<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 2, 1999
-------------------------------------------------------
-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)
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
1
<PAGE> 2
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. [|X|] Yes [ ] 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 through the Company's
network of independent distributors and Company owned routes: (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.
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.
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. 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.
2
<PAGE> 3
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 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 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.
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. 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.
3
<PAGE> 4
ITEM 6. SELECTED FINANCIAL DATA
Set forth below are certain summary historical financial data for the
Company as of fiscal years 1998, 1997, and 1996. The selected historical
financial information for the Company as of and for the full fiscal years
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.
Selected historical financial data below.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------------
DEC. 28, JAN. 3, JAN. 2,
(DOLLARS IN THOUSANDS) 1996 1998 1999
---- ---- ----
<S> <C> <C> <C>
INCOME STATEMENT DATA:
NET SALES $ 205,856 $ 212,648 $ 202,380
COSTS OF GOODS SOLD (133,624) (131,454) (123,228)
--------- --------- ---------
GROSS PROFIT 72,232 81,194 79,152
EXPENSES AND OTHER INCOME:
SELLING AND ADMINISTRATIVE EXPENSES (69,735) (75,954) (73,701)
AMORTIZATION OF GOODWILL AND INTANGIBLE ASSETS (1,678) (1,792) (2,177)
OTHER INCOME, NET 1,309 1,138 1,902
RESTRUCTURING AND NONRECURRING CHARGES (3,793)(A) (500)(B) (3,224)(C)
--------- --------- ---------
(73,897) (77,108) (77,200)
--------- --------- ---------
INCOME (LOSS) FROM OPERATIONS (1,665) 4,086 1,952
INTEREST EXPENSE, NET (9,402) (9,978) (8,129)
--------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES
AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE (11,067) (5,892) (6,177)
PROVISION FOR INCOME TAXES 0 50 50
--------- --------- ---------
NET LOSS BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE (11,067) (5,942) (6,227)
CUMULATIVE EFFECT OF ACCOUNTING CHANGE 0 0 1,050
--------- --------- ---------
NET LOSS $ (11,067) $ (5,942) $ (5,177)
========= ========= =========
OTHER DATA:
OPERATING CASH FLOW $ 8,829 $ 10,506 $ 2,153
INVESTING CASH FLOW (5,376) (3,213) (6,917)
FINANCING CASH FLOW (3,047) (1,923) 364
EBITDA(D) 6,291 13,128 11,227
ADJUSTED EBITDA(E) 10,084 13,628 14,451
CASH INTEREST EXPENSE(F) 2,512 2,566 7,874
DEPRECIATION AND AMORTIZATION 7,956 9,042 9,268
CAPITAL EXPENDITURES 5,798 3,419 6,323
RATIO OF ADJUSTED EBITDA TO NET INTEREST EXPENSE(G) 1.07X 1.37X 1.54X
RATIO OF ADJUSTED EBITDA
RATIO OF EARNINGS TO FIXED charges(h)(i) -- 0.48 0.36
BALANCE SHEET DATA (AS OF END OF PERIOD):
WORKING CAPITAL $ 7,362 $ 12,792 $ 13,069
TOTAL ASSETS 139,790 141,045 135,506
TOTAL DEBT 88,981 70,324 70,741
CLASS A PREFERRED STOCK -- 7,167 7,911
TOTAL SHAREHOLDERS' EQUITY 16,519 32,832 28,155
</TABLE>
Footnotes on following page.
4
<PAGE> 5
Footnotes from previous page.
(a) In 1996, the Company recorded a nonrecurring charge ($3.8 million) for
expenses incurred in connection with the refinancing of the Company's
debt. See the Liquidity and Capital Resources section under Item 7.
(b) In 1997, the Company recorded a nonrecurring charge ($500,000) for a
bonus paid by the Company to management in connection with the
refinancing of the Company's debt. See Note 4 of Notes to Financial
Statements included in Exhibit 14(a).
(c) In 1998, the Company recorded a nonrecurring charge ($3.2 million) for
a bonus earned by management in connection with refinancing of the
Company's debt in 1997 but deferred until 1998 and
certain/restructuring charges and nonrecurring. See the Restructuring
and Nonrecurring Charges Section under Item 7.
(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 nonrecurring
charges $3.8 million for fiscal 1996, $500,000 for fiscal 1997 and $3.2
million for fiscal 1998.
(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 $966,000 for fiscal 1996, $1.4 million for fiscal 1997 and
$1.5 million for 1998. (See Exhibit 12).
(i) The deficiency of the earnings to fixed charges was $700,000 for the
year ended December 28, 1996.
5
<PAGE> 6
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
FISCAL YEAR ENDED JANUARY 2, 1999 COMPARED TO FISCAL YEAR ENDED JANUARY
3, 1998
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
-----------------
JAN. 3, 1998 JAN. 2, 1999
-------------------- --------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales $ 212,648 100.0% $ 202,380 100.0%
Cost of goods sold (131,454) (61.8) (123,228) (60.9)
--------- ----- --------- -----
Gross profit 81,194 38.2 79,152 39.1
Selling and administrative expenses (75,954) (35.7) (73,701) (36.4)
Amortization of goodwill and
intangible assets (1,792) (0.8) (2,177) (1.1)
Other income (expense) 1,138 0.5 1,902 0.9
Restructuring and nonrecurring charges (500) (0.3) (3,224) (1.6)
--------- ----- --------- -----
Income (loss) from operations 4,086 1.9 1,952 0.9
Interest expense, net (9,978) (4.7) (8,129) (4.0)
--------- ----- --------- -----
Loss before income taxes and cumulative
effect of accounting change (5,892) (2.8) (6,177) (3.1)
Provision for income taxes 50 0.0 50 0.0
--------- ----- --------- -----
Net loss before cumulative effect
of accounting change (5,942) (2.8) (6,227) (3.1)
Cumulative effect of accounting change 0 0.0 1,050 0.5
--------- ----- --------- -----
Net loss $ (5,942) (2.8)% $ (5,177) (2.6)%
========= ===== ========= =====
Adjusted EBITDA $ 13,628 6.4% $ 14,451 7.1%
Depreciation and amortization 9,042 4.3 9,268 4.6
</TABLE>
Net Sales
Net sales for fiscal 1998 (a 52 week fiscal year) were $202.4 million,
a decrease of $10.3 million, or 4.8%, compared to $212.6 reported for the 1997
comparable period (which was a 53 week fiscal year). In addition to the shorter
year, sales declined due to lower national account and contract sales compared
to 1997.
