufacturing operations
were also contributors.
Selling and Administrative Expenses
Selling and administrative expenses increased $6.2 million, or 8.9%,
for fiscal 1997 compared to the comparable 1996 period. This increase is due to:
(i) higher promotion expenses consistent with the higher sales volume; (ii)
higher selling and administrative expenses, primarily relating to increased
incentive-based compensation and an enlarged marketing staff; and (iii)
increased route operating expenses as the average number of Company-owned and
operated routes increased.
Amortization of Goodwill and Intangible Assets
Goodwill and intangible assets arose during the acquisition of the
Company in May 1993. The Company has attributed the goodwill and intangible
assets to its distribution system, an assembled staff, various trademarks and
goodwill. These items are being amortized using the straight-line method over
8
<PAGE> 9
their estimated useful life. The amortized expense for both fiscal 1997 and 1996
was $1.7 million in each period.
In connection with the October 1997 Offering, the Company incurred $3.5
million in fees and expenses which were capitalized and are being amortized over
the life of the Notes. As of January 3, 1998, the accumulated amortization of
these costs equals approximately $115,000.
Other Income (Expense)
Other income (expense) decreased $171,000 for fiscal 1997 over the
comparable period in 1996 due to lower commission income derived from the sales
of affiliated products manufactured by others as the Company de-emphasized this
business segment.
Restructuring and Non-recurring Charges
In fiscal 1997, the Company recorded a non-recurring charge of $500,000
for expense associated with the October 1997 Offering. In fiscal 1996, the
Company recorded $3.8 million in non-recurring transaction costs directly
associated with the refinancing of certain of its long-term debt obligations and
the securing of a senior loan facility which included a working capital line of
credit. See "Certain Relationships and Related Transactions".
Adjusted EBITDA
Reported EBITDA for fiscal 1997 was $13.1 million including a
non-recurring charge of $500,000 for expenses associated with the October 1997
Offering which, if added back, produces an Adjusted EBITDA (exclusive of the
non-recurring charge) of $13.6 million. Similarly, a non-recurring charge of
$3.8 million was incurred in fiscal 1996 for the costs of the Company's
refinancing transaction which, if added back to the fiscal 1996 EBITDA of $6.3
million, produces an Adjusted EBITDA of $10.l million. Comparing the two years,
fiscal 1997 Adjusted EBITDA of $13.6 million increased 34.7% over fiscal year
1996 Adjusted EBITDA of $10.1 million.
Interest Expense
Interest expense, net of interest income, increased to $10.0 million
for fiscal 1997 from $9.4 million for fiscal 1996 as a result of higher
outstanding loan balances and an increase in interest rates relative to certain
debt obligations refinanced in August 1996. Average outstanding borrowings for
fiscal 1997 were $90.2 million, with an average effective interest rate of
11.2%, an increase of $9.5 million and a decrease of 0.5 percentage points,
compared to $80.7 million of average outstanding borrowings and an average
effective interest rate of 11.7% for fiscal 1996. See "Certain Relationships and
Related Transactions".
Provision for Federal and State Income Taxes
For fiscal 1997 and 1996, the Company estimated that it would have no
Federal tax obligation due to loss carryforwards from prior years, however, the
Company did provide for certain state income and franchise tax obligations in
both years. The Company has a net operating loss carryforward of approximately
$50.0 million which begins to expire in fiscal 2009.
Net Loss
As a result of the above, the Company recorded a net loss for fiscal
1997 of $5.9 million, compared to a net loss of $11.1 million for the comparable
1996 period.
FISCAL YEAR ENDED DECEMBER 28, 1996 COMPARED TO FISCAL YEAR ENDED
DECEMBER 30, 1995
The following table sets forth for the periods indicated certain
historical income statement data derived from the Company's statements of
operations expressed in dollars and as percentage of net sales.
9
<PAGE> 10
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------
December 30, 1995 December 28, 1996
----------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales $ 198,340 100.0% $ 205,856 100.0%
Cost of goods sold (125,396) (63.2) (133,624) (64.9)
--------- ------ --------- ------
Gross profit 72,944 36.8 72,232 35.1
Selling and administrative
expenses (75,783) (38.2) (69,735) (33.9)
Amortization of goodwill and
intangible assets (1,678) (0.9) (1,678) (0.8)
Other income (expense) 3,296 1.7 1,309 0.6
Restructuring and non-recurring
charges (9,570) (4.8) (3,793) (1.8)
--------- ------ --------- ------
Income (loss) from operations (10,791) (5.4) (1,665) (0.8)
Interest expense, net (7,870) (4.0) (9,402) (4.6)
--------- ------ --------- ------
Loss before income taxes (18,661) (9.4) (11,067) (5.4)
Provision (benefit) for income
taxes (400) (0.2) 0 0
--------- ------- --------- ------
Net loss $ (18,261) (9.2)% $ (11,067) (25.4)%
========= ====== ========= ======
Adjusted EBITDA $ 8,374 4.2% $ 10,084 4.9%
Depreciation and amortization 9,595 4.8 7,956 3.9
</TABLE>
Net Sales
Net sales increased 3.8%, or $7.6 million, to $205.9 million in fiscal
1996 from $198.3 million in fiscal 1995. Sales to distributors were down
slightly but were more than offset by higher sales to contract customers.
Gross Profit
Gross profit for fiscal 1996 decreased slightly to $72.2 million, or
35.1% of net sales, from $72.9 million, or 36.8% of net sales, for fiscal 1995
due to changes in product mix.
Selling and Administrative Expenses
Selling and administrative expenses decreased by more than $6.0
million, or 8.0%, to $69.7 million in fiscal 1996 from $75.8 million in fiscal
1995 largely due to the reorganization of the sales and management functions in
1995 and aggressive cost reduction programs.
Amortization of Goodwill and Intangible Assets
Goodwill and intangible assets arose during the acquisition of the
Company in May 1993. The Company has attributed the goodwill and intangible
assets to a distribution system, an assembled staff, various trademarks and
goodwill. These items are being amortized using the straight-line method over
their estimated useful life. The amortized expense for fiscal 1996 and 1995 was
$1.7 million in each period.
Other Income (Expense)
Other income (expense) decreased $2.0 million from $3.3 million in
fiscal 1995 to $1.3 million in fiscal 1996. This decrease was primarily due to
the drop in franchise fees and related vending machine rental income that
occurred with the curtailment of the Company's modified single-route franchising
program at the end of 1995.
Restructuring and Non-recurring Charges
In fiscal 1996, the Company recorded $3.8 million in non-recurring
transaction costs directly associated with the refinancing of certain of its
long-term debt obligations and the securing of a senior loan facility which
included a working capital line of credit.
10
<PAGE> 11
In recent years, the Company has twice modified its strategy with
regard to its distribution system. Traditionally, the Company's distribution
system has been an independent single and multi-route distribution system. In
1991, the Company began supplementing its traditional distribution system with a
modified independent single-route distribution strategy. This strategy included
the purchase of certain multi-route distributors, the termination of certain
non-performing multi-route distributors and implementing new modified
single-route distributors to fill perceived voids and supplement the traditional
distribution system. In connection with the modified supplemental single-route
distribution strategy, the Company recorded a restructuring reserve of $29.9
million (the "1991 Reserve") which is discussed more fully below. At no time did
the Company actually have more than 360 of these supplemental single-route
distributors (out of a total of approximately 2,400 routes) which represented
less than 15% of the total routes in the distribution system at any time.
In 1995, the Company assembled a new management team which determined
that the modified single-route distribution strategy was not a strategy the
Company should continue to pursue. At that time, new management determined that
the Company would not continue the modified single-route distribution strategy
and would encourage modified single-route distributors to become multi-route
distributors or traditional single route distributors. As a result, in 1995, the
Company reversed the remainder of the 1991 Reserve (which at that time was $9.6
million) and established a new reserve of approximately $6.5 million (the "1995
Reserve") to assist in converting the modified single-route distributors to
multi-route distributors or traditional single route distributors. The 1995
Reserve is described more fully below. None of the 1995 Reserve was remaining at
January 3, 1998.
In 1991 and in connection with the modified single-route distribution
strategy, the Company recorded the 1991 Reserve which represented the expenses
related to the purchase of some distributorships, assumption of certain
distributor liabilities, bad debts, losses from the temporary operation of
Company-owned routes, and additional expenses. In 1991, the Company
underestimated the costs of fully implementing the modified single-route
distribution strategy. These costs included personnel and related costs for
sales, accounting and administrative staff, warehouse space, marketing costs,
legal costs, and increased bad debt costs. As a result, the Company utilized
$20.2 million of the 1991 Reserve in fiscal 1991, 1992, 1993, 1994 and 1995. In
fiscal 1994 and 1995, the Company utilized approximately $6.5 million and $2.6
million, respectively, of the 1991 Reserve leaving a remaining reserve of
approximately $9.6 million at December 30, 1995.
In 1995, the Company's new management team noted that the Company was
spending significant capital supporting the modified supplemental single-route
distributor program that represented a very small portion, in number of routes
and dollars contributed, of its distribution system. Therefore, in 1995, the
Company reversed the remainder of the 1991 Reserve of $9.6 million and
established a new reserve of approximately $6.5 million (the "1995 Reserve") to
purchase available modified single-route distributors to develop these into
multi-route distributors and traditional single route distributors. Management
determined that the multi-route distributors and traditional single route
distributors would benefit the Company by reducing the administrative sales
staff necessary to support the modified single-route distributors, decreasing
needed warehouse space for the delivery of goods and decreasing bad debt expense
as a direct result of having more stable and qualified distributors. Management
commenced in 1995 to take steps to develop a specific plan involving the
identification of the routes to become traditional single route distributors or
to become part of multi-route distributors in 1995, 1996 and 1997. Management
determined that the receivables related to modified single route distributors
was the only substantial incremental cost of converting the modified single
route distributors. Therefore, the costs included in the 1995 Reserve primarily
related to legal and bad debt costs associated with the purchase of available
modified single-route distributors or termination of non-performing modified
single route distributors, some of which was required under recourse provisions
with the financial institution to whom the Company had sold certain receivables.
In fiscal 1996, the Company utilized approximately $3.1 million of the 1995
Reserve resulting in an ending balance
11
<PAGE> 12
of approximately $3.4 million at December 28, 1996. For the year ended January
3, 1998, the Company utilized all of the remainder of the reserve.
In addition to the establishment of the 1995 Reserve, the Company
recorded several non-recurring charges in 1995 totaling approximately $12.8
million. These non-recurring charges were associated with the changes made in
the sales and administrative staff as well as changes in certain product lines
produced by the Company. The non-recurring items included the following:
1. The payment of early retirement and severance benefits of
approximately $3.7 million. The new management team determined that the sales
and administrative functions of the Company could be streamlined and simplified.
As a result, the Company offered an early retirement option to eligible
employees and completed severance agreements with others. Substantially all the
payments were made to individuals prior to December 30, 1995.
2. The write off of certain assets related to the restructuring of the
sales force of approximately $4.9 million. The new management team determined
that the sales function had outgrown the necessary levels to service the core
distribution system. Therefore, in addition to and as a result of reducing
headcount, the value of several assets was either impaired or eliminated. These
assets primarily related to a computer system of approximately $2.7 million that
was being developed to track reporting for single-route distributors. The
system was not functional for multi-route distributors and consequently, further
development was curtailed and the system was never completed. Also, certain
field assets including sales office furniture and vehicles and warehouses of
approximately $2.2 million were eliminated.
3. The write off of certain display equipment and packaging for a
discontinued "low-fat, no-fat" product line of approximately $4.1 million. In
the fourth quarter of 1995, the Company completed an analysis noting that these
product lines were not widely accepted among the Company's core customers.
Therefore, management made a decision to eliminate a significant number of these
products from its product line. The packaging write off of approximately $1.4
million related to pre-purchased inventory for certain "low-fat, no fat"
products that were not accepted by the market. The display equipment related
primarily to equipment purchased specifically for the discontinued products of
approximately $2.6 million.
Adjusted EBITDA
Reported EBITDA for fiscal 1996 was $6.3 million including a
non-recurring charge of $3.8 million for refinancing transaction costs which, if
added back, produces an Adjusted EBITDA (exclusive of the non-recurring charge)
of $10.1 million. Similarly, a non-recurring restructuring charge of $9.6
million was incurred in fiscal 1995 for the costs of the Company's
reorganization efforts which, if added back to the fiscal 1995 EBITDA loss of
$1.2 million, produces an Adjusted EBITDA of $8.4 million. Comparing the two
years, fiscal 1996 Adjusted EBITDA of $10.1 million increased 20.4% over fiscal
1995 Adjusted EBITDA of $8.4 million.
Interest Expense
Interest expense, net of interest income, increased to $9.4 million for
fiscal 1996 from $7.9 million for fiscal 1995 as a result of higher outstanding
loan balances and an increase in interest rates relative to certain debt
obligations refinanced in August 1996. Average outstanding borrowings for fiscal
1996 were $80.7 million, with an average effective interest rate of 11.7%, an
increase of $8.2 million and 0.8 percentage points, compared to $72.5 million of
average outstanding borrowings and an average effective interest rate of 10.9%
for fiscal 1995. See "Certain Relationships and Related Transactions".
12
<PAGE> 13
Provision for Federal and State Income Taxes
Due to net operating loss carryforwards from prior years, the Company
estimated that it would have no income tax liability for fiscal 1996. The
Company recorded an income tax benefit of $400,000 in fiscal 1995.
Net Loss
As a result of the above, the Company recorded net loss of $11.1
million (including $3.8 million in non-recurring refinancing costs) for fiscal
1996 as compared to a net loss of $18.3 million (including $9.6 million in
non-recurring restructuring costs) reported in fiscal 1995.
