##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION  FORM 10-Q (Mark One) þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the quarter (twelve-weeks) ended September 11, 2004 [  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the transition period from            to Commission File Number Toms Foods Inc.  Delaware  58-1516963
(I.R.S. Employer Identification No.) 900 8th Street 
 (706) 323-2721  Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes
þ No [  ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). [  ] Yes þ No




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TOMS FOODS INC. QUARTERLY REPORT ON FORM 10-Q
FOR THE TWELVE-WEEKS
ENDED SEPTEMBER 11, 2004 TABLE OF CONTENTS PagePART I. FINANCIAL INFORMATIONItem 1. Financial Statements:Condensed Balance Sheets as of September 11, 2004 (unaudited) and January 3, 2004
    
    
    3Condensed Statements of Operations for the twelve weeks and thirty-six weeks ended September 11, 2004 and September 6, 2003 (unaudited)
    
    
    4Condensed Statements of Cash Flows for the thirty-six weeks ended September 11, 2004 and September 6, 2003 (unaudited)
    
    
    5Notes to Condensed Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    16Item 4. Controls and Procedures
    
    
    16PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    16Item 6. Exhibits and Reports on Form 8-K
    
    
    17EX-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. 
    September 11, 2004
    
    January 3, 2004(unaudited)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    1,837
    
    
    $
    1,444Accounts and notes receivable, net of allowance for uncollectible of
$935 and $906 at Sept. 11, 2004 and January 3, 2004, respectively
    
    
    13,655
    
    
    
    10,120Inventories:Raw materials
    
    
    2,533
    
    
    
    2,484Packaging materials
    
    
    2,379
    
    
    
    1,518Finished goods and work in progress
    
    
    5,239
    
    
    
    4,133Litigation escrow deposit
    
    
    1,563
    
    
    
    0Other current assets
    
    
    3,802
    
    
    
    3,504Total current assets
    
    
    31,008
    
    
    
    23,203Property, plant, and equipment:Land and land improvements
    
    
    5,705
    
    
    
    5,702Buildings
    
    
    18,536
    
    
    
    18,515Machinery, equipment and vehicles
    
    
    62,097
    
    
    
    61,670Vending and other distribution equipment
    
    
    12,667
    
    
    
    12,888Furniture and fixtures
    
    
    22,031
    
    
    
    17,399Construction in progress
    
    
    2,972
    
    
    
    8,075Total property, plant, and equipment
    
    
    124,008
    
    
    
    124,249Accumulated depreciation
    
    
    (78,499
    )
    
    
    (76,386
    )Net property, plant, and equipment
    
    
    45,509
    
    
    
    47,863Noncurrent accounts and notes receivable, net of allowance for uncollectible
of $195 and $213 at Sept. 11, 2004 and January 3, 2004, respectively
    
    
    196
    
    
    
    312Litigation escrow deposit
    
    
    0
    
    
    
    1,563Deferred financing costs, net
    
    
    118
    
    
    
    477Intangible assets, net
    
    
    18,827
    
    
    
    19,312Goodwill
    
    
    801
    
    
    
    790Total assets
    
    $
    96,459
    
    
    $
    93,520LIABILITIES AND SHAREHOLDERS DEFICITCurrent liabilities:Revolving debt
    
    $
    6,093
    
    
    $
    96Accounts payable
    
    
    10,857
    
    
    
    9,700Accrued liabilities
    
    
    6,871
    
    
    
    8,131Current portion of other debt obligations
    
    
    60,217
    
    
    
    60,268Total current liabilities
    
    
    84,038
    
    
    
    78,195Long term debt obligations
    
    
    120
    
    
    
    271Other long term obligations
    
    
    37
    
    
    
    37Accrued pension cost
    
    
    15,118
    
    
    
    15,242Total liabilities
    
    
    99,313
    
    
    
    93,745Exchangeable portion of Preferred Stock, $.01 par value, Class A,
7,000 shares authorized, 7,000 shares issued and outstanding at
Sept. 11, 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 Sept. 11, 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
Sept. 11, 2004 and January 3, 2004
    
    
    4,193
    
    
    
    3,158Preferred Stock, $.01 par value, Class B, 21,737 shares authorized,
21,737 shares issued and outstanding at Sept. 11, 2004
and January 3, 2004
    
