UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(X) Annual report pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934 for the fiscal year ended December 25, 2004 (52 weeks)
( ) 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 1-5084
TASTY BAKING COMPANY
(Exact name of Company as specified in its charter)
Pennsylvania 23-1145880
(State of Incorporation) (IRS Employer Identification Number)
2801 Hunting Park Avenue
Philadelphia, Pennsylvania 19129
(Address of principal executive offices) (zip code)
Telephone: 215-221-8500
(Company's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock,
par value $.50 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the company (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of company's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the company is an accelerated filer (as defined
in Rule 12b-2 of the Act). YES X NO
The aggregate market value of voting stock held by non-affiliates as of June 26,
2004 is $71,109,187 (computed by reference to the closing price on the New York
Stock Exchange on June 26, 2004).
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of February 18, 2005.
Class Outstanding
----- -----------
Common Stock, 8,176,898 shares
par value $.50
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Document
--------
The Registrant has incorporated by reference in Part III of this report on Form
10-K portions of the company's definitive Proxy Statement for the 2005 Annual
Meeting of Shareholders to be held on May 12, 2005 which is expected to be filed
with the Securities and Exchange Commission not later than 120 days after the
end of the company's last fiscal year.
Page 1
TASTY BAKING COMPANY AND SUBSIDIARIES
PART I
Item 1. Business
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The company was incorporated in Pennsylvania in 1914 and maintains its main
offices and manufacturing facilities in Philadelphia, Pennsylvania. The company
manufactures and sells a variety of premium single portion cakes, pies,
pretzels, brownies, donuts, and snack bars under the well established trademark,
TASTYKAKE(R). These products comprise approximately 100 varieties. The
availability of some products, especially the holiday-themed offerings, varies
according to the season of the year. The single portion cakes, snack bars and
donuts principally sell at retail prices for individual packages ranging from
$0.40 to $0.99 per package and family convenience packages at $2.99. The
individual pies include various fruit and cream filled varieties and, at various
times of the year, additional seasonal varieties. The pastries and brownies are
marketed principally in snack packages and sell at a retail price of $0.99 per
package. The best known products with the widest sales acceptance are various
sponge cakes marketed under the trademarks JUNIORS(R) and KRIMPETS(R), and
chocolate enrobed cakes under KANDY KAKES(R). During 2004 the company introduced
a new line of sugar-free single portion cakes and snack bars under the name
TASTYKAKE Sensables(TM) which are sold at retail prices ranging from $0.59 for
single serve to $3.59 for Family Packs.
Tasty Baking Oxford, Inc., a wholly-owned subsidiary of the company, located in
Oxford, Pennsylvania, currently manufactures honey buns, donuts, mini donuts and
donut holes under the trademark TASTYKAKE(R). The company created the SNAK N'
FRESH(R) and AUNT SWEETIE'S BAKERY(R) brands. The SNAK N' FRESH(R) and AUNT
SWEETIE'S BAKERY(R) brands were established to enter the private label markets
without compromising the reputation of its TASTYKAKE(R) brand although the
company does not currently market products under these trademarks. All of the
products manufactured at the Oxford facility are sold to the company for resale.
During the fourth quarter of 2001 the company closed the plant of its
wholly-owned subsidiary, Dutch Mill Baking Company, Inc. (Dutch Mill), based in
Wyckoff, New Jersey. Dutch Mill was then merged into the company's subsidiary,
Tasty Baking Oxford, Inc. The trademark DUTCH MILL(R) will remain an asset of
the company.
The company's products are sold principally by independent sales distributors
through distribution routes to approximately 15,000 retail outlets in Delaware,
Maryland, New Jersey, New York, Pennsylvania and Virginia, which make up the
company's principal market. During 2003, the core route regions were expanded to
include the eastern shore of Maryland, Pittsburgh, Pennsylvania and Cleveland,
Ohio. This method of distribution for direct store deliveries via independent
sales distributors has been used since 1986. The company also distributes its
products through distributorships and major grocery chains which have
centralized warehouse distribution capabilities located in many areas of the
country. The company has formed alliances with distributors that can warehouse
and distribute the Tastykake product line most effectively in both fresh and
frozen forms. During 2003, the company refocused its efforts in its core sales
distributor business, while at the same time, carefully evaluated existing and
new business possibilities outside the core market. As a result, the decision
was made in 2003 to pull out of the West Coast markets and add 36 new routes to
the core region. Products are sold throughout the continental United States and
Puerto Rico via third party distributorships. The company also distributes its
products through the TastyShop program, whereby consumers can call a toll-free
number or visit the company's website to order a variety of Tastykake gift packs
for home delivery.
During 2002, the company closed its remaining 18 thrift stores which did not
meet the profitability objectives set by the company. The company closed 6
stores during the second quarter of 2002 and closed the remaining 12 stores as
of year end 2002. The company has recorded restructuring charges related to the
closures. The company's thrift store program was first implemented at the end of
2000. The purpose of the thrift stores was to recover the cost of stale, damaged
and other products not generally salable through normal distribution channels,
to recoup part of the cost of developing and introducing new products into the
marketplace, and to raise consumer awareness and acceptance of the company's
products.
The company's top 20 customers represent 57.9% of its 2004 net sales. The top
customer, Wal-Mart, represents 16.3% of the company's net sales for 2004. This
relationship has been reasonably consistent over the prior two years. All
customers in the route sales area are serviced by independent sales
distributors. If any of the customers in this group changed their buying
patterns with the company, its current sales levels could be adversely affected.
The company conducts advertising programs which utilize outdoor billboard
campaigns, newspapers, consumer coupons, and radio advertising. During 2004, the
company focused on point of sale marketing, introducing new packaging for the
Page 2
Item 1. Business (continued)
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entire product line plus new products and expanded varieties on existing
products. In 2005 the company expects to engage in more billboard advertising
and an elevated level of radio advertising campaigns.
The company is engaged in a highly competitive business. Although the number of
competitors varies among marketing areas, certain competitors are national
companies with multiple production facilities, nationwide distribution systems
and significant advertising and promotion budgets. The company specializes in
premium single portion snack cakes and pies. The company is able to maintain a
strong competitive position in its principal marketing area through the quality
of its products and brand name recognition. The company has a significant market
share throughout its principal marketing area.
Outside of its principal marketing area, awareness of the company's trademarks
and reputation is not as strong and the company's market share is generally less
significant. In these markets, the company competes for the limited shelf space
available from retailers, leveraging product quality, price promotions and
consumer acceptance. The company has been able to solidify its sales outside of
its principal marketing area through the distribution of its products using mass
merchandisers, third party distributors, convenience stores and other methods of
distribution.
The company's principal competitor in the premium snack cake market throughout
the country is Interstate Bakeries Corporation ("Interstate") which owns three
major brands in this category - Hostess, Dolly Madison and Drakes. Interstate is
a large publicly held corporation which has achieved national recognition of its
Hostess brand name through advertising. Interstate competes on price, product
quality and brand name recognition. Interstate filed for Chapter 11 Bankruptcy
protection in 2004. McKee Foods Corporation, a large privately held company,
competes in the snack cake market under the brand name Little Debbie as a low
price snack cake. Little Debbie holds the largest share of the snack cake market
in the United States. Many large food companies advertise and promote
single-serve packages of their traditional multi-serve cookie and sweet and
salty snack varieties and compete against the company for a portion of the
overall snack market. George Weston Foods competes in the multi-serve and
single-serve baked goods market under the brand name of Entenmann's. Local
independent bakers also compete in a number of regional markets. In addition,
there are national food companies that are expanding their snack product
offerings in our category.
The company is dependent upon sugar, eggs, oils, flour and cocoa for its
ingredients and paperboard for its packaging. The price of sugar is expected to
remain stable through 2005 even though demand is down due to allotment control
by the USDA, which is expected to keep the sugar pricing structure stable. Egg
pricing was volatile in 2004 but is expected to stabilize for 2005. Flour
pricing was high in 2004. In 2005, with sluggish export demand due to foreign
competition, the flour pricing is expected to stabilize. For 2005, the soybean
crop is expected to be very good and world-wide production output is also
expected to be good. Therefore, the company expects some softening in prices for
oils in 2005. Cocoa pricing has been volatile. Although the crops were good in
November 2004, political unrest in the Ivory Coast and elections in 2005 have
caused the pricing outlook to be uncertain. The entire paperboard market is
having capacity issues due to high exports and construction due to the
hurricanes along the East Coast of the U.S. in 2004 along with continued growth
in disposable consumer paper products. Paper product pricing continues to
increase because of limited supply.
The company's policies with respect to working capital items are not unique.
Inventory is generally maintained at levels sufficient for one to three weeks of
sales, while the ratio of current assets to current liabilities is generally
maintained at a level between 1.3 and 2.5 to 1.
The company believes that our brand trademarks such as "Tastykake(R)" and
"Tastykake Sensables(TM)" and product trademarks such as "Krimpets(R),"
"Kreamies(TM)," "Juniors(R)," and "Kandy Kakes(R)" are of material importance to
the company's strategy of brand building. The company takes appropriate action
from time to time against third parties to prevent infringement of our
trademarks and other intellectual property. The company also enters into
confidentiality agreements from time to time with employees and third parties as
necessary to protect formulas and processes used in producing our products.
The company sells seasonal and holiday products as well as its core products
throughout the year.
The company's plants are subject to inspection by the Food and Drug
Administration and various other governmental agencies, and its products must
comply with regulations under the Federal Food, Drug and Cosmetic Act and with
various comparable state statutes regulating the manufacturing and marketing of
food products.
In the past the company has made investments based on compliance with
environmental laws and regulations. Such expenditures have not been material
with respect to the company's capital expenditures, earnings or competitive
position.
Page 3
Item 1. Business (continued)
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The company employs approximately 1,100 persons, including approximately 160
part-time employees. In January 2005, approximately 65 maintenance employees
voted to be represented by a labor union but they have not commenced
negotiations for a collective bargaining contract. The company does not expect
this situation to have a material impact on the financial results of the
company.
The company's annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to those reports filed or furnished
pursuant to the Section 13(a) or 15(d) of the Securities Exchange Act of 1934,
as amended ("Exchange Act"), are made available free of charge through the
company's website the same day as they are made available on the SEC website.
These reports are available by going to the company's website at
www.tastykake.com, under the "Corporate Info, Annual Reports & SEC Filings-SEC
website" captions. See the first paragraph of Item 7 below regarding the use of
forward-looking statements contained herein.
The Corporate Governance Guidelines, Code of Business Conduct and charters for
the Audit Committee, Compensation Committee and Nominating and Corporate
Governance Committee are available on the company's website at
www.tastykake.com, under the "Corporate Info-Corporate Governance" captions or
are available upon written request directed to the Secretary of the Company at
2801 Hunting Park Avenue, Philadelphia, Pennsylvania 19129.
The company will also post to its website any amendments to the Business Code of
Conduct, or a waiver from the provisions of the Code of Business Conduct
relating to the company's principal executive officers or directors. Waivers
will be located under the "Corporate Info-Corporate Governance-Waivers" caption.
On May 20, 2004, the company filed the Chief Executive Officer certification
with the New York Stock Exchange as required under Section 303A.12(a) of the New
York Stock Exchange Listed Company Manual.
Item 2. Properties
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The locations and primary use of the materially important physical properties of
the company and its subsidiaries are as follows:
Location Primary Facility Use
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2801 Hunting Park Avenue Certain Corporate Offices,
Philadelphia, PA (1) Production of cakes, pies, snack bars and donuts
3413 Fox Street Sales and Finance Offices, Data Processing Operations,
Philadelphia, PA (2) Office Services and Warehouse
700 Lincoln Street Tasty Baking Oxford Offices,
Oxford, PA (3) Production of honey buns, mini donuts and donut holes
(1) This property is recorded as a capital lease. See Note 6 of the
Consolidated Financial Statements.
(2) This property is owned by Tasty Baking Company.
(3) This property was purchased and is owned by Tasty Baking Oxford, Inc. It is
secured by a first party mortgage as collateral under the company's credit
facility as described in Note 5 of the Consolidated Financial Statements.
In addition to the above, the company leases various other properties used
principally as local pick-up and distribution points. All of these properties
are sufficient for the business of the company as now conducted.
Item 3. Legal Proceedings
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The company is involved in certain legal and regulatory actions, all of which
have arisen in the ordinary course of the company's business. The company is
unable to predict the outcome of these matters, but does not believe that the
ultimate resolution of such matters will have a material adverse effect on the
consolidated financial position or results of operations of the company.
However, if one or more of such matters were determined adversely to the
company, the ultimate liability arising therefrom is not expected to be material
to the financial position of the company, but could be material to its results
of operations in any quarter or annual period.
In November 1998, nine (9) independent route sales distributors (Plaintiffs), on
behalf of all present and former route sales distributors, commenced suit
against the company seeking recovery from the company of amounts (i) which the
Page 4
sales distributors paid in the past to the Internal Revenue Service on account
of employment taxes, and (ii) collected by the company since January 1, 1998, as
an administrative fee from all unincorporated sales distributors. The company
removed the action to the United States District Court for the Eastern District
of Pennsylvania and was successful in having the action dismissed with prejudice
as to all federal causes of action on March 29, 1999.
Subsequently, Plaintiffs commenced a new suit in Common Pleas Court for
Philadelphia County, Pennsylvania, asserting state law claims seeking damages
for (1) the alleged erroneous treatment of the sales distributors as independent
contractors by the company such that the sales distributors were required to pay
self-employment, social security and federal unemployment taxes which they
allege should have been paid by the company, and (2) for alleged breach of
contract relating to the collection of an administrative fee from all
unincorporated sales distributors. The Court dismissed with prejudice Plaintiffs
first claim in March 2000. As to the second claim, in January 2002, the Court
certified a class of approximately 200 sales distributors (representing
approximately 40% of the company's current routes), consisting of unincorporated
sales distributors who, since February 7, 1998, have paid or continue to pay the
administrative fee to the company. The company believes the case to be without
merit and is defending the matter vigorously. The company has not established
any reserve in the event that the ultimate outcome of this litigation proves
unfavorable to the company. If this matter is determined adversely to the
company, the ultimate liability arising therefrom is not expected to be material
to the financial position of the company, but could be material to its results
of operations in any quarter or annual period.
Item 4. Submission of Matters to a Vote of Security Holders
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No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
Page 5
TASTY BAKING COMPANY AND SUBSIDIARIES
PART II
Item 5. Market for the Company's Common Equity and Related Shareholder Matters
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Quarterly amounts have been reclassified for comparative purposes
(000's, except per share amounts)
All disclosures are pre-tax, unless otherwise noted Earnings per share
(EPS) by quarter may not agree with fiscal year EPS due to rounding and shares
outstanding.
Quarterly Summary (Unaudited)
Summarized quarterly financial data and market prices for the company's common
stock for 2004 and 2003 are as follows:
First Second Third Fourth Year
---------------------------------------------------------------------------------------------------------------------------
2004(a)
Gross sales $ 68,360 $ 64,837 $ 62,724 $ 63,108 $ 259,029
Net sales 40,478 40,055 39,310 39,218 159,061
Gross profit (after depreciation) 12,423 12,478 11,823 10,934 47,658
Net income (loss) 483 654 217 (111) 1,243
Per share of common stock:
Net income (loss):
Basic and diluted .06 .08 .03 (.01) .15
Cash dividends .05 .05 .05 .05 .20
Market prices:
High 10.75 9.85 9.49 8.48 10.75
Low 9.87 8.90 7.80 7.90 7.80
2003(b)
Gross sales $ 64,372 $ 62,944 $ 60,837 $ 62,495 $ 250,648
Net sales 40,984 40,191 38,948 39,006 159,129
Gross profit (after depreciation) 11,201 11,450 10,707 9,935 43,293
Net income (loss) 482 389 (1,433) (1,800) (2,362)
Per share of common stock:
Net income (loss):
Basic and diluted .06 .05 (.18) (.22) (.29)
Cash dividends .05 .05 .05 .05 .20
Market prices:
High 9.60 9.91 11.30 10.08 11.30
Low 7.20 7.86 9.20 7.50 7.20
Each quarter consists of thirteen weeks. The market prices of the company's
stock reflect the high and low price by quarter as traded on the New York Stock
Exchange. The approximate number of holders of record of the company's common
stock (par value $ 0.50 per share) as of February 18, 2005, was 2,722.
(a) In the second quarter 2004, the company realized a $75 gain from the sale
of a route to an independent sales distributor.
In the fourth quarter 2004, the company favorably settled certain thrift
store lease contracts for a gain of $35. This gain was offset by reversals
of previously settled contracts, and other adjustments related to the
estimated expenses for maintaining the thrift stores still under contract,
which resulted in a net charge of $9.
Also, in the fourth quarter 2004, the company recorded additional pension
expense in the amount of $771, in connection with the company's method of
immediately recognizing gains and losses that fall outside the pension
corridor. Of this amount, $540 was charged to cost of goods sold.
(b) During the fourth quarter of 2003, the company incurred a $429 restructure
charge related to specific arrangements made with senior executives who
departed the company in 2003. During 2003, there were restructure charge
reversals of $220, $95, $129 and $56 during the first, second, third and
fourth quarters, respectively, related to the favorable settlement of
thrift store leases reserved in the 2002 restructuring.
