Inventure Foods (SNAK) 10-Q 2005 Q1 Quarterly report

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

ýQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended March 26, 2005

OR

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from                    to                   

Commission File Number 1-14556

POORE BROTHERS, INC.

(Exact Name of Registrant as Specified in its Charter)

Delaware	86-0786101
(State or Other Jurisdiction of Incorporation or	(I.R.S. Employer
Organization)	Identification No.)
3500 S. La Cometa Drive, Goodyear, Arizona	85338
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s Telephone Number, Including Area Code:  (623) 932-6200

Indicate by check whether the Registrant: (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 Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  ý   No  o

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes  o   No ý

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  19,647,561 as of March 26, 2005.

Table of Contents

Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
	Consolidated balance sheets as of March 26, 2005 and December 25, 2004
	Consolidated statements of income for the quarters ended March 26, 2005 and March 27, 2004
	Consolidated statements of cash flows for the quarters ended March 26, 2005 and March 27, 2004
	Notes to consolidated financial statements
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.		Quantitative and Qualitative Disclosures About Market Risk
Item 4.		Controls and Procedures
Part II. OTHER INFORMATION
Item 1.		Legal Proceedings
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.		Defaults Upon Senior Securities
Item 4.		Submission of Matters to a Vote of Security Holders
Item 5.		Other Information
Item 6.		Exhibits

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PART I.          FINANCIAL INFORMATION

Item 1.Financial Statements

POORE BROTHERS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(unaudited)

	March 26, 2005		December 25, 2004
ASSETS
Current assets:
Cash and cash equivalents	$	10,474,289	$	9,675,490
Accounts receivable, net of allowance of $97,000 in 2005 and $89,000 in 2004	5,099,329		5,379,362
Inventories	2,689,856		2,145,742
Deferred income tax asset	1,226,664		1,341,723
Other current assets	494,000		471,051
Total current assets	19,984,138		19,013,368
Property and equipment, net	10,697,938		10,815,963
Goodwill	5,986,252		5,986,252
Trademarks	4,207,032		4,207,032
Other assets	93,213		94,672
Total assets	$	40,968,573	$	40,117,287
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	3,952,750	$	2,809,187
Accrued liabilities	2,630,165		2,656,887
Current portion of long-term debt	1,168,581		1,390,667
Current portion of accrued costs related to brand discontinuance and other current liabilities	405,513		442,533
Total current liabilities	8,157,009		7,299,274
Long-term debt, less current portion	1,717,608		1,729,134
Non-current portion of accrued costs related to brand discontinuance and other liabilities	289,267		492,541
Deferred income tax liability	1,788,252		1,788,252
Total liabilities	11,952,136		11,309,201
Commitments and contingencies (Note 5)
Shareholders’ equity:
Preferred stock, $100 par value; 50,000 shares authorized; no shares issued or outstanding at March 26, 2005 and December 25, 2004	—		—
Common stock, $.01 par value; 50,000,000 shares authorized; 19,647,561 shares issued and outstanding at March 26, 2005 and December 25, 2004	196,476		196,476
Additional paid-in capital	27,274,825		27,274,825
Retained earnings	1,545,136		1,336,785
Total shareholders’ equity	29,016,437		28,808,086
Total liabilities and shareholders’ equity	$	40,968,573	$	40,117,287

The accompanying notes are an integral part of these consolidated financial statements.

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POORE BROTHERS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

	Quarter Ended
	March 26, 2005			March 27, 2004
Net revenues	$	16,556,875		$	17,718,493
Cost of revenues	13,169,025			14,138,374
Gross profit	3,387,850			3,580,119
Selling, general and administrative expenses	3,047,797			2,664,055
Operating income	340,053			916,064
Interest (income) expense, net	(1,299		)	45,741
Income before income tax provision	341,352			870,323
Income tax provision	133,000			337,000
Net income	$	208,352		$	533,323
Earnings per common share:
Basic	$	0.01		$	0.03
Diluted	$	0.01		$	0.03
Weighted average number of common shares:
Basic	19,647,561			18,602,978
Diluted	19,854,440			19,317,706

The accompanying notes are an integral part of these consolidated financial statements.