Liquidity and Capital Resources
In 1996, the Company substantially refinanced its long-term debt
obligations. In connection with the 1996 refinancing, the Company entered into a
$29.0 million senior loan facility with Congress Financial Corporation
("Congress"), which included a $9.0 million term loan facility, a $3.0 million
equipment line of credit, and a $17.0 million revolving line of credit
(collectively, the "Congress Debt"). The Company borrowed $9.0 million of
Congress Debt and used other available cash to make a $10.0 million payment on
certain existing long-term debt obligations to a group of lenders agented by
Canadian Imperial Bank of Commerce (the "CIBC Debt"). The repayment reduced the
outstanding balance under the CIBC Debt from $62.3 million to $52.3 million. The
Company also had $8.8 million of outstanding long-term debt (the "MassGeneral
Debt") which included $1.3 million in accrued interest (which was subsequently
paid to TFH Corp. ("TFH")). As part of the 1996 Refinancing, the CIBC Debt and
the MassGeneral Debt were sold to TFH and the terms of the CIBC Debt and
MassGeneral Debt were modified to subordinate this debt to the Congress Debt,
defer payments of principal and interest owing thereon and increase the interest
rate to 13% per annum. In addition, the stockholders of TFH caused letters of
credit to be posted in the aggregate original face amount of $10.0 million to
replace a $10,000,000 letter of credit previously posted by the Company in
connection with its industrial development revenue bonds. In connection with the
1996 Refinancing, the TFH Stockholders assigned their reimbursement rights
against the Company under the letters of credit to TFH and TFH agreed to
subordinate its rights to Congress. TFH waived any rights or claims to
reimbursement by the Company in connection with such TFH Stockholders' letters
of credit through December 31, 2005 and has subordinated its rights to
reimbursement to the Congress Debt. Thereafter, subject to the terms of the
subordination, the Company would have been obligated to reimburse TFH for any
draws which are made on the TFH Stockholders' letters of credit.
In 1996, the Company also refinanced certain indebtedness under
guarantee obligations to STI Credit Corporation (the "STI Debt") to limit
payments of interest and principal on the STI Debt to $600,000 annually through
August 1999. At the end of such period, any outstanding guarantee obligation of
the Company was to be amortized over 50 months plus interest. Interest accrued
on such indebtedness at the higher of 1.5% over the prime rate or 2.0% over
LIBOR.
On October 14, 1997, the Company issued (the "Offering") $60 million of
its 10.5% Senior Secured Notes (the "Notes") due November 1, 2004. The proceeds
of the Offering were primarily used to pay certain of the Company's long-term
debt obligations. The amounts repaid with the proceeds of the Offering included
$40 million to TFH as a payment of the purchased CIBC Debt, $8.3 million to
Congress to repay the term portion of the Congress Debt and the MassGeneral
Debt, and $10 million to satisfy the STI Debt. After the Offering, the remaining
portion of the CIBC Debt and MassGeneral Debt, including accrued interest
thereon, was converted to $7 million of Class A preferred stock and $21.8
million of Class B preferred stock which is held by TFH.
The Notes are secured by a first lien on and security interest in
substantially all of the assets and properties owned by the Company, except
those that are security for other debt obligations. The indenture governing the
Notes has certain covenants including, without limitation, covenants
13
<PAGE> 14
limiting the incurrence of additional indebtedness, assets sales, investments,
restricted payments and liens. Except in certain circumstances, the Company may
not redeem the Notes prior to November 1, 2001, and following that date, the
Company may redeem the Notes in whole or in part at redemption prices, as
defined. In connection with the Offering, the Company incurred $3.5 million in
fees and expenses which were capitalized and are being amortized over the life
of the Notes. As of January 3, 1998, the accumulated amortization of these costs
equaled approximately $115,000.
The revolving loan is secured by a first lien on and security interest
in the inventory and receivables of the Company and certain related Collateral.
Interest is payable on the revolving loan from Congress at a rate of 1.375%
above the prime rate of interest. The maximum borrowing amount under the
revolving loan (including the letter-of-credit accommodations) is $17 million.
Standby letters of credit relating to insurance coverage and inventory purchases
outstanding under the revolving loan as of January 3, 1998 and December 28, 1996
were $2.8 million and $3.0 million, respectively. For the year ended January 3,
1998, the weighted average interest rate under the revolving loan was 9.7%.
The revolving credit agreement matures August 30, 1999 and contains a
provision for the extension of the maturity date for up to two one-year periods
upon the agreement of both the Company and Congress. The agreement requires the
Company to maintain certain financial ratios relating to working capital and
tangible net worth, as defined. The agreement also contains certain other
covenants including, but not limited to, paying dividends, incurring additional
indebtedness, certain investment activities, and capital expenditures. As of
January 3, 1998, the Company was in compliance with all financial ratios and
restrictive covenants.
As of January 3, 1998, the Company had $60 million in Notes outstanding
and a $17 million revolving line of credit with Congress (of which $2.8 million
was outstanding in the form of letters of credit). The Company also had $10
million outstanding under certain industrial development revenue bonds related
to its plants located in Florida and Tennessee. The industrial development
revenue bonds are secured by certain real property and equipment of the Company
and are due in various amounts through 2009 at fixed interest rates ranging from
6 1/2% to 6 3/4% per annum. In addition, the Company finances certain purchases
of peanut inventory through a financing arrangement with Golden Peanut
Corporation.
The Company's cash flow requirements are for working capital, capital
expenditures and debt service. The Company has met its liquidity needs to date
through internally generated funds and a revolving line of credit. As of January
3, 1998, the Company had no outstanding loans under the revolving line and had
$8.5 million in borrowing availability thereunder.
The Company's working capital improved to $12.8 million as of January
3, 1998 from $7.4 million in the same period in 1996. Additionally, as a result
of the 1996 Refinancing and the overall improvement in the Company's operations,
the Company's working capital improved to $7.4 million at December 28,1996 from
$4.6 million at December 30, 1995 (after reclassification for fiscal 1995 of a
revolving loan of $8.0 million and the current portion of long-term debt of $8.1
million both due as part of the CIBC Debt, both of which were refinanced as
long-term debt in August 1996).
Net cash provided by operating activities was $10.5 million for fiscal
1997 as compared to $8.8 million for fiscal 1996. This was primarily due to
stronger operating performance coupled with a progressive working capital
management program and an increase in accrued liabilities, primarily interest
related to the TFH Debt. Net cash provided (used) by operating activities was
$8.8 million and ($4.8) million for fiscal 1996 and 1995, respectively. The
improvement in 1996 operating cash flow was driven by lower inventory of
$300,000, a reduction in other assets of $2.7 million, an increase in accounts
payable of $4.7 million, and an increase in other liabilities of $5.0 million.
The reduction in other assets, which included assets such as route trucks and
hand held computers previously held for resale, was driven by the
reclassification of these assets as long-term. The $5.0 million increase in
14
<PAGE> 15
other liabilities was primarily a result of accrued interest due to TFH. These
improvements were partially offset by an increase in accounts receivable of $4.5
million which is attributed to an increase in contract sales and national
accounts business, both of which have longer payment terms than distributor
business.
Capital expenditures were $3.4 million, $5.8 million and $7.3 million
in fiscal 1997, 1996 and 1995, respectively. For fiscal 1997, 1996 and 1995,
respectively, the Company spent $3.2 million, $3.7 million (including the
installation of the pretzel manufacturing line) and $3.8 million on its
manufacturing facilities and $200,000, $2.1 million, and $3.5 million on
distributor acquisitions and distribution equipment. The Company also utilizes
operating leases for capital equipment, primarily for over the road trucks and
trailers, route delivery trucks used on Company-owned routes and passenger
vehicles. All operating leases are treated as operating expenses and their cash
flow impact is reflected in cash flows from operating activities.
Net cash provided (used) by financing activities was ($1.9) million,
($3.0) million and $7.1 million for fiscal 1997, 1996 and 1995, respectively. In
fiscal 1997, the Company sold $60.0 million of Senior Secured Notes to fund
repayment of $40.0 million to TFH, $8.3 million to Congress and $10.0 million to
STI. In fiscal 1996, as part of the 1996 Refinancing, the Company borrowed $9.0
million in Congress Debt to fund repayment of a portion of the CIBC Debt and
also expended $2.1 million to fund transaction costs relating to the
refinancing. In fiscal 1995, the Company borrowed $8.9 million of which $8.0
million came from its CIBC Debt, made loan repayments of $4.2 million, and sold
$2.4 million in recourse receivables to STI under a program that was
subsequently discontinued. The Company did not pay dividends for fiscal years
1997, 1996, 1995, or 1994.
The Company believes that internally generated funds, financing
arrangements with Golden Peanut and amounts which will be available to it
revolving line of credit are and will continue to be sufficient to satisfy its
operating cash requirements and planned capital expenditures.
CAUTIONARY STATEMENTS RELATED TO FORWARD-LOOKING STATEMENTS
The statements contained in the foregoing "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and elsewhere which
are not historical facts are forward-looking statements that involve risks and
uncertainties that could cause actual results to differ materially from those
set forth in the forward-looking statements. There can be no assurance that any
forward-looking statement will be realized or that actual results will not be
significantly higher or lower than set forth in such forward-looking statement.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements as of January 3, 1998, December 28, 1996, and
December 30, 1995 together with the auditor's report are in Exhibit 14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
15
<PAGE> 16
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ---- --- -----------
<S> <C> <C>
Michael E. Heisley 61 Chairman of the Board and Director
Rolland G. Divin 51 President, Chief Executive Officer and
Director
Stanley H. Meadows(a) 53 Assistant Secretary and Director
Thomas C. Mattick 58 Director
Emily Heisley Stoeckel 34 Director
Andrew G. C. Sage II(a) 72 Director
S. Albert Gaston 38 Senior Vice President and Chief Financial
Officer
Gerald R. Barker 51 Senior Vice President -- Marketing
Wyatt F. Hearp 51 Vice President -- Manufacturing
Paul C. Serff 59 Senior Vice President -- Human Resources
</TABLE>
(a) Member of the Compensation Committee. Mark A. Bounds, a Director of TFH
and TFCC, is also a member of the Compensation Committee.
Michael E. Heisley. Mr. Heisley has been the Chairman of the Board of
Directors of the Company since May 1993. Since 1988, Mr. Heisley has been the
Manager, President and Chief Executive Officer of The Heico Companies, L.L.C., a
holding company in Chicago, Illinois which acquires or invests in and operates a
diverse group of businesses. Mr. Heisley also serves as the Chief Executive
Officer of various of The Heico Companies, L.L.C.'s subsidiaries and is a
Director of Robertson-Ceco Corp. and Environdyne Industries, Inc., both of which
are publicly-held companies. Mr. Heisley received a bachelor's degree in
business administration from Georgetown University in 1960. Mr. Heisley is the
father of Emily Heisley Stoeckel.
Rolland G. Divin. Mr. Divin has been the President, Chief Executive
Officer and a Director of the Company since January 1995. From December 1991 to
January 1995, Mr. Divin was the President and Chief Executive Officer of Chun
King, Inc., a national brand food business based in Cambridge, Maryland. Prior
to joining Chun King, Mr. Divin was the President, Chief Executive Officer and a
Director of Orange Co., Inc., a publicly-held national brand food company based
in Bartow, Florida from 1989 to 1991. Mr. Divin graduated from Kansas State
University in 1970 with a multi-discipline bachelor's of science degree in
business/pre-veterinary studies and has completed graduate studies in finance at
the University of Minnesota-St. Paul.
Stanley H. Meadows. Mr. Meadows has been the Assistant Secretary and a
Director of the Company since May 1993. Since 1980 he has been a partner
(through a professional corporation) of McDermott, Will & Emery, a law firm
based in Chicago, Illinois which provides legal services to the Company, TFH and
TFCC. Mr. Meadows is also a Director of Robertson-Ceco Corp., a publicly-held
company. Mr. Meadows received a bachelor of science degree from the University
of Illinois in 1966 and a law degree from the University of Chicago in 1970.
Thomas C. Mattick. Mr. Mattick has been a Director of the Company since
May 1993. Mr. Mattick is a CPA and has been Managing Director of Heico
Acquisitions, Inc. an acquisition company in Chicago, Illinois, since January
1992. Mr. Mattick received a bachelor's degree in business administration from
the University of Wisconsin in 1962.
Emily Heisley Stoeckel. Ms. Stoeckel has been a Director of the Company
since August 1996. She has held various positions with Heico Acquisitions, Inc.
in Chicago, Illinois since January 1989 and has been Vice President since
January 1996. Ms. Stoeckel received a bachelor of arts degree in economics from
Northwestern University in 1987 and a master's degree in business administration
from the University of Chicago in 1991. Ms. Stoeckel is the daughter of Michael
E. Heisley.
16
<PAGE> 17
Andrew G. C. Sage II. Mr. Sage has been a Director of the Company since
1993. Mr. Sage held various positions with Shearson Lehman Brothers, Inc. and
its predecessors, Lehman Brothers and Lehman Brothers Kuhn Loeb, Inc., since
joining the investment bank in 1948, including General Partner from 1960-1970,
President from 1970-1973, Vice Chairman from 1973-1977, Managing Director from
1977-1987, and Senior Consultant from 1987-1990. Since 1990, Mr. Sage has been a
consultant in general business and financial management. Mr. Sage is a Director
of Robertson-Ceco Corp. and Computervision Corporation, both of which are
publicly-held companies.
