UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 28, 2002
[ ] 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 (I.R.S. Employer
incorporation or organization) Identification No.)
3500 South La Cometa Drive
Goodyear, Arizona 85338
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code: (623) 932-6200
---------------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class Name of exchange on which registered
---------------------------- ------------------------------------
Common Stock, $.01 par value Nasdaq
Indicate by check mark 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 [X] No [ ]
Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the voting stock (Common Stock, $.01 par value)
held by non-affiliates of the Registrant was $15,031,234 based upon the closing
market price on March 23, 2003.
The number of issued and outstanding shares of Common Stock, $.01 par value, as
of March 23, 2003 was 16,729,911.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's Annual Meeting of
Shareholders to be held on May 20, 2003 are incorporated by reference into Part
III of this Form 10-K.
TABLE OF CONTENTS
PART I
Item 1. Description of Business 4
Item 2. Description of Property 14
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 15
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 16
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 21
Item 8. Financial Statements and Supplementary Data 22
Item 9. Changes in and Disagreements with Auditors on Accounting
and Financial Disclosure 22
PART III
Item 10. Directors and Executive Officers of the Registrant 22
Item 11. Executive Compensation 23
Item 12. Security Ownership of Certain Beneficial Owners and Management 23
Item 13. Certain Relationships and Related Transactions 23
PART IV
Item 14. Controls and Procedures 23
Item 15. Exhibits, Financial Statement Schedules, and Reports of
Form 8-K 24
2
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K, 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
12E 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 Annual Report on Form 10-K, 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
Annual Report on Form 10-K 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 Company's
relatively brief operating history, significant historical operating losses and
the possibility of future operating losses, 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,
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, 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 Annual Report on Form 10-K 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.
3
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS
Poore Brothers, Inc. and its subsidiaries (collectively, "the Company") are
engaged in the development, production, marketing and distribution of innovative
salted snack food products that are sold primarily through grocery retailers,
mass merchandisers, club stores and vend distributors across the United States.
The Company (i) manufactures and sells T.G.I. Friday's(R) brand salted snacks
under license from TGI Friday's Inc., (ii) manufactures and sells its own brands
of salted snack food products including Poore Brothers(R), Bob's Texas Style(R),
and Boulder Potato Company(R) brand batch-fried potato chips and Tato Skins(R)
brand potato snacks, (iii) manufactures private label potato chips for grocery
retail chains in the southwest, and (iv) distributes snack food products that
are manufactured by others.
For the fiscal year ended December 28, 2002, net revenues totaled
$59,348,471. In fiscal 2002, approximately 93% of revenues were attributable to
products manufactured by the Company (89% branded snack food products, 5%
private label products) and approximately 7% of revenues were attributable to
the distribution by the Company of snack food products manufactured by other
companies. For the fiscal year ended December 31, 2001, net revenues totaled
$53,904,816. In fiscal 2001, approximately 91% of revenues were attributable to
products manufactured by the Company (84% branded snack food products, 7%
private label products) and approximately 9% of revenues were attributable to
the distribution by the Company of snack food products manufactured by other
companies. For the fiscal year ended December 31, 2000, net revenues totaled
$39,055,082. In fiscal 2000, approximately 87% of revenues were attributable to
products manufactured by the Company (72% branded snack food products, 15%
private label products) and approximately 13% of revenues were attributable to
the distribution by the Company of snack food products manufactured by other
companies. The Company sells its T.G.I. Friday's(R) brand salted snack products
to retailers, mass merchandisers and club stores directly and the rest of its
products to retailers and vend operators through independent distributors. See
Note 10 "BUSINESS SEGMENTS AND SIGNIFICANT CUSTOMERS" to the financial
statements included in Item 8.
The Company produces T.G.I. Friday's(R) brand salted snacks and Tato
Skins(R) brand potato snacks utilizing a sheeting and frying process that
includes patented technology. The Company licenses the patented technology from
a third party and has an exclusive right to use the technology within North
America until the patents expire between 2004 and 2006. T.G.I. Friday's(R) brand
salted snacks and Tato Skins(R) brand potato snacks are offered in several
different flavors and formulations. These products are manufactured at the
Company's leased facility in Bluffton, Indiana. The Company acquired the
Bluffton, Indiana manufacturing operation in October 1999 as part of its
acquisition of Wabash Foods, LLC ("Wabash Foods"). In December 2002, Warner
Bros. Consumer Products granted the Company rights to introduce an innovative
new brand of salted snacks featuring Looney Tunes(TM) characters. The Company
plans to launch the new brand nationwide in the summer of 2003 under a
multi-year agreement that grants the Company exclusive salted snack category
brand licensing and promotional rights for Looney Tunes(TM) characters. See
"PRODUCTS" and "PATENTS AND TRADEMARKS".
Poore Brothers(R), Bob's Texas Style(R) and Boulder Potato Company(R) brand
potato chips are manufactured with a batch-frying process that the Company
believes produces potato chips with enhanced crispness and flavor. Poore
Brothers(R) potato chips are currently offered in 11 flavors, Bob's Texas
Style(R) potato chips are currently offered in six flavors, and Boulder Potato
Company(R) potato chips are currently offered in seven flavors. The Company also
manufactures potato chips for sale on a private label basis using a continuous
frying process. The Company's potato chips are manufactured at a Company-owned
facility in Goodyear, Arizona. See "PRODUCTS" and "MARKETING AND DISTRIBUTION."
The Company's business objective is to be a leading developer,
manufacturer, marketer and distributor of innovative branded salted snack foods
by providing high quality products at competitive prices that are superior in
taste, texture, flavor variety and brand personality to comparable products. A
significant element of the Company's growth strategy is to develop, acquire or
license innovative salted snack food brands that provide strategic fit and
possess strong national brand equity in order to expand, complement or diversify
the Company's existing business. The Company also plans to increase sales of its
existing products, increase distribution revenues and continue to improve its
manufacturing capacity utilization. See "BUSINESS STRATEGY."
The Company's executive offices are located at 3500 South La Cometa Drive,
Goodyear, Arizona 85338, and its telephone number is (623) 932-6200.
4
COMPANY HISTORY
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, pursuant to which 2,250,000 shares of Common Stock were offered
and sold to the public at an offering price of $3.50 per share. Of such shares,
1,882,652 shares were sold by the Company. The initial public offering was
underwritten by Paradise Valley Securities, Inc. (the "Underwriter"). The net
proceeds to the Company from the sale of the 1,882,652 shares of Common Stock,
after deducting underwriting discounts and commissions and the expenses of the
offering payable by the Company, were approximately $5,300,000. On January 6,
1997, 337,500 additional shares of Common Stock were sold by the Company upon
the exercise by the Underwriter of an over-allotment option granted to it in
connection with the initial public offering. After deducting applicable
underwriting discounts and expenses, the Company received net proceeds of
approximately $1,000,000 from the sale of such additional shares.
On November 4, 1998, the Company acquired the business and certain assets
of Tejas Snacks, L.P., a Texas-based potato chip manufacturer, including Bob's
Texas Style(R) potato chips brand, inventories and certain capital equipment. In
consideration for these assets, the Company issued 523,077 unregistered shares
of Common Stock with a fair value at the time of $450,000 and paid approximately
$1,250,000 in cash.
On October 7, 1999, the Company acquired Wabash Foods, including the Tato
Skins(R), O'Boisies(R), and Pizzarias(R) trademarks for a total purchase price
of $12,763,000. The Company acquired all of the membership interests of Wabash
Foods from Pate Foods Corporation in exchange for (i) the issuance of 4,400,000
unregistered shares of Common Stock, (ii) the issuance of a five-year warrant to
purchase 400,000 unregistered shares of Common Stock at an exercise price of
$1.00 per share, and (iii) the effective assumption of $8,073,000 in
liabilities.
On June 8, 2000, the Company acquired Boulder Natural Foods, Inc. and the
business and certain related assets and liabilities of Boulder Potato Company, a
Colorado-based potato chip marketer and distributor. The assets included the
Boulder Potato Company(R) and Boulder Chips(TM) brand, accounts receivable,
inventories, certain other intangible assets and specified liabilities. In
consideration for these assets and liabilities, the Company paid a total
purchase price of $2,637,000, consisting of: (i) the issuance of 725,252
unregistered shares of Common Stock with a fair value at the time of $1,235,000,
(ii) a cash payment of $301,000, (iii) the issuance of a promissory note to the
seller in the amount of $830,000, and (iv) the assumption of $271,000 in
liabilities. In addition, the Company was required to issue additional
unregistered shares of Common Stock to the seller on each of the first two (and
may on the third) anniversaries of the closing of the acquisition. Any such
issuances will be dependent upon, and will be calculated based upon, increases
in sales of Boulder Potato Company(R) products as compared to previous periods.
In October 2000, the Company launched its T.G.I. Friday's(R) brand salted
snacks pursuant to a license agreement with TGI Friday's Inc., which expires in
2014.
On December 27, 2001, the Company completed the sale of 586,855 shares of
Common Stock at an offering price of $2.13 per share to BFS US Special
Opportunities Trust PLC, a fund managed by Renaissance Capital, in a private
placement transaction.
In December 2002, Warner Bros. Consumer Products granted the Company rights
to introduce an innovative new brand of salted snacks featuring Looney Tunes(TM)
characters. The Company plans to launch the new brand nationwide in the summer
of 2003 under a multi-year agreement that grants the Company exclusive salted
snack category brand licensing and promotional rights for Looney Tunes(TM)
characters.
BUSINESS STRATEGY
The Company's business objective is to be a leading developer,
manufacturer, marketer and distributor of innovative branded salted snack foods
by providing high quality products at competitive prices that are superior in
taste, texture, flavor variety and brand personality to comparable products. A
significant element of the Company's growth strategy is to develop, acquire or
license innovative salted snack food brands that provide strategic fit and
possess strong national brand equity in order to expand, complement or diversify
the Company's existing business. The Company also plans to increase sales of its
existing products, increase distribution revenues and continue to improve its
manufacturing capacity utilization. The primary elements of the Company's
business strategy are as follows:
5
DEVELOP, ACQUIRE OR LICENSE INNOVATIVE SNACK FOOD BRANDS. A
significant element of the Company's growth strategy is to develop, acquire
or license innovative salted snack food brands that provide strategic fit
and possess strong national brand equity in order to expand, complement or
diversify the Company's existing business. The acquisitions of the Bob's
Texas Style(R), Tato Skins(R) and Boulder Potato Company(R) brands in
November 1998, October 1999 and June 2000, respectively, were three such
strategic acquisitions. In addition, in October 2000 the Company launched
the T.G.I. Friday's(R) brand salted snacks under a license from TGI
Friday's Inc. In December 2002, Warner Bros. Consumer Products granted the
Company rights to introduce an innovative new brand of salted snacks
featuring Looney Tunes(TM) characters. The Company plans to launch the new
brand nationwide in the summer of 2003 under a multi-year agreement that
grants the Company exclusive salted snack category brand licensing and
promotional rights for Looney Tunes(TM) characters. The Company will
continue to seek to develop, acquire or license additional brands with
strong, differentiated snack food product opportunities.
BUILD BRANDED SNACK FOOD REVENUES. The Company plans to build the
market share of its branded products through continued trade advertising
and promotional activity in selected markets and channels. Marketing
efforts include, among other things, joint advertising with distributors,
supermarkets and other manufacturers, in-store advertisements and in-store
displays. The Company also participates in selected event sponsorships and
marketing relationships with the Arizona Diamondbacks baseball team. The
Company believes that these events offer opportunities to conduct mass
sampling to motivate consumers to try its branded products. Opportunities
to achieve new or expanded distribution in alternate channels, such as
airlines and the national vend channel, will continue to be targeted.
IMPROVE MANUFACTURING CAPACITY UTILIZATION. The Company's Arizona and
Indiana facilities are currently operating at approximately sixty percent
and forty percent of their respective capacities. The Company believes that
additional improvements to manufactured products' gross profit margins are
possible with the achievement of the business strategies discussed above.
Depending on product mix, the Company believes that the existing
manufacturing facilities could produce, in the aggregate, up to $150
million in annual revenue volume and thereby further reduce manufacturing
product costs.
The Company currently has arrangements with several California and
Arizona grocery chains for the manufacture and distribution by the Company
of their respective private label potato chips, in various types and
flavors as specified by them. The Company believes that contract
manufacturing opportunities exist. While they are extremely price
competitive and can be short in duration, the Company believes that they
provide a profitable opportunity for the Company to improve the capacity
utilization of its facilities. The Company intends to seek additional
private label customers located near its facilities who demand superior
product quality at a reasonable price.
PRODUCTS
MANUFACTURED SNACK FOOD PRODUCTS. The Company produces T.G.I.
Friday's(R)brand salted snacks and Tato Skins(R)brand potato crisps utilizing a
sheeting and frying process. T.G.I. Friday's(R)brand salted snacks and Tato
Skins(R)brand potato crisps are offered in several different flavors and
formulations.
Poore Brothers(R), Bob's Texas Style(R), and Boulder Potato Company(R)
brand potato chips are marketed by the Company as premium products based on
their distinctive combination of cooking method and variety of distinctive
flavors. Poore Brothers(R) potato chips are currently offered in 11 flavors,
Bob's Texas Style(R) potato chips are currently offered in six flavors, and
Boulder Potato Company(R) potato chips are currently offered in seven flavors.
The Company currently has agreements with several California and Arizona
grocery chains pursuant to which the Company produces their respective private
label potato chips in the styles and flavors specified by such grocery chains.
DISTRIBUTED SNACK FOOD PRODUCTS. The Company purchases and resells
throughout Arizona snack food products manufactured by others. Such products
include pretzels, popcorn, dips, and meat snacks.
MANUFACTURING
The Company's manufacturing facility in Bluffton, Indiana includes three
fryer lines that can produce an aggregate of up to approximately 9,000 pounds
per hour of T.G.I. Friday's(R) and Tato Skins(R) brand products. The Indiana
6
facility is currently operating at approximately forty percent of capacity. The
T.G.I. Friday's(R) and Tato Skins(R) brand products are produced utilizing a
sheeting and frying process that includes patented technology utilized by the
Company. The Company licenses the technology from a third party and has an
exclusive right to use the technology within North America until the patents
expire between 2004 and 2006. See "PATENTS AND TRADEMARKS."
The Company believes that a key element of the success to date of the Poore
Brothers(R), Bob's Texas Style(R) and Boulder Potato Company(R) brand potato
chips has been the Company's use of certain cooking techniques and key
ingredients in the manufacturing process to produce potato chips with improved
flavor. These techniques currently involve two elements: the Company's use of a
batch frying process, as opposed to the conventional continuous line cooking
method, and the Company's use of distinctive seasonings to produce potato chips
in a variety of flavors. The Company believes that although the batch frying
process produces less volume, it is superior to conventional continuous line
cooking methods because it enhances crispness and flavor through greater control
over temperature and other cooking conditions.
In September 1997, the Company consolidated all of its manufacturing
operations into its present facility in Goodyear, Arizona, which was newly
constructed at the time and, in connection therewith, discontinued manufacturing
operations at a facility in LaVergne, Tennessee. In 1999, the Company purchased
and installed additional batch frying equipment in the Arizona facility. The
Arizona facility has the capacity to produce up to approximately 3,500 pounds of
potato chips per hour, including 1,400 pounds of batch fried branded potato
chips per hour and 2,100 pounds of continuous fried private label potato chips
per hour. The Company owns additional batch frying equipment which, if needed,
could be installed without significant time or cost, and which would result in
increased capacity to produce the batch fried potato chips. The Arizona facility
is currently operating at approximately sixty percent of capacity.
On October 28, 2000, the Company experienced a fire at the Arizona
facility, causing a temporary shutdown of manufacturing operations at the
facility. There was extensive damage to the roof and equipment utilities in the
potato chip processing area. Third party manufacturers agreed to provide the
Company with production volume to satisfy nearly all of the Company's
anticipated customers' needs during the shutdown. The Company continued to
season and package the bulk product received from third party manufacturers. The
Company resumed full production in March 2001.
There can be no assurance that the Company will obtain sufficient business
to recoup the Company's investments in its manufacturing facilities or to
increase the utilization rates of such facilities. See "ITEM 2. DESCRIPTION OF
PROPERTY."
MARKETING AND DISTRIBUTION
The Company's T.G.I. Friday's(R), Tato Skins(R), and Poore Brothers(R)
brand snack food products have achieved significant market presence in the
vending channel nationwide through an independent network of brokers and
distributors, particularly in the mid-west and eastern regions. The Company
attributes the success of its products in these markets to consumer loyalty. The
Company believes this loyalty results from the products' differentiated taste,
texture and flavor variety which result from its manufacturing processes.
