SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13
or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

-or-

Tom’s Foods Inc.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 125 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. þYes oNo

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. þ

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). oYes þNo

Table of Contents

PART I

Item 1. BUSINESS

     Tom’s Foods is a multi regional snack food manufacturing and distribution company, incorporated in the state of Delaware. The Company has manufactured and sold snack food products since 1925 under the widely recognized “Tom’s” brand name, as well as other names. 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 primarily 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 other companies which complement the Company’s product line.

Distribution Network

     The Company’s products are primarily marketed through its network of independent resellers and Company owned routes: (i) to retail outlets through a direct store delivery system, and (ii) directly to the public through vending machines. The Company ships freshly-made merchandise directly to its distribution network, which, in turn, delivers products to retail outlets and vending machines.

Contract Sales and Direct Sales

     The Company also manufactures products for other food companies and retail customers under contract packaging agreements.

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 competitor is Frito-Lay which the Company views as a “full-line” snack food competitor 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 have smaller geographic footprints such as Lance Inc., Golden Flake Snack Foods Inc., Wise Potato Chip Co. and Nabisco maintain a presence in some of 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: natural gas: packaging materials; potatoes, nuts, flour, corn, vegetable oils, and other milled or refined agriculture 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.

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Government Regulation

     As a manufacturer and marketer of food items, the Company is subject to regulation by various government agencies, including the United States Department of Agriculture 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 effect 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 independent reseller agreements, independent resellers are granted a non-exclusive license to use certain of the Company Marks. Such independent reseller agreements otherwise provide that independent resellers shall make no use of the Company Marks, nor engage in any program or activity, which makes use of or contains any reference to the Company, its products or the Company Marks, except with written consent of the Company.

     The Company has and will continue to maintain and vigorously defend its intellectual property rights, including policing its trademark rights by pursuing trademark infringers.

Employees

     As of January 3, 2004, the Company has approximately 1,583 full time employees. None of the Company employees are subject to collective bargaining agreements. The Company considers its employee relations to be good.

Item 2. PROPERTIES

     The Company owns and operates seven plants in five states. Sandwich crackers, baked goods, nuts and candy products are produced in three plants located in Columbus, Georgia, which is also the location of the Company’s headquarters (the aggregate area of the Columbus facilities is approximately 580,000 square feet). Chip products are manufactured in four plants located in Fresno, California (47,000 square feet); Perry, Florida (111,000 square feet); Knoxville, Tennessee (116,000 square feet); and Corsicana, Texas (84,000 square feet). The key markets in the southeastern and southwestern United States are served by the Perry, Florida, Columbus, Georgia, Knoxville, Tennessee and Corsicana, Texas plants. The Fresno, California plant primarily services Arizona, California and Nevada and to a lesser extent Oregon and Washington. All of the Company’s facilities have 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 activities and Company owned distribution 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.

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     The Company is the defendant in a lawsuit filed in the Circuit Court in Alabama. The lawsuit alleged that the Company had interfered with the plaintiff’s purchase of vending machines from a former independent reseller of the Company and with plaintiff’s relations with its customers. On October 24, 2002, a jury returned a verdict in favor of the plaintiff, which, following post-trial motions, was reduced to $1,250,000 in total damages. 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. The Company believes the verdict is without factual basis and is contrary to the applicable law and plans to appeal the verdict to the Alabama Supreme Court.

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.

Item 6. SELECTED FINANCIAL DATA

     Set forth below are selected historical financial data for the Company as of and for the fiscal years 2003, 2002, 2001, 2000 and 1999. The selected historical financial information for the Company as of and for the years ended January 3, 2004 and December 28, 2002 were derived from the financial statements for the Company that were audited by Deloitte & Touche LLP, independent auditors. The financial information as of and for the fiscal years ended 2001, 2000 and 1999 were derived from the Company’s financial statements that were audited by Arthur Andersen LLP (that have ceased operations), but have been revised to reflect the change in reporting of certain sales incentives as a reduction of revenue, rather than as a selling and administrative expense. The revision resulted in a reduction of revenue of $9.8 million, $8.5 million, $8.7 million, $9.0 million, and $8.3 million for the fiscal years 2003, 2002, 2001, 2000, and 1999, respectively. The selected 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.

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TOM’S FOODS INC.
HISTORICAL FINANCIAL DATA

Footnotes on following page.

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     Footnotes from previous page.

(a)		In 2001, the Company recorded a charge of $117,000 for the early retirement of $9.0 million of its outstanding Industrial Revenue Bonds.
(b)		In 2001, the Company recorded a restructuring and other charge of $864,000 for certain restructuring and other expenses primarily associated with severance related benefits. See the “Restructuring and Other charges” section under Item 7.
(c)		In 2000, the Company recorded a restructuring and other charge of $419,000 for an unsuccessful acquisition attempt.
(d)		Earnings before interest, taxes, depreciation and amortization (“EBITDA”) represents the sum of income (loss) before income taxes plus interest expense, depreciation and amortization less amortization of deferred financing costs included in interest expense. The Company due to its debt structure uses EBITDA and operating cash flow as a measure of its ability to incur and service debt, to undertake capital expenditures, and to meet working capital requirements. However, 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)		Cash interest expense is net interest expense less amounts not paid in cash for the period indicated including interest accrued on Class A preferred stock of $239,000 for fiscal 2001, $950,000 for fiscal 2000, $900,000 for fiscal 1999. There was no such expense in the fiscal years 2002 and 2003.
(f)		For the purpose of computing the ratio of earnings to fixed charges, “earnings” consists of operating income (loss) before income taxes, extraordinary loss, and cumulative effect of accounting change plus fixed charges, and “fixed charges” consists of net interest expense and the portion of rental expense deemed representative of the interest factor of $1.8 million in 2003, $1.7 million in 2002, $1.5 million in 2001, $1.3 million in 2000 and $1.2 million in 1999. (See Exhibit 12).

     A reconciliation of Net loss to EBITDA is as follows:

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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     Executive Summary

     In 2003, the Company continued to pursue its strategic plan of:

a)		Focusing on manufacturing and distributing a wide product line of snack foods and baked goods to convenience store, grocery, mass merchandiser and vending channels;
b)		Expanding and investing in its company owned direct store door delivery and vending network; and
c)		Assisting the Company’s independent retail and vend resellers in becoming more effective at meeting customer product, merchandising and service requirements.