S. Albert Gaston. Mr. Gaston has been the Senior Vice President and
Chief Financial Officer of the Company since April 1995. From November 1989 to
April 1995, Mr. Gaston was the Vice President and Chief Financial Officer of
Apache Products Company, a building materials manufacturer and distributor
headquartered in Meridian, Mississippi. Mr. Gaston is a CPA and received his
bachelor's degree in business administration from Millsaps College in 1981 and
his masters degree in business administration from Southern Methodist University
in 1987.
Gerald R. Barker. Mr. Barker has been the Senior Vice President --
Marketing of the Company since August 1995. Prior to joining the Company, Mr.
Barker served as a marketing officer for Borden Inc., a national brand food
company, in Atlanta, Georgia from September 1987 through June 1995. Mr. Barker
has a bachelor's degree in economics degree from State University of New York in
1969 and a masters degree in business administration from Arizona State
University in 1974.
Wyatt F. Hearp. Mr. Hearp has been Vice President -- Manufacturing of
the Company since 1995. Prior to becoming an officer, Mr. Hearp held various
positions with the Company or its predecessor businesses since 1972, including
manager of the Company's chip division from 1990 to 1995. Mr. Hearp received a
bachelor's degree in biology from High Point University in 1969 and a master's
of science degree in food technology from Auburn University in 1977.
Paul C. Serff. Mr. Serff has been the Senior Vice President -- Human
Resources of the Company or its predecessor businesses since August 1987. Mr.
Serff received a bachelor's degree in industrial management from the Georgia
Institute of Technology in 1961 and a master's degree in business administration
from Emory University in 1964.
TERM OF OFFICE
Each member of the Board of Directors of the Company is elected
annually. All officers serve at the pleasure of the Board of Directors.
DIRECTOR COMPENSATION
All directors may be reimbursed for certain expenses in connection with
attendance at Board and committee meetings. Other than with respect to
reimbursement of expenses, directors do not receive additional compensation for
service as a director.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information with respect to all
compensation paid or earned for services rendered to the Company in 1997 by the
Company's chief executive officer and the Company's next four most highly
compensated executive officers (each, a "Named Officer"):
17
<PAGE> 18
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION
- ------------
NAME PRINCIPAL POSITION SALARY BONUS
- ---- ------------------ ------ -----
<S> <C> <C> <C>
Rolland G. Divin President, Chief Executive Officer
and Director $300,000 $525,676
S. Albert Gaston Senior Vice President and Chief
Financial Officer 150,000 190,271
Gerald R. Barker Senior Vice President -- Marketing 140,000 171,658
Paul C. Serff Senior Vice President --
Human Resources 133,300 80,221
Wyatt F. Hearp Vice President --
Manufacturing/Distribution 111,000 56,922
</TABLE>
DEFINED BENEFIT RETIREMENT PLANS
The Company has two noncontributory defined benefit retirement plans
(the "Hourly Plan" and the "Salaried Plan") which cover substantially all
full-time employees who are at least 21 years of age. The Company also has an
unqualified pension plan ("Unqualified Plan") covering only certain salaried
employees. The plans provide for payment of monthly benefits to participants
upon their reaching normal retirement dates. Benefit amounts are determined by a
benefit formula which considers length of service and average salary for the
Salaried Plan and the Unqualified Plan and length of service multiplied by a
fixed rate, as determined by the Company, for the Hourly Plan.
Salaried Plan. For those employees participating in the Salaried Plan,
the Company estimates that the following annual benefits would be payable upon
retirement at or after age 60 to persons at the following compensation and
year-of-service classifications, less amounts received as social security
benefits:
TOM'S FOODS INC. PENSION PLAN FOR SALARIED EMPLOYEES
SUPPLEMENTAL RETIREMENT PLAN TABLE
Annual Pension Payable at Age 65
<TABLE>
<CAPTION>
YEARS OF SERVICES
-----------------
COMPENSATION(A) 5 10 15 20 25 30 OR MORE
- --------------- - -- -- -- -- ----------
<S> <C> <C> <C> <C> <C> <C>
$100,000 $6,767 $13,535 $20,302 $27,070 $33,837 $40,604
125,000 8,642 17,285 25,927 34,570 43,212 51,854
150,000 10,517 21,035 31,552 42,070 52,587 63,104
200,000 11,267 22,535 33,802 45,070 56,337 67,604
300,000 11,267 22,535 33,802 45,070 56,337 67,604
500,000 11,267 22,535 33,802 45,070 56,337 67,604
</TABLE>
(a) Compensation is assumed to be constant. Table is based on covered
compensation of $27,540 for a participant turning 65 in 1997. The IRC
Section 401(a)(17) limit on compensation is assumed constant at the
1997 level of $160,000.
The compensation used to determine a person's benefits under the
Salaried Plan and the Unqualified Plan includes such person's salary and annual
bonus, whether or not deferred. The current compensation for each of the Named
Officers is identical to the amounts listed in the Summary Compensation Table.
The estimated credited years of service at the end of fiscal 1997 for each of
the Named Officers are 3.0 years for Mr. Divin, 2.7
18
<PAGE> 19
years for Mr. Gaston, 2.3 years for Mr. Barker, 10.3 years for Mr. Serff and
24.6 years for Mr. Hearp.
Unqualified Plan. The Supplemental Employee Retirement Plan of Tom's
Foods Inc. (the "SERP") provides employees designated by the Company with
certain pension benefits upon retirement on or after age 58 (55 for certain
employees) in order to supplement benefits provided under the Company's
qualified plans and Social Security. The SERP generally provides for lifetime
benefits of 50.0% of average monthly compensation less 50.0% of primary Social
Security, reduced for service less than 30 years and receipt prior to age 62
1/2, and further offset by the actuarial value of prior cash payments. Of the
five Named Officers, only Mr. Serff participates in the SERP. The Company
estimates that the annual benefits payable to Mr. Serff at normal retirement age
pursuant to the SERP would be $20,518.
Hourly Plan. The Hourly Plan provides hourly employees with certain
pension benefits upon retirement on or after age 55 if the employees worked five
or more years prior to termination. Generally, the plan provides for monthly
pension benefits based only on a participant's years of service. None of the
Named Officers participate in this plan.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Mr. Divin, the
Company's President and Chief Executive Officer, and Mr. Serff, the Company's
Vice President -- Human Resources. The employment agreement with Mr. Divin
provides for an ongoing 12-month term and is terminable by the Company upon 60
days prior notice. If the Company terminates the agreement without cause, if Mr.
Divin resigns because of a material breach by the Company or if Mr. Divin's
responsibilities are materially diminished after a change in control of the
Company, the Company will be required to pay Mr. Divin severance payments of up
to a maximum of 12 months of salary. The employment agreement with Mr. Serff
provides for an ongoing 24-month term. Should the Company terminate Mr. Serff's
employment without cause, the Company is required to pay Mr. Serff severance
payments for the remainder of the term, or a minimum of 24 months based on his
then-current salary. Each of Mr. Divin's and Mr. Serff's employment agreements
contains a covenant not to compete with the Company within certain geographic
areas for up to one year following the respective officer's resignation or
termination. Mr. Gaston and Mr. Barker also are entitled to severance payments
of up to a maximum of 12 months salary in certain circumstances.
INCENTIVE COMPENSATION PLANS
Management Incentive Compensation Plan. The Company's Management
Incentive Compensation Plan (the "Management Incentive Plan") is administered by
the Compensation Committee of the Board of Directors and applies to those key
employees designated by the President and Chief Executive Officer. The terms and
conditions upon which awards become payable are determined by the Compensation
Committee and subject to approval by the Board of Directors. Target incentive
amounts are expressed as a percentage of the key employees' salary and actual
incentive amounts are provided based on the Company's achievement of certain
criteria, including manufacturing profit and sales performance objectives. Each
of the Named Officers, as well as other key employees, participated in the
Management Incentive Plan in fiscal 1996.
Executive Incentive Plan. In addition, the Company's Executive
Incentive Plan (the "Executive Incentive Plan") applies to Mr. Divin, Mr. Gaston
and Mr. Barker (collectively, the "Participants"). Each of the Participants has
an option to acquire his allocated share of 20.0% of the Preferred Stock
(including any liquidation preferences accruing thereon) issued to TFH in
satisfaction of the TFH Debt. The options, which are allocated 60.0% to Mr.
Divin, 20.0% to Mr. Gaston and 20.0% to Mr. Barker, will expire if not exercised
by December 31, 2002. The options to acquire Preferred Stock will vest, for
those Participants then employed by the Company, upon: (i) a sale of the Company
or substantially all its assets; (ii) an exchange of the outstanding Preferred
Stock for Common Stock of the Company; (iii) a Public Equity Offering; or (iv) a
redemption of or sale to a
19
<PAGE> 20
third party of the Preferred Stock (collectively, the "Exercise Events"). In
addition, the options to acquire Class A Preferred Stock may be exercised at any
time prior to December 31, 2002 if the Class A Preferred Stock becomes
exchangeable for Exchange Notes. The options to acquire Preferred Stock shall
apply to any partial exchanges under clause (ii) above, to partial redemptions
or sales under clause (iv) above and partial exchangeability of the Class A
Preferred Stock, to the extent of 20.0% of the amount exchanged, redeemed, sold
or exchangeable. The aggregate exercise price for the options will be $1,000.
The options vest as follows: (i) 33.33%, one year after consummation of the
Offering; (ii) 66.67%, two years after consummation of the Offering; and (iii)
100.0%, three years after consummation of the Offering. The grant of the options
described herein will result in a charge to compensation expense upon an
Exercise Event equal to the dollar amount of such options less the amount paid
by Mr. Divin, Mr. Gaston and Mr. Barker.
The Executive Incentive Plan further provided the Participants with a
cash payment in an aggregate amount of $1.0 million. 50.0% of such amount was
paid upon consummation of the October 1997 Offering and 50.0% will be paid on
December 31, 1998 to Participants then employed by the Company. TFH has an
obligation to pay $1.0 million to the Participants in cash from such amount,
with $500,000 paid at consummation of the October 1997 Offering (which is
included in the compensation table set forth herein) and $500,000 due on
December 31, 1998, subject to continued employment by the Company. The first
payment resulted in a $500,000 charge to compensation expense of the Company
upon consummation of the October 1997 Offering. A similar charge will be
recorded upon the $500,000 payment to be made on December 31, 1998.
All obligations to the Participants pursuant to the Executive Incentive
Plan are obligations solely of TFH, not of the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The issued and outstanding Common Stock of the Company consists of
5,000 shares, 4,000 of which (80.0%) are held by TFH and 1,000 of which (20.0%)
are held by TFCC. All of the outstanding shares of Preferred Stock of the
Company, which are non-voting, are held by TFH. Under the terms of a
Stockholders' Agreement among all of the stockholders of TFH (the "TFH
Stockholders' Agreement"), Heico Holding, Inc. ("Heico Holding") is entitled to
elect a majority of the Boards of Directors of each of TFH and the Company.
Michael E. Heisley, Chairman of the Board and a Director of the Company, holds
substantially all of the voting securities of Heico Holding. Under the terms of
a Stockholders' Agreement among all of the Stockholders of TFCC (the "TFCC
Stockholders' Agreement"), Mr. Heisley is entitled to designate a majority of
the Board of Directors of TFCC. As a result of the foregoing, Mr. Heisley has
beneficial ownership of all of the outstanding capital stock of the Company.
Heico Holding holds 55.0% of the shares of common stock of TFH. The
remaining shares of common stock of TFH are held by Gerald D. Hosier ("Hosier")
(20.0%), Allstate Insurance Company ("Allstate") (15.0%) and TCW Shared
Opportunity Fund L.P. ("TCW") (10.0%). Pursuant to the TFH Stockholders'
Agreement, the consent of Heico Holding and one of Allstate, Hosier or TCW is
required in order to approve (a) a merger resulting in the sale of the Company,
(b) any sale of substantially all of the Company's assets, (b) asset sales, by
the Company in any fiscal year exceeding, in the aggregate, $7.5 million, (c)
acquisitions by the Company of assets in any fiscal year exceeding $7.5 million
in the aggregate, (d) capital expenditures by the Company in any fiscal year
exceeding $7.5 million in the aggregate, (e) certain issuance of capital stock
of the Company and (f) the incurrence by the Company of indebtedness for
borrowing money exceeding $7.5 million in the aggregate. In addition, each of
Allstate, TCW and Hosier has the right to designate one member of the Boards of
Directors of each of TFH and the Company.
The capitalization of TFCC consists of 30,750 shares of Class A 6%
Cumulative Convertible Preferred Stock (the "TFCC Class A Preferred Stock"), 867
shares of Class B Preferred Stock, 2,225.35 shares of Class C 6% Cumulative
Convertible Preferred Stock (the "TFCC Class C Preferred Stock"), 8,750 shares
of Class D 6% Cumulative Convertible Preferred Stock (the "TFCC
20
<PAGE> 21
Class D Preferred Stock") and 410,734 shares of common stock (the "TFCC Common
Stock"). Each share of TFCC Class A Preferred Stock, TFCC Class C Preferred
Stock and TFCC Class D Preferred Stock is convertible into 34.9895 shares of
TFCC Common Stock and has a liquidation preference of $1,000 plus unpaid
dividends which have accrued since May 13, 1993. TFCC Class A Preferred Stock
and TFCC Class D Preferred Stock rank pari passu and senior to all other TFCC
preferred stock. The TFCC Class A Preferred Stock and TFCC Class C Preferred
Stock are entitled to 34.9895 votes per share and vote together with TFCC Common
Stock in all matters upon which such holders are entitled to vote. TFCC Class B
Preferred Stock and TFCC Class D Preferred Stock are generally not voting.
Allstate and its affiliates hold 20,000 shares of TFCC Class A Preferred Stock
with 44.7% of the voting power of the outstanding voting securities of TFCC.