During 2001, the Company retained Crossmark, Inc., a leading national sales
and marketing agency with employees and offices nationwide. Crossmark represents
T.G.I. Friday's(R) brand salted snacks on behalf of Poore Brothers in the
grocery and convenience store channels. The Company's own sales organization
sells T.G.I. Friday's(R) brand salted snacks in the club, mass, drug and vend
channels.
The Company's potato chip products are distributed primarily by a select
group of independent distributors. Poore Brothers(R) brand potato chip products
have achieved significant market presence in Arizona, New Mexico, Southern
California, Hawaii, Missouri, Ohio and Michigan. The Company's Bob's Texas
Style(R) brand potato chip products have achieved significant market presence in
south/central Texas, including Houston, San Antonio and Austin. The Company's
Boulder Potato Company(R) brand potato chip products have achieved significant
market presence in Colorado and in natural food stores across the country.
The Company's Arizona distribution business operates throughout Arizona,
with 50 independently operated service routes. Each route is operated by an
independent distributor who merchandises as many as 143 items at major grocery
store chains in Arizona, such as Albertson's, Basha's, Fry's, and Safeway
stores. In addition to servicing major supermarket chains, the Company's
distributors service many independent grocery stores, club stores, and military
facilities throughout Arizona. In addition to Poore Brothers(R) brand products,
the Company distributes throughout Arizona a wide variety of snack food items
manufactured by other companies, including pretzels, popcorn, dips, and meat
snacks.
7
Outside of Arizona, the Company selects brokers and distributors for its
branded products primarily on the basis of quality of service, call frequency on
customers, financial capability and relationships they have with supermarkets
and vending distributors, including access to "shelf space" for snack food.
Successful marketing of the Company's products depends, in part, upon
obtaining adequate shelf space for such products, particularly in supermarkets
and vending machines. Frequently, the Company incurs additional marketing costs
in order to obtain additional shelf space. Whether or not the Company will
continue to incur such costs in the future will depend upon a number of factors
including, demand for the Company's products, relative availability of shelf
space and general competitive conditions. The Company may incur significant
shelf space, consumer marketing or other promotional costs as a necessary
condition of entering into competition or maintaining market share in particular
markets or channels. Any such costs may materially affect the Company's
financial performance.
The Company's marketing programs are designed to increase product trial and
build brand awareness in core markets. Most of the Company's marketing spending
is focused on trade advertising and trade promotions designed to attract new
consumers to the products at a reduced retail price. The Company's marketing
programs also include selective event sponsorship designed to increase brand
awareness and to provide opportunities to mass sample branded products.
Sponsorship of the Arizona Diamondbacks typifies the Company's efforts to reach
targeted consumers and provide them with a sample of the Company's products to
encourage new and repeat purchases.
SUPPLIERS
The principal raw materials used by the Company are potatoes, potato
flakes, wheat flour, corn and oil. The Company believes that the raw materials
it needs to produce its products are readily available from numerous suppliers
on commercially reasonable terms. Potatoes, potato flakes, wheat flour and corn
are widely available year-round. The Company uses a variety of oils in the
production of its products and the Company believes that alternative sources for
such oils, as well as alternative oils, are readily abundant and available. The
Company also uses seasonings and packaging materials in its manufacturing
process.
The Company chooses its suppliers based primarily on price, availability
and quality and does not have any long-term arrangements with any supplier.
Although the Company believes that its required products and ingredients are
readily available, and that its business success is not dependent on any single
supplier, the failure of certain suppliers to meet the Company's performance
specifications, quality standards or delivery schedules could have a material
adverse effect on the Company's operations. In particular, a sudden scarcity, a
substantial price increase, or an unavailability of product ingredients could
materially adversely affect the Company's operations. There can be no assurance
that alternative ingredients would be available when needed and on commercially
attractive terms, if at all.
CUSTOMERS
Two customers of the Company, Vending Services of America ("VSA", a
national vending distributor) and Wal*Mart (including its SAM's Clubs) accounted
for 13% and 21%, respectively, of the Company's 2002 net revenues. The remainder
of the Company's revenues were derived from sales to a limited number of
additional customers, either grocery chains, club stores or regional
distributors, none of which individually accounted for more than 10% of the
Company's sales in 2002. A decision by any of the Company's major customers to
cease or substantially reduce their purchases could have a material adverse
effect on the Company's business.
All of the Company's revenues are attributable to external customers in the
United States and all of its assets are located in the United States.
MARKET OVERVIEW AND COMPETITION
According to the Snack Food Association ("SFA"), the U.S. market for salted
snack foods reached $21.8 billion at retail in 2001 (the latest year for which
data is available) with potato chips, tortilla chips and potato crisps,
accounting for nearly 50% of the market, and corn snacks, popcorn, pretzels,
nuts, meat snacks and other products accounting for the balance. Total salted
snack sales, in dollar terms, increased in each of the last ten years, ranging
from an increase of 8.5% (in 1997) to 0.3% (in 1995), with a 2001 increase of
5.1%. Potato chip, tortilla chips and potato crisps combined sales have
similarly increased, with 2001 retail sales of $10.2 billion, a 6.2% increase
over 2000 sales of $9.6 billion.
8
The Company's products compete generally against other salted snack foods,
including potato chips and tortilla chips. The salted snack food industry is
large and highly competitive and is dominated primarily by Frito-Lay, Inc., a
subsidiary of PepsiCo, Inc. Frito-Lay, Inc. possesses substantially greater
financial, production, marketing, distribution and other resources than the
Company and brands that are more widely recognized than the Company's products.
Numerous other companies that are actual or potential competitors of the
Company, many with greater financial and other resources (including more
employees and more extensive facilities) than the Company, offer products
similar to those of the Company. In addition, many of such competitors offer a
wider range of products than offered by the Company. Local or regional markets
often have significant smaller competitors, many of whom offer products similar
to those of the Company. Expansion of the Company's operations into new markets
has and will continue to encounter significant competition from national,
regional and local competitors that may be greater than that encountered by the
Company in its existing markets. In addition, such competitors may challenge the
Company's position in its existing markets. While the Company believes that its
innovative products and methods of operation will enable it to compete
successfully, there can be no assurance of its ability to do so.
The principal competitive factors affecting the market of the Company's
products include product quality and taste, brand awareness among consumers,
access to shelf space, price, advertising and promotion, variety of snacks
offered, nutritional content, product packaging and package design. The Company
competes in the market principally on the basis of product quality and taste.
GOVERNMENT REGULATION
The manufacture, labeling and distribution of the Company's products are
subject to the rules and regulations of various federal, state and local health
agencies, including the FDA. In May 1994, regulations under the NLEA concerning
labeling of food products, including permissible use of nutritional claims such
as "fat-free" and "low-fat," became effective. The Company believes that it is
complying in all material respects with the NLEA regulations and closely
monitors the fat content of its products through various testing and quality
control procedures. The Company does not believe that compliance with the NLEA
regulations materially increases the Company's manufacturing costs. There can be
no assurance that new laws or regulations will not be passed that could require
the Company to alter the taste or composition of its products or impose other
obligations on the Company. Such changes could affect sales of the Company's
products and have a material adverse effect on the Company.
In addition to laws relating to food products, the Company's operations are
governed by laws relating to environmental matters, workplace safety and worker
health, principally the Occupational Safety and Health Act. The Company believes
that it presently complies in all material respects with such laws and
regulations.
EMPLOYEES
As of December 28, 2002, the Company had 260 full-time employees, including
225 in manufacturing and distribution, 15 in sales and marketing and 20 in
administration and finance. The Company's employees are not represented by any
collective bargaining organization and the Company has never experienced a work
stoppage. The Company believes that its relations with its employees are good.
PATENTS AND TRADEMARKS
The Company produces T.G.I. Friday's(R) brand salted snacks and Tato
Skins(R) brand potato crisps utilizing a sheeting and frying process that
includes patented technology that the Company licenses from Miles Willard
Technologies, LLC, an Idaho limited liability company ("Miles Willard").
Pursuant to the license agreement between the Company and Miles Willard, the
Company has an exclusive right to use the patented technology within North
America until the patents expire between 2004 and 2006. In consideration for the
use of these patents, the Company is required to make royalty payments to Miles
Willard on sales of products manufactured utilizing the patented technology.
The Company licenses the T.G.I. Friday's(R) brand salted snacks trademark
from TGI Friday's Inc. under a license agreement with a term expiring in 2014.
Pursuant to the license agreement, the Company is required to make royalty
payments on sales of T.G.I. Friday's(R) brand salted snack products and is
required to achieve certain minimum sales levels by certain dates during the
contract term.
In December 2002, Warner Bros. Consumer Products granted the Company rights
to introduce an innovative new brand of salted snacks (called Crunch Toons(TM))
featuring Looney Tunes(TM) characters, including Bugs Bunny, Tweety and the
Tasmanian Devil. The Company plans to launch the new brand nationwide in the
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summer of 2003 under a multi-year agreement that grants the Company exclusive
salted snack category brand licensing and promotional rights for Looney
Tunes(TM) characters.
The Company owns the following trademarks, which are registered in the
United States: Poore Brothers(R), An Intensely Different Taste(R), Texas
Style(R), Boulder Potato Company(R), Tato Skins(R), O'Boisies(R), Pizzarias(R),
Braids(R) and Knots(R). The Company considers its trademarks to be of
significant importance in the Company's business. The Company is not aware of
any circumstances that would have a material adverse effect on the Company's
ability to use its trademarks.
RISK FACTORS
BRIEF OPERATING HISTORY; SIGNIFICANT PRIOR NET LOSSES; ACCUMULATED DEFICIT;
SIGNIFICANT FUTURE EXPENSES DUE TO IMPLEMENTATION OF BUSINESS STRATEGY. Although
certain of the Company's subsidiaries have operated for several years, the
Company as a whole has a relatively brief operating history upon which an
evaluation of its prospects can be made. Such prospects are subject to the
substantial risks, expenses and difficulties frequently encountered in the
establishment and growth of a new business in the snack food industry, which is
characterized by a significant number of market entrants and intense
competition, as well as risk factors described herein. Although the Company has
been profitable since fiscal 1999, the Company experienced significant net
losses in prior fiscal years. At December 28, 2002, the Company had an
accumulated deficit of $1,849,893 and net working capital of $1,959,971. See
"ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION."
Even if the Company is successful in developing, acquiring and/or licensing
new brands, and increasing distribution and sales volume of the Company's
existing products, it may be expected to incur substantial additional expenses,
including advertising and promotional costs, "slotting" expenses (i.e., the cost
of obtaining shelf space in certain grocery stores), and integration costs of
any future acquisitions. Accordingly, the Company may incur additional losses in
the future as a result of the implementation of the Company's business strategy,
even if revenues increase significantly. There can be no assurance that the
Company's business strategy will prove successful or that the Company will be
profitable in the future.
NEED FOR ADDITIONAL FINANCING. A significant element of the Company's
business strategy is the development, acquisition and/or licensing of innovative
salted snack food brands, for the purpose of expanding, complementing and/or
diversifying the Company's business. In connection with each of the Company's
previous brand acquisitions (Bob's Texas Style(R) in November 1998, Tato
Skins(R) and Pizzarias(R) in October 1999, and Boulder Potato Company(R) in June
2000), the Company borrowed funds or assumed additional indebtedness in order to
satisfy a substantial portion of the consideration required to be paid by the
Company. See "BUSINESS -- COMPANY HISTORY" and "ITEM 6. MANAGEMENT'S DISCUSSION
AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- LIQUIDITY AND
CAPITAL Resources." The Company may, in the future, require additional third
party financing (debt or equity) as a result of any future operating losses, in
connection with the expansion of the Company's business through non-acquisition
means, in connection with any additional acquisitions completed by the Company,
or to provide working capital for general corporate purposes. There can be no
assurance that any such required financing will be available or, if available,
on terms attractive to the Company. Any third party financing obtained by the
Company may result in dilution of the equity interests of the Company's
shareholders.
ACQUISITION-RELATED RISKS. In recent years, a significant element of the
Company's business strategy has been the pursuit of selected strategic
acquisition opportunities for the purpose of expanding, complementing and/or
diversifying the Company's business. Strategic acquisitions are likely to
continue to comprise an element of the Company's business strategy for the
foreseeable future. However, no assurance can be given that the Company will be
able to continue to identify, finance and complete additional suitable
acquisitions on acceptable terms, or that future acquisitions, if completed,
will be successful. Any future acquisitions, could divert management's attention
from the daily operations of the Company and otherwise require additional
management, operational and financial resources. Moreover, there can be no
assurance that the Company will be able to successfully integrate acquired
companies or their management teams into the Company's operating structure,
retain management teams of acquired companies on a long-term basis, or operate
acquired companies profitably. Acquisitions may also involve a number of other
risks, including adverse short-term effects on the Company's operating results,
dependence on retaining key personnel and customers, and risks associated with
unanticipated liabilities or contingencies.
SUBSTANTIAL LEVERAGE; FINANCIAL COVENANTS PURSUANT TO U.S. BANCORP CREDIT
AGREEMENT; POSSIBLE ACCELERATION OF INDEBTEDNESS. At December 28, 2002, the
Company had outstanding indebtedness under a credit agreement with U.S. Bancorp
10
(the "U.S. Bancorp Credit Agreement") in the aggregate principal amount of
$3,312,455. The indebtedness under the U.S. Bancorp Credit Agreement is secured
by substantially all of the Company's assets. The Company is required to comply
with certain financial covenants pursuant to the U.S. Bancorp Credit Agreement
so long as borrowings from U.S. Bancorp thereunder remain outstanding. Should
the Company be in default under any of such covenants, U.S. Bancorp shall have
the right, upon written notice and after the expiration of any applicable period
during which such default may be cured, to demand immediate payment of all of
the then unpaid principal and accrued but unpaid interest under the U.S. Bancorp
Credit Agreement. At December 28, 2002, the Company was in compliance with all
financial covenants under the U.S. Bancorp Credit Agreement (including minimum
annual operating results, minimum fixed charge coverage and minimum tangible
capital requirements). There can be no assurance that the Company will be in
compliance with the financial covenants in the future. Any acceleration of the
borrowings under the U.S. Bancorp Credit Agreement prior to the applicable
maturity dates could have a material adverse effect upon the Company. See "ITEM
6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION--LIQUIDITY AND CAPITAL RESOURCES." In addition to the indebtedness
under the US Bancorp Credit Agreement, the Company has significant secured and
unsecured indebtedness pursuant to a number of other agreements with other
lenders. At December 28, 2002, the aggregate principal amount of such other
indebtedness was $1,897,667. The acceleration of the Company's indebtedness
under any such agreements could have a material adverse effect upon the Company.
VOLATILITY OF MARKET PRICE OF COMMON STOCK. The market price of the Common
Stock has experienced a high level of volatility since the completion of the
Company's initial public offering in December 1996. Commencing with an offering
price of $3.50 per share in the initial public offering, the market price of the
Common Stock experienced a substantial decline, reaching a low of $0.50 per
share (based on last reported sale price of the Common Stock on the Nasdaq
SmallCap Market) on December 22, 1998. During fiscal 2002, the market price of
the Common Stock (based on last reported sale price of the Common Stock on the
Nasdaq SmallCap Market) ranged from a high of $3.40 per share to a low of $1.49
per share. The last reported sales price of the Common Stock on the Nasdaq
SmallCap Market on March 23, 2003 was $2.00 per share. There can be no assurance
as to the future market price of the Common Stock. See "COMPLIANCE WITH NASDAQ
LISTING MAINTENANCE REQUIREMENTS."
COMPLIANCE WITH NASDAQ LISTING MAINTENANCE REQUIREMENTS. In order for the
Company's Common Stock to continue to be listed on the Nasdaq SmallCap Market,
the Company is required to be in compliance with certain continued listing
standards. One of such requirements is that the bid price of listed securities
be equal to or greater than $1.00. If, in the future, the Company's Common Stock
fails to be in compliance with the minimum closing bid price requirement for at
least thirty consecutive trading days or the Company fails to be in compliance
with any other Nasdaq continued listing requirements, then the Common Stock
could be de-listed from the Nasdaq SmallCap Market. Upon any such de-listing,
trading, if any, in the Common Stock would thereafter be conducted in the
over-the-counter market on the so-called "pink sheets" or the "Electronic
Bulletin Board" of the National Association of Securities Dealers, Inc.
("NASD"). As a consequence of any such de-listing, an investor could find it
more difficult to dispose of, or to obtain accurate quotations as to the price
of, the Company's Common Stock. See "VOLATILITY OF MARKET PRICE OF COMMON
STOCK."
COMPETITION. The market for salted snack foods, such as those sold by the
Company, including potato chips, tortilla chips, dips, pretzels and meat snacks,
is large and intensely competitive. Competitive factors in the salted snack food
industry include product quality and taste, brand awareness among consumers,
access to supermarket shelf space, price, advertising and promotion, variety of
snacks offered, nutritional content, product packaging and package design. The
Company competes in that market principally on the basis of product taste and
quality.
