Item 1. Business - --------------------
The Registrant was incorporated in Pennsylvania in 1914 and maintains its main offices and manufacturing facilities in Philadelphia, Pennsylvania. The Registrant's Tastykake Division (Tastykake) manufactures and sells a variety of premium single portion cakes, pies, cookies, pretzels, brownies, pastries, donuts, miniature donuts, snack bars, boxed cookies and large family sized cakes, pies and danish under the well established trademark, TASTYKAKE(R). These products comprise approximately 120 varieties. The availability of some products, especially the holiday-themed offerings, varies according to the season of the year. The single portion cakes, cookies and donuts principally sell at retail prices for individual packages ranging from 50(cent) to 99(cent) per package and family convenience packages ranging from $2.50 to $2.99. The pies principally sell at retail prices from 50(cent) to 69(cent) each and include various fruit and creme 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 99(cent) 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). In 1999, Tastykake introduced a line of large family-sized cakes produced by Tasty Baking Oxford, Inc., a wholly-owned subsidiary, and currently sold by the Registrant, under the trademark CLASSIC BAKED GOODS(TM) at retail prices ranging from $2.50 to $3.29. In addition, large pies, boxed cookies, donuts, donut holes and large danish are sold by the Registrant under the trademark CLASSIC BAKED GOODS(TM) at retail prices ranging from $2.50 to $3.59. There are approximately 35 varieties available under the Classic Baked Goods line.
During the fourth quarter of 2001 the Registrant 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 Registrant's subsidiary, Tasty Baking Oxford, Inc. The trademark DUTCH MILL(R) will remain an asset of the Registrant.
Tasty Baking Oxford, Inc., located in Oxford, Chester County, Pennsylvania, currently manufactures honey buns, large cakes, donuts and muffins under the trademarks TASTYKAKE(R), CLASSIC BAKED GOODS(TM), SNAK N' FRESH(R) and AUNT SWEETIE'S BAKERY(R). These products are distributed through independent owner/operators and regional distributors. The SNAK N' FRESH(R) and AUNT SWEETIE'S BAKERY(R) brands were instituted to allow the Registrant to enter the private label and food service markets without compromising the integrity of its TASTYKAKE(R) brand. All of the products manufactured at the Oxford facility are sold to the Registrant for resale.
Tastykake products are sold principally by independent owner/operators through distribution routes to approximately 15,000 retail outlets in Delaware, Maryland, New Jersey, New York, Pennsylvania and Virginia, which make up the Registrant's principal market. This method of distribution for direct store deliveries has been used since 1986. The Registrant also distributes its products through distributorships and major grocery chains which have centralized warehouse distribution capabilities located in many areas of the country. The Registrant has formed alliances with distributors which can warehouse and distribute the Tastykake product line most effectively in order to promote geographic expansion. Products are sold in a majority of the continental United States and Puerto Rico. The Registrant also distributes its products through the TASTYKARE(R) program, whereby consumers can call a toll-free number or visit the Registrant's web-site to order the delivery of a variety of Tastykake gift packs.
During 2002, the Registrant closed its remaining 18 thrift stores which did not meet the profitability objectives set by the Registrant. The Registrant closed 6 stores during the second quarter and closed the remaining 12 stores as of year end. The Registrant has recorded restructuring charges related to the closures. The Registrant'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 Registrant's products. The Registrant is in the process of soliciting other outlets for its stale and damaged products.
In 1998, the Registrant began a $22 million modernization program(program) for its manufacturing facility in Philadelphia, Pennsylvania. These renovations were undertaken to increase productivity and efficiency. The program is being completed in phases and was expected to take approximately four years from inception. Phase I of the program, the complete renovation of the Krimpet and Junior production and packaging lines, was completed in 1999. Phase II, the renovation of the cupcake lines, began in 2000. Two of the four cupcake lines were successfully converted in 2000 and the third line was completed in 2002. The remaining portion of the program is still in process and decisions regarding the details of its completion will be made prior to the end of fiscal 2003.
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Item 1. Business, continued
The Registrant's top 20 customers represent 74.1% of its 2002 net sales. The top two customers in this group represent 13.7% and 11.6% of the Registrant's net sales for 2002. These relationships have been reasonably consistent over the prior two years. If any of the customers in this group changed their buying patterns with the Registrant, its current sales levels could be adversely affected.
The Registrant maintains an advertising program which, from time to time, utilizes outdoor poster campaigns, newspapers, customer coupons, radio and television advertising, and promotions with various sports teams. While the Registrant sponsors research and development activities, the cost is not a material item.