Gross Profit
Gross Profit for fiscal 1998 was down $2.0 million, or 2.5%, compared
to fiscal 1997 due to the lower sales volume, however, the gross profit percent
increased 0.9% due to continued emphasis on operational cost efficiencies and a
mix shift between distribution channels.
Selling and Administrative Expenses
Selling and administrative expenses decreased $2.3 million, or 3.0%,
for fiscal 1998 compared to the comparable 1997 period due to cost reduction
efforts and lower incentive compensation payments.
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
their estimated useful life. The amortization expense for both fiscal 1998 and
1997 was $1.7 million in each period.
6
<PAGE> 7
In connection with the October 1997 debt refinancing, the Company
incurred $3.5 million in fees and expenses which were capitalized and are being
amortized over the life of the new Senior Notes. The amortization of these costs
was $500,000 and $115,000 for the year ended January 2, 1999 and January 3,
1998, respectively.
Other Income (Expense)
Other income (expense) increased $764,000 for fiscal 1998 over the
comparable period in 1997 due to the recovery of fees previously paid by the
Company for consulting work.
Restructuring and Nonrecurring Charges
In 1998, the Company recorded approximately $3.2 million in
nonrecurring charges comprised of the following items. The Company incurred
$960,000 in accounting, legal and other expenses related to an unsuccessful
acquisition attempt and the write-off of a company research project which was
begun in 1997. Also in 1998, the Company incurred several one-time nonrecurring
charges related to restructuring its Company owned route distribution system
resulting in a charge of $533,000 in related severance and reorganization costs.
Other 1998 nonrecurring charges included $800,000 of additional depreciation
expense for a change in the estimated useful life of certain handheld computer
equipment, $216,000 for the write-down in inventory value at certain locations
and $65,000 for the write-off of unusable handheld computer software.
In addition, in 1998, the Company reorganized portions of its company
owned distribution system resulting in a nonrecurring charge of $150,000. Also
included in the nonrecurring charges was a bonus of $500,000 paid by the Company
to management in connection with the Offering (Note 4) in each of 1998 and 1997.
Adjusted EBITDA
Reported EBITDA for fiscal 1998 was $11.2 million including
nonrecurring charges of $3.2 million discussed above which, if added back
produces an Adjusted EBITDA (exclusive of non-recurring charges) of $14.5
million. Similarly, a nonrecurring charge of $500,000 was incurred in fiscal
1997 for expenses associated with the October 1997 Offering which, if added back
to the fiscal 1997 EBITDA of $13.1 million produces an Adjusted EBITDA of $13.6
million.
Interest Expense
Interest expense, net of interest income, decreased to $8.1 million for
fiscal 1998 from $10.0 million for fiscal 1997 due to a lower interest rate for
the bonds related to the Offering. Average outstanding borrowings for fiscal
1998 were $79.4 million, a decrease of $10.8 million from 1997's average
borrowings, with an average effective interest rate of 10.0%, a decrease of 1.2
percentage points, compared to $90.2 million of average outstanding borrowings
for fiscal 1997 and an average effective interest rate of 11.2%. See "Certain
Relationships and Related Transactions"
Provision for Federal and State Income Taxes
For fiscal 1998 and 1997, 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
$57.0 million which begins to expire in fiscal 2008.
Net Loss Before Cumulative Effect of Accounting Change
As a result of the above, the Company recorded a net loss before the
effect of an accounting change for fiscal 1998 of $6.2 million, compared to a
net loss of $5.9 million for the comparable period in 1997.
Cumulative Effect of Accounting Change
In 1998, the Company changed its accounting policy to record
maintenance spare parts in inventory and to later expense the parts when taken
from
7
<PAGE> 8
inventory (rather than when purchased as was the previous policy) to provide
greater accountability for spare parts usage. This change in accounting method
lead to a one-time gain of $1.0 million in 1998.
Net Loss
As a result of the above, the Company recorded a net loss for fiscal
1998 of $5.2 million compared to a net loss of $5.9 million for the comparable
period in 1997.
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
-----------------
DEC. 28, 1996 JAN. 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 nonrecurring 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 for income taxes 0 0.0 50 0.0
--------- ----- --------- -----
Net loss $ (11,067) (5.4)% $ (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 was 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
8
<PAGE> 9
assets to its 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 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 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 Nonrecurring Charges
In fiscal 1997, the Company recorded a nonrecurring charge of $500,000
for expense associated with the October 1997 Offering. In fiscal 1996, the
Company recorded $3.8 million in nonrecurring 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
nonrecurring charge of $500,000 for expenses associated with the October 1997
Offering which, if added back, produces an Adjusted EBITDA (exclusive of the
nonrecurring charge) of $13.6 million. Similarly, a nonrecurring 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.
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
9
<PAGE> 10
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 purchased by 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 $10.0 million 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 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 2, 1999, the accumulated amortization of these costs
equaled approximately $615,000.
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 2, 1999 and January 3, 1998
were $2.1 million and $2.8 million, respectively. For the year ended January 2,
1999, the weighted average interest rate under the revolving loan was 9.8%.
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
10
<PAGE> 11
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 2, 1999, the Company was in compliance with all financial ratios and
restrictive covenants.
As of January 2, 1999, the Company had $60 million in Notes outstanding
and a $17 million revolving line of credit with Congress (of which $2.1 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.
