SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
(Mark One)
| þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. | |
| For the quarter (twelve-weeks) ended March 22, 2003 | ||
| o | 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.
Delaware
(State or other jurisdiction of incorporation or organization)
58-1516963
(I.R.S. Employer Identification No.)
900 8th Street
Columbus, GA 31902
(Address of principal executive offices, including zip code)
(706) 323-2721
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes þ No o
TOM’S FOODS INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE TWELVE-WEEKS
ENDED MARCH 22, 2003
TABLE OF CONTENTS
| Page | |||||
PART I. FINANCIAL INFORMATION |
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Item 1. Financial Statements: |
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Balance Sheets as of March 22, 2003 (unaudited) and December 28, 2002 |
3 | ||||
Statements of Operations for the twelve-weeks ended
March 22, 2003 and March 23, 2002 (unaudited) |
4 | ||||
Statements of Cash Flows for the twelve-weeks ended
March 22, 2003 and March 23, 2002 (unaudited) |
5 | ||||
Notes to Financial Statements |
6 | ||||
Item 2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations |
7 | ||||
Item 3. Quantitative and Qualitative Disclosures About Market Risk |
10 | ||||
Item 4. Controls and Procedures |
11 | ||||
PART II. OTHER INFORMATION |
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Item 6. Exhibits and Reports on Form 8-K |
11 | ||||
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TOM’S FOODS INC.
| March 22, 2003 | December 28, 2002 | ||||||||||
| (unaudited) | |||||||||||
ASSETS |
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Current Assets: |
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Cash and short-term investments |
$ | 1,377 | $ | 1,856 | |||||||
Accounts and notes receivable, net of allowance
for uncollectible of
$1,542 and $1,687 at March 22, 2003 and
December 28, 2002, respectively |
13,395 | 11,746 | |||||||||
Inventories: |
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Raw materials |
4,199 | 2,489 | |||||||||
Packaging materials |
2,245 | 2,672 | |||||||||
Finished goods and work in progress |
6,011 | 5,910 | |||||||||
Other current assets |
3,369 | 3,032 | |||||||||
Total current assets |
30,596 | 27,705 | |||||||||
Property, plant, and equipment: |
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Land and land improvements |
5,907 | 5,908 | |||||||||
Buildings |
18,319 | 18,273 | |||||||||
Machinery, equipment and vehicles |
60,188 | 59,042 | |||||||||
Vending and other distribution equipment |
12,954 | 12,953 | |||||||||
Furniture and fixtures |
16,733 | 16,510 | |||||||||
Construction in progress |
7,554 | 8,205 | |||||||||
Total property, plant, and equipment |
121,655 | 120,891 | |||||||||
Accumulated depreciation |
(71,255 | ) | (69,166 | ) | |||||||
Net property, plant, and equipment |
50,400 | 51,725 | |||||||||
Noncurrent accounts and notes receivable, net |
68 | 47 | |||||||||
Other assets |
226 | 226 | |||||||||
Deferred financing costs, net |
797 | 919 | |||||||||
Intangible assets, net |
19,846 | 20,009 | |||||||||
Goodwill, net |
644 | 644 | |||||||||
Total assets |
$ | 102,577 | $ | 101,275 | |||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
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Current liabilities: |
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Revolving debt |
$ | 7,619 | $ | — | |||||||
Accounts payable |
8,997 | 11,751 | |||||||||
Accrued liabilities |
9,853 | 11,166 | |||||||||
Current portion of other debt obligations |
231 | 239 | |||||||||
Total current liabilities |
26,700 | 23,156 | |||||||||
Long-term debt: |
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Senior secured notes |
60,000 | 60,000 | |||||||||
Other debt obligations |
380 | 431 | |||||||||
Total long-term debt |
60,380 | 60,431 | |||||||||
Other long-term obligations |
37 | 37 | |||||||||
Accrued pension cost |
14,959 | 14,795 | |||||||||
Exchangeable portion of Preferred Stock, $.01 par
value, Class A,
7,000 shares authorized, 7,000 shares issued and
outstanding at March 22, 2003 and December 28, 2002 |
10,000 | 10,000 | |||||||||
Shareholders’ Equity: |
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Common stock, $0.01 par value; 10,000 shares authorized,
5,000 shares issued and outstanding at March 22, 2003