    
    41,289
    
    
    
    38,545Additional paid-in capital
    
    
    43,725
    
    
    
    43,725Accumulated other comprehensive loss
    
    
    (7,542
    )
    
    
    (7,542
    )Accumulated deficit
    
    
    (94,519
    )
    
    
    (88,111
    )Total shareholders deficit
    
    
    (12,854
    )
    
    
    (10,225
    )Total liabilities and shareholders deficit
    
    $
    96,459
    
    
    $
    93,520
 See notes to interim condensed financial statements 3




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##### Table of Contents



TOMS FOODS INC. 
     Twelve Weeks Ended
    
    Thirty-Six Weeks EndedSept. 11, 2004
    
    Sept. 6, 2003
    
    Sept. 11, 2004
    
    Sept. 6, 2003(unaudited)
    
    (unaudited)
    
    (unaudited)
    
    (unaudited)Net sales
    
    $
    44,465
    
    
    $
    44,330
    
    
    $
    130,301
    
    
    $
    137,648Cost of goods sold
    
    
    (28,077
    )
    
    
    (27,131
    )
    
    
    (81,301
    )
    
    
    (85,619
    )Gross profit
    
    
    16,388
    
    
    
    17,199
    
    
    
    49,000
    
    
    
    52,029Expenses and other income:Selling and administrative expenses
    
    
    (15,259
    )
    
    
    (16,024
    )
    
    
    (46,553
    )
    
    
    (49,650
    )Amortization of intangible assets
    
    
    (164
    )
    
    
    (164
    )
    
    
    (491
    )
    
    
    (489
    )Other operating income, net
    
    
    114
    
    
    
    278
    
    
    
    414
    
    
    
    623Income from operations
    
    
    1,079
    
    
    
    1,289
    
    
    
    2,370
    
    
    
    2,513Interest expense, net
    
    
    (1,687
    )
    
    
    (1,649
    )
    
    
    (4,922
    )
    
    
    (4,897
    )Income (loss) before income taxes
    
    
    (608
    )
    
    
    (360
    )
    
    
    (2,552
    )
    
    
    (2,384
    )Provision for income taxes
    
    
    (25
    )
    
    
    (31
    )
    
    
    (77
    )
    
    
    (93
    )Net Income (loss)
    
    $
    (633
    )
    
    $
    (391
    )
    
    $
    (2,629
    )
    
    $
    (2,477
    )
 See notes to interim condensed financial statements 4




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##### Table of Contents



TOMS FOODS INC. 
 
 Thirty-Six Weeks EndedSept. 11, 2004
    
    Sept. 6, 2003(unaudited)
    
    (unaudited)Cash flows from operating activities:Net loss
    
    $
    (2,629
    )
    
    $
    (2,477
    )Adjustments to reconcile net loss to net cash
used in operating activities:Depreciation
    
    
    5,102
    
    
    
    5,620Amortization of intangible assets
    
    
    491
    
    
    
    489Amortization of deferred debt issuance cost
    
    
    359
    
    
    
    364Deferred income taxes
    
    
    78
    
    
    
    93(Gain) loss on disposal of property, plant, and equipment
    
    
    (15
    )
    
    
    (3
    )Changes in operating assets and liabilities:Accounts and notes receivable, net
    
    
    (3,431
    )
    
    
    (1,917
    )Inventories
    
    
    (2,016
    )
    
    
    771Other assets
    
    
    (298
    )
    
    
    (111
    )Accounts payable
    
    
    1,157
    
    
    
    (2,955
    )Other liabilities
    
    
    (1,339
    )
    
    
    (1,623
    )Accrued pension cost
    
    
    (124
    )
    
    
    482Total adjustments
    
    
    (36
    )
    
    
    1,210Net cash used in operating activities
    
    
    (2,665
    )
    
    
    (1,267
    )Cash flows from investing activities:Additions to property, plant, and equipment
    
    
    (2,921
    )
    
    
    (2,915
    )Proceeds from disposal of property, plant, and equipment
    
    
    182
    
    
    
    30Net cash used in investing activities
    
    
    (2,739
    )
    
    
    (2,885
    )Cash flows from financing activities:Net borrowing from working capital revolving facility
    
    
    5,998
    
    
    
    5,689Litigation escrow deposit
    
    
    0
    
    
    