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
2, 1999, the Company had no outstanding loans under the revolving line and had
$9.0 million in borrowing availability thereunder.
The Company's working capital improved to $13.1 million as of January
2, 1999 from $12.8 million in the same period in 1997. Additionally, as a result
of the 1996 Refinancing and the overall improvement in the Company's operations,
the Company's working capital improved to $12.8 million at January 3, 1998 from
$7.4 million at December 28, 1996.
Net cash provided by operating activities was $2.2 million for fiscal
1998 as compared to $10.5 million for fiscal 1997, and $8.8 million for fiscal
1996. In fiscal 1998, lower earnings, higher inventory ($700,000 from an
opportunistic purchase of raw materials) as well as interest payments of $6.3
million on the $60 million Senior Notes that had been PIK interest (non-cash) in
1997 contributed to the decrease in net cash provided by operating activities.
Capital expenditures were $6.3 million, $3.4 million and $5.8 million
in fiscal 1998, 1997, and 1996, respectively. For fiscal 1998, 1997 and 1996,
respectively, the Company spent $3.1 million (including the beginning phase of a
plant expansion), $3.2 million and $3.7 million (including the installation of a
pretzel manufacturing line) on its manufacturing facilities, and $3.2 million,
$200,000 and $2.1 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 $0.4 million,
($1.9) million and ($3.0) million for fiscal 1998, 1997, and 1996, 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.
The Company believes that internally generated funds and amounts which
will be available to it under the revolving line of credit are and will continue
to be sufficient to satisfy its operating cash requirements and planned capital
expenditures.
YEAR 2000 ISSUES
The Company has conducted an assessment of its Year 2000 readiness
including a review of its financial information systems, manufacturing systems,
and distribution operations to identify those systems or operations that might
be affected by the arrival of the year 2000. Plans have been developed to
correct those components that were found to be affected by the date change. To
date, corrections have been addressed through limited outside services at a
11
<PAGE> 12
cost of $120,000 and through the use of internal resources which should be
adequate to complete the Company's Year 2000 preparations. The costs of
addressing Year 2000 issues have been expensed in the ordinary course of
business. Substantially all, if not all, of the Company's compliance activities
are anticipated to be complete by the end of the third quarter of 1999. The
Company has begun to develop contingency plans in the event that it does not
reach its compliance objectives on time. These plans are expected to be complete
by the end of the second quarter of 1999.
In addition to the activities discussed above, the Company has and
continues to work with suppliers, customers, and other third parties with whom
the Company conducts business to determine the Year 2000 readiness of these key
business partners. Business partner preparation is anticipated to be adequate.
Additionally, there are alternative suppliers for most key raw materials. The
Company will continue to monitor year 2000 compliance progress of its trading
partners and work with, as appropriate, these business partners as the Company
develops its contingency plans.
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
Raw materials used by the Company are subject to price volatility
caused by weather, government farm programs, global supply and demand, and other
unpredictable factors. To manage potential volatility in raw material prices,
the Company from time to time enters into commodity future and option contracts,
which are less than one year in duration. The Company's Board-approved policy is
to use such commodity derivative financial instruments only to the extent
necessary to manage these raw material price exposures. The Company does not use
these financial instruments for trading purposes. These commodity instruments
are marketable exchange traded contracts designated as hedges, and the changes
in the market value of such contracts have a high correlation to the price
changes of the hedged commodity. At January 2, 1999, the Company had futures
contracts in wheat, soybean oil and corn maturing during 1999 with contract
values totaling $2.2 million and fair market values totaling $2.0 million. As an
example of price volatility, if there were a 10% decrease in the contract value
of these futures at the time of offset or maturity, the Company would realize a
$218,000 loss. The Company also had positions in short put options in corn and
wheat maturing in 1999. If these options were called when the corresponding
futures market values were down by 10%, the Company would realize a $24,000
loss, net of the option premiums.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements as of January 2, 1999, January 3, 1998, and
December 28, 1996 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.
12
<PAGE> 13
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, Sr. 62 Director
Rolland G. Divin 52 President, Chief Executive Officer and Director
Stanley H. Meadows(a) 54 Assistant Secretary and Director
Thomas C. Mattick 59 Director
Emily Heisley Stoeckel 35 Director
Andrew G. C. Sage II(a) 73 Director
Timothy J. Healy (a) 51 Director
S. Albert Gaston 39 Senior Vice President and Chief Financial
Officer
Gerald R. Barker 52 Senior Vice President -- Marketing
Wyatt F. Hearp 52 Vice President -- Manufacturing
Paul C. Serff 60 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, Sr. Mr. Heisley has been a Director 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/beverage
company based in Bartow, Florida from 1989 to 1991. Mr. Divin graduated from
Kansas State University in 1970 with a multi-discipline bachelor of science
degree in business/pre-veterinary studies and has pursued 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, Sr.
13
<PAGE> 14
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.
Timothy J. Healy. Mr. Healy has been a Director of the Company since
April 1998. He currently works as a Managing Director with J.W. Childs and
Associates where he has been employed since July 1998. Prior to this, he was the
Chairman of the Board, President, and Chief Executive Officer of Select
Beverages, Inc. in Chicago, IL where he had worked from 1991 until 1998. Mr.
Healy received a bachelor of science degree from Iowa State University in 1970
and a master of business administration degree from Cornell University in 1972.
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. Messrs. Sage and Healy receive
$20,000 annually as compensation for their services as Directors. Other than
with respect to the reimbursement of expenses and the fees noted above for
Messrs. Sage and Healy, 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 1998 by the
Company's chief executive officer and the Company's next four most highly
compensated executive officers (each, a "Named Officer"):
14
<PAGE> 15
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
NAME PRINCIPAL POSITION SALARY COMPENSATION BONUS *
- ---- ------------------------- ------------ -------
<S> <C> <C> <C>
Rolland G. Divin President, Chief Executive Officer
and Director $330,000 $300,000
S. Albert Gaston Senior Vice President and Chief
Financial Officer 165,000 100,000
Gerald R. Barker Senior Vice President -- Marketing 149,000 100,000
Paul C. Serff Senior Vice President --
Human Resources 133,300 0
Wyatt F. Hearp Vice President --
Manufacturing/Distribution 127,000 0
</TABLE>
* These payments were made under the Executive Incentive Plan (described
below). There were no payments made for 1998 under the Management Incentive
Compensation Plan (described below).
