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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 September 6, 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.

(Exact name of registrant as specified in its charter)

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 o    No þ

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TOM’S FOODS INC.

QUARTERLY REPORT ON FORM 10-Q
FOR THE TWELVE-WEEKS
ENDED SEPTEMBER 6, 2003

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TOM’S FOODS INC.
CONDENSED BALANCE SHEETS
SEPTEMBER 6, 2003 AND DECEMBER 28, 2002
(in thousands except share data)

     See notes to interim condensed financial statements

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TOM’S FOODS INC.
CONDENSED STATEMENTS OF OPERATIONS FOR THE TWELVE AND
THIRTY-SIX WEEKS ENDED
SEPTEMBER 6, 2003 AND SEPTEMBER 7, 2002
(in thousands)

     See notes to interim condensed financial statements

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TOM’S FOODS INC.
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THIRTY-SIX WEEKS ENDED
SEPTEMBER 6, 2003 AND SEPTEMBER 7, 2002
(in thousands)

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TOM’S FOODS INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS

Item 1. FINANCIAL STATEMENTS

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.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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.

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. The Company accounts for certain sales incentives given to customers as a reduction of net sales.

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.

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Pension Plans

The Company’s pension costs are determined by using various assumptions and methodologies as prescribed by Statement of Financial Accounting Standards No. 87, “Employers’ Accounting for Pensions”. These assumptions include discount rates, inflation, rate of compensation increases, expected return on plan assets, mortality rates and other factors. The Company believes that the assumptions utilized in recording the obligations under our plans are reasonable based on input from our outside actuary. The Company recorded an additional minimum liability of $7.9 million for the fiscal year ended December 28, 2002.

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 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 September 6, 2003, the Company had no open futures or options contracts.

Statement of Financial Accounting Standards No. 150

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments With Characteristics of Both Liabilities and Equity. The statement establishes standards for how an issuer classifies and measures certain financial instruments with both characteristics of liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Adoption of this standard is required for existing or new contracts for fiscal years beginning after December 15, 2003. The Company’s Class A preferred stock may be exchanged, at the Company’s option, for an equal amount of senior debt if the Company meets certain financial targets, as defined. As the Class A preferred stock is only redeemable upon the Company meeting certain financials targets, which have not been met as of September 6, 2003, and is redeemable at the option of the Company, no reclassification of the Class A preferred stock is required under SFAS No. 150.

Revolving Credit Facility

Revolver borrowings were $5.7 million in the first three quarters of 2003 compared to $3.9

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million in the same period of 2002. In connection with the appeal of a $1.2 million verdict against the Company in the Circuit Court of Alabama, the Company deposited $1.6 million in cash to secure a bond posted in order to stay the execution of the verdict pending such appeal, which is recorded as the litigation escrow deposit under financing activities.

Goodwill and Intangible Assets

The useful lives of amortizable intangible assets are evaluated periodically, and subsequent to impairment reviews, to determine whether revision is warranted. If cash flows related to a nonamortizable intangible are not expected to continue beyond the foreseeable future, a useful life would be assigned.

Upon adoption of SFAS No. 141, the Company reclassified certain intangible assets previously allocated to assembled staff into goodwill, and ceased amortization related to these intangibles. A summary of the changes to goodwill for the periods ended December 28, 2002 and September 6, 2003 is presented below (in thousands):

Other intangible assets are subject to amortization with useful lives ranging up to 35 years. Intangible assets with indefinite lives are not amortized. The Company has reviewed the carrying value of these assets under the guidance of SFAS No. 144 and determined there was no impairment related to these balances. Intangible assets at December 28, 2002 and September 6, 2003 consist of the following (in thousands):

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations

TWELVE-WEEKS ENDED SEPTEMBER 6, 2003
COMPARED TO TWELVE-WEEKS ENDED SEPTEMBER 7, 2002

Net sales for the third quarter ended September 6, 2003 were $44.3 million, compared to sales of $47.3 million for the corresponding period in 2002. The decrease continues to be from lower volume in third party contract pack sales consistent with the first and second quarters of 2003.

Gross profit was $17.2 million in the third quarter of 2003 as compared to $16.8 million in the third quarter of 2002, with Tom’s branded sales margins increasing by $805,000 versus prior year and lower margins of $463,000, resulting from the decreased contract pack production, as noted above versus last year.

For the third quarter of 2003, selling and administrative expenses were $16.0 million compared to $14.9 million for the third quarter in 2002 due primarily to an increase in the number of Company owned and operated distribution routes, which is consistent with the Company’s strategic plan.

Interest expense, net of interest income was $1.6 million in the third quarter of 2003 and $1.7 million for the third quarter of 2002.

The provision for income taxes was relatively flat at $31,000 in 2003 compared to $35,000 for 2002. The Company estimates that it will have no Federal tax obligation for the fiscal year due to loss carryforwards from prior years.

Net loss for the twelve-week period ended September 6, 2003 was $391,000 compared to a net income of $142,000 for the corresponding period in 2002, due to the factors discussed above.