The snack food industry is primarily dominated by Frito-Lay, Inc., which
has substantially greater financial and other resources than the Company and
sells brands that are more widely recognized than are the Company's products.
Numerous other companies that are actual or potential competitors of the
Company, many with greater financial and other resources (including more
employees and more extensive facilities) than the Company, offer products
similar to those of the Company. In addition, many of such competitors offer a
wider range of products than that offered by the Company. Local or regional
markets often have significant smaller competitors, many of whom offer batch
fried products similar to those of the Company. Expansion of Company operations
into new markets has and will continue to encounter significant competition from
national, regional and local competitors that may be greater than that
encountered by the Company in its existing markets. In addition, such
competitors may challenge the Company's position in its existing markets. While
the Company believes that its innovative products and methods of operation will
enable it to compete successfully, there can be no assurance of its ability to
do so.
PROMOTIONAL AND SHELF SPACE COSTS. Successful marketing of food products
generally depends upon obtaining adequate retail shelf space for product
display, particularly in supermarkets. Frequently, food manufacturers and
distributors, such as the Company, incur additional costs in order to obtain
11
additional shelf space. Whether or not the Company incurs such costs in a
particular market is dependent upon a number of factors, including demand for
the Company's products, relative availability of shelf space and general
competitive conditions. The Company may incur significant shelf space or other
promotional costs as a necessary condition of entering into competition or
maintaining market share in particular markets or stores. If incurred, such
costs may materially affect the Company's financial performance.
NO ASSURANCE OF CONSUMER ACCEPTANCE OF COMPANY'S EXISTING AND FUTURE
PRODUCTS. Consumer preferences for snack foods are continually changing and are
extremely difficult to predict. The ability of the Company to generate revenues
in new markets will depend upon customer acceptance of the Company's products.
There can be no assurance that the Company's products will achieve a significant
degree of market acceptance, that acceptance, if achieved, will be sustained for
any significant period or that product life cycles will be sufficient to permit
the Company to recover start-up and other associated costs. In addition, there
can be no assurance that the Company will succeed in the development of any new
products or that any new products developed by the Company will achieve market
acceptance or generate meaningful revenue for the Company.
UNCERTAINTIES AND RISKS OF FOOD PRODUCT INDUSTRY. The food product industry
in which the Company is engaged is subject to numerous uncertainties and risks
outside of the Company's control. Profitability in the food product industry is
subject to adverse changes in general business and economic conditions,
oversupply of certain food products at the wholesale and retail levels,
seasonality, the risk that a food product may be banned or its use limited or
declared unhealthful, the risk that product tampering may occur that may require
a recall of one or more of the Company's products, and the risk that sales of a
food product may decline due to perceived health concerns, changes in consumer
tastes or other reasons beyond the control of the Company.
FLUCTUATIONS IN PRICES OF SUPPLIES; DEPENDENCE UPON AVAILABILITY OF
SUPPLIES AND PERFORMANCE OF SUPPLIERS. The Company's manufacturing costs are
subject to fluctuations in the prices of potatoes, potato flakes, wheat flour,
corn and oil, as well as other ingredients of the Company's products. Potatoes,
potato flakes, wheat flour and corn are widely available year-round. The Company
uses a variety of oils in the production of its products. The Company is
dependent on its suppliers to provide the Company with products and ingredients
in adequate supply and on a timely basis. Although the Company believes that its
requirements for products and ingredients are readily available, and that its
business success is not dependent on any single supplier, the failure of certain
suppliers to meet the Company's performance specifications, quality standards or
delivery schedules could have a material adverse effect on the Company's
operations. In particular, a sudden scarcity, a substantial price increase, or
an unavailability of product ingredients could materially adversely affect the
Company's operations. There can be no assurance that alternative ingredients
would be available when needed and on commercially attractive terms, if at all.
LACK OF PROPRIETARY MANUFACTURING METHODS FOR CERTAIN PRODUCTS; FUTURE
EXPIRATION OF PATENTED TECHNOLOGY LICENSED BY THE COMPANY. The Company licenses
patented technology from a third party in connection with the manufacture of its
T.G.I. Friday's(R) and Tato Skins(R) brand products and has an exclusive right
to use such technology within North America until the patents expire between
2004 and 2006. In addition, the Company expects to utilize patented technology
from one or more third parties in connection with the manufacture of future
products. Upon the expiration of such patents, competitors of the Company,
certain of which may have significantly greater resources than the Company, may
utilize the patented technology in the manufacture of products that are similar
to those currently manufactured, or that may in the future be manufactured, by
the Company with such patented technology. The entry of any such products into
the marketplace could have a material adverse effect on sales of T.G.I.
Friday's(R) and Tato Skins(R) brand products, as well as any such future
products, by the Company.
The taste and quality of Poore Brothers(R), Bob's Texas Style(R), and
Boulder Potato Company(R) brand potato chips is largely due to two elements of
the Company's manufacturing process: its use of batch frying and its use of
distinctive seasonings to produce a variety of flavors. The Company does not
have exclusive rights to the use of either element; consequently, competitors
may incorporate such elements into their own processes.
DEPENDENCE UPON KEY SNACK FOOD BRANDS; DEPENDENCE UPON T.G.I. FRIDAY'S(R)
LICENSE AGREEMENT AND FUTURE LICENSE AGREEMENTS. The Company derives a
substantial portion of its revenue from a limited number of snack food brands.
For the year ended December 28, 2002, approximately 73% of the Company's net
revenues were attributable to the T.G.I. Friday's(R) brand products and the
Poore Brothers(R) brand products. A decrease in the popularity of a particular
snack food brand during any year could have a material adverse effect on the
Company's business, financial condition and results of operations. There can be
no assurance that any of the Company's snack food brands will retain their
historical levels of popularity or increase in popularity. Decreased sales from
any one of the key snack food brands without a corresponding increase in sales
from other existing or newly introduced products would have a material adverse
effect on the Company's financial condition and results of operations.
12
Furthermore, the T.G.I. Friday's(R) brand products are manufactured and
sold by the Company pursuant to a license agreement by and between the Company
and TGI Friday's Inc. which expires in 2014. Pursuant to the license agreement,
the Company is subject to various requirements and conditions (including,
without limitation, minimum sales targets). The failure of the Company to comply
with certain of such requirements and conditions could result in the early
termination of the license agreement by TGI Friday's Inc. Any termination of the
license agreement, whether at the expiration of its term or prior thereto, could
have a material adverse effect on the Company's financial condition and results
of operations.
The Company may introduce one or more new product lines in the future that
will be manufactured and sold pursuant to additional license agreements by and
between the Company and one or more third parties. Pursuant to any such license
agreements, the Company will likely be subject to various requirements and
conditions (including minimum sales targets). The failure of the Company to
comply with certain of such requirements and conditions could result in the
early termination of such additional license agreements. Depending upon the
success of any such new product lines, a termination of the applicable license
agreements, whether at the expiration of their respective terms or prior
thereto, could have a material adverse effect on the Company's financial
condition and results of operations.
DEPENDENCE UPON MAJOR CUSTOMERS. Two customers of the Company, Vending
Services of America ("VSA", a national vending distributor) and Wal*Mart
(including its SAM's Clubs), accounted for 13% and 21%, respectively, of the
Company's 2002 net revenues, with the remainder of the Company's net revenues
being derived from sales to a limited number of additional customers, either
grocery chains or regional distributors, none of which individually accounted
for more than 10% of the Company's revenues for 2002. A decision by any major
customer to cease or substantially reduce its purchases could have a material
adverse effect on the Company's business.
RELIANCE ON KEY EMPLOYEES; NON-COMPETE AGREEMENTS. The Company's success is
dependent in large part upon the abilities of its executive officers, including
Eric J. Kufel, President and Chief Executive Officer, Glen E. Flook, Senior Vice
President-Operations, and Thomas W. Freeze, Senior Vice President and Chief
Financial Officer. The inability of the Company's executive officers to perform
their duties or the inability of the Company to attract and retain other highly
qualified personnel could have a material adverse effect upon the Company's
business and prospects. The Company does not maintain, nor does it currently
contemplate obtaining, "key man" life insurance with respect to such employees.
The employment of the executive officers of the Company is on an "at-will"
basis. The Company has non-compete agreements with all of its executive
officers. See "ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY."
GOVERNMENTAL REGULATION. The packaged food industry is subject to numerous
federal, state and local governmental regulations, including those relating to
the preparation, labeling and marketing of food products. The Company is
particularly affected by the Nutrition Labeling and Education Act of 1990
("NLEA"), which requires specified nutritional information to be disclosed on
all packaged foods. The Company believes that the labeling on its products
currently meets these requirements. The Company does not believe that complying
with the NLEA regulations materially increases the Company's manufacturing
costs. There can be no assurance, however, that new laws or regulations will not
be passed that could require the Company to alter the taste or composition of
its products. Such changes could affect sales of the Company's products and have
a material adverse effect on the Company.
PRODUCT LIABILITY CLAIMS. As a manufacturer and marketer of food products,
the Company may be subjected to various product liability claims. There can be
no assurance that the product liability insurance maintained by the Company will
be adequate to cover any loss or exposure for product liability, or that such
insurance will continue to be available on terms acceptable to the Company. Any
product liability claim not fully covered by insurance, as well as any adverse
publicity from a product liability claim, could have a material adverse effect
on the financial condition or results of operations of the Company.
SIGNIFICANT SHAREHOLDERS; POSSIBLE CHANGE IN CONTROL. As a result of the
Wabash Foods acquisition, Capital Foods, LLC ("Capital Foods") (an affiliate of
the former owner of Wabash Foods) became the single largest shareholder of the
Company, currently holding approximately 27% of the outstanding shares of Common
Stock (without giving effect to the possible exercise of warrants to purchase
250,000 shares of Common Stock also held by Capital Foods). Accordingly, Capital
Foods is in a position to exercise substantial influence on the business and
affairs of the Company. In addition, Renaissance Capital Group, Inc. manages
three funds, Renaissance Capital Growth & Income Fund III, Inc., Renaissance
U.S. Growth & Income Trust PLC, and BFS US Special Opportunities Trust PLC,
which are currently the beneficial owners of approximately 12%, 6% and 7%,
respectively, of the outstanding shares of Common Stock of the Company. Capital
Foods, Renaissance Capital Growth & Income Fund III, Inc., Renaissance U.S.
Growth & Income Trust PLC, and BFS US Special Opportunities Trust PLC are
hereinafter referred to collectively as the "Significant Shareholders". Although
the Company is not aware of any plans or proposals on the part of any
13
Significant Shareholder to recommend or undertake any material change in the
management or business of the Company, there is no assurance that a Significant
Shareholder will not adopt or support any such plans or proposals in the future.
Apart from transfer restrictions arising under applicable provisions of the
securities laws, there are no restrictions on the ability of the Significant
Shareholders to transfer any or all of their respective shares of Common Stock
at any time. One or more of such transfers could have the effect of transferring
effective control of the Company, including to one or more parties not currently
known to the Company.
POSSIBILITY THE COMPANY WILL BE REQUIRED TO REGISTER SHARES OF CERTAIN
STOCKHOLDERS FOR RESALE; SHARES AVAILABLE FOR FUTURE SALE. On December 27, 2001,
the Company completed the sale of 586,855 shares of Common Stock, $0.01 par
value, to BFS US Special Opportunities Trust PLC ("BFS"), a fund managed by
Renaissance Capital Group, Inc., in a private placement transaction. The net
proceeds of the transaction were utilized by the Company to reduce the Company's
outstanding indebtedness. In connection with such transaction, the Company
granted demand and piggyback registration rights to BFS. Pursuant to the demand
registration rights, the Company may be required, upon demand of BFS, to file a
registration statement (the "BFS Registration Statement") with the Securities
and Exchange Commission covering the resale of the shares of Common Stock issued
to BFS in the transaction. The Company will be required to pay all expenses
relating to any such registration, other than underwriting discounts, selling
commissions and stock transfer taxes applicable to the shares, and any other
fees and expenses incurred by the holder(s) of the shares (including, without
limitation, legal fees and expenses) in connection with the registration.
Approximately 7,374,156 shares of outstanding Common Stock and 956,156
shares of Common Stock issuable upon the exercise of warrants issued by the
Company are subject to "piggyback" registration rights granted by the Company,
pursuant to which such shares of Common Stock may be registered under the
Securities Act and, as a result, become freely tradable in the future. All or a
portion of such shares may, at the election of the holders thereof, be included
in the BFS Registration Statement and, upon the effectiveness of thereof, may be
sold in the public markets.
No prediction can be made as to the effect, if any, that future sales of
shares of Common Stock will have on the market price of the Common Stock
prevailing from time to time. Sales of substantial amounts of Common Stock, or
the perception that these sales could occur, could adversely affect prevailing
market prices for the Common Stock and could impair the ability of the Company
to raise additional capital through the sale of its equity securities or through
debt financing.
CERTAIN ANTI-TAKEOVER PROVISIONS. The Company's Certificate of
Incorporation authorizes the issuance of up to 50,000 shares of "blank check"
preferred stock with such designations, rights and preferences as may be
determined from time to time by the Board of Directors of the Company. The
Company may issue such shares of preferred stock in the future without
shareholder approval. The rights of the holders of Common Stock will be subject
to, and may be adversely affected by, the rights of the holders of any preferred
stock that may be issued in the future. The issuance of preferred stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of discouraging, delaying or
preventing a change of control of the Company, and preventing holders of Common
Stock from realizing a premium on their shares. In addition, under Section 203
of the Delaware General Corporation Law (the "DGCL"), the Company is prohibited
from engaging in any business combination (as defined in the DGCL) with any
interested shareholder (as defined in the DGCL) unless certain conditions are
met. This statutory provision could also have an anti-takeover effect.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases a 140,000 square foot facility located on 15 acres of
land in Bluffton, Indiana, approximately 20 miles south of Ft. Wayne, Indiana.
The Company has entered into a lease expiring in April 2018 with respect to the
facility with two five-year renewal options. Current lease payments are $20,000
per month. The lease payments are subject to an annual CPI-based increase. The
Company produces its T.G.I. Friday's(R) brand salted snacks and Tato Skins(R)
brand potato snacks at the Bluffton, Indiana facility.
The Company owns a 60,000 square foot facility located on 7.7 acres of land
in Goodyear, Arizona, approximately 15 miles west of Phoenix, Arizona.
Construction of this facility was completed in June 1997. In August 1997, the
Company completed the transition of all of its Arizona operations into the
facility. The site will enable the Company to expand the facility in the future
to a total building size of approximately 120,000 square feet. The facility is
financed by a mortgage with Morgan Guaranty Trust Company of New York that
14
matures in June 2012. The Company produces its Poore Brothers(R), Bob's Texas
Style(R) and Boulder Potato Company(R) brand potato chips, as well as its
private label potato chips at the Goodyear, Arizona facility.
The Company is responsible for all insurance costs, utilities and real
estate taxes in connection with its facilities. The Company believes that its
facilities are adequately covered by insurance.
ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq SmallCap Market tier of
the Nasdaq Stock Market under the symbol "SNAK". There were approximately 3,500
shareholders of record on March 23, 2003. The Company has never declared or paid
any dividends on the shares of Common Stock. Management intends to retain any
future earnings for the operation and expansion of the Company's business and
does not anticipate paying any dividends at any time in the foreseeable future.
Additionally, certain debt agreements of the Company limit the Company's ability
to declare and pay dividends.
The following table sets forth the range of high and low sale prices of the
Company's Common Stock as reported on the Nasdaq SmallCap Market for each
quarter of the fiscal years ended December 28, 2002 and December 31, 2001.