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
non-qualified pension plan ("non-qualified 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 non-qualified 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 6,722 13,444 20,165 26,887 33,609 40,331
$125,000 8,597 17,194 25,790 34,387 42,984 51,581
$150,000 10,472 20,944 31,415 41,887 52,359 62,831
$200,000 11,222 22,444 33,665 44,887 56,109 67,331
$300,000 11,222 22,444 33,665 44,887 56,109 67,331
$500,000 11,222 22,444 33,665 44,887 56,109 67,331
</TABLE>
(a) Compensation is assumed to be constant. Table is based on covered
compensation of $31,128 for a participant turning 65 in 1998. The IRC
Section 401(a)(17) limit on compensation is assumed constant at the
1998 level of $160,000.
The compensation used to determine a person's benefits under the
Salaried Plan and the non-qualified 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 1998 for
each of the Named Officers are 4.0 years for Mr. Divin, 3.7 years for Mr.
Gaston, 3.3 years for Mr. Barker, 11.3 years for Mr. Serff and 25.6 years for
Mr. Hearp.
15
<PAGE> 16
Non-qualified 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 1998.
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 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
16
<PAGE> 17
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% was 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 and $500,000 due
on December 31, 1998, subject to continued employment by the Company (which is
included in the compensation table set forth herein). The first payment resulted
in a $500,000 charge to compensation expense of the Company upon consummation of
the October 1997 Offering. The second payment was made as scheduled resulting in
a $500,000 charge to compensation expense in 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, Sr. 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 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
17
<PAGE> 18
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 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 remain in effect.
OTHER
Beginning with fiscal 1994, the Company has entered into consulting
arrangements with Michael E. Heisley, Sr. 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 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.
18
<PAGE> 19
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. 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
1. Financial Statements
<TABLE>
<CAPTION>
Description
----------- Page
<S> <C>
Report of Independent Public Accounts 22
Balance Sheets as of January 3, 1998 and January 2, 1999 23
Statements of Operations for the years ended December 28,
1996, January 3, 1998 and January 2, 1999 25
Statements of Changes in Shareholders' Equity for the years
ended December 28, 1996, January 3, 1998 and January 2, 1999 26
Statements of Cash Flows for the years ended December 28,
1996, January 3, 1998 and January 2, 1999 27
Notes to Financial Statements 28
2. Financial Statement Schedules
Description
----------- Page
Report of Independent Public Accountants on Financial
Statement Schedule 42
Valuation and Qualifying Accounts 43
</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.
19
<PAGE> 20
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,
filed as Exhibit 4.2 to the Company's 1997 form 10-K, is incorporated
herein by reference.
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.
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
20
<PAGE> 21
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.
13 Accountant's Preferability Letter is filed herewith as an exhibit.
27 The Financial Data Schedule is filed herewith as an exhibit.
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.
21
<PAGE> 22
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Tom's Foods Inc.:
We have audited the accompanying balance sheets of TOM'S FOODS INC. (a Delaware
corporation) as of January 2, 1999 and January 3, 1998 and the related
statements of operations, changes in shareholders' equity, and cash flows for
each of the three years in the period ended January 2, 1999. 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
2, 1999 and January 3, 1998 and the results of its operations and its cash flows
for each of the three years in the period ended January 2, 1999 in conformity
with generally accepted accounting principles.
Atlanta, Georgia
February 12, 1999
<PAGE> 23
Tom's Foods Inc.
BALANCE SHEETS
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
ASSETS
January 2, January 3,
1999 1998
--------- ---------
<S> <C> <C>
CURRENT ASSETS:
Cash and short-term investments $ 3,087 $ 7,487
Accounts and notes receivable, net 16,073 15,408
Inventories:
Raw materials 2,383 2,494
Packaging materials 2,916 1,928
Finished goods and work in progress 5,657 5,217
Other current assets 2,859 2,328
--------- ---------
Total current assets 32,975 34,862
--------- ---------
PROPERTY, PLANT, AND EQUIPMENT:
Land and land improvements 5,690 5,546
Buildings 14,358 14,304
Machinery, equipment, and vehicles 46,733 44,309
Vending and other distribution equipment 10,121 11,184
Furniture and fixtures 9,834 8,906
Construction in progress 4,497 2,743
--------- ---------
Total property, plant, and equipment 91,233 86,992
Accumulated depreciation (40,449) (34,662)
--------- ---------
Net property, plant, and equipment 50,784 52,330
--------- ---------
NONCURRENT ACCOUNTS AND NOTES RECEIVABLE, net 505 477
OTHER ASSETS 1,770 1,727
DEFERRED DEBT ISSUE COSTS, net of accumulated amortization of $615 and $115 at
January 2, 1999 and January 3, 1998, respectively 2,885 3,385
GOODWILL AND INTANGIBLE ASSETS, net of accumulated amortization of $9,438 and
$7,761 at January 2, 1999 and January 3, 1998, respectively 46,587 48,264
--------- ---------
Total assets $ 135,506 $ 141,045
========= =========
</TABLE>
<PAGE> 24
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
January 2, January 3,
1999 1998
---------- ----------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 11,473 $ 11,070
Accrued liabilities 8,277 10,973
Current portion of capital lease and other debt obligations 156 27
--------- ---------
Total current liabilities 19,906 22,070
--------- ---------
LONG-TERM DEBT:
Senior secured notes 60,000 60,000
Industrial development revenue bonds 10,000 10,000
Capital lease and other debt obligations 585 297
--------- ---------
Total long-term debt 70,585 70,297
--------- ---------
OTHER LONG-TERM OBLIGATIONS 37 37
ACCRUED PENSION COST 7,115 6,587
ACCRUED POSTRETIREMENT BENEFITS OTHER THAN PENSIONS 1,797 2,055
Exchangeable preferred stock, $.01 par value; Class A, 7,000 shares authorized;
7,000 shares issued and outstanding at January 2, 1999 and January 3, 1998 7,911 7,167
COMMITMENTS AND CONTINGENT LIABILITIES (Note 9)
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value; 10,000 shares authorized, 5,000 shares issued
and outstanding at January 2, 1999 and January 3, 1998 0 0
Preferred stock, $.01 par value, Class B, 21,737 shares authorized, 21,737
shares issued and outstanding at January 2, 1999 and January 3, 1998 24,316 22,226
Additional paid-in capital 43,725 43,225
Retained deficit (39,886) (32,619)
--------- ---------
Total shareholders' equity 28,155 32,832
--------- ---------
Total liabilities and shareholders' equity $ 135,506 $ 141,045
========= =========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
<PAGE> 25
Tom's Foods Inc.
