U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended June 25, 2005
OR
o 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 1-14556
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 |
|
|
|
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 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: 19,772,561 as of June 25, 2005.
Table of Contents
2
POORE BROTHERS, INC. AND SUBSIDIARIES
(unaudited)
|
| June 25, |
| December 25, |
| ||
ASSETS |
|
|
|
|
| ||
Current assets: |
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 12,419,504 |
| $ | 9,675,490 |
|
Accounts receivable, net of allowance of $136,000 in 2005 and $89,000 in 2004 |
| 7,848,966 |
| 5,379,362 |
| ||
Inventories |
| 2,417,157 |
| 2,145,742 |
| ||
Deferred income tax asset |
| 485,860 |
| 1,341,723 |
| ||
Other current assets |
| 440,177 |
| 471,051 |
| ||
Total current assets |
| 23,611,664 |
| 19,013,368 |
| ||
|
|
|
|
|
| ||
Property and equipment, net |
| 10,478,724 |
| 10,815,963 |
| ||
Goodwill |
| 5,986,252 |
| 5,986,252 |
| ||
Trademarks |
| 4,207,032 |
| 4,207,032 |
| ||
Other assets |
| 91,754 |
| 94,672 |
| ||
|
|
|
|
|
| ||
Total assets |
| $ | 44,375,426 |
| $ | 40,117,287 |
|
|
|
|
|
|
| ||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
| ||
Current liabilities: |
|
|
|
|
| ||
Accounts payable |
| $ | 5,152,802 |
| $ | 2,809,187 |
|
Accrued liabilities |
| 3,308,187 |
| 2,656,887 |
| ||
Current portion of long-term debt |
| 946,518 |
| 1,390,667 |
| ||
Current portion of costs related to brand discontinuance and other current liabilities |
| 444,104 |
| 442,533 |
| ||
Total current liabilities |
| 9,851,611 |
| 7,299,274 |
| ||
|
|
|
|
|
| ||
Long-term debt, less current portion |
| 1,705,820 |
| 1,729,134 |
| ||
Non-current portion of accrued costs related to brand discontinuance and other liabilities |
| 253,287 |
| 492,541 |
| ||
Deferred income tax liability |
| 1,788,252 |
| 1,788,252 |
| ||
Total liabilities |
| 13,598,970 |
| 11,309,201 |
| ||
|
|
|
|
|
| ||
Commitments and contingencies (Note 5) |
|
|
|
|
| ||
|
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| ||
Shareholders’ equity: |
|
|
|
|
| ||
Preferred stock, $100 par value; 50,000 shares authorized; no shares issued or outstanding at June 25, 2005 and December 25, 2004 |
| — |
| — |
| ||
Common stock, $.01 par value; 50,000,000 shares authorized; 19,772,561 and 19,647,561 shares issued and outstanding at June 25, 2005 and December 25, 2004, respectively |
| 197,726 |
| 196,476 |
| ||
Additional paid-in capital |
| 27,513,046 |
| 27,274,825 |
| ||
Retained earnings |
| 3,065,684 |
| 1,336,785 |
| ||
Total shareholders’ equity |
| 30,776,456 |
| 28,808,086 |
| ||
|
|
|
|
|
| ||
Total liabilities and shareholders’ equity |
| $ | 44,375,426 |
| $ | 40,117,287 |
|
The accompanying notes are an integral part of these consolidated financial statements.