During the fourth quarter of 2003, the company realized a $1,077 gain from
the sale of eleven routes to independent sales distributors in Maryland.
Page 6
Item 5. Market for the Company's Common Equity and Related Shareholder Matters
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(continued)
-----------
Dividends
The declaration and payment of dividends is subject to the discretion of the
company Board of Directors ("Board"). The Board bases its decisions regarding
dividends on, among other things, general business conditions, the company's
financial results, contractual, legal and regulatory restrictions regarding
dividend payments and any other factors the Board may consider relevant. Under
the terms of the company's Credit Facility as amended, the company is permitted
to pay annual dividends in an amount equal to the excess of the company's
tangible net worth over $39.8 million.
Issuer Purchases of Equity Securities
On July 28, 2004, the Board of Directors renewed the company's stock repurchase
program originally adopted in July 2003. Under the program, the company may
acquire up to 400,000 shares of Tasty Baking Company common stock, which is
approximately 5% of the shares outstanding, through July 29, 2006. These
purchases may be commenced or suspended without prior notice depending on
then-existing business or market conditions and other factors. The following
chart sets forth the amounts of the company's common stock purchased on the open
market by the company during the fourth quarter of fiscal 2004 under the stock
repurchase plan.
-------------------- -------------------------- -------------------------- -------------------------- ------------------------
Period (a) Total Number of (b) Average Price Paid (c) Total Number of (d) Maximum Number (or
Shares (or Units per Share (or Unit) Shares (or Units) Approximate Dollar
Purchased) Purchased as Part of Value) of Shares (or
Publicly Announced Plans Units) that May Yet Be
or Programs Purchased Under the
Plans or Programs
-------------------- -------------------------- -------------------------- -------------------------- ------------------------
September 26 - - - - 400,000
October 30
-------------------- -------------------------- -------------------------- -------------------------- ------------------------
October 31- 11,400 $8.32 11,400 388,600
November 27
-------------------- -------------------------- -------------------------- -------------------------- ------------------------
November 28- - - - 388,600
December 25
-------------------- -------------------------- -------------------------- -------------------------- ------------------------
Total 11,400 $8.32 11,400 388,600
-------------------- -------------------------- -------------------------- -------------------------- ------------------------
Page 7
Item 6. Selected Financial Data
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(000's, except per share amounts)
All disclosures are pre-tax, unless otherwise noted
Five Year Selected Financial Data
2004(a) 2003(b) 2002(c) 2001(d) 2000
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Operating results
Gross sales $ 259,029 $ 250,648 $ 255,504 $ 255,336 $ 249,691
Net sales (e) $ 159,061 $ 159,129 $ 162,263 $ 166,245 $ 162,877
Net income (loss) $ 1,243 $ (2,362) $ (4,341) $ 6,320 $ 8,144
Per share amounts
Net income:
Basic $ .15 $ (.29) $ (.54) $ .79 $ 1.04
Diluted $ .15 $ (.29) $ (.54) $ .78 $ 1.04
Cash dividends $ .20 $ .20 $ .48 $ .48 $ .48
Shareholders' equity $ 4.99 $ 5.24 $ 5.86 $ 6.84 $ 6.40
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Financial position
Working capital $ 6,769 $ 7,585 $ 15,467 $ 18,284 $ 15,474
Total assets $ 118,502 $ 117,243 $ 116,560 $ 116,137 $ 112,192
Long-term obligations $ 13,159 $ 12,705 $ 12,486 $ 14,603 $ 16,843
Shareholders' equity $ 40,787 $ 42,419 $ 47,525 $ 55,065 $ 50,174
Shares of common stock
outstanding 8,178 8,097 8,104 8,052 7,845
---------------------------------------------------------------------------------------------------------------------------
Statistical information
Capital expenditures $ 9,295 $ 6,676 $ 5,359 $ 7,314 $ 8,116
Depreciation $ 7,711 $ 7,148 $ 6,807 $ 7,204 $ 7,759
Average common shares
outstanding:
Basic 8,103 8,098 8,075 7,998 7,837
Diluted 8,109 8,104 8,159 8,140 7,861
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(a) In the second quarter 2004, the company realized a $75 gain from the sale
of a route to an independent sales distributor.
In the fourth quarter 2004, the company favorably settled certain thrift
store lease contracts for a gain of $35. This gain was offset by reversals
of previously settled contracts, and other adjustments related to the
estimated expenses for maintaining the thrift stores still under contract,
which resulted in a net charge of $9.
Also, in the fourth quarter 2004, the company recorded additional pension
expense in the amount of $771, in connection with the company's method of
immediately recognizing gains and losses that fall outside the pension
corridor.
(b) During the fourth quarter of 2003, the company realized a $1,077 gain from
the sale of eleven routes to independent sales distributors in Maryland.
During the fourth quarter of 2003, the company incurred a $429 restructure
charge related to specific arrangements made with senior executives who
departed the company in 2003. During 2003 the restructure charge was offset
by $500 in restructure charge reversals resulting from the favorable
settlement of thrift store leases reserved in the 2002 restructuring,
resulting in a 2003 net restructure charge reversal of $71.
(c) During the second quarter of 2002, the company incurred a $1,405
restructure charge related to its decision to close six thrift stores and
to eliminate certain manufacturing and administrative positions. During the
fourth quarter of 2002, the company incurred a $4,936 restructure charge
related to the closing of the remaining twelve thrift stores and the
specific arrangements made with senior executives who departed the company
in the fourth quarter of 2002.
Also, during the fourth quarter of 2002, the company recorded additional
pension expense in the amount of $4,656, in connection with the company's
method of immediately recognizing gains and losses that fall outside the
pension corridor.
(d) During the fourth quarter of 2001, the company incurred a $1,728
restructure charge related to its decision to close its Dutch Mill Baking
Company production facility and two company thrift stores.
(e) For comparative purposes net sales for 2001 and 2000 have been reclassified
to reflect changes in accounting for thrift stores and cooperative
advertising. The change was an increase of $1,637 for 2001 and a decrease
of $1,406 for 2000.
Page 8
Item 7. Management's Discussion and Analysis of Financial Condition and Results
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of Operations
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Statements contained in this Annual Report on Form 10-K, including but not
limited to those under the headings "Business," "Legal Proceedings" and
"Management's Discussion and Analysis," contain "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995, and
are subject to the safe harbor created by that Act. Such forward-looking
statements are based upon assumptions by management, as of the date of this
Report, including assumptions about risks and uncertainties faced by the
company. These forward-looking statements can be identified by the use of such
words as "anticipate," "believe," "could," "estimate," "expect," "intend,"
"may," "plan," "predict," "project," "should," "would," "is likely to," or "is
expected to" and other similar terms. They include comments about legal
proceedings, competition within the baking industry, availability and pricing of
raw materials and capital, sales growth through its independent sales
distributors, regional distributors, route expansion, new packaging, private
label, food service, institutional sales and other channels of distribution,
changes in and execution of the company's business strategies and other
statements contained herein that are not historical facts.
Because such forward-looking statements involve risks and uncertainties, there
are various factors that could cause actual results to differ materially from
those expressed or implied by such forward-looking statements, which include
changes in general economic or business conditions nationally and in the
company's primary markets, the availability of capital upon terms acceptable to
the company, the availability and pricing of raw materials, the level of demand
for the company's products, the outcome of legal proceedings to which the
company is or may become a party, the actions of competitors within the packaged
food industry, changes in consumer tastes or eating habits, the success of
business strategies implemented by the company to meet future challenges, the
retention of key employees, the ability to develop and market in a timely and
efficient manner new products which are accepted by consumers, credit and
business risks related to our customers which operate in a competitive retail
food industry, and business disruption due to political instability, armed
hostilities, incidents of terrorism or responses to these or similar events or
conditions. If any of our assumptions prove incorrect or should unanticipated
circumstances arise, our actual results could differ materially from those
anticipated by such forward-looking statements. The differences could be caused
by a number of factors or combination of factors, including, but not limited to,
those factors described below as "Risk Factors." Readers are strongly encouraged
to consider these factors when evaluating any such forward-looking statements.
The company undertakes no obligation to publicly revise or update such
statements, except as required by law. Readers are advised, however, to consult
any further public disclosures by the company (such as in the company's filings
with the SEC or in company press releases) on related subjects.
Critical Accounting Policies
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States,
which require that management make numerous estimates and assumptions. Actual
results could differ from those estimates and assumptions, impacting the
company's reported results of operations and financial position. The company's
significant accounting policies are more fully described in Note 1 to the
company's audited consolidated financial statements. Certain accounting
policies, however, are considered to be critical in that (i) they are most
important to the depiction of the financial condition and results of operations
of the company and (ii) their application requires management's most subjective
judgment in making estimates about the effect of matters that are inherently
uncertain.
Customer sales and promotions
The company offers various sales incentive programs to customers and consumers,
such as cooperative advertising programs, price discounts, in-store display
incentives and coupons. These expenses are accounted for as a reduction of
sales. The recognition of expense for some of these programs involves the use of
judgment related to performance and redemption estimates. Estimates are based on
historical experience and other factors.
Collections
The company performs ongoing credit evaluations of customers' financial
conditions and makes quarterly estimates of its collectability of its accounts
receivable balances. Management specifically analyzes accounts receivable trends
and historical bad debts, customer concentrations, customer credit worthiness,
levels of customer deductions, current economic trends and changes in customer
payment terms when evaluating the adequacy of the allowance for doubtful
accounts. If the financial condition of customers were to deteriorate, resulting
in an impairment of their ability to make payments, additional allowances would
be required.
Long-lived asset impairment
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. If this
review indicates that the expected future undiscounted net cash flows of the
related asset is less than the asset's carrying value, an impairment loss is
recognized.
Page 9
Pension and Postretirement Plans
Accounting for pensions and postretirement benefit plans requires the use of
estimates and assumptions regarding numerous factors, including discount rate,
rate of return on plan assets, compensation increases, health care cost
increases, mortality and employee turnover. A sensitivity analysis for pensions
is included in Note 8 and a sensitivity analysis for postretirement benefits
other than pensions is included in Note 9. Licensed independent actuaries
perform these required calculations to determine liability and expense in
accordance with the generally accepted accounting principles in the United
States. In addition, the company may experience significant changes in its
pension expense from year to year because of its election in 1987 to immediately
recognize all pension gains and losses in excess of its pension corridor in the
year that they occur. For comparative purposes, this is relevant because most
other public companies use an amortization method that allows recognition of
pension gains and losses to be amortized over longer periods of time, up to 15
years. Also, the final determination of the gains and losses that could
potentially exceed the corridor is not known until the last day of the year, and
that makes it difficult to estimate. The combination of low interest rates and
low or negative rates of return on plan assets can cause higher levels of
pension expense; conversely, high interest rates and high rates of return on
assets could result in higher levels of pension income. Market conditions where
interest rates and asset returns move inversely relative to each other, in most
instances, cause the company to have pension expense or income within its
allowable pension corridor. Actual results may differ from the company's
assumptions and may impact the reported liability and expense amounts reported
for pensions and postretirement benefits.
Workers' Compensation Expense
Accounting for workers' compensation expense requires the use of estimates and
assumptions regarding numerous factors, including the ultimate severity of
injuries, the timeliness of reporting injuries, and health care cost increases.
Actual results may differ from the company's assumptions, which may have an
impact on the reported expense or liability for workers' compensation.
Income Tax Valuation
The company has recorded a deferred income tax asset for the benefit of federal
and state income tax loss carryforwards ("NOL's"). These carryforwards expire in
varying amounts between 2005 and 2024. Realization is dependent on generating
sufficient taxable income prior to expiration of the loss carryforwards.
Although realization is not assured, management believes that it is more likely
than not that the deferred tax assets will be realized. However, the amount
realizable could be reduced if estimates of future taxable income during the
carryforward period are reduced.
The company has recorded a deferred income tax asset benefit for unused federal
AMT credits, which do not expire, and for unused state tax credits, which expire
in varying amounts between 2005 and 2009. Realization is dependent on generating
sufficient taxable income prior to expiration of the state credits. A valuation
allowance in the amount of $407 has been established as management believes that
a portion of the state credits may not be realized since NOL's must be utilized
before the state credits.
Page 10
Results of Operations
(000's, except per share amounts)
All disclosures are pre-tax, unless otherwise noted.
Percentages may not calculate due to rounding.
The following table sets forth the percentage relationships to gross sales of
certain items in the company's consolidated statements of operations:
52 Weeks Ended 52 Weeks Ended 52 Weeks Ended
Dec. 25, 2004 Dec. 27, 2003 Dec. 28, 2002
--------------------------------------------------------------------------------------------------------------------------
Gross sales 100.0% 100.0% 100.0%
Discounts and allowances 38.6 36.5 36.5
Net sales 61.4 63.5 63.5
Costs, expenses and other
Cost of sales 40.0 43.4 43.6
Depreciation 3.0 2.9 2.7
Selling, general & administrative expenses 17.7 19.2 17.9
Restructure charge net of reversals - - 2.5
Interest expense .5 .4 .4
Gain on sale of routes - (.4) -
Other income, net (.4) (.3) (.5)
Income (loss) before provision for income taxes .7 (1.5) (3.1)
Provision for (benefit from) income taxes .2 (.6) (1.4)
Net income (loss) .5 (.9) (1.7)
Net income for the fiscal year ended December 25, 2004, was $1,243 or $0.15 per
fully diluted share. Net loss for the fiscal year ended December 27, 2003, was
$2,362 or $0.29 per fully diluted share. Net loss for the fiscal year ended
December 28, 2002, was $4,341 or $0.54 per share.
Sales
Gross sales increased by 3.3% in 2004 compared to 2003. Gross sales through
independent sales distributors in the Mid-Atlantic region (core routes)
increased by 5.3% in 2004, primarily driven by list price increases instituted
on the Family Pack product line, the new Tastykake Sensables(TM) product line
launched in August 2004 and the impact of the new route territories added in
Pittsburgh and Cleveland in the fourth quarter of 2003. Gross sales outside the
core route region (non-route) decreased in 2004 by 2.1% compared to 2003
primarily due to a three month impact of the company's exit from business on the
West Coast in support of the company's renewed focus on the core routes. Gross
sales declined 1.9% in 2003 compared to 2002. Gross sales in the core routes
increased by 3.7% in 2003; driven by the increased number of new routes in
Maryland and the expansion into Pittsburgh and Cleveland. Other factors
contributing to the change in core route sales during 2003 included price
increases instituted on certain product lines and new product introductions,
which were offset by the negative volume effect of decreases in promotional
activity and the discontinuation of certain low profit items. Non-route gross
sales declined by 14.8% in 2003 compared to 2002. The decline was primarily
attributable to the company's exit from business on the West Coast at the end of
the first quarter 2003.
Net sales in 2004 were relatively unchanged when compared to 2003. Sales
increases due to the Family Pack price increase, launch of Sensables and
expansion into Pittsburgh and Cleveland were offset by increased returns and
promotional spending. Net sales declined 1.9% in 2003 compared to 2002, which is
consistent with the decline in gross sales. A reduction in discounts and
promotions for 2003 was offset by the unfavorable impact of increased product
returns over 2002 and the existence of thrift stores sales in 2002.
Cost of Sales
During the fourth quarter of 2004, the company recorded additional pension
expense in the amount of $771, in connection with the company's method of
immediately recognizing gains and losses that fall outside the pension corridor
and a curtailment charge in connection with the company's decision to freeze
benefit accruals effective March 26, 2005. Of this expense, $540 was included in
cost of sales and $231 was included in selling, general and administrative
expenses. The company expects the volatility of the pension expense to decrease
in future years due to the freeze in benefit accruals on March 26, 2005. During
2003 there were no additional pension expense or income items related to the
company's method of immediately recognizing gains and losses that fall outside
the pension corridor. During 2002, the company recorded additional pension
expense in the amount of $4,656, in connection with the company's method of
immediately recognizing gains and losses that fall outside the pension corridor.
Of this expense, $3,259 was included in cost of sales and $1,397 was included in
selling, general and administrative expense.
Cost of sales, as a percentage of gross sales, was 40.0%, 43.4% and 43.6% in
2004, 2003 and 2002, respectively. Cost of sales as a percentage of gross sales
decreased in 2004 compared to 2003 primarily due to sales price increases on the
Family Pack product line and decreased product packaging costs of approximately
$1,500, partially offset
Page 11
by increased ingredient costs and increased pension expense. Cost of sales as a
percentage of gross sales remained constant in 2003 compared to 2002.
Favorability from price increases instituted in 2003 and reduced pension expense
was offset by increased cost of labor and ingredients.
Gross Margin
Gross margin after depreciation, as a percentage of net sales, was 30.0%, 27.2%
and 27.1% in 2004, 2003 and 2002, respectively. Gross margin increased in 2004
compared to 2003 due to sales price increases and decreased product packaging
costs. This savings was partially offset by increased returns, ingredient costs,
pension expense and the company's decision to increase promotional spending to
support the price increase and new product introductions. Gross margin remained
constant from 2003 compared to 2002 due to price increases and reduced pension
expense offset by the increased cost of labor, certain ingredients and inventory
write-offs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased 5.0%, or $2,398, in 2004
compared to 2003 due the company's decision to decrease marketing spending to
compensate for the increase in promotional spending. This reduction in operating
expenses was partially offset by an increase in administrative expense for
auditing and consulting fees in conjunction with the company's compliance work
for Sarbanes-Oxley Section 404 as well as $231 in increased pension expense.