     For the Company as a whole, net sales in fiscal 2003 were $195.7 million and declined by approximately $13.5 million from 2002 levels of $209.2 million. EBITDA declined from approximately $19.0 million (a high since at least 1993) achieved in fiscal 2002 to $12.4 million in fiscal 2003 a decline of $6.6 million. Income from Operations declined by $5.4 million to $3.9 million in 2003 compared to $9.3 million (also a high since at least 1993) in 2002. The declines in net sales and earnings were a direct result of $16.2 million in reduced co-pack volume from a prior year level of approximately $48.5 million due to co-pack customer product line eliminations and their weaker than anticipated overall sales offset in part by increases in Tom’s direct store delivery net sales through its independent resellers and company owned route structure of approximately $2.8 million. The reduced co-pack volume had an approximately $6.4 million negative impact on EBITDA and income from operations versus prior year. Earnings were also negatively impacted by further expanding and investing into the Company route initiative which as noted above and discussed in earlier filings is a key aspect of the Company’s strategic plan. Nevertheless, as sales through this initiative grew expenses as a percent of sales continued to decline by 5.2% of net D.S.D. sales through these company owned routes. Earnings were also negatively impacted by increased energy, commodity and packaging prices. Also included in the fiscal 2003 EBITDA and earnings were one-time charges totaling $1.7 million.

     Fiscal 2003 operating cash flow after interest expense was $5.4 million as compared to fiscal 2002 operating cash flow of $12.0 million (a high since at least 1993). This reduction was in large part a result of reduced co-pack sales discussed above. Also included in the fiscal 2003 operating cash flow were one-time charges totaling $1.3 million.

     Additional factors of note relative to fiscal 2003 versus fiscal 2002 were:

	•		Administrative and marketing expenses as a percent of net sales continued to decline and were 0.2 percent of net sales lower
	•		Selling expense as a percent of net sales increased by 0.6 percentage points due to a further shift in sales to the Company route initiative
	•		Gross profit as a percent of net sales increased by 1.5 percent due to improved mix, pricing actions and efficiencies in spite of unprecedented higher prices of energy, major commodities and packaging

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	•		Risk management practices continued to be effective affording the Company an overall lower third of available opportunity commodity market range cost structure in spite of unprecedented increases in market values for these commodities
	•		Overall raw material, packaging, labor and overhead expenses were at or slightly lower than prior year and when adjusted for the reduced co-pack volume and higher energy costs actually declined by 1 percent
	•		Over-the-road delivery expenses as a percent of net direct store door sales declined by 0.13 percent and were at a 15 year historical low in spite of rapidly increasing fuel costs
	•		New products introduced over the last few years represented approximately 36.8% of branded direct store door/vend sales — up from 33.6% in 2002
	•		The majority of independent resellers continued to grow their purchases from the Company and had volume increases on average of 5.4%
	•		Independent resellers who reduced purchases from the Company were a smaller percent of total independent resellers (35% in 2003, 47% in 2002) and declined at the same rate as fiscal 2002 of a negative 14.1% representing a continuance of a longer term moderating trend
	•		Company route sales growth rate increased by 7%

Estimated Fiscal 2004 vs. Fiscal 2003 Results

     The Company is estimating that fiscal 2004 net sales will be slightly improved over fiscal 2003 levels. Sales of branded products through all channels of distribution are anticipated to continue upward trends. Branded segment income is also anticipated to exceed fiscal 2003 levels in both percent of net sales and total dollar terms. All other aspects of the Company’s core branded business are expected to continue to improve. Co-pack volume is also expected to increase vs. fiscal 2003 yet this segments margin is anticipated to decrease slightly in both percent of net sales and total dollar terms due to changes in customer sets and mix.

     Total Company fiscal 2004 EBITDA is expected to improve to a range of $15.5 million to $16.5 million. In addition, fiscal 2004 operating cash flow after interest expense is estimated to a range of $8.0 million to $9.0 million. In fiscal 2004, both EBITDA and operating cash flow are estimated to be in line with the average EBITDA and operating cash flow since 1998 of $15.5 million and $8 million, respectively.

     The above fiscal 2004 over fiscal 2003 improvements are anticipated to be due in large part to continued improvements in:

	•		sales mix and margin improvements
	•		expansion of a successful initiative requiring nominal growth cap-ex
	•		manufacturing efficiencies
	•		efficiency improvements in the company owned direct store delivery network
	•		effectiveness of independent resellers
	•		incremental improvements in over-the-road transportation costs due to newly adopted routing technologies

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     These improvements are expected to be offset in part by continuing increases in historically high commodity and energy costs.

Refinancing

     The Company currently has a $17 million revolving credit facility due in August 2004. As of January 3, 2004, there was $96,000 borrowed and $2,839,000 in letters of credit issued under this facility. The Company also has $60 million of 10.5% senior secured notes. These notes became callable at PAR in November of 2003 and mature in November 2004. The Company has received written and verbal proposals to refinance both the revolving credit facility and the senior secured notes and anticipates to receive additional proposals. Although the Company cannot give absolute assurances that it will obtain such financing on a timely basis, management believes it will be able to replace its working capital facility and refinance the notes by their maturity. If the Company is not successful in obtaining new financing, the Company may not be able to repay its lender and the holders of the notes when such debt is due.

Critical Accounting Policies

     The SEC defines “critical accounting policies” as those that require application of management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.

     The following is not intended to be a comprehensive list of all of our accounting policies. Our significant accounting policies are more fully described in Note 1 to the Consolidated Financial Statements. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States of America, with no need for management’s judgment in their application. There are also areas in which management’s judgment in selecting an available alternative would not produce a materially different result.

     We have identified the following as accounting policies critical to us: income taxes, goodwill impairment, self-insurance accruals and pension plans.

     Income Taxes — Income taxes are calculated using the asset and liability method under Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (“SFAS 109”). Under this method, deferred income taxes are calculated by applying enacted statutory tax rates to cumulative temporary differences between financial statement carrying amounts and the tax basis of existing assets and liabilities. Under SFAS 109, the effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.