3
POORE BROTHERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
|
| Quarter Ended |
| Six Months Ended |
| ||||||||
|
| June 25, |
| June 26, |
| June 25, |
| June 26, |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net revenues |
| $ | 23,331,522 |
| $ | 17,441,069 |
| $ | 39,888,397 |
| $ | 35,159,562 |
|
|
|
|
|
|
|
|
|
|
| ||||
Cost of revenues |
| 17,270,415 |
| 13,339,194 |
| 30,439,440 |
| 27,477,568 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Costs related to brand discontinuance |
| — |
| 1,414,759 |
| — |
| 1,414,759 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Gross profit |
| 6,061,107 |
| 2,687,116 |
| 9,448,957 |
| 6,267,235 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Selling, general and administrative expenses |
| 3,600,141 |
| 2,634,420 |
| 6,647,938 |
| 5,298,475 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Operating income |
| 2,460,966 |
| 52,696 |
| 2,801,019 |
| 968,760 |
| ||||
Interest income (expense), net |
| 24,431 |
| (50,205 | ) | 25,730 |
| (95,946 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Income before income tax provision |
| 2,485,397 |
| 2,491 |
| 2,826,749 |
| 872,814 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Income tax provision |
| (964,850 | ) | (1,000 | ) | (1,097,850 | ) | (338,000 | ) | ||||
|
|
|
|
|
|
|
|
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| ||||
Net income |
| $ | 1,520,547 |
| $ | 1,491 |
| $ | 1,728,899 |
| $ | 534,814 |
|
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Earnings per common share: |
|
|
|
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|
|
|
|
| ||||
Basic |
| $ | 0.08 |
| $ | 0.00 |
| $ | 0.09 |
| $ | 0.03 |
|
Diluted |
| $ | 0.08 |
| $ | 0.00 |
| $ | 0.09 |
| $ | 0.03 |
|
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| ||||
Weighted average number of common shares: |
|
|
|
|
|
|
|
|
| ||||
Basic |
| 19,681,902 |
| 18,622,839 |
| 19,664,731 |
| 18,612,908 |
| ||||
Diluted |
| 19,841,862 |
| 19,164,767 |
| 19,824,190 |
| 19,205,655 |
| ||||
The accompanying notes are an integral part of these consolidated financial statements.
4
POORE BROTHERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
|
| Six Months Ended |
| ||||
|
| June 25, 2005 |
| June 26, 2004 |
| ||
Cash flows provided by operating activities: |
|
|
|
|
| ||
Net income |
| $ | 1,728,899 |
| $ | 534,814 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
| ||
Depreciation |
| 604,525 |
| 696,474 |
| ||
Amortization |
| 2,918 |
| 15,764 |
| ||
Provision for bad debts |
| 42,056 |
| (180,253 | ) | ||
Other asset amortization |
| — |
| 34,878 |
| ||
Deferred income taxes |
| 855,863 |
| 296,756 |
| ||
Costs related to brand discontinuance |
| — |
| 1,758,919 |
| ||
Loss on disposition of equipment |
| 5,699 |
| 16,571 |
| ||
Tax benefit from exercise of stock options |
| 104,232 |
| — |
| ||
Change in operating assets and liabilities: |
|
|
|
|
| ||
Accounts receivable |
| (2,511,660 | ) | 784,952 |
| ||
Inventories |
| (271,415 | ) | 33,688 |
| ||
Other assets and liabilities |
| (206,809 | ) | 23,696 |
| ||
Accounts payable and accrued liabilities |
| 2,994,915 |
| (829,246 | ) | ||
Net cash provided by operating activities |
| 3,349,223 |
| 3,187,013 |
| ||
|
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| ||
Cash flows used in investing activities: |
|
|
|
|
| ||
Purchase of equipment |
| (278,035 | ) | (320,753 | ) | ||
Proceeds from disposition of fixed assets |
| 5,050 |
| — |
| ||
Net cash used in investing activities |
| (272,985 | ) | (320,753 | ) | ||
|
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Cash flows used in financing activities: |
|
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Proceeds from issuance of common stock |
| 135,238 |
| 266,758 |
| ||
Payments made on long-term debt |
| (467,462 | ) | (485,630 | ) | ||
Net cash used in financing activities |
| (332,224 | ) | (218,872 | ) | ||
|
|
|
|
|
| ||
Net increase in cash |
| 2,744,014 |
| 2,647,388 |
| ||
Cash at beginning of period |
| 9,675,490 |
| 3,239,570 |
| ||
Cash at end of period |
| $ | 12,419,504 |
| $ | 5,886,958 |
|
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Supplemental disclosures of cash flow information: |
|
|
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| ||
Cash paid during the period for interest |
| $ | 97,519 |
| $ | 95,143 |
|
The accompanying notes are an integral part of these consolidated financial statements.
5
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 April 2005, the Company launched its Cinnabon® brand pursuant to a license agreement with Cinnabon, Inc, the initial term of which expires in 2011. A renewal term for an additional five years exists at the end of the initial term. The Company plans to develop and sell a variety of snack products, to include cookies, under the Cinnabon® brand.
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 Canyon Natural FoodsTM 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, grocery, club and drug stores directly and to convenience stores and vend operators through independent distributors. The Company’s other brands are also sold through independent distributors.
