##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 FORM 10-Q (Mark One)x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.For the quarter (twelve-weeks) ended June 19, 2004o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.For the transition period from           
          to
 Commission File Number Toms Foods Inc.
(Exact name of registrant as specified in its charter) Delaware
(State or other jurisdiction of incorporation or organization) 58-1516963
(I.R.S. Employer Identification No.) 900 8th Street
Columbus, GA 31902
(Address of principal executive offices, including zip code) (706) 323-2721
(Registrants telephone number, including area code) Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes x No o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). o Yes x No




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TOMS FOODS INC. QUARTERLY REPORT ON FORM 10-Q
FOR THE TWELVE-WEEKS
ENDED JUNE 19, 2004 TABLE OF CONTENTS PagePART I. FINANCIAL INFORMATIONItem 1. Financial Statements:Condensed Balance Sheets as of June 19, 2004 (unaudited)
and January 3, 2004
    
    
    3Condensed Statements of Operations for the twelve weeks
and twenty-four weeks ended June 19, 2004 and June 14,
2003 (unaudited)
    
    
    4Condensed Statements of Cash Flows for the twenty-four
weeks ended June 19, 2004 and June 14, 2003 (unaudited)
    
    
    5Notes to Condensed Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    10Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    13Item 4. Controls and Procedures
    
    
    13PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    13Item 6. Exhibits and Reports on Form 8-K
    
    
    14EX-31.1 SECTION 302 CERTIFICATION OF CEOEX-31.2 SECTION 302 CERTIFICATION OF CFOEX-32.1 SECTION 906 CERTIFICATION OF CEOEX-32.2 SECTION 906 CERTIFICATION OF CFO
  2




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##### Table of Contents



TOMS FOODS INC.
CONDENSED BALANCE SHEETS
JUNE 19, 2004 AND JANUARY 3, 2004
(in thousands except share data) June 19, 2004
    
    January 3, 2004(unaudited)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    1,453
    
    
    $
    1,444Accounts and notes receivable, net of allowance
for uncollectible of $1,187 and $1,119 at
June 19, 2004 and January 3, 2004, respectively
    
    
    11,976
    
    
    
    10,120Inventories:Raw materials
    
    
    3,064
    
    
    
    2,484Packaging materials
    
    
    2,297
    
    
    
    1,518Finished goods and work in progress
    
    
    5,501
    
    
    
    4,133Other current assets
    
    
    3,626
    
    
    
    3,504Total current assets
    
    
    27,917
    
    
    
    23,203Property, plant, and equipment:Land and land improvements
    
    
    5,702
    
    
    
    5,702Buildings
    
    
    18,536
    
    
    
    18,515Machinery, equipment and vehicles
    
    
    61,968
    
    
    
    61,670Vending and other distribution equipment
    
    
    12,697
    
    
    
    12,888Furniture and fixtures
    
    
    24,407
    
    
    
    17,399Construction in progress
    
    
    2,249
    
    
    
    8,075Total property, plant, and equipment
    
    
    125,559
    
    
    
    124,249Accumulated depreciation
    
    
    (79,283
    )
    
    
    (76,386
    )Net property, plant, and equipment
    
    
    46,276
    
    
    
    47,863Noncurrent accounts and notes receivable, net
    
    
    211
    
    
    
    312Litigation escrow deposit
    
    
    1,563
    
    
    
    1,563Deferred financing costs, net
    
    
    237
    
    
    
    477Intangible assets, net
    
    
    18,991
    
    
    
    19,312Goodwill
    
    
    801
    
    
    
    790Total assets
    
    $
    95,996
    
    
    $
    93,520LIABILITIES AND SHAREHOLDERS DEFICITCurrent liabilities:Revolving debt
    
    $
    6,583
    
    
    $
    96Accounts payable
    
    
    10,072
    
    
    
    9,700Accrued liabilities
    
    
    5,865
    
    
    
    8,131Current portion of other debt obligations
    
    
    60,240
    
    
    
    60,268Total current liabilities
    
    
    82,760
    
    
    
    78,195Long term debt obligations
    
    
    162
    
    
    