SALES PRICES
---------------
PERIOD OF QUOTATION HIGH LOW
------------------- ---- ---
Fiscal 2001:
First Quarter $3.19 $2.31
Second Quarter $3.34 $2.54
Third Quarter $3.99 $2.25
Fourth Quarter $3.12 $2.28
Fiscal 2002:
First Quarter $2.72 $2.20
Second Quarter $3.40 $2.35
Third Quarter $2.97 $2.20
Fourth Quarter $3.02 $1.49
ITEM 6. SELECTED FINANCIAL DATA 1998
FIVE YEAR FINANCIAL SUMMARY
(IN MILLIONS EXCEPT SHARE AND PER SHARE DATA)
2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
STATEMENTS OF EARNINGS DATA
Net revenues (a) $ 59.3 $ 53.9 $ 39.1 $ 21.5 $ 12.2
Gross profit (a) 11.3 10.9 7.7 4.0 2.3
Operating income (loss) 2.7 2.1 1.9 0.9 (0.4)
Net income (loss) 2.6 1.0 0.7 0.1 (0.9)
Net income (loss) per share - diluted $ 0.15 $ 0.06 $ 0.05 $ 0.01 $ (0.12)
Weighted average common shares 17,826,953 17,198,648 15,129,593 9,134,414 7,210,810
15
BALANCE SHEET DATA
Net working capital $ 2.0 $ 2.0 $ 0.8 $ 0.8 $ 0.8
Total assets 31.8 31.7 30.3 26.1 12.9
Long-term debt 4.1 8.7 9.0 10.7 5.7
Shareholders' equity 20.7 16.8 14.3 11.3 5.3
(a) Data for fiscal years 1998 - 2001 has been restated for adoption of
Emerging Issues Task Force (EITF) Issue No. 01-9 effective January 1,
2002. See Note 1 "Organization, Business and Summary of Significant
Accounting Policies - New Pronouncements" to the financial statements
included in Item 8.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion summarizes the significant factors affecting the
consolidated operating results, financial condition, liquidity and capital
resources of the Company. This discussion should be read in conjunction with the
financial statements under Item 8 and the "Cautionary Statement on
Forward-Looking Statements" on page 4.
Significant changes to the Company's business mix and nonrecurring events
that have been recorded over the last three years affect the comparisons of
fiscal 2002, 2001, and 2000 operations. Consequently, comparative results are
more difficult to analyze and explain. Where practicable, this discussion
addresses not only the financial results as reported, but also the key results
and factors affecting Poore Brothers' on-going business.
In 2001, the Emerging Issues Task Force (EITF) issued EITF Issue No. 01-9,
"Accounting for Consideration Given by a Vendor to a Customer or a Reseller of
the Vendor's Products," (EITF Issue No. 01-9). EITF Issue No. 01-9 addresses the
accounting for certain consideration given by a vendor to a customer and
provides guidance on the recognition, measurement and income statement
classification for sales incentives. In general, the guidance requires that
consideration from a vendor to a retailer be recorded as a reduction in revenue
unless certain criteria are met. The Company adopted the provisions of the EITF
Issue No. 01-9 effective in the first quarter of 2002 and as a result, costs
previously recorded as expense have been reclassified and reflected as
reductions in revenue. The Company was also required to reclassify amounts in
prior periods in order to conform to the revised presentation of these costs if
practicable. As a result of adopting EITF Issue No. 01-9, the Company reduced
both net revenues and selling, general and administrative expenses in 2001 and
2000 by $3,761,072 and $2,687,925 respectively. There was no change to the 2001
and 2000 previously reported net income as a result of this change.
Effective January 1, 2002, the Company changed the fiscal year from the
twelve calendar months ending on December 31 each year to the 52-week period
ending on the last Saturday occurring in the month of December of each calendar
year. Accordingly, fiscal 2002 commenced January 1, 2002 and ended December 28,
2002.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 28, 2002 COMPARED TO THE YEAR ENDED DECEMBER 31, 2001
For fiscal 2002, net revenues reached $59.3 million, up 10% from fiscal
2001 net revenues of $53.9. The Company's revenue increase was attributable to
growth from T.G.I Friday's(R) brand salted snacks, which accounted for over 60%
of revenues. T.G.I. Friday's(R) growth was partially offset by lower shipments
of Tato Skins(R) and Poore Brothers(R) brand snacks in the vending channel due
to deliberate cannibalization by T.G.I. Friday's(R) brand salted snacks, and by
lower shipments of private label potato chips. Revenues from the Company's other
kettle-cooked potato chip brands and distributed products rose modestly.
Revenues in fiscal 2001 included approximately $1.2 million from the Company's
Texas merchandising operation which was sold in the fourth quarter of 2001.
16
Net income for the year was $2.6 million, or $0.16 per basic and $0.15 per
diluted share, an increase of 152% compared to fiscal 2001 net income of $1.0
million, or $0.07 per basic and $0.06 per diluted share. The Company's improved
profitability was principally attributable to increased revenue and improved
operating efficiencies, which also allowed the Company to significantly increase
promotional spending to support continued growth, particularly for T.G.I.
Friday's(R) brand salted snacks. In addition, the Company recorded an income tax
credit of $242,837 in fiscal 2002 compared to an income tax provision of $43,000
in fiscal 2001. The change primarily reflects the income tax benefit of a
deferred valuation allowance reversal in the third quarter.
Manufacturing efficiencies improved as a result of increased production
volumes due to higher revenues, and gross profit increased 3% to $11.3 million,
or 19.1% of net revenue, despite the higher promotional spending. Profits were
also positively affected by both lower selling, general and administrative
expenses and lower interest expense. Selling, general and administrative
expenses declined 2% to $8.6 million, or 14.6% of net revenue, despite higher
revenues due to tight spending controls and no intangibles amortization expense
as a result of the adoption of SFAS No. 142. Interest expense declined 48% to
$0.5 million due to reduced indebtedness, improved working capital management
and lower interest rates.
YEAR ENDED DECEMBER31, 2001 COMPARED TO THE YEAR ENDED DECEMBER 31, 2000
For fiscal 2001, net revenues reached $53.9 million, up 38% compared to
fiscal 2000 net revenues of $39.1 million. Revenue growth for the year was
driven by a 45% increase in manufactured products segment revenues and was
attributable to the rollout of T.G.I. Friday's(R) brand salted snacks into
nearly all distribution channels. The distributed products segment revenues
declined 8% to $4.8 million due to lower promotional activity and the sale of
the Company's Texas merchandising operation in early November.
Gross profit for the year ended December 31, 2001, was $10.9 million, or
20% of net revenues, as compared to $7.7 million or 19% of net revenues for
fiscal 2000. The $3.2 million increase, or 42%, in gross profit resulted from
the increased volume in manufactured products.
Selling, general and administrative expenses increased to $8.8 million, or
16.4% of net revenues for the year ended December 31, 2001, from $5.8 million or
14.7% of net revenues for fiscal 2000. This represents a $3.0 million increase,
or 51.7%, compared to fiscal 2000, primarily due to an increase of $2.0 million
in sales and marketing spending to support the increased sales volume primarily
in connection with support of T.G.I. Friday's(R) brand products.
Net interest expense decreased to $1.0 million for the year ended December
31, 2001, from $1.2 million for fiscal 2000. This decrease was principally due
to lower interest rates on certain of the Company's indebtedness.
The Company's net income for the year ended December 31, 2001 was $1.0
million, and the net income for the year ended December 31, 2000 was $0.7
million. This increase in net income was attributable primarily to the increased
gross profit offset by higher selling, general and administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
Net working capital was $1,960,000 (a current ratio of 1.3:1), $2,015,000
(a current ratio of 1.3:1) and $771,000 (a current ratio of 1.1:1) at December
28, 2002, December 31, 2001 and December 31, 2000, respectively. For the fiscal
year ended December 28, 2002, the Company generated cash flow of $5,842,000 from
operating activities, principally from operating income and a decrease in
accounts receivable, invested $581,000 in new equipment, and made $5,393,000 in
payments on long-term debt.
On October 28, 2000, the Company experienced a fire at the Goodyear,
Arizona manufacturing plant, causing a temporary shutdown of manufacturing
operations at the facility. There was extensive damage to the roof and equipment
utilities in the potato chip processing area. Third party manufacturers provided
the Company with production volume to satisfy nearly all of the Company's
customers' needs during the shutdown. The Company continued to season and
package the bulk product received from third party manufacturers. Full
production at the Arizona facility resumed in March 2001.
On October 7, 1999, the Company signed a new $9.15 million Credit Agreement
with U.S. Bancorp (the "U.S. Bancorp Credit Agreement") consisting of a $3.0
million working capital line of credit (the "U.S. Bancorp Line of Credit"), a
$5.8 million term loan (the "U.S. Bancorp Term Loan A") and a $350,000 term loan
(the "U.S. Bancorp Term Loan B"). Borrowings under the U.S. Bancorp Credit
17
Agreement were used to pay off indebtedness under the Company's previously
existing Wells Fargo Credit Agreement, to refinance indebtedness assumed by the
Company in connection with the Wabash Foods acquisition, and for future general
working capital needs. The U.S. Bancorp Line of Credit bears interest at an
annual rate of prime plus 1%. The U.S. Bancorp Term Loan A bears interest at an
annual rate of prime and requires monthly principal payments of approximately
$74,000 commencing February 1, 2000, plus interest, until maturity on July 1,
2006. The U.S. Bancorp Term Loan B had an annual interest rate of prime plus
2.5%, required monthly principal payments of approximately $29,000, plus
interest, and matured in March 2001. Pursuant to the terms of the U.S. Bancorp
Credit Agreement, the Company issued to U.S. Bancorp a warrant (the "U.S.
Bancorp Warrant") to purchase 50,000 shares of Common Stock for an exercise
price of $1.00 per share. The U.S. Bancorp Warrant is exercisable until its
termination on October 7, 2004 and provides the holder thereof certain piggyback
registration rights.
In June 2000, the U.S Bancorp Credit Agreement was amended to include an
additional $300,000 term loan (the "U.S. Bancorp Term Loan C") and to refinance
a $715,000 non-interest bearing note due to U.S. Bancorp on June 30, 2000.
Proceeds from the U.S. Bancorp Term Loan C were used in connection with the
Boulder acquisition. The U.S. Bancorp Term Loan C had an annual rate of prime
plus 2% and required monthly principal payments of approximately $12,500, plus
interest, until maturity in August 2002. The Company made a payment of $200,000
on the $715,000 non-interest bearing note and refinanced the balance in a term
loan (the "U.S. Bancorp Term Loan D"). The U.S. Bancorp Term Loan D had an
annual rate of prime plus 2% and required monthly principal payments of
approximately $21,500, plus interest, until maturity in June 2002.
In April 2001, the U.S. Bancorp Credit Agreement was amended to increase
the U.S. Bancorp Line of Credit from $3.0 million to $5.0 million, establish a
$0.5 million capital expenditure line of credit (the "CapEx Term Loan"), extend
the U.S. Bancorp Line of Credit maturity date from October 2002 to October 31,
2003, and modify certain financial covenants. In June 2002, the U.S. Bancorp
Credit Agreement was amended to extend the U.S. Bancorp Line of Credit maturity
date from October 31, 2003 to October 31, 2005 and modify certain financial
covenants. The Company borrowed $241,430 under the CapEx Term Loan in December
2001. The CapEx Term Loan bears interest at an annual rate of prime plus 1% and
requires monthly principal payments of approximately $10,000, plus interest,
until maturity on October 31, 2003 when the balance is due.
The U.S. Bancorp Credit Agreement is secured by accounts receivable,
inventories, equipment and general intangibles. Borrowings under the line of
credit are limited to 80% of eligible receivables and up to 60% of eligible
inventories. At December 28, 2002, the Company had a borrowing base of
$3,174,000 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 a minimum annual operating results ratio, a
minimum tangible capital base and a minimum fixed charge coverage ratio. At
December 28, 2002, the Company was in compliance with all of the financial
covenants. Management believes that the fulfillment of the Company's plans and
objectives will enable the Company to attain a sufficient level of profitability
to remain in compliance with these financial covenants. There can be no
assurance, however, that the Company will attain any such profitability and
remain in compliance. Any acceleration under the U.S. Bancorp Credit Agreement
prior to the scheduled maturity of the U.S. Bancorp Line of Credit or the U.S.
Bancorp Term Loans could have a material adverse effect upon the Company.
As of December 28, 2002, there was no outstanding balance on the U.S.
Bancorp Line of Credit, $3,181,685 on the U.S. Bancorp Term Loan A, and $130,770
on the CapEx Term Loan.
The Company's Goodyear, Arizona manufacturing, distribution and
headquarters facility is subject to a $1.9 million mortgage loan from Morgan
Guaranty Trust Company of New York, 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 $18,425 are
determined based on a twenty-year amortization period.
The following table outlines the Company's future contractual financial
obligations as of December 28, 2002, due by period:
LESS THAN 1
TOTAL YEAR 1 - 3 YEARS 4 - 5 YEARS AFTER 5 YEARS
----------- ----------- ----------- ----------- -------------
Long-term debt ............ $ 5,210,122 $ 1,105,004 $ 1,867,437 $ 603,908 $ 1,633,773
Operating leases .......... 7,114,645 980,270 1,868,336 1,595,148 2,670,891
----------- ----------- ----------- ----------- -----------
Total contractual cash
obligations ............... $12,324,767 $ 2,085,274 $ 3,735,773 $ 2,199,056 $ 4,304,664
=========== =========== =========== =========== ===========
18
The Company has entered into a variety of capital and operating leases for
the acquisition of equipment and vehicles. The leases generally have three to
seven-year terms, bear interest at rates from 8.2% to 11.3%, require monthly
payments and expire at various times through 2008 and are collateralized by the
related equipment.
Rental expense under operating leases was $956,000 and $506,900 for each of
fiscal 2002 and 2001, respectively. Minimum future rental commitments under
non-cancelable leases as of December 28, 2002 are as follows:
CAPITAL OPERATING
YEAR LEASES LEASES TOTAL
- ---- ---------- ---------- ----------
2003 ................................... $ 46,484 $ 980,270 $1,026,754
2004 ................................... -- 952,300 952,300
2005 ................................... -- 916,036 916,036
2006 ................................... -- 888,325 888,325
2007 ................................... -- 706,823 706,823
Thereafter ............................. -- 2,670,891 2,670,891
---------- ---------- ----------
Total .................................. 46,484 $7,114,645 $7,161,129
Less amount representing interest ...... (705) ========== ==========
----------
Present value .......................... $ 45,779
==========
At December 31, 2001, the Company had outstanding a 9% Convertible
Debenture due July 1, 2002 in the principal amount of $427,656 held by Wells
Fargo Small Business Investment Company, Inc. ("Wells Fargo SBIC"). The 9%
Convertible Debenture was secured by land, building, equipment and intangibles.
Interest on the 9% Convertible Debenture was paid by the Company on a monthly
basis. Monthly principal payments of approximately $5,000 were required to be
made by the Company on the Wells Fargo SBIC 9% Convertible Debenture through
June 2002 and the remaining balance was due on July 1, 2002. In June 2002, Wells
Fargo SBIC converted its 9% Convertible Debenture holdings into 401,497 shares
of Common Stock. In November 1999, Renaissance Capital converted 50% ($859,047)
of its 9% Convertible Debenture holdings into 859,047 shares of Common Stock and
agreed unconditionally to convert into Common Stock the remaining $859,047 not
later than December 31, 2000. In December 2000, Renaissance Capital converted
the remaining 859,047 shares of its 9% Convertible Debentures into Common Stock.
On December 27, 2001, the Company completed the sale of 586,855 shares of
Common Stock at an offering price of $2.13 per share to BFS US Special
Opportunities Trust PLC, a fund managed by Renaissance Capital, in a private
placement transaction. The net proceeds of the transaction were utilized by the
Company for general corporate purposes and to reduce the Company's outstanding
indebtedness. The Company has granted BFS US Special Opportunities Trust PLC
both demand and piggyback registration rights with respect to the shares of
Common Stock purchased in the offering.
The Company plans to support its introduction of Crunch Toons(TM) with the
most comprehensive advertising, consumer promotion and public relations campaign
in the Company's history. In the second half of 2003, the Company will launch a
multi-million dollar national television advertising campaign, newspaper coupon
program, and public relations activities, as well as feature on-pack promotions
such as free Looney Tunes(TM) tattoos. Due to approximately $4 million in
planned spending during the year for the aforementioned activities and other
costs associated with the launch, the Company expects to be marginally
profitable for 2003.
At December 28, 2002, the Company had net operating loss carryforwards
available for federal income taxes of approximately $2.6 million. The Company's
accumulated net operating loss carryforwards will begin to expire in varying
amounts between 2010 and 2018.
MANAGEMENT'S PLANS
In connection with the implementation of the Company's business strategy,
the Company may incur additional operating losses in the future and is likely to
require future debt or equity financings (particularly in connection with future
strategic acquisitions). Expenditures relating to acquisition-related
integration costs, trade and consumer marketing programs and new product
development may adversely affect 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 investments may benefit future periods. Management believes that
cash flow from operations, during the next twelve months, along with available
working capital and borrowing facilities, should enable the Company to meet its
19
operating cash requirements through 2003. 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.
INFLATION AND SEASONALITY
While inflation has not had a significant effect on operations in the last
year, management recognizes that inflationary pressures may have an adverse
effect on the Company as a result of higher asset replacement costs and related
depreciation and higher material costs. Additionally, the Company may be subject
to seasonal price increases for raw materials. The Company attempts to minimize
the fluctuation in seasonal costs by entering into purchase commitments in
advance, which have the effect of smoothing out price volatility. The Company
will attempt to minimize overall price inflation, if any, through increased
sales prices and productivity improvements.