STATEMENTs OF OPERATIONS
(In Thousands)
<TABLE>
<CAPTION>
January 2, January 3, December 28,
1999 1998 1996
--------- --------- ---------
<S> <C> <C> <C>
NET SALES $ 202,380 $ 212,648 $ 205,856
Cost of goods sold (123,228) (131,454) (133,624)
--------- --------- ---------
Gross profit 79,152 81,194 72,232
--------- --------- ---------
Expenses and other income:
Selling and administrative expenses (73,701) (75,954) (69,735)
Amortization of goodwill and intangible assets (2,177) (1,792) (1,678)
Other income, net 1,902 1,138 1,309
Restructuring and nonrecurring charges (3,224) (500) (3,793)
--------- --------- ---------
(77,200) (77,108) (73,897)
--------- --------- ---------
income (LOSS) FROM OPERATIONS 1,952 4,086 (1,665)
INTEREST EXPENSE, net of interest income of $110, $166, and
$210 for 1998, 1997, and 1996, respectively (8,129) (9,978) (9,402)
--------- --------- ---------
LOSS BEFORE INCOME TAXES AND cumulative effect of accounting
change
(6,177) (5,892) (11,067)
PROVISION FOR INCOME TAXES 50 50 0
--------- --------- ---------
NET LOSS before cumulative effect of accounting change (6,227) (5,942) (11,067)
cumulative effect of accounting change 1,050 0 0
--------- --------- ---------
net loss $ (5,177) $ (5,942) $ (11,067)
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 26
TOM'S FOODS INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
CLASS B
COMMON STOCK PREFERRED STOCK ADDITIONAL
----------------- -------------------- PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
------ ------ ------ ------ ---------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT december 30, 1995 1,000 $0 0 $ 0 $42,725 $(15,139)
Shares issued 4,000 0 0 0 0 0
Net loss 0 0 0 0 0 (11,067)
----- -- ------ ------- ------- --------
BALANCE AT december 28, 1996 5,000 0 0 0 42,725 (26,206)
Issuance of Class B preferred stock 0 0 21,737 21,755 0 0
Contribution from TFH Corporation 0 0 0 0 500 0
Dividends accrued 0 0 0 471 0 (471)
Net loss 0 0 0 0 0 (5,942)
----- -- ------ ------- ------- --------
BALANCE AT January 3, 1998 5,000 0 21,737 22,226 43,225 (32,619)
Contribution from TFH Corporation 0 0 0 0 500 0
Dividends accrued 0 0 0 2,090 0 (2,090)
Net loss 0 0 0 0 0 (5,177)
----- -- ------ ------- ------- --------
BALANCE AT January 2, 1999 5,000 $0 21,737 $24,316 $43,725 $(39,886)
===== == ====== ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 27
TOM'S FOODS INC.
STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
January 2, January 3, December 28,
1999 1998 1996
---------- ---------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(5,177) $ (5,942) $(11,067)
------- -------- --------
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization 9,268 9,042 7,956
Accrued interest on TFH term loan 0 6,358 2,582
Restructuring and nonrecurring charges 2,881 0 3,793
Cumulative effect of accounting change (1,050) 0 0
Provision for income taxes 50 50 0
Dividends accrued 744 167 0
(Gain) loss on disposal of property, plant, and equipment (265) 96 (121)
Changes in assets and liabilities:
Accounts and notes receivable (277) 3,067 (4,479)
Inventories (1,409) 219 278
Other assets 301 (96) 2,661
Accounts payable 403 (3,200) 4,731
Other liabilities (3,586) 454 2,443
Accrued pension cost 528 478 216
Accrued postretirement benefits other than pensions (258) (187) (164)
------- -------- --------
Total adjustments 7,330 16,448 19,896
------- -------- --------
Net cash provided by operating activities 2,153 10,506 8,829
------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant, equipment, and vending machines (6,323) (3,419) (5,798)
Proceeds from disposal of property, plant, and equipment 256 206 422
Unsuccessful acquisition and related costs (850) 0 0
------- -------- --------
Net cash used in investing activities (6,917) (3,213) (5,376)
------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (136) (59,763) (10,252)
Proceeds from issuance of long-term debt 0 60,840 9,000
Proceeds from sale of vending machine leases 0 0 300
Debt issue costs 0 (3,500) (2,095)
Capital contribution from TFH Corporation 500 500 0
------- -------- --------
Net cash provided by (used in) financing activities 364 (1,923) (3,047)
------- -------- --------
(DECREASE) INCREASE IN CASH AND SHORT-TERM INVESTMENTS (4,400) 5,370 406
CASH AND SHORT-TERM INVESTMENTS, beginning of year 7,487 2,117 1,711
------- -------- --------
CASH AND SHORT-TERM INVESTMENTS, end of year $ 3,087 $ 7,487 $ 2,117
======= ======== ========
SUPPLEMENTAL DISCLOSURES:
Interest paid during the year $ 7,874 $ 2,566 $ 2,512
======= ======== ========
Income taxes paid during the year $ 37 $ 27 $ 0
======= ======== ========
Issuance of exchangeable preferred stock, Class A, for debt (Note 5) $ 0 $ 7,000 $ 0
======= ======== ========
Issuance of preferred stock, Class B, for debt (Note 5) $ 0 $ 21,755 $ 0
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 28
TOM'S FOODS INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 2, 1999, JANUARY 3, 1998, AND DECEMBER 28, 1996
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. The Company operates in
one segment, as defined by Statement of Financial Accounting Standards
("SFAS") No. 131, "Disclosure About Segments of an Enterprise and
Related Information." Additionally, the Company does not have any
significant foreign operations.