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POORE BROTHERS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	Quarter Ended
	March 26, 2005			March 27, 2004
Cash flows provided by (used in) operating activities:
Net income	$	208,352		$	533,323
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	301,724			351,370
Amortization	1,459			13,944
Provision for bad debts	14,731			(91,789		)
Deferred income taxes	115,059			295,909
Loss on disposition of fixed assets	—			16,121
Change in operating assets and liabilities:
Accounts receivable	265,302			(759,494		)
Inventories	(544,114		)	(267,615		)
Other assets and liabilities	(263,243		)	(27,553		)
Accounts payable and accrued liabilities	1,116,840			1,124,799
Net cash provided by operating activities	1,216,110			1,189,015
Cash flows provided by (used in) investing activities:
Purchase of property and equipment	(183,700		)	(188,917		)
Net cash used in investing activities	(183,700		)	(188,917		)
Cash flows provided by (used in) financing activities:
Proceeds from issuance of common stock	—			57,116
Payments made on long-term debt	(233,611		)	(252,706		)
Net cash used in financing activities	(233,611		)	(195,590		)
Net increase in cash	798,799			804,508
Cash and cash equivalents at beginning of period	9,675,490			3,239,570
Cash and cash equivalents at end of period	$	10,474,289		$	4,044,078
Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	64,345		$	44,303

The accompanying notes are an integral part of these consolidated financial statements.

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POORE BROTHERS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1.Organization and Summary of Significant Accounting Policies:

Poore Brothers, Inc., (“the Company”) a Delaware corporation, was formed in 1995 as a holding company to acquire a potato chip manufacturing and distribution business which had been founded by Donald and James Poore in 1986.

In December 1996, the Company completed an initial public offering of its Common Stock.  In November 1998, the Company acquired the business and certain assets (including the Bob’s Texas Style® potato chip brand) of Tejas Snacks, L.P. (“Tejas”), a Texas-based potato chip manufacturer.  In October 1999, the Company acquired Wabash Foods, LLC (“Wabash”) including the Tato Skins®, O’Boisies®, and Pizzarias® trademarks, the Bluffton, Indiana manufacturing operation and assumed all of Wabash Foods’ liabilities.  In June 2000, the Company acquired Boulder Natural Foods, Inc. (“Boulder”) and the Boulder Potato Company® brand of totally natural potato chips. As part of the Boulder acquisition, the Company was required to issue additional unregistered shares of Common Stock to the seller on each of the first three anniversaries of the closing of the acquisition.  The issuance of such shares was dependent upon increases in sales of Boulder product as compared to previous periods.  In 2003, 2002 and 2001, the Company was required to issue 93,728 shares valued at $420,566, 88,864 shares valued at $210,786 and 57,898 shares valued at $185,274, respectively.  With each issuance of shares the Company increased the goodwill recorded from this acquisition.

In October 2000, the Company launched its T.G.I. Friday’s® brand salted snacks pursuant to a license agreement with TGI Friday’s Inc., which expires in 2014.

In June 2003, the Company launched its Crunch Toons® brand potato snacks, initially featuring Looney Tunes™ characters pursuant to a multi-year license agreement with Warner Bros. Consumer Products.  The Company decided to discontinue the brand in June 2004, and amended its license agreements with Warner Bros. Consumer Products.

In September 2004, the Company signed a multi-year license agreement with Cinnabon®, Inc. pursuant to which the Company plans to develop and sell a variety of snack products, to include cookies and bars under the Cinnabon® brand.  The Company began shipping the Cinnabon® snack products in April 2005.

The Company is engaged in the development, production, marketing and distribution of innovative snack food products that are sold primarily through grocery retailers, mass merchandisers, club stores, convenience stores and vend distributors across the United States.  The Company currently manufactures and sells nationally T.G.I. Friday’s® brand snacks under license from TGI Friday’s Inc. and sells nationally Cinnabon® brand snacks under license from Cinnabon®, Inc.  The Company also currently (i) manufactures and sells regionally its own brands of snack food products, including Poore Brothers®, Bob’s Texas Style®, and Boulder Potato Company® brand batch-fried potato chips and Tato Skins® brand potato snacks, (ii) manufactures private label potato chips for grocery retail chains in the southwest, and (iii) distributes in Arizona snack food products that are manufactured by others.  The Company sells its T.G.I. Friday’s® brand snack products to mass merchandisers, grocer, club and drug stores directly and to primarily convenience stores and vend operators through independent distributors.  The Company’s other brands are also sold through independent distributors.