     Goodwill Impairment — The Financial Accounting Standards Board issued Statement No. 142, “Goodwill and Other Intangible Assets,” (“FAS 142”) in June 2001. As a result of the issuance of this new standard, goodwill is no longer amortized, but is subject to annual impairment testing. Goodwill impairment testing requires that we estimate the fair value of our goodwill and compare that estimate to the amount of goodwill recorded on our balance sheet. The estimation of fair value requires that we make judgments concerning future cash flows and appropriate discount rates. Our estimate of the fair value of goodwill could change over time based on a variety of factors. Upon adoption of FAS 142, the Company recorded an impairment charge of $22.9 million relating to goodwill, which is presented as a cumulative effect of change in accounting principle. This process also required an independent appraisal of other intangible assets with a net carrying value of $20.0 million, which were appraised at a value of $46.9 million, however there is no

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provision in FAS 142 that allows the write up of these intangible assets. There was no impairment indication noted in fiscal 2003.

     Self-Insurance Accruals — The Company estimated costs associated with worker’s compensation liability, automobile liability, and general liability, up to certain limits. Insurance reserves are established for estimates of the loss that we will ultimately incur on reported claims, as well as estimates of claims that have been incurred but not yet reported. An outside actuary determines the level of reserves, and incorporates historical loss experience and judgments about the present and expected levels of cost per claim. Trends in actual experience are a significant factor in the determination of such reserves. The Company believes our estimated reserves are adequate, however actual experience in claim frequency and/or severity could materially differ from our estimates. The Company also purchases liability insurance, which provides protection up to $75,000,000 in excess of our deductibles of $500,000 for workers’ compensation, $250,000 for auto liability, and $50,000 for general liability.

     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. FAS 87 allows plan sponsors to look to rates of return on high-quality (Aa or higher) fixed income investments of similar duration in selecting a discount rate. Management, after consultation with the plan’s actuaries, determined that 6.25% was a reasonable rate for the evaluation of its obligation at January 3, 2004. A survey done by the Company’s actuaries indicates that more than 80% of their clients with December 31 measurement dates chose a discount rate of 6.25%. Choosing a higher discount rate would decrease those pension obligations, while choosing a lower discount rate would increase those obligations. The Company recorded an additional minimum liability of $7.9 million for the fiscal year ended December 28, 2002. For the year ended January 3, 2004, the Company recorded a reduction to other comprehensive income of $201,000 and a reduction in the intangible asset of $76,000.

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Results of Operations

     Fiscal Year Ended January 3, 2004 Compared to Fiscal Year Ended December 28, 2002

TOM’S FOODS INC.
FISCAL YEAR ENDED JANUARY 3, 2004 COMPARED
TO FISCAL YEAR ENDED DECEMBER 28, 2002
(in thousands)

     Net Sales

     For the Company as a whole, net sales for fiscal 2003 were $195.7 million, a decrease of $13.5 million from fiscal 2002. The declines in net sales were a direct result of co-pack customer product line eliminations and their weaker than anticipated overall sales offset in part by further increases in Tom’s DSD/Vend volume of approximately $2.8 million. The sales figures for each year have been reduced as a result of a reclassification of certain promotional expenses from selling and administrative expenses in accordance with the FASB EITF consensus Issue 00-14 which the Company adopted during the first quarter of 2002. The reclassified amounts for the fiscal years 2003 and 2002 were $9.8 million and $8.5 million, respectively.

     Gross Profit

     Gross Profit for fiscal 2003 decreased $2.0 million, or 2.7% compared to fiscal 2002 due to the decrease in Co-Pack sales volume associated with product line eliminations and weaker than anticipated overall sales of co-pack customers. Additionally overall commodity markets continued

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the unfavorable upward trends, which the Company partially offset by reducing the package weights and increasing prices.

     Selling and Administrative Expenses

     Selling and administrative expenses increased $3.4 million, or 5.0%, compared to fiscal 2002 due to an increase in the number of Company-owned and operated routes in fiscal 2003. These costs include the necessary overhead, such as warehouses, vehicles and other related costs, required to increase the distribution in the Company-owned routes. In February of 2003, the Company terminated its use of certain facilities owned by a related party and paid $358,000 associated with this property that are included as selling and administrative expenses in the accompanying statement of operations. In the fourth quarter of 2003, the Company began capitalizing wire display racks placed into service, which decreased the net loss in fiscal 2003 by approximately $80,000. (See Note 11)

     Amortization of Goodwill and Intangible Assets

     Goodwill and intangible assets arose during the acquisition of the Company in May 1993. The provisions of SFAS No. 142 were adopted by the Company for its fiscal year beginning on December 30, 2001. The adoption of these accounting standards resulted in certain of the intangibles being subsumed into goodwill as well as the discontinuation of amortization of these assets of goodwill. 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. There was no impairment charge recorded for fiscal 2003. The remaining intangible assets are attributable to its distribution system with a carrying value of $20.5 million. These items are being amortized using the straight-line method over their estimated useful life. The amortization expense for fiscal years 2003 and 2002 was $0.7 million.

     EBITDA

     EBITDA for fiscal 2003 was $12.4 million a decrease of $6.6 million, over the EBITDA of $19.0 million for fiscal 2002. The decline in EBITDA was, in large part, a direct result of co-pack customer product line eliminations and their weaker than anticipated overall sales offset in part by further increases in Tom’s DSD/Vend volume. The reduced co-pack volume had an approximate $6.4 million negative EBITDA impact versus prior year. EBITDA was also negatively impacted by further expanding and investing into the Company DSD route initiative.

     Interest Expense

     Interest expense, net of interest income, decreased to $7.1 million for fiscal 2003 from $7.2 million for fiscal 2002. Average outstanding revolving debt obligations for fiscal 2003 were higher than 2002’s average revolving debt borrowings, while the average effective interest rate on the Company’s line of credit of 4.1% for fiscal 2003 decreased 0.6 percentage points from 2002’s average effective interest rate of 4.7%. In connection with the October 1997 debt refinancing, the Company incurred $3.5 million in transaction costs, which were capitalized and are being amortized over the seven year term of the new Senior Notes. Additionally, $102,000 in transaction costs incurred in connection with the Company’s renewal of its revolving line of credit was capitalized in 2000 and are being amortized over four years. The amortization of these costs, recorded as interest expense, was $526,000 for each of the years ended January 3, 2004 and December 28, 2002.

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     Provision for Federal and State Income Taxes

     For fiscal 2003 and 2002, 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 tax obligations in both years. At the end of fiscal 2003, the Company had a net operating loss carryforward of approximately $54.6 million, which begins to expire in fiscal 2008.

     Net Loss after the Cumulative Effect of Accounting Change

     As a result of the above, the Company recorded a fiscal 2003 net loss of $3.3 million, compared to a net loss of $20.9 million for the comparable period in 2002.