and December 28, 2002 |
0 | 0 | |||||||||
Nonexchangeable portion of Preferred Stock, $.01 par value, Class A,
7,000 shares authorized, 7,000 shares issued and outstanding
at March 22, 2003 and December 28, 2002 |
2,197 | 1,922 | |||||||||
Preferred Stock, $.01 par value, Class B, 21,737 shares authorized,
21,737 shares issued and outstanding at March 22, 2003 and
December 28, 2002 |
35,978 | 35,256 | |||||||||
Additional paid-in capital |
43,725 | 43,725 | |||||||||
Accumulated other comprehensive income (loss) |
(7,742 | ) | (7,742 | ) | |||||||
Accumulated deficit |
(83,657 | ) | (80,305 | ) | |||||||
Total shareholders’ equity |
(9,499 | ) | (7,144 | ) | |||||||
Total liabilities and shareholders’ equity |
$ | 102,577 | $ | 101,275 | |||||||
The accompanying notes are an integral part of these financial statements.
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TOM’S FOODS INC.
| Twelve Weeks Ended | |||||||||
| March 22, 2003 | March 23, 2002 | ||||||||
| (unaudited) | (unaudited) | ||||||||
Net sales |
$ | 46,739 | $ | 48,902 | |||||
Cost of goods sold |
(30,176 | ) | (31,285 | ) | |||||
Gross profit |
16,563 | 17,617 | |||||||
Expenses and other income: |
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Selling and administrative expenses |
(17,293 | ) | (16,088 | ) | |||||
Amortization of intangible assets |
(162 | ) | (159 | ) | |||||
Other operating income, net |
182 | 127 | |||||||
(Loss) income from operations |
(710 | ) | 1,497 | ||||||
Interest expense, net |
(1,614 | ) | (1,621 | ) | |||||
Loss before income taxes |
(2,324 | ) | (124 | ) | |||||
Provision for income taxes |
(31 | ) | (34 | ) | |||||
Loss before cumulative effect of a
change in accounting principle |
$ | (2,355 | ) | $ | (158 | ) | |||
Cumulative effect of a change in accounting principle |
0 | (22,934 | ) | ||||||
Net loss |
$ | (2,355 | ) | $ | (23,092 | ) | |||
The accompanying notes are an integral part of these financial statements.
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TOM’S FOODS INC.
STATEMENTS OF CASH FLOWS
FOR THE TWELVE WEEKS ENDED
MARCH 22, 2003 AND MARCH 23, 2002
(in thousands)
| Twelve Weeks Ended | |||||||||||
| March 22, 2003 | March 23, 2002 | ||||||||||
| (unaudited) | (unaudited) | ||||||||||
Cash flows from operating activities: |
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Net loss |
$ | (2,355 | ) | $ | (23,092 | ) | |||||
Adjustments
to reconcile net loss to net cash (used in)
provided by in operating activities: |
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Depreciation |
2,107 | 2,010 | |||||||||
Amortization of intangible assets and goodwill |
162 | 159 | |||||||||
Amortization of deferred debt issuance cost |
121 | 121 | |||||||||
Cumulative effect of a change in accounting principle |
0 | 22,934 | |||||||||
Provision for income taxes |
31 | 34 | |||||||||
Loss (gain) on disposal of property, plant, and equipment |
4 | 65 | |||||||||
Changes in operating assets and liabilities: |
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Accounts and notes receivable, net |
(1,670 | ) | (5,095 | ) | |||||||
Inventories |
(1,384 | ) | (2,156 | ) | |||||||
Other assets |
(337 | ) | (129 | ) | |||||||
Accounts payable |
(2,753 | ) | 2,482 | ||||||||
Other liabilities |
(1,344 | ) | (88 | ) | |||||||
Accrued pension cost |
164 | (37 | ) | ||||||||
Total adjustments |
(4,899 | ) | 20,300 | ||||||||
Net
cash used in operating activities |
(7,254 | ) | (2,792 | ) | |||||||
Cash flows from investing activities: |
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Additions to property, plant, and equipment |
(791 | ) | (3,824 | ) | |||||||
Proceeds from disposal of property, plant, and equipment |
5 | 4 | |||||||||
Net cash used in investing activities |
(786 | ) | (3,820 | ) | |||||||
Cash flows from financing activities: |
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Net borrowing from working capital revolving facility |
7,619 | 4,616 | |||||||||
Return of industrial development revenue bond escrow deposit |
0 | 354 | |||||||||
Borrowings/payments of other long-term debt |
(58 | ) | 112 | ||||||||
Net cash provided by financing activities |
7,561 | 5,082 | |||||||||
Decrease in cash and short-term investments |
(479 | ) | (1,530 | ) | |||||||
Cash and short-term investments, beginning of period |
1,856 | 2,933 | |||||||||
Cash and short-term investments, end of period |
$ | 1,377 | $ | 1,403 | |||||||