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. Therefore,
no change in the basis of assets and liabilities was required.
In 1997, the Company completed a refinancing of the Company's debt
obligations, including the debt due to 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 years ended January 2, 1999 and
December 28, 1996 contained 52 weeks. The year ended January 3, 1998
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.
<PAGE> 29
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 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 2,
1999 and January 3, 1998, the net gains and losses deferred or expensed
are operating income, and there are no material commitments outstanding
relating to derivative financial instruments.
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 is
effective for the fiscal year ending December 30, 2000. The Company has
not determined the effect on its financial statements for the adoption
of this standard.
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
<PAGE> 30
life of goodwill may warrant revision or that the remaining balance of
goodwill may not be recoverable. The Company uses an estimate of
undiscounted operating income over 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 secured notes, 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 2, 1999 and January 3, 1998.
ACCOUNTING CHANGE
Effective January 4, 1998, the Company changed its accounting policy to
capitalize in other current assets all maintenance parts. The Company's
previous policy was to expense these items as purchased. The Company
believes this new method is preferable because it provides a better
matching of costs and related revenues. The Company purchased parts
during 1998 and expensed them when placed in the manufacturing process.
The net effect of items capitalized and expensed in 1998 was to
capitalize an additional $250,000 that would have been expensed under
the previous method used by the Company. The Company recorded a
cumulative effect of an accounting change as of January 4, 1998 of
$1,050,000 related to the accounting change.
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.
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 2, 1999, January
3, 1998, and December 28, 1996.
In connection with the term loan from TFH, prior to the Offering (Note
4), and the assumption of accrued interest thereon, 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 had 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.
<PAGE> 31
2. Restructuring and nonrecurring charges
Following are the components of amounts classified as restructuring and
nonrecurring charges in the accompanying statements of operations (in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Write-down of assets to realizable values and
change in estimates $1,191 $ 0 $ 0
Unsuccessful acquisition and related costs
850 0 0
Restructuring of portions of the sales and
distribution functions 683 0 0
Payment of nonrecurring management bonuses
related to the Offering 500 500 0
Costs associated with August 1996 refinancing
0 0 3,793
------ ------ ------
$3,224 $ 500 $3,793
====== ====== ======
</TABLE>
At January 2, 1999, January 3, 1998, and December 31, 1996, all amounts
related to these charges had been paid, except for $1,136 at January 2,
1999, which are expected to be paid during fiscal year 1999.
In addition, the Company recorded a $6,450,000 charge during fiscal
year 1995 related to the overall restructuring of its distribution
function. In fiscal years 1996 and 1997, the Company utilized
$3,091,000 and $3,359,000, respectively, of this amount representing
the entire reserve.
3. accounts and notes receivable
Accounts and notes receivable as of January 2, 1999 and January 3, 1998
consist of the following (in thousands):
<TABLE>
<CAPTION>
January 2, January 3,
1999 1998
---------- ----------
<S> <C> <C>
Notes receivable from distributors $ 3,122 $ 3,008
Trade accounts receivable 15,739 17,361
Less allowance for doubtful accounts (2,283) (4,484)
-------- --------
16,578 15,885
Less current portion (16,073) (15,408)
-------- --------
Noncurrent accounts and notes receivable, net $ 505 $ 477
======== ========
</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 notes are typically 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.
<PAGE> 32
Prior to the Offering (Note 4), the Company had guaranteed the
repayment of certain 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
its 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 the amount of the average annual net cash
flow, as adjusted, of the distributorship, measured over the preceding
three years. 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.
4. DEBT
Long-term debt as of January 2, 1999 and January 3, 1998 consists of
the following (in thousands):
<TABLE>
<CAPTION>
January 2, January 3,
1999 1998
---------- ----------
<S> <C> <C>
10.5% senior secured notes due in 2004 $ 60,000 $ 60,000
-------- --------
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 $4,123 and $4,561 in 1998
and 1997, 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 $2,185 and $2,264 in 1998 and 1997, respectively 4,200 4,200
-------- --------
Long-term industrial development revenue bonds 10,000 10,000
-------- --------
</TABLE>
<PAGE> 33
<TABLE>
<CAPTION>
January 2, January 3,
1999 1998
---------- ----------
<S> <C> <C>
Capital lease and other debt obligations secured by computers, office
equipment, and vending machines 741 324
Less current portion of capital lease obligations (156) (27)
-------- --------
Long-term portion of capital lease obligations 585 297
-------- --------
Long-term debt $ 70,585 $ 70,297
======== ========
</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 capitalized and are being
amortized over the life of the Notes. Amortization expense of these
costs was $615,000 for the year ended January 2, 1999 and $115,000 for
the year ended January 3, 1998. In addition, the Company paid a bonus
of $500,000 to management in connection with the Offering in both 1998
and 1997, which is included in nonrecurring charges in the accompanying
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 lender 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.