    (1,563
    )Payments of other long-term debt
    
    
    (201
    )
    
    
    (40
    )Net cash provided by financing activities
    
    
    5,797
    
    
    
    4,086Increase (decrease) in cash and cash equivalents
    
    
    393
    
    
    
    (66
    )Cash and cash equivalents, beginning of period
    
    
    1,444
    
    
    
    1,856Cash and cash equivalents, end of period
    
    $
    1,837
    
    
    $
    1,790Interest paid during the period
    
    $
    3,813
    
    
    $
    3,829Income taxes paid during the period
    
    $
    63
    
    
    $
    88
 5




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##### Table of Contents



TOMS FOODS INC. 
  
 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s credit facility (Credit Facility) becomes due on October 29,
2004. The Credit Facility is secured by all of the receivables and inventory
of the Company. Outstanding principal of $60 million and accrued interest of
$3.15 million under the Companys 10.5% senior secured notes (the Notes)
mature on November 1, 2004. The Notes are secured by the Companys principal
manufacturing facilities (including real property and equipment) and its
intellectual property. The Company is currently in discussions with its Credit
Facility lender for an extension of the term of the Credit Facility and with
prospective lenders to refinance the Notes. There can be no assurance that the
Company will be able to obtain an extension of the Credit Facility or refinance
the Notes prior to their maturity. In the event the Company fails to extend the maturity of the Credit Facility,
(i) the Company will be in default under the Credit Facility and the Notes
(pursuant to cross default provisions) and the Credit Facility lender and the
holders of the Notes will be entitled to exercise their remedies under the term
of the Credit Facility and the Notes and such lenders could attempt to
foreclose on their respective collateral securing such indebtedness and (ii)
even if such foreclosure does not occur, the Companys ability to operate and
obtain working capital necessary to operate its business would be materially
adversely impacted. Under these circumstances, the Company would have
difficulty maintaining existing relationships with its suppliers, who might
stop 6




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providing supplies or services to the Company or provide or supply such
services only on cash on deliver or other terms that would have an adverse
impact on the Companys cash flow and the Company may have to consider pursuing
appropriate restructuring options. Use of Estimates The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates. Revenue Recognition Revenues for 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. 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
(SFAS) 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 third quarter and will
contribute a remaining $674,000 in the fourth quarter. 7




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Pension and other benefit costs for the periods ended September 11, 2004 and
September 6, 2003 were as follows: Toms Foods Inc. Pension PlanThree Months Ended
    
    Six Months Ended
    
    Nine Months EndedJune 19, 2004
    
    June 14, 2003
    
    June 19, 2004
    
    June 14, 2003
    
    Sept. 11, 2004
    
    Sept. 6, 2003Service Cost
    
    $
    330,000
    
    
    $
    289,000
    
    
    $
    660,000
    
    
    $
    578,000
    
    
    $
    940,110
    
    
    $
    866,364Interest Cost
    
    
    925,000
    
    
    
    928,000
    
    
    
    1,850,000
    
    
    
    1,856,000
    
    
    
    2,758,582
    
    
    
    2,783,634Expected Return on Assets
    
    
    (1,020,000
    )
    
    
    (1,060,000
    )
    
    
    (2,040,000
    )
    
    
    (2,119,000
    )
    
    
    (3,049,219
    )
    
    
    (3,178,518
    )Amortizations- Unrecognized transition obligation
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0- Prior service cost
    
    
    20,000
    
    
    
    17,000
    
    
    
    40,000
    
    
    
    34,000
    
    
    
    52,487
    
    
    
    52,488- Actuarial loss
    
    
    10,000
    
    
    
    0
    
    
    
    20,000
    
    
    
    0
    
    
    
    23,961
    
    
    
    0Net Periodic Pension Cost
    
    $
    265,000
    
    
    $
    174,000
    
    
    $
    530,000
    
    
    $
    349,000
    
    
    $
    725,921
    
    
    $
    523,968
 Toms Foods Inc. SERPThree Months Ended
    
    Six Months Ended
    
    Nine Months EndedJune 19, 2004
    
    June 14, 2003
    
    June 19, 2004
    
    June 14, 2003
    
    Sept. 11, 2004
    
    Sept. 6, 2003Service Cost
    
    $
    350
    
    
    $
    323
    
    
    $
    700
    
    
    $
    646
    
    
    $
    1,050
    
    
    $
    969Interest Cost
    
    
    22,700
    
    
    