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Basis of Presentation

The consolidated financial statements include the accounts of Poore Brothers, Inc. and all of its wholly owned subsidiaries.  All significant intercompany amounts and transactions have been eliminated.  The financial statements have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all the information and footnotes required by accounting principles generally accepted in the United States of America.  In the opinion of management, the consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary in order to make the consolidated financial statements not misleading.  A description of the Company’s accounting policies and other financial information is included in the audited financial statements filed with Form 10-K for the fiscal year ended December 25, 2004.  The results of operations for the quarter ended March 26, 2005 are not necessarily indicative of the results expected for the full year.

Earnings Per Common Share

Basic earnings per common share is computed by dividing net income by the weighted average number of shares of Common Stock outstanding during the period.  Exercises of outstanding stock options or warrants are assumed to occur for purposes of calculating diluted earnings per share for periods in which their effect would not be anti-dilutive.

	Quarter Ended
	March 26, 2005		March 27, 2004
Basic Earnings Per Share:
Net income	$	208,352	$	533,323
Weighted average number of common shares	19,647,561		18,602,978
Earnings per common share.	$	0.01	$	0.03
Diluted Earnings Per Share:
Net income	$	208,352	$	533,323
Weighted average number of common shares	19,647,561		18,602,978
Incremental shares from assumed conversions-
Warrants	—		209,666
Stock options.	206,879		505,062
Adjusted weighted average number of common shares	19,854,440		19,317,706
Earnings per common share	$	0.01	$	0.03

The Company’s stock-based compensation plan is accounted for under the recognition and measurement provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations.  The Company has adopted the disclosure-only provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure”.  Accordingly, no compensation cost has been recognized for stock option grants.  Awards under the plan vest over periods ranging from one to three years, depending on the type of award.  The following table illustrates the effect on net income and earnings per share if the fair value method had been applied to all outstanding and unvested awards in each period presented, using the Black-Scholes valuation model.

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	March 26, 2005			March 27, 2004
Net income as reported	$	208,352		$	533,323
Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects	(102,793		)	(179,731		)
Pro forma net income	$	105,559		$	353,592
Net income per share – basic – as reported	$	0.01		$	0.03
Pro forma net income per share – basic	$	0.01		$	0.02
Net income per share – diluted – as reported.	$	0.01		$	0.03
Pro forma net income per share – diluted	$	0.01		$	0.02

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for options granted in 2004:  dividend yield of 0%; expected volatility of 62%; risk-free interest rate of 3.15%; and expected lives of 3 years.  There were no option grants during the quarters ended March 27, 2004 and March 26, 2005.

2.Inventories

Inventories consisted of the following:

	March 26, 2005		December 25, 2004
Finished goods	$	2,055,105	$	1,537,488
Raw materials	634,751		608,254
	$	2,689,856	$	2,145,742

3.Long-Term Debt

The Company’s Goodyear, Arizona manufacturing, distribution and headquarters facility is subject to a $1.8 million mortgage loan from Morgan Guaranty Trust Company of New York, which bears interest at 9.03% per annum and is secured by the building and the land on which it is located.  The loan matures on July 1, 2012; however, monthly principal and interest installments of $16,825 are determined on a twenty-year amortization period.

The U.S. Bancorp Credit Agreement consists of a $5.0 million Line of Credit, a $0.5 million capital expenditure line of credit (“CapEx Term Loan”) and a $5.8 million term loan (“Term Loan A”).  At March 26, 2005, there were no balances on either the Line of Credit or the CapEx Term Loan, and $1.1 million outstanding on Term Loan A.

The U.S. Bancorp Credit Agreement is secured by accounts receivable, inventories, equipment and general intangibles.  Borrowings under the U.S. Bancorp Line of Credit are limited to 80% of eligible receivables, 60% of eligible finished goods inventories and 50% of eligible raw materials inventories.  At March 26, 2005, the Company had a borrowing base of approximately $3,890,000 under the U.S. Bancorp Line of Credit.  The U.S. Bancorp Credit Agreement requires the Company to be in compliance with certain financial performance criteria, including minimum annual operating results, a minimum tangible capital base and a minimum fixed charge coverage ratio.  In July 2004, the U.S. Bancorp Credit Agreement was amended to modify certain financial covenants that allow the Company to exclude one-time extraordinary, non-operating gains/losses during the applicable period.  At March 26, 2005 the Company was in compliance with all of the financial covenants.