Selling, general and administrative expenses in 2003 increased 5.5%, or $2,490,
compared to 2002 primarily due to increased marketing spending as well as
selling and administrative expenses for the launch into the Pittsburgh and
Cleveland markets. This increase was partially offset by reduced pension expense
and reduced selling, general and administrative expenses resulting from the
thrift store closings in December 2002.
Depreciation
Depreciation expense in 2004 increased 7.9% compared to 2003. This increase is
primarily due to the amortization of new handheld equipment placed into service
during the second quarter of 2004. During the first quarter, the company
performed a comprehensive review of the estimated useful lives of all asset
classes. As a result, the company evaluated the utilization of certain machinery
and equipment and determined that its useful lives should be extended to 15
years from 7 years, consistent with similar assets already being depreciated
over 15 years. The useful lives of buildings and improvements were standardized
at 39 years from 15 to 35 years. These changes in estimates resulted in a
decrease in depreciation expense of $1,608 in 2004. Also, depreciation expense
increased by $1,524 in 2004 due to a change in estimated useful lives of certain
machinery, leasehold improvements and acceleration of depreciation of the former
enterprise resource planning system which was replaced in the fourth quarter of
2004. Depreciation expense in 2003 increased 5.0% compared to 2002. The 2003
increase reflects the increased capital expenditures made for the bakeries'
production equipment, upgraded office facilities, technology and investment in
trucks purchased for the route expansion.
Non-Operating Items
Other income, net, increased $256 in 2004 compared to 2003 due to a gain on the
sale of equipment compared to a loss in the prior year. Other income, net,
decreased by $292 in 2003 compared to 2002 due to a loss on disposal of certain
assets and decreased interest income from independent sales distributor loans
caused by interest rate decreases.
Interest expense in 2004 increased by $345 compared to 2003, primarily due to
rate increases from a change in credit spreads on certain credit facilities.
Interest expense in 2003 decreased by $157 compared to 2002 due to decreased
average borrowing levels partially offset by increased average interest rates.
The company is exposed to market risk relative to its interest expense as its
notes payable and long-term debt have floating interest rates that vary with the
conditions in the credit markets. It is expected that a one percentage point
increase in interest rates would result in additional annual expense of
approximately $130.
The effective tax rates were a provision of 32.7% in 2004 and a benefit of 36.9%
and 45.2% in 2003 and 2002, respectively. These rates compare to a federal
statutory rate of 34.0%. In 2004 the difference between the effective rate and
the statutory rate is the result of state tax benefits generated from reported
state losses, partially offset by a valuation allowance for neighborhood
assistance credits established in 2003 which are not assured of recovery and a
state tax charge for the retroactive disallowance of certain deductions in the
state of Maryland. The difference between the effective rate and the statutory
rate in 2003 is principally due to the effect of state income taxes and the
establishment of a valuation allowance for neighborhood assistance credits in
2003 related to years 2000 through 2002 which are not assured of recovery. In
2002, the difference between the effective rate and the statutory rate is the
reversal of taxes accrued for prior year amounts that are no longer likely of
assertion.
In the second quarter 2004, the company realized a gain of $75 from the sale of
a route to an independent sales distributor. In the fourth quarter 2004, the
company favorably settled certain thrift store lease contracts for a gain of
$35. This gain was offset by reversals of previously settled contracts, and
other adjustments related to the estimated expenses for maintaining the thrift
stores still under contract, which resulted in a net charge of $9. See Note 2 to
the company's audited financial statements.
Page 12
During 2003, the company realized a gain of $1,077 from the sale of eleven
routes to independent sales distributors in Maryland. For 2003, there was a net
restructure charge reversal of $71. Included in this net reversal was a
restructure charge of $429 incurred during the fourth quarter of 2003 for costs
related to specific arrangements made with senior executives who departed the
company. Also included during 2003 were restructure charge reversals totaling
$500, resulting from the favorable settlement of thrift store leases reserved in
the 2002 restructuring. See Note 2 to the company's audited consolidated
financial statements.
During 2002, the company incurred a $6,341 restructure charge related to its
decision to close company owned thrift stores and to eliminate certain
manufacturing and administrative positions. See Note 2 to the company's audited
consolidated financial statements.
Liquidity and Capital Resources
Current assets at December 25, 2004 were $30,153 compared to $32,004 at December
27, 2003, and current liabilities at December 25, 2004, were $23,384 compared to
$24,419 at December 27, 2003. The decrease in current assets is primarily
related to a prepayment for a 2003 carryback of a federal tax loss which was
collected in 2004. This was partially offset by an increase in accounts
receivable, net of the allowance. The accounts receivable allowance increased by
$1,200 which can be attributed to a reserve for customer credits not yet issued
for certain promotional deals. The decrease in current liabilities in 2004 was
principally related to a decrease in short term notes payable and 2004 cash
payments against the restructuring reserve, partially offset by an increase in
the accrual for worker's compensation resulting from certain large claims during
2004.
Cash and Cash Equivalents
Historically, the company has been able to generate sufficient amounts of cash
from operations. Bank borrowings are used to supplement cash flow from
operations during periods of cyclical shortages. A Credit Facility ("Facility")
is maintained with two banks ("Bank Group") and certain capital and operating
leases are utilized. Contractual obligations arising under these arrangements
and related commitment expirations are detailed in Notes 5 to 7 to the company's
audited consolidated financial statements.
Subsequent to the company's fourth quarter of 2004, the company and the Bank
Group amended the Facility ("Amended Facility") 1) to waive certain covenant
violations that existed on December 25, 2004; 2) to amend the Facility's
definitions to exclude the effects of the company's 2004 pension expense in
excess of its 10% corridor; 3) to amend the limit on capital expenditures for
2005 to $10 million; 4) to amend the minimum Tangible Net Worth required; and 5)
to extend the maturity of the 364-day line to March 20, 2006. The waivers
obtained cured the company's covenant violations for its 2004 capital
expenditures and its required Tangible Net Worth. Further, the company expects
to enter into negotiations with the Bank Group in 2005 to extend the maturity of
the three-year revolving line beyond its current maturity date of January 22,
2007.
Net cash from operating activities in 2004 increased by $3,978 compared to 2003.
The increase primarily resulted from an increase in net income when compared to
the net loss in 2003 and a decrease in restructure payments. Partially
offsetting these favorable changes were net unfavorable changes in assets and
liabilities including an increase in receivables compared to a decrease in the
prior year and a smaller increase in accounts payable partially offset by a
decrease in prepayments from the collection of a federal income tax refund.
Net cash from operating activities in 2003 decreased by $712 compared to 2002.
Focus on working capital management resulted in a $4,191 increase in cash from
the changes in assets and liabilities. This favorable change was more than
offset by the decrease in cash from operating income compared to 2002.
Net cash used for investing activities in 2004 increased by $2,679 compared to
2003. The increase in capital expenditures was for the new enterprise resource
planning system and a new production line at the company's Oxford manufacturing
location. Capital expenditures totaled $9,295 in 2004.
Net cash used for investing activities in 2003 increased by $1,732 compared to
2002, principally due to an increase in capital expenditures and an increase in
loans to independent sales distributors which exceeded repayments in 2003.
Capital expenditures totaled $6,676 in 2003. These expenditures were made
primarily for the upgrade of the office facilities, the bakeries' production
equipment, technology and investment in trucks to be sold to independent sales
distributors in route expansion territories.
Net cash used for financing activities in 2004 increased by $764 compared to
2003, principally due to an increase in net debt repayments compared to 2003.
Net cash used for financing activities in 2003 decreased by $2,280 compared to
2002, principally due to a reduction of dividends paid. The company reduced its
quarterly dividend to $0.05 in 2003. The quarterly dividend had been $0.12 per
share since 1997.
The company anticipates that for the foreseeable future cash flow from operating
activities along with the continued availability of the Amended Facility and
other long-term lease financing will provide sufficient cash for planned capital
expenditures and other operating and financing requirements.
Page 13
Certain Financing Activity
Future payments due under debt, lease and employee benefits obligations as of
December 25, 2004, are reflected in the following table:
--------------- ------------------------- ------------------ -------------- ------------- ------------ -------------
Fiscal Year Capital lease Noncancelable Notes Long-term Estimated Total (c)
Employee
obligations Benefit
(at 11.0% and 5.9%) operating leases Payable (a) Debt (b) Payments
--------------- ------------------------- ------------------ -------------- ------------- ------------ -------------
2005 $ 1,142 $ 1,747 $ 2,900 - $ 510 $ 6,299
--------------- ------------------------- ------------------ -------------- ------------- ------------ -------------
2006 $ 1,142 $ 1,440 - - $ 510 $ 3,092
--------------- ------------------------- ------------------ -------------- ------------- ------------ -------------
2007 $ 1,089 $ 701 - $9,000 $ 502 $ 11,292
--------------- ------------------------- ------------------ -------------- ------------- ------------ -------------
2008 $ 581 $ 487 - - $ 492 $ 1,560
--------------- ------------------------- ------------------ -------------- ------------- ------------ -------------
2009 $ 561 $ 146 - - $ 469 $ 1,176
--------------- ------------------------- ------------------ -------------- ------------- ------------ -------------
Thereafter $ 2,525 $ 4 - - $ 2,258 $ 4,787
--------------- ------------------------- ------------------ -------------- ------------- ------------ -------------
Total $ 7,040 $ 4,525 $ 2,900 $9,000 $ 4,741 $ 28,206
--------------- ------------------------- ------------------ -------------- ------------- ------------ -------------
(a) On March 21, 2005, the company extended the maturity of its 364-day line in
the Credit Facility to March 19, 2006. On the consolidated balance sheet,
the 364-day line is reflected as a current liability as the balance
fluctuates daily based on working capital requirements.
(b) On January 23, 2004, the company extended the maturity of its revolving
line in the Credit Facility to January 22, 2007.
(c) In addition to the obligations listed in this chart, the company enters
into purchase commitments primarily related to the purchase of ingredients
and packaging utilized in the ordinary course of business, which
historically approximate $60 to $65 million annually. These items are
obtained by purchase orders on an as needed basis. As of December 25, 2004,
the company does not have any purchase commitments that extend beyond a
twelve month period.
There is no minimum cash contribution for the Pension Plan in 2005. The company
is expecting to make a cash contribution in 2005 but has not determined the
amount.
Recent Accounting Statements
In December 2004, the Financial Accounting Standards Board (FASB) issued FASB
Statement No. 123(R), Share-Based Payment (FAS 123(R)), which requires companies
to expense the fair-value of employee stock options and other forms of
stock-based compensation. This statement is effective for public entities that
do not file as small business issuers as of the beginning of the first interim
or annual reporting period that begins after June 15, 2005. The company expects
to adopt FAS 123(R) in July 2005. The company expects to select the Modified
Prospective Application (MPA), without restatement of prior interim periods in
the year of adoption. The company is currently evaluating the impact of the
adoption of the Share Based Payments, but does not expect a material impact
compared to the pro forma amounts.
In November 2004, the FASB issued Statement of Financial Accounting Standards
No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4 ("SFAS No.
151"). SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4, "Inventory
Pricing," to clarify the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material (spoilage). Paragraph 5 of
ARB No. 43, Chapter 4, previously stated that "...under some circumstances,
items such as idle facility expense, excessive spoilage, double freight, and
rehandling costs may be so abnormal as to require treatment as current period
charges..." SFAS No. 151 requires that those items be recognized as
current-period charges regardless of whether they meet the criterion of "so
abnormal." In addition, SFAS No. 151 requires that allocation of fixed
production overheads to the costs of conversion be based on the normal capacity
of the production facilities. The company does not expect any changes to its
financial accounting and reporting as a result of the implementation of SFAS No.
151.
Risk Factors
Competition
The company is engaged in a highly competitive business. The number of choices
facing the consumer on how to spend snack food dollars, particularly with the
introduction of more convenient packaging of traditional products, both sweet
and salty, has increased significantly over the last several years. Although the
number of competitors varies among marketing areas, certain competitors are
national companies with multiple production facilities, national distribution
systems, and nationally recognized brands with large advertising and promotion
budgets. Increased competition could result in lower sales, profits, and market
share.
Page 14
Concentration of Customers
The company's top twenty customers represent 57.9% of its 2004 net sales
dollars, 56.0% of its 2003 net sales dollars, and 55.9% of its 2002 net sales
dollars. The company's largest customer, Wal-Mart, represents 16.3% of the net
sales in 2004, 15.2% of net sales in 2003, and 13.3% of net sales in 2002. All
customers in the route sales area are serviced by independent sales
distributors. If any of the top twenty customers change their buying habits, the
company's sales and profits could be adversely affected.
Commodity Prices
The company is dependent upon sugar, eggs, oils, flour and cocoa for its
ingredients and paperboard for its packaging. Commodity prices have been
volatile and may continue to be volatile. Any substantial increase in
commodities prices may have an adverse impact on the company's profitability.
Consumer Preferences
The company's success is attributable to the company's ability to forecast the
tastes and preferences of consumers and offer products that appeal to their
preferences. Consumer preference changes, and the company's failure to
anticipate, identify or react to these changes, could result in reduced demand
for the company's branded products, which could adversely affect the company's
financial and operational results.
Long-term Receivables
The company's long-term receivables represent loans issued to its independent
sales distributors for the purchase of route territories and delivery vehicles.
These loans are issued through a wholly-owned subsidiary, TBC Financial
Services, Inc. Current lending guidelines require significant collateral to
minimize the company's risk in the event of default by an independent sales
distributor and the company's loss history has been minimal. However, the
collectibility of the entire loan portfolio is directly related to the company's
current route distribution system and the individual independent sales
distributor's ability to repay the loan, which is directly related to the
economic success of the route. In addition, any external event or circumstance
that impacts the independent sales distributors may also affect the long-term
receivables.
Core vs. Expanded Market
Historically, independent sales distributors have accounted for the largest part
of the company's revenues. Prior to 2003 as the company expanded outside of its
core Mid-Atlantic route market, the percentage of volume began to shift toward
more non-route business, causing some erosion of the company's gross margin. As
part of management's new strategy in 2003, the company refocused its efforts on
its core independent sales distributor business, while at the same time,
carefully evaluated existing and new business possibilities outside the core
market. If the company is unable to further develop brand recognition in the
expanded markets, sales could be adversely affected.
Production and Inventory Management
The company's products have limited shelf life. Production planning and
monitoring of demand is essential to effective operations, both to fulfill
customer demand and to minimize the level of returns. Delays in getting the
product to market such as transportation or bad weather may cause loss of sales,
which could adversely affect the company's operating results.
Production Facilities
The company has two production facilities: Philadelphia and Oxford,
Pennsylvania. The Philadelphia facility is a multi-storied manufacturing
facility where the company's signature products are exclusively manufactured.
The Oxford facility is a single-story manufacturing facility with expansion
possibilities. The loss of either production facility due to casualty could have
an adverse impact on the company's results of operations.
Availability of Capital
The company has historically been successful in generating the funds necessary
for capital improvements through internally generated sources and limited
borrowings. Future capital programs and the expansion of the company's markets
may be affected by the availability and cost of capital in the equity and debt
markets.
Interest Rates
Fluctuation in interest rates will affect the company's recognition of interest
expense related to its short and long-term debt, and the interest income it
realizes on its long-term receivables.
Page 15
Governmental Regulation
The company's products and properties are subject to regulation by various
federal, state and local government entities and agencies. Compliance with,
violation of or increased regulations could have a material adverse impact on
the company's operations and financial results. The company is unable to predict
whether any entity or agency will adopt any regulations that would have a
material impact on the company's operating results.
Litigation
The company is involved in legal proceedings, most of which are routine and have
arisen in the ordinary course of business. The company is unable to predict the
outcome of litigation, but it does not believe that the ultimate resolution of
any matter will have a material adverse effect on the financial position or
results of operations of the company. However, if one or more of such matters
were determined adversely, the ultimate liability arising therefrom could be
material to results of operations in the quarter or annual period it is
determined.
Pension Expense
Accounting for pension expense requires the use of estimates and assumptions
including discount rate, rate of return on plan assets, compensation increases,
mortality and employee turnover, all of which affect the amount of expense
recognized by the company. In addition, the rate of return on plan assets is
directly related to changes in the equity and credit markets, which can be very
volatile. The use of the above assumptions, market volatility and the company's
election in 1987 to recognize all pension gains and losses in excess of its
pension corridor in the current year may cause the company to experience
significant changes in its pension expense from year to year, which could
adversely affect the company's operating results. This election is unique to the
company as most other public companies use an amortization method that allows
recognition of pension gains and losses to be amortized over longer periods of
time, up to 15 years. The company's pension plan is also the owner of its
Philadelphia production property, which it leases back to the company under a
long-term capital lease. An impairment of this asset may impact the company's
pension expense and the cash contributions that it is required to make to the
pension plan.
Intellectual Property and Trade Secrets
The company has taken efforts to protect its trademarks, copyrights and trade
secrets as the company considers its intellectual property rights important to
its success. However, other parties may take actions that could impair the value
of the company's proprietary rights or reputation of its brands. Any such
impairment could adversely affect the company's business. Moreover, protecting
the company's intellectual property and other proprietary rights could be costly
and any increase in the unauthorized use of the company's intellectual property
could make it more expensive to do business and therefore, adversely affect the
company's operating results.