    271Other long term obligations
    
    
    37
    
    
    
    37Accrued pension cost
    
    
    15,258
    
    
    
    15,242Total liabilities
    
    
    98,217
    
    
    
    93,745Exchangeable portion of Preferred Stock, $.01 par value,
Class A, 7,000 shares authorized, 7,000 shares issued
and outstanding at June 19, 2004 and January 3, 2004
    
    
    10,000
    
    
    
    10,000Shareholders Deficit:Common stock, $0.01 par value; 10,000 shares authorized,
5,000 shares issued and outstanding at June 19, 2004
and January 3, 2004
    
    
    0
    
    
    
    0Nonexchangeable portion of Preferred Stock, $.01 par value, Class A,
7,000 shares authorized, 7,000 shares issued and outstanding at
June 19, 2004 and January 3, 2004
    
    
    3,814
    
    
    
    3,158Preferred Stock, $.01 par value, Class B, 21,737 shares authorized,
21,737 shares issued and outstanding at June 19, 2004
and January 3, 2004
    
    
    40,277
    
    
    
    38,545Additional paid-in capital
    
    
    43,725
    
    
    
    43,725Accumulated other comprehensive loss
    
    
    (7,542
    )
    
    
    (7,542
    )Accumulated deficit
    
    
    (92,495
    )
    
    
    (88,111
    )Total shareholders deficit
    
    
    (12,221
    )
    
    
    (10,225
    )Total liabilities and shareholders deficit
    
    $
    95,996
    
    
    $
    93,520
 See notes to interim condensed financial statements 3




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##### Table of Contents



TOMS FOODS INC.
CONDENSED STATEMENTS OF OPERATIONS
FOR THE TWELVE AND TWENTY-FOUR WEEKS ENDED
JUNE 19, 2004 AND JUNE 14, 2003
(in thousands) Twelve Weeks Ended
    
    Twenty-four Weeks EndedJune 19, 2004
    
    June 14, 2003
    
    June 19, 2004
    
    June 14, 2003(unaudited)
    
    (unaudited)
    
    (unaudited)
    
    (unaudited)Net sales
    
    $
    44,213
    
    
    $
    46,579
    
    
    $
    85,836
    
    
    $
    93,318Cost of goods sold
    
    
    (27,278
    )
    
    
    (28,312
    )
    
    
    (53,224
    )
    
    
    (58,488
    )Gross profit
    
    
    16,935
    
    
    
    18,267
    
    
    
    32,612
    
    
    
    34,830Expenses and other income:Selling and administrative expenses
    
    
    (15,393
    )
    
    
    (16,333
    )
    
    
    (31,294
    )
    
    
    (33,626
    )Amortization of intangible assets
    
    
    (163
    )
    
    
    (163
    )
    
    
    (327
    )
    
    
    (325
    )Other operating income, net
    
    
    121
    
    
    
    163
    
    
    
    300
    
    
    
    345Income from operations
    
    
    1,500
    
    
    
    1,934
    
    
    
    1,291
    
    
    
    1,224Interest expense, net
    
    
    (1,664
    )
    
    
    (1,634
    )
    
    
    (3,235
    )
    
    
    (3,248
    )Income (loss) before income taxes
    
    
    (164
    )
    
    
    300
    
    
    
    (1,944
    )
    
    
    (2,024
    )Provision for income taxes
    
    
    (26
    )
    
    
    (31
    )
    
    
    (52
    )
    
    
    (62
    )Net Income (loss)
    
    $
    (190
    )
    
    $
    269
    
    
    $
    (1,996
    )
    
    $
    (2,086
    )
 See notes to interim condensed financial statements 4




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TOMS FOODS INC.
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE TWENTY-FOUR WEEKS ENDED
JUNE 19, 2004 AND JUNE 14, 2003
(in thousands) Twenty-Four Weeks EndedJune 19, 2004
    
    June 14, 2003(unaudited)
    
    (unaudited)Cash flows from operating activities:Net loss
    
    $
    (1,996
    )
    
    $
    (2,086
    )Adjustments to reconcile net loss to net cash
used in operating activities:Depreciation
    