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4.Brand Discontinuance

On June 11, 2004, the Company discontinued its Crunch Toons® brand.  The Company negotiated amendments to its license agreements with Warner Bros. Consumer Products pursuant to which the Agreements will remain in effect but become non-exclusive.  However, because the Company ceased using the Crunch Toons® brand in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”, the Company recorded a liability for the estimated fair value of the remaining guaranteed future minimum payments under the agreements by computing the present value of the future cash payments.

In 2004, the Company concluded that a leased packaging machine, primarily associated with Crunch Toons®, was no longer likely to be used.

The following table summarizes the activity of the accrued costs related to the brand discontinuance and other liabilities for the quarter ended March 26, 2005:

	Dec. 25, 2004 Balance		Payments			Mar. 26, 2005 Balance
Present value of guaranteed minimum royalty payments	$	592,472	$	(170,310	)	$	422,162	(1), (2)
Reclamation costs	34,498		(33,375		)	1,123		(1)
Present value of remaining lease payments on equipment	308,104		(36,608		)	271,496		(1), (3)
	$	935,074	$	(240,293	)	$	694,781

(1)These amounts are reflected in the Consolidated Balance Sheets as “Current and Non-current portions of accrued costs related to brand discontinuance and other liabilities”.

(2)In accordance with SFAS No. 146, interest accretion was recorded for the period and future royalty payments will be made in accordance with the amended agreements.

(3)In accordance with SFAS No. 146, the fair value of remaining operating lease payments was recorded relating to a machine the Company determined will no longer be used.  Future operating lease payments will be made in accordance with the existing lease agreement.

5.Litigation

The Company is periodically a party to various lawsuits arising in the ordinary course of business.  Management believes, based on discussions with legal counsel, that the resolution of any such lawsuits will not have a material effect on the financial statements taken as a whole.

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6.   Business Segments

The Company’s operations consist of two segments: manufactured products and distributed products.  The manufactured products segment produces potato chips, potato crisps and potato skins, for sale primarily to snack food distributors and retailers.  The distributed products segment sells snack food products manufactured by other companies to the Company’s Arizona snack food distributors.  The Company’s reportable segments offer different products and services.  All of the Company’s revenues are attributable to external customers in the United States and  Canada and all of its assets are located in the United States.

The accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies included in Note 1 to the audited financial statements filed with the Form 10-K for the fiscal year ended December 25, 2004.  The Company does not allocate assets, selling, general and administrative expenses, income taxes or other income and expense to segments.

	Manufactured Products		Distributed Products		Consolidated
Quarter ended March 26, 2005
Revenues from external customers	$	15,798,936	$	757,939	$	16,556,875
Depreciation and amortization included in segment gross profit	211,381		—		211,381
Segment gross profit	3,283,066		104,784		3,387,850
Quarter ended March 27, 2004
Revenues from external customers	$	17,067,931	$	650,562	$	17,718,493
Depreciation and amortization included in segment gross profit	268,322		—		268,322
Segment gross profit	3,476,012		104,107		3,580,119

The following table reconciles reportable segment gross profit to the Company’s consolidated income before income tax provision.

	Quarter Ended
	March 26, 2005			March 27, 2004
Segment gross profit	$	3,387,850		$	3,580,119
Unallocated amounts:
Selling, general and administrative expenses	3,047,797			2,664,055
Interest (income) expense, net	(1,299		)	45,741
Income before income taxes	$	341,352		$	870,323

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7.     Income Taxes

The Company accounts for income taxes using a balance sheet approach whereby deferred tax assets and liabilities are determined based on the differences in financial reporting and income tax basis of assets and liabilities.  The differences are measured using the income tax rate in effect during the year of measurement.

The Company experienced significant net losses in prior fiscal years resulting in a net operating loss (“NOL”) carryforward  for federal income tax purposes of approximately $1.9 million at December 25, 2004.  The Company’s NOL will begin to expire in varying amounts between 2010 and 2018.

Generally accepted accounting principles require that a valuation allowance be established when it is more likely than not that all or a portion of a deferred tax asset will not be realized.  Changes in valuation allowances from period to period are included in the tax provision in the period of change.  In determining whether a valuation allowance is required, the Company takes into account all positive and negative evidence with regard to the utilization of a deferred tax asset including our past earnings history, expected future earnings, the character and jurisdiction of such earnings, unsettled circumstances that, if unfavorably resolved, would adversely affect utilization of a deferred tax asset, carryback and carryforward periods, and tax strategies that could potentiallyenhance the likelihood of realization of a deferred tax asset.  The Company provides for income taxes at a rate equal to the combined federal and state effective rates, which approximated 39% under current tax rates.