Economic Conditions
The company's business may be adversely affected by changes in economic and
business conditions nationally and particularly within its core market. In
addition, the business strategies implemented by management to meet these
business conditions and other market challenges may have a significant impact
upon the company's future results of operations.
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
-------- ---------------------------------------------------------
The company has certain floating rate debt notes. Under current market
conditions, the company believes that changes in interest rates would not have a
material impact on the financial statements of the company. It is expected that
a one percentage point increase in interest rates would result in additional
annual expense of approximately $130,000. The company also has notes receivable
from sales distributors whose rates adjust every three years, and, therefore,
would partially offset the fluctuations in the company's interest rates on its
notes payable. The company also has the right to sell these notes receivable,
and could use these proceeds to liquidate a corresponding amount of the debt
notes payable. Information on the debt and receivable notes can be found in the
Notes to Consolidated Financial Statements, Notes 5 and 4, respectively.
Page 16
Item 8. Consolidated Financial Statements and Supplementary Data
------- --------------------------------------------------------
Index to Financial Statements
Page
Report of Independent Registered Public Accounting Firm 18
Operations and Retained Earnings 20
Cash Flows 21
Balance Sheets 22
Changes in Capital Accounts 24
Notes to Consolidated Financial Statements 25
Page 17
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of the Tasty Baking Company:
We have completed an integrated audit of Tasty Baking Company's 2004
consolidated financial statements and of its internal control over financial
reporting as of December 25, 2004 and audits of its 2003 and 2002 consolidated
financial statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Our opinions, based on our audits,
are presented below.
Consolidated financial statements and financial statement schedule
------------------------------------------------------------------
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of Tasty
Baking Company and its subsidiaries at December 25, 2004 and December 27, 2003,
and the results of their operations and their cash flows for each of the three
years in the period ended December 25, 2004 in conformity with accounting
principles generally accepted in the United States of America. In addition, in
our opinion, the financial statement schedule listed in the accompanying index
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit of financial statements includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
Internal control over financial reporting
-----------------------------------------
Also, we have audited management's assessment, included in Management's Report
on Internal Control over Financial Reporting appearing under Item 9A, that Tasty
Baking Company did not maintain effective internal control over financial
reporting as of December 25, 2004, because the Company did not maintain
effective controls over (i) accounting for income taxes and the determination of
income taxes payable, deferred income tax assets and liabilities, and the
related income tax provision, (ii) payroll and (iii) spare parts inventory,
based on criteria established in Internal Control - Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The Company's management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express
opinions on management`s assessment and on the effectiveness of the Company's
internal control over financial reporting based on our audit.
We conducted our audit of internal control over financial reporting in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. An audit of
internal control over financial reporting includes obtaining an understanding of
internal control over financial reporting, evaluating management's assessment,
testing and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we consider necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinions.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Page 18
A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. The following material weaknesses have been identified and included
in management's assessment.
1. Accounting for Income Taxes: As of December 25, 2004, the Company did
not maintain effective controls over the determination of income taxes
payable, deferred income tax assets and liabilities, and the related
income tax provision. Specifically, management identified the
following related to the Company's internal control over accounting
for income taxes: a lack of dedicated personnel with expertise in
income tax accounting matters, insufficient formalized policies and
procedures, insufficient historical analysis and ineffective
reconciliation of tax asset and liability general ledger accounts.
This control deficiency resulted in immaterial misstatements to the
consolidated financial statements. However, this control deficiency
could result in a misstatement of income taxes payable, deferred
income tax assets and liabilities, and the related income tax
provision that would result in a material misstatement to the annual
or interim consolidated financial statements that would not be
prevented or detected. Accordingly, management has determined that
this control deficiency constitutes a material weakness.
2. Payroll: As of December 25, 2004, the Company did not maintain
effective control over payroll. Specifically, certain employees had
inappropriate access to the payroll system and authority to process
time without appropriate documentation and/or management approval.
This control deficiency did not result in any adjustments to the
annual or interim consolidated financial statements; however, this
control deficiency could result in a misstatement of payroll liability
and expense accounts that would result in a material misstatement to
annual or interim consolidated financial statements that would not be
prevented or detected. Accordingly, management has determined that
this control deficiency constitutes a material weakness.
3. Spare Parts Inventory: As of December 25, 2004, the Company did not
maintain effective controls over spare parts inventory. This
deficiency in internal control included ineffective review and
approval of parts issued and received as well as ineffective
application of cycle count procedures. Furthermore, the Company did
not maintain effective control over validation of prices invoiced to
the Company from the third party service provider. This deficiency did
not result in any adjustments to the annual or interim consolidated
financial statements; however, this control deficiency could result in
a misstatement of spare parts inventory that would result in a
material misstatement to annual or interim consolidated financial
statements that would not be prevented or detected. Accordingly,
management has determined that this control deficiency constitutes a
material weakness.
These material weaknesses were considered in determining the nature, timing, and
extent of audit tests applied in our audit of the 2004 consolidated financial
statements, and our opinion regarding the effectiveness of the Company's
internal control over financial reporting does not affect our opinion on those
consolidated financial statements.
In our opinion, management's assessment that Tasty Baking Company did not
maintain effective internal control over financial reporting as of December 25,
2004, is fairly stated, in all material respects, based on criteria established
in Internal Control-Integrated Framework issued by the COSO. Also, in our
opinion, because of the effects of the material weaknesses described above on
the achievement of the objectives of the control criteria, Tasty Baking Company
has not maintained effective internal control over financial reporting as of
December 25, 2004, based on criteria established in Internal Control -
Integrated Framework issued by the COSO.
PricewaterhouseCoopers LLP
/s/ PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 25, 2005
Page 19
Consolidated Financial Statements
Tasty Baking Company and Subsidiaries
Consolidated Statements of Operations and Retained Earnings
(000's, except per share amounts)
52 Weeks Ended 52 Weeks Ended 52 Weeks Ended
Dec. 25, 2004 Dec. 27, 2003 Dec. 28, 2002
---------------------------------------------------------------------------------------------------------------------------
Operations
-------------------------------------------------------
Gross sales $ 259,029 $ 250,648 $ 255,504
Less discounts and allowances (99,968) (91,519) (93,241)
-------------------------------------------------------------------
Net sales 159,061 159,129 162,263
-------------------------------------------------------------------
Costs and expenses:
-------------------------------------------------------
Cost of sales 103,693 108,689 111,469
Depreciation 7,711 7,148 6,807
Selling, general and administrative 45,751 48,149 45,659
Interest expense 1,254 909 1,066
Gain on sale of routes (75) (1,077) -
Other income, net (1,129) (873) (1,165)
Restructure charge net of reversals 9 (71) 6,341
-------------------------------------------------------------------
157,214 162,874 170,177
-------------------------------------------------------------------
Income (loss) before provision for income taxes 1,847 (3,745) (7,914)
-------------------------------------------------------------------
Provision for (benefit from) income taxes:
-------------------------------------------------------
Federal 147 (3,089) (11)
State 80 709 (316)
Deferred 377 997 (3,246)
-------------------------------------------------------------------
604 (1,383) (3,573)
-------------------------------------------------------------------
Net income (loss) $ 1,243 $ (2,362) $ (4,341)
-------------------------------------------------------------------
-------------------------------------------------------
Retained Earnings
-------------------------------------------------------
Balance, beginning of year $ 22,641 $ 26,622 $ 34,839
Cash dividends paid on common shares
($0.20 per share in 2004 and 2003, $0.48 per
share in 2002) (1,623) (1,619) (3,876)
-------------------------------------------------------------------
Balance, end of year $ 22,261 $ 22,641 $ 26,622
-------------------------------------------------------------------
Per share of common stock:
Net income (loss):
Basic and Diluted $ .15 $ (.29) $ (.54)
See accompanying notes to consolidated financial statements.
Page 20
Consolidated Statements of Cash Flows
(000's)
52 Weeks Ended 52 Weeks Ended 52 Weeks Ended
Dec. 25, 2004 Dec.27, 2003 Dec.28 ,2002
--------------------------------------------------------------------------------------------------------------------------------
Cash flows from (used for) operating activities
------------------------------------------------------
Net income (loss) $ 1,243 $ (2,362) $ (4,341)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 7,711 7,148 6,807
Gain on sale of routes (75) (1,077) -
Restructure charges net of reversals 9 (71) 6,341
Pension and SERP expense 2,449 2,190 5,866
Pension contributions - - (1,000)
Deferred taxes 377 997 (3,246)
Restructure payments (1,347) (2,525) (1,207)
Other (41) (594) (611)
Changes in assets and liabilities:
Decrease (increase) in receivables (278) 961 393
Decrease in inventories 318 1,047 1,635
Decrease (increase) in prepayments and other 1,236 (330) (1,840)
Increase in accounts payable, accrued
payroll and other accrued liabilities 1,779 4,019 1,318
-----------------------------------------------------------------------
Net cash from operating activities 13,381 9,403 10,115
-----------------------------------------------------------------------
Cash flows from (used for) investing activities
------------------------------------------------------
Proceeds from independent sales distributor
loan repayments 3,691 3,540 3,987
Proceeds from sale of property, plant and equipment 82 147 -
Purchase of property, plant and equipment (9,295) (6,676) (5,359)
Loans to independent sales distributors (3,785) (3,628) (3,881)
Other (403) (414) (46)
-----------------------------------------------------------------------
Net cash used for investing activities (9,710) (7,031) (5,299)
-----------------------------------------------------------------------
Cash flows from (used for) financing activities
------------------------------------------------------
Dividends paid (1,623) (1,619) (3,876)
Payment of long-term debt (1,467) (1,402) (2,117)
Net increase (decrease) in short-term debt (2,200) 400 600
Additional long-term debt 2,000 - -
Net proceeds from sale of common stock - - 492
Purchase of stock for treasury (95) - -
-----------------------------------------------------------------------
Net cash used for financing activities (3,385) (2,621) (4,901)
-----------------------------------------------------------------------
Net increase (decrease) in cash 287 (249) (85)
Cash, beginning of year 33 282 367
-----------------------------------------------------------------------
Cash, end of year $ 320 $ 33 $ 282
-----------------------------------------------------------------------
Supplemental cash flow information
Cash paid during the year for:
------------------------------------------------------
Interest $ 1,104 $ 841 $ 1,084
Income taxes $ (2,186) $ 98 $ 1,012
Noncash investing and financing activities
------------------------------------------------------
Capital leases $ 155 $ 2,079 $ -
-----------------------------------------------------------------------
Loans to independent sales distributors $ (73) $ (1,076) $ -
-----------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
Page 21
Consolidated Balance Sheets
(000's)
Dec. 25, 2004 Dec. 27, 2003
------------------------------------------------------------------------------------------------------------------------------
Assets
--------------------------------------------------------------------------------
Current assets:
--------------------------------------------------------------------------------
Cash $ 320 $ 33
Receivables, less allowance of $4,848 and $3,648, respectively 20,049 19,068
Inventories 5,412 5,730
Deferred income taxes 3,280 3,902
Prepayments and other 1,092 3,271
----------------------------------
Total current assets 30,153 32,004
----------------------------------
Property, plant and equipment:
--------------------------------------------------------------------------------
Land 1,033 1,098
Buildings and improvements 41,327 40,288
Machinery and equipment 166,449 158,286
----------------------------------
208,809 199,672
Less accumulated depreciation and amortization 143,774 136,156
----------------------------------
65,035 63,516
----------------------------------
Other assets:
--------------------------------------------------------------------------------
Long-term receivables from independent sales distributors 11,185 11,688
Deferred income taxes 10,337 9,267
Miscellaneous 1,792 768
----------------------------------
23,314 21,723
----------------------------------
Total Assets $ 118,502 $ 117,243
----------------------------------
See accompanying notes to consolidated financial statements.
Page 22
Dec. 25, 2004 Dec. 27, 2003
---------------------------------------------------------------------------------------------------------------------------
Liabilities
--------------------------------------------------------------------------------
Current liabilities:
--------------------------------------------------------------------------------
Current obligations under capital leases $ 713 $ 634
Notes payable, banks 2,700 4,900
Accounts payable 9,083 9,261
Accrued payroll and employee benefits 7,145 6,013
Reserve for restructure 436 1,331
Other accrued liabilities 3,307 2,280
----------------------------------
Total current liabilities 23,384 24,419
Long-term obligations under capital leases, less current portion 4,159 4,705
Long-term debt 9,000 8,000
Reserve for restructures, less current portion 601 1,044
Accrued pensions and other liabilities 23,824 19,938
Postretirement benefits other than pensions 16,747 16,718
----------------------------------
Total liabilities 77,715 74,824
----------------------------------
Commitments and Contingencies
Shareholders' Equity
--------------------------------------------------------------------------------
Common stock, par value $0.50 per share, and entitled to one vote per share:
Authorized 15,000 shares, issued 9,116 shares 4,558 4,558
Capital in excess of par value of stock 29,292 29,393
Retained earnings 22,261 22,641
----------------------------------
56,111 56,592
Less:
--------------------------------------------------------------------------------
Accumulated other comprehensive loss 2,398 1,236
Treasury stock, at cost:
939 shares and 1,020 shares, respectively 12,823 12,545
Management Stock Purchase Plan receivables and deferrals 103 392
----------------------------------
40,787 42,419
----------------------------------
Total Liabilities and Shareholders' Equity $ 118,502 $ 117,243
----------------------------------
See accompanying notes to consolidated financial statements.
Page 23
Consolidated Statements of Changes in Capital Accounts
(000's)
Dec. 25, 2004 Dec. 27, 2003 Dec. 28, 2002
---------------------------------------------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
---------------------------------------------------------------------------------------------------------------------------
Common Stock:
Balance, beginning of year 9,116 $ 4,558 9,116 $ 4,558 9,116 $ 4,558
------------------------------------------------------------------------------------------
Balance, end of year 9,116 $ 4,558 9,116 $ 4,558 9,116 $ 4,558
------------------------------------------------------------------------------------------
Capital in Excess of
Par Value of Stock:
Balance, beginning of year $ 29,393 $ 29,433 $ 29,389
Issuances (Terminations):
Management Stock Purchase Plan (98) (42) 17
Stock Option Plan - (7) (25)
Tax benefits related to
Management Stock Purchase
Plan and Stock Option Plan (3) 9 52
------------------------------------------------------------------------------------------
Balance, end of year $ 29,292 $ 29,393 $ 29,433
------------------------------------------------------------------------------------------
Accumulated Other
Comprehensive (loss):
Balance, beginning of year $ (1,236) $ - $ -
Minimum pension liability,
net of taxes of $810 and
$723 (1,162) (1,236) -
------------------------------------------------------------------------------------------
Balance, end of year $ (2,398) $ (1,236) $ -
------------------------------------------------------------------------------------------
Treasury Stock:
Balance, beginning of year (1,020) $ (12,545) (1,013) $ (12,539) (1,065) $ (13,167)
Management Stock
Purchase Plan:
Reissued - - 1 17 12 159
Reacquired (20) (183) (8) (75) (7) (129)
Net shares reissued
in connection with:
Stock Option Plan - - - 52 47 598
Restricted Stock Grant 112 - - - - -
Purchase of Stock for Treasury (11) (95) - - - -
------------------------------------------------------------------------------------------
Balance, end of year (939) $ (12,823) (1,020) $ (12,545) (1,013) $ (12,539)
------------------------------------------------------------------------------------------
Management Stock Purchase
Plan Receivables and Deferrals:
Balance, beginning of year $ (392) $ (549) $ (554)
Common stock issued - (13) (176)
Common stock repurchased 242 93 99
Note payments and amortization
of deferred compensation 47 77 82
------------------------------------------------------------------------------------------
Balance, end of year $ (103) $ (392) $ (549)
-------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
Page 24
Notes to Consolidated Financial Statements
(000's, except share and per share amounts)
All disclosures are pre-tax, unless otherwise noted.
1. Summary of Significant Accounting Policies
--------------------------------------------------------------------------------
Nature of the Business
Tasty Baking Company is a leading producer of sweet baked goods and one of the
nation's oldest and largest independent baking companies, in operation since
1914. It has two manufacturing facilities, one in Philadelphia, PA, and a second
facility in Oxford, PA.
Fiscal Year
The company and its subsidiaries operate on a 52-53 week fiscal year, ending on
the last Saturday of December. Fiscal year 2005 is a 53-week year.
Basis of Consolidation
The consolidated financial statements include the accounts of the company and
its subsidiaries. Inter-company transactions are eliminated.
Use of Estimates
Certain amounts included in the accompanying consolidated financial statements
and related footnotes reflect the use of estimates based on assumptions made by
management. These estimates are made using all information available to
management, and management believes that these estimates are as accurate as
possible as of the dates and for the periods that the financial statements are
presented. Actual amounts could differ from these estimates. Significant
estimates for the company include receivable's allowance, inventory reserves,
reserve for product returns, and pension plan assumptions for plan asset return
and discount rate.
Concentration of Credit
The company encounters, in the normal course of business, exposure to
concentrations of credit risk with respect to trade receivables. Ongoing credit
evaluations of customers' financial conditions are performed and, generally, no
collateral is required. The company maintains reserves for potential credit
losses and such losses have not exceeded management's expectations. The
company's top twenty customers represent 57.9% of its 2004 net sales dollars,
56.0% of its 2003 net sales dollars, and 55.9% of its 2002 net sales dollars.