Under a senior credit agreement, 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 2, 1999 and January 3, 1998 in the amounts of $2,057,000 and
$2,799,000, respectively. For the year ended January 2, 1999, the
weighted average interest rate under the revolving loan was 9.8%. At
January 2, 1999 and January 3, 1998, 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 1-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
<PAGE> 34
dividends, incurring additional indebtedness, certain investment
activities, and capital expenditures. As of January 2, 1999, the
Company was in compliance with all financial ratios and restrictive
covenants.
The scheduled maturities of all company debt obligations are $156,000
in 1999, $1,129,000 in 2000, $1,135,000 in 2001, $1,146,000 in 2002,
$1,066,000 in 2003, and $66,109,000 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 are
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 if the Company meets certain financial targets, as
defined. Dividends of $744,000 and $167,000 were accrued to the Class A
preferred stock for fiscal 1998 and 1997, respectively, and are
included in interest expense in the accompanying statements of
operations. Dividends of $2,090,000 and $471,000 for fiscal 1998 and
1997, respectively, were accrued to the Class B preferred stock and are
included in the accumulated deficit.
6. 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.
<PAGE> 35
The components of the deferred tax assets and liabilities as of January
2, 1999 and January 3, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
January 2, January 3,
1999 1998
---------- ----------
<S> <C> <C>
Deferred tax liabilities:
Property, plant, and equipment $ 5,087 $ 5,119
Other 1,274 934
-------- --------
Total deferred tax liabilities 6,361 6,053
-------- --------
Deferred tax assets:
Operating loss carryforwards (22,081) (19,687)
Accounts and notes receivable (951) (1,760)
Pensions and employee benefits (3,032) (2,924)
Workers' compensation (599) (750)
Discount on industrial development revenue bonds (517) (582)
-------- --------
Total deferred tax assets (27,180) (25,703)
-------- --------
Net deferred tax assets (20,819) (19,650)
Less valuation allowance (20,819) (19,650)
-------- --------
Net deferred tax assets $ 0 $ 0
======== ========
</TABLE>
The Company has operating loss carryforwards of approximately
$56,600,000, which begin to expire in 2008.
The provision for income taxes consisted of the following as of January
2, 1999, January 3, 1998, and December 28, 1996 (in thousands):
<TABLE>
<CAPTION>
January 2, January 3, December 28,
1999 1998 1996
---------- ---------- ------------
<S> <C> <C> <C>
Federal income taxes:
Current $ 0 $ 0 $0
Deferred 0 0 0
State and franchise taxes 50 50 0
--- --- --
Provision for income taxes $50 $50 $0
=== === ==
</TABLE>
<PAGE> 36
For the years ended January 2, 1999, January 3, 1998, and December 28,
1996, the provision for income taxes at the Company's effective rate
differed from the provision for income taxes at the statutory rate, as
follows (in thousands):
<TABLE>
<CAPTION>
January 2, January 3, December 28,
1999 1998 1996
---------- ---------- -----------
<S> <C> <C> <C>
Income tax benefit at federal statutory rate
$(1,743) $(2,020) $(3,763)
State income taxes, net of federal effect (205) (237) (443)
Interest expense on TFH term loan 0 2,480 0
Change in valuation allowance 1,169 (1,220) 3,246
Intangibles amortization 347 347 347
Other 482 700 613
------- ------- -------
Provision for income taxes $ 50 $ 50 $ 0
======= ======= =======
</TABLE>
7. 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 age.
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.
In 1998, the Company adopted SFAS No. 132, "Employers' Disclosures
about Pensions and Other Post-Retirement Benefits." The statement
standardizes the disclosure requirements for pensions and other
postretirement benefits to the extent practicable.
On a weighted average basis, the following assumptions were used in
accounting for the net periodic benefits costs and for the Plans:
<TABLE>
<CAPTION>
January 2, January 3, December 28,
1999 1998 1996
---------- ---------- ------------
<S> <C> <C> <C>
Discount rate 6.75% 7.00% 7.50%
Expected return on plan assets 9.00% 9.00% 9.00%
Rate of compensation increase 4.75% 5.00% 5.00%
</TABLE>
<PAGE> 37
The amount of net periodic benefit cost recognized includes the
following components (in thousands):
<TABLE>
<CAPTION>
January 2, January 3, December 28,
1999 1998 1996
---------- ---------- ------------
<S> <C> <C> <C>
Components of periodic benefits costs:
Service cost $ 1,175 $ 979 $ 1,077
Interest cost 3,412 3,219 3,269
Expected return on assets (3,989) (3,661) (3,390)
Amortization of:
Actuarial gain (73) (126) (132)
Transition obligation 0 0 0
Prior service cost 68 68 68
------- ------- -------
Total net periodic benefit cost $ 593 $ 479 $ 892
======= ======= =======
</TABLE>
- -------------------------------------------------------------------------------
The reconciliation of the beginning and ending balances of the benefits
obligation for the Plans and the fair value of plan assets were as
follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Change in benefit obligation:
Net benefit obligation at the beginning of year
$ 47,873 $ 46,328
Service cost 1,175 979
Interest cost 3,412 3,219
Actuarial loss 2,392 176
Gross benefits paid (2,924) (2,829)
-------- --------
Net benefit obligation at end of year $ 51,928 $ 47,873
======== ========
Change in plan assets:
Fair value of plan assets at beginning of year $ 51,384 $ 45,670
Actual return on plan assets 5,963 8,533
Gross benefits paid (2,918) (2,819)
-------- --------
Fair value of plan assets at end of year $ 54,429 $ 51,384
======== ========
</TABLE>
<PAGE> 38
The funded status of the Plans and the amounts recognized in the
accompanying consolidated balance sheets were as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Reconciliation of funded status:
Funded status at end of year $ 2,501 $ 3,511
Unrecognized net actuarial gain (9,985) (10,535)
Unrecognized prior service cost 369 437
------- --------
Net amount recognized at end of year $(7,115) $ (6,587)
======= ========
Amounts recognized in the consolidated balance sheets:
Accrued benefit cost $(7,115) $ (6,587)
</TABLE>
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 date. The Company may match a portion of an
employees contribution up to a maximum amount. For the years ended
January 2, 1999, January 3, 1998, and December 28, 1996, the Company
contributed approximately $214,000, $195,000, and $133,000,
respectively to this plan.