    
    3,367
    
    
    
    3,946Amortization of intangible assets
    
    
    327
    
    
    
    325Amortization of deferred debt issuance cost
    
    
    238
    
    
    
    242Provision for income taxes
    
    
    52
    
    
    
    62(Gain) loss on disposal of property, plant, and equipment
    
    
    (15
    )
    
    
    4Changes in operating assets and liabilities:Accounts and notes receivable, net
    
    
    (2,002
    )
    
    
    (168
    )Inventories
    
    
    (2,827
    )
    
    
    (994
    )Other assets
    
    
    (20
    )
    
    
    359Accounts payable
    
    
    608
    
    
    
    (2,694
    )Other liabilities
    
    
    (2,319
    )
    
    
    (2,755
    )Accrued pension cost
    
    
    16
    
    
    
    330Total adjustments
    
    
    (2,575
    )
    
    
    (1,343
    )Net cash used in operating activities
    
    
    (4,571
    )
    
    
    (3,429
    )Cash flows from investing activities:Additions to property, plant, and equipment
    
    
    (1,939
    )
    
    
    (1,695
    )Proceeds from disposal of property, plant, and equipment
    
    
    168
    
    
    
    19Net cash used in investing activities
    
    
    (1,771
    )
    
    
    (1,676
    )Cash flows from financing activities:Net borrowing from working capital revolving facility
    
    
    6,487
    
    
    
    6,085Litigation escrow deposit
    
    
    0
    
    
    
    (1,563
    )Payments of other long-term debt
    
    
    (136
    )
    
    
    (6
    )Net cash provided by financing activities
    
    
    6,351
    
    
    
    4,516Increase (decrease) in cash and cash equivalents
    
    
    9
    
    
    
    (589
    )Cash and cash equivalents, beginning of period
    
    
    1,444
    
    
    
    1,856Cash and cash equivalents, end of period
    
    $
    1,453
    
    
    $
    1,267Interest paid during the period
    
    $
    3,558
    
    
    $
    3,577Income taxes paid during the period
    
    $
    52
    
    
    $
    84
 5




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TOMS FOODS INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS 
  Item 1.
    FINANCIAL STATEMENTS The accompanying unaudited financial statements of Toms Foods Inc. have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. It is suggested that
these financial statements be read in conjunction with the financial statements
and the notes thereto included in the annual report on Form 10-K for the fiscal
year ended January 3, 2004. The accompanying unaudited financial statements include, in the opinion of
management, all adjustments, which are of a normal recurring nature, necessary
for a fair presentation for the periods presented. Results for the interim
periods presented are not necessarily indicative of results that may be
expected for a full fiscal year. Fiscal Year The Companys fiscal year is the 52- or 53-week period ending on the Saturday
nearest to December 31. The current year, fiscal 2004, ends January 1, 2005
and contains 52 weeks. The Companys first three quarters contain twelve-weeks
of results while the fourth quarter contains 16 or 17 weeks coinciding with the
Companys fiscal year. Going Concern The Company currently has a $17 million revolving credit facility due in August
of 2004. As of January 3, 2004, there were $96,000 borrowed and $2,839,000
letters of credit issued under this facility. 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. Use of Estimates The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent 6




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assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates. Revenue Recognition Revenues for 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
quarters ended June 19, 2004 and June 14, 2003 resulted in the reduction of
selling and administrative expenses and net sales by approximately $2,422,000
and $2,184,000, 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
process. Finished goods cost is determined using the first-in, first-out
method. Cost elements include the cost of raw materials, direct labor, and
overhead incurred in the manufacturing process. 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, SFAS No. 87. 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. SFAS No. 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.
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 $7,900,000 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. The Company contributed $293,000 to the pension plan in the second
quarter and expects to contribute a remaining $1,200,000 to the Companys
pension plans for the year ended January 1, 2005. 7




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##### Table of Contents



Pension and other benefit costs for the periods ended June 19, 2004 and June
14, 2003 were as follows: Toms Foods Inc. Pension Plan Three Months Ended
    