The company's largest customer, Wal-Mart, represents 16.3% of the net sales in
2004, 15.2% of net sales in 2003, and 13.3% of net sales in 2002. All customers
in the route sales area are serviced by independent sales distributors. If any
of the top twenty customers change their buying habits, the company's ability to
maintain current sales levels could be adversely affected.
Revenue Recognition
Revenue is recognized when title and risk of loss pass, which is generally upon
receipt of goods by the customer. For route area sales, the company sells to
independent sales distributors who, in turn, sell to retail customers.
Provisions for estimated discounts, product returns and other adjustments are
provided in the same period that the related sales are recorded based upon
promotional calendars and historical trends.
Cash and Cash Equivalents
The company considers all investments with an original maturity of three months
or less on their acquisition date to be cash equivalents.
Inventory Valuation
Inventories are stated at the lower of cost or market, cost being determined
using the first-in, first-out ("FIFO") method.
Property and Depreciation
Property, plant and equipment are carried at cost. Depreciation is computed by
the straight-line method over the estimated useful lives of the assets.
Buildings and improvements are depreciated over thirty-nine years. The principal
manufacturing plant is leased from the company's pension plan and is amortized
over twenty years. Leasehold improvements are generally depreciated over
thirty-nine years. Machinery and equipment are depreciated over a range of seven
to fifteen years. Spare parts are capitalized as part of machinery and equipment
and are expensed as utilized. The new enterprise resource planning system is
being depreciated over five years.
Costs of major additions, replacements and betterments are capitalized, while
maintenance and repairs, which do not improve or extend the life of the
respective assets, are expensed as incurred.
The company capitalizes interest and labor costs associated with the
construction and installation of plant and equipment and in 2004 the company
capitalized labor costs associated with the implementation of the company's new
enterprise resource planning system.
Page 25
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. If this
review indicates that the expected future undiscounted net cash flows of the
related asset is less than the asset's carrying value, an impairment loss is
recognized.
Marketing Costs
The company expenses marketing costs, which include advertising and consumer
promotions, as incurred. Marketing costs are included as a part of selling,
general and administrative expense. Total marketing expenses, including direct
marketing and marketing overhead costs, totaled $2,725, $5,708, and $2,105 for
the years ended December 25, 2004, December 27, 2003, and December 28, 2002,
respectively.
Shipping and Handling Costs
Shipping and handling costs are included as a part of selling, general and
administrative expense.
Pension Plan
The company's funding policy for the pension plan is to contribute amounts
deductible for federal income tax purposes plus such additional amounts, if any,
as the company's actuarial consultants advise to be appropriate. In 1987 the
company elected to immediately recognize all gains and losses in excess of the
pension corridor.
Stock-Based Compensation
In December of 2002, the Financial Accounting Standards Board (FASB) issued
Statement No. 148 "Accounting for Stock-Based Compensation - Transition and
Disclosure - an Amendment of FASB Statement No. 123 (FAS 148)." The provisions
of this statement are effective for fiscal years beginning after December 15,
2003. The company measures stock-based compensation and reports the calculated
differences between the reported and pro-forma impact of the fair-value method
on the interim and annual financial reports as required. See Recent Accounting
Statements in Note 1 regarding a change effective in 2005.
2004 2003 2002
---------------------------------------------------------------------------------------------------------------------------
Net income (loss) as reported $ 1,243 $ (2,362) $ (4,341)
Deduct: Total stock-based employee
compensation expense determined under
fair-value method, net of related tax effects 261 302 69
-----------------------------------------------------------------
Pro forma net income (loss) $ 982 $ (2,664) $ (4,410)
-----------------------------------------------------------------
Earnings per share:
Basic and Diluted - as reported .15 (.29) (.54)
-----------------------------------------------------------------
Basic - pro forma .12 (.33) (.55)
Diluted - pro forma .12 (.33) (.54)
-----------------------------------------------------------------
Treasury Stock
Treasury stock is stated at cost. Cost is determined by the FIFO method.
Accounting for Income Taxes
The company accounts for income taxes under the asset and liability method.
Deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates in effect when the differences are expected to be
recovered or settled.
Net Income Per Common Share
Net income per common share is presented as basic and diluted earnings per
share. Net income per common share - Basic is based on the weighted average
number of common shares outstanding during the year. Net income per common share
- Diluted is based on the weighted average number of common shares and dilutive
potential common shares outstanding during the year. Dilution is the result of
outstanding stock options.
Prior Period Reclassifications
For 2003 and 2002, amounts have been reclassified in the company's consolidated
statements of operations and retained earnings, cash flows and balance sheets
for comparative purposes.
Recent Accounting Statements
In December 2004, the FASB issued FASB Statement No. 123(R), Share-Based Payment
(FAS 123(R)), which requires companies to expense the fair-value of employee
stock options and other forms of stock-based compensation. This statement is
effective for public entities that do not file as small business issuers as of
the beginning of the first interim or annual reporting period that begins after
June 15, 2005. The company expects to adopt FAS 123(R) in July 2005. The company
expects to select the Modified Prospective Application (MPA), without
restatement of prior interim periods in the year of adoption. The company is
currently evaluating the impact of the adoption of the Share Based Payments, but
does not expect a material impact compared to the pro forma amounts.
Page 26
In November 2004, the FASB issued Statement of Financial Accounting Standards
No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4 ("SFAS No.
151"). SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4, "Inventory
Pricing," to clarify the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material (spoilage). Paragraph 5 of
ARB No. 43, Chapter 4, previously stated that "...under some circumstances,
items such as idle facility expense, excessive spoilage, double freight, and
rehandling costs may be so abnormal as to require treatment as current period
charges..." SFAS No. 151 requires that those items be recognized as
current-period charges regardless of whether they meet the criterion of "so
abnormal." In addition, SFAS No. 151 requires that allocation of fixed
production overheads to the costs of conversion be based on the normal capacity
of the production facilities. The company does not expect any changes to its
financial accounting and reporting as a result of the implementation of SFAS No.
151.
2. Restructure Charges
--------------------------------------------------------------------------------
In the fourth quarter 2004, the company favorably settled certain thrift store
lease contracts for a gain of $35. This gain was offset by reversals of
previously settled contracts, and other adjustments related to the estimated
expenses for maintaining the thrift stores still under contract, which resulted
in a net charge of $9.
The company recognized net restructure charge reversals in 2003 of $500. These
reversals resulted from favorable settlements of certain thrift store lease
contracts reserved in the 2002 restructuring.
During the fourth quarter of 2003, the company incurred a $429 restructure
charge related to specific arrangements made with senior executives who departed
the company.
During the fourth quarter of 2002, the company incurred a $4,936 restructure
charge related to the closing of the remaining twelve thrift stores and the
specific arrangements made with senior executives who departed the company in
the fourth quarter of 2002. There were 29 employees terminated as a result of
this restructure, of which 25 were thrift store employees and 4 were corporate
executives.
During the second quarter of 2002, the company closed six thrift stores and
eliminated certain manufacturing and administrative positions. There were 67
employees terminated as a result of this restructure, of which 42 were temporary
employees, 13 were thrift store employees and 12 were corporate and
administrative employees. Costs related to these events were included in a
restructure charge of $1,405.
During the fourth quarter of 2001, the company closed its Dutch Mill Baking
Company production facility. There were 19 manufacturing and four administrative
positions eliminated as a result. In addition, the company closed two thrift
stores. The closing affected six thrift store employees. Costs related to these
events were included in a restructure charge of $1,728.
RESTRUCTURE RESERVE ACTIVITY
Lease obligations Severance Fixed Assets Other Total
--------------------------------------------------------------------------------
Balance December 29, 2001 $ 428 $ 208 $ 58 $ 157 $ 851
2002 Restructure charges 2,015 3,736 412 178 6,341
2002 Reclassification of PP&E - - (144) - (144)
2002 Payments (365) (541) - (157) (1,063)
---------------------------------------------------------------------------
Balance December 28, 2002 2,078 3,403 326 178 5,985
2003 Restructure charges - 429 - - 429
2003 Reclassification of PP&E - - (326) - (326)
2003 Reclassification of SERP - (683) - - (683)
2003 Reversal of reserve (500) - - - (500)
2003 Payments (765) (1,664) - (101) (2,530)
---------------------------------------------------------------------------
Balance December 27, 2003 813 1,485 - 77 2,375
2004 Reversal of reserve, net of adjustments 4 - - 5 9
2004 Payments (410) (893) - (44) (1,347)
---------------------------------------------------------------------------
Balance December 25, 2004 $ 407 $ 592 $ - $ 38 $ 1,037
The balance of the severance charges is expected to be paid as of December 2005
and the balance of the lease obligations and other charges is expected to be
paid as of November 2006.
Page 27
3. Inventories
--------------------------------------------------------------------------------
Inventories are classified as follows:
Dec. 25, 2004 Dec. 27, 2003 (a)
---------------------------------------------------------------------------------------------------------------------------
Finished goods $ 1,481 $ 2,397
Work in progress 135 202
Raw materials and supplies 3,796 3,131
-------------------------------------
$ 5,412 $ 5,730
-------------------------------------
(a) For comparative purposes, $538 has been reclassified from Work in
progress to Raw materials and supplies in 2003, which reflects a change
in classification for certain materials.
4. Long-Term Receivables from Independent Sales Distributors
--------------------------------------------------------------------------------
The company's sales distribution routes are owned by independent sales
distributors who purchased the exclusive right to sell and distribute Tastykake
products in defined geographical territories. The company maintains a
wholly-owned subsidiary to assist in financing route purchase activities if
requested by new independent sales distributors, using the route and certain
associated assets as collateral. Most route purchase activities involve
transactions between existing and new independent sales distributors. At
December 25, 2004, and December 27, 2003, interest-bearing notes receivable
(based on treasury yields plus a spread) of $12,879 and $13,115, respectively
are included in current and long-term receivables in the accompanying
consolidated balance sheets. During 2004, the company sold one new route to an
independent sales distributor. The gain of $75 on this sale was recognized in
the current year and a note receivable in the amount of $75 was established.
During 2003, the company sold eleven new routes to independent sales
distributors. The gain of $1,077 on these sales was recognized in 2003 and notes
receivable in the amount of $1,076 were established.
5. Notes Payable and Long-Term Debt
--------------------------------------------------------------------------------
On January 31, 2002, the company entered into a new $40 million Credit Facility
(Facility) with two banks (the Bank Group) to replace its short-term lines of
credit and the former Revolving Credit Agreement. The agreement was subsequently
amended on January 23, 2004 to reduce the commitments under the Facility to $30
million. The Facility, as amended, provides $10 million for short-term
borrowings under a 364-day line and $20 million for long-term borrowings under a
three year revolving line. The 364-day line contains a $6 million sub-limit for
overnight borrowings and the revolving line allows for the issuance of Standby
Letters of Credit up to $6 million, which reduce the availability under the
Facility. Upon approval of the Bank Group, the terms of both the 364-day line
and the revolving line may be extended for an additional 364-day or annual
period, respectively. Interest rates in the Facility are indexed to LIBOR or the
Prime Rate based upon the company's ratio of debt to EBITDA and rates may change
up to 1.5% based on that ratio. Commitment Fees are charged on the unused
portion of the Facility and range from 30 to 45 basis points based upon the same
ratio used to determine interest rates. The Facility, as amended, contains
restrictive covenants that require the maintenance of Tangible Net Worth, that
limit the amount of capital expenditures and that limit the ratios of EBITDA to
certain fixed charges and total indebtedness. The Facility also provides the
Bank Group with a security interest in all unencumbered assets of the company
including certain real property through the second quarter of 2005. After that
date, the security interest may be terminated if certain objective measures are
met.
Subsequent to the company's fourth quarter of 2004, the company and the Bank
Group amended the Facility 1) to waive certain covenant violations that existed
on December 25, 2004; 2) to amend the Facility's definitions to exclude the
effects of the company's 2004 pension expense in excess of its 10% corridor; 3)
to amend the limit on capital expenditures for 2005 to $10 million; 4) to amend
the minimum Tangible Net Worth required; and 5) to extend the maturity of the
364-day line to March 20, 2006. The waivers obtained cured the company's
covenant violations for its 2004 capital expenditures and its required Tangible
Net Worth. Further, it is expected that the company and the Bank Group will
amend the facility in 2005 to extend the maturity of the three year revolving
line beyond its current maturity date of January 22, 2007.
During the third and fourth quarters of 2003, the company violated the
Facility's restrictive covenants for the ratio of EBITDA to total indebtedness.
The company obtained a waiver for the third quarter violation and amended the
Facility's covenants to cure the violation in the fourth quarter. The amendment
also reduced the Facility from $40 million to $30 million and incorporated other
changes that are described in the terms above.
On the consolidated balance sheet as of December 25, 2004, $2,700 is classified
as Notes Payable under the 364-day line of credit at an interest rate of 5.42%.
Notes Payable is reflected as a current liability as it fluctuates daily based
on the company's working capital requirements. Notes Payable of $4,900 were
outstanding at December 27, 2003 at an interest rate of 4.14%. The average
outstanding borrowing during 2004 was $5,749 and was $3,730 in 2003. The average
interest rate in 2004 was 4.79% and 3.58% in 2003, calculated on the basis of
the average daily balance. The maximum short-term borrowing by the company at
any period end was $8,100 and $6,100 during 2004 and 2003, respectively.
Page 28
Notes payable consists of the following: Dec. 25, 2004 Dec. 27, 2003
---------------------------------------------------------------------------------------------------------------------------
Credit Facility, with interest at or below the prime rate
(5.42% at December 25, 2004 and 4.14% at December 27, 2003) $ 2,700 $ 4,900
---------------------------------------------------------------------------------------------------------------------------
Long-term debt consists of the following:
---------------------------------------------------------------------------------------------------------------------------
Credit Facility, with interest at or below the prime rate
(5.06% at December 25, 2004 and 4.14% at December 27, 2003) $ 9,000 $ 8,000
---------------------------------------------------------------------------------------------------------------------------
6. Obligations under Capital Leases
--------------------------------------------------------------------------------
Obligations under capital leases consist of the following:
Dec. 25, 2004 Dec. 27, 2003
----------------------------------------------------------------------------------------------------------------------------
Capital lease obligation, with interest at 11.0%, payable in
monthly installments of $47 through June 2014 $ 3,299 $ 3,486
Capital lease obligation, with interest at 5.7%, payable in
monthly installments of $45 through October 2007 1,445 1,853
Capital lease obligation, with interest at 5.7% payable in
monthly installments of $3 through February 2008 128 -
-----------------------------------
4, 872 5,339
Less current portion 713 634
-----------------------------------
$ 4,159 $ 4,705
-----------------------------------
7. Commitments and Contingencies
--------------------------------------------------------------------------------
The company leases certain plant and distribution facilities, machinery and
automotive equipment under noncancelable lease agreements. The company expects
that in the normal course of business, leases that expire will be renewed or
replaced by other leases. Included therein is a lease with the Trustees of the
Tasty Baking Company Pension Plan for property contributed to the plan on
December 1, 1960. The net annual rental is subject to adjustment every three
years to provide fair market rental to the Pension Plan and accordingly, the net
annual rental was adjusted effective July 1, 2002. The lease was renewed on July
1, 2002, for four additional three year periods. In addition, the company has an
option to purchase the property at any time at its then fair market value.
Property, plant and equipment relating to capital leases was $5,965 at December
25, 2004, and $8,310 at December 27, 2003, with accumulated amortization of
$1,019 and $2,303, respectively. Depreciation and amortization of assets
recorded under capital leases was $690 in 2004 and $261 in 2003.
The following is a schedule of future minimum lease payments as of December 25,
2004:
Noncancelable
Capital Leases Operating Leases
---------------------------------------------------------------------------------------------------------------------------
2005 $ 1,142 $ 1,747
2006 1,142 1,440
2007 1,089 701
2008 581 487
2009 561 146
Later years 2,525 4
-----------------------------------
Total minimum lease payments $ 7,040 $ 4,525
-------------
Less interest portion of payments 2,168
-------------
Present value of future minimum lease payments $ 4,872
-------------
Rental expense was approximately $2,474 in 2004, $2,194 in 2003, and $2,513 in
2002.
In connection with a workers' compensation insurance policy, the company has
obtained Standby Letters of Credit in the amount of $3,800 which are required by
its insurance company in order to guarantee future payment of claims.
The company is involved in certain legal and regulatory actions, all of which
have arisen in the ordinary course of the company's business. The company is
unable to predict the outcome of these matters, but does not believe that the
ultimate resolution of such matters will have a material adverse effect on the
consolidated financial position or results of operations of the company.
However, if one or more of such matters were determined adversely to the
company, the ultimate liability arising therefrom should not be material to the
financial position of the company, but could be material to its results of
operations in any quarter or annual period.
Page 29
In November, 1998, nine (9) independent route sales distributors (Plaintiffs),
on behalf of all present and former route sales distributors, commenced suit
against the company seeking recovery from the company of amounts (i) which the
sales distributors paid in the past to the Internal Revenue Service on account
of employment taxes, and (ii) collected by the company since January 1, 1998 as
an administrative fee from all unincorporated sales distributors. The company
removed the action to the United States District Court for the Eastern District
of Pennsylvania and was successful in having the action dismissed with prejudice
as to all federal causes of action.