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q, including all documents incorporated by reference, includes “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, and Poore Brothers, Inc. (the “Company”) desires to take advantage of the “safe harbor” provisions thereof.  Therefore, the Company is including this statement for the express purpose of availing itself of the protections of the safe harbor with respect to all of such forward-looking statements.  In this Quarterly Report on Form 10-Q, the words “anticipates,” “believes,” “expects,” “intends,” “estimates,” “projects,” “will likely result,” “will continue,” “future” and similar terms and expressions identify forward-looking statements.  The forward-looking statements in this Quarterly Report on Form 10-Q reflect the Company’s current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties, including specifically the possibility that the Company will need additional financing due to future operating losses or in order to implement the Company’s business strategy, the possible diversion of management resources from the day-to-day operations of the Company as a result of strategic acquisitions, potential difficulties resulting from the integration of acquired businesses with the Company’s business, other acquisition-related risks, lack of consumer acceptance of existing and future products, dependence upon key license agreements, dependence upon major customers, significant competition, risks related to the food products industry, volatility of the market price of the Company’s common stock, par value $.01 per share (the “Common Stock”), the possible de-listing of the Common Stock from the Nasdaq SmallCap Market if the Company fails to satisfy the applicable listing criteria (including a minimum share price) in the future and those other risks and uncertainties discussed herein and in the Company’s other periodic reports filed with the Securities and Exchange Commission, that could cause actual results to differ materially from historical results or those anticipated.  In light of these risks and uncertainties, there can be no assurance that the forward-looking information contained in this Quarterly Report on Form 10-Q will in fact transpire or prove to be accurate.  Readers are cautioned to consider the specific risk factors described herein and in “Risk Factors,” and not to place undue reliance on the forward-looking statements contained herein, which speak only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that may arise after the date hereof. All subsequent written or oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by this section.

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Results of Operations

Quarter ended March 26, 2005 compared to the quarter ended March 27, 2004.

Net revenues for the quarter ended March 26, 2005 were $16.6 million, 7% below last year’s first quarter of $17.7 million.  The Company’s net revenue decrease was principally caused by changes to the timing of promotional events with several large retailers and a decline in sales in the vending channel.  Strong 31% growth of  T.G.I. Friday’s® brand salted snacks in the first quarter last year was due primarily to new distribution and large promotional events at mass retailers in the quarter.  Similar large promotional events did not occur in this year’s first quarter, but are expected to occur later this fiscal year.  The brand continued its strong growth performance in grocery and convenience stores.  As a result, overall T.G.I. Friday’s® brand salted snack revenue declined 9% versus the first quarter of 2004 to $11.3 million, or 68% of total revenue. The Company’s potato chip brands rose 6% and distributed products grew 17% over the prior year.  In addition, the Crunch Toons® brand contributed sales of $0.4 million in last year’s first quarter but was discontinued in June 2004.

Gross profit for the quarter ended March 26, 2005 was $3.4 million, or 20.5% of net revenue, compared to $3.6 million, or 20.2% of net revenue, in the same quarter of 2004.  The improvement in gross profit percentage was attributable to increased manufacturing and supply chain efficiencies, substantially offset by higher freight costs.

Selling, general and administrative expenses increased to $3.0 million in the first quarter of 2005 as compared to $2.7 million in 2004, or 18.4% versus 15.0% of net revenue, respectively.  The higher level of spending was due primarily to increased payroll costs due to planned growth and separation costs, and an increase in new product development and consumer testing expenses.

Net interest income was $1,299 in the first quarter of 2005 compared to interest expense of $45,741 in the first quarter of 2004 due to higher interest income earned on investments.  The Company’s effective income tax rate increased slightly in the first quarter of 2005 to 39.0% from 38.7% in the comparable period in 2004.

Net income was $0.2 million, or $0.01 per basic and diluted share, as compared to $0.5 million, or $0.03 per basic and diluted share last year.

Liquidity and Capital Resources

Net working capital was $11.8 million (a current ratio of 2.5:1) at March 26, 2005 and $11.7 million (a current ratio of 2.6:1) at December 25, 2004.  For the quarter ended March 26, 2005, the Company generated cash flow of  $1.2 million from operating activities, invested $0.2 million in equipment, and made $0.2 million in payments on long-term debt.