     Fiscal Year Ended December 28, 2002 Compared to Fiscal Year Ended December 29, 2001

TOM’S FOODS INC.
FISCAL YEAR ENDED DECEMBER 28, 2002 COMPARED
TO FISCAL YEAR ENDED DECEMBER 29, 2001
(in thousands)

12

     Net Sales

     Net sales for fiscal 2002 were $209.2 million, an increase of $7.4 million, or 3.7%, compared to $201.8 million reported for the fiscal 2001 comparable year due to improved branded sales through Company-owned routes and an increase in co-pack manufactured sales. The sales figures for each year have been reduced as a result of a reclassification of certain promotional expenses from selling and administrative expenses in accordance with the FASB EITF consensus Issue 00-14 which the Company adopted during the first quarter of 2002. The reclassified amounts for the fiscal years 2002 and 2001 were $8.5 million and $8.7 million, respectively.

     Gross Profit

     Gross Profit for fiscal 2003 increased $2.2 million, or 3.1% compared to fiscal 2001 due to the increase in sales, favorable raw material costs, and continued efficiency improvements resulting from equipment upgrades. The Company also negotiated a favorably priced multi year contract with its flexible packaging supplier.

     Selling and Administrative Expenses

     Selling and administrative expenses increased $1.5 million, or 2.3%, compared to fiscal 2001 due to an increase in the number of Company-owned and operated routes. These costs include the necessary overhead, such as warehouses, vehicles and other related costs, required to increase the distribution in the Company-owned routes.

     Amortization of Goodwill and Intangible Assets

     Goodwill and intangible assets arose during the acquisition of the Company in May 1993. The provisions of SFAS No. 142 were adopted by the Company for its fiscal year beginning on December 30, 2001. The adoption of these accounting standards resulted in certain of the intangibles being subsumed into goodwill as well as the discontinuation of amortization of these assets of goodwill. 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. The remaining intangible assets are attributable to its distribution system with a carrying value of $20.5 million. These items are being amortized using the straight-line method over their estimated useful life. The amortization expense for fiscal 2002 was $0.7 million and fiscal 2001 was $1.7 million.

     Other Income (Expense)

     Other income increased $169,000 from the comparable 2001 year to $895,000, primarily due to an increase in affiliated supplier income.

     Restructuring and Other Charges

     In fiscal 2001, the Company recorded and paid $864,000 in other charges for expenses related to severance and reorganization costs as well as expenses associated with the Preferred A debt conversion study. There were no such charges in fiscal 2002.

     EBITDA

     Reported EBITDA for fiscal 2002 was $19.0 million an increase of $2.4 million, or 14.4%, over the EBITDA of $16.6 million for fiscal 2001.

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     Interest Expense

     Interest expense, net of interest income, decreased to $7.2 million for fiscal 2002 from $7.6 million for fiscal 2001. Average outstanding revolving debt obligations for fiscal 2002 were higher than 2001’s average revolving debt borrowings, while the average effective interest rate on the Company’s line of credit of 4.7% for fiscal 2002 decreased 2.6 percentage points from 2001’s average effective interest rate of 7.3%. In connection with the October 1997 debt refinancing, the Company incurred $3.5 million in transaction costs, which were capitalized and are being amortized over the seven year term of the new Senior Notes. Additionally, $102,000 in transaction costs incurred in connection with the Company’s renewal of its revolving line of credit was capitalized in 2000 and are being amortized over four years. The amortization of these costs, recorded as interest expense, was $526,000 for each of the years ended December 28, 2002 and December 29, 2001.

     Provision for Federal and State Income Taxes

     For fiscal 2002 and 2001, 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. At the end of fiscal 2002, the Company had a net operating loss carryforward of approximately $50.7 million, which begins to expire in fiscal 2008.

     Net Loss after the Cumulative Effect of Accounting Change

     As a result of the above, the Company recorded a fiscal 2002 net loss of $20.9 million, compared to a net loss of $1.3 million for the comparable period in 2001.

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 at 100%, 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 January 3, 2004 the accumulated amortization of these costs equaled approximately $3.2 million. The Company currently has a $17 million revolving credit facility due in August of 2004. As of January 3, 2004, there is $96,000 borrowed and $2,839,000 letters of credit issued under this facility (See Note 5). The Company also has $60,000,000 of 10.5% Senior Secured Notes (the “Notes”). These Notes are due in November of 2004 and therefore, are classified as current liabilities on the January 3, 2004 balance sheet. The Notes became callable on November 1, 2003 and the Company is currently in the process of refinancing the Notes. Although there can be no assurance this debt will be refinanced, management believes that the Company will be successful in obtaining refinancing. If the refinancing is not completed, it may indicate that the Company will be unable to continue as a going concern and therefore may not be able to realize its assets and settles its liabilities in the normal course of business. Our auditors have included in their report for fiscal 2003 an explanatory paragraph expressing concern about our ability to continue as a going concern due to our Notes being classified as a current liability, if refinancing is not obtained. The Company is subject to various risks in connection with the operation of their businesses including among other things (i)

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changes in market and (i.i.) various competitive factors. The accompanying financial statements have been prepared assuming the Company will be able to continue as a going concern.

     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 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.

     As of January 3, 2004, the Company also had $539,000 outstanding under several long term notes due to former independent resellers who sold their businesses to the Company. These notes are due in various amounts, typically paid monthly, with $268,000 due in fiscal 2004.

     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 its revolving line of credit. As of January 3, 2004, the Company had $96,000 in outstanding borrowings and $2.8 million outstanding in letters of credit under the revolving line and had $5.6 million in borrowing availability thereunder.

     Capital expenditures were $4.2 million, $10.3 million, and $8.3 million in fiscal 2003, 2002, and 2001, respectively. For fiscal 2003, 2002, and 2001, respectively, the Company spent $2.0 million, $3.4 million, and $3.0 million, on its manufacturing facilities, and $2.2 million, $6.9 million, and $5.3 million on independent reseller acquisitions, distribution equipment, information technology and other investments. 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 the related cash flow impact is reflected in cash flows from operating activities.

     Net cash used in financing activities was $1.7 million, $2.7 million and $4.8 million for fiscal 2003, 2002, and 2001, respectively. These amounts were directly related to debt service obligations under the industrial revenue bond agreements, independent reseller notes and the litigation escrow deposit.