8. 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 Post-Retirement Benefits Other Than Pensions."
The components of the accumulated benefit obligation as of January 2,
1999 and January 3, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
January 2, January 3,
1999 1998
---------- ----------
<S> <C> <C>
Current retirees $ 726 $ 977
Active employees 513 457
------ ------
Accumulated benefit obligation 1,239 1,434
Unrecognized net gain 558 621
------ ------
Accrued postretirement benefit cost $1,797 $2,055
====== ======
</TABLE>
<PAGE> 39
Net costs of the plan for the years ended January 2, 1999, January 3,
1998, and December 28, 1996 included the following components (in
thousands):
<TABLE>
<CAPTION>
January 2, January 3, December 28,
1999 1998 1996
---------- ---------- ------------
<S> <C> <C> <C>
Service cost of benefits earned during
the period $ 4 $ 4 $ 4
Interest cost on projected benefit obligation 58 129 153
--- ---- ----
Net postretirement benefit costs $62 $133 $157
=== ==== ====
</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 or a 1% decrease
in the assumed health care cost trend rate per year would increase the
accumulated postretirement benefit obligation by 3.3% or 3.2%,
respectively as of January 2, 1999. The weighted average discount rates
used in determining the accumulated postretirement benefit obligation
were 6.75%, 7%, and 7.5% as of January 2, 1999, January 3, 1998, and
December 28, 1996, respectively.
9. 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 2, 1999 were as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1999 $ 4,770
2000 4,404
2001 1,515
2002 216
2003 44
Thereafter 44
-------
$10,993
=======
</TABLE>
The rental expense for all operating leases for the years ended January
2, 1999, January 3, 1998, and December 28, 1996 was approximately
$4,450,000, $4,196,000, and $2,914,000, 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.
<PAGE> 40
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).
<PAGE> 41
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: March 26, 1999
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 March 26, 1999.
/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
/s/ Timothy J. Healy
- ----------------------------------
Timothy J. Healy, Director
<PAGE> 42
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL
STATEMENT SCHEDULE
To 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, 1999. Our audit was made for the
purpose of forming an opinion on the basic financial statements taken as a
whole. The foregoing schedule 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, 1999
<PAGE> 43
Schedule II
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>
1996 $9,349 $444 $523 (A) $1,636 (B) $8,680
1997 8,680 530 74 (A) 4,800 (B) 4,484
1998 4,484 276 0 2,747 (B) 2,283
</TABLE>
- -------------
(A) Represents amounts recovered.
(B) Represents amounts charged against the reserve.
<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 28, January 3, January 2,
1996 1998 1999
---- ---- ----
<S> <C> <C> <C>
Earnings:
Loss before income taxes
and cumulative effect
of accounting change $(11,067) $ (5,892) $(6,177)
Fixed charges 10,368 11,375 9,611
-------- -------- -------
(699) 5,483 3,434
Fixed Charges:
Interest expense 9,402 9,978 8,129
Preferred stock dividends 0 0 0
Interest factor relating to
rentals (a) 966 1,397 1,482
-------- -------- -------
10,368 11,375 9,611
Ratio of earnings to fixed
charges (0.07) 0.48 0.36
======== ======== =======
</TABLE>
- --------------
(a) Represents interest expense factor related to rental expense.
<PAGE> 1
EXHIBIT 13
Tom's Foods Inc.
Re: Form 10-K Report for the year ended January 2, 1999.
Gentlemen/Ladies:
This letter is written to meet the requirements of Regulation S-K calling
for a letter from a registrant's independent accountants whenever there has
been a change in accounting principle or practice.
As of January 4, 1998, the Company changed from the method of expensing
certain spare parts and maintenance inventory items to capitalizing those
items when they are acquired and expensing the items as used in the
manufacturing process. According to the management of the Company, this
change was made to a preferable method to better reflect the assets and the
expense of the Company in its financial statements.
A complete coordinated set of financial and reporting standards for
determining the preferability of accounting principles among acceptable
alternative principles has not been established by the accounting
profession. Thus, we cannot make an objective determination of whether the
change in accounting described in the preceding paragraph is to a
preferable method. However, we have reviewed the pertinent factors,
including those related to financial reporting, in this particular case on
a subjective basis, and our opinion stated below is based on our
determination made in this manner.
We are of the opinion that the Company's change in method of accounting is
to an acceptable alternative method of accounting, which, based upon the
reasons stated for the change and our discussions with you, is also
preferable under the circumstances in this particular case. In arriving at
this opinion, we have relied on the business judgment and business planning
of your management.
Very truly yours,
ARTHUR ANDERSEN LLP
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> JAN-03-1998
<PERIOD-END> JAN-02-1999
<CASH> 3,087
<SECURITIES> 0
<RECEIVABLES> 18,355
<ALLOWANCES> 2,283
<INVENTORY> 10,956
<CURRENT-ASSETS> 32,975
<PP&E> 91,233
<DEPRECIATION> 40,449
<TOTAL-ASSETS> 135,506
<CURRENT-LIABILITIES> 19,906
<BONDS> 70,000
7,911
24,316
<COMMON> 0
<OTHER-SE> 43,725
<TOTAL-LIABILITY-AND-EQUITY> 135,506
<SALES> 202,380
<TOTAL-REVENUES> 202,380
<CGS> 123,228
<TOTAL-COSTS> 76,924
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 276
<INTEREST-EXPENSE> (8,129)
<INCOME-PRETAX> (6,177)
<INCOME-TAX> 50
<INCOME-CONTINUING> (6,227)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 1,050
<NET-INCOME> (5,177)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