    Six Months EndedJune 19, 2004
    
    June 14, 2003
    
    June 19, 2004
    
    June 14, 2003Service Cost
    
    $
    330,000
    
    
    $
    289,000
    
    
    $
    660,000
    
    
    $
    578,000Interest Cost
    
    
    925,000
    
    
    
    928,000
    
    
    
    1,850,000
    
    
    
    1,856,000Expected Return on Assets
    
    
    (1,020,000
    )
    
    
    (1,060,000
    )
    
    
    (2,040,000
    )
    
    
    (2,119,000
    )Amortizations- Unrecognized transition obligation
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0- Prior service cost
    
    
    20,000
    
    
    
    17,000
    
    
    
    40,000
    
    
    
    34,000- Actuarial loss
    
    
    10,000
    
    
    
    0
    
    
    
    20,000
    
    
    
    0Net Periodic Pension Cost
    
    $
    265,000
    
    
    $
    174,000
    
    
    $
    530,000
    
    
    $
    349,000
 Toms Foods Inc. SERP Three Months Ended
    
    Six Months EndedJune 19, 2004
    
    June 14, 2003
    
    June 19, 2004
    
    June 14, 2003Service Cost
    
    $
    350
    
    
    $
    323
    
    
    $
    700
    
    
    $
    646Interest Cost
    
    
    22,700
    
    
    
    22,725
    
    
    
    45,400
    
    
    
    45,450Expected Return on Assets
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Amortizations- Unrecognized transition obligation
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0- Prior service cost
    
    
    1,550
    
    
    
    1,550
    
    
    
    3,100
    
    
    
    3,100- Actuarial loss
    
    
    2,900
    
    
    
    2,886
    
    
    
    5,800
    
    
    
    5,772Net Periodic Pension Cost
    
    $
    27,500
    
    
    $
    27,484
    
    
    $
    55,000
    
    
    $
    54,968
 8




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Hedging Transactions The Company has limited involvement with derivative financial instruments and
does not use them for speculative purposes. The Company enters into various
futures contracts and futures options to reduce the impact of volatility in raw
material prices. Effective December 31, 2000, the Company adopted the Financial
Accounting Standards Boards (FASB) Statement of Financial Accounting
Standard (SFAS) No. 133, Accounting for Derivative Instruments and Hedging
Activities, subsequently amended by SFAS No. 138, Accounting for Certain
Derivative Instruments. SFAS No. 133 and SFAS No. 138 require the Company to
recognize all derivative instruments as assets or liabilities and to measure
those instruments at fair value. Changes in the derivative fair values are
deferred and recorded as a component of accumulated other comprehensive income
until the hedged transactions occur and are recognized in earnings. Any
ineffective portion of a hedging derivatives change in fair value is
immediately recognized in earnings. The Company formally documents all
relationships between hedging instruments and hedged items as well as its risk
management objectives and strategies for undertaking the hedge transactions.
The Company links all hedges to forecast transactions and assesses, both at the
inception of the hedge and on an ongoing basis, whether the derivatives that
are used in hedging transactions are highly effective in offsetting changes in
cash flows of hedged items. Adoption of these Statements did not have a
significant impact on the Companys financial position and operating results.
At June 19, 2004, the Company had no open futures or options contracts. Displays In the first quarter of 2003, the Company procured a large national account
that required an investment in wire rack displays that was substantially larger
than prior investments in a single retail account. The Company has been and is
expected to continue to focus on marketing channels that require an investment
in wire rack displays. Additionally, over a period of time, the Company had
been refining tracking and reporting procedures to more precisely account for
and track wire displays placed in service and to implement a change in
managements intention regarding the control and recovery of wire display racks
placed in service. At the beginning of the fourth quarter (September 7, 2003),
with the improved tracking and reporting procedures, and the increased
attention to recovery and placement, wire display racks placed into service
after September 7, 2003, were capitalized on the date of purchase and will be
depreciated over a three year period. Prior to the fourth quarter of 2003, wire
rack displays were expensed when they were placed into service. All wire rack
displays purchased in the future will be capitalized and depreciated over three
years. During the first twenty-four weeks of 2004, the Company capitalized
$253,000 in wire rack displays. 9