     As of January 3, 2004, the Company was in compliance with all of its debt covenants. The Company believes that internally generated funds and amounts which will be available to it under the revolving line of credit have been, are and will continue to be sufficient to satisfy its operating cash requirements, pension plan funding requirements and planned capital expenditures, for the next 12 months. The Company must enter into new financing arrangements prior to August to satisfy its debt obligations. As noted above, the Company is in the process of evaluating various alternatives to refinance the Notes that mature in 2004.

New Accounting Pronouncements

     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

15

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 Company adopted the provisions of SFAS No. 146 for exit or disposal activities that are initiated after December 28, 2002. The adoption of SFAS No. 146 did not have a significant impact on the Company’s financial position or results of operations.

     On January 1, 2003, the Company adopted Financial Accounting Standards Board (FASB) Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantors, Including Indirect Guarantees of Indebtedness of Others, which requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation that it assumes under the guarantee. Guarantors are also required to meet expanded disclosure obligations. The adoption of Interpretation No. 45 did not have a material impact on the Company’s financial position or results of operations.

     In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities. Interpretation No. 46 addresses consolidation by business enterprises of variable interest entities, which are entities that either (a) do not have equity investors with vesting rights or (b) have equity investors that do not provide sufficient financial resources for the entity to support its activities. The interpretation is effective immediately for variable interest entities created after January 31, 2003. In December 2003, the FASB published a revision to Interpretation No. 46 to defer the effective date of implementation for certain entities that existed prior to January 31, 2003. The revised interpretation is effective for the first interim or annual reporting period ending after March 15, 2004, with the exception of structures that are commonly referred to as special-purpose entities, for which the statement is effective for periods ending after December 15, 2003. The adoption of Interpretation No. 46 did not and is not expected to have a material impact on the Company’s results of operations or financial position.

     In April 2003, the FASB issued SFAS No. 149, Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities. This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133. SFAS No. 149 requires that contracts with comparable characteristics be accounted for similarly. The statement is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The provisions of SFAS No. 149 generally are to be applied prospectively only. The adoption of SFAS No. 149 did not have a material impact on the Company’s results of operations or financial position.

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     In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 establishes standards for classification and measurement by an issuer of certain financial instruments with characteristics of both liabilities and equity. The statement requires that an issuer classify a financial instrument that is within its scope as a liability (or asset in some circumstances). This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except as it relates to consolidated limited-life subsidiaries. The FASB indefinitely deferred the effective dates as a result of the provisions of FASB Staff Position 150-3, Effective Date, Disclosures, and Transition for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests Under FASB Statement No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” The Company believes that it has properly classified and measured in its balance sheet and disclosed in its financial statements all financial instruments with characteristics of both liabilities and equity.

     In December 2003, the FASB issued SFAS No. 132 (revised 2003), Employers’ Disclosures about Pensions and Other Postretirement Benefits. This statement revises employers’ disclosures about pension plans and other postretirement benefit plans; however it does not change the measurement or recognition of those plans required by SFAS No. 87, Employers’ Accounting for Pensions, SFAS No. 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, and SFAS No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions. The revised statement retains the disclosure requirements contained in the original SFAS No. 132 and requires additional disclosures to those in the original statement about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. The revised statement is effective for fiscal years ending after December 15, 2003.

     Reclassifications-Effective January 1, 2003, the Company adopted FASB Statement No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections (“SFAS 145”). SFAS 145 rescinds Statement No. 4, which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect, and requires the criteria in Accounting Principles Board Opinion No. 30 to be used to classify gains and losses. Accordingly, the Company has reclassified the extraordinary losses incurred in 2001 to early extinguishment of debt. These debt extinguishments totaled $117,000 of pre-tax expense in 2001.

Contractual Obligations and Contingent Liabilities

     Leases — The Company leases vehicles and warehouse space under certain noncancelable operating leases. The rental expense for all operating leases for the years ended January 3, 2004, December 28, 2002, and December 29, 2001 was approximately $5,455,000, $5,001,000, and $4,495,000, respectively.

     Letters of Credit — The Company has outstanding standby letters of credit (see Note 5).

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     Our contractual obligations and commercial commitments principally include obligations associated with our outstanding indebtedness and future minimum operating lease obligations, as set forth in the table below:

     * The Company’s Notes are classified as a current liability. (See Note 5) Because of the uncertainty as to the timing of such payments, the Company has excluded cash payments related to interest on its revolving loan facility.

     Litigation — The Company is the defendant in a lawsuit filed in the Circuit Court in Alabama. The lawsuit alleged that the Company had interfered with the plaintiff’s purchase of vending machines from a former independent reseller of the Company and with plaintiff’s relations with its customers. On October 24, 2002, a jury returned a verdict in favor of the plaintiff, which, following post-trial motions, was reduced to $1,250,000 in total damages. 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. The Company believes the verdict is without factual basis and is contrary to the applicable law and plans to appeal the verdict to the Alabama Supreme Court. The Company is a party to a number of other 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.

     Employment Agreements — The Company has entered into employment agreements with certain executive officers, which guarantee certain severance benefits.

     Independent Reseller Purchase Requirement — Subject to certain conditions, the Company has the right of first refusal to purchase, for either cash or a note at the Company’s option, the independent resellers business or assets from certain independent resellers at a multiple of the amount of the average annual net cash flow, as adjusted, of the independent resellers business, measured over the preceding three years. This exit strategy will only be available to successful independent resellers 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 independent resellers and the distribution network as a whole. Because the Company does not know which independent resellers will avail themselves of this provision and when they

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might do so after becoming eligible, the Company believes that it is not possible to determine any future contingency requirement. Any potential purchase obligation is, however, based on a multiple of net cash flow. Any purchase is, therefore, funded primarily through the stream of future cash flows from the purchased independent reseller, which is enhanced by the capture of integrated distribution margins.

     Purchase Commitment — The United States Congress, with the 2002 Farm Bill, changed dramatically the Peanut Program to reflect the handling of other basic commodity programs (Corn, Wheat, Cotton) administered by United States Department of Agriculture (USDA).