THIRTY-SIX WEEKS ENDED SEPTEMBER 6, 2003
COMPARED TO THIRTY-SIX WEEKS ENDED SEPTMEBER 7, 2002

Net sales for the three quarters ended September 6, 2003 were $137.6 million, compared to sales of $148.3 million for the corresponding period in 2002. The sales decrease is totally attributable to a decrease in third party contract sales volume. During the second quarter the Company received notification, from a contract customer, of the discontinuation of one of its product lines, the volume of which had been declining through the first quarter and was the primary reason for the first and second quarter sales shortfall compared to prior year. In addition, another contract customer revised/rescheduled the sales projection for its products for the remainder of the year. While the revised sales projection will be lower than the budgeted sales, the volume is expected to be greater than 2002, on these same products.

Gross profit was $52.0 million, or 37.8%, in the first thirty-six weeks of 2003 as compared to $54.2 million, or 36.5%, in the corresponding period of 2002, due to lower margin/fixed cost coverage from the decreased contract pack production, as noted above, which is partially offset by an increase in Tom’s branded volume/margins, as well as continued increased energy and

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commodity costs, as noted in the first and second quarter filings.

For the first thirty-six weeks of 2003, selling and administrative expenses increased to $49.7 million from $47.3 million in the same period of 2002, 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. During 2002, the Company discontinued its postretirement medical benefit plan designed to bridge certain employees whom had taken an early retirement to Medicare eligibility. The non-cash accrued postretirement long-term liability, which had been previously expensed against operating income and had a balance of $1.7 million at December 29, 2001, was reversed with a corresponding non-cash credit to selling and administrative expense which was partially offset by the noted increase in Company owned route related costs and higher estimated expenses associated with the Company’s insurance and employee welfare programs.

Interest expense, net of interest income was $4.9 million in the three quarters of 2003 compared to $5.0 million in the corresponding period in 2002.

The provision for income taxes was $93,000 in 2003 compared to $103,000 for 2002. The Company estimates that it will have no Federal tax obligation for the fiscal year due to loss carryforwards from prior years.

Loss before cumulative effect of a change in accounting principle was $2.5 million for the three quarters of 2003 compared to a net income of $1.6 million for the corresponding period in 2002, due entirely to the lost volume from the third party contract sales customers.

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. During 2003, the Company conducted its goodwill impairment testing and determined no impairment was necessary.

The net loss for the thirty-six week period ended September 6, 2003 was $2.5 million compared to a net loss of $21.3 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 September 6, 2003, the accumulated amortization of these costs equaled approximately $3.0 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.

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On January 31, 2000, the Company entered into a revolving credit facility which terminates on August 30, 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 average effective interest rate on the Company’s line of credit for the three quarters ended September 6, 2003 and September 7, 2002 was 4.2% and 4.8% for each year, respectively. 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.

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 August 2004.

As of September 6, 2003, the Company had an outstanding revolving loan balance of $5.7 million, letters of credit outstanding of $2.8 million, $4.2 million of borrowing availability and a working capital position of $4.5 million.

Net cash used in operating activities was $1.3 million for the thirty-six week period ended September 6, 2003, a variance of $3.0 million, versus $1.8 million provided by operations during the same period in 2002, mainly attributable to the reduction in revenue associated with the contract sales volume.

Net cash used in investing activities was $2.9 million in the first three quarters of 2003 compared to $7.9 million in 2002.

Net cash provided by financing activities was $4.1 million the first three quarters of 2003 versus $4.3 million in the same period of 2002. Revolver borrowings were $5.7 million in the first three quarters of 2003 compared to $3.9 million in the same period of 2002. In connection with the appeal of a $1.2 million verdict against the Company in the Circuit Court of Alabama, the Company deposited $1.6 million in cash to secure a bond posted in order to stay the execution of the verdict pending such appeal, which is recorded as the litigation escrow deposit under financing activities.

New Accounting Pronouncements

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 required 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).

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

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whereas the initial recognition and measurement provisions are applicable on a prospective basis for guarantees issued or modified after December 31, 2002.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN 46”), an Interpretation of ARB No. 51. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after December 15, 2003. The Company does not expect FIN 46 to have a material impact on the Company’s financial position or results of operations.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments With Characteristics of Both Liabilities and Equity. The statement establishes standards for how an issuer classifies and measures certain financial instruments with both characteristics of liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Adoption of this standard is required for existing or new contracts for fiscal years beginning after December 15, 2003. The Company’s Class A preferred stock may be exchanged, at the Company’s option, for an equal amount of senior debt if the Company meets certain financial targets, as defined. As the Class A preferred stock is only redeemable upon the Company meeting certain financials targets, which have not been met as of September 6, 2003, and is redeemable at the option of the Company, no reclassification of the Class A preferred stock is required under SFAS No. 150.

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 September 6, 2003, the Company had no open futures or options contracts in wheat, soybean oil, corn, diesel, or natural gas.

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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 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 12 months 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.

     There were no reports on Form 8-K filed by the Registrant during the quarter ended September 6, 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.

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