    22,725
    
    
    
    45,400
    
    
    
    45,450
    
    
    
    68,100
    
    
    
    68,175Expected Return on Assets
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Amortizations- Unrecognized transition obligation
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0- Prior service cost
    
    
    1,550
    
    
    
    1,550
    
    
    
    3,100
    
    
    
    3,100
    
    
    
    4,650
    
    
    
    4,650- Actuarial loss
    
    
    2,900
    
    
    
    2,886
    
    
    
    5,800
    
    
    
    5,772
    
    
    
    8,700
    
    
    
    8,658Net Periodic Pension Cost
    
    $
    27,500
    
    
    $
    27,484
    
    
    $
    55,000
    
    
    $
    54,968
    
    
    $
    82,500
    
    
    $
    82,452
 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) 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 8




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in offsetting changes in
cash flows of hedged items. Adoption of these Statements did not have a
significant impact on the Companys financial position and operating results.
At September 11, 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 three quarters of 2004, the Company capitalized
$292,000 in wire rack displays. 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 September 11, 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 October 2004
were $6.1 million in the
third quarter of 2004 compared to $5.7 million in the same period of 2003.
Under the loan agreement, the revolving loan is based on 85% of all eligible
accounts receivables, plus 65% 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 September 11, 2004 and September 6, 2003 was 4.8% and 4.0%,
respectively. The 9




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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. 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 September 11, 2004
    
    $
    801
    
    
    $
    801
 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 September 11, 2004 consist of the
following (in thousands): Accumulated
    
    CarryingTotal
    
    Amortization
    
    ValueBalance January 3, 2004Trademark
    
    $
    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
    
    CarryingTotal
    
    Amortization
    
    ValueBalance September 11, 2004Trademark
    
    $
    4,803
    
    
    $
    (1,121
    )
    
    $
    3,682Distribution System
    
    
    22,432
    
    
    
    (7,843
    )
    
    
    14,589Distribution System, intangible asset acquired
    
    
    471
    
    
    
    (36
    )
    
    
    435Unamortized prior service cost
    
    
    121
    
    
    
    
    
    
    
    121$
    27,827
    
    
    $
    (9,000
    )
    
    $
    18,827
 10




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Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations TWELVE-WEEKS ENDED SEPTEMBER 11, 2004
COMPARED TO TWELVE-WEEKS ENDED SEPTEMBER 6, 2003 Net Sales for the quarter ended September 11, 2004 were $44.4 million versus
$44.3 million in the same quarter in 2003. Co-pack volume was higher in the
quarter ended September 11, 2004 offset by declines in the branded sales
compared to the same quarter in the prior year. Branded National Account volume
(primarily convenience stores) was lower in the quarter ended September 11,
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, higher
gas prices, reduced travel 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 impacts of the hurricanes
forced store closings and Distributor and Company owned distribution route
closings for an extended period of time due to store damage and electricity
interruptions. Gross Profit for the quarter ended September 11, 2004 was $16.4 million or a
gross margin of 36.9%, compared to $17.2 million or a gross margin of 38.8% in
the same quarter of 2003. The gross profit decrease was also impacted by
reduced National Account volume, which primarily consists of higher gross
profit chip products. With the continued increases in commodity and energy our
costs increased which also adversely affected gross profit. For the quarter ended September 11, 2004, selling and administrative expenses
decreased $765,000 to $15.3 million from $16.0 million in the same quarter of
2003. Other Income was $114,000 for the quarter ended September 11, 2004 compared to
$278,000 for the corresponding period in 2003, due to reduced vendor
commissions. Interest expense, net of interest income was $1.7 million in the quarter ended
September 11, 2004 compared to $1.6 million in the same period of 2003. The provision for income taxes was $25,000 in the quarter ended September 11,
2004 compared to
$31,000 for same quarter in 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 quarter ended September 11, 2004 was $633,000 compared to
a net loss of $391,000 for the same period of 2003. EBITDA for the third quarter was $3.0 million compared to $3.1 million in the
prior year. 11