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Statement of Financial Accounting Standards No. 150 In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments With Characteristics of Both Liabilities and Equity. The statement
establishes standards for how an issuer classifies and measures certain
financial instruments with both characteristics of liabilities and equity. It
requires that an issuer classify a financial instrument that is within its
scope as a liability (or an asset in some circumstances). Adoption of this
standard was required for existing or new contracts for fiscal years beginning
after December 15, 2003. The Companys Class A preferred stock may be
exchanged, at the Companys option, for an equal amount of senior debt if the
Company meets certain financial targets, as defined. As the Class A preferred
stock is only redeemable upon the Company meeting certain financial targets,
which have not been met as of June 19, 2004, and is redeemable at the option of
the Company, no reclassification of the Class A preferred stock is required
under SFAS No. 150. Revolving Credit Facility Borrowings under the $17 million revolving credit facility due in August 2004
were $6.6 million in the second quarter of 2004 compared to $6.1 million in the
same period of 2003. Under the loan agreement, the revolving loan is based on
85% of all eligible accounts receivables, plus 55% of the value of eligible
inventory, plus 10% of packaging materials, all as defined. The interest rate
for the new revolving facility is the prime rate of interest or, at the
Companys option, LIBOR plus 2.0%. The average effective interest rate on the
Companys line of credit for the quarters ended June 19, 2004 and June 14, 2003
was 4.1% and 4.3%, respectively. 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. Goodwill and Intangible Assets The useful lives of amortizable intangible assets are evaluated periodically,
and are subject to impairment reviews, to determine whether revision in
carrying value is warranted. If cash flows related to a nonamortizable
intangible are not expected to continue beyond the foreseeable future, a useful
life would be assigned. Upon adoption of SFAS No. 141, the Company reclassified certain intangible
assets previously allocated to assembled staff into goodwill, and ceased
amortization related to these intangibles.
A summary of the changes to goodwill for the period from January 3, 2004 to
June 19, 2004 is presented below (in thousands): CarryingGoodwill
    
    ValueBalance at January 3, 2004
    
    $
    790
    
    
    $
    790Add: Goodwill Acquired
    
    
    11
    
    
    
    11Balance at June 19, 2004
    
    $
    801
    
    
    $
    801
 10




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##### Table of Contents



Other intangible assets are subject to amortization with useful lives ranging
up to 35 years. Intangible assets with indefinite lives are not amortized. The
Company has reviewed the carrying value of these assets under the guidance of
SFAS No. 144 and determined there was no impairment related to these balances.
Intangible assets at January 3, 2004 and June 19, 2004 consist of the following
(in thousands): Accumulated
    
    CarryingBalance January 3, 2004
    
    Total
    
    Amortization
    
    ValueTrademark
    
    $
    4,803
    
    
    $
    (1,121
    )
    
    $
    3,682Distribution System
    
    
    22,432
    
    
    
    (7,364
    )
    
    
    15,068Distribution System, intangible asset acquired
    
    
    465
    
    
    
    (24
    )
    
    
    441Unamortized prior service cost
    
    
    121
    
    
    
    
    
    
    
    121$
    27,821
    
    
    $
    (8,509
    )
    
    $
    19,312
 Accumulated
    
    CarryingBalance June 19, 2004
    
    Total
    
    Amortization
    
    ValueTrademark
    
    $
    4,803
    
    
    $
    (1,121
    )
    
    $
    3,682Distribution System
    
    
    22,432
    
    
    
    (7,683
    )
    
    
    14,749Distribution System, intangible asset acquired
    
    
    471
    
    
    
    (32
    )
    
    
    439Unamortized prior service cost
    
    
    121
    
    
    
    
    
    
    
    121$
    27,827
    
    
    $
    (8,836
    )
    