Hosier holds 8,750 shares of TFCC Class A Preferred Stock with 19.6% of the
voting power of the outstanding voting securities of TFCC. Heico Holding holds
2,000 shares of TFCC Class A Preferred Stock and 160,596 shares of TFCC Common
Stock and TF Partners, an affiliate of Mr. Heisley, holds 150,862 shares of TFCC
Common Stock. Heico Holding and TF Partners together hold voting securities with
24.4% of the voting power of the outstanding voting securities of TFCC. In
addition, Allstate is entitled to designate two members of the Board of
Directors of TFCC.
Of the Named Officers, each of Rolland G. Divin, S. Albert Gaston and
Paul C. Serff beneficially owns 48,664, 9,733 and 11,680 shares of TFCC Common
Stock, respectively, or 3.1%, 0.6% and 0.7%, respectively, of the voting power
of the outstanding voting securities of TFCC. In accordance with the Executive
Incentive Plan, each of Messrs. Divin, Gaston and Barker has the option to
acquire 12.0%, 4.0% and 4.0%, respectively, of the Preferred Stock issued to
TFH. See "Management -- Incentive Compensation Plans -- Executive Incentive
Plan."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
THE 1988 ACQUISITION
In June of 1988, TF Acquisition Corporation acquired the Company (the
"1988 Acquisition") in a leveraged buy-out financed with (i) senior secured
indebtedness provided under the CIBC Debt, and (ii) certain subordinated
indebtedness. In connection with the 1988 Acquisition, the Company indemnified
its predecessor for its obligations with respect to the industrial development
revenue bonds (as defined). The Company supported such indemnification by
posting the Company's letter of credit and escrowing an amount equal to one
year's interest on the industrial development revenue bonds.
THE 1993 REFINANCING
In May of 1993, an investor group led by Michael E. Heisley, currently
the Chairman of the Board and a Director of the Company, acquired the existing
subordinated debt of the Company and exchanged it for preferred stock of TFCC
(the "1993 Refinancing"). In connection with the 1993 Refinancing, the Company
(i) borrowed the MassGeneral Debt and (ii) re-negotiated the terms of the CIBC
Debt. As a result of the 1993 Refinancing, the Company became a wholly-owned
subsidiary of TFCC.
THE 1996 REFINANCING
Prior to the 1996 Refinancing, Heico Holding, a 55.0% stockholder of
TFH, advised the Company in connection with the restructuring of the CIBC Debt
and the MassGeneral Debt, and, on behalf of the Company, negotiated with the
holders of such debt. In connection with these negotiations, Heico Holding paid
a total of $600,000 in fees to the holders of the CIBC Debt in consideration for
such holders agreeing to extend the maturity of the CIBC Debt for the period of
time required to complete the 1996 Refinancing. In addition, Heico Holding
provided the Company with services in connection with the negotiations with the
holders of the CIBC Debt and the MassGeneral Debt which ultimately led to such
debt being sold to TFH. The Company reimbursed Heico Holding for the fees at the
closing of the 1996 Refinancing. In consideration of Heico Holding providing the
foregoing services, the Company transferred to Heico Holding a parcel of its
real property located in Harris
21
<PAGE> 22
County, Georgia and reimbursed Heico Holding for the fees paid to the holders of
the CIBC Debt. Heico Holding is controlled by Mr. Heisley, the Chairman of the
Board and a Director of the Company.
As part of the 1996 Refinancing, the Company entered into an agreement
with Congress, which provided the Company with up to $12.0 million of term loans
and up to $17.0 million of availability under a revolving line of credit.
Proceeds from the term loans were used, among other things, to repay certain
indebtedness of the Company. The revolving line of credit has been available for
general working capital purposes.
In connection with the 1996 Refinancing, TFH was formed to, among other
things, acquire and refinance certain of the Company's long-term debt
obligations, including: (i) the $52.3 million outstanding of CIBC Debt; and (ii)
the $8.8 million outstanding of MassGeneral Debt, which included $1.3 million in
accrued interest which was subsequently paid to TFH.
In consideration of TFH's participation in the 1996 Refinancing, the
Company issued 4,000 shares of the Company's Common Stock to TFH, which
represents 80.0% of the issued and outstanding shares of the Company's Common
Stock, and paid TFH accrued interest owing on the MassGeneral Debt of
approximately $1.3 million.
THE 1997 REFINANCING
On October 14, 1997, the Company issued (the "Offering") $60,000,000 of
its 10.5% Senior Secured Notes (the "Notes") due November 1, 2004. The proceeds
of the Offering were used to refinance certain of the Company's long-term debt
obligations. The amounts repaid include $40,000,000 to TFH as payment on the
purchased CIBC Debt and MassGeneral Debt, $8,336,000 to Congress, and
$10,000,000 to satisfy the STI Debt. After the Offering, the remaining portion
of the CIBC Debt and the MassGeneral Debt, including accrued interest thereon,
was converted to $7,000,000 of Class A preferred stock and $21,755,000 of Class
B preferred stock.
The payment of $8,336,000 satisfied all outstanding amounts on the
Congress Debt. Prior to the Offering, the credit agreement related to the
Congress Debt provided for a revolving loan, letter-of-credit accommodations, a
term loan, and additional equipment loans. After the payment, as part of the
Offering, the credit agreement related to the Congress Debt was amended to
include only letter-of-credit accommodations and a revolving loan facility.
Prior to the Offering, the Company had an agreement with STI Credit
Corporation to sell receivables from distributors and receivables relating to
vending machine leases. With the $10,000,000 paid as part of the Offering, the
Company satisfied its obligation to STI.
The industrial revenue bonds and the financing arrangements with Golden
Peanut Corporation remain in effect.
OTHER
Beginning with fiscal 1994, the Company has entered into consulting
arrangements with Mr. Heisley and Thomas C. Mattick, a Director of the Company,
for provision of consulting services to the Company. In respect of such
consulting services, Mr. Heisley and Mr. Mattick each received $100,000 per
year.
As a result of TFH's ownership of 80.0% of the Common Stock of the
Company, TFH and the Company are required to file a consolidated return for
federal income tax purposes. As the common parent of the consolidated group, TFH
is responsible for the payment of any consolidated tax liabilities. TFH and the
Company have entered into a tax sharing agreement which provides that, in
connection with the filing of the consolidated federal income tax return and the
filing of state income tax returns in those states in which the operations of
the Company are consolidated or combined with TFH, the Company shall be required
to pay to TFH an amount equal to the Company's federal and
22
<PAGE> 23
state tax liabilities that the Company and its subsidiaries would have had to
pay had the Company and its subsidiaries filed their own separate, consolidated
or combined tax returns.
TFCC has entered into restricted stock purchase agreements with each of
Rolland G. Divin, the Company's President and Chief Executive Officer, S. Albert
Gaston, the Company's Senior Vice President and Chief Financial Officer and Paul
C. Serff, the Company's Senior Vice President -- Human Resources. Pursuant to
the agreements, each of Mr. Divin and Mr. Gaston were granted restricted stock
in TFCC which vests over time in increments upon the respective officer's
continuing employment with the Company. Mr. Serff's restricted stock awards were
granted subject to: (i) vesting for one-half of the shares based upon Mr.
Serff's continued employment with the Company; and (ii) vesting for one-half of
the shares based upon the Company's achievement of certain objectives, including
certain financial targets. Each of Mr. Divin, Mr. Gaston and Mr. Serff have
vested and non-vested shares in TFCC pursuant to these agreements. See "Security
Ownership of Management and Certain Beneficial Owners."
TFH received a portion of the proceeds from the October 1997 Offering
and all of the shares of Class A Preferred Stock and Class B Preferred Stock. Up
to $10.0 million of the Class A Preferred Stock is exchangeable for Exchange
Notes. The Class A Preferred Stock, the Class B Preferred Stock and the Exchange
Notes held by TFH will be restricted securities and will not be transferable
unless such securities are registered or an exemption from such registration is
available. Accordingly, in connection with the exchange of TFH Debt, the Company
granted to TFH and its transferees the right to require the Company, at the
Company's expense, to file a registration statement for the purpose of
registering the resale of the Class A Preferred Stock, Class B Preferred Stock
and Exchange Notes held by TFH.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
14 (A) DOCUMENT LIST
<TABLE>
<CAPTION>
1. Financial Statements
--------------------
Description
-----------
Page
----
<S> <C> <C>
Report of Independent Public Accounts 27
Balance Sheets as of December 28, 1996 and January 3, 1998 28
Statements of Operations for the years ended December 30,
1995, December 28, 1996 and January 3, 1998 30
Statements of Changes in Shareholders' Equity for the years
ended December 30, 1995, December 28, 1996 and January 3, 1998 31
Statements of Cash Flows for the years ended December 30,
1995, December 28, 1997 and January 3, 1998 (audited) 32
Notes to Financial Statements 33
</TABLE>
23
<PAGE> 24
<TABLE>
<CAPTION>
2. Financial Statement Schedules
-----------------------------
Description
-----------
Page
----
<S> <C> <C>
Report of Independent Public Accountants on Financial
Statement Schedule 50
Valuation and Qualifying Accounts 51
</TABLE>
All other schedules are omitted because they are not required,
are inapplicable or the information is otherwise shown in the financial
statements or notes thereto.
3. Exhibits Required by Item 601 of Regulation S-K
-----------------------------------------------
Exhibit Description
- ------- -----------
3.1 The Second Restated Certificate of Incorporation of the Company, as
amended, and the Certificate of Designations of the Series A and Series
B Preferred Stock of the Company, filed as Exhibit 3.1 to the
Registration Statement on Form S-4, Registration No. 333-38853 (the
"Registration Statement"), are incorporated herein by reference.
3.2 The By-laws of the Company, filed as Exhibit 3.2 to the Registration
Statement, are incorporated herein by reference.
4.1 The Indenture, dated as of October 14, 1997, by and between the Company
and IBJ Schroder Bank & Trust Company, as Trustee, filed as Exhibit 4
to the Registration Statement, is incorporated herein by reference.
4.2 The First Supplemental Indenture, dated as of February 27, 1998, by and
between the Company and IBJ Schroder Bank & Trust Company, as Trustee,
is filed herewith as an exhibit.
10.1 The Registration Rights Agreement, dated as of October 14, 1997, by and
between the Company and PaineWebber Incorporated, filed as Exhibit 10.1
to the Registration Statement, is incorporated herein by reference.
10.2 The Amended and Restated Loan and Security Agreement, dated as of
October 14, 1997, by and between the Company and Congress Financial
Corporation (Southern), filed as Exhibit 10.2 to the Registration
Statement, is incorporated herein by reference.
10.3 The Guarantee from Tom's Foods Capital Corporation to Congress
Financial Corporation (Southern), dated as of August 30, 1996, filed as
Exhibit 10.3 to the Registration Statement, is incorporated herein by
reference.
10.4 The Confirmation and Acknowledgment of Guarantee and General Security
Agreement from Tom's Foods Capital Corporation to Congress Financial
Corporation (Southern), dated as of October 14, 1997, filed as Exhibit
10.4 to the Registration Statement, is incorporated herein by
reference.
10.5 The Industrial Revenue Bond Documents for Knox County, Tennessee, filed
as Exhibit 10.5 to the Registration Statement, are incorporated herein
by reference.
24
<PAGE> 25
10.6 The Industrial Revenue Bond Documents for Taylor County, Florida, filed
as Exhibit 10.6 to the Registration Statement, are incorporated herein
by reference.
10.7 The Intercreditor Agreement, dated as of October 14, 1997, by and
Congress Financial Corporation (Southern) and IBJ Schroder Bank & Trust
Company, filed as Exhibit 10.7 to the Registration Statement, is
incorporated herein by reference.
10.8 The form of the Company's Distributor Agreement, filed as Exhibit 10.8
to the Registration Statement, is incorporated herein by reference.
10.9 The Subordination Agreement, dated as of October 14, 1997, by and
between IBJ Schroder Bank & Trust Company and TFH Corp., filed as
Exhibit 10.9 to the Registration Statement, is incorporated herein by
reference.
10.10 The Guarantee from TFH Corp. to Congress Financial Corporation
(Southern), dated as of August 30, 1996, filed as Exhibit 10.10 to the
Registration Statement, is incorporated herein by reference.
10.11 The Confirmation and Acknowledgment of Guarantee and general Security
Agreement from TFH Corp. to Congress Financial Corporation (Southern),
dated as of October 14, 1997, filed as Exhibit 10.11 to the
Registration Statement, is incorporated herein by reference.
10.12 The Employment Agreement, dated as of January 6, 1995, by and between
the Company and Rolland G. Divin, filed as Exhibit 10.12 to the
Registration Statement, is incorporated herein by reference.
10.13 The Employment Agreement, dated as of May 16, 1991 and as amended July
9, 1992, by and between the Company and Paul C. Serff, filed as Exhibit
10.13 to the Registration Statement, is incorporated herein by
reference.
10.14 The Employment Agreement, dated as of October 14, 1997, by and between
the Company and Gerald Barker, filed as Exhibit 10.14 to the
Registration Statement, is incorporated herein by reference.
10.15 The Employment Agreement, dated as of October 14, 1997, by and between
the Company and S. Albert Gaston, filed as Exhibit 10.15 to the
Registration Statement, is incorporated herein by reference.
10.16 The Registration Rights Agreement, dated as of October 14, 1997, by and
between the Company and TFH Corp., filed as Exhibit 10.16 to the
Registration Statement, is incorporated herein by reference.
10.17 The Company's "Executive Incentive Plan", filed as Exhibit 10.17 to the
Registration Statement, is incorporated herein by reference.
10.18 The Letters of Credit of the shareholders of TFH Corp., filed as
Exhibit 10.18 to the Registration Statement, is incorporated herein by
reference.