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THIRTY-SIX WEEKS ENDED SEPTEMBER 11, 2004
COMPARED TO THIRTY-SIX WEEKS ENDED SEPTEMBER 6, 2003 Net Sales for the thirty-six weeks ended September 11, 2004 were $130.3 million
a decrease of $7.3 million versus the same period in 2003. Co-pack volume was
substantially lower in the thirty-six weeks ended September 11, 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 (primarily convenience
stores) was lower in the thirty-six weeks ended September 11, 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, higher gas prices, reduced
travel 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 impacts of the hurricanes forced store closings
and Distributor and Company owned distribution route closings for an extended
period of time due to store damage and electricity interruptions. Gross Profit for the thirty-six week period of 2004 was $49.0 million or a
gross margin of 37.6%, compared to $52.0 million or a gross margin of 37.8% in
the thirty-six weeks of 2003. With the continued increases in commodity and
energy prices, our costs increased which also adversely affected gross profit. For the thirty-six weeks in 2004, selling and administrative expenses decreased
to $46.6 million from $49.7 million in the 2003 period a decrease of $2.3
million due in large part to continued cost controls, some of which are
directly related to the reduced National Account volume. Other Income was $414,000 for the thirty-six weeks of 2004 compared to $623,000
for the corresponding period in 2003 due to reduced vendor commissions. Interest expense, net of interest income was $4.9 million in the thirty-six
week period of both 2004 and 2003. The provision for income taxes was $77,000 for the thirty-six weeks of 2004
compared to $93,000 for same period of 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 thirty-six week period ended September 11, 2004 was $2.6
million, compared to a
net loss of $2.5 million for the same period of 2003. EBITDA for the thirty-six weeks was $8.0 million versus $8.6 million in the
prior year due to the factors discussed above. Revised Fiscal 2004 Forecast Company is revising its previously reported estimates for fiscal 2004 EBITDA.
Fiscal 2004 EBITDA is expected to be in a range of approximately $10 million to
$10.5 million. In addition, fiscal 2004 operating cash flow after interest
expense is estimated to be approximately $500,000. The Company had previously
predicted that fiscal 2004 EBITDA would be in a range of approximately $14
million and $15 million and that operating cash flow after interest expense 12




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would be approximately $4 million. The Companys operations for the full
fiscal 2004 year will be adversely affected by a number of factors, including:
(i) lower than expected sales volume resulting from the initiation of
bankruptcy proceedings by certain convenience store chains and reduced
convenience store sales due to higher gas prices and reduced travel, (ii)
unexpected reduced volume under a co-packing agreement and (iii) the impact of
hurricane forced store temporary closings and distributor and company-owned
distribution route temporary closings. The Company is examining whether any of
the losses resulting from the hurricanes are recoverable under insurance
policies. Continuation of Efforts to Refinance Indebtedness The Companys credit facility (Credit Facility) becomes due on October 29,
2004. The Credit Facility is secured by all of the receivables and inventory
of the Company. Outstanding principal of $60 million and accrued interest of
$3.15 million under the Companys 10.5% senior secured notes (the Notes)
mature on November 1, 2004. The Notes are secured by the Companys principal
manufacturing facilities (including real property and equipment) and its
intellectual property. The Company is currently in discussions with its Credit
Facility lender for an extension of the term of the Credit Facility and with
prospective lenders to refinance the Notes. There can be no assurance that the
Company will be able to obtain an extension of the Credit Facility or refinance
the Notes prior to their maturity. In the event the Company fails to extend the maturity of the Credit Facility,
(i) the Company will be in default under the Credit Facility and the Notes
(pursuant to cross default provisions) and the Credit Facility lender and the
holders of the Notes will be entitled to exercise their remedies under the term
of the Credit Facility and the Notes and such lenders could attempt to
foreclose on their respective collateral securing such indebtedness and (ii)
even if such foreclosure does not occur, the Companys ability to operate and
obtain working capital necessary to operate its business would be materially
adversely impacted. Under these circumstances, the Company would have
difficulty maintaining existing relationships with its suppliers, who might
stop providing supplies or services to the Company or provide or supply such
services only on cash on deliver or other terms that would have an adverse
impact on the Companys cash flow and the Company may have to consider pursuing
appropriate restructuring options. 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 Credit facility and Notes 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. 13