Subsequently, Plaintiffs commenced a new suit in Common Pleas Court for
Philadelphia County, Pennsylvania, asserting state law claims seeking damages
for (1) the alleged erroneous treatment of the sales distributors as independent
contractors by the company such that the sales distributors were required to pay
self-employment, social security and federal unemployment taxes which they
allege should have been paid by the company, and (2) for breach of contract
relating to the collection of an administrative fee from all unincorporated
sales distributors. The Court dismissed with prejudice Plaintiffs first claim in
March 2000. As to the second claim, in January 2002, the Court certified a class
of approximately 200 sales distributors (representing approximately 40% of the
company's current routes), consisting of unincorporated sales distributors who,
since February 7, 1998, have paid or continue to pay the administrative fee to
the company. The company believes the case to be without merit and is defending
the matter vigorously. The company has not established any reserve in the event
that the ultimate outcome of this litigation proves unfavorable to the company.
If this matter is determined adversely to the company, the ultimate liability
arising therefrom should not be material to the financial position of the
company, but could be material to its results of operations in any quarter or
annual period.
8. Defined Benefit Retirement Plans
--------------------------------------------------------------------------------
The company maintains a partially funded noncontributory pension plan (the
"Pension Plan") providing retirement benefits for substantially all employees.
Benefits under this Pension Plan generally are based on the employees' years of
service and compensation during the years preceding retirement. The company
maintains an unfunded Supplemental Executive Retirement Plan ("SERP") providing
retirement benefits for key employees designated by the Board of Directors.
Benefits under the SERP generally are based on the key employees' years of
service and compensation during the years preceding retirement. The company also
maintains an unfunded Directors' Retirement Plan. The benefit amount is the
annual retainer in the year of retirement.
In December 2004, upon approval by the Board of Directors, the company announced
to its employees that it was amending the Pension Plan to freeze benefit
accruals effective March 26, 2005. Participants will be credited for service
after March 26, 2005, solely for vesting purposes pursuant to the terms of the
Pension Plan. Each vested participant will receive their total pension benefit
accrued through March 26, 2005, upon retirement from the company.
As a result of the Pension Plan amendment, a remeasurement occurred at November
30, 2004. The remeasurement resulted in the recognition of a pre-tax non-cash
loss of $508 as of November 30, 2004, which was the amount of the unrecognized
loss outside the "10% corridor," which is 10% of the larger of the projected
benefit obligation or the fair value of assets. There was also a one-time
curtailment charge of $263 attributable to the recognition of the remainder of
unrecognized prior service cost at November 30, 2004. The remeasurement was
based on a 6.0% discount rate and actual assets of $61,076 as of November 30,
2004. As a result of the Pension Plan amendment, there was a reduction of the
Projected Benefit Obligation ("PBO") of $6,718 immediately after the November
30, 2004 remeasurement, which reduced the net unrecognized loss of the plan
within the corridor.
Effective at the beginning of the second quarter 2005, the company adopted a new
company funded retirement plan which is a defined contribution benefit that
replaces the benefit provided in the Pension Plan. In the new company funded
retirement plan, the company will make cash contributions into individual
accounts for all eligible employees. These contributions will be equal to a
percentage of an employee's eligible compensation and will increase with the
employee's age and years of credited service.
Effective October 2004, the SERP for all active employees was converted from a
defined benefit to a defined contribution plan to be consistent with the changes
made to the Pension Plan. See Note 10 for more information.
In 2002, the estimated unrecognized loss for the pension plan at year-end
exceeded the pension corridor by $4,656. Thus, the total net periodic pension
cost for fiscal 2002 for the pension plan has been increased by this amount,
resulting in a final 2002 cost of $5,866.
Page 30
The components of pension, SERP, and Directors' Retirement plans cost are
summarized as follows:
2004 2003 2002
---------------------------------------------------------------------------------------------------------------------------
Service cost-benefits earned during the year $ 1,657 $ 1,486 $ 1,435
Interest cost on projected benefit obligation 5,288 5,441 5,407
Expected return on plan assets (5,174) (4,786) (5,665)
Prior service cost amortization 10 (2) (17)
Actuarial loss recognition 50 51 50
Actuarial loss recognition, in excess of corridor 508 - 4,656
Curtailment charge 263 - -
SERP amendment (153) - -
---------------------------------------------------------
Net pension amount charged to income $ 2,449 $ 2,190 $ 5,866
---------------------------------------------------------
8. Defined Benefit Retirement Plans (continued)
--------------------------------------------------------------------------------
The following table sets forth the change in projected benefit obligation,
change in plan assets, funded status of the pension, SERP, and Directors'
Retirement plans and net liability recognized in the company's balance sheet at
December 25, 2004 and December 27, 2003:
2004 2003
-----------------------------------------------------------------------------------------------------
Change in Projected Benefit Obligation
----------------------------------------------------------
Projected benefit obligation, beginning of year $ 88,867 $ 81,524
Service cost 1,657 1,486
Interest cost 5,288 5,441
Actuarial loss 2,249 5,630
Curtailment gain (6,720) -
SERP amendment (153) -
Benefits paid (5,512) (5,214)
---------------------------------------
Projected benefit obligation, end of year $ 85,676 $ 88,867
---------------------------------------
Change in Accumulated Benefit Obligation
----------------------------------------------------------
Accumulated benefit obligation, beginning of year $ 81,631 $ 73,873
Accumulated benefit obligation, end of year $ 85,647 $ 81,631
Change in Pension Plan Assets
----------------------------------------------------------
Fair-value of plan assets, beginning of year $ 61,815 $ 57,229
Actual return on plan assets 5,414 9,546
Benefits paid (5,116) (4,960)
---------------------------------------
Fair value of plan assets, end of year $ 62,113 $ 61,815
---------------------------------------
Net Liability Recognized in Balance Sheet
----------------------------------------------------------
Funded status of plan, end of year $ (23,563) $ (27,052)
Unrecognized actuarial loss 3,970 9,238
Unrecognized prior service cost (81) 193
---------------------------------------
Net liability recognized in balance sheet
end of year $ (19,674) $ (17,621)
---------------------------------------
Amounts Recognized in the statement of financial position consists of:
------------------------------------------------------------------------------------------------------
Accrued benefit cost $ (19,674) $ (17,621)
Additional minimum liability (3,931) (2,251)
Intangible asset - 292
Deferred tax effect 1,533 723
Accumulated other comprehensive loss 2,398 1,236
---------------------------------------
Net amount recognized, end of year $ (19,674) $ (17,621)
---------------------------------------
Page 31
The actuarial present value of benefits and projected benefit obligations were
determined using a discount rate of 5.80% for fiscal year 2004, 6.10% for fiscal
year 2003, and 6.75% for fiscal year 2002. The expected long-term rate of return
on assets was 8.75% for fiscal years 2004 and 2003 and 9.0% for fiscal year
2002. The rate of compensation increase used to measure the projected benefit
obligation was 3.5% for fiscal year 2004 and 2003 and 4.0% for fiscal year 2002.
Plan assets are invested in a diverse portfolio that primarily consists of
equity and debt securities as well as the company's Philadelphia production
facility.
The return on assets assumption is conservatively based upon analysis of
historical market returns, current market conditions, and the fund's past
experience. One of the factors that contributed to this assumption was the
historical return on plan assets which has been at or above 9.0%. This assumes
no benefit from manager selection strategies.
The return on assets assumption is conservatively based upon analysis of
historical market returns, current market conditions, and the fund's past
experience. One of the factors that contributed to this assumption was the
historical return on plan assets which has been at or above 9.0%. This assumes
no benefit from manager selection strategies.
The degree of sensitivity of the net cost to changes in the discount rate is
dependent on the relationship of the unrecognized gain or loss to the pension
corridor. The following reflects sensitivities of net cost and projected benefit
obligations to 25 basis point changes based on a 5.8% discount rate and 8.5%
expected return on assets:
Impact on Pension Impact on Pension Impact on
Expense without Expense with Full Projected Benefit
Corridor Recognition Corridor Recognition Obligation
---------------------------------------------------------------------------------------------------------------------------
25 basis point decrease in discount rate $ (54) $ 1,941 $ 2,218
25 basis point increase in discount rate 48 (1,894) (2,158)
25 basis point decrease in return on assets assumption 155 155 -
25 basis point increase in return on assets assumption (155) (155) -
As of December 25, 2004, the pension corridor approximates $8,000, which is the
greater of 10% of the Projected Benefit Obligation or Plan Assets of the Pension
Plan. Actuarial losses would have to exceed $5,300 before they would be charged
immediately to the Income Statement in 2005.
Expected Cash Flows
Information about cash flows for the pension plans follows:
Employer Contributions
2005 (expected) to plan trusts $ -
2005 (expected) to plan participants $ 510
The expected 2005 contribution to plan trusts is shown as zero, as the company
has estimated that any amounts due in 2005 will be covered by the existing
credit balance in the plan and cash contribution during 2005 will not be
required.
Expected Benefit Payments From: Plan Trust Company Assets
--------------------------------------------------------------------------------
2005 $ 5,168 $ 510
2006 5,230 510
2007 5,336 502
2008 5,462 492
2009 5,607 469
2010-2014 28,823 2,258
Investment Strategy
The financial strategy of the Pension Plan is based on the Statement of
Investment Policy, which was designed by the company in corroboration with an
outside investment consultant. There is a pension committee that consists of a
number of the company's employees and the third party investment advisor that
evaluates performance quarterly. The policy and the underlying asset allocation,
was created by analyzing both the current and the long-term payout stream and
modeling various asset allocation scenarios around the liability data. The
asset-liability analysis was used to create an investment strategy which
provides the highest likelihood of generating returns sufficient to meet the
payout requirements, while preserving capital in down markets and minimizing
downside return volatility.
Page 32
The asset allocation for the Pension Plan at the end of 2004 and 2003, and the
target allocation for 2005 by asset category follows:
Percentage of Plan
Target Allocation Assets at Year End
Asset Category for 2005 2004 2003
--------------------------------------------------------------------------------
Equity securities 55 % 64 % 49 %
Debt securities 34 % 27 % 35 %
Real estate (Hunting Park lease) 6 % 5 % 6 %
Other 5 % 4 % 10 %
-------------------------------
Total 100 % 100 % 100 %
Equity securities include Tasty Baking's common stock which is less than 1% of
plan assets at the end of 2004 and 2003.
9. Postretirement Benefits Other than Pensions
--------------------------------------------------------------------------------
In addition to providing pension benefits, the company also provides certain
unfunded health care and life insurance programs for substantially all retired
employees. These benefits are provided through contracts with insurance
companies and health service providers.
The net periodic postretirement benefit cost included the following components:
2004 2003 2002
---------------------------------------------------------------------------------------------------------------------------
Service cost $ 415 $ 336 $ 364
Interest cost 953 988 996
Net amortization and deferral - (130) (263)
Total FAS 106 Net Periodic Postretirement Benefit
Cost $ 1,368 $ 1,194 $ 1,097
The following table sets forth the change in projected benefit obligation,
funded status of the postretirement benefit plan and the net liability
recognized in the company's balance sheet at December 25, 2004 and December 27,
2003:
2004 2003
-----------------------------------------------------------------------------------------------------
Change in Projected Benefit Obligation
-----------------------------------------------
Projected benefit obligation, beginning of year $ 16,971 $ 14,901
Service cost 415 336
Interest cost 953 988
Actuarial loss 401 1,813
Benefits paid (1,159) (1,067)
-------------------------------------------
Projected benefit obligation, end of year $ 17,581 $ 16,971
-------------------------------------------
Net Liability Recognized in Balance Sheet
-----------------------------------------------
Funded status of plan, end of year $ (17,581) $ (16,971)
Unrecognized net gain (506) (906)
-------------------------------------------
Net liability recognized in balance sheet, end of year $ (18,087) $ (17,877)
Less current portion 1,340 1,159
-------------------------------------------
$ (16,747) $ (16,718)
-------------------------------------------
The accumulated postretirement benefit obligation was determined using a
weighted average discount rate of 5.6% in 2004, 5.75% in 2003, and 6.75% in
2002, and an assumed compensation increase rate of 3.5% in 2004 and 2003 and
4.5% in 2002.
For 2004, the health care cost trend rates are anticipated to be 10.8% for
HMO-type health plans, gradually declining to 5.0% in five years and remaining
at that level thereafter. The health care cost trend rate assumptions have a
significant effect on the amounts reported.
Page 33
Effect of health care trend rate 2004 2003 2002
--------------------------------------------------------------------------------
1% increase effect on accumulated benefit obligation $ 847 $ 467 $ 389
1% increase effect on periodic cost 82 53 55
1% decrease effect on accumulated benefit obligation 750 454 361
1% decrease effect on periodic cost 72 48 50
The Medicare Prescription Drug Improvement and Modernization Act of 2003 was
signed into law on December 8, 2003. In accordance with FASB Staff Position FAS
106-1, the company has made a one-time election to defer recognition of the
effects of the law in the accounting for its plan under FAS 106 and in providing
disclosures related to the plan. In accordance with FASB Staff Position 106-2,
any measures of the Accumulated Postretirement Benefit Obligation or Net
Periodic Postretirement Benefit Cost do not reflect any amount associated with
the subsidy because the company has not yet concluded whether the benefits
provided by the plan are actuarially equivalent to Medicare Part D under the
Act.
10. Defined Contribution Retirement Plans
--------------------------------------------------------------------------------
The Tasty Baking Company 401(k) Thrift Plan ("Thrift Plan") permits participants
to make contributions to the plan on a pre-tax salary reduction basis in
accordance with the provision of Section 401(k) of the Internal Revenue Code.
After six months of employment, the company matches 100% of participant's
contributions up to a specified limit. Company contributions charged against
income totaled $438 in 2004, $467 in 2003, and $483 in 2002. The Thrift Plan is
administered under a Section 401(k) prototype plan sponsored by Mellon HR & IS
Solutions. Under the Thrift Plan, the company's contributions are invested in
Tasty Baking Company common stock, and participants may choose from a selection
of guaranteed and mutual fund options offered by Dreyfus for investment of their
contributions. The company also maintains the Tasty Baking Oxford, Inc. 401(k)
Savings Plan ("Oxford Plan") for the employees who work for its Oxford
subsidiary. The Oxford Plan is also administered by Mellon HR & IS Solutions and
is similar to the Thrift Plan except that the company match is contributed in
cash. The company had 188,527 shares of its common stock reserved for possible
issuance under the Thrift Plan at December 25, 2004.
Effective March 27, 2005, the company is merging the Thrift Plan and the Oxford
Plan into the Tasty Baking Company 401(k) and Company Funded Retirement Plan
("Retirement Plan"). All assets of the Thrift Plan and the Oxford Plan will be
transferred immediately after the effective date to the Retirement Plan which is
sponsored and administered by the Vanguard Group. In the Retirement Plan, all
participants will receive a company match of 50% of the first 4% contributed to
the Retirement Plan which will be paid in cash. In the Retirement Plan, the
waiting period for participation has been eliminated. Participants will be
offered a broader array of investment choices and new target retirement date
investment options. In addition, as a replacement for the company's defined
benefit plan which was frozen as of March 26, 2005, the company will make weekly
retirement contributions for all eligible employees. These contributions are
based on employees' point values which are the sum of age and years of service
as of January 1 each year. All employees will receive contributions that range
from 2% to 5% of eligible compensation relative to their point totals. Employees
at March 27, 2005, who have 20 years of service or 10 years of service and 60
points will receive an additional "grandfathered" contribution of between 1.5%
and 3.5% of salary as of that date. The "grandfathered" contribution amount will
remain constant until retirement or separation of service. These "grandfathered"
contributions are being made to compensate older employees for the shorter
earnings period that their accounts will have to appreciate in value.
As mentioned in Note 8, effective October 2004, the company converted the SERP
for one eligible active employee from an unfunded defined benefit to an unfunded
defined contribution SERP to be consistent with the changes in the Pension Plan.
As a result of the change, $153 was transferred to the defined contribution
liability from the defined benefit liability. The total defined contribution
SERP liability for 2004, including the $153 transferred from the defined benefit
SERP, was $218.
11. Management Stock Purchase Plan
--------------------------------------------------------------------------------
In March of 2003, the Management Stock Purchase Plan was discontinued
prospectively. The Management Stock Purchase Plan provided that common shares
may be sold to management employees from time to time at prices designated by
the Board of Directors (not less than 50% of the fair market value at date of
grant) and under certain restrictions and obligations to resell to the company.
During 2003, 1,400 shares of common stock were sold at 50% of fair market value
at date of grant. The aggregate sales price of these shares was $7 for which
collateral judgment notes were obtained to be paid in equal quarterly
installments (not to exceed 40) with interest on the unpaid balance at 2.13%.
For accounting purposes, the difference between the fair market value of the
stock at the date of grant and the purchase price in 2003 was $6 and represented
compensation. The compensation is deferred and, together with the notes
receivable, is shown as a deduction from shareholders' equity. The deferred
compensation is amortized over a ten-year vesting period or the period the
employees perform services, whichever is less. Unvested shares are forfeited if
the employee separates from service for anything other than retirement.
Amortization charged to income amounted to $22, $38, and $42 in 2004, 2003, and
2002, respectively.