6
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 June 25, 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 |
| Six Months Ended |
| ||||||||
|
| June 25, |
| June 26, |
| June 25, |
| June 26, |
| ||||
Basic Earnings Per Share: |
|
|
|
|
|
|
|
|
| ||||
Net income |
| $ | 1,520,547 |
| $ | 1,491 |
| $ | 1,728,899 |
| $ | 534,814 |
|
Weighted average number of common shares |
| 19,681,902 |
| 18,622,839 |
| 19,664,731 |
| 18,612,908 |
| ||||
Earnings per common share |
| $ | 0 .08 |
| $ | 0 .00 |
| $ | 0.09 |
| $ | 0.03 |
|
|
|
|
|
|
|
|
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|
| ||||
Diluted Earnings Per Share: |
|
|
|
|
|
|
|
|
| ||||
Net Income |
| $ | 1,520,547 |
| $ | 1,491 |
| $ | 1,728,899 |
| $ | 534,814 |
|
|
|
|
|
|
|
|
|
|
| ||||
Weighted average number of common shares |
| 19,681,902 |
| 18,622,839 |
| 19,664,731 |
| 18,612,908 |
| ||||
|
|
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|
|
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| ||||
Incremental shares from assumed conversions- |
|
|
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|
|
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|
| ||||
Warrants |
| — |
| 199,126 |
| — |
| 204,701 |
| ||||
Stock options |
| 159,960 |
| 342,802 |
| 159,459 |
| 388,046 |
| ||||
Adjusted weighted average number of common shares |
| 19,841,862 |
| 19,164,767 |
| 19,824,190 |
| 19,205,655 |
| ||||
Earnings per common share |
| $ | 0.08 |
| $ | 0.00 |
| $ | 0.09 |
| $ | 0.03 |
|
7
The Company’s stock-based compensation plan is accounted for under the recognition and measurement provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards (“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.
|
| Quarter Ended |
| Six Months Ended |
| ||||||||
|
| June 25, |
| June 26, |
| June 25, |
| June 26, |
| ||||
Net income as reported |
| $ | 1,520,547 |
| $ | 1,491 |
| $ | 1,728,899 |
| $ | 534,814 |
|
Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects |
| (58,764 | ) | (175,647 | ) | (123,466 | ) | (355,378 | ) | ||||
Pro forma net income (loss) |
| $ | 1,461,783 |
| $ | (174,156 | ) | $ | 1,605,433 |
| $ | 179,436 |
|
|
| Quarter Ended |
| Six Months Ended |
| ||||||||
|
| June 25, |
| June 26, |
| June 25, |
| June 26, |
| ||||
Net income per share – basic – as reported |
| $ | 0.08 |
| $ | 0.00 |
| $ | 0.09 |
| $ | 0.03 |
|
Pro forma net income (loss) per share – basic |
| $ | 0.07 |
| $ | (0.01 | ) | $ | 0.08 |
| $ | 0.01 |
|
Net income per share – diluted – as reported |
| $ | 0.08 |
| $ | 0.00 |
| $ | 0.09 |
| $ | 0.03 |
|
Pro forma net income (loss) per share – diluted |
| $ | 0.07 |
| $ | (0.01 | ) | $ | 0.08 |
| $ | 0.01 |
|
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. Under this method, the weighted-average fair value of the options granted was $1.37 in 2004, with no options yet being granted in 2005.
New Accounting Pronouncements
In January 2003, the FASB issued interpretation (“FIN”) No. 46, “Consolidation of Variable Interest Entities – An Interpretation of Accounting Research Bulletin (“ARB”) No. 51.” This interpretation was subsequently revised by FIN 46 (Revised 2003) in December 2003. This revised interpretation states that consolidation of variable interest entities will be required by the primary beneficiary if the entities do not effectively disperse risks among the parties involved. The requirements are effective for fiscal years ending after December 15, 2003 for special-purpose entities and for all other types of entities for periods ending after March 31, 2004. The Company has no variable interest entities and the adoption of FIN No. 46 (R) did not impact our operations or financial position.
8
On December 16, 2004, the FASB issued SFAS No. 123R, “Share-Based Payment,” requiring all share-based payments to employees, including grants of employee stock options, to be recognized as compensation expense in the consolidated financial statements based on their fair values. This standard is effective for periods beginning after June 15, 2005 and includes two transition methods. Upon adoption, we will be required to use either the modified prospective or the modified retrospective transition method. Under the modified prospective method, awards that are granted, modified, or settled after the date of adoption should be measured and accounted for in accordance with SFAS 123R. Unvested equity-classified awards that were granted prior to the effective date should continue to be accounted for in accordance with SFAS 123 except that amounts must be recognized in the income statement. Under the modified retrospective approach, the previously-reported amounts are restated (either to the beginning of the year of adoption or for all periods presented) to reflect the SFAS 123 amounts in the income statement. We are currently evaluating the impact of this standard and its transitional alternatives.