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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 September 11,
2004 the accumulated amortization of these costs equaled approximately $3.5
million. The Notes are due on November 1, 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 discussions with
lenders 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 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 credit facility due in October 29,
2004. The Company is in discussions with its credit facility lender to extend
the credit facility. 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 credit facility, the revolving loan is based on
85% of all eligible accounts receivables, plus 65% of the value of eligible
inventory, plus 10% of packaging materials, all as defined. The interest rate
for the credit 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 September 11, 2004 and September 6, 2003
was 4.8% and 4.0% for each year, respectively. The credit facility requires
the Company to maintain certain financial ratios relating to fixed charge
coverage, working capital, and minimum borrowing availability, as defined. The
Companys credit 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 credit facility also includes letter-of-credit
accommodations. As of September 11, 2004, the Company had an outstanding
revolving loan balance of $6.1 million, letters of credit outstanding of $2.9
million and $4.2 million of borrowing availability. In the event the Company fails to extend the maturity of the Credit Facility,
(i) the Company will be in default under the Credit Facility and the Notes
(pursuant to cross default provisions) and the Credit Facility lender and the
holders of the Notes will be entitled to exercise their remedies 14




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under the term
of the Credit Facility and the Notes and such lenders could attempt to
foreclose on their respective collateral securing such indebtedness and (ii)
even if such foreclosure does not occur, the Companys ability to operate and
obtain working capital necessary to operate its business would be materially
adversely impacted. Under these circumstances, the Company
would have difficulty maintaining existing relationships with its suppliers,
who might stop providing supplies or services to the Company or provide or
supply such services only on cash on deliver or other terms that would have
an adverse impact on the Companys cash flow and the Company may have to
consider pursuing appropriate restructuring options. The Companys cash flow requirements are for working capital, capital
expenditures and debt service. The Company met its liquidity needs through the
third quarter of 2004 through internally generated funds and the credit
facility. Net cash used in operating activities was $2.7 million for the thirty-six week
period ended September 11, 2004 versus $1.3 million during the same period in
2003. The Company contributed $586,000 to its pension plans during the
thirty-six week period in 2004. Net cash used in investing activities was $2.8 million in the thirty-six week
period of 2004 compared to $2.9 million in 2003. Net cash provided by financing activities was $5.8 million the thirty-six week
period of 2004 versus $4.1 million in the same period of 2003. Credit facility
borrowings were $6.1 million in the thirty-six week period of 2004 compared to
$5.7 million in the same period of 2003. Critical Accounting
Policies The Company has identified
critical accounting policies utilized by management in the
preparation of the Company's financial statements.  A description of
these critical accounting policies is included in the annual report
on Form 10-K for the fiscal year ended January 3, 2004. 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
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 15




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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 September 11, 2004, and is redeemable at the
option of the Company, no reclassification of the Class A preferred stock is
required under SFAS No. 150. 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Raw materials used by the Company are subject to price volatility caused by
weather, government farm programs, global supply and demand, and other
unpredictable factors. To manage potential volatility in raw material prices,
the Company from time to time enters into commodity future and option
contracts, which are less than one year in duration. The Companys
Board-approved policy is to use such commodity derivative financial instruments
only to the extent necessary to manage these raw material price exposures. The
Company does not use these financial instruments for speculative purposes.
These commodity instruments are marketable exchange traded contracts designated
as hedges, and the changes in the market value of such contracts have a high
correlation to the price changes of the hedged commodity. As of September 11,
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 during the
period covered by this Form 10-Q, that have materially affected or are
reasonably likely to materially affect the Companys internal control over
financial reporting. 
 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 16




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motions, was reduced to $1,250,000 in total damages. In connection
with the appeal of the $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. On
August 20, 2004, the Supreme Court of Alabama reversed the judgment and entered
a judgment in favor of the Company. On September 14, 2004 the litigation
escrow
deposit was refunded. 
 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.Current report on Form 8-K was filed on October 19, 2004 regarding
an update on Company projected financial results. (Furnished but
not filed with the SEC)
Current report on Form 8-K was filed on October 22, 2004 regarding
an update on the Companys credit facility. (Furnished but not
filed with the SEC) 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. DivinRolland G. DivinPresident, Chief Executive Officer,and Director (Principal Executive Officer)Date: October 26, 2004By /s/ Sharon M. SandersSharon M. SandersActing Chief Financial OfficerDate: October 26, 2004
 18