12 Statement Regarding Computation of Ratio of Earnings to Fixed Charges
is filed herewith as an exhibit.
25
<PAGE> 26
27 The Financial Data Schedule is filed herewith as an exhibit.
(for SEC use only).
14 (B) REPORTS
No Current Report on Form 8-K was required to be filed by the Company
during the last quarter of the period covered by this report.
26
<PAGE> 27
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Tom's Foods Inc.:
We have audited the accompanying balance sheets of TOM'S FOODS INC. (a Delaware
corporation) as of January 3, 1998 and December 28, 1996 and the related
statements of operations, changes in shareholders' equity, and cash flows for
each of the three years in the period ended January 3, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Tom's Foods Inc. as of January
3, 1998 and December 28, 1996 and the results of its operations and its cash
flows for each of the three years in the period ended January 3, 1998 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 12, 1998
27
<PAGE> 28
Page 1 of 2
TOM'S FOODS INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ASSETS
January 3, December 28,
1998 1996
---------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and short-term investments $ 7,487 $ 2,117
Accounts and notes receivable, net 15,408 18,519
Inventories:
Raw materials 2,494 2,464
Packaging materials 1,928 2,643
Finished goods and work in progress 5,217 4,751
Other current assets 2,328 2,250
---------- ------------
Total current assets 34,862 32,744
---------- ------------
PROPERTY, PLANT, AND EQUIPMENT:
Land and land improvements 5,546 5,518
Buildings 14,304 14,143
Machinery, equipment, and vehicles 44,309 42,761
Vending and other distribution equipment 11,184 8,781
Furniture and fixtures 8,906 8,258
Construction in progress 2,743 3,034
---------- ------------
Total property, plant, and equipment 86,992 82,495
Accumulated depreciation (34,662) (27,532)
---------- ------------
Net property, plant, and equipment 52,330 54,963
---------- ------------
NONCURRENT ACCOUNTS AND NOTES RECEIVABLE, NET 477 433
OTHER ASSETS 1,727 1,709
DEFERRED DEBT ISSUE COSTS, NET OF ACCUMULATED AMORTIZATION
OF $115 AND $0 AT JANUARY 3, 1998 AND DECEMBER 28, 1996,
RESPECTIVELY 3,385 0
GOODWILL AND INTANGIBLE ASSETS, NET OF ACCUMULATED
AMORTIZATION OF $7,761 AND $6,084 AT JANUARY 3, 1998 AND
DECEMBER 28, 1996, RESPECTIVELY 48,264 49,941
---------- ------------
Total assets $ 141,045 $ 139,790
========== ============
</TABLE>
28
<PAGE> 29
Page 2 of 2
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
January 3, December 28,
1998 1996
---------- ------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 11,070 $ 14,270
Accrued liabilities 10,973 8,273
Current portion of restructuring reserves 0 1,152
Current portion of senior credit agreement 0 1,533
Current portion of capital lease and other debt obligations 27 24
Current portion of other long-term obligations 0 130
---------- ------------
Total current liabilities 22,070 25,382
---------- ------------
LONG-TERM DEBT:
Senior secured notes 60,000 0
Senior credit agreement 0 7,363
Term loan from TFH Corporation 0 59,828
Industrial development revenue bonds 10,000 10,000
Capital lease and other debt obligations 297 327
Note payable 0 7,192
---------- ------------
Total long-term debt 70,297 84,710
---------- ------------
OTHER LONG-TERM OBLIGATIONS 37 2,621
RESTRUCTURING RESERVES 0 2,207
ACCRUED PENSION COST 6,587 6,109
ACCRUED POSTRETIREMENT BENEFITS OTHER THAN
PENSIONS 2,055 2,242
EXCHANGEABLE PREFERRED STOCK, $.01 PAR VALUE; CLASS A,
7,000 SHARES AUTHORIZED; 7,000 SHARES ISSUED AND OUTSTANDING AT
JANUARY 3, 1998 7,167 0
COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 10)
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value; 10,000 shares authorized, 5,000
shares issued and outstanding at January 3, 1998 and
December 28, 1996 0 0
Preferred Stock, $.01 par value, Class B, 21,737 shares authorized,
21,737 shares issued and outstanding at January 3, 1998 22,226 0
Additional paid-in capital 43,225 42,725
Retained deficit (32,619) (26,206)
---------- ------------
Total shareholders' equity 32,832 16,519
---------- ------------
Total liabilities and shareholders' equity $ 141,045 $ 139,790
========== =============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
29
<PAGE> 30
TOM'S FOODS INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
January 3, December 28, December 30,
1998 1996 1995
---------- ------------ ------------
<S> <C> <C> <C>
NET SALES $ 212,648 $ 205,856 $ 198,340
COST OF GOODS SOLD (131,454) (133,624) (125,396)
---------- ------------ ------------
Gross profit 81,194 72,232 72,944
---------- ------------ ------------
EXPENSES AND OTHER INCOME:
Selling and administrative expenses (75,954) (69,735) (75,783)
Amortization of goodwill and intangible assets (1,792) (1,678) (1,678)
Other income 1,138 1,309 3,296
Restructuring and nonrecurring charges (500) (3,793) (9,570)
---------- ------------ ------------
(77,108) (73,897) (83,735)
---------- ------------ ------------
INCOME (LOSS) FROM OPERATIONS 4,086 (1,665) (10,791)
INTEREST EXPENSE, NET OF INTEREST INCOME OF
$166, $210, AND $248 FOR 1997, 1996, AND 1995,
RESPECTIVELY (9,978) (9,402) (7,870)
---------- ------------ ------------
LOSS BEFORE INCOME TAXES (5,892) (11,067) (18,661)
PROVISION (BENEFIT) FOR INCOME TAXES 50 0 (400)
---------- ------------ ------------
NET LOSS $ (5,942) $ (11,067) $ (18,261)
========== ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
30
<PAGE> 31
TOM'S FOODS INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CLASS B MINIMUM
COMMON STOCK PREFERRED STOCK ADDITIONAL PENSION
------------------ ------------------- PAID-IN RETAINED LIABILITY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT
------ ------ ------ ------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994 1,000 $ 0 0 $ 0 $42,725 $ 3,122 $ (717)
Minimum pension liability adjustment 0 0 0 0 0 0 717
Net loss 0 0 0 0 0 (18,261) 0
------ ------ ------ ------- ------- -------- ----------
BALANCE AT DECEMBER 30, 1995 1,000 0 0 0 42,725 (15,139) 0
Shares issued 4,000 0 0 0 0 0 0
Net loss 0 0 0 0 0 (11,067) 0
------ ------ ------ ------- ------- -------- ----------
BALANCE AT DECEMBER 28, 1996 5,000 0 0 0 42,725 (26,206) 0
Issuance of Class B preferred stock 0 0 21,737 21,755 0 0 0
Contribution from TFH Corporation 0 0 0 0 500 0 0
Dividends accrued 0 0 0 471 0 (471) 0
Net loss 0 0 0 0 0 (5,942) 0
------ ------ ------ ------- ------- -------- ----------
BALANCE AT JANUARY 3, 1998 5,000 $ 0 21,737 $22,226 $43,225 $(32,619) $ 0
====== ====== ====== ======= ======= ======== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
31
<PAGE> 32
TOM'S FOODS INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
January 3, December 28, December 30,
1998 1996 1995
---------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,942) $ (11,067) $ (18,261)
---------- ------------ ------------
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:
Depreciation and amortization 9,042 7,956 9,595
Accrued interest on TFH term loan 6,358 2,582 0
Restructuring and nonrecurring charges 0 3,793 9,570
Provision (benefit) for income taxes 50 0 (400)
Dividends accrued 167 0 0
Loss (gain) on disposal of property, plant, and equipment 96 (121) 244
Net gain on sales of receivables 0 0 (22)
Changes in assets and liabilities:
Accounts and notes receivable 3,067 (4,479) (2,263)
Inventories 219 278 1,648
Other assets (96) 2,661 1,600
Accounts payable (3,200) 4,731 (224)
Other liabilities 454 2,443 (6,730)
Accrued pension cost 478 216 482
Accrued postretirement benefits other than pensions (187) (164) (64)
---------- ------------ ------------
Total adjustments 16,448 19,896 13,436
---------- ------------ ------------
Net cash provided by (used in) operating activities 10,506 8,829 (4,825)
---------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant, equipment, and vending machines (3,419) (5,798) (7,304)
Proceeds from disposal of property, plant, and equipment 206 422 0
---------- ------------ ------------
Net cash used in investing activities (3,213) (5,376) (7,304)
---------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (59,763) (10,252) (4,218)
Proceeds from issuance of long-term debt 60,840 9,000 8,931
Proceeds from sale of vending machine leases 0 300 2,402
Debt issue costs (3,500) (2,095) 0
Capital contribution from TFH Corporation 500 0 0
---------- ------------ ------------
Net cash (used in) provided by financing activities (1,923) (3,047) 7,115
---------- ------------ ------------
INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS 5,370 406 (5,014)
CASH AND SHORT-TERM INVESTMENTS, BEGINNING OF YEAR 2,117 1,711 6,725
---------- ------------ ------------
CASH AND SHORT-TERM INVESTMENTS, END OF YEAR $ 7,487 $ 2,117 $ 1,711
========== ============ ============
SUPPLEMENTAL DISCLOSURES:
Interest paid during the year $ 2,566 $ 2,512 $ 6,725
========== ============ ============
Income taxes paid during the year $ 27 $ 0 $ 0
========== ============ ============
Issuance of exchangeable preferred stock, Class A, for debt (Note 5) $ 7,000 $ 0 $ 0
========== ============ ============
Issuance of preferred stock, Class B, for debt (Note 5) $ 21,755 $ 0 $ 0
========== ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
32
<PAGE> 33
TOM'S FOODS INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 3, 1998, DECEMBER 28, 1996, AND DECEMBER 30, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Tom's Foods Inc. (the "Company") manufactures and distributes snack food
products. The principal markets for these products are the southeastern and
southwestern United States.
RESTRUCTURING AND REFINANCING
On August 30, 1996, the Company restructured its debt obligations (Note 4).
In connection with the debt restructuring, TFH Corporation ("TFH") was
formed. TFH was capitalized by various parties having common control of
Tom's Foods Capital Corporation, the prior parent. TFH used the capital
proceeds to purchase outstanding senior and subordinated debt obligations of
the Company for $52,828,000, inclusive of accrued interest. In return for
subordinating its purchased debt claims and a deferral of interest and
principal payments, TFH received 80% of the stock of the Company, making TFH
the Company's new parent. This transaction was accounted for as a purchase
of entities under common control. Therefore, no change in the basis of
assets and liabilities was recorded.
In 1997, the Company completed a refinancing of the Company's debt
obligations, including the debt of TFH (the "Offering") (Note 4).
FISCAL YEAR
The Company's fiscal year is the 52- or 53-week period ending the Saturday
nearest to December 31. The current year, fiscal 1997, ended January 3, 1998
and contained 53 weeks.
CASH AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investment instruments with an
original maturity of three months or less to be cash equivalents. These
investments are stated at cost, which approximates market value.
33
<PAGE> 34
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are stated at cost and are depreciated using
the straight-line method over the following estimated useful lives:
<TABLE>
<S> <C>
Land improvements 20 years
Buildings 32 years
Machinery, equipment, and vehicles 3 to 12 years
Vending machines and other distribution equipment 5 to 10 years
Furniture and fixtures 3 to 10 years
</TABLE>
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the average cost for raw materials, packaging materials, and work in
progress. Finished goods cost is determined using the first-in, first-out
method. Cost elements include the cost of raw materials, direct labor, and
overhead incurred in the manufacturing process.
HEDGING TRANSACTIONS
The Company has limited involvement with derivative financial instruments
and does not use them for trading purposes. The Company enters into various
futures contracts and futures options to reduce the impact of volatility in
raw material prices. These transactions meet the requirements for hedge
accounting, including designation to specific inventory amounts and probable
future purchases and high correlation. Amounts payable or receivable under
these transactions are recognized as deferred gains or losses and included
in other assets or other liabilities. The deferred amounts are charged or
credited to cost of sales, as the related raw materials are charged to
operations. If the Company were to ever have a derivative transaction that
did not meet the requirement for hedges, it would recognize the unrealized
gains and losses as they occur. At January 3, 1998, the net gains and losses
deferred or expensed are not material, and there are no material commitments
outstanding relating to derivative financial instruments.
GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets arose during the acquisition of the Company
on May 13, 1993. These items are being amortized using the straight-line
method over the estimated useful lives as follows:
<TABLE>
<S> <C>
Assembled staff 20 years
Trademarks 40 years
Distribution system 35 years
Goodwill 40 years
</TABLE>
The Company periodically reviews the value assigned to goodwill and
intangible assets to determine whether events and circumstances have
occurred which indicate that the remaining estimated useful life of goodwill
may warrant revision or that the remaining balance of goodwill may not be
recoverable. The Company uses an estimate of undiscounted net income over
34
<PAGE> 35
the remaining life of the goodwill in measuring whether the goodwill is
recoverable.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and short-term
investments, trade receivables, notes receivable, accounts payable, purchase
commitments, senior loans, industrial development revenue bonds,
subordinated debt, other long-term obligations, and capital lease
obligations. In management's opinion, the carrying amounts of these
financial instruments approximate their fair values at January 3, 1998 and
December 28, 1996.
DISTRIBUTOR FRANCHISE REVENUE
The Company sells distributorships in the normal course of business. In 1996
and 1995, the revenues from the purchase of rights to a particular service
area and the direct costs associated with the selling of the distributor
rights were deferred and were recognized at the one-year anniversary of the
sale of the distributorship, the date on which the distributor could no
longer terminate the related agreement without obligation to the Company.
