| TASTY BAKING CO Item 1A Risk Factors The risks described below, together with all of the other information included in this report, should be carefully considered in evaluating our business and prospects |
| Additional information regarding various risks and uncertainties facing us are included under Item 7 of this report on Form 10-K The risks and uncertainties described herein are not the only ones facing us |
| Additional risks and uncertainties not presently known or deemed insignificant may also impair our business operations |
| The occurrence of any of the following risks could harm our business, financial condition or results of operations |
| Solely for purposes of the risk factors in this Item 1A, the terms “we” , “our” and “us” refer to Tasty Baking Company and its subsidiaries |
| Increased Competition May Impair Profitability We are 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 |
| From time to time, we experience price pressure in certain of our markets as a result of competitors’ promotional pricing practices |
| Increased competition could result in lower sales, profits, and market share |
| The increased prices could have a negative effect on consumer demand for our products and our sales and profits |
| Our largest customer, Wal-Mart, represents 18dtta6prca of our net sales in 2005, 16dtta3prca of our net sales in 2004, and 15dtta2prca of our net sales in 2003 |
| If any of the top twenty customers change their buying patterns with us, our sales and profits could be adversely affected |
| Increased Commodity Prices May Impact Profitability We are dependent upon sugar, eggs, oils, flour and cocoa for our ingredients and paperboard for our packaging |
| Many commodity prices have been volatile and may continue to be volatile |
| Any substantial increase in commodity prices may have an adverse impact on our profitability |
| -4- _________________________________________________________________ Change in Consumer Preferences May Adversely Affect Our Financial and Operational Results Our success is contingent upon our 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 our branded products, which could adversely affect our financial and operational results |
| Collectibility of Long-term Receivables May Adversely Affect Our Financial Position Our long-term receivables represent loans issued to our 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 our risk in the event of default by an independent sales distributor and our loss history has been minimal |
| However, the ability to collect the entire loan portfolio is directly related to the success of our current route distribution system and the 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 collectibility of long-term receivables |
| Our Brand Recognition May Not Extend beyond Our Core Market Historically, route sales by independent sales distributors have accounted for the largest part of our revenues |
| Prior to 2003 as we expanded outside of our core Mid-Atlantic route market, the percentage of volume began to shift toward more non-route business, causing some erosion of our gross margin |
| We continue to evaluate existing and new business possibilities outside the core market utilizing distributors |
| We also distribute products through distributorships and major grocery chains which have centralized warehouse distribution capabilities throughout the continental United States and Puerto Rico via third party distributorships |
| If we are unable to further develop brand recognition in the expanded markets, sales and profitability could be adversely affected |
| Production planning and monitoring of demand is essential to effective operations, both to fulfill customer demand and to minimize the levels of inventory and returns |
| Delays in getting the product to market, such as transportation or bad weather, may cause loss of sales, which could adversely affect our operating results |
| Product Recall or Safety Concerns May Adversely Affect Our Financial and Operational Results We may recall certain of our products should they be mislabeled, contaminated or damaged |
| A product recall or an adverse result in any related litigation could have a material effect on our operating and financial results |
| Loss of Production Facilities Could Adversely Affect Our Financial and Operational Results We have two production facilities: one each in Philadelphia and Oxford, Pennsylvania |
| The Philadelphia facility is a multi-storied manufacturing facility where our 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 our operations, financial condition and results of operations |
| Availability of Capital May Affect Future Capital Programs and Expansion Opportunities We have 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 our markets may be affected by the availability, cost of capital, and terms relating thereto, in the equity and debt markets |
| Increased Interest Rates May Adversely Affect Our Financial and Operational Results Increases in interest rates will increase our recognition of interest expense related to long-term debt and the interest income related to our long-term receivables |
| A decrease in interest rates could adversely impact the relationship of our unrecognized gain or loss to the pension corridor |
| A sensitivity analysis on the impact of this relationship is included under Note 8 of the consolidated financial statements |
| -5- _________________________________________________________________ Terms of Indebtedness Impose Significant Restrictions on Our Business Our Amended Credit Agreement, term loans and mortgage loan (the “Agreements”) contain various covenants that limit our ability to, among other things, incur or become liable for additional indebtedness; create or suffer to exist certain liens; enter into business combinations or asset sale transactions; make restricted payments, including dividends over a specified amount; make investments; enter into transactions with affiliates; and enter into new businesses |