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 Securities and Exchange Commission 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 $409,000 and $219,000 at December 28,
2002 and December 31, 2001, 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 and useful lives 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 a
trade advertising or promotion 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 $4.7 million at December 31, 2001. 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. During the third quarter of 2002, the Company concluded that
it is more likely than not that its deferred tax asset at that time would
be realized and also began providing for income taxes at a rate equal to
the combined federal and state effective rates, which approximates 39.2%
under current tax rates, rather than the 7.5% rate previously being used to
record a tax provision for only certain state income taxes. Subsequent
revisions to the estimated net realizable value of the deferred tax asset
could cause the provision for income taxes to vary significantly from
period to period, although the cash tax payments will remain unaffected
until the benefit of the NOL is utilized.
20
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 and notes thereto which begin on page 34
of this Annual Report on Form 10-K which contain accounting policies and other
disclosures required by auditing standards generally accepted in the United
States.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 141, "BUSINESS
COMBINATIONS" and SFAS No. 142, "GOODWILL AND OTHER INTANGIBLE ASSETS". SFAS No.
141 requires companies to apply the purchase method of accounting for all
business combinations initiated after June 30, 2001 and prohibits the use of the
pooling-of-interests method. SFAS No. 142 changes the method by which companies
recognize intangible assets in purchase business combinations and generally
requires identifiable intangible assets to be recognized separately from
goodwill. In addition, it eliminates the amortization of all existing and newly
acquired goodwill on a prospective basis and requires companies to assess
goodwill for impairment, at least annually, based on the fair value of the
reporting unit. Upon adoption on January 1, 2002, the Company ceased the
amortization of goodwill and other intangible assets with indefinite lives in
accordance with SFAS No. 142. Goodwill and trademark amortization expense was
approximately $652,000 and $603,000 for 2001 and 2000 respectively.
In August 2001, the FASB issued SFAS No. 144, "ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS". SFAS No. 144 supersedes SFAS No.
121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF" and the accounting and reporting provisions of APB
Opinion No. 30, "REPORTING THE RESULTS OF OPERATIONS - REPORTING THE EFFECTS OF
DISPOSAL OF A SEGMENT OF A BUSINESS, AND EXTRAORDINARY, UNUSUAL AND INFREQUENTLY
OCCURRING EVENTS AND TRANSACTIONS". SFAS No. 144 modifies the method by which
companies account for certain asset impairment losses. There was no effect from
adopting SFAS No. 144 on January 1, 2002.
In 2001, the Emerging Issues Task Force (EITF) issued EITF Issue No. 01-9,
"Accounting for Consideration Given by a Vendor to a Customer or a Reseller of
the Vendor's Products," (EITF Issue No. 01-9). EITF Issue No. 01-9 addresses the
accounting for certain consideration given by a vendor to a customer and
provides guidance on the recognition, measurement and income statement
classification for sales incentives. In general, the guidance requires that
consideration from a vendor to a retailer be recorded as a reduction in revenue
unless certain criteria are met. The Company adopted the provisions of the EITF
Issue No. 01-9 effective in the first quarter of 2002 and as a result, costs
previously recorded as expense have been reclassified and reflected as
reductions in revenue. The Company was also required to reclassify amounts in
prior periods in order to conform to the revised presentation of these costs if
practicable. As a result of adopting EITF Issue No. 01-9, the Company reduced
both net revenues and selling, general and administrative expenses in 2001 and
2000 by $3,761,072 and $2,687,925 respectively. There was no change to the 2001
and 2000 previously reported net income as a result of this change.
See Note 1 to the financial statements in Item 8 for a discussion regarding
recently issued accounting standards, including Statement of Financial
Accounting Standards (SFAS) Nos. 141-148 and EITF Issue No. 01-9.
ITEM 7A. 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 18 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.
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 December 28, 2002 and
December 31, 2001, the Company had $3.0 million and $8.0 million of variable
rate debt outstanding. A hypothetical 10% adverse change in weighted average
interest rates during fiscal 2002 and 2001 would have had an unfavorable impact
of $0.03 million and $0.08 million respectively, 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. In 2002 and 2001, substantially all of the
Company's customers were distributors or retailers whose sales were concentrated
in the grocery industry, throughout the United States. The Company investigates
a customer's credit worthiness before extending credit. At December 28, 2002,
two customers accounted for approximately 27% of the Company's accounts
receivable.
21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE
----
REPORTS
Independent Auditors Reports with respect to financial statements for the
years ended December 28, 2002, December 31, 2001 and December 31, 2000 30
FINANCIAL STATEMENTS
Consolidated balance sheets as of December 28, 2002 and December 31, 2001 32
Consolidated statements of income for the years ended December 28, 2002,
December 31, 2001 and December 31, 2000 33
Consolidated statements of shareholders' equity for the years ended
December 28, 2002, December 31, 2001 and December 31, 2000 34
Consolidated statements of cash flows for the years ended December 28,
2002, December 31, 2001 and December 31, 2000 35
Notes to consolidated financial statements 36
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Information with respect to this Item 9 is hereby incorporated by reference
from the Company's "Current Report on Form 8-K" filed by the Company with the
Securities and Exchange Commission on May 14, 2002.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and Directors of the Company and their ages, are as
follows:
Name Age Position
---- --- --------
Eric J. Kufel 36 President, Chief Executive Officer, Director
Glen E. Flook 44 Senior Vice President-Operations
Thomas W. Freeze 51 Senior Vice President, Chief Financial
Officer, Treasurer, Secretary, and Director
Mark S. Howells 49 Chairman, Director
Thomas E. Cain 48 Director
James W. Myers 68 Director
Robert C. Pearson 67 Director
Aaron M. Shenkman 62 Director
ERIC J. KUFEL. Mr. Kufel has served as President, Chief Executive Officer and a
Director of the Company since February 1997. From November 1995 to January 1997,
Mr. Kufel was Senior Brand Manager at The Dial Corporation and was responsible
for the operating results of Purex Laundry Detergent. From June 1995 to November
1995, Mr. Kufel was Senior Brand Manager for The Coca-Cola Company where he was
responsible for the marketing and development of Minute Maid products. From
November 1994 to June 1995 Mr. Kufel was Brand Manager for The Coca-Cola
Company, and from June 1994 to November 1994, Mr. Kufel was Assistant Brand
Manager for The Coca-Cola Company. From January 1993 to June 1994, Mr. Kufel was
employed by The Kellogg Company in various capacities including being
responsible for introducing the Healthy Choice line of cereal and executing the
marketing plan for Kellogg's Frosted Flakes cereal. Mr. Kufel earned a Masters
of International Management from the American Graduate School of International
Management in December 1992.
GLEN E. FLOOK. Mr. Flook has served as Senior Vice President-Operations since
May 2000 and as Vice President-Manufacturing from March 1997 to May 2000. From
January 1994 to February 1997, Mr. Flook was employed by The Dial Corporation as
a Plant Manager. From January 1983 to January 1994, Mr. Flook served in various
capacities with Frito-Lay, Inc., including Plant Manager and Production Manager.
22
THOMAS W. FREEZE. Mr. Freeze has served as Senior Vice President since May 2000,
as Chief Financial Officer, Secretary and Treasurer since April 1997, and as a
Director since October 1999. From April 1997 to May 2000, Mr. Freeze served as a
Vice President of the Company. From April 1994 to April 1997, Mr. Freeze served
as Vice President, Finance and Administration - Retail of New England Business
Service, Inc. From October 1989 to April 1994, Mr. Freeze served as Vice
President, Treasurer and Secretary of New England Business Service, Inc.
MARK S. HOWELLS. Mr. Howells has served as Chairman of the Board of the Company
since March 1995. For the period from March 1995 to August 1995, Mr. Howells
also served as President and Chief Executive Officer of the Company. He served
as the Chairman of the Board of Poore Brothers Southeast, Inc., a former
subsidiary of the Company, from its inception in May 1993 until it was dissolved
in 1999 and served as its President and Chief Executive Officer from May 1993 to
August 1994. From 1988 to May 2000, Mr. Howells served as the President and
Chairman of Arizona Securities Group, Inc., a registered securities
broker-dealer. Since May 2000, Mr. Howells has devoted a majority of his time to
serving as the President and Chairman of MS.Howells & Co., a registered
securities broker-dealer.
THOMAS E. CAIN. Mr. Cain has served as a Director since September 2000. Mr. Cain
has been Chief Executive Officer of Focus Capital Group LLC since December 2001.
From 1999 to 2001, Mr. Cain was Chairman of Frontstep distribution.com and from
1991 to 1999, Mr. Cain was President and Chief Executive Officer of Distribution
Architects International, Inc., a distribution and logistics software developer
and marketer. Mr. Cain has extensive experience in software development,
e-commerce and supply chain management.
JAMES W. MYERS. Mr. Myers has served as a Director since January 1999. Mr. Myers
has been President of Myers Management & Capital Group, Inc., a consulting firm
specializing in strategic, organizational and financial advisory services to
CEO's, since January 1996. From December 1989 to December 1995, Mr. Myers served
as President of Myers, Craig, Vallone & Francois, Inc., a management and
corporate finance consulting firm. Previously, Mr. Myers was an executive with a
variety of consumer goods companies.
ROBERT C. PEARSON. Mr. Pearson has served as a Director of the Company since
March 1996. Mr. Pearson has been Senior Vice President-Corporate Finance for
Renaissance Capital Group, Inc. since April 1997. Previously, Mr. Pearson had
been an independent financial and management consultant specializing in
investments with emerging growth companies. Renaissance Capital Group is the
investment manager of Renaissance Capital Growth & Income Fund III, Inc., the
former owner of a 9% Convertible Debenture and currently a shareholder of the
Company. See "ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION - LIQUIDITY AND CAPITAL Resources". From 1990
to 1994, Mr. Pearson served as Executive Vice President and Chief Financial
Officer of Thomas Group, Inc., a publicly traded consulting firm. Prior to 1990,
Mr. Pearson was Vice President-Finance of Texas Instruments, Incorporated. Mr.
Pearson is currently a director of Advance Power Technology, Inc. (a publicly
traded semiconductor manufacturer), and CaminoSoft Corp. (a distributor of
consumables for laser printers).
AARON M. SHENKMAN. Mr. Shenkman has served as a Director of the Company since
June 1997. He has served as the General Partner of Managed Funds LLC since
October 1997. He served as the Vice-Chairman of Helen of Troy Corp., a
distributor of personal care products, from March 1997 to October 1997. From
February 1984 to February 1997, Mr. Shenkman was the President of Helen of Troy
Corp. From 1993 to 1996, Mr. Shenkman also served as a Director of Craftmade
International, a distributor of ceiling fans.
ITEMS 10-13. DOCUMENTS INCORPORATED BY REFERENCE
Information with respect to a portion of Item 10 and Items 11, 12 and 13 of
Form 10-K is hereby incorporated by reference into this Part III of the Annual
Report of Form 10-K from the Company's Proxy Statement relating to the Company's
2003 Annual Meeting of Shareholders to be filed by the Company with the
Securities and Exchange Commission on or about April 15, 2003.
PART IV
ITEM 14. CONTROLS AND PROCEDURES
As required by Securities and Exchange Commission Rule 13a-15 promulgated
under the Securities Exchange Act of 1934, as amended, within 90 days prior to
the filing date of this report, the Company carried out an evaluation of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. This evaluation was carried out under the supervision and with
the participation of the Company's management, including the Company's President
and Chief Executive Officer and the Company's Chief Financial Officer. Based
upon that evaluation, the Company's President and Chief Executive Officer and
23
the Company's Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective. Subsequent to the date the Company
carried out its evaluation, there have been no significant changes in the
Company's internal controls or in other factors which could significantly affect
internal controls.
Disclosure controls and procedures are controls and other procedures that
are designed to ensure that information required to be disclosed in Company
reports filed or submitted under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed in Company reports filed under the
Securities Exchange Act of 1934, as amended, is accumulated and communicated to
management, including the Company's Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure.
ITEM 15. EXHIBITS AND REPORTS OF FORM 8-K
The following documents are filed as part of this Annual Report on Form
10-K:
(a) 1. FINANCIAL STATEMENTS
REPORTS
Report of independent auditors with respect to financial statements
for the years ended December 28, 2002, December 31, 2001 and
December 31, 2000
FINANCIAL STATEMENTS
Consolidated balance sheets as of December 28, 2002 and December 31,
2001
Consolidated statements of income for the years ended December 28,
2002, December 31, 2001 and December 31, 2000
Consolidated statements of shareholders' equity for the years ended
December 28, 2002, December 31, 2001 and December 31, 2000
Consolidated statements of cash flows for the years ended
December 28, 2002, December 31, 2001 and December 31, 2000
Notes to consolidated financial statements
(b) 2. FINANCIAL SCHEDULES
Schedules have been omitted because of the absence of conditions under
which they are required or because information required is included in
the Company's financial statements or notes thereto.
(c) 3. EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K:
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
3.1 -- Certificate of Incorporation of the Company filed with the Secretary
of State of the State of Delaware on February 23, 1995. (1)
3.2 -- Certificate of Amendment to the Certificate of Incorporation of the
Company filed with the Secretary of State of the State of Delaware on
March 3, 1995. (1)
3.3 -- Certificate of Amendment to the Certificate of Incorporation of the
Company filed with the Secretary of State of the State of Delaware on
October 7, 1999. (Incorporated by reference to the Company's
definitive Proxy Statement on Schedule 14A filed with the Securities
and Exchange Commission on September 15, 1999.)
3.4 -- By-Laws of the Company. (1)
4.1 -- Specimen Certificate for shares of Common Stock. (1)
4.2 -- Convertible Debenture Loan Agreement dated May 31, 1995 by and among
the Company (and certain of its subsidiaries), Renaissance Capital and
Wells Fargo. (1)
4.3 -- 9.00% Convertible Debenture dated May 31, 1995, issued by the Company
to Renaissance Capital. (1)
4.4 -- 9.00% Convertible Debenture dated May 31, 1995, issued by the Company
to Wells Fargo. (1)
4.5 -- Form of Warrant issued as of February 1998 to Renaissance Capital and
Wells Fargo. (3)
4.6 -- Warrant dated November 4, 1998, issued by the Company to Norwest
Business Credit, Inc. (4)
24
4.7 -- Warrant to purchase 400,000 shares of Common Stock, issued by the
Company to Wabash Foods on October 7, 1999. (Incorporated by reference
to the Company's definitive Proxy Statement on Schedule 14A filed with
the Securities and Exchange Commission on September 15, 1999.)
4.8 -- Form of Revolving Note, Term Note A and Term Note B issued by the
Company to U.S. Bancorp Republic Commercial Finance, Inc. on October
7, 1999. (5)
4.9 -- Warrant to purchase 50,000 shares of Common Stock, issued by the
Company to U.S. Bancorp Republic Commercial Finance, Inc. on October
7, 1999. (5)
4.10 -- Form of Term Note C and Term Note D issued by the Company to U.S.
Bancorp as of June 30, 2000. (6)
10.1 -- Non-Qualified Stock Option Agreements dated August 1, 1995, August 31,
1995 and February 29, 1996, by and between the Company and Mark S.
Howells. (1)
10.2 -- Non-Qualified Stock Option Agreements dated August 1, 1995, August 31,
1995 and February 29, 1996, by and between the Company and Jeffrey J.
Puglisi. (1)
10.3 -- Agreement dated August 29, 1996, by and between the Company and
Westminster Capital, Inc. ("Westminster"), as amended. (1)
10.4 -- Amendment No. 1 dated October 14, 1996, to Warrant dated September 11,
1996, issued by the Company to Westminster. (1)
10.5 -- Letter Agreement dated November 5, 1996, amending the Non-Qualified
Stock Option Agreement dated February 29, 1996, by and between the
Company and Mark S. Howells. (1)
10.6 -- Letter Agreement dated November 5, 1996, amending the Non-Qualified
Stock Option Agreement dated February 29, 1996, by and between the
Company and Jeffrey J. Puglisi. (1)
10.7 -- Non-Qualified Stock Option Agreement dated as of October 22, 1996, by
and between the Company and Mark S. Howells. (1)
10.8 -- Letter Agreement dated as of November 5, 1996, by and between the
Company and Jeffrey J. Puglisi. (1)
10.9 -- Letter Agreement dated November 1, 1996, by and among the Company,
Mark S. Howells, Jeffrey J. Puglisi, David J. Brennan and Parris H.