In accordance with an Internal Revenue Service regulation, the company includes
both the dividends paid on shares restricted under the plan, and the difference
between the purchase price of the stock at the date of the grant and the fair
market value at the date the plan restrictions lapse, as employee compensation
for federal income tax purposes.
Page 34
The tax benefits relating to the difference between the amounts deductible for
federal income taxes over the amounts charged to income for book purposes have
been credited to capital in excess of par value of stock.
12. Stock Compensation
--------------------------------------------------------------------------------
On October 29, 2004, 112,000 shares of the company's common stock were granted
as a Restricted Stock Award (RSA) to certain management employees of the company
under the Tasty Baking Company 2003 Long Term Incentive Plan (the Plan). Under
the terms of the RSA, recipients will vest ratably in their shares over 5 years
beginning on the first anniversary date and on each subsequent anniversary date
until fully vested. The terms of the RSA also provide for accelerated vesting.
In the event that the closing price of the company's common stock is at least
$14 for 10 consecutive trading days, the shares shall vest either on that tenth
consecutive day of a $14 trading price or on the third anniversary of the RSA,
whichever is later. Recipients of the RSA forfeit any unvested shares upon
separation of employment.
On March 27, 2003, the Board of Directors adopted the Tasty Baking Company 2003
Long Term Incentive Plan (2003 Plan), which was approved by shareholders at the
2003 Annual Meeting. Under the terms of the 2003 Plan, 400,000 shares were
authorized for issuance. On August 7, 2003, 312,056 of the authorized shares
were granted as options to employees and directors of the company. In addition
on August 7, 2003, 77,434 and 11,250 options were granted to employees under the
1997 Long Term Incentive Plan and the 1994 Long Term Incentive Plan,
respectively. During 2004, 30,000 shares were granted to employees and directors
under the 1997 Long Term Incentive Plan and 16,000 shares were granted to
employees under the 2003 Plan. Under these grants, the options vest in three
equal installments beginning on the first anniversary date with a five year
retention period from the date of grant. There were 375,000 shares authorized
for issuance under the 1997 Long Term Incentive Plan.
The option price is determined by the Compensation Committee of the Board and,
in the case of incentive stock options, will be no less than the fair market
value of the shares on the date of grant. Options lapse at the earlier of the
expiration of the option term specified by the Compensation Committee of the
Board (not more than ten years in the case of incentive stock options) or three
months following the date on which employment with the company terminates.
Transactions involving the stock option plans are summarized as follows:
2004 2003 2002
---------------------------------------------------------------------------------------------------------------------------
Weighted-Average Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
Options outstanding at
beginning of year 739 $11.50 461 $12.73 434 $13.48
Less: Exercises - - - - (27) 11.18
Forfeitures (261) 13.76 (105) 11.78 (31) 15.64
----------------------------------------------------------------------------------------------
478 356 376
Granted 41 9.66 383 10.50 85 9.46
----------------------------------------------------------------------------------------------
Outstanding at end of year 519 $10.89 739 $11.50 461 $12.73
----------------------------------------------------------------------------------------------
Options exercisable at year-end 206 323 372
Weighted-average fair value of
options granted during
the year $2.70 $2.19 $1.87
The following table provides certain information with respect to stock options
outstanding and exercisable at December 25, 2004:
Outstanding Options Exercisable Options
------------------------------------------------ -----------------------------------
Weighted-Average
Range of Remaining Weighted-Average Weighted-Average
Exercise Prices Shares Contractual Life Exercise Price Shares Exercise Price
------------------ ---------------------------------------------------------------- -----------------------------------
$7.62-$11.60 499 8.4 $10.29 186 $10.30
$18.31 20 3.0 $18.31 20 $18.31
--- ---
519 206
------------------ ------------------------ ---------------- -------------------- ---------------- -----------------
Page 35
A summary of the status of options granted to the Directors by the company for
the fiscal years 2004, 2003 and 2002 is presented below:
2004 2003 2002
------------------------------------------------------------------------------------------------------------------------------
Weighted-Average Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
-------------------------------- ------------------------------ ---------------------------- ----------------------------
Options outstanding at
beginning of year 139 $11.19 88 $11.43 104 $11.45
Less: Exercises - - (16) 11.56
------------------------------------------------------------------------------------------
139 88 88
Granted 5 10.24 51 10.78 -
------------------------------------------------------------------------------------------
Outstanding at end of year 144 $11.17 139 $11.19 88 $11.43
------------------------------------------------------------------------------------------
Options exercisable at year-end 105 88 82
Range of exercise prices $10.24 to $11.60 $10.78 to $11.60 $11.00 to $11.60
Weighted-average fair value of
options granted during the year $ 2.87 $ 2.19 -
The fair-value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model and certain weighted-average assumptions. The
following assumptions were used for the 2004 employee grants: dividend yield of
2.72%, expected volatility of 35.94%, expected life of 5 years and risk-free
interest rate of 3.21%.
On December 21, 2000, the Board of Directors adopted the Tasty Baking Company
Restricted Stock Incentive Plan (Restricted Stock Plan), which was approved by
shareholders at the 2001 Annual Meeting. Under the terms of the Restricted Stock
Plan, 200,000 common shares were authorized and 109,500 of those shares were
granted to executives of the company. The target for these awards is the
achievement of a compound annualized increase in earnings per share of 10% per
year for fiscal years 2001 through 2003 (Measurement Period) over earnings per
share for fiscal year 2000. The number of shares awarded is subject to
adjustment on a roughly pro rata basis in the event the actual compound
annualized rate of increase in the company's cumulative earnings per share for
the Measurement Period is 50% to 125% of the target. During the first quarter of
2002, the balance of the accrual of $240 was reversed since the target for 2001
had not been achieved, and based on the first quarter 2002 results, the company
was satisfied that the overall target would not be achieved. On February 4,
2004, the Compensation Committee reviewed the company's performance during the
Measurement Period and determined that the minimum earnings targets were not
achieved and all restricted stock awards were forfeited.
Under the terms of the 1997 Long Term Incentive Plan, options to purchase a
total of 375,000 common shares may be granted to key executives of the company.
Options become exercisable in five equal installments beginning on the date of
grant until fully exercisable after four years. The option price is determined
by the Board and, in the case of incentive stock options, will be no less than
the fair market value of the shares on the date of grant. Options lapse at the
earlier of the expiration of the option term specified by the Long Term
Incentive Plan Committee of the Board (not more than ten years in the case of
incentive stock options) or three months following the date on which employment
with the company terminates. The company also has options outstanding under the
1994 Long Term Incentive Plan, the terms and conditions of which are similar to
the 1997 Long Term Incentive Plan.
13. Capitalization of Interest Costs
------------------------------------------------------------------------------------------------------------------------------------
The company capitalizes interest as a component of the cost of significant
construction projects. The following table sets forth data relative to
capitalized interest:
2004 2003 2002
------------------------------------------------------------------------------------------------------------------------------------
Total interest $ 1,254 $ 911 $ 1,096
Less: Capitalized interest - 2 30
-------------------------------------------------------------------
Interest expense $ 1,254 $ 909 $ 1,066
-------------------------------------------------------------------
14. Other Income, Net
------------------------------------------------------------------------------------------------------------------------------------
Other income, net consists of the following:
2004 2003 2002
------------------------------------------------------------------------------------------------------------------------------------
Interest income $ 789 $ 817 $ 957
Other, net 340 56 208
-------------------------------------------------------------------
$ 1,129 $ 873 $ 1,165
-------------------------------------------------------------------
15. Income Taxes
------------------------------------------------------------------------------------------------------------------------------------
The effective tax rates were a provision of 32.7% in 2004 and a benefit of 36.9%
and 45.2% in 2003 and 2002, respectively. The rates differ from the amounts
derived from applying the statutory U.S. federal income tax rate of 34.0% to
income before provision (benefit) for income taxes as follows:
2004 2003 2002
------------------------------------------------------------------------------------------------------------------------------------
Statutory tax provision $ 628 $ (1,273) $ (2,691)
State income taxes, net of
federal income tax benefit (228) (300) (816)
Addition to (release of) tax reserves 18 (163) (128)
Valuation allowance 120 286 -
Non-deductible expenses and other 66 67 62
-------------------------------------------------------------------
Provision (benefit) for income taxes $ 604 $ (1,383) $ (3,573)
-------------------------------------------------------------------
In 2001, additional tax reserves of $128 were established for tax exposure that
was determined to be unnecessary and released in 2002. During 2003, the company
released $163 of its tax reserves due to enacted state tax law changes.
Page 36
15. Income Taxes (continued)
--------------------------------------------------------------------------------
Deferred income taxes represent the future tax consequences of differences
between the tax bases of assets and liabilities and their financial reporting
amounts at each year end. Significant components of the company's deferred
income tax assets (liabilities) are as follows:
2004 2003
--------------------------------------------------------------------------------------------------
Postretirement benefits other than pensions $ 7,268 $ 7,253
Pension and employee benefit costs 9,531 7,719
Depreciation and amortization (8,058) (7,530)
Vacation pay 1,028 1,029
Provision for doubtful accounts 1,025 1,137
Restructure charge 502 1,209
Charitable contributions 429 385
Net operating loss carryforwards 1,057 1,416
Unused state tax credits 669 688
Valuation allowance (407) (286)
Other 573 149
--------------------------------------------
Net deferred tax asset 13,617 13,169
Less: Current portion 3,280 3,902
--------------------------------------------
$ 10,337 $ 9,267
--------------------------------------------
The company has recorded a deferred income tax asset of $1,057 for the benefit
of state income tax loss carryforwards ("NOL's"). These carryforwards expire in
varying amounts between 2005 and 2023. Realization is dependent on generating
sufficient taxable income prior to expiration of the loss carryforwards.
Although realization is not assured, management believes that it is more likely
than not that the deferred tax asset will be realized. However, the amount
realizable could be reduced if estimates of future taxable income during the
carryforward period are reduced.
The company has recorded a deferred income tax asset for benefits in the amount
of $669 for unused state tax credits, most of which expire in varying amounts
between 2005 and 2009. Realization is dependent on generating sufficient
Page 37
taxable income prior to expiration of the state credits. A valuation allowance
in the amount of $407 has been established for some of the state credits that
management believes will not be realized since the NOL's must be utilized before
the state credits.
16. Net Income (Loss) per Common Share
------------------------------------------------------------------------------------------------------------------------------------
(000's, except per share amounts)
The following is a reconciliation of the Basic and Diluted net income (loss) per
common share computations:
2004 2003 2002
---------------------------------------------------------------------------------------------------------------------------
Net income (loss) per common share - Basic:
Net income (loss) $ 1,243 $ (2,362) $ (4,341)
---------------------------------------------------------------
Weighted-average shares outstanding 8,103 8,098 8,075
Basic per share amount $ .15 $ (.29) $ (.54)
---------------------------------------------------------------
Net income (loss) per common share - Diluted:
Net income (loss) $ 1,243 $ (2,362) $ (4,341)
---------------------------------------------------------------
Weighted-average shares outstanding 8,103 8,098 8,075
Dilutive options 6 6 84
---------------------------------------------------------------
Total diluted shares 8,109 8,104 8,159
---------------------------------------------------------------
Diluted per share amount $ .15 $ (.29) $ (.54)
---------------------------------------------------------------
Dilutive options to purchase 6 and 84 shares were not included in the
computation of the diluted per share amounts in 2003 and 2002, respectively,
because they would have an anti-dilutive effect due to the net loss.
Page 38
Item 9. Changes and Disagreements with Accountants
------- ------------------------------------------
None
Item 9A. Controls and Procedures
-------- -----------------------
Evaluation of Disclosure Controls and Procedures
The company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the company's reports filed
or submitted pursuant to the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), is to be recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission's rules and
forms. Disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that such information is accumulated and
communicated to the company's management, including its Chief Executive Officer
and Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. A control system, no matter how well designed and operated,
can provide only reasonable, not absolute, assurance that the control system's
objectives will be met.
Management of the company, including the Chief Executive Officer and Chief
Financial Officer, conducted an evaluation of the effectiveness of the company's
disclosure controls and procedures (as defined in the Exchange Act Rule
13a-15(e)) as of December 25, 2004. Based upon the evaluation, the Chief
Executive Officer and the Chief Financial Officer concluded that the company's
disclosure controls and procedures were not effective as of December 25, 2004
because of the material weaknesses outlined below.
As a consequence of the material weaknesses noted below, the company applied
other procedures to verify the reliability of its accounting for income taxes,
payroll, and spare parts. Based on these other procedures, management believes
that the consolidated financial statements included in this report, as well as
the company's financial statements for each quarter in 2004, as previously
reported, are fairly stated in all material respects in accordance with
generally accepted accounting principles.
Management's Report on Internal Control over Financial Reporting
The management of Tasty Baking Company and subsidiaries ("Tasty Baking" or the
"company") is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rule 13a-15(f) of the Exchange
Act. The company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with U.S. generally accepted accounting principles. Internal control
over financial reporting includes policies and procedures that: i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with U.S. generally
accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and
directors of the company; and iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisitions, use or disposition
of the company's assets that could have a material effect on the financial
statements.
As part of Tasty Baking's compliance efforts relative to Section 404 of the
Sarbanes-Oxley Act of 2002, Tasty Baking's management assessed the effectiveness
of the company's internal control over financial reporting as of December 25,
2004. In making this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in
Internal Control-Integrated Framework. Management's assessment included an
evaluation of such elements as the design and operating effectiveness of key
financial reporting controls, process documentation, accounting policies and the
overall control environment.
A material weakness is a control deficiency, or combination of control
deficiencies, that results in a more than remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected.
The company identified the following material weaknesses in its assessment of
the effectiveness of internal control over financial reporting as of December
25, 2004. A description of these material weaknesses that existed as of December
25, 2004, as well as their actual and potential effect on the presentation of
the company's consolidated financial statements issued during their existence,
is discussed below:
1. Accounting for Income Taxes: As of December 25, 2004, the company did
not maintain effective controls over the determination of income taxes
payable, deferred income tax assets and liabilities, and the related
income tax provision. Specifically, management identified the
following related to the company's internal control over accounting
for income taxes: a lack of dedicated personnel with expertise in
income tax accounting matters, insufficient formalized policies and
procedures, insufficient historical analysis and ineffective
reconciliation of tax asset and liability general ledger accounts.
This control deficiency resulted in immaterial misstatements to the
consolidated financial statements. However, this control deficiency
could result in a misstatement of
Page 39
income taxes payable, deferred income tax assets and liabilities, and
the related income tax provision that would result in a material
misstatement to the annual or interim consolidated financial
statements that would not be prevented or detected. Accordingly,
management has determined that this control deficiency constitutes a
material weakness.
2. Payroll: As of December 25, 2004, the company did not maintain
effective control over payroll. Specifically, certain employees had
inappropriate access to the payroll system and authority to process
time without appropriate documentation and/or management approval.
This control deficiency did not result in any adjustments to the
annual or interim consolidated financial statements; however, this
control deficiency could result in a misstatement of payroll liability
and expense accounts that would result in a material misstatement to
annual or interim consolidated financial statements that would not be
prevented or detected. Accordingly, management has determined that
this control deficiency constitutes a material weakness.
3. Spare Parts Inventory: As of December 25, 2004, the company did not
maintain effective controls over spare parts inventory. This
deficiency in internal control included ineffective review and
approval of parts issued and received as well as ineffective
application of cycle count procedures. Furthermore, the company did
not maintain effective control over validation of prices invoiced to
the company from the third party service provider. This deficiency did
not result in any adjustments to the annual or interim consolidated
financial statements; however, this control deficiency could result in
a misstatement of spare parts inventory that would result in a
material misstatement to annual or interim consolidated financial
statements that would not be prevented or detected. Accordingly,
management has determined that this control deficiency constitutes a
material weakness.
Because of the material weaknesses described above, management has concluded
that, as of December 25, 2004, the company did not maintain effective internal
control over financial reporting based on criteria established in Internal
Control - Integrated Framework.
Tasty Baking's independent registered public accounting firm,
PricewaterhouseCoopers LLP, has audited management's assessment of the
effectiveness of the company's internal control over financial reporting as of
December 25, 2004 as stated in their report which appears on pages 17 and 18.
Management's Discussion on Material Weaknesses and Changes in Internal Control
over Financial Reporting
The company has implemented the following specific enhancements to our internal
control over financial reporting related to the material weaknesses described
above. A material weakness is a control deficiency, or combination of control
deficiencies, that results in a more than remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. The company has and will continue to implement procedures and
controls to mitigate the material weaknesses as follows:
1. Accounting for Income Taxes: The company has i) implemented additional
monitoring controls through increased documented management review;
ii) fully documented the methodology and tools for calculating and
reporting tax related transactions; iii) enhanced the formality and
rigor of controls for reconciliation procedures; and iv) increased use
of a third party service provider for the more complex areas of the
company's income tax compliance efforts.
2. Payroll: Effective March 2005, the company made improvements to
segregation of duties and formalized and implemented more rigorous
approval policies and procedures.
3. Spare Parts Inventory: During the third quarter of fiscal 2003, the
company contracted with a third party provider for the maintenance,
custody, accounting, and reporting of spare parts usage and inventory
in an effort to enhance controls surrounding these functions. As a
result of certain transition issues during 2004, these controls were
not implemented as agreed to between the company and the third party
provider. During the first quarter of 2005, the company formalized and
enhanced management's process for documenting and executing cycle
counts, performing analytical procedures surrounding parts issues, and
assuring authorization of price and use of parts on a monthly basis.