The Company recognized revenue, net of direct costs, of approximately $0,
$50,000, and $3,613,000 for the years ended January 3, 1998, December 28,
1996, and December 30, 1995, respectively, related to the sale of routes.
PERVASIVENESS OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
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. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform with the
current year presentation.
EFFECT OF ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosure About Segments of an Enterprise and
Related Information." SFAS No. 130 and No. 131 will be effective for fiscal
1998. In February 1998, the FASB issued SFAS No. 132, "Employers'
Disclosures About Pensions and Other Postretirement Benefits," which will be
effective for fiscal 1998.
SFAS No. 130 requires the disclosure of comprehensive income, which includes
all changes in the equity of an enterprise other than transactions with
owners. SFAS No. 131 requires information regarding the segments of a
business. SFAS No. 132 revises a company's disclosures about pension and
other postretirement benefit plans.
35
<PAGE> 36
SFAS No. 130, No. 131, and No. 132 are not expected to have a material
effect on the Company's financial statements or disclosures. Other issued
but not yet required FASB standards are not currently applicable to the
Company's operations.
TRANSACTIONS WITH RELATED PARTIES
The Company has entered into consulting agreements with the chairman of the
board and a director of the Company for providing consulting services to the
Company. In return for such consulting services, each received $100,000 for
each of the years ended January 3, 1998, December 28, 1996, and December 30,
1995.
In connection with the term loan from TFH and the assumption of accrued
interest thereon (Note 4), the Company recognized interest expense of
$6,358,000 and $7,750,000 for the years ended January 3, 1998 and December
28, 1996, respectively.
As part of the August 30, 1996 refinancing, the stockholders of TFH caused
letters of credit to be posted in the aggregate face amount of $10,000,000
to replace the letters of credit posted by the Company to back the
industrial development revenue bonds discussed in Note 4. As of January 3,
1998, TFH has waived its rights to reimbursement through December 31, 2005.
After this date and subject to the terms of the subordination, the Company
will be obligated to reimburse TFH for any draws which have been or are
subsequently made on the TFH stockholders' letters of credit.
2. RESTRUCTURING RESERVES
In recent years, the Company has twice modified its strategy with regard to
its distribution system. Traditionally, the Company's distribution system
has been an independent single and multiroute distribution system. In 1991,
the Company began supplementing its traditional multiroute distribution
system with a modified independent single-route distribution strategy. This
strategy included the purchase of certain multiroute distributors, the
termination of certain nonperforming multiroute distributors, and
implementing new modified single-route distributors to fill perceived voids
and supplement the traditional distribution system. In connection with the
modified supplemental single-route distribution strategy, the Company
recorded a restructuring reserve of $29,852,000 (the "1991 Reserve"), which
is discussed more fully below. At no time did the Company actually have more
than 360 of these supplemental single-route distributors out of a total of
approximately 2,400 routes, which represented less than 15% of the total
routes in the distribution system at any time.
In 1995, the Company assembled a new management team which determined that
the modified single-route distribution strategy was not a strategy that the
Company should continue to pursue. At that time, new management determined
that the Company would not continue the modified single-route distribution
strategy and would encourage modified single-route distributors to become
multiroute distributors or traditional single-route distributors. As a
result, in 1995, the Company reversed the remainder of the 1991 Reserve
(which at that time was $9,645,000) and established a new reserve of
$6,450,000 (the "1995 Reserve") to assist in converting the modified
single-route distributors to multiroute distributors or traditional
single-route distributors. The 1995 Reserve is described more fully
36
<PAGE> 37
below. None of the 1995 Reserve was remaining at January 3, 1998.
In 1991 and in connection with the modified single-route distribution
strategy, the Company recorded the 1991 Reserve, which represented the
expenses related to the purchase of some distributorships, assumption of
certain distributor liabilities, bad debts, losses from the temporary
operation of company-owned routes, and additional expenses. In 1991, the
Company underestimated the costs of fully implementing the modified
single-route distribution strategy. These costs included personnel and
related costs for sales, accounting and administrative staff, warehouse
space, marketing costs, legal costs, and increased bad debt costs. As a
result, the Company utilized $20,207,000 of the 1991 Reserve over the course
of fiscal 1991, 1992, 1993, 1994, and 1995. In fiscal 1994 and 1995, the
Company utilized $6,450,000 and $2,625,000, respectively, of the 1991
Reserve, leaving a remaining reserve of approximately $9,645,000 at December
30, 1995.
In 1995, the Company's new management team noted that the Company was
spending significant capital supporting the modified supplemental
single-route distributor program that represented a very small portion, in
number of routes and dollars contributed, of its distribution system.
Therefore, in 1995, the Company reversed the remainder of the 1991 Reserve
of $9,645,000 and established the 1995 Reserve to purchase available
modified single-route distributors and to develop these into multiroute
distributors and traditional single-route distributors. Management
determined that the multiroute distributors and traditional single-route
distributors would benefit the Company by reducing the administrative sales
staff necessary to support the single-route distributors, decreasing needed
warehouse space for the delivery of goods, and decreasing bad debt expense
as a direct result of having more stable and qualified distributors.
Management commenced in 1995 to take steps to develop a specific plan
involving the identification of the routes to become traditional
single-route distributors or to become a part of multiroute distributors in
1995, 1996, and 1997. Management determined that the receivables related to
modified single-route distributors were the only substantial incremental
cost of converting the modified single-route distributors. Therefore, the
costs included in the 1995 Reserve primarily related to legal and bad-debt
costs associated with the purchase of available modified single-route
distributors or termination of nonperforming modified single-route
distributors, some of which were required under its recourse provisions with
the financial institution to whom the Company had sold certain receivables.
In fiscal 1996, the Company utilized approximately $3,091,000 of the 1995
Reserve, resulting in an ending balance of approximately $3,359,000 at
December 28, 1996. For the year ended January 3, 1998, the Company utilized
all of the remainder of the reserve.
In addition to the establishment of the 1995 Reserve, the Company recorded
several nonrecurring charges in 1995 totaling approximately $12,765,000.
These nonrecurring charges were associated with changes made in the sales
and administrative staff, as well as changes in certain product lines
produced by the Company. The nonrecurring items included the following:
1. The payment of early retirement and severance benefits of
approximately $3,700,000. The new management team determined that the
sales and administrative functions of the Company could be streamlined
and simplified.
37
<PAGE> 38
As a result, the Company offered an early retirement option to eligible
employees and completed severance agreements with others.
Substantially all of the payments were made to individuals prior to
December 30, 1995, and no reserves were outstanding at December 30,
1995.
2. The write off of certain assets related to the restructuring of the
sales force of approximately $4,949,000. The new management team
determined that the sales function was larger than necessary to
service the core distribution system. Therefore, in addition to and as
a result of reducing headcount, the value of several assets was either
impaired or eliminated. These assets primarily related to a computer
system of approximately $2,728,000 that was being developed to track
reporting for single-route distributors. The system was not functional
for multiroute distributors, and consequently, further development was
curtailed, and the system was never completed. Also, certain field
assets, including sales office furniture, vehicles, and warehouses of
approximately $2,221,000, were eliminated.
3. The write off of certain display equipment and packaging for a
discontinued "low-fat, no-fat" product line of approximately
$4,116,000. In the fourth quarter of 1995, the Company completed an
analysis noting that these product lines were not widely accepted
among the Company's core customers. Therefore, management made a
decision to eliminate a significant number of these products from its
product line. The packaging write off of approximately $1,487,000
related to prepurchased inventory for certain "low-fat, no-fat"
products that were not accepted by the market. The display equipment
related primarily to equipment purchased specifically for the
discontinued products of approximately $2,629,000.
3. ACCOUNTS AND NOTES RECEIVABLE
Accounts and notes receivable as of January 3, 1998 and December 28, 1996
consist of the following (in thousands):
<TABLE>
<CAPTION>
January 3, December 28,
1998 1996
---------- ------------
<S> <C> <C>
Notes receivable from distributors $ 3,008 $ 3,772
Trade accounts receivable 17,361 23,860
Less allowance for doubtful accounts (4,484) (8,680)
---------- ------------
15,885 18,952
Less current portion (15,408) (18,519)
---------- ------------
Noncurrent accounts and notes receivable, net $ 477 $ 433
========== ============
</TABLE>
Notes receivable from distributors are due in varying amounts over periods
of up to ten years and bear interest at stated rates from 0% to 16.25%. The
interest rates on notes receivable related to distributorship financing were
13.25% and 13.2% for the years ended
38
<PAGE> 39
January 3, 1998 and December 28, 1996. The notes are payable over an
eight-year amortization schedule, with a balloon payment at the end of year
five. The notes are secured by certain distributor assets and guarantees.
The Company had an agreement with a financial institution to sell
receivables from distributors. The proceeds under this agreement for the
years ended December 28, 1996 and December 30, 1995 were $335,000 and
$4,422,000, respectively, and are included in cash flows from operating
activities in the accompanying statements of cash flows. In fiscal 1997, the
Company did not sell receivables under this agreement.
Prior to the Offering (Note 4), the Company had guaranteed the repayment of
certain amounts of these receivables. The Company settled the guaranteed
amount by paying $10,000,000 in full satisfaction of the note payable under
guarantee obligations (Note 4) and as a settlement of the remaining
guaranteed amount. This remaining settlement amount was reserved for as of
December 28, 1996. Therefore, the ultimate amount of the Company's
guaranteed repayment did not have a material effect on the financial
position or results of operations.
Subject to certain conditions, the Company has the right of first refusal to
repurchase, for either cash or a note at the Company's option,
distributorships or distributorship assets from certain distributors at a
multiple of 3.5 times the amount of the average annual net cash flow, as
adjusted, of the distributorship, measured over the preceding three years.
This obligation relates only to those distributors who have signed the 1997
distributor agreement and have been in full compliance, as defined in the
1997 distributor agreement, for the previous three years. As of January 3,
1998, 90 of the Company's distributors had signed the new agreement.
Consequently, the Company may not be required to repurchase distributorships
pursuant to this agreement until 2000. The Company believes that the
repurchase requirement in the new distributor contract is an advantage to
both the independent distributor network and to the Company. The repurchase
requirement allows the Company greater control over its distribution network
by providing the Company with a first opportunity to buy the businesses of
existing distributors, should they desire to sell, and provides these
distributors with an orderly exit strategy. This exit strategy will only be
available to successful distributors who have remained in full compliance
with their contracts for a minimum of three years, including meeting certain
growth requirements, and thus enhances the value of successful
distributorships and the distribution network as a whole. Because the Company
does not know which distributors will avail themselves of this provision and
when they might do so after becoming eligible, the Company believes that it
is not possible to determine any future contingency requirement. Any
potential repurchase obligation is, however, based on a multiple of net cash
flow. Any repurchase is therefore funded primarily through the stream of
future cash flows from the purchased distributorship, which is enhanced by
the capture of integrated margins.
39
<PAGE> 40
4. DEBT
Long-term debt as of January 3, 1998 and December 28, 1996 consists of the
following (in thousands):
<TABLE>
<CAPTION>
January 3, December 28,
1998 1996
---------- ------------
<S> <C> <C>
10.5% senior secured notes due in 2004 $ 60,000 $ 0
---------- ------------
Senior credit agreement 0 8,896
Less current portion of senior credit agreement 0 (1,533)
---------- ------------
Long-term portion of senior credit agreement 0 7,363
---------- ------------
Term loan from TFH 0 59,828
---------- ------------
6.75% Taylor County, Florida, industrial development
revenue bonds; payable in five annual installments
beginning September 1, 2000, secured by property with
a net book value of $4,561 and $4,979 in 1997 and 1996,
respectively 5,800 5,800
6.5% Industrial Development Board of the County of
Knox, Tennessee, industrial development revenue
bonds; payable in five equal annual installments
beginning October 1, 2005, secured by property with a
net book value of $6,274 and $6,578 in 1997 and 1996,
respectively 4,200 4,200
---------- ------------
Long-term industrial development revenue
bonds 10,000 10,000
---------- ------------
Note payable under guarantee obligations 0 7,192
---------- ------------
Capital lease and other debt obligations; secured by
computers, office equipment, and vending machines 324 351
Less current portion of capital lease obligations (27) (24)
---------- ------------
Long-term portion of capital lease
obligations 297 327
---------- ------------
Long-term debt $ 70,297 $ 84,710
========== ============
</TABLE>
On October 14, 1997, the Company sold $60,000,000 of 10.5% Senior Secured
Notes (the "Notes") due November 1, 2004. The Notes are secured by a first
lien on and security interest in substantially all of the assets and
properties owned by the Company, except those that are security for other
debt obligations. The indenture relating to the Offering has certain
covenants, as defined. The Company may not redeem the Notes prior to
November 1, 2001, and following that date, the Company may redeem the Notes
in whole or in part at redemption prices, as defined. In connection with the
Offering, the Company incurred (3,500,000 in fees and expenses which were
40
<PAGE> 41
capitalized and are being amortized over the life of the Notes. As of January
3, 1998, the accumulated amortization of these costs equals approximately
$115,000. In addition, the Company paid an additional bonus of $500,000 to
management in connection with the Offering, which is shown separately on the
statements of operations.
The proceeds of the Offering were used to pay certain of the Company's debt
obligations. Amounts paid include $40,000,000 to TFH, $8,336,000 to the
lenders under the Senior Credit Agreement, and $10,000,000 to satisfy the
note payable and outstanding amounts relating to the Company's guarantee
obligations (Note 3) with a financial institution. After the Offering, the
remaining portion of the TFH obligations, including accrued interest
thereon, was converted to $7,000,000 of Class A preferred stock and
$21,755,000 of Class B preferred stock (Note 5).