Holmes, Jr. (1)
10.10 -- Letter Agreement dated December 4, 1996, by and between the Company
and Jeffrey J. Puglisi, relating to stock options. (1)
10.11 -- Letter Agreement dated December 4, 1996, by and between the Company
and Mark S. Howells, relating to stock options. (1)
10.12 -- Employment Agreement dated January 24, 1997, by and between the
Company and Eric J. Kufel. (2)
10.13 -- Employment Agreement dated February 14, 1997, by and between the
Company and Glen E. Flook. (2)
10.14 -- Employment Agreement dated April 10, 1997, by and between the Company
and Thomas W. Freeze. (Incorporated by reference to the Company's
Quarterly Report on Form 10-QSB for the three-month period ended March
31, 1997.)
10.15 -- Fixed Rate Note dated June 4, 1997, by and between La Cometa
Properties, Inc. and Morgan Guaranty Trust Company of New York. (3)
10.16 -- Deed of Trust and Security Agreement dated June 4, 1997, by and
between La Cometa Properties, Inc. and Morgan Guaranty Trust Company
of New York. (3)
10.17 -- Guaranty Agreement dated June 4, 1997, by and between the Company and
Morgan Guaranty Trust Company of New York. (3)
10.18 -- Agreement for Purchase and Sale of Limited Liability Company
Membership Interests dated as of August 16, 1999, by and between Pate
Foods Corporation, Wabash Foods and the Company. (Incorporated by
reference to the Company's definitive Proxy Statement on Schedule 14A
filed with the Securities and Exchange Commission on September 15,
1999.)
10.19 -- Letter Agreement dated July 30, 1999 by and between the Company and
Stifel, Nicolaus & Company, Incorporated. (Incorporated by reference
to the Company's Quarterly Report on Form 10-QSB for the three-month
period ended September 30, 1999.)
10.20 -- Poore Brothers, Inc. 1995 Stock Option Plan, as amended. (5)
10.21 -- Credit Agreement, dated as of October 3, 1999, by and between the
Company and U.S. Bancorp Republic Commercial Finance, Inc. (5)
10.22 -- Security Agreement, dated as of October 3, 1999, by and between the
Company and U.S. Bancorp Republic Commercial Finance, Inc. (5)
10.23 -- Commercial Lease, dated May 1, 1998, by and between Wabash Foods, LLC
and American Pacific Financial Corporation. (5)
10.24 -- Agreement for the Purchase and Sale of Assets of Boulder Potato
Company dated as of June 8, 2000, by and among the Company, the
shareholders of Boulder Potato Company, and Boulder Potato Company.
(6)
10.25 -- Registration Rights Agreement dated as of June 8, 2000, by and between
Boulder Potato Company and the Company. (6)
25
10.26 -- First Amendment, dated as of June 30, 2000, to Credit Agreement, dated
as of October 3, 1999, by and between the Company and U.S. Bancorp.
(6)
10.27 -- Second Amendment to Credit Agreement (dated March 2, 2001), by and
between the Company and U.S. Bank National Association. (7)
10.28 -- License Agreement, dated April 3, 2000, by and between the Company and
TGI Friday's Inc. (Certain portions of this exhibit have been omitted
pursuant to a confidential treatment request filed with the Securities
and Exchange Commission.) (7)
10.29 -- Third Amendment to Credit Agreement (dated March 30, 2001), by and
between the Company and U.S. Bank National Association. (8)
10.30 -- First Amendment to License Agreement, dated as of July 11, 2001, by
and between the Company and TGI Friday's Inc. (certain portions of
this exhibit have been omitted pursuant to a confidentiality treatment
request filed with the Securities and Exchange Commission). (9)
10.31 -- Share Purchase Agreement, dated December 27, 2001, by and between the
Company and BFS US Special Opportunities Trust PLC. (Incorporated by
reference to the Company's Current Report on Form 8-K filed with the
Securities and Exchange Commission on January 10, 2002.)
10.32 -- Fourth Amendment to Credit Agreement (dated as of June 29, 2002), by
and between the Company and U.S. Bank National Association. (10)
10.33 -- License Agreement, dated November 20, 2002, by and between the Company
and Warner Bros., a division of Time Warner Entertainment Company,
L.P. (Certain portions of this exhibit have been omitted pursuant to a
confidential treatment request filed with the Securities and Exchange
Commission.) (11)
10.34 -- License Agreement, dated November 20, 2002, by and between the Company
and Warner Bros., a division of Time Warner Entertainment Company,
L.P. (Certain portions of this exhibit have been omitted pursuant to a
confidential treatment request filed with the Securities and Exchange
Commission.) (11)
10.35 -- License Agreement, dated July 19, 2000, by and between the Company and
M.J. Quinlan & Associates Pty. Limited (Certain portions of this
exhibit have been omitted pursuant to a confidential treatment request
filed with the Securities and Exchange Commission.) (11)
21.1 -- List of Subsidiaries of the Company. (11)
23.1 -- Consent of Deloitte & Touche, LLP. (11)
23.2 -- Notice Regarding Consent of Arthur Andersen LLP (11)
99.1 -- Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. (11)
- ----------
(1) Incorporated by reference to the Company's Registration Statement on Form
SB-2, Registration No. 333-5594-LA.
(2) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1996.
(3) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the three-month period ended June 30, 1997.
(4) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the three-month period ended September 30, 1998.
(5) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1999.
(6) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the three-month period ended June 30, 2000.
(7) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the three-month period ended March 31, 2001.
(8) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the three-month period ended June 30, 2001.
(9) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the three-month period ended September 30, 2001.
(10) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 28, 2002.
(11) Filed herewith.
(b) Reports on Form 8-K.
None.
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March 28, 2003 POORE BROTHERS, INC.
By: /s/ Eric J. Kufel
-------------------------------------
Eric J. Kufel
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant, in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Eric J. Kufel President, Chief Executive Officer, March 28, 2003
- ----------------------- and Director (Principal Executive
Eric J. Kufel Officer)
/s/ Thomas W. Freeze Senior Vice President, Chief Financial March 28, 2003
- ----------------------- Officer, Treasurer, Secretary, and
Thomas W. Freeze Director (Principal Financial Officer
and Principal Accounting Officer)
/s/ Mark S. Howells Chairman, Director March 28, 2003
- -----------------------
Mark S. Howells
/s/ Thomas E. Cain Director March 28, 2003
- -----------------------
Thomas E. Cain
/s/ James W. Myers Director March 28, 2003
- -----------------------
James W. Myers
/s/ Robert C. Pearson Director March 28, 2003
- -----------------------
Robert C. Pearson
/s/ Aaron M. Shenkman Director March 28, 2003
- -----------------------
Aaron M. Shenkman
27
CERTIFICATIONS
I, Eric J. Kufel, certify that:
1. I have reviewed this Annual Report on Form 10-K of Poore Brothers, Inc.;
2. Based on my knowledge, this Annual on Form 10-K does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Annual Report on Form 10-K, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Securities and Exchange Commission Rules 13a-14 and 15d-14 promulgated under the
Securities and Exchange Act of 1934, as amended) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this Annual
Report on Form 10-K (the "Evaluation Date"); and
c) Presented in this Annual Report on Form 10-K our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
Annual Report on Form 10-K whether there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 28, 2003
/s/ Eric J. Kufel
- -------------------------------------
Eric J. Kufel
President and Chief Executive Officer
(principal executive officer)
28
CERTIFICATIONS
I, Thomas W. Freeze, certify that:
1. I have reviewed this Annual Report on Form 10-K of Poore Brothers, Inc.;
2. Based on my knowledge, this Annual on Form 10-K does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Annual Report on Form 10-K, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Securities and Exchange Commission Rules 13a-14 and 15d-14 promulgated under the
Securities and Exchange Act of 1934, as amended) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this Annual
Report on Form 10-K (the "Evaluation Date"); and
c) Presented in this Annual Report on Form 10-K our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
Annual Report on Form 10-K whether there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 28, 2003
/s/ Thomas W. Freeze
- --------------------------------------------
Thomas W. Freeze
Senior Vice President, Chief Financial
Officer, Treasurer and Secretary
(principal financial and accounting officer)
29
INDEPENDENT AUDITORS' REPORT
Shareholders and Board of Directors of Poore Brothers, Inc. and Subsidiaries
Goodyear, Arizona
We have audited the accompanying consolidated balance sheet of Poore Brothers,
Inc. and subsidiaries (the "Company") as of December 28, 2002, and the related
consolidated statements of income, shareholders' equity, and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The Company's consolidated financial
statements as of December 31, 2001 and for the years ended December 31, 2001 and
2000, before the reclassifications described in Note 1 and before the inclusion
of the disclosures discussed in Note 2 to the consolidated financial statements,
were audited by other auditors who have ceased operations. Those auditors
expressed an unqualified opinion on those financial statements in their report
dated February 11, 2002.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Poore Brothers, Inc. and
subsidiaries as of December 28, 2002, and the results of their operations and
their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.
As discussed above, the financial statements of the Company for the years ended
December 31, 2001 and 2000 were audited by other auditors who have ceased
operations. As described in Note 1, those financial statements have been
reclassified to give effect to Emerging Issues Task Force (EITF) Issue No. 01-9,
Accounting for Consideration Given by a Vendor to a Customer or Reseller of the
Vendor's Products, which was adopted by the Company on January 1, 2002. We
audited the reclassifications described in Note 1 that were applied to conform
the 2001 and 2000 financial statements to the comparative presentation required
by EITF Issue 01-9. Our audit procedures with respect to the 2001 and 2000
disclosures in Note 1 included (i) comparing the amounts shown as customer
incentive costs in Note 1 to underlying accounting analysis obtained from
management, and (2) on a test basis, comparing the amounts comprising the
customer incentive costs obtained from management to independent supporting
documentation, and (3) testing the mathematical accuracy of the underlying
analysis. In our opinion, such reclassifications have been properly applied.
However, we were not engaged to audit, review, or apply any procedures to the
2001 and 2000 financial statements of the Company other than with respect to
such reclassifications and, accordingly, we do not express an opinion or any
form of assurance on the 2001 and 2000 financial statements taken as a whole.
As described in Note 2, these financial statements have been revised to include
the transitional disclosures required by Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142"), which was
adopted by the Company as of January 1, 2002. Our audit procedures with respect
to the disclosures in Note 2 with respect to 2001 and 2000 included (1)
comparing the previously reported net income to the previously issued financial
statements and the adjustments to reported net income representing amortization
expense (including any related tax effects) recognized in those periods related
to goodwill and intangible assets that are no longer being amortized, as a
result of initially applying SFAS 142 (including any related tax effects) to the
Company's underlying analysis obtained from management, and (2) testing the
mathematical accuracy of the reconciliation of adjusted net income to reported
net income and the related earnings-per-share amounts. In our opinion, the
disclosures for 2001 and 2000 in Note 2 are appropriate. However, we were not
engaged to audit, review, or apply any procedures to the 2001 and 2000 financial
statements of the Company other than with respect to such disclosures and,
accordingly, we do not express an opinion or any other form of assurance on the
2001 and 2000 financial statements taken as a whole.
DELOITTE & TOUCHE LLP
February 12, 2003
Phoenix, Arizona
30
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
NOTE: The report of Arthur Andersen LLP presented below is a copy of a
previously issued Arthur Andersen LLP report. This report has not been
reissued by Arthur Andersen LLP nor has Arthur Andersen LLP provided a
consent to the inclusion of its report in this Form 10-K.
To Poore Brothers, Inc.
We have audited the accompanying consolidated balance sheets of POORE BROTHERS,
INC. (a Delaware corporation) and SUBSIDIARIES as of December 31, 2001 and 2000,
and the related consolidated statements of operations, shareholders' equity, and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Poore Brothers, Inc. and
subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Phoenix, Arizona,
February 11, 2002
31
POORE BROTHERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 28, DECEMBER 31,
2002 2001
------------ ------------
ASSETS
Current assets:
Cash ................................................................. $ 1,395,187 $ 894,198
Accounts receivable, net of allowance of $409,000 in 2002
and $219,000 in 2001 ............................................... 4,427,531 4,982,793
Inventories .......................................................... 1,760,401 1,887,872
Deferred income tax asset ............................................ 421,942 --
Other current assets ................................................. 803,665 430,914
------------ ------------
Total current assets .............................................. 8,808,726 8,195,777
Property and equipment, net ............................................ 13,009,948 13,730,273
Goodwill ............................................................... 5,565,687 5,354,901
Intangible assets, net ................................................. 4,207,032 4,207,032
Other assets, net ...................................................... 165,233 200,077
------------ ------------
Total assets ...................................................... $ 31,756,626 $ 31,688,060
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ..................................................... $ 2,937,602 $ 2,430,857
Accrued liabilities .................................................. 2,806,149 1,406,845
Current portion of long-term debt .................................... 1,105,004 2,343,472
------------ ------------
Total current liabilities ......................................... 6,848,755 6,181,174
Long-term debt, less current portion ................................... 4,105,118 8,661,255
Deferred income tax liability .......................................... 80,512 --
------------ ------------
Total liabilities ................................................. 11,034,385 14,842,429
------------ ------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $100 par value; 50,000 shares authorized;
no shares issued or outstanding at December 28, 2002 and
2001, respectively ................................................. -- --
Common stock, $.01 par value; 50,000,000 shares authorized;
16,729,911 and 15,687,518 shares issued and outstanding at
December 28, 2002 and December 31, 2001, respectively .............. 167,299 156,875
Additional paid-in capital ........................................... 22,404,835 21,175,485
Accumulated deficit .................................................. (1,849,893) (4,486,729)
------------ ------------
Total shareholders' equity ........................................ 20,722,241 16,845,631
------------ ------------
Total liabilities and shareholders' equity ........................ $ 31,756,626 $ 31,688,060
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
32
POORE BROTHERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
DECEMBER 28, DECEMBER 31,
2002 2001 2000
------------ ------------ ------------
Net revenues .................................... $ 59,348,471 $ 53,904,816 $ 39,055,082
Cost of revenues ................................ 48,036,462 42,958,822 31,350,941
------------ ------------ ------------
Gross profit ............................... 11,312,009 10,945,994 7,704,141
Selling, general and administrative expenses .... 8,637,652 8,816,627 5,758,883
------------ ------------ ------------
Operating income ........................... 2,674,357 2,129,367 1,945,258
------------ ------------ ------------
Fire related income, net ........................ 259,376 4,014 --
Interest expense, net ........................... (539,733) (1,045,117) (1,177,467)
------------ ------------ ------------
Total interest expense and other ......... (280,357) (1,041,103) (1,177,467)
------------ ------------ ------------
Income before income tax provision ......... 2,394,000 1,088,264 767,791
Income tax benefit (provision) .................. 242,837 (43,000) (38,000)
------------ ------------ ------------
Net income ................................... $ 2,636,837 $ 1,045,264 $ 729,791
============ ============ ============
Earnings per common share:
Basic ....................................... $ 0.16 $ 0.07 $ 0.05
============ ============ ============
Diluted ..................................... $ 0.15 $ 0.06 $ 0.05
============ ============ ============
Weighted average number of common shares:
Basic ....................................... 16,146,081 15,050,509 13,769,614
============ ============ ============
Diluted ..................................... 17,826,953 17,198,648 15,129,593
============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
33
POORE BROTHERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK ADDITIONAL
------------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1999 ............ 13,222,044 $ 132,220 $17,386,827 $(6,261,784) $11,257,263
Exercise of common stock options .... 153,334 1,533 173,705 -- 175,238
Issuance of common stock ............ 1,619,387 16,194 2,117,010 -- 2,133,204
Net income .......................... -- -- -- 729,791 729,791
----------- ----------- ----------- ----------- -----------
Balance, December 31, 2000 ............ 14,994,765 149,947 19,677,542 (5,531,993) 14,295,496
Exercise of common stock options .... 76,000 760 97,810 -- 98,570
Issuance of warrants ................ -- -- 16,800 -- 16,800
Issuance of common stock ............ 616,753 6,168 1,383,333 -- 1,389,501
Net income .......................... -- -- -- 1,045,264 1,045,264
----------- ----------- ----------- ----------- -----------
Balance, December 31, 2001 ............ 15,687,518 156,875 21,175,485 (4,486,729) 16,845,631
Exercise of common stock options .... 349,016 3,490 508,304 -- 511,794
Issuance of common stock ............ 693,377 6,934 721,044 -- 727,978
Net income .......................... -- -- -- 2,636,837 2,636,837
----------- ----------- ----------- ----------- -----------
Balance, December 28, 2002 ............ 16,729,911 $ 167,299 $22,404,835 $(1,849,893) $20,722,241
=========== =========== =========== =========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
34
POORE BROTHERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
2002 2001 2000
----------- ----------- -----------
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income ............................................................... $ 2,636,837 $ 1,045,264 $ 729,791
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation ......................................................... 1,288,333 1,237,260 1,089,004
Amortization ......................................................... 33,939 694,067 648,938
Accounts receivable and inventory provisions ......................... 329,996 53,558 102,325
Other asset amortization ............................................. 423,088 349,723 252,148
Deferred income taxes ................................................ (341,430) -- --
(Gain) loss on disposition of fixed assets ........................... 7,073 (167,450) --
Change in operating assets and liabilities, net of effect of business
acquired:
Accounts receivable .................................................. 365,782 240,981 (1,974,013)
Inventories .......................................................... (13,045) (186,238) (481,401)
Other assets and liabilities ......................................... (794,934) (396,916) (252,812)
Accounts payable and accrued liabilities ............................. 1,906,049 (776,807) 2,503,632
----------- ----------- -----------
Net cash provided by operating activities .................... 5,841,688 2,093,442 2,617,612
----------- ----------- -----------
CASH FLOWS (USED IN) PROVIDED BY INVESTING ACTIVITIES:
Purchase of equipment .................................................... (581,087) (2,655,535) (635,415)
Proceeds from disposition of fixed assets ................................ 6,006 700,000 --
Acquisition related expenses ............................................. -- -- (365,542)
----------- ----------- -----------
Net cash used in investing activities ....................... (575,081) (1,955,535) (1,000,957)
----------- ----------- -----------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Proceeds from issuance of common stock ................................... 627,494 1,313,571 175,238
Stock and debt issuance costs ............................................ -- (10,774) (11,164)
Proceeds from issuance of debt ........................................... -- -- 610,329
Payments made on long-term debt .......................................... (1,954,844) (2,404,470) (2,053,149)
Net increase (decrease) in working capital line of credit ................ (3,438,268) 1,530,410 (114,720)
----------- ----------- -----------
Net cash provided by (used in) financing activities ......... (4,765,618) 428,738 (1,393,466)
----------- ----------- -----------
Net increase in cash ....................................................... 500,989 566,645 223,189
Cash and cash equivalents at beginning of year ............................. 894,198 327,553 104,364
----------- ----------- -----------
Cash and cash equivalents at end of year ................................... $ 1,395,187 $ 894,198 $ 327,553
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest ................................... $ 521,420 $ 1,055,248 $ 1,047,380
Summary of noncash investing and financing activities:
Common Stock issued for acquisitions and related earnouts .............. 210,786 185,274 1,235,321
Common Stock or warrant issued for sales commissions ................... -- 16,800 50,000
Conversion of Convertible Debenture into Common Stock .................. 401,497 -- 859,047
Note payable issued for purchase of equipment .......................... -- 538,308 --
Note payable issued for acquisition .................................... -- -- 830,000
The accompanying notes are an integral part of these
consolidated financial statements.