Interest paid during the period |
$ | 209 | $ | 223 | |||||||
Income taxes paid during the period |
$ | 22 | $ | 45 | |||||||
The accompanying notes are an integral part of these financial statements
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TOM’S FOODS INC.
Item 1. BASIS OF FINANCIAL STATEMENTS AND FORMATION AND ORGANIZATION
The accompanying unaudited financial statements of Tom’s Foods Inc. have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. It is suggested that these financial statements be read in conjunction with the financial statements and the notes thereto included in the annual report and Form 10-K for the fiscal year ended December 28, 2002.
The accompanying unaudited financial statements include, in the opinion of management, all adjustments, which are of a normal recurring nature, necessary for a fair presentation for the periods presented. Results for the interim periods presented are not necessarily indicative of results that may be expected for a full fiscal year.
Fiscal Year
The Company’s fiscal year is the 52- or 53-week period ending on the Saturday nearest to December 31. The current year, fiscal 2003, ends January 3, 2004 and contains 53 weeks. The Company’s first three quarters contain twelve-weeks of results while the fourth quarter contains 16 or 17 weeks coinciding with the Company’s fiscal year.
Revenue Recognition
Revenues for distributor sales are recognized when the goods are received by the distributor. Revenues for product sold through the Company’s internal distributor network are recognized when the goods are received by the retailer. Revenues for contract sales are recognized when the goods are picked up by the customer.
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 process. 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 speculative purposes. The Company enters into various futures contracts and futures options to reduce the impact of volatility in raw material prices. Effective December 31, 2000, the Company adopted the Financial Accounting Standards Board’s (“FASB”) Statement of Financial Accounting Standard (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” subsequently amended by SFAS No. 138, “Accounting for Certain Derivative Instruments.” SFAS No. 133 and SFAS No. 138 require the Company to recognize all derivative instruments as assets or liabilities and to measure those instruments at fair value. Changes in the derivative fair values are deferred and recorded as a component of accumulated other
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comprehensive income until the hedged transactions occur and are recognized in earnings. Any ineffective portion of a hedging derivative’s change in fair value is immediately recognized in earnings. The Company formally documents all relationships between hedging instruments and hedged items as well as its risk management objectives and strategies for undertaking the hedge transactions. The Company links all hedges to forecast transactions and assesses, both at the inception of the hedge and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items. Adoption of these Statements did not have a significant impact on the Company’s financial position and operating results. At March 22, 2003, the Company had no open futures or options contracts.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
TWELVE-WEEKS ENDED MARCH 22, 2003
COMPARED TO TWELVE-WEEKS ENDED MARCH 23, 2002
Net sales for the first quarter ended March 22, 2003 were $46.7 million, a decrease of $2.2 million compared to sales of $48.9 million for the corresponding period in 2002. The first quarter of 2002, included a new product introduction for Contract Sales that was heavily promoted therefore an unfavorable variance to prior year was anticipated due to the normalized sales volume in the first quarter of 2003. However, new National Account volume gained in the first quarter of 2003, helped offset this decline. The sales figures for each quarter have been reduced as the result of a reclassification of certain promotional expenses from Selling and Administrative Expenses in accordance with the Financial Accounting Standard Board’s (“FASB”) Emerging Issues Task Force (“EITF”) consensus Issue 00-14 which the Company adopted during the first quarter of 2002. The reclassified amounts for the first quarter of 2003 and 2002 were $2.3 million and $2.1 million, respectively.