The U.S. Bancorp Credit Agreement consists of a $5.0 million Line of Credit, a $0.5 million capital expenditure line of credit (“CapEx Term Loan”) and a $5.8 million term loan (“Term Loan A”).  At March 26, 2005, there were no balances on either the Line of Credit or the CapEx Term Loan, and $1.1 million outstanding on Term Loan A.  The Company is evaluating its options to payoff Term Loan A and/or negotiate a new credit facility with a bank.

The U.S. Bancorp Credit Agreement is secured by accounts receivable, inventories, equipment and general intangibles.  Borrowings under the U.S. Bancorp Line of Credit are limited to 80% of eligible receivables, 60% of eligible finished goods inventories and 50% of eligible raw materials inventories.  At March 26, 2005, the Company had a borrowing base of approximately $3.9 million under the U.S. Bancorp Line of Credit.  The U.S. Bancorp Credit Agreement requires the Company to be in compliance with certain financial performance criteria, including minimum annual operating results, a minimum tangible capital base and a minimum fixed charge coverage ratio.  In July 2004, the U.S. Bancorp Credit Agreement was amended to modify certain financial covenants that allow the Company to exclude one-time extraordinary, non-operating gains/losses during the applicable period.  At March 26, 2005 the Company was in compliance with all of the financial covenants.

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Contractual Obligations

The Company’s future contractual obligations consist principally of long-term debt, operating leases, minimum commitments regarding third party warehouse operations services, and remaining minimum royalty payments due licensors pursuant to brand licensing agreements.  There have been no material changes to the Company’s contractual obligations since year end other than scheduled payments.  Under the amendments to the license agreements with Warner Bros. Consumer Products, the remaining minimum royalty payments will continue to be due throughout the remaining term of the agreements. The Company currently has no material marketing or capital expenditure commitments.

Management’s Plans

In connection with the implementation of the Company’s business strategy, the Company may incur operating losses in the future and may require future debt or equity financings (particularly in connection with future strategic acquisitions, new brand introductions or capital expenditures).  Expenditures relating to acquisition-related integration costs, market and territory expansion and new product development and introduction may adversely affect promotional and operating expenses and consequently may adversely affect operating and net income.  These types of expenditures are expensed for accounting purposes as incurred, while revenue generated from the result of such expansion or new products may benefit future periods.  Management believes that the Company will generate positive cash flow from operations during the next twelve months, which, along with its existing working capital and borrowing facilities, will enable the Company to meet its operating cash requirements for the next twelve months.  The belief is based on current operating plans and certain assumptions, including   those   relating to the Company’s   future   revenue levels and expenditures, industry and general economic conditions and other conditions. If any of these factors change, the Company may require future debt or equity financings to meet its business requirements. There can be no assurance that any required financings will be available or, if available, on terms attractive to the Company.

Critical Accounting Policies and Estimates

In December 2001, the Securities and Exchange Commission issued an advisory requesting that all registrants describe their three to five most “critical accounting policies”.  The SEC indicated that a “critical accounting policy” is one which is both important to the portrayal of the Company’s financial condition and results and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.  The Company believes that the following accounting policies fit this definition:

Allowance for Doubtful Accounts.  The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments.  If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.  The allowance for doubtful accounts was $97,000 at March 25, 2005 and $89,000 at December 25, 2004, respectively.

Inventories.The Company’s inventories are stated at the lower of cost (first-in, first-out) or market.  The Company identifies slow moving or obsolete inventories and estimates appropriate loss provisions related thereto.  Historically, these loss provisions have not been significant; however, if actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

Goodwill and Trademarks.  Goodwill and trademarks are reviewed for impairment annually, or more frequently if impairment indicators arise.  Goodwill is required to be tested for impairment between the annual tests if an event occurs or circumstances change that more-likely-than-not reduce the fair value of a reporting unit below its carrying value.  Intangible assets with indefinite lives are required to be tested for impairment between the annual tests if an event occurs or circumstances change indicating that the asset might be impaired.  The Company believes at this time that the carrying values continue to be appropriate.

Advertising and Promotional Expenses.  The Company expenses production costs of advertising the first time the advertising takes place, except for cooperative advertising costs, which are expensed when the related

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sales are recognized.  Costs associated with obtaining shelf space (i.e. “slotting fees”) are expensed in the period in which such costs are incurred by the Company.  Anytime the Company offers consideration (cash or credit) as trade advertising or promotional allowance to a purchaser of products at any point along the distribution chain, the amount is accrued and recorded as a reduction in revenue.  Any marketing programs that deal directly with the consumer are recorded in selling, general and administrative expenses.