In November 2004, the FASB issued SFAS No. 151, “Inventory Costs”. This statement clarifies the accounting for the abnormal amount of idle facilities expense, freight, handling costs and wasted material. This statement requires that those items be recognized as current-period expense. In addition, the statement requires that allocation of fixed overhead to the cost of conversion be based on the normal capacity of the production facilities. This statement is effective for inventory costs incurred after December 31, 2005. Adoption of this statement will not have a material effect on the financial statements of the Company.
2. Inventories
Inventories consisted of the following:
|
| June 25, |
| December 25, |
| ||
Finished goods |
| $ | 1,685,788 |
| $ | 1,537,488 |
|
Raw materials |
| 731,369 |
| 608,254 |
| ||
|
| $ | 2,417,157 |
| $ | 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 June 25, 2005, there were no balances on either the Line of Credit or the CapEx Term Loan, and $901,000 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 June 25, 2005, the Company had a borrowing base of approximately $6.5 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 June 25, 2005 the Company was in compliance with all of the financial covenants.
9
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. Also 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 June 25, 2005:
Description: |
| March 26, 2005 |
| Activity |
| June 25, 2005 |
| |||
|
|
|
|
|
|
|
| |||
Present value of guaranteed minimum royalty payments |
| $ | 422,162 |
| $ | 5,276 |
| $ | 427,438 | (1),(2) |
Reclamation costs |
| 1,123 |
| 34,471 |
| 35,594 | (1) | |||
Present value of remaining lease payments on equipment |
| 271,496 |
| (37,137 | ) | 234,359 | (1),(3) | |||
Total |
| $ | 694,781 |
| $ | 2,611 |
| $ | 697,391 |
|
(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. This machine lease was completely paid off in July 2005 and sold to an unrelated party.
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.
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.
10
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 |
| Distributed |
| Consolidated |
| |||
Quarter ended June 25, 2005 |
|
|
|
|
|
|
| |||
Net revenues from external customers |
| $ | 22,516,110 |
| $ | 815,412 |
| $ | 23,331,522 |
|
Depreciation and amortization in segment gross profit |
| 211,831 |
| — |
| 211,831 |
| |||
Segment gross profit |
| 5,940,610 |
| 120,497 |
| 6,061,107 |
| |||
|
|
|
|
|
|
|
| |||
Quarter ended June 26, 2004 |
|
|
|
|
|
|
| |||
Net revenues from external customers |
| $ | 16,987,210 |
| $ | 453,859 |
| $ | 17,441,069 |
|
Depreciation and amortization in segment gross profit |
| 261,088 |
| — |
| 261,088 |
| |||
Cost related to brand discontinuance |
| 1,414,759 |
| — |
| 1,414,759 |
| |||
Segment gross profit |
| 2,616,738 |
| 70,378 |
| 2,687,116 |
| |||
|
|
|
|
|
|
|
| |||
Six months ended June 25, 2005 |
|
|
|
|
|
|
| |||
Net revenues from external customers |
| $ | 38,315,046 |
| $ | 1,573,351 |
| $ | 39,888,397 |
|
Depreciation and amortization in segment gross profit |
| 423,212 |
| — |
| 423,212 |
| |||
Segment gross profit |
| 9,223,676 |
| 225,281 |
| 9,448,957 |
| |||
|
|
|
|
|
|
|
| |||
Six months ended June 26, 2004 |
|
|
|
|
|
|
| |||
Net revenues from external customers |
| $ | 34,055,141 |
| $ | 1,104,421 |
| $ | 35,159,562 |
|
Depreciation and amortization in segment gross profit |
| 529,410 |
| — |
| 529,410 |
| |||
Costs related to brand discontinuance |
| 1,414,759 |
| — |
| 1,414,759 |
| |||
Segment gross profit |
| 6,092,750 |
| 174,485 |
| 6,267,235 |
| |||
The following table reconciles reportable segment gross profit to the Company’s consolidated income before income tax provision.
|
| Quarter Ended |
| Six Months Ended |
| ||||||||
|
| June 25, 2005 |
| June 26, 2004 |
| June 25, 2005 |
| June 26, 2004 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Consolidated segment gross profit |
| $ | 6,061,107 |
| $ | 2,687,116 |
| $ | 9,448,957 |
| $ | 6,267,235 |
|
Unallocated amounts: |
|
|
|
|
|
|
|
|
| ||||
Selling, general and administrative expenses |
| 3,600,141 |
| 2,634,420 |
| 6,647,938 |
| 5,298,475 |
| ||||
Interest income (expense), net |
| 24,431 |
| (50,205 | ) | 25,730 |
| (95,946 | ) | ||||
Income before income tax provision |
| $ | 2,485,397 |
| $ | 2,491 |
| $ | 2,826,749 |
| $ | 872,814 |
|
11
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 carryforward (“NOL”) 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 potentially enhance 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 approximate 39% under current tax rates.