Gross profit decreased to $16.6 million in the first quarter of 2003 from $17.6 million in the first quarter of 2002, a decrease of $1.0 million or 6.0% due to a shift in product mix as well as increased energy and commodity costs.
For the first quarter 2003, selling and administrative expenses increased to $17.3 million from $16.1 million in the 2002 period, an increase of 7.5% or $1.2 million due primarily to an increase in the number of Company owned and operated distribution routes and one time costs associated with the increased distribution from new National Account customers.
Other Income was $182,000 for the first quarter of 2003 compared to $127,000 for the corresponding period in 2002.
Interest expense, net of interest income was $1.6 million in the first quarter of 2003 and 2002.
Loss before cumulative effect of a change in accounting principle was $2.4 million for the first quarter of 2003 and $158,000 for the corresponding period in 2002.
The provision for income taxes was relatively flat at $31,000 in 2003 compared to $34,000 for 2002. The Company estimates that it will have no Federal tax obligation for the fiscal year due to loss carryforwards from prior years.
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In the first quarter of 2002, the Company completed its goodwill impairment testing indicating a non-cash goodwill impairment loss of $22.9 million recorded as a cumulative effect of accounting change and a reduction in goodwill. No such expense was incurred in 2003.
The net loss for the twelve-week period ended March 22, 2003 was $2.4 million compared to a net loss of $23.1 million for the same period of 2002.
FINANCIAL CONDITION
Liquidity and Capital Resources
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 Notes are secured by a first lien on and security interest in all of the Company’s real properties, other than the Perry, FL and Knoxville, TN facilities and the Company’s equipment and intellectual property. 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. The Company may redeem the Notes in whole or in part at a redemption price of 102.625% until October 31, 2003, and 100% thereafter, plus accrued interest through the date of redemption. In connection with the Offering, the Company incurred $3.5 million in fees and expenses which were capitalized and are being amortized over the seven year term of the Notes. As of March 22, 2003, the accumulated amortization of these costs equaled approximately $3.1 million. The Company is in the process of evaluating various alternatives to refinance the Notes prior to their maturity on November 1, 2004. Failure to refinance the Notes on similar terms would have a material adverse affect on the Company’s future cash flows and its ability to reinvest in the business at current levels or fund its working capital requirements.
On January 31, 2000, the Company entered into a revolving credit facility which terminates on January 31, 2004 providing for a $17,000,000 revolving loan facility and letter-of-credit accommodations. Under the loan agreement, the revolving loan is based on 85% of all eligible accounts receivables, plus 55% of the value of eligible inventory, plus 10% of packaging materials, all as defined. The interest rate for the new revolving facility is the prime rate of interest or, at the Company’s option, LIBOR plus 2.0%. The revolving credit agreement requires the Company to maintain certain financial ratios relating to fixed charge coverage, working capital, and minimum borrowing availability, as defined. The Company’s revolving loan facility is secured by a first lien on and security interest in the inventory and receivables of the Company and certain related Collateral. During 2003, the Company intends to generate sufficient cash flow to repay any borrowings under the credit facility outstanding at January 31, 2004 and to fund its working capital requirements through 2004.
The Company’s cash flow requirements are for working capital, capital expenditures and debt service. The Company has met its liquidity needs through internally generated funds and a revolving line of credit established in January 2000 which matures in January 2004.