     For the Company, this required moving from a supply contract, previously used by Tom’s Foods Inc. to purchasing peanuts directly from the grower, as well as providing the grower with public warehousing for his peanuts placed under a Commodity Credit Corporation (USDA-CCC) Loan. The grower stores peanuts in the Company’s silos, holds title to those peanuts and may borrow money from the government, based on the value of those peanuts. The grower ultimately sells most peanuts placed in the Company’s silos to the Company at a later date. The Company has licensed the silos at Columbus, Georgia with the USDA as a public warehouse. The Company must provide warehouse services for the grower of peanuts other than those ultimately sold to the Company. If the grower does not redeem the peanuts, after nine (9) months, they become the property of USDA-CCC and the Company then provides storage services for USDA-CCC until the peanuts are disposed of by USDA-CCC. All cost of storage is the responsibility of the grower or USDA-CCC unless the Company waives these cost for peanuts ultimately redeemed by the Company for use in its manufacturing facility. Waived costs become part of the cost for peanuts used in Company’s manufacturing facility, as with peanuts purchased at the time of delivery.

     The Company signs contracts with growers to purchase some portion of the peanuts at the time of delivery and some portion at a later date, as specified by the Company. The grower, often, (but is not required to) uses the warehouse receipt, provided by the Company, as collateral with USDA to obtain a loan on the peanuts that will be sold to the Company at a later date. As of January 3, 2004, Tom’s Foods Inc. is committed to purchasing 2,700 tons of peanuts at the market price on the date of their purchase. Therefore, Tom’s has not recorded a liability for this commitment, as the price is dependent on the date of purchase. Additionally, the Company believes all of these peanuts will be consumed in operations.

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 that may adversely impact results of operations and financial position. 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

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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 January 3, 2004, the Company had no open futures contracts in wheat, soybean oil, corn, diesel, or natural gas.

     Most of the Company’s long-term debt obligations incur interest at a set rate, however the Company’s revolving facility incurs interest at floating rates, based on changes in the U.S. prime rate or LIBOR rate of interest. The Company has not entered into any interest rate swap agreements to hedge the variable interest rate on its revolving loan facility.

     The Company is exposed to certain credit risks related to its accounts receivables. The Company performs ongoing credit evaluations of its customers to minimize the potential exposure. As of January 3, 2004, the Company had an allowance for doubtful accounts of $1.1 million.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The financial statements as of January 3, 2004 and December 28, 2002 together with the auditor’s report are in Exhibit 15(a) and are incorporated herein by reference.

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

     Not applicable.

Item 9A. CONTROLS AND PROCEDURES.

     The Company’s Chief Executive Officer and Acting Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by 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 over financial reporting during the fourth quarter of fiscal 2003 that have materially affected, or are reasonably likely to materially affect, the registrant’s internal control over financial reporting.

PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The directors and executive officers of the Company are as follows:

     (a) Member of the Compensation Committee.

     (b) Member of the Audit Committee

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     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 Environdyne Industries, Inc., which is a publicly-held company. 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 received a bachelor of science degree from the University of Illinois in 1966 and a law degree from the University of Chicago in 1970.

     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.

     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 Computervision Corporation, which is a publicly-held company.

     Timothy J. Healy. Mr. Healy has been a Director of the Company since April 1998. He is currently Chairman of Healy & Company that was formed January 2003. Prior to this, he was Managing Director with J.W. Childs and Associates from 1998 to 2002. 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. Mr. Healy resigned as a director in May of 2004.

     Gerald R. Barker. Mr. Barker has been the Senior Vice President — Sales and 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 master’s degree in business administration from Arizona State University in 1974.

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     Wyatt F. Hearp. Mr. Hearp has been Senior Vice President — Manufacturing, Distribution and Risk Management 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.

     Sharon M. Sanders. Mrs. Sanders has been with the Company for over 20 years. Mrs. Sanders has held progressively more responsible positions in the organization. In 1995, she was promoted to Marketing Financial Manager. In 1997, she was promoted to Financial Controller and in 1999 she assumed the role of Corporate Controller. Most recently, she has assumed the role of acting CFO while Tom’s recruits a new CFO. Mrs. Sanders has a bachelor’s of accounting from Troy State University.

     The Company does not have an audit committee financial expert on its audit committee.

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.

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 2003 by the Company’s chief executive officer and the Company’s next four most highly compensated executive officers (each, a “Named Officer”):

Summary Compensation Table

*

No bonuses were earned or paid for the 2003 Management Incentive Compensation Plan.

Director Compensation

     All directors may be reimbursed for certain expenses in connection with attendance at Board and committee meetings. Mr. Sage and Mr. Healy received $20,000 and $8,333, annually, respectively, as compensation for their services as Directors. Other than with respect to the

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reimbursement of expenses and the fees noted above for Messrs. Sage and Healy, directors do not receive additional compensation for service as a director.

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. As of December 30, 2002, the Company has merged the two plans. The Company also has a 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 to a participant retiring at 65 in 2002 at the following compensation and year-of-service classifications:

Tom’s Foods Inc. Pension Plan for Salaried Employees
Annual Pension Payable at Age 65

(a)

Compensation is assumed to be constant. Table is based on covered compensation of $43,968 for a participant turning 65 in 2003. The IRC Section 401(a)(17) limit on compensation is assumed constant at the 2003 level of $200,000.

     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 2003 for each of the Named Officers are 10.0 years for Mr. Divin, 9.5 years for Mr. Barker, 30.6 years for Mr. Hearp, 2.2 years for Mr. Vogler and 15.7 years for Mr. Killough.

     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, none of them participates in the SERP.

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Employment Agreements

     The Company has entered into employment agreement with Mr. Divin, the Company’s President and Chief Executive Officer. 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. Mr. Divin’s employment agreement contains a covenant not to compete with the Company within certain geographic areas for up to one year following his resignation or termination.

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 profit and sales performance objectives. Each of the Named Officers, as well as other key employees, participated in the Management Incentive Plan in fiscal 2003 but no payments were made.

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 Tom’s Foods Capital Corporation (“TFCC”). 80% of the outstanding shares of Preferred Stock are held by TFH. Messrs. Rolland G. Divin, S. Albert Gaston, and Gerald R. Barker own 12.0%, 4.0% and 4.0%, respectively, of the Preferred Stock which was acquired from TFH during 2001.

     Under the terms of a Stockholders’ Agreement among all of the common 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., 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.

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     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 matters upon which such holders are entitled to vote. TFCC Class B Preferred Stock and TFCC Class D Preferred Stock are generally non-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. 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.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The Company has entered into a consulting arrangement with Michael E. Heisley, Sr., a director of the Company, for the provision of consulting services to the Company. In respect of such consulting services, aggregate payments of $200,000 were made during 2003. The Company also uses the services of a law firm in which Stanley H. Meadows, a director of the Company, is a partner.

     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.