The payment of $8,336,000 satisfied all outstanding amounts under the Senior
Credit Agreement which the Company had entered into on August 30, 1996.
Prior to the Offering, the Senior Credit Agreement provided for a revolving
loan, letter-of-credit accommodations, a term loan, and additional equipment
loans. After the payment, as part of the Offering, the Senior Credit
Agreement was amended to include only letter-of-credit accommodations and a
revolving loan facility.
The revolving loan is based on 85% of all eligible accounts, plus 50% of the
value of eligible inventory, as defined. Interest is payable on the
revolving loan at a rate of 1.375% above the prime rate of interest. The
maximum borrowing amount under the revolving loan and the letter-of-credit
accommodations is $17,000,000. Standby letters of credit relating to
insurance coverages and inventory purchases were outstanding under the
revolving loan as of January 3, 1998 and December 28, 1996 in the amounts of
$2,799,000 and $3,036,000, respectively. For the year ended January 3, 1998,
the weighted average interest rate under the revolving loan was 9.7%. At
January 3, 1998 and December 28, 1996, there were no outstanding balances
other than the letters of credit under the revolving loan.
The Senior Credit Agreement matures August 30, 1999 and contains a provision
for the extension of the maturity date for up to two one-year periods upon
the agreement of both the Company and the lender. The Senior Credit
Agreement, as amended, requires the Company to maintain certain financial
ratios relating to working capital and tangible net worth, as defined. The
Senior Credit Agreement also restricts the Company in a number of areas,
including, but not limited to, paying dividends, incurring additional
indebtedness, certain investment activities, and capital expenditures. As of
January 3, 1998, the Company was in compliance with all financial ratios and
restrictive covenants.
Until August 30, 1996, the Company had a senior term loan (the "Senior Term
Loan") pursuant to a credit agreement dated June 3, 1988, as amended June 6,
1990, May 13, 1993, and December 31, 1994, between the Company and a bank
group. The interest on these loans was at either a base rate plus 1.5% per
annum or a Eurodollar rate, as defined.
Prior to the Offering, in addition to the obligation to TFH, the Company had
an agreement with a financial institution to sell receivables from
distributors (Note 3) and receivables relating to vending machine leases
(Note 6). On August 30, 1996, the Company amended its agreement with the
41
<PAGE> 42
financial institution relating to the Company's guaranty obligation for
receivables sold. The new agreement established a note payable (the "Note
Payable") for the Company's guaranty obligations related to failed
distributors or unpaid notes. When a sold receivable became the
responsibility of the Company, as defined by the agreement, the amount of the
obligation was added to the Note Payable balance carried on the Company's
balance sheet. With the $10,000,000 paid as part of the Offering, the Company
eliminated its obligation relating to receivables sold and satisfied all
outstanding amounts under the Note Payable.
The scheduled maturities of all company debt obligations are $27,000 in
1998, $29,000 in 1999, $1,034,000 in 2000, $1,038,000 in 2001, $1,040,000 in
2002, and $67,156,000 in the years thereafter.
5. SHAREHOLDERS' EQUITY
On October 14, 1997, in connection with the Offering, the Company issued
7,000 shares of Class A preferred stock and 21,737 shares of Class B
preferred stock. The Class A preferred stock has an aggregate liquidation
preference of $7,000,000 and was issued in exchange for $7,000,000 of the
outstanding term loan from TFH, as discussed in Note 4. The Class A
preferred stock is exchangeable at the option of the Company or the holder
upon certain events, and is therefore classified outside of shareholders'
equity in the accompanying balance sheets. As the Class A preferred stock
has characteristics that are similar to debt, dividends are accrued to
interest expense. The Class B preferred stock has an aggregate liquidation
preference of $21,755,000 and was issued in exchange for the remaining
outstanding term loan from TFH, as discussed in Note 4. The Class A and
Class B preferred stock is nonvoting, except in certain circumstances. The
Class A preferred stock ranks senior to the Class B preferred stock.
Dividends on the Class A preferred stock and the Class B preferred stock
accrue at a rate of 10.5% and 9.5%, respectively. Unpaid dividends increase
the liquidation preference of the respective shares. Upon a change in
control, holders of up to $10,000,000 of Class A preferred stock will be
entitled to require the Company to purchase these shares at 100% of the
liquidation preference at the date of purchase. On or after January 1, 1999,
up to an aggregate of $10,000,000 of Class A preferred stock may be
exchangeable at the Company's option for an equal amount of subordinated
debt, only if the Company meets certain financial targets, as defined.
Dividends of $167,000 were accrued to the Class A preferred stock and are
included in interest expense in the accompanying statements of operations.
Dividends of $471,000 were accrued to the Class B preferred stock and are
included in the accumulated deficit.
6. SALE OF VENDING MACHINE LEASES
The Company supplies vending machines to certain distributors under
sales-type and operating leases. During December 1994, the Company entered
into an agreement to periodically sell to a financial institution, with
limited recourse, the revenue stream related to sales-type leases and to
obtain long-term financing secured by the revenue stream related to
operating leases. The Company discontinued transactions under this agreement
in May 1996. The proceeds under this agreement during 1996 and 1995 were
$300,000 and $2,402,000 respectively, which represent the present value of
42
<PAGE> 43
the future lease payments using a discount rate of 13.2%. These amounts are
included in cash flows from financing activities in the accompanying
statements of cash flows. The portion of the proceeds relating to operating
leases was classified as other long-term obligations and was to be repaid
over the operating lease term or through the sale of the vending machines
to the distributors using sales-type lease arrangements. At December 28,
1996 and December 30, 1995, there were approximately $331,000 and $1,220,000,
respectively, of other long-term obligations, which were securitized by
operating lease payments. These long-term obligations were eliminated as
part of the $10,000,000 payment made in the Offering (Note 4), and no
obligations remain at January 3, 1998. Also, under the limited recourse
provisions of the original agreement, the Company was contingently liable
for 50% of the sales-type leases sold. This contingency was also eliminated
as part of the Offering (Notes 3 and 4).
7. INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," and files a consolidated federal income tax
return with TFH.
The components of the deferred tax assets and liabilities as of January 3,
1998 and December 28, 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
January 3, December 28,
1998 1996
---------- ------------
<S> <C> <C>
Deferred tax liabilities:
Property, plant, and equipment $ 5,119 $ 6,113
Other 934 0
---------- ------------
Total deferred tax liabilities 6,053 6,113
---------- ------------
Deferred tax assets:
Operating loss carryforwards (19,687) (17,007)
Restructuring reserves 0 (1,310)
Accounts and notes receivable (1,760) (4,280)
Pensions and employee benefits (2,924) (2,819)
Workers' compensation (750) (601)
Discount on industrial development
revenue (582) (647)
Other 0 (319)
---------- ------------
Total deferred tax assets (25,703) (26,983)
---------- ------------
Net deferred tax assets (19,650) (20,870)
Less valuation allowance 19,650 20,870
---------- ------------
Net deferred tax assets $ 0 $ 0
========== ============
</TABLE>
The Company has operating loss carryforwards of approximately $50,000,000,
which begin to expire in 2009.
43
<PAGE> 44
The provision for income taxes consisted of the following as of January 3,
1998, December 28, 1996, and December 30, 1995 (in thousands):
<TABLE>
<CAPTION>
January 3, December 28, December 30,
1988 1996 1995
---------- ------------ ------------
<S> <C> <C> <C>
Federal income taxes:
Current $ 0 $ 0 $ (400)
Deferred 0 0 0
State and franchise taxes 50 0 0
---------- ------------ ------------
Provision for income taxes $ 50 $ 0 $ (400)
========== ============ ============
</TABLE>
For the years ended January 3, 1998, December 28, 1996, and December 30,
1995, the provision for income taxes at the Company's effective rate
differed from the provision (benefit) for income taxes at the statutory
rate, as follows (in thousands):
<TABLE>
<CAPTION>
January 3, December 28, December 30,
1988 1996 1995
---------- ------------ ------------
<S> <C> <C> <C>
Income tax benefit at federal statutory
rate $ (2,020) $ (3,763) $ (6,263)
State income taxes, net of federal effect (237) (443) (737)
Interest expense on TFH term loan 2,480 0 0
Change in valuation allowance (1,220) 3,246 6,886
Alternative minimum tax carrybacks 0 0 (500)
Intangibles amortization 347 347 347
Other 700 613 (133)
--------- ------------ ------------
Provision for (benefit from) income
taxes $ 50 $ 0 $ (400)
========= ============ ============
</TABLE>
8. EMPLOYEE BENEFIT PLANS
The Company has two noncontributory defined benefit retirement plans (the
"Hourly Plan" and the "Salaried Plan") which cover substantially all
full-time employees who are at least 21 years of age. The Company also has
an unqualified pension plan ("Unqualified Plan") covering only certain
salaried employees. The plans provide for payment of monthly benefits to
participants upon their reaching normal retirement dates. Benefit amounts
are determined by a benefit formula which considers length of service and
average salary for the Salaried Plan and the Unqualified Plan and length of
service multiplied by a fixed rate, as determined by the Company, for the
Hourly Plan. The pension cost for the Hourly Plan and the Salaried Plan is
funded at amounts equal to the minimum funding requirements of the Employee
Retirement Income Security Act of 1974. Assets of the Hourly Plan and the
Salaried Plan include common stocks, U.S. government securities, and
corporate bonds. The Unqualified Plan is not funded.
44
<PAGE> 45
The following table sets forth the plans' funded status and amounts
recognized in the Company's balance sheet as of January 3, 1998 (in
thousands):
<TABLE>
<CAPTION>
SALARIED HOURLY UNQUALIFIED
PLAN PLAN PLAN
-------- -------- -----------
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested $ 24,135 $ 17,461 $ 201
Nonvested 384 135 20
-------- -------- -----------
Accumulated benefit obligation 24,519 17,596 221
Effect of projected future compensation levels 5,450 0 86
-------- -------- -----------
Projected benefit obligation 29,969 17,596 307
Plan assets at fair value (32,388) (18,996) 0
Unrecognized prior service costs (2,267) 1,874 (43)
Unrecognized net gain 7,086 2,690 759
-------- -------- -----------
Accrued pension costs $ 2,400 $ 3,164 $ 1,023
======== ======== ===========
</TABLE>
Net periodic pension costs for the plans for the years ended January 3,
1998, December 28, 1996, and December 30, 1995 included the following
components (in thousands):
<TABLE>
<CAPTION>
January 3, December 28, December 30,
1998 1996 1995
---------- ------------ ------------
<S> <C> <C> <C>
Service cost of benefits earned during
the period $ (979) $ 1,077 $ 1,158
Interest cost on projected benefit
obligation 3,219 3,269 3,359
Actual return on assets (8,533) (4,798) (9,819)
Amortization of prior service costs 68 880 0
Net amortization and deferral 4,746 464 6,342
Settlement gain 0 0 (166)
---------- ------------ ------------
Net periodic pension costs $ 479 $ 892 $ 874
========== ============ ============
</TABLE>
The rate of increase in future compensation levels and the expected
long-term rate of return on assets used in determining the actuarial present
value of the projected benefit obligation were 5% and 9%, respectively, as
of January 3, 1998, December 28, 1996, and December 30, 1995. The discount
rates used in determining the actuarial present value of the projected
benefit obligation for January 3, 1998, December 28, 1996, and December 30,
1995 were 7%, 7.5%, and 7%, respectively.
Pursuant to the provisions of SFAS No. 87 "Employers' Accounting for
Pensions," the Company recorded as accrued pension cost an additional
minimum pension liability of $717,000 as of December 31, 1994, representing
the amount by which the accumulated benefit obligation exceeded the fair
value of plan assets plus accrued amounts previously recorded. The amount in
excess of previously unrecognized prior service cost was recorded as a
reduction of shareholders' equity in the amount of $717,000 at December 31,
45
<PAGE> 46
1994. There was no additional minimum pension liability at January 3, 1998,
December 28, 1996, or December 30, 1995.
The Company also has a defined contribution plan which covers substantially
all employees who are eligible at the start of the quarter after their hire
dates. The Company may match a portion of an employee's contributions up to
a maximum amount. For the years ended January 3, 1998, December 28, 1996,
and December 30, 1995, the Company contributed approximately $195,000,
$133,000, and $130,000, respectively, to this plan.
During 1995, the Company offered an early retirement incentive plan to
certain members of the Hourly and Salaried Plans. Certain special benefits
were offered to eligible employees, and lump-sum payments were paid out of
the Salaried Plan. As a result, the Company recognized a pension settlement
gain of $166,000 in accordance with SFAS No. 88, "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits." There was no early retirement incentive plan during
1996 or 1997.
9. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides certain health care and life insurance benefits for
certain retired employees. The Company may provide certain health care and
life insurance benefits for employees electing early retirement in the
future until they reach normal retirement age. The liability for these
benefits is not funded. The Company accounts for these benefits in
accordance with SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions."