35
POORE BROTHERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
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, pursuant to which 2,250,000 shares of Common Stock were offered
and sold to the public at an offering price of $3.50 per share. Of such shares,
1,882,652 shares were sold by the Company. The initial public offering was
underwritten by Paradise Valley Securities, Inc. (the "Underwriter"). The net
proceeds to the Company from the sale of the 1,882,652 shares of Common Stock,
after deducting underwriting discounts and commissions and the expenses of the
offering payable by the Company, were approximately $5,300,000. On January 6,
1997, 337,500 additional shares of Common Stock were sold by the Company upon
the exercise by the Underwriter of an over-allotment option granted to it in
connection with the initial public offering. After deducting applicable
underwriting discounts and expenses, the Company received net proceeds of
approximately $1,000,000 from the sale of such additional shares.
On November 4, 1998, the Company acquired the business and certain assets
of Tejas Snacks, L.P., a Texas-based potato chip manufacturer, including Bob's
Texas Style(R) potato chips brand, inventories and certain capital equipment. In
consideration for these assets, the Company issued 523,077 unregistered shares
of Common Stock with a fair value at the time of $450,000 and paid approximately
$1,250,000 in cash.
On October 7, 1999, the Company acquired Wabash Foods, including the Tato
Skins(R), O'Boisies(R), and Pizzarias(R) trademarks for a total purchase price
of $12,763,000. The Company acquired all of the membership interests of Wabash
Foods from Pate Foods Corporation in exchange for (i) the issuance of 4,400,000
unregistered shares of Common Stock, (ii) the issuance of a five-year warrant to
purchase 400,000 unregistered shares of Common Stock at an exercise price of
$1.00 per share, and (iii) the effective assumption of $8,073,000 in
liabilities.
On June 8, 2000, the Company acquired Boulder Natural Foods, Inc. and the
business and certain related assets and liabilities of Boulder Potato Company, a
Colorado-based potato chip marketer and distributor. The assets included the
Boulder Potato Company(R) and Boulder Chips(TM) brand, accounts receivable,
inventories, certain other intangible assets and specified liabilities. In
consideration for these assets and liabilities, the Company paid a total
purchase price of $2,637,000, consisting of: (i) the issuance of 725,252
unregistered shares of Common Stock with a fair value at the time of $1,235,000,
(ii) a cash payment of $301,000, (iii) the issuance of a promissory note to the
seller in the amount of $830,000, and (iv) the assumption of $271,000 in
liabilities. In addition, the Company was required to issue additional
unregistered shares of Common Stock to the seller on each of the first two (and
may be required on the third) anniversaries of the closing of the acquisition.
Any such issuances will be dependent upon, and will be calculated based upon,
increases in sales of Boulder Potato Company(R) products as compared to previous
periods.
In October 2000, the Company launched its T.G.I. Friday's(R) brand salted
snacks pursuant to a license agreement with TGI Friday's Inc., which expires in
2014.
On December 27, 2001, the Company completed the sale of 586,855 shares of
Common Stock at an offering price of $2.13 per share to BFS US Special
Opportunities Trust PLC, a fund managed by Renaissance Capital, in a private
placement transaction.
In December 2002, Warner Bros. Consumer Products granted the Company rights
to introduce a new brand of salted snacks featuring Looney Tunes(TM) characters.
The Company plans to launch the new brand nationwide in the summer of 2003 under
a multi-year agreement that grants the Company exclusive salted snack category
brand licensing and promotional rights for Looney Tunes(TM) characters.
Effective January 1, 2002, the Company changed its fiscal year from the
twelve calendar months ending on December 31 each year to the 52-week period
ending on the last Saturday occurring in the month of December of each calendar
year. Accordingly, fiscal 2002 commenced January 1, 2002 and ended December 28,
2002.
36
POORE BROTHERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
1. ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
Certain amounts in the prior year consolidated financial statements have
been reclassified to conform to the current year presentation.
BUSINESS
The Company is engaged in the development, production, marketing and
distribution of innovative salted snack food products that are sold through
grocery retail chains, mass merchandisers, club stores and through vend
distributors across the United States. Although certain of the Company's
subsidiaries have operated for several years, the Company as a whole has a
relatively brief operating history. The Company had significant operating losses
prior to fiscal 1999. Successful future operations are subject to certain risks,
uncertainties, expenses and difficulties frequently encountered in the
establishment and growth of a new business in the snack food industry. The
market for salted snack foods, such as potato chips, tortilla chips, popcorn and
pretzels, is large and intensely competitive. The industry is dominated by one
significant competitor and includes many other competitors with greater
financial and other resources than the Company.
PRINCIPLES OF CONSOLIDATION
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.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. We routinely evaluate our estimates, including those
related to customer programs and incentives, product returns, bad debts, income
taxes, long-lived assets, inventories and contingencies. We base our estimates
on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances. Actual results could differ from those
estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 28, 2002, December 31, 2001 and 2000, the carrying value of
cash, accounts receivable, accounts payable, and accrued liabilities approximate
fair values since they are short-term in nature. The carrying value of the
long-term debt approximates fair-value based on the borrowing rates currently
available to the Company for long-term borrowings with similar terms, except for
the mortgage loan with interest at 9.03%, which has a fair value of
approximately $1.4 million at December 28, 2002. The Company estimates fair
values of financial instruments by using available market information.
Considerable judgment is required in interpreting market data to develop the
estimates of fair value. Accordingly, the estimates may not be indicative of the
amounts that the Company could realize in a current market exchange. The use of
different market assumptions or valuation methodologies could have a material
effect on the estimated fair value amounts.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Cost includes expenditures for
major improvements and replacements. Maintenance and repairs are charged to
operations when incurred. When assets are retired or otherwise disposed of, the
related costs and accumulated depreciation are removed from the appropriate
accounts, and the resulting gain or loss is recognized. Depreciation expense is
computed using the straight-line method over the estimated useful lives of the
assets, ranging from 2 to 30 years.
37
POORE BROTHERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
1. ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
In accordance with Financial Accounting Standards Board ("FASB") Statement
of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", we evaluate the recoverability of
property and equipment not held for sale by comparing the carrying amount of the
asset or group of assets against the estimated undiscounted future cash flows
expected to result from the use of the asset or group of assets and their
eventual disposition. If the undiscounted future cash flows are less than the
carrying value of the asset or group of assets being evaluated, an impairment
loss is recorded. The loss is measured as the difference between the fair value
and carrying value of the asset or group of assets being evaluated. Assets to be
disposed of are reported at the lower of the carrying amount or the fair value
less cost to sell. The estimated fair value would be based on the best
information available under the circumstances, including prices for similar
assets or the results of valuation techniques, including the present value of
expected future cash flows using a discount rate commensurate with the risks
involved.
INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets". SFAS No. 142 changes the method by which companies
recognize intangible assets in purchase business combinations and generally
requires identifiable intangible assets to be recognized separately from
goodwill. In addition, it eliminates the amortization of all existing and newly
acquired goodwill on a prospective basis and requires companies to assess
goodwill for impairment, at least annually, based on the fair value of the
reporting unit. Upon adoption on January 1, 2002, the Company ceased the
amortization of goodwill and other intangible assets with indefinite lives in
accordance with SFAS No. 142.
Goodwill is recorded at cost and reviewed for impairment annually, or more
frequently if impairment indicators arise. Goodwill amortization expense was
approximately $321,000 and $299,000 for 2001 and 2000, respectively. See Note 2.
Trademarks are recorded at cost and are reviewed for impairment annually,
or more frequently if impairment indicators arise. Amortization expense on these
trademarks was approximately $331,000 and $304,000 for 2001 and 2000,
respectively. See Note 2.
REVENUE RECOGNITION
Net revenues are recorded when the risk of loss and title to the product
transfers to the purchaser. Revenues are recorded net of allowances for cash
discounts, estimated sales returns, trade promotions and other sales incentives.
ADVERTISING AND PROMOTION
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. Accrued advertising and promotion, which is
included in the current liabilities section of the accompanying consolidated
balance sheet, was $946,000 and $388,000 in 2002 and 2001, respectively.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the expected future
tax consequences of events that have been included in the financial statements
or income tax returns. Deferred tax assets and liabilities are determined based
on the difference between the financial statement and tax bases of assets and
liabilities using enacted rates expected to apply to
38
POORE BROTHERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
1. ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
taxable income in the years in which those differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the period that includes the enactment
date.
STOCK OPTIONS
The Company's stock-based compensation plan, described in Note 8, 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 the stock option plan.
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 based method had been
applied to all outstanding and unvested awards in each period presented, using
the Black-Scholes valuation model.
(in thousands) 2002 2001 2000
------------- ------------- -------------
Net income as reported $ 2,636,837 $ 1,045,264 $ 729,791
Deduct: Total stock-based employee compensation expense determined
under fair value method for all awards, net of related tax effects (1,010,139) (850,301) (701,300)
------------- ------------- -------------
Pro forma net income $ 1,626,698 $ 194,963 $ 28,491
============= ============= =============
Net income per share - basic - as reported $ 0.16 $ 0.07 $ 0.05
Pro forma net income per share - basic 0.10 0.01 0.00
Net income per share - diluted - as reported 0.15 0.06 0.05
Pro forma net income per share - diluted 0.09 0.01 0.00
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: dividend yield of 0%; expected volatility of 44%, 58% and 110%;
risk-free interest rate of 3.8%, 3.4% and 6.1%; and expected lives of 3 years
for 2002, 2001 and 2000, respectively. Under this method, the weighted average
fair value of the options granted was $1.27, $1.59 and $1.23 per share in 2002,
2001 and 2000, respectively.
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 and conversion of convertible
debentures are assumed to occur for purposes of calculating diluted earnings per
share for periods in which their effect would not be anti-dilutive.
DECEMBER 28, DECEMBER 31,
2002 2001 2000
----------- ----------- -----------
BASIC EARNINGS PER COMMON SHARE:
Net income $ 2,636,837 $ 1,045,264 $ 729,791
=========== =========== ===========
Weighted average number of common shares 16,146,081 15,050,509 13,769,614
=========== =========== ===========
Earnings per common share $ 0.16 $ 0.07 $ 0.05
=========== =========== ===========
39
POORE BROTHERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
1. ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
DILUTED EARNINGS PER COMMON SHARE:
Net income $ 2,636,837 $ 1,045,264 $ 729,791
=========== =========== ===========
Weighted average number of common shares 16,146,081 15,050,509 13,769,614
Incremental shares from assumed conversions -
Debentures 120,279 -- --
Warrants 476,019 690,428 475,943
Stock options 1,084,574 1,457,711 884,036
----------- ----------- -----------
Adjusted weighted average number of common shares 17,826,953 17,198,648 15,129,593
=========== =========== ===========
Earnings per common share $ 0.15 $ 0.06 $ 0.05
=========== =========== ===========
Options and warrants to purchase 950,577, 653,077 and 985,527 shares of
Common Stock were outstanding at December 28, 2002, December 31, 2001 and
December 31, 2000, respectively, but were not included in the computation of
diluted earnings per share because the option and warrant exercise prices were
greater than the average market price per share of the Common Stock. For the
years ended December 31, 2001 and 2000 conversion of the convertible debentures
was not assumed, as the effect of the conversion would be anti-dilutive.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 141, "BUSINESS
COMBINATIONS" and SFAS No. 142, "GOODWILL AND OTHER INTANGIBLE ASSETS". SFAS No.
141 requires companies to apply the purchase method of accounting for all
business combinations initiated after June 30, 2001 and prohibits the use of the
pooling-of-interests method. SFAS No. 142 changes the method by which companies
recognize intangible assets in purchase business combinations and generally
requires identifiable intangible assets to be recognized separately from
goodwill. In addition, it eliminates the amortization of all existing and newly
acquired goodwill on a prospective basis and requires companies to assess
goodwill for impairment, at least annually, based on the fair value of the
reporting unit. Upon adoption on January 1, 2002, the Company ceased the
amortization of goodwill and trademarks in accordance with SFAS No. 142.
Goodwill and trademark amortization expense was approximately $652,000 and
$603,000 for 2001 and 2000 respectively.
In August 2001, the FASB issued SFAS No. 144, "ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS". SFAS No. 144 supersedes SFAS No.
121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF" and the accounting and reporting provisions of APB
Opinion No. 30, "REPORTING THE RESULTS OF OPERATIONS - REPORTING THE EFFECTS OF
DISPOSAL OF A SEGMENT OF A BUSINESS, AND EXTRAORDINARY, UNUSUAL AND INFREQUENTLY
OCCURRING EVENTS AND TRANSACTIONS". SFAS No. 144 modifies the method by which
companies account for certain asset impairment losses. There was no effect from
adopting SFAS No. 144 on January 1, 2002.
In 2001, the Emerging Issues Task Force (EITF) issued EITF Issue No. 01-9,
"Accounting for Consideration Given by a Vendor to a Customer or a Reseller of
the Vendor's Products," (EITF Issue No. 01-9). EITF Issue No. 01-9 addresses the
accounting for certain consideration given by a vendor to a customer and
provides guidance on the recognition, measurement and income statement
classification for sales incentives. In general, the guidance requires that
consideration from a vendor to a retailer be recorded as a reduction in revenue
unless certain criteria are met. The Company adopted the provisions of the EITF
Issue No. 01-9 effective in the first quarter of 2002 and as a result, costs
previously recorded as expense have been reclassified and reflected as
reductions in revenue. The Company was also required to reclassify amounts in
prior periods in order to conform to the revised presentation of these costs if
practicable. As a result of adopting EITF Issue No. 01-9, the Company reduced
both net revenues and selling, general and administrative expenses in 2001 and
2000 by $3,761,072 and $2,687,925 respectively. There was no change to the 2001
and 2000 previously reported net income as a result of this change.
40
POORE BROTHERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
1. ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others". FIN 45 expands the disclosure
requirements to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued.