Significant efforts were made to establish a framework to improve our internal
control over financial reporting during 2004. The company committed considerable
resources to the design, implementation, documentation and testing of the key
internal controls of the company. Additional efforts were required to remediate
and retest certain internal control
Page 40
deficiencies. Management believes that these efforts have improved the company's
internal control over financial reporting. While the company's internal control
over financial reporting is significantly improved, management has identified
certain areas that it believes should be further enhanced. With respect to these
areas, the company has implemented compensating controls and procedures that are
designed to prevent a material misstatement of the company's consolidated
financial statements. Nevertheless, management intends to continue improving the
company's internal control over financial reporting. Initiatives the company has
implemented to improve the company's internal control over financial reporting
in 2004, or will implement in 2005, include the following:
o In the fourth quarter of fiscal 2004, the company implemented a new
enterprise resource planning (ERP) system. This new ERP system has
provided the company with an integrated planning, accounting and
reporting system. In the first quarter of 2005, the company continued
to evaluate each of these processes and controls. As a result of the
efforts in 2004 and continued efforts in 2005, the company believes
that the new ERP system has strengthened the company's overall
internal control. The ERP implementation resulted in material changes
in the company's system of internal control over financial reporting
during the fourth quarter of 2004.
o In late 2003 and during 2004, the company engaged certain specialists
and/or outsourced certain functions not considered core competencies
of the company including, but not limited to i) payroll processing and
regulatory compliance, ii) spare parts maintenance, custody,
accounting and reporting, and iii) tax compliance. The company
established contracts with each of these providers intended to enhance
the overall control of each of these processes. While certain
transition issues were identified during the company's evaluation of
internal control during 2004, management has and will continue to
formalize the company's controls surrounding these processes in 2005
and fully expects to realize the enhanced control in each of these
functions.
Initiatives the company will implement to further enhance the company's
internal control over financial reporting in 2005 include, but are not
limited to, the following:
o continue to enhance the control consciousness throughout the entire
organization;
o continue to train finance and accounting personnel;
o re-evaluate current job responsibilities to create a more efficient
financial reporting process while improving segregation of duties;
o implement additional monitoring controls through increased documented
management review of certain account reconciliations, calculations,
estimates and transactions;
o automate certain controls that are currently performed manually; and
o enhance documentation of all key financial procedures.
Limitations on the Effectiveness of Controls
The effectiveness of any system of internal control over financial reporting,
including management's own, is subject to certain inherent limitations,
including the exercise of judgment in designing, implementing, operating, and
evaluating the controls and procedures, and the inability to eliminate
misconduct completely. Internal control over financial reporting cannot provide
absolute assurance of achieving financial reporting objectives because of its
inherent limitations. Internal control over financial reporting is a process
that involves human diligence and compliance and is subject to lapses in
judgment and breakdowns resulting from human failures. Internal control over
financial reporting also can be circumvented by collusion or improper management
override. Because of such limitations, there is a risk that material
misstatements may not be prevented or detected on a timely basis by internal
control over financial reporting. However, these inherent limitations are known
features of the financial reporting process. Therefore, it is possible to design
into the process safeguards to reduce, though not eliminate, this risk.
Item 9B. Other Information
-------- -----------------
On March 21, 2005, Tasty Baking Company executed the Waiver and Eighth Amendment
to Credit Agreement (the "Amendment") with PNC Bank, NA and Citizens Bank of
Pennsylvania (the "Banks"). The Amendment amends the Credit Agreement dated
January 31, 2002, as amended ("Credit Agreement"). The Amendment specifically 1)
waives certain covenant violations that existed on December 25, 2004; 2) amends
certain definitions and financial covenants in the Credit Agreement to exclude
the effects of the company's 2004 pension expense in excess of its 10% corridor;
3) amends the limit on capital expenditures for 2005 to $10 million; 4) amends
the minimum Tangible Net Worth required; and 5) extends the maturity of the
364-day line to March 20, 2006. Upon a default under the Credit Agreement,
including the non-payment of principal or interest, the obligations under the
Credit Agreement may be accelerated. Material terms and conditions of the Credit
Agreement are found in Note 5 to the company's audited consolidated financial
statements.
Page 41
On March 22, 2005, the Board of Directors amended the company's By-Laws to
provide for a Director Emeritus position. Pursuant to the By-Laws, a Director
Emeritus shall serve for a one-year term and may be re-elected by the Board of
Directors for one further year term but may not serve more than two such
one-year terms. This amendment becomes effective on March 22, 2005.
On March 22, 2005, Philip J. Baur, Jr. announced his retirement from the Board
of Directors of Tasty Baking Company, effective May 12, 2005. Mr. Baur has
served as a Director of the company since 1954 and his positions have included
Secretary, Vice-President and President, as well as, Chairman of the Board and a
member of its Audit Committee and Nominating and Corporate Governance Committee.
The Board has elected Mr. Baur as Director Emeritus, commencing May 12, 2005.
The Board would like to extend its sincere thanks and appreciation for Mr.
Baur's dedication and service to the company for more than 50 years. The Board
has made no decision as to whether it will fill the resulting Class 3 seat at
this time.
The Board of Directors has nominated Fred C. Aldridge, Jr., James C. Hellauer,
and James E. Nevels for election as Class 1 Directors at the company's annual
meeting of shareholders to be held on May 12, 2005. Additional information
regarding the nominees will be provided in the definitive proxy statement for
the 2005 Annual Meeting of Shareholders ("Proxy Statement"), which the company
expects to mail on or before April 12, 2005.
Page 42
TASTY BAKING COMPANY & SUBSIDIARIES
PART III
Item 10. Directors and Executive Officers
-------- --------------------------------
The names, ages, positions held with the company, periods of service as a
director or executive officer, principal occupations, business experience and
other directorships of nominees for director of the company are set forth in the
Proxy Statement in the section entitled "Directors and Executive Officers,"
which information is incorporated herein by reference.
Information regarding the identity of the Audit Committee as a separately
designated standing committee of the Board and information regarding the status
of one or more members of the Audit Committee being an "audit committee
financial expert" are set forth in the Proxy Statement in the section entitled
"Committees of the Board of Directors," which information is incorporated herein
by reference.
Information regarding compliance with Section 16 (1) of the Exchange Act is set
forth in the section of the Proxy Statement entitled "Section 16 (a) Benficial
Owners Compliance" which information is incorporated herein by reference.
Information regarding the company's Code of Business Conduct applicable to the
company's directors, officers and employees is set forth in the section of the
Proxy Statement entitled "Code of Business Conduct," which information is
incorporated herein by reference.
Item 11. Executive Compensation
-------- ----------------------
Information concerning compensation of each of the named executive officers,
including the Chief Executive Officer, of the company during 2004, and
compensation of directors, is set forth in the sections entitled, respectively,
"Compensation of Executive Officers" and "Director Attendance and Compensation,"
which information is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
--------------------------------------------------------------------------------
Information concerning ownership of the company's voting securities by certain
beneficial owners, individual nominees for director, the Chief Executive
Officer, the four most highly compensated executive officers other than the
Chief Executive Officer and executive officers as a group, is set forth in the
section entitled "Principal Holders of Voting Securities" in the Proxy
Statement, which information is incorporated herein by reference.
Information regarding equity compensation plans is set forth in the section
entitled "Securities Authorized for Issuance under Equity Compensation Plans,"
which information is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
-------- ----------------------------------------------
Information concerning certain relationships and related transactions is set
forth in the section entitled "Directors and Executive Officers", which
information is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
-------- --------------------------------------
Information concerning principal accountant fees and services including the
Pre-Approval Policy Regarding Independent Auditor Services, is set forth in the
section entitled "Independent Auditor Fees" in the Proxy Statement, which
information is incorporated herein by reference.
Page 43
TASTY BAKING COMPANY AND SUBSIDIARIES
PART IV
ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
For the Fiscal Years Ended December 25,
2004, December 27, 2003 and December 28, 2002
Item 15(a)(1).
--------------------------------------------------------------------------------
The audited consolidated financial statements of the company and its
subsidiaries and the Report of the Independent Registered Public Accounting Firm
thereon are set forth in Item 8 of this Report.
Item 15(a)(2).
--------------------------------------------------------------------------------
The following consolidated financial statement schedule of the company and its
subsidiaries for the years ended December 25, 2004, December 27, 2003, and
December 28, 2002, is included on page 46 hereof.
Schedule II-Valuation and Qualifying Accounts
All other schedules are omitted because they are inapplicable or not required
under Regulation S-X or because the required information is given in the
financial statements and notes to financial statements.
Item 15(a)(3). Exhibits Index - The following Exhibit Numbers refer to
Regulation S-K, Item 601
--------------------------------------------------------------------------------
(3) (a) Articles of Incorporation of Company as amended are
incorporated herein by reference to Exhibit 3 to Form 10-K
report of company for fiscal 1998.
*(b) By-laws of company, as amended on March 22, 2005.
(10) #(a) 2003 Long Term Incentive Plan, effective as of March
27, 2003, is incorporated herein by reference to Appendix B
of the Proxy Statement for the Annual Meeting of the
Shareholders on May 2, 2003, filed on or about March 31,
2003.
#(b) 1991 Long Term Incentive Plan, effective as of January 1,
1991, is incorporated herein by reference to Exhibit 10 to
Form 10-K report of Company for fiscal 1990.
#(c) 1985 Stock Option Plan, effective December 20, 1985, is
incorporated herein by reference to Exhibit A of the Proxy
Statement for the Annual Meeting of Shareholders on April
18, 1986, filed on or about March 21, 1986.
#(d) Supplemental Executive Retirement Plan, dated February 18,
1983, and amended May 15, 1987 and April 22, 1988, is
incorporated herein by reference to Exhibit 10(d) to Form
10-K report of Company for fiscal 1991.
#(e) Management Stock Purchase Plan is incorporated herein by
reference to the Proxy Statement for the Annual Meeting of
Shareholders on April 19, 1968 filed on or about March 20,
1968 and amended April 23, 1976, April 24, 1987, and April
19, 1991.
#(f) Trust Agreement, dated as of November 17, 1989, between the
Company and Wachovia Bank, N.A.(formerly Meridian Trust
Company) relating to Supplemental Executive Retirement Plan
is incorporated herein by reference to Exhibit 10(f) to Form
10-K report of Company for 1994.
#(g) Director Retirement Plan dated October 15, 1987 is
incorporated herein by reference to Exhibit 10(h) to Form
10-K report of Company for 1992.
#(h) 1993 Replacement Option Plan (P&J Spin-Off) is incorporated
herein by reference to Exhibit A of the Definitive Proxy
Statement dated March 17, 1994, for the Annual Meeting of
Shareholders on April 22, 1994.
#(i) 1994 Long Term Incentive Plan is incorporated herein by
reference to Exhibit 10(j) to Form 10-K report of company
for 1994.
Page 44
TASTY BAKING COMPANY AND SUBSIDIARIES
#(j) Trust Agreement, dated January 19, 1990, between the Company
and Wachovia Bank, N.A.(formerly Meridian Trust Company)
relating to the Director Retirement Plan is incorporated
herein by reference to Exhibit 10(k) to Form 10-K report of
company for 1995.
#(k) 1997 Long Term Incentive Plan is incorporated herein by
reference to Annex II of the Proxy Statement for the Annual
Meeting of Shareholders on April 24, 1998.
#(l) Employment Agreement, dated as of August 14, 2002, between
the company and Charles P. Pizzi is incorporated herein by
reference to Exhibit 10(m) to Form 10-K report of company
for 2002.
#(m) Supplemental Executive Retirement Plan Agreement, dated as
of October 7, 2002, between the company and Charles P. Pizzi
is incorporated herein by reference to Exhibit 10(n) to Form
10-K report of company for 2002.
#(n) Amendment to the Supplemental Executive Retirement Plan
Agreement between the company and Charles P. Pizzi, dated as
of August 19, 2004, is incorporated herein by reference to
Exhibit 10.2 to Form 10-Q report of company for the 39 weeks
ending September 25, 2004.
*#(o) Amendment to the Employment Agreement, dated as of January
19, 2004, between the company and Charles P. Pizzi.
#(p) Amendment to the Employment Agreement, dated as of August
19, 2004, between the company and Charles P. Pizzi is
incorporated herein by reference to Exhibit 10.1 to Form
10-Q report of company for the 39 weeks ending September 25,
2004.
(q) Credit Agreement, as amended January 23, 2004, by and among
the company and PNC Bank, N.A. and Citizens Bank of
Pennsylvania is incorporated herein by reference to Exhibit
10.1 to Form 10-Q report of company for the 13 weeks ending
March 27, 2004.
*(r) Sixth Amendment to Credit Agreement, dated January 21,
2005, by and among the company and PNC Bank, N.A. and
Citizens Bank of Pennsylvania.
*(s) Waiver and Seventh Amendment to Credit Agreement, dated
February 28, 2005, by and among the company and PNC Bank,
N.A. and Citizens Bank of Pennsylvania.
*(t) Eighth Amendment to the Credit Agreement, dated March
21, 2005, by and among the company and PNC Bank, N.A. and
Citizens Bank of Pennsylvania.
*#(u) Form of Restricted Stock Award Agreement for the 2003 Long
Term Incentive Plan, dated October 29, 2004, between the
company and certain executive officers.
*#(v) Form of Grant Agreement for the 1997 and 2003 Long Term
Incentive Plan.
*(21) Subsidiaries of the Company.
*(23)(a) Consent of Independent Registered Public Accounting
Firm.
*(31)(a) Certification of Charles P. Pizzi, Chief Executive
Officer, pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
*(31)(b) Certification of David S. Marberger, Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
*(32) Certification of Charles P. Pizzi, Chief Executive Officer,
and David S. Marberger, Chief Financial Officer, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
--------------------------
* Filed or furnished herewith
# Indicates a management contract or compensatory arrangement
Page 45
TASTY BAKING COMPANY AND SUBSIDIARIES
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
for the fiscal years ended December 25, 2004, December 27, 2003, and December 28, 2002
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
Balance at Charged to Balance
beginning Costs and at end
of Period Expenses Deductions of Period
------ -------- ---------- ------
Description Deducted from applicable assets:
Allowance for doubtful accounts:
For the fiscal year ended December 25, 2004 $ 3,648 $ 1,627 $ 427 $ 4,848
===== ===== === =====
For the fiscal year ended December 27, 2003 $ 3,606 $ 1,059 $ 1,017 $ 3,648
===== ===== ===== =====
For the fiscal year ended December 28, 2002 $ 3,752 $ 958 $ 1,104 $ 3,606
===== ==== ===== =====
Inventory valuation reserves:
For the fiscal year ended December 25, 2004 $ 232 $ 294 $ 385 $ 141
=== ==== ==== ===
For the fiscal year ended December 27, 2003 $ 682 $ 300 $ 750 $ 232
=== === === ===
For the fiscal year ended December 28, 2002 $ 335 $ 702 $ 355 $ 682
==== === === ===
Spare parts inventory reserve for obsolescence:
For the fiscal year ended December 25, 2004 $ 56 $ 19 $ (86) $ 161
== == ==== ===
For the fiscal year ended December 27, 2003 $ 365 $ 396 $ 705 $ 56
=== === === ==
For the fiscal year ended December 28, 2002 $ 481 $ 48 $ 164 $ 365
==== === === ===
Page 46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TASTY BAKING COMPANY
March 25, 2005 /s/ Charles P. Pizzi
-------------------------------------------------
Charles P. Pizzi,
President and
Chief Executive Officer
March 25, 2005 /s/ David S. Marberger
-------------------------------------------------
David S. Marberger,
Senior Vice President,
Chief Financial Officer and Chief Accounting Officer
[Principal Financial and Accounting Officer]
Page 47
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the company and in
the capacities and on the dates indicated.
Signature Capacity Date
------------------------------------------ ------------------------------- --------------------------
/s/ James E. Ksansnak Chairman of the Board March 25, 2005
------------------------------------------
James E. Ksansnak and Director of Tasty
Baking Company
/s/ Charles P. Pizzi President, Chief March 25, 2005
------------------------------------------
Charles P. Pizzi Executive Officer and
Director of Tasty
Baking Company
[Principal Executive Officer]
/s/ Fred C. Aldridge, Jr. Director of Tasty March 25, 2005
------------------------------------------
Fred C. Aldridge, Jr. Baking Company
/s/ Philip J. Baur, Jr. Director of Tasty March 25, 2005
------------------------------------------
Philip J. Baur, Jr. Baking Company
/s/ Ronald J. Kozich Director of Tasty March 25, 2005
------------------------------------------
Ronald J. Kozich Baking Company
/s/ Judith M. von Seldeneck Director of Tasty March 25, 2005
------------------------------------------
Judith M. von Seldeneck Baking Company
/s/ David J. West Director of Tasty March 25, 2005
------------------------------------------
David J. West Baking Company
/s/ David S. Marberger Senior Vice President March 25, 2005
------------------------------------------
David S. Marberger Chief Financial Officer and
Chief Accounting Officer of
Tasty Baking Company
[Principal Financial and
Accounting Officer]
Page 48