12
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 under the caption “Risk Factors” in our Annual Report on Form 10-K for our fiscal year ended December 25, 2004, 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.
13
Results of Operations
Quarter ended June 25, 2005 compared to the quarter ended June 26, 2004.
Net revenues in the second quarter of 2005 were $23.3 million, an increase of 34% compared to second quarter 2004 net revenues of $17.4 million. The Company’s strong second-quarter revenue growth versus last year was the result of across the board gains for all of the Company’s brands. T.G.I. Friday’s® brand salted snacks increased 7.5% to $13.7 million, buoyed modestly by initial shipments of the new meat snacks products. As the Company continues to diversify its portfolio of products, T.G.I. Friday’s® brand salted snacks will become a smaller percentage of total net revenue. The brand represented 59% of total net revenue compared to over 70% of total net revenue in the same quarter of 2004, while continuing to show solid growth in the high single digits. The Cinnabon® brand cookie introduction generated $2.5 million in revenues driven by large introductory promotional orders from a large mass merchandiser. The Company’s potato chip brands rose 35% mostly due to very strong promotional activity, particularly on the Company’s repositioned Boulder Canyon Natural Foods™ brand. Distributed products also grew 79% over the prior year due to increased product lines.
Gross profit was $6.1 million, or 26.0% of net revenue compared to $2.7 million, or 15.4% of net revenue, in the same quarter of 2004. In last year’s second quarter the Company discontinued the Crunch Toons® brand and recorded a $1.8 million charge. Excluding this charge, last year’s gross profit would have been $4.4 million, or 25.0% of net revenue. The improvement in this year’s gross profit percentage was attributable primarily to efficiency gains in manufacturing and supply chain and Cinnabon® brand revenues, which were partially offset by higher freight costs.
Selling, General and Administrative expenses increased to $3.6 million in the second quarter of 2005 as compared to $2.6 million in 2004, or 15.4% versus 15.1% of net revenue, respectively. The higher level of spending in 2005 was due to increases in marketing costs for new product development, consumer testing programs, as well as commission expenses associated with the higher revenues.
Net interest income was $24,431 in the second quarter of 2005 compared to net interest expense of $50,205 in the second quarter of 2004 due to higher interest rates on investments and increased operating cash. The Company’s effective income tax rate decreased slightly in the second quarter of 2005 to 39% from 40% in the comparable period in 2004 due to some higher state taxes in 2004.
Net income for the second quarter of 2005 was $1.5 million, or $0.08 per basic and diluted share, as compared to break-even in 2004. Without the Crunch Toons® brand discontinuance charge in 2004, net income would have been $1.1 million, or $0.06 per basic and diluted share.
Six months ended June 25, 2005 compared to the six months ended June 26, 2004
For the six months ended June 25, 2005, net revenue increased 13% to $39.9 million, compared with net revenue of $35.2 million in the first half of the previous year. Most of the increase came from the Cinnabon® launch, with the potato chip products increasing 20%, and distributed products up 43%. T.G.I. Friday’s® net revenues are now equal to last year through six months and are expected to show solid growth for the remainder of the year.
Gross profit for the six months ended June 25, 2005 was $9.4 million, or 23.7% of net revenues, compared to $6.3 million, or 17.8% of net revenues for the six months ended June 26, 2004. Excluding the brand discontinuance costs in 2004, gross profit margins would have been approximately 22.6% for the six months ended June 26, 2004.
Selling, General and Administrative expenses increased to $6.6 million, or 16.7% of net revenues for the six months ended June 25, 2005 from $5.3 million, or 15.1% of net revenues, for the six months ended June 26, 2004. The higher level of spending in 2005 was due to increases in marketing costs for new product development, consumer testing programs, as well as commission expenses associated with the higher revenues.
14
Net interest income was $25,730 in the first half of 2005 compared to net interest expense of $95,946 in the first half of 2004 due to higher interest rates and more operating cash. The Company’s effective income tax rate was 39% in 2005 and 2004.