| These restrictions could limit our ability to obtain future financing, sell assets, make acquisitions or needed capital expenditures, withstand a future downturn in our business or the economy in general, conduct operations or otherwise take advantage of business opportunities that may arise |
| The Agreements also require us to maintain certain financial ratios |
| Our ability to remain in compliance with our financial ratio requirements in the future can be affected by events beyond our control, such as general economic conditions, a significant increase in the cost of our raw materials or a material increase in our pension or postretirement obligations |
| Failure to maintain any applicable financial ratios may prevent us from borrowing additional amounts under the Amended Credit Agreement and could result in a default under the Agreements, which could cause the indebtedness outstanding under the Agreements to become immediately due and payable |
| If we were unable to repay those amounts, our banks could initiate a bankruptcy or liquidation proceeding |
| If the banks were to accelerate the repayment of all outstanding borrowings under the Agreements, we may not have sufficient assets to repay those amounts and any others that cross default as a result thereof |
| In addition, if we amend our Agreements or seek a waiver for any events of default, we may incur additional fees and/or higher interest rates on all or a portion of our borrowings under the Agreements |
| Changes in Governmental Laws and Regulations Could Adversely Affect Our Financial and Operational Results Our business, includng but not limited to, our products, properties, employees, distribution and overall operations, is subject to regulation by various federal, state and local government entities and agencies |
| Changes in laws and regulations and the manner in which they are interpreted or applied may alter the environment in which we operate and may affect results of operations or increase liabilities |
| These include changes in food and drug laws, laws related to advertising and marketing practices, accounting standards, taxation requirements, competition laws, employment laws and environmental laws |
| Litigation Could Adversely Affect Our Financial and Operational Results We are involved in certain legal and regulatory actions, all of which have arisen in the ordinary course of our business |
| We are unable to predict the outcome of these matters, but do not believe that the ultimate resolution of these matters will have a material adverse effect on our consolidated financial position or results of operations |
| However, if one or more of these matters were determined adversely to us, the ultimate liability arising therefrom should not be material to our financial position, but could be material to our results of operations in any quarter or annual period |
| In addition, we may become subject to additional litigation at any time which could have an adverse material impact on us |
| Changes in Pension Expense Assumptions and Estimates May Adversely Affect Our Operational Results 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 us |
| In addition, the rate of return on plan assets is directly related to changes in the equity and credit markets, which can be volatile |
| The use of the above assumptions, market volatility and our election in 1987 to recognize all pension gains and losses in excess of our pension corridor in the current year may cause us to experience significant changes in our pension expense from year to year, which could adversely affect our operating results |
| Most other public companies elected an amortization method that allows recognition of pension gains and losses to be amortized over longer periods of time, up to 15 years |
| Increases in Employee and Employee-Related Costs Could Adversely Affect Our Financial and Operational Results Health care and workers’ compensation costs have been increasing and may continue to rise |
| Any substantial increase in costs may have an adverse impact on our profitability |
| In addition, a shortage of qualified employees, a substantial increase in the cost of qualified employees, or any adverse effect resulting from third-party labor negotiations could have an adverse effect on our operations and financial results |
| -6- _________________________________________________________________ Loss or Impairment of Intellectual Property and Trade Secrets Could Adversely Affect Our Brands and Our Business We have taken efforts to protect our trademarks, copyrights and trade secrets as we consider our intellectual property rights important to our success |
| However, other parties may take actions that could impair the value of our proprietary rights or the reputation of our brands |
| Any such impairment could adversely affect our business |
| Moreover, protecting our intellectual property and other proprietary rights could be costly and any increase in the unauthorized use of our intellectual property could make it more expensive to do business and therefore, adversely affect our operating results |
| Changes in Economic Conditions Could Adversely Affect Our Financial and Operational Results Our business may be adversely affected by changes in economic and business conditions nationally and particularly within our 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 our future results of operations |