As of March 22, 2003, the Company had an outstanding revolving loan balance of $7.6 million, letters of credit outstanding of $2.8 million, and $2.9 million of borrowing availability thereunder. The Company’s working capital position of $3.9 million as of March 22, 2003, increased by $555,000 compared to the working capital position of $3.3 million for the same period of 2002.
Net cash used in operating activities was $7.3 million for the twelve-week period ended March 22, 2003, a variance of $4.4 million, versus $2.9 million used during the same period in 2002. $2.2 million of the variance is due to the increase in net loss for the reasons discussed in the results of operations above, and the remainder mainly attributable to the reduced accounts payable balances versus prior year.
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Net cash used in investing activities was $786,000 in the first quarter of 2003 compared to $3.8 million in 2002.
Net cash provided by financing activities was $7.6 million the first quarter of 2003 versus $5.1 million in the same period of 2002. Revolver borrowings were $7.6 million in the first quarters of 2003 and 2002, respectively.
New Accounting Pronouncements
In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The Company was required to adopt SFAS No. 144 on December 30, 2001. The adoption of SFAS No. 144 did not have a material effect on the Company’s results of operations or financial position.
In April 2002, the FASB issued SFAS No. 145 Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No 145 addresses the treatment of debt extinguishment as an extraordinary item in the statement of operations. Adoption of this standard is required for fiscal years beginning after May 15, 2002. The adoption of SFAS No. 145 will require a reclassification of the extraordinary item for debt extinguishment included in the company’s December 29, 2001 financial statements to be reclassified to operating income (loss).
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The FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (FIN 45), which addresses the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees. FIN 45 also clarifies the requirements related to the recognition of a liability by a guarantor at the inception of a guarantee for the guarantor’s noncontingent obligations associated with such guarantee. The disclosure requirements of this Interpretation are effective for financial statements of periods ending after December 15, 2002 whereas the initial recognition and measurement provisions are applicable on a prospective basis for guarantees issued or modified after December 31, 2002.
In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”, which addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes Emerging Issues Task Force (“EITF”) Issue 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring): SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. A liability for an exit cost as defined in EITF 9403 is recognized at the date of an entity’s commitment to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. The adoption of SFAS No. 146 did not have a material effect on the Company’s results of operations or financial position.
Cautionary Statement 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 3. 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 speculative 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. As of March 22, 2003, the Company had no open futures or options contracts in wheat, soybean oil, corn, diesel, or natural gas.
The Company has a credit facility that has an interest rate based upon the prime rate or, at the Company’s option, the London InterBank Offered Rate (“LIBOR”) plus 2%. Any increases in such rates may dramatically increase the interest rates under such facility and would make it more costly for the Company to borrow funds thereunder. These increased borrowing costs may impede the Company’s growth and operating strategies if management determines that such costs
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are too high to implement those strategies. These increased costs may also hinder the Company’s ability to fund its working capital requirements.
The Company’s $60 million senior secured credit facility matures on November 1, 2004. In spite of continued financial improvement since the Company issued its senior notes in October 1997, there can be no assurance given current credit market conditions that the Company will be able to renew its senior credit facility on terms or at rates as favorable as those set to expire in 2004. While the facility expiration is still more than two years away, failure to renew on similar terms could hinder the Company’s future cash flows and its ability to reinvest in the business at current levels or fund its working capital requirements.
ITEM 4. CONTROLS AND PROCEDURES
The Company’s Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation within 90 days prior to the filing date of this report, that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of the foregoing evaluation.
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
| (a) | Exhibits. | |
| None. | ||
| (b) | Reports on Form 8-K. |
There were no reports on Form 8-K filed by the Registrant during the quarter ended March 22, 2003.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each 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 | |||
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Rolland G. Divin President, Chief Executive Officer, and Director (Principal Executive Officer) |
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| Date: May 6, 2003 | ||||
| By | /s/ Sharon M. Sanders | |||
|
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|
Sharon M. Sanders Acting Chief Financial Officer |
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| Date: May 6, 2003 | ||||
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