     In December 1999, the stockholders of TFH renewed their letters of credit posted in the aggregate face amount of $10.0 million in support of the Company’s outstanding Industrial Development Revenue Bonds. The letters of credit replaced previous letters of credit that expired at the end of 1999. The full amount of these letters of credit was released with the retirement of all of the Company’s outstanding Industrial Development Revenue Bonds during 2001. Also during 2001, the stockholders of TFH provided letters of credit in support of the Company’s revolving credit facility. These letters of credit terminated in 2002.

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Item 14. Principal Accounting Fees and Services

Fees paid to Deloitte & Touche LLP — Audit and non-audit fees

     The following table presents fees for professional audit services rendered by Deloitte & Touche LLP for the audit of the Company’s annual financial statements for the years ended January 3, 2004 and December 28, 2002 and fees billed for other services rendered by Deloitte & Touche LLP during those periods.

	(1)		Audit related fees consist of the assurance and related services that are reasonably related to the performance of the audit or review of the Company’s financial statements. This category includes fees related to the performance of audits of the Company’s benefits plans, compliance letter required as part of the Company’s Credit Agreement and accounting consultations regarding the application of GAAP to proposed transactions.
	(2)		Tax fees consist of the aggregate fees billed for professional services rendered by Deloitte & Touche LLP for tax compliance, tax advice and tax planning.

PART IV

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

15 (a) Document List

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     All other schedules are omitted because they are not required, are inapplicable or the information is otherwise shown in the financial statements or notes thereto.

3.

Exhibits Required by Item 601 of Regulation S-K

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(b) Reports on Form 8-K

     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.

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SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	TOM’S FOODS INC.
	By:	/s/ Rolland G. Divin
		Rolland G. Divin
		President, Chief Executive Officer and Director
Dated: April 12, 2004

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities indicated on April 6, 2004.

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INDEPENDENT AUDITORS’ REPORT

To the Board of Directors and Shareholders of

Tom’s Foods Inc.

We have audited the accompanying balance sheets of Tom’s Foods Inc. (the “Company”) as of January 3, 2004 and December 28, 2002, and the related statements of operations, changes in shareholders’ deficit, and cash flows for the two years then in the period ended January 3, 2004. 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. The financial statements of Tom’s Foods Inc. as of and for the year ended December 29, 2001 before revisions discussed in Notes 1 and 4 to the financial statements, were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements in their report dated February 7, 2002.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits 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 2003 and 2002 financial statements referred to above present fairly, in all material respects, the financial position of the Company at January 3, 2004 and December 28, 2002, and the results of its operations and its cash flows for the two years in the period ended January 3, 2004 in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the Financial Statements, the Company, as of January 3, 2004, has classified its $60,000,000 in Senior Secured Notes (the “Notes”) due November 2004 as a current liability. Since the Company has not yet completed the refinancing of the Notes, this matter raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans concerning these matters are also described in Note 1. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

As discussed in Note 11 to the financial statements, in the fourth quarter of 2003, the Company recorded a change in estimate effected by a change in accounting method for wire rack displays.

As discussed in Note 4 to the financial statements, effective December 30, 2001, the Company changed its method of accounting for goodwill and other intangible assets to conform to Statement of Financial Accounting Standards (“SFAS”) No. 142.

As discussed above, the financial statements of Tom’s Foods Inc. as of and for the year ended December 29, 2001, were audited by other auditors who have ceased operations. The financial statements have been revised as follows:

•

As described in Note 1, the Company adopted the provisions of Emerging Issues Task Force 00-14, Accounting for Certain Sales Incentives (“EITF 00-14”) and therefore reclassified certain revenue and expenses to conform to the presentation requirements of EITF 00-14. We audited the reclassifications described in Note 1 that were applied to conform the 2001

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financial statements to the comparative presentation required by EITF 00-14. Our audit procedures with respect to the 2001 disclosures in Note 1 included (1) comparing the amounts shown as net sales and selling and administrative expenses in the Company’s statements of operations to the Company’s underlying accounting analysis obtained from management, and (2) on a test basis, comparing the amounts comprising the sales incentive expenses obtained from management to independent supporting documentation, and (3) testing the mathematical accuracy of the underlying analysis.

	•		As described in Note 5, the Company adopted the provisions of SFAS No. 142 as of December 30, 2001. These financial statements have been revised to include the transitional disclosures required by SFAS No. 142. Our audit procedures with respect to the transitional disclosures in Note 5 with respect to 2001 included (1) comparing the previously reported net loss to the previously issued financial statements and the adjustments to report net loss representing amortization expense (including any related tax effects) recognized in those periods related to goodwill and intangible assets that are no longer being amortized as a result of initially applying SFAS No. 142 (including any related tax effects) to the Company’s underlying analysis obtained from management and (2) testing the mathematical accuracy of the reconciliation of adjusted net loss to reported net loss.
	•		In Note 1, the Company has disclosed the amounts of shipping and handling costs recorded to expense. These financial statements have been revised to include such disclosure for 2001. Our audit procedures with respect to the 2001 disclosure in Note 1 included (1) comparing the shipping and handling expenses to the Company’s underlying analysis obtained from management, (2) on a test basis, comparing the amounts comprising the shipping and handling expenses obtained from management to independent supporting documentation, and (3) testing the mathematical accuracy of the underlying analysis.
	•		As described in Note 1, the Company adopted the provisions of Statement of Financial Accounting Standards No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Correcting” effective January 1, 2003. We audited the reclassifications described in Note 1 that were applied to conform the 2001 financial statements to the comparative presentation required by FASB No. 145. Our audit procedures with respect to the 2001 disclosures in Note 1 included (1) comparing the amounts shown as extraordinary loss from the early extinguishment of debt in the Company’s statements of operations to the Company’s underlying accounting analysis obtained from management, and (2) on a test basis, comparing the amounts comprising the extraordinary loss from the early extinguishment of debt obtained from management to independent supporting documentation, and (3) testing the mathematical accuracy of the underlying analysis.

In our opinion, such reclassifications, adjustments and disclosures are appropriate and have been properly applied. However, we were not engaged to audit, review, or apply any procedures to the 2001 financial statements of the Company other than with respect to such adjustments and disclosures and, accordingly, we do not express an opinion or any other form of assurance on the 2001 financial statements taken as a whole.