The Registrant 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 large advertising and promotion budgets. The Registrant believes it is one of the largest producers in the country specializing in premium single portion snack cakes and pies. The Registrant is able to maintain a strong competitive position in its principal marketing area through the quality of its products and brand name recognition. The Registrant has a significant market share throughout its principal marketing area.
Outside of its principal marketing area, awareness of the Registrant's trademarks and reputation for quality is not as strong. In these markets, the Registrant competes for the limited shelf space available from retailers using price, product quality and consumer acceptance. The Registrant has been able to increase its sales nationally through the distribution of its products using mass merchandisers, wholesale clubs, convenience stores and other distribution outlets. The Registrant's growth in national sales has resulted in higher average balances of finished product inventory which are needed to satisfy the delivery requirements of these customers, and in higher average accounts receivable balances due to longer billing cycles and payment terms of national account customers.
Outside of the principal marketing area, its market share is generally less significant. Its principal competitor in the premium snack cake market throughout the country is Interstate Bakeries Corporation(Interstate) which owns three major brands - Hostess, Dolly Madison and Drakes. Local independent bakers also compete in a number of regional markets. Interstate is a large publicly held corporation which has achieved national recognition of its Hostess brand name through national advertising, and it competes on price, product quality and brand name recognition. Interstate also promotes its Drakes product line in areas where the Registrant is attempting to expand its market share. 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 have begun to advertise and promote single-serve packages of their traditional multi-serve cookie and sweet and salty snack varieties which now compete against the Registrant for a portion of the overall snack market.
The Registrant is heavily dependent upon sugar, flour and cocoa to manufacture its products. No difficulties were experienced in obtaining raw materials in 2002. The price of sugar was higher but stable during 2002. Recent drought conditions in the Midwest may result in reduced wheat supplies which could expose the Registrant to price increases during 2003. In addition, there has been political unrest in the Ivory Coast of West Africa which is a key supplier of cocoa pressed cake to the world market. This instability has resulted in reduced availability and higher commodity prices for cocoa pressed cake. At present, the Registrant purchases cocoa pressed cake and manufactures it into cocoa powder which it uses as a principal ingredient in many of its chocolate products. Because of the uncertainty of the supply of cocoa pressed cake, the Registrant may switch to processed cocoa powder which has a higher cost and will adversely affect the margins on the chocolate products in which it is used. It is not anticipated that there will be any significant adverse effects on the financial condition of the Registrant as a result of price fluctuations or the availability of raw materials in 2003.
The Registrant'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 maintained at a level between 1.5 and 2.5 to 1.
The Registrant employs approximately 1,060 persons, including approximately 140 part-time employees.
Since February 11, 2003, the Registrant'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 Exchange Act have been made available free of charge through its website the same day as they are made available on the SEC website. These reports are available by going to the Registrant's website(www.tastykake.com) and selecting "Corporate Info," "SEC Filings," and then "SEC website."
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Item 2.
Item 2. Properties - ----------------------
The locations and primary use of the materially important physical properties of the Registrant and its subsidiaries are as follows:
Location Primary Facility Use -------- --------------------
2801 Hunting Park Avenue Corporate office, Philadelphia, PA (1) Production of cakes, pies, cookies and donuts
Fox and Roberts Streets Sales and Finance offices, Philadelphia, PA (1) Data Processing Operations, office Services and Warehouse
700 Lincoln Street Tasty Baking Oxford offices, Oxford, PA (2) Production of honey buns, donuts, pastries, muffins, and large cake
(1) These properties are recorded as capital leases. For a description of major encumbrances on these properties, see Note 7 and 8 of Notes to Consolidated Financial Statements in the 2002 Annual Report to Shareholders - Exhibit 13, incorporated herein by reference.
(2) This property was purchased and is owned by Tasty Baking Oxford, Inc.
In addition to the above, the Registrant leases various other properties used principally as local pick up and distribution points. All of these properties are sufficient for the business of the Registrant as now conducted.
Item 3.
Item 3. Legal Proceedings - -----------------------------
The Registrant is involved in certain legal and regulatory actions, all of which have arisen in the ordinary course of the Registrant's business. The Registrant 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 Registrant. However, if one or more of such matters were determined adversely to the Registrant, the ultimate liability arising therefrom should not be material to the financial position of the Registrant, but could be material to its results of operations in any quarter or annual period.