    $
    18,991
 
  Item 2.
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations TWELVE-WEEKS ENDED JUNE 19, 2004
COMPARED TO TWELVE-WEEKS ENDED JUNE 14, 2003 Net Sales for the quarter ended June 19, 2004 were $44.2 million a decrease of
$2.4 million versus the same quarter in 2003. Co-pack volume was substantially
lower in the quarter ended June 19, 2004 than the same quarter in the prior
year due to lost run rate volume from 2003 discussed in earlier filings.
Branded National Account volume (basically convenience stores) was lower in the
quarter ended June 19, 2004 than the same quarter in the prior year due to; the
initiation of bankruptcy proceedings by several convenience store chains, lower
in-store take off in convenience stores due to decreased disposable consumer
income and higher gas prices and diminished convenience store cash flow due to
decreased levels of higher margin sales (that are primarily generated from
snacks, beverages, cigarettes sales, etc.). The build up of inventory and the
sales by convenience stores during the Memorial Day weekend were weaker than
expected due to these factors. 11




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Gross Profit for the second quarter of 2004 was $16.9 million or a gross margin
of 38.3%, compared to $18.3 million or a gross margin of 39.2% in the second
quarter of 2003. The gross profit decrease was also impacted by reduced
National Account volume, which primarily consists of higher gross profit chip
products. The commodity and energy market price increases continue to adversely
affect gross profit. Also adversely affecting gross profit in the quarter
ended June 19, 2004 were increased packaging and raw material costs of
approximately $1.6 million that have been absorbed by the Company compared to
the second quarter of 2003. For the second quarter of 2004, selling and administrative expenses decreased
$900,000 or 6.0% to $15.4 million from $16.3 million in the second quarter of
2003 due to the one time charges that occurred in the second quarter of 2003
due primarily to one time costs associated with the increased distribution from
new National Account customers and continued cost controls. As the Company
continues to invest and grow its Company owned route program selling and
administrative expenses are expected to increase. Other Income was $121,000 for the second quarter of 2004 compared to $163,000
for the corresponding period in 2003, due to reduced affiliated commissions. Interest expense, net of interest income was $1.7 million in the second quarter
of 2004 compared to $1.6 million in the same period of 2003. The provision for income taxes was $26,000 in 2004 compared to $31,000 for
2003. The Company estimates that it will have no Federal tax obligation for
the fiscal year due to loss carryforwards from prior years. The net loss for the twelve-week period ended June 19, 2004 was $190,000
compared to a net income of $269,000 for the same period of 2003, which is
result of the sales decrease discussed above. EBITDA for the second quarter was $3.4 million compared to $3.9 million in the
prior year due to the factors discussed above. TWENTY-FOUR WEEKS ENDED JUNE 19, 2004
COMPARED TO TWENTY-FOUR WEEKS ENDED JUNE 14, 2003 Net Sales for the twenty-four weeks ended June 19, 2004 were $85.8 million a
decrease of $7.5 million versus the same period in 2003. Co-pack volume was
substantially lower in the twenty-four weeks ended June 19, 2004 than the same
period in the prior year due to lost run rate volume from 2003 discussed in
earlier filings. Branded National Account volume (basically convenience stores)
was lower in the twenty-four weeks ended June 19, 2004 than the same period in
the prior year due to; the initiation of bankruptcy proceedings by several
convenience store chains, lower in-store take off in convenience stores due to
decreased disposable consumer income and higher gas prices and diminished
convenience store cash flow due to decreased levels of higher margin sales
(that are primarily generated from snacks, beverages, cigarettes sales, 12