Income Taxes.  The Company has been profitable since 1999; however, it experienced significant net losses in prior fiscal years resulting in a net operating loss (“NOL”) carryforward  for federal income tax purposes of approximately $1.9 million at December 25, 2004.  Generally accepted accounting principles require that the Company record a valuation allowance against the deferred tax asset associated with this NOL if it is “more likely than not” that the Company will not be able to utilize it to offset future taxes.

The above listing is not intended to be a comprehensive list of all of the Company’s accounting policies.  In many cases the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles, with no need for management’s judgment in their application.  See the Company’s audited financial statements for the fiscal year ended December 25, 2004 and the notes thereto included in the Company’s Annual Report on Form 10-K with respect to such period, which contain a description of the Company’s accounting policies and other disclosures required by accounting standards generally accepted in the United States of America.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

The principal market risks to which the Company is exposed that may adversely impact the Company’s results of operations and financial position are changes in certain raw material prices and interest rates.  The Company has no market risk sensitive instruments held for trading purposes.

Raw materials used by the Company are exposed to the impact of changing commodity prices.  The Company’s most significant raw material requirements include potatoes, potato flakes, wheat flour, corn and oil.  The Company attempts to minimize the effect of future price fluctuations related to the purchase of raw materials primarily through forward purchasing to cover future manufacturing requirements, generally for periods from one to 12 months.  Futures contracts are not used in combination with the forward purchasing of these raw materials.  The Company’s procurement practices are intended to reduce the risk of future price increases, but also may potentially limit the ability to benefit from possible price decreases.  Inflation and changing prices have not had a material impact on the Company’s net revenues and net income.  Increased transportation costs, driven by higher fuel prices, could result in higher commodity costs in the future.

The Company also has interest rate risk with respect to interest expense on variable rate debt, with rates based upon changes in the prime rate.  Therefore, the Company has an exposure to changes in those rates.  At March 26, 2005, the Company had $1.1 million of variable rate debt outstanding.  A hypothetical 10% adverse change in weighted average interest rates during fiscal 2005 would have had minimal impact on both the Company’s net earnings and cash flows.

The Company’s primary concentration of credit risk is related to certain trade accounts receivable.  In the normal course of business, the Company extends unsecured credit to its customers.  Substantially all of the Company’s customers are distributors or retailers whose sales are concentrated in the grocery industry, throughout the United States.  The Company investigates a customer’s credit worthiness before extending credit.  Two customers accounted for approximately 32% of the Company’s net revenues for the quarter ended March 26, 2005 and for approximately 26% of the Company’s accounts receivable balance at the end of the quarter.

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Item 4.  Controls and Procedures

(a)Evaluation of Disclosure Controls and Procedures

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report.  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as of the end of the period covered by this report have been designed and are functioning effectively to provide reasonable assurance that the information required to be disclosed by the Company in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms.

(b)Change in Internal Control over Financial Reporting

No change in the Company’s internal control over financial reporting occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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Part II.Other Information

Item 1.Legal Proceedings

The Company is periodically a party to various lawsuits arising in the ordinary course of business.  Management believes, based on discussions with legal counsel, that the resolution of such lawsuits will not have a material effect on the Company’s financial position or results of operations.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.Defaults Upon Senior Securities

None.

Item 4.Submission of Matters to a Vote of Security Holders

None.

Item 5.Other Information

None.

Item 6.Exhibits

(a)	Exhibits:
	31.1 —	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15(d)-14(a)
	31.2 —	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15(d)-14(a)
	32.1 —	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		POORE BROTHERS, INC.
		By:	/s/  Thomas W. Freeze
Dated:	May 4, 2005		Thomas W. Freeze
			President and Chief Executive Officer
			(principal executive officer)
		By:	/s/  Richard M. Finkbeiner
Dated:	May 4, 2005		Richard M. Finkbeiner
			Senior Vice President, Chief Financial Officer,
			Treasurer and Secretary
			(principal financial and accounting officer)

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EXHIBIT INDEX

31.1 —	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15(d)-14(a)
31.2 —	Certification of Chief Financial Officer and Principal Accounting Officer pursuant to Rule 13a-14(a) or Rule 15(d)-14(a)
32.1 —	Certification of Chief Executive Officer, Chief Financial Officer and Principal Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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