In November, 1998, nine (9) independent route owner/operators (Plaintiffs), on behalf of all present and former route owner/operators, commenced suit against the Registrant seeking recovery from the Registrant of amounts (i) which the owner/operators paid in the past to the Internal Revenue Service on account of employment taxes, and (ii) collected by the Registrant since January 1, 1998 as an administrative fee from all unincorporated owner/operators. The Registrant removed the complaint to the United States District Court for the Eastern District of Pennsylvania and was successful in having the complaint 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 owner/operators as independent contractors by the Registrant such that the owner/operators were required to pay self-employment, social security and federal unemployment taxes which they allege should have been paid by the Registrant, and (2) for breach of contract relating to the collection of an administrative fee from all unincorporated owner/operators. The Court dismissed with prejudice the Plaintiffs first claim in March 2000. As to the second claim, in January 2002, the Court certified a class of approximately 200 owner/operators (representing approximately 43% of the Registrant's current routes), consisting of unincorporated owner/operators who, since February 7, 1998, have paid or continue to pay the administrative fee to the Registrant. The Registrant believes the case to be without merit and is defending the matter vigorously. The Registrant has not established any reserve in the event that the ultimate outcome of this litigation proves unfavorable to the Registrant. If this matter is determined adversely to the Registrant, the ultimate liability arising therefrom should not be material to the financial position of the Registrant, but could be material to its results of operations in any quarter or annual period.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders - ---------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.
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Item 14
Item 14 Controls and Procedures
The Registrant maintains a system of disclosure controls and procedures designed to provide reasonable assurance as to the reliability of its consolidated financial statements and other disclosures included in the report. The Registrant established a disclosure committee, which consists of certain members of management. Within 90 days prior to the date of filing of this report, the Registrant carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the design and operation of the Registrant's disclosure controls and procedures. Based on this evaluation, the Registrant's Chief Executive Officer and Chief Financial Officer concluded that the
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TASTY BAKING COMPANY AND SUBSIDIARIES
PART III
CROSS REFERENCE INDEX
FORM 10-K ITEM NUMBER AND CAPTION - -----------------------
Item 14 Controls and Procedures cont'd.
Registrant's disclosure controls and procedures are effective for gathering, analyzing and disclosing material information the Registrant is required to disclose in the reports it files with the Securities and Exchange Commission(SEC) pursuant to the Securities and Exchange Act of 1934, within the time periods specified in the SEC's rules and forms. There have been no significant changes in the Registrant's internal controls or in other factors that could significantly affect internal controls subsequent to the date of this evaluation.
Page(s) in definitive Proxy Statement
Item 15
Item 15 Principal Accountant Fees and Services 29 - 30
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REPORT of INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Shareholders and the Board of Directors Tasty Baking Company
Our audits of the consolidated financial statements referred to in our report dated March 19, 2003, appearing on page 39 of the 2002 Annual Report to Shareholders of Tasty Baking Company and subsidiaries, (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedule listed in Item 16(a)(2) of this Form 10-K. In our opinion, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP Philadelphia, Pennsylvania March 19, 2003
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
TASTY BAKING COMPANY
By /s/ Charles P. Pizzi ------------------------------------ Charles P. Pizzi, President and Chief Executive officer
/s/ David S. Marberger ------------------------------------ David S. Marberger, Senior Vice President, Chief Financial officer and Chief Accounting officer
/s/ John M. Pettine ------------------------------------ John M. Pettine, Executive Vice President and Director
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Certification
I, Charles P. Pizzi, President and Chief Executive officer of Tasty Baking Company, certify that:
(1) I have reviewed this annual report on Form 10-K of Tasty Baking Company;
(2) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
(3) Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
(4) The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
(5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board or directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
(6) The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 27, 2003 ---------------
/s/ Charles P. Pizzi -------------------- Charles P. Pizzi President and Chief Executive Officer
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Certification
I, David S. Marberger, Senior Vice President and Chief Financial Officer of Tasty Baking Company, certify that:
(1) I have reviewed this annual report on Form 10-K of Tasty Baking Company;
(2) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
(3) Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
(4) The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
(5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board or directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
(6) The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 27, 2003 --------------
/s/ David S. Marberger ---------------------- David S. Marberger Senior Vice President and Chief Financial Officer
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Certification
I, John M. Pettine, Executive Vice President of Tasty Baking Company, certify that:
(1) I have reviewed this annual report on Form 10-K of Tasty Baking Company;
(2) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
(3) Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
(4) The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
(5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board or directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
(6) The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 27, 2003 --------------
/s/ John M. Pettine ------------------- John M. Pettine Executive Vice President
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