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etc.). The build up of inventory and the sales by convenience stores during the
Memorial Day weekend were weaker than expected due to these factors. Gross Profit for the first half of 2004 was $32.6 million or a gross margin of
38.0%, compared to $34.8 million or a gross margin of 37.3% in the first half
of 2003. The commodity and energy market price increases continue to adversely
affect gross profit. Also adversely affecting gross profit in the quarter
ended June 19, 2004 were increased packaging and raw material costs of
approximately $1.6 million that have been absorbed by the Company compared to
the second quarter of 2003. For the first twenty four weeks in 2004, selling and administrative expenses
decreased to $31.3 million from $33.6 million in the 2003 period, a decrease of
7.0% or $2.3 million due to the one time charges that occurred in the first
half of 2003 and continued cost controls, some of which are directly related to
the reduced National Account volume. As the Company continues to invest and
grow its Company owned route program selling and administrative expenses are
expected to increase. Other Income was $300,000 for the first half of 2004 compared to $345,000 for
the corresponding period in 2003 due to reduced affiliated commissions. Interest expense, net of interest income was $3.2 million in the twenty four
week period of both 2004 and 2003. The provision for income taxes was $52,000 in 2004 compared to $62,000 for
2003. The Company estimates that it will have no Federal tax obligation for
the fiscal year due to loss carryforwards from prior years. The net loss for the twenty four week period ended June 19, 2004 was $2.0
million, favorable by $100,000, compared to a net loss of $2.1 million for the
same period of 2003. EBITDA for the twenty four weeks was $5.0 million versus $5.5 million in the
prior year due to the factors discussed above. Estimated Fiscal 2004 vs. Fiscal 2003 Results The Company is estimating that fiscal 2004 net sales will be lower than
fiscal 2003 levels and the fiscal 2004 EBITDA is expected to be in a range of
approximately $14.0 million to $15.0 million. In addition, fiscal 2004
operating cash flow after interest expense is estimated to be approximately
$4.0 million. The above estimated fiscal 2004 over fiscal 2003 results are based upon
the following expectations and assumptions:  
    
    Approximately $2.5 million of the sales decline is expected to be
attributable to an extra week in fiscal 2003; 13




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
    
    Commodity and energy prices and other raw material/packaging costs
continue to increase over fiscal 2003 as discussed above. In part offsetting these factors in the second half of the year are:  
    
    Revised marketing programs have been initiated and are in place for
the remainder of the year which are expected to generate a net sales
increase in 2004, compared to the prior year of over 3%, adjusted for
the 53rd week in 2003;
    
    Company routes continue to perform better than prior year;
    
    Overall improvement in product/channel mix. FINANCIAL CONDITION Liquidity and Capital Resources On October 14, 1997, the Company issued (the Offering) $60 million of its
10.5% Senior Secured Notes (the Notes) due November 1, 2004. The Notes are
secured by a first lien on and security interest in all of the Companys real
properties, other than the Perry, FL and Knoxville, TN facilities and the
Companys equipment and intellectual property. The indenture governing the
Notes has certain covenants including, without limitation, covenants limiting
the incurrence of additional indebtedness, assets sales, investments,
restricted payments and liens. 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 June 19, 2004 the
accumulated amortization of these costs equaled approximately $3.4 million.
The Notes are due in November of 2004 and therefore, are classified as current
liabilities on the June 19, 2004 balance sheets. The Notes became callable on
November 1, 2003 and the Company is currently in the process of refinancing the
Notes. The Company may redeem the Notes in whole at 100%, plus accrued interest
through the date of redemption. Although there can be no assurance this debt
will be refinanced, management believes that the Company will be able to
refinance the Notes. 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, if refinancing is not obtained. The Company currently has two
written proposals to refinance the Notes, and is in discussions with other
potential lenders. The Company is subject to various risks in connection with
the operation of its businesses including among other things (i) changes in
market and (ii) various competitive factors. The accompanying financial
statements have been prepared assuming the Company will be able to continue as
a going concern. The Company currently has a $17 million revolving credit facility due in August
2004. The Company is in discussions with its current revolving facility
provider to extend the facility once the Company has made a final determination
on the refinancing alternative. Additionally, the Company is in discussions
with its owners to bridge the revolving credit facility in the event that the
extension is not implemented. Under the loan agreement, the revolving loan is
based on 85% 14