The components of the accumulated benefit obligation as of January 3, 1998
and December 28, 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
January 3, December 28,
1998 1996
---------- -------------
<S> <C> <C>
Current retirees $ 977 $ 1,522
Active employees 457 392
---------- -------------
Accumulated benefit obligation 1,434 1,914
Unrecognized net gain 621 328
---------- -------------
Accrued postretirement benefit cost $ 2,055 $ 2,242
========== ============
</TABLE>
46
<PAGE> 47
Net costs of the plan for the years ended January 3, 1998, December 28,
1996, and December 30, 1995 included the following components (in
thousands):
<TABLE>
<CAPTION>
January 3, December 28, December 30,
1998 1996 1995
---------- ------------ ------------
<S> <C> <C> <C>
Service cost of benefits earned during
the period $ 4 $ 4 $ 5
Interest cost on projected benefit
obligation 129 153 123
---------- ------------ ------------
Net postretirement benefit costs $ 133 $ 157 $ 128
========== ============ ============
</TABLE>
A 7% annual rate of increase in the per capita cost of covered health care
benefits is assumed for all future years for certain grandfathered
retirees; for all other current and future retirees, no increase was
assumed due to a fixed payment schedule. A 1% increase in the assumed
health care cost trend rate year would increase the accumulated
postretirement benefit obligation by 3.8% as of January 3, 1998 and would
increase the fiscal 1997 expense by 4.1%. The weighted average discount
rates used in determining the accumulated postretirement benefit obligation
were 7%, 7.5%, and 7% as of January 3, 1998, December 28, 1996, and
December 30, 1995, respectively.
10. COMMITMENTS AND CONTINGENT LIABILITIES
LEASES
The Company leases vehicles and warehouse space under noncancelable
operating leases. Noncancelable future minimum operating lease commitments
as of January 3, 1998 were as follows (in thousands):
<TABLE>
<S> <C>
1998 $1,365
1999 639
2000 379
2001 184
2002 83
Thereafter 2,748
------
$5,398
======
</TABLE>
The rental expense for all operating leases for the years ended January 3,
1998, December 28, 1996, and December 30, 1995 was approximately
$4,196,000, $2,914,000, and $3,389,000, respectively.
LITIGATION
The Company is a party to a number of claims and lawsuits incidental to its
business. In the opinion of management, after consultation with outside
counsel, the ultimate outcome of these matters, in the aggregate, will not
have a material adverse effect on the financial position or results of
operations of the Company.
47
<PAGE> 48
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with certain executive
officers which guarantee benefits.
DISTRIBUTOR REPURCHASE REQUIREMENT
The Company will be obligated to purchase certain distributors at certain
terms as discussed in Note 3.
LETTERS OF CREDIT
The Company has outstanding certain letters of credit (Note 4).
48
<PAGE> 49
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.
TOM'S FOODS INC.
By: /s/ Rolland G. Divin
----------------------------------
Rolland G. Divin
President, Chief Executive Officer
and Director
Dated: April 3, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities indicated on April 3, 1998.
/s/ Rolland G. Divin
- ----------------------------------
Rolland G. Divin, President, Chief
Executive Officer and Director
/s/ S. Albert Gaston
- ----------------------------------
S. Albert Gaston, Senior Vice
President and Chief Financial
Officer
/s/ Michael E. Heisley
- ----------------------------------
Michael E. Heisley, Director
/s/ Stanley H. Meadows
- ----------------------------------
Stanley H. Meadows, Assistant
Secretary and Director
/s/ Thomas C. Mattick
- ----------------------------------
Thomas C. Mattick, Director
/s/ Emily Heisley Stoeckel
- ----------------------------------
Emily Heisley Stoeckel, Director
/s/ Andrew C.G. Sage II
- ----------------------------------
Andrew C.G. Sage II, Director
49
<PAGE> 50
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL
STATEMENT SCHEDULE
To the Board of Directors
of Tom's Foods Inc.:
We have audited in accordance with generally accepted auditing standards, the
financial statements of Tom's Foods Inc. included in this Form 10-K and have
issued our report thereon dated February 12, 1998. Our audit was made for the
purpose of forming an opinion on the basic financial statements taken as a
whole. The schedule at Exhibit 27 is the responsibility of the company's
management and is presented for purposes of complying with the Securities and
Exchange Commissions rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 12, 1998
50
<PAGE> 51
TOM'S FOODS INC.
Valuation and Qualifying Accounts
Allowance for Doubtful Accounts
(in thousands)
<TABLE>
<CAPTION>
Balance at
Balance at Charged to End of
Beginning Cost and Charged to the
of the Period Expenses Other Accounts Deductions Period
------------- -------- -------------- ---------- ------
<S> <C> <C> <C> <C> <C>
1995 5,693 4,315 269 (A) 928 (B) 9,349
1996 9,349 444 523 (A) 1,636 (B) 8,680
1997 8,680 530 74 (A) 4,800 (B) 4,484
</TABLE>
- -------------
(A) Represents amounts recovered.
(B) Represents amounts charged against the reserve.
51
<PAGE> 1
Exhibit 4.2
- --------------------------------------------------------------------------------
FIRST SUPPLEMENTAL INDENTURE
by and between
TOM'S FOODS INC.
and
IBJ SCHRODER BANK & TRUST COMPANY,
as Trustee
-----------------------------
Dated as of February 27, 1998
-----------------------------
Relating to:
$70,000,000
10 1/2% Senior Secured Notes due 2004
- --------------------------------------------------------------------------------
FIRST SUPPLEMENTAL INDENTURE
THIS FIRST SUPPLEMENTAL INDENTURE, dated as of February 27,
1998, by and between Tom's Foods Inc., a Delaware corporation, as Issuer (the
"Company") and IBJ Schroder Bank & Trust Company, a New York banking
corporation, as Trustee and as Collateral Agent (in either or both of such
capacities, the "Trustee"):
<PAGE> 2
WITNESSETH
WHEREAS, the Company has heretofore entered into an Indenture
of Trust, dated as of October 14, 1997 (the "Original Indenture") by and between
the Company and the Trustee;
WHEREAS, all capitalized terms used herein and not otherwise
defined shall have the meanings set forth in the Original Indenture, as
supplemented;
WHEREAS, the Original Indenture contains certain ambiguities
and inconsistencies with respect to the treatment of proceeds of sales of
Collateral other than proceeds of sales of Collateral which constitute Asset
Sales;
WHEREAS, the Original Indenture provides that it may be
amended, waived or supplemented to cure any ambiguity, defect or inconsistency,
without notice to or consent of any Holder;
WHEREAS, the Company deems it desirable to amend the Original
Indenture as set forth and described herein; and
WHEREAS, all of the requirements and conditions set forth in
the Original Indenture for the amendment thereof have been satisfied (or will be
satisfied prior to execution and delivery of this First Supplemental Indenture).
NOW, THEREFORE, in consideration of this First Supplemental
Indenture and for other good and valuable consideration, receipt of which is
hereby acknowledged, the parties hereto agree as follows:
ARTICLE I
CONDITIONS PRECEDENT TO THIS
FIRST SUPPLEMENTAL INDENTURE
This First Supplemental Indenture is conditioned upon the
receipt by the Trustee of:
(i) This First Supplemental Indenture duly executed by
the Company;
(ii) A certificate of (a) the Secretary or Assistant Secretary of the Company
certifying: (I) a copy of the Unanimous Written Consent of the Company's board
of directors authorizing and directing the execution, delivery and performance
of this First Supplemental Indenture; and (II) the names and true signatures of
the officers of the Company authorized to sign this First Supplemental
Indenture; and (b) an Authorized Officer of the Company (I) as to such matters
required under the Original Indenture; and (II) as to such matters as the
Trustee may reasonably request;
(iii) An Opinion of McDermott, Will & Emery, counsel to the Company, as to (A)
such matters required under the Original Indenture; and (B) as to such matters
as the Trustee may reasonably request; and
<PAGE> 3
(iv) Such other documents as the Trustee may reasonably request.
ARTICLE II
AMENDMENTS TO ORIGINAL INDENTURE
Section 2.01. Purpose of Amendments. In order to clarify the
ambiguities and correct the inconsistencies in the Original Indenture with
respect to the treatment of proceeds of sales of Collateral other than proceeds
of sales of Collateral which constitute Asset Sales, the Company and the Trustee
have agreed to certain amendments to the Original Indenture.
Section 2.02. Amendment to Section 1.1. Section 1.1 of the Original
Indenture is hereby amended as follows:
(i) The definition of "Related Business Investment" is amended to read in its
entirety:
" "Related Business Investment" means any Investment, capital expenditure or
other expenditure by the Company which is related to the business of the Company
and its Restricted Subsidiaries as it is conducted on the date of the sale of
the Collateral giving rise to the Net Cash Proceeds or net proceeds (as defined
in Section 10.4(d)) to be reinvested ".
Section 2.03. Amendments to Section 10.4. Section 10.4 of the Original
Indenture is hereby amended as follows:
(i) The first paragraph of Section 10.4 is amended to read in
its entirety:
" In addition to its rights under Sections 10.3 and 10.5, the Company (and any
Restricted Subsidiary with respect to any Collateral pledged by such Restricted
Subsidiary) shall have the right, at any time and from time to time, to sell,
exchange or otherwise dispose of any of the Collateral (other than Trust Moneys
(but other than Trust Moneys constituting Collateral Proceeds or net proceeds
(as defined in Section 10.4(d)), which are subject to release from the Lien of
the Security Documents as provided under Article XI), upon compliance with the
requirements and conditions of this Section 10.4, and the Trustee shall promptly
release the same from the Lien of any of the Security Documents upon receipt by
the Trustee (other than in the case of Section 10.4(d) of a Release Notice (as
hereinafter defined) requesting such release and describing the property to be
so released, together with delivery of the following, among other matters: ".
(ii) Section 10.4(b)(i)(2) is amended to read in its entirety:
" (2) the Collateral to be released is Trust Moneys representing net proceeds
(as defined in Section 10.4(d)) that are not required or cannot possibly be
required through the passage of time or otherwise, to be used to purchase the
Securities pursuant to Section 4.14; ".
Section 2.04. Amendment to Section 11.4. Section 11.4 of the Original
Indenture is hereby amended as follows:
<PAGE> 4
(i) The first paragraph of Section 11.4 is amended to read in
its entirety:
" To the extent that any Trust Moneys consist of (a) Net Cash Proceeds received
by the Trustee pursuant to Section 4.14 or (b) net proceeds (as defined in
Section 10.4(d)) of sales of Collateral which do not constitute Asset Sales, and
the Company intends to reinvest such Net Cash Proceeds or net proceeds (as
defined in Section 10.4(d)) in a manner that would constitute a Related Business
Investment, such Trust Moneys may be withdrawn by the Company by the proper
officer or officers of the Company, to reimburse the Company for expenditures
made or to pay costs incurred by the Company in connection with such Related
Business Investment, upon receipt by the Trustee of the following: ".
ARTICLE III
MISCELLANEOUS
Section 3.01. Severability. If any provision of this First Supplemental
Indenture shall be held or deemed to be or shall, in fact, be illegal,
inoperative or unenforceable, the same shall not affect any other provision or
provisions herein contained or render the same invalid, inoperative or
unenforceable to any extent whatsoever.
Section 3.02. Counterparts. This First Supplemental Indenture may be
simultaneously executed in several counterparts, each of which shall be an
original and all of such shall constitute but one and the same instrument.
Section 3.03. Governing Law. This First Supplemental Indenture shall be
governed by and construed in accordance with the internal laws of the State of
New York.
Section 3.04. Captions. The captions and headings in this First
Supplemental Indenture are for convenience only and in no way define, limit or
describe the scope or intent of any provisions or Sections of this First
Supplemental Indenture.
Section 3.05. Amendments and Supplements. This First Supplemental
Indenture may be amended, changed or modified only as provided in Article IX of
the Original Indenture.
Section 3.06. Original Indenture. This First Supplemental Indenture is
supplemental to the Original Indenture and all provisions of the Original
Indenture, unless clearly amended hereby, shall remain in full force and effect
and be applicable to this First Supplemental Indenture, and matters relating
thereto as if set forth verbatim herein.
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have caused this First
Supplemental Indenture to be executed by their respective officers thereunto
duly authorized, as of the date first above.
TOM'S FOODS INC.
By:_____________________________
Name:___________________________
Title:____________________________
IBJ SCHRODER BANK & TRUST COMPANY, as Trustee
By:____________________________
Name:__________________________
Title:___________________________
<PAGE> 1
Exhibit 12
TOM'S FOODS INC.
Statement Regarding Computation of Ratio of Earnings to Fixed Charges
(in thousands, except ratio)
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------------------------
December 30, December 28, January 3,
1995 1996 1998
---- ---- ----
<S> <C> <C> <C>
Earnings:
Pretax loss (18,261) (11,067) (5,942)
Fixed charges 9,002 10,368 11,375
------- ------- -------
(9,259) (699) 5,433
Fixed Charges:
Interest expense 7,870 9,402 9,978
Preferred stock dividends 0 0 0
Interest factor relating to
rentals (a) 1,132 966 1,397
------- ------- -------
9,002 10,368 11,375
Ratio of earnings to fixed
charges (1.03) (0.07) 0.48
======= ======= =======
</TABLE>
- --------------
(a) Represents interest expense factor related to rental expense.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF TOM'S FOODS FOR THE YEAR ENDED JANUARY 3, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-03-1998
<PERIOD-START> DEC-28-1996
<PERIOD-END> JAN-03-1998
<CASH> 7,487
<SECURITIES> 0
<RECEIVABLES> 19,892
<ALLOWANCES> 4,484
<INVENTORY> 9,639
<CURRENT-ASSETS> 34,862
<PP&E> 86,992
<DEPRECIATION> 34,662
<TOTAL-ASSETS> 141,045
<CURRENT-LIABILITIES> 22,070
<BONDS> 70,000
7,167
22,226
<COMMON> 0
<OTHER-SE> 43,225
<TOTAL-LIABILITY-AND-EQUITY> 141,045
<SALES> 212,648
<TOTAL-REVENUES> 212,648
<CGS> 131,454
<TOTAL-COSTS> 77,108
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,978
<INCOME-PRETAX> (5,892)
<INCOME-TAX> 50
<INCOME-CONTINUING> (5,942)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,942)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