Atlanta, Georgia
April 6, 2004

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The following report of Arthur Andersen LLP (“Andersen”) is a copy of the report
previously issued by Andersen on March 26, 2002. The report of Andersen is
included in this annual report on Form 10-K pursuant to Rule 2-02(e) of
regulation S-X. The Company has not been able to obtain a reissued report from
Andersen. Andersen has not consented to the inclusion of its report in this
Form 10-K. Because Andersen has not consented to the inclusion
of its report in this annual report, it may be difficult to seek remedies against
Andersen, and the ability to seek relief against Andersen may be impaired.

To Tom’s Foods, Inc.:

We have audited the accompanying balance sheets of Tom’s Foods, Inc. (a Delaware Corporation) as of December 29, 2001 and December 30, 2000 and the related statements of operations, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 29, 2001. 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 auditing standards generally accepted in the United States. 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 December 29, 2001 and December 30, 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 29, 2001 in conformity with accounting principles generally accepted in the United States.

Atlanta, Georgia
February 7, 2002

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TOM’S FOODS INC.

BALANCE SHEETS
JANUARY 3, 2004 AND DECEMBER 28, 2002
(In thousands, except share data)

33

TOM’S FOODS INC.

BALANCE SHEETS
JANUARY 3, 2004 AND DECEMBER 28, 2002
(In thousands, except share data)

34

TOM’S FOODS INC.

STATEMENTS OF OPERATIONS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JANUARY 3, 2004
(In thousands)

35

TOM’S FOODS INC.

STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JANUARY 3, 2004
(In thousands)

See notes to financial statements.

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TOM’S FOODS INC.

STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JANUARY 3, 2004
(In thousands, except share data)

37

TOM’S FOODS INC.

NOTES TO FINANCIAL STATEMENTS AS OF JANUARY 3, 2004 AND
DECEMBER 28, 2002 AND FOR EACH OF THE THREE YEARS IN THE
PERIOD ENDED JANUARY 3, 2004.

1. ORGANIZATION AND 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.

Organization-TFH Corporation (“TFH”) was formed on August 30, 1996, as the parent of Tom’s Foods Inc. TFH was capitalized by various parties having common control of Tom’s Foods Capital Corporation, the prior parent.

Going Concern-The Company currently has a $17 million revolving credit facility due in August of 2004. As of January 3, 2004, there is $96,000 borrowed and $2,839,000 letters of credit issued under this facility (See Note 5). The Company also has $60,000,000 of 10.5% Senior Secured Notes (the “Notes”). These Notes are due in November of 2004 and therefore, are classified as current liabilities on the January 3, 2004 balance sheet. The Notes became callable on November 1, 2003 and the Company is currently in the process of refinancing the Notes. Although there can be no assurance this debt will be refinanced, management believes that the Company will be able to obtain refinancing, in a timely manner. If the refinancing is not completed, it may indicate that the Company will be unable to continue as a going concern and therefore may not be able to realize its assets and settle its liabilities in the normal course of business.

Fiscal Year-The Company’s fiscal year is the 52- or 53-week period ending the Saturday nearest to December 31. The year ended January 3, 2004 contained 53 weeks and the years ended December 28, 2002, and December 29, 2001, contained 52 weeks.

Revenue Recognition-Revenues for independent reseller sales are recognized when the goods are received by the independent reseller. Revenues for product sold through the Company’s internal distribution 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. In May 2000, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue 00-14, Accounting for Certain Sales Incentives. Issue 00-14 addresses the recognition and income statement classification of various sales incentives. Among its requirements, the consensus requires costs related to customer price reductions at the point of sale and other product promotions currently classified as marketing costs to be classified as a reduction of revenue. The Company adopted this standard during 2002. The impact of adopting this consensus for the years ended January 3, 2004, December 28, 2002, and December 29, 2001 resulted in the reduction of selling and administrative expenses and net sales by approximately $9,824,000, $8,512,000, and $8,748,000, respectively. As a result, the Company revised its statements of operations for the year ended December 29, 2001 to reflect the new classification.

Cash and Cash Equivalents-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.

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Property, Plant, and Equipment-Property, plant, and equipment are recorded at cost less accumulated depreciation. Depreciation is provided on a straight-line basis over the estimated useful lives of 20 years for leasehold improvements, 32 years for buildings, 3 to 12 years for machinery, equipment, and vehicles, 5 to 10 years for vending and other distribution equipment, and 3 to 10 years for furniture and fixtures. Expenditures for maintenance and repairs are charged to expense as incurred. Construction in progress represent costs incurred related to manufacturing and information systems upgrades. Also included in construction in progress is capitalized interest of $310,000 and $241,000 for 2003 and 2002, respectively. Depreciation expense for the years ended January 3, 2004, December 28, 2002, and December 29, 2001 was $7,789,000, $8,993,000, and $8,375,000 respectively.

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.

Income Taxes-The Company accounts for income taxes using the asset and liability method for recognition of deferred tax consequences of temporary differences, net operating losses, and tax credits by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities.

In the event the future tax consequences of differences between the financial reporting bases and the tax bases of our assets and liabilities results in deferred tax assets, an evaluation of the probability of the Company’s ability to realize the future benefits indicated by such an asset is required. A valuation allowance is provided for a portion of the deferred tax asset when it is more likely than not that some portion or all of the deferred tax asset will not be realized. In assessing the realizability of the deferred tax assets, management considers the scheduled reversals of deferred tax liabilities, projected future taxable income, and tax-planning strategies.

Goodwill and Intangible Assets-Goodwill and intangible assets primarily arose during the acquisition of the Company on May 13, 1993. On December 30, 2001, the Company adopted the provisions of SFAS No. 142 and completed the transitional provisions whereby the Company ceased amortizing goodwill as a result of SFAS No. 142 and also determined that the Company’s trademark has an indefinite life. The intangible assets are being amortized using the straight-line method over their estimated useful lives as follows:

Goodwill Impairment- The Company assesses goodwill for impairment annually unless events occur that require more frequent reviews. The Company assesses the fair value of goodwill by using discounted estimated future cash flows.

Valuation of Long-Lived Assets-In fiscal 2002, the Company adopted Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses financial accounting and reporting for the impairment and disposition of long-lived assets. The Company evaluates the recoverability of long-lived assets, other than indefinite lived intangible assets, for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which the asset is used, or a significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable. For long-lived assets to be held and used, the Company recognizes an impairment loss only if its carrying amount is not recoverable through its undiscounted cash flows and measures the impairment loss based on the difference between the carrying amount and fair value.

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Accrued Liabilities-Accrued liabilities at January 3, 2004 and December 28, 2002 consist of the following (in thousands):