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of all eligible accounts receivables, plus 55% of the value of eligible
inventory, plus 10% of packaging materials, all as defined. The interest rate
for the new revolving facility is the prime rate of interest or, at the
Companys option, LIBOR plus 2.0%. The average effective interest rate on the
Companys line of credit for the quarters ended June 19, 2004 and June 14, 2003
was 4.1% and 4.3% for each year, respectively. The revolving credit agreement
requires the Company to maintain certain financial ratios relating to fixed
charge coverage, working capital, and minimum borrowing availability, as
defined. The Companys revolving loan facility is secured by a first lien on
and security interest in the inventory and receivables of the Company and
certain related collateral. The Companys $17 million revolving credit facility
also includes letter-of-credit accommodations. As of June 19, 2004, the Company
had an outstanding revolving loan balance of $6.6 million, letters of credit
outstanding of $2.8 million and $2.9 million of borrowing availability. The Companys cash flow requirements are for working capital, capital
expenditures and debt service. The Company met its liquidity needs through the
second quarter of 2004 through internally generated funds and the revolving
line of credit. Net cash used in operating activities was $4.6 million for the twenty-four week
period ended June 19, 2004 versus $3.4 million during the same period in 2003. Net cash used in investing activities was $1.8 million in the first twenty-four
weeks of 2004 compared to $1.7 million in 2003. Net cash provided by financing activities was $6.4 million the first half of
2004 versus $4.5 million in the same period of 2003. Revolver borrowings were
$6.6 million in the first half of 2004 compared to $6.1 million in the same
period of 2003. New Accounting Pronouncements 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 Company adopted the provision of SFAS No. 132 in its fiscal 2003
financial statements. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments With Characteristics of Both Liabilities and Equity. The statement
establishes standards for how an issuer classifies and measures certain
financial instruments with both characteristics of liabilities and equity. It
requires that an issuer classify a financial instrument that is within its 15




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scope as a liability (or an asset in some circumstances). Adoption of this
standard was required for existing or new contracts for fiscal years beginning
after December 15, 2003. The Companys Class A preferred stock may be
exchanged, at the Companys option, for an equal amount of senior debt if the
Company meets certain financial targets, as defined. As the Class A preferred
stock is only redeemable upon the Company meeting certain financial targets,
which have not been met as of June 19, 2004, and is redeemable at the option of
the Company, no reclassification of the Class A preferred stock is required
under SFAS No. 150. Cautionary Statement Related to Forward-Looking Statements The statements contained in the foregoing Managements Discussion and Analysis
of Financial Condition and Results of Operations and elsewhere which are not
historical facts are forward-looking statements. These forward-looking
statements include the estimated fiscal 2004 results described above and
statements containing the words believe, anticipate, expect, and similar
expressions. These forward-looking statements involve risks and uncertainties
that could cause actual results to differ materially from those set forth in
the forward-looking statements. These risks include the Companys ability to
refinance its debt as anticipated and the risk factors identified in the
Companys Annual Report on Form 10-K for fiscal 2003. There can be no assurance
that any forward-looking statement will be realized or that actual results will
not be significantly higher or lower than set forth in such forward-looking
statement. 
  ITEM 3.
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Raw materials used by the Company are subject to price volatility caused by
weather, government farm programs, global supply and demand, and other
unpredictable factors. To manage potential volatility in raw material prices,
the Company from time to time enters into commodity future and option
contracts, which are less than one year in duration. The Companys
Board-approved policy is to use such commodity derivative financial instruments
only to the extent necessary to manage these raw material price exposures. The
Company does not use these financial instruments for speculative purposes.
These commodity instruments are marketable exchange traded contracts designated
as hedges, and the changes in the market value of such contracts have a high
correlation to the price changes of the hedged commodity. As of June 19, 2004,
the Company had no open futures or options contracts. 
  ITEM 4.
    CONTROLS AND PROCEDURES The Companys Chief Executive Officer and 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 changes in the Companys internal controls or in other factors that could
significantly affect these controls subsequent to the date of the foregoing
evaluation. 16




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Part II. OTHER INFORMATION 
 ITEM 1. 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. 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 6. Exhibits and Reports on Form 8-K.  (a)
    
    Exhibits.Exhibit 31.1  Section 302 Certification of the CEOExhibit 31.2  Section 302 Certification of the CFOExhibit 32.1  Section 906 Certification of the CEOExhibit 32.2  Section 906 Certification of the CFO(b)
    
    Reports on Form 8-K.There were no reports on Form 8-K filed by the Registrant during
the quarter ended June 19, 2004. 17




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, each
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized. TOMS FOODS INC.  By /s/ Rolland G. Divin  
 Date: August 3, 2004 By /s/ Sharon M. Sanders  
 Date: August 3, 2004 18