Net income for the six months ended June 25, 2005 was $1.7 million, or $0.09 per basic and diluted share, compared with net income of $0.5 million, or $0.03 per basic and diluted share, in the prior-year period.
Liquidity and Capital Resources
Net working capital was $13.8 million (a current ratio of 2.4:1) at June 25, 2005 and $11.7 million (a current ratio of 2.6:1) at December 25, 2004. For the six months ended June 25, 2005, the Company generated cash flow of $3.3 million from operating activities, principally from operating results; invested $0.3 million in new equipment; made $0.5 million in payments on long-term debt and received $0.1 million in issuance of common stock.
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 June 25, 2005, there were no balances on either the line of credit or the CapEx Term Loan, and $901,000 outstanding on Term Loan A. The Company is in the process of negotiating a new credit facility with U.S. Bancorp.
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 June 25, 2005, the Company had a borrowing base of approximately $6.5 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 June 25, 2005 the Company was in compliance with all of the financial covenants.
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, will be on terms attractive to the Company.
15
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 $136,000 at June 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 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 carryforward (“NOL”) 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 Company does not have a valuation allowance as of June 25, 2005.
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.
16
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 June 25, 2005 the Company had $901,000 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 33% of net revenues for the six months ended June 25, 2005 and for approximately 30% of the Company’s accounts receivable balance at the end of the quarter.
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.
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.
17
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
(a) The annual Meeting of Shareholders of the Company (the “Meeting”) was held on May 17, 2005.
(b) Proxies for the Meeting were solicited pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended. There was no solicitation in opposition to the management’s nominees as listed in the proxy statement and all of such nominees were elected.
(c) At the Meeting, the Company’s shareholders voted upon the election of seven directors of the Company. Management’s nominees were Messrs. Thomas W. Freeze, F. Phillips Giltner, III, Mark S. Howells, Eric J. Kufel, James W. Myers, Shannon Bard and Larry R. Polhill. There were no other nominees. The following are the respective numbers of votes cast “for” and “withheld” with respect to each nominee.
Name of Nominee |
| Votes Cast For |
| Votes Withheld |
Shannon Bard |
| 16,287,294 |
| 100,575 |
Thomas W. Freeze |
| 16,140,444 |
| 247,425 |
F. Phillips Giltner, III |
| 16,208,835 |
| 179,034 |
Mark S. Howells |
| 16,264,094 |
| 123,775 |
Eric J. Kufel |
| 16,134,244 |
| 253,625 |
James W. Myers |
| 16,289,294 |
| 98,575 |
Larry R. Polhill |
| 16,137,394 |
| 250,475 |
(d) At the Meeting, the Company’s shareholders voted to approve the Poore Brothers, Inc. 2005 Equity Incentive Plan. The purpose of the plan is to enable the Company to motivate, attract and retain employees and to align the personal interests of employees with the interests of stockholders of the Company through equity participation. The following are the respective number of votes cast “for”, “against” and “abstaining”:
Votes for: |
| 9,112,761 |
|
Votes against: |
| 1,432,048 |
|
Votes abstaining: |
| 29,075 |
|
(e) At the Meeting, there was a shareholder proposal to recommend changing the Company’s proxy cards distributed to shareholders in connection with the annual meeting to use the terminology “against” rather than “withheld” in relation to voting on the Election of Directors. The following are the respective number of votes cast “for”, “against” and “abstaining”:
Votes for: |
| 186,612 |
|
Votes against: |
| 10,315,609 |
|
Votes abstaining: |
| 71,663 |
|
None.
18
(a) Exhibits:
10.1 – Summary of Director Compensation, incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on August 4, 2005
10.2 - Agreement between Poore Brothers, Inc. and Cinnabon, Inc. entered into September 10, 2004, but becoming material in the reporting period of June 25, 2005* (certain portions of this exhibit have been omitted pursuant to a confidential treatment request filed with the Securities and Exchange Commission)
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 and Chief Financial Officer and Principal Accounting 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. *
* - Filed Herewith
19
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: August 8, 2005 |
| Thomas W. Freeze |
|
|
| President and Chief Executive Officer |
|
|
| (principal executive officer) |
|
|
|
|
|
|
|
|
|
| By: | /s/ Richard M. Finkbeiner |
|
Dated: August 8, 2005 |
| Richard M. Finkbeiner |
|
|
| Senior Vice President, Chief Financial Officer, |
|
|
| Treasurer and Secretary |
|
|
| (principal financial and accounting officer) |
|
20