The Interpretation also clarifies that a guarantor is required to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The Company does not have and does not
anticipate issuing any guarantees which would be required to be recognized as a
liability under the provisions of FIN 45 and thus does not expect the adoption
of this Interpretation to have a material impact on its results of operations or
financial position.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure". This Statement amends SFAS No. 123 to
provide alternative methods of transition for a voluntary change to the fair
value method of accounting for stock-based employee compensation. Specifically,
SFAS No. 148 prohibits companies from utilizing the prospective method of
transition, the only method offered under the original SFAS No. 123, in fiscal
years beginning after December 15, 2003. However, the statement permits two
additional transition methods for companies that adopt the fair value method of
accounting for stock-based compensation, which include the modified prospective
and retroactive restatement methods. Under the prospective method, expense is
recognized for all employee awards granted, modified, or settled after the
beginning of the fiscal year in which the recognition provisions are first
applied. The modified prospective method recognizes stock-based employee
compensation cost from the beginning of the fiscal year in which the provisions
are first applied, as if the fair value method had been used to account for all
employee awards granted, modified, or settled in fiscal years beginning after
December 15, 1994. Under the retroactive restatement method, all periods
presented are restated to reflect stock-based employee compensation cost under
the fair value method for all employee awards granted, modified, or settled in
fiscal years beginning after December 15, 1994. In addition, this Statement
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results with a prescribed specific tabular format and requiring
disclosure in the "Summary of Significant Accounting Policies" or its
equivalent. The Company has adopted the new disclosure requirements for 2002,
and is evaluating the impact if it were to adopt the fair value method of
accounting for stock-based employee compensation under all three methods.
2. ACQUISITIONS:
On June 8, 2000, the Company acquired Boulder Natural Foods, Inc. (a
Colorado corporation) and the business and certain related assets and
liabilities of Boulder Potato Company, a totally natural potato chip marketer
based in Boulder Colorado. The assets, which were acquired through a newly
formed wholly owned subsidiary of the Company, Boulder Natural Foods, Inc., an
Arizona corporation, included the Boulder Potato Company(R) and Boulder
Chips(TM) brands, other intangible assets, receivables, inventories and
specified liabilities. In consideration for these assets and liabilities, the
Company paid a total purchase price of $2,637,000, consisting of: (i) the
issuance of 725,252 unregistered shares of Common Stock with a fair value at the
time of $1,235,000, (ii) a cash payment of $301,000, (iii) the issuance of a
note to the seller in the amount of $830,000 with interest at 6.4%, was secured
by the Boulder assets acquired, and required monthly principal and interest
payments of approximately $37,000 until maturity on June 15, 2002, and (iv) the
assumption by the Company of $271,000 in liabilities, including a note to the
seller in the amount of $130,000 with interest at 6.0% and requires monthly
principal and interest payments of approximately $6,000 until maturity on June
15, 2002. The initial $301,000 cash payment was subsequently financed with the
U.S. Bank Term Loan D. In addition, the Company may be required to issue
additional unregistered shares of Common Stock to the seller on each of the
first, second and third anniversaries of the closing of the acquisition. Any
such issuances will be dependent upon, and will be calculated based upon,
increases in sales of Boulder Potato Company(R) products as compared to previous
periods. In 2002, the Company was required to issue 88,864 shares pursuant to
this provision, which were valued at $210,786 and increased the goodwill
recorded from this acquisition. In 2001, the Company was required to issue
57,898 shares pursuant to this provision, which were valued at $185,274 and
increased the goodwill recorded from this acquisition. The acquisition was
accounted for using the purchase method of accounting in accordance with APB
Opinion No. 16. Accordingly, only the results of operations subsequent to the
acquisition date have been included in the Company's results. In connection with
the acquisition, the Company has recorded trademarks of $1,000,000 and goodwill
of $1,690,539, which were previously amortized on a straight-line basis over 15
and 20-year
41
POORE BROTHERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. ACQUISITIONS: (CONTINUED)
periods, respectively. Amortization of these intangible assets ceased on January
1, 2002 in accordance with the adoption of SFAS No. 142. Boulder had sales of
approximately $0.9 million for the five months ended May 31, 2000.
On October 7, 1999, the Company acquired all of the membership interests of
Wabash from Pate Foods Corporation in exchange for (i) 4,400,000 unregistered
shares of Common Stock with a fair value at the time of $4,400,000, (ii) a
warrant to purchase 400,000 unregistered shares of Common Stock at an exercise
price of $1.00 per share with a fair value at the time of $290,000, and (iii)
the assumption of $8,073,000 in liabilities, or a total purchase price of
$12,763,000. The warrant has a five-year term and became exercisable upon
issuance. As a result, the Company acquired all the assets of Wabash, including
the Tato Skins(R), O'Boisies(R), and Pizzarias(R) trademarks. The acquisition
was accounted for using the purchase method of accounting in accordance with APB
Opinion No. 16. Accordingly, only the results of operations subsequent to the
acquisition date have been included in the Company's results. In connection with
the acquisition, the Company recorded goodwill of $1,327,227, which was
previously amortized on a straight-line basis over a 20-year period.
Amortization of this goodwill ceased on January 1, 2002 in accordance with the
adoption of SFAS No. 142.
On November 4, 1998, the Company acquired the business and certain assets
of Tejas, a Texas-based potato chip manufacturer. The assets, which were
acquired through a newly formed wholly owned subsidiary of the Company, Tejas PB
Distributing, Inc., included the Bob's Texas Style(R) potato chips trademark,
inventories and certain capital equipment. In exchange for these assets, the
Company issued 523,077 unregistered shares of Common Stock with a fair value of
$450,000 and paid $1.25 million in cash, or a total purchase price of $1.7
million. The Company utilized available cash as well as funds available pursuant
to the Wells Fargo Line of Credit Agreement to satisfy the cash portion of the
consideration. Tejas had sales of approximately $2.8 million for the nine months
ended September 30, 1998. In connection with the acquisition, the Company
transferred production of the Bob's Texas Style(R) brand potato chips to its
Arizona facility. The acquisition was accounted for using the purchase method of
accounting in accordance with APB Opinion No. 16. Accordingly, only the results
of operations subsequent to the acquisition date have been included in the
Company's results. In connection with the acquisition, the Company recorded
goodwill of $126,702, which was previously amortized on a straight-line basis
over a 20-year period. Amortization of this intangible asset ceased on January
1, 2002 in accordance with the adoption of SFAS No. 142. In 2001, the Company
cancelled and retired 28,000 shares of Common Stock issued in connection with
the Tejas acquisition. The cancellation was made pursuant to the terms of the
escrow agreement in settlement of post acquisition liabilities.
Intangibles not subject to amortization consisted of the following:
2002 2001
---------- ----------
Goodwill (1) $5,565,687 $5,354,901
Trademarks 4,207,032 4,207,032
---------- ----------
$9,772,719 $9,561,933
========== ==========
(1) Additions to goodwill are related to the earnout payment to the
previous owners of Boulder Natural Foods, Inc.
In connection with the implementation of SFAS No. 142, effective January 1,
2002, the Company ceased amortizing goodwill and other intangible assets with
indefinite lives. The following table shows the pro forma impact of the adoption
of SFAS No. 142 for the years ended December 31, 2001 and December 31, 2000.
DECEMBER 31, 2001 DECEMBER 31, 2000
----------------- -----------------
NET INCOME
As reported $1,045,264 $ 729,791
Add back: Goodwill and trademark
amortization 652,104 603,017
---------- ----------
Adjusted $1,697,368 $1,332,808
========== ==========
42
POORE BROTHERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. ACQUISITIONS: (CONTINUED)
BASIC EARNINGS PER COMMON SHARE:
As reported $0.07 $0.05
Add back: Goodwill and trademark amortization 0.04 0.04
----- -----
Adjusted $0.11 $0.09
===== =====
DILUTED EARNINGS PER COMMON SHARE:
As reported $0.06 $0.05
Add back: Goodwill and trademark amortization 0.04 0.04
----- -----
Adjusted $0.10 $0.09
===== =====
3. CONCENTRATIONS OF CREDIT RISK:
The Company's cash is placed with major banks. The Company, in the normal
course of business, maintains balances in excess of Federal insurance limits.
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. In 2002 and 2001, substantially all of the
Company's customers were distributors or retailers whose sales were concentrated
in the grocery industry, throughout the United States. The Company investigates
a customer's credit worthiness before extending credit. At December 28, 2002,
two customers accounted for approximately 27% of accounts receivable in the
accompanying Consolidated Balance Sheets.
4. INVENTORIES:
Inventories consisted of the following:
DECEMBER 28, DECEMBER 31,
2002 2001
------------ ------------
Finished goods ....................... $ 713,616 $ 588,376
Raw materials ........................ 1,046,785 1,299,496
------------ ------------
$ 1,760,401 $ 1,887,872
============ ============
5. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
USEFUL DECEMBER 28, DECEMBER 31,
LIVES 2002 2001
------ ----------- -----------
Buildings and improvements ...... 20-30 years $ 5,226,016 $ 5,137,005
Equipment ....................... 7-15 years 11,464,258 11,085,794
Land ............................ -- 272,006 272,006
Vehicles ........................ 5 years 11,393 40,178
Furniture and office equipment .. 5 years 1,207,291 1,109,325
----------- -----------
18,180,964 17,644,308
Less accumulated depreciation
and amortization .............. (5,171,016) (3,914,035)
----------- -----------
$13,009,948 $13,730,273
=========== ===========
Depreciation expense was $1,288,333, $1,237,260 and $1,089,004 in 2002,
2001 and 2000, respectively.
Included in equipment are assets held under capital leases with an original
cost of $330,149 at December 28, 2002 and $1,193,110 at December 31, 2001, and
accumulated amortization of $106,694 and $993,106 at December 28, 2002, December
31, 2001, respectively.
43
POORE BROTHERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
5. PROPERTY AND EQUIPMENT: (CONTINUED)
On October 28, 2000, the Company experienced a fire at the Goodyear,
Arizona manufacturing plant, causing a temporary shutdown of manufacturing
operations at the facility. There was extensive damage to the roof and equipment
utilities in the potato chip processing area. Third party manufacturers agreed
to provide the Company with production volume to assist the Company in meeting
anticipated customers' needs during the shutdown. The Company continued to
season and package the bulk product received from third party manufacturers. In
fiscal 2000, the Company identified and recorded approximately $1.4 million of
incremental expenses incurred as a result of the fire, primarily associated with
outsourcing production. These extra expenses were charged to "cost of revenues"
and offset by a $1.4 million credit representing estimated future insurance
proceeds. As of December 31, 2000, the Company had been advanced $0.5 million of
the $1.4 million by its insurance company as partial reimbursement.
The Company resumed full production of private label potato chips in early
January of 2001 and resumed full production of batch-fried potato chips in late
March of 2001. During fiscal 2001, the Company recorded approximately $1.4
million of incremental expenses incurred as a result of the fire, primarily
associated with outsourcing production. These extra expenses were charged to
"cost of revenues" and offset by a $1.4 million credit representing insurance
proceeds. The Company also incurred approximately $2.3 million in building and
equipment reconstruction costs in connection with the fire. During fiscal 2001,
the Company was advanced a total of $3.2 million by the insurance company. "Fire
related income, net" on the accompanying Consolidated Statement of Operations
for fiscal 2001 includes (i) a gain of $167,000, representing the excess of
insurance proceeds over the book value for the building and equipment of
$533,000 damaged by the fire, and (ii) expenses not reimbursed by the insurance
company of approximately $163,000.
In December 2002, the Company received $261,000 from its insurance company
in partial settlement of outstanding claims, which is shown in "Fire related
income, net" on the accompanying Consolidated Statement of Operations for fiscal
2002. This includes (i) a gain of $121,000, representing additional insurance
proceeds over the book value of equipment previously written off, and (ii)
reimbursement of $140,000 for expenses previously denied by the insurance
company. The Company does not have any receivables from the insurance company
reflected in the accompanying Consolidated Balance Sheets as of December 28,
2002.
6. LONG-TERM DEBT:
Long-term debt consisted of the following:
DECEMBER 28, DECEMBER 31,
2002 2001
------------ ------------
Convertible Debentures due in monthly installments through July 1, 2002; ........... $ -- $ 427,656
interest at 9%; collateralized by land, buildings, equipment and intangibles
Working capital line of credit expiring October 31, 2005; interest at prime
rate plus 1% (5.75% at December 31, 2001); collateralized by accounts
receivable, inventories, equipment and general intangibles ....................... -- 3,438,269
Term loan due in monthly installments through July 1, 2006; interest at prime
rate (4.25% at December 28, 2002); collateralized by accounts receivable,
inventories, equipment and general intangibles ................................... 3,181,685 4,089,743
Mortgage loan due in monthly installments through July 2012; interest at
9.03%; collateralized by land and building ....................................... 1,851,888 1,882,282
Term loan due in monthly installments through June 30, 2002; interest at
prime plus 2% (6.75% at December 31, 2001); collateralized by accounts
receivable, inventories, equipment and general intangibles ....................... -- 128,751
Term loan due in monthly installments through June 15, 2002; interest at
6.4%; collateralized by certain assets of Boulder ................................ -- 217,499
Term loan due in monthly installments through June 15, 2002; interest
at 6% ............................................................................ -- 33,968
Term loan due in monthly installments through August 31, 2002; interest at
prime plus 2% (6.75% at December 31, 2001); collateralized by accounts
receivable, inventory, equipment and intangibles ................................. -- 87,500
44
POORE BROTHERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
6. LONG-TERM DEBT: (CONTINUED)
Capital lease obligations due in monthly installments through 2003; interest
rates ranging from 8.2% to 11.3%; collateralized by equipment .................... 45,779 457,629
Capital Expenditures Term loan due in monthly installments through October 31,
2003; interest at prime plus 1% (5.25% at December 28, 2002); collateralized
by equipment ..................................................................... 130,770 241,430
------------ ------------
5,210,122 11,004,727
Less current portion ............................................................... (1,105,004) (2,343,472)
------------ ------------
$ 4,105,118 $ 8,661,255
============ ============
Annual maturities of long-term debt at December 28, 2002 are as follows:
YEAR
----
2003..................................................... $ 1,105,004
2004..................................................... 931,857
2005..................................................... 935,580
2006..................................................... 552,106
2007..................................................... 51,802
Thereafter............................................... 1,633,773
-----------
$ 5,210,122
===========
The Company's Goodyear, Arizona manufacturing, distribution and
headquarters facility is subject to a $1.9 million mortgage loan from Morgan
Guaranty Trust Company of New York, 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 $18,425 are
determined based on a twenty-year amortization period.
The Company has entered into a variety of capital and operating leases for
the acquisition of equipment and vehicles. The leases generally have three to
seven year terms, bear interest at rates from 8.2% to 11.3%, require monthly
payments and expire at various times through 2008 and are collateralized by the
related equipment.
During 2002, the Company's remaining outstanding 9% Convertible Debenture
due July 1, 2002 in the principal amount of $427,656 held by Wells Fargo Small
Business Investment Company, Inc. ("Wells Fargo SBIC") was converted into
401,497 shares of the Company's common stock. In November 1999, Renaissance
Capital converted 50% ($859,047) of its 9% Convertible Debenture holdings into
859,047 shares of Common Stock and agreed unconditionally to convert into Common
Stock the remaining $859,047 not later than December 31, 2000. In December 2000,
Renaissance Capital converted the remaining 859,047 shares of its 9% Convertible
Debentures into Common Stock. For the period November 1, 1999 through December
31, 2000, Renaissance Capital agreed to waive all mandatory principal redemption
payments and to accept 30,000 unregistered shares of the Company's Common Stock
and a warrant to purchase 60,000 shares of common stock at $1.50 per share in
lieu of cash interest payments.
On October 7, 1999, the Company signed a new $9.15 million Credit Agreement
with U.S. Bancorp (the "U.S. Bancorp Credit Agreement"). In April 2001, the U.S.
Bancorp Credit Agreement was amended to increase the U.S. Bancorp Line of Credit
from $3.0 million to $5.0 million, establish a $0.5 million capital expenditure
line of credit (the "CapEx Term Loan"), extend the U.S. Bancorp Line of Credit
maturity date from October 2002 to October 31, 2003, and modify certain
financial covenants. In June 2002, the U.S. Bancorp Credit Agreement was amended
to extend the U.S. Bancorp Line of Credit maturity date from October 31, 2003 to
October 31, 2005, and modify certain financial covenants.
The U.S. Bancorp Credit Agreement is secured by accounts receivable,
inventories, equipment and general intangibles. Borrowings under the line of
credit are limited to 80% of eligible receivables and up to 60% of eligible
inventories. At December 28, 2002, the Company had a borrowing base of
$3,174,000 under the U.S. Bancorp Line of Credit. There were no amounts
outstanding on the U.S. Bancorp line of credit at December 28, 2002. The U.S.
Bancorp Credit Agreement requires the Company to be in compliance with certain
45
POORE BROTHERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
6. LONG-TERM DEBT: (CONTINUED)
financial performance criteria, including a minimum cash flow coverage ratio, a
minimum debt service coverage ratio, minimum annual operating results, a minimum
tangible capital base and a minimum fixed charge coverage ratio. At December 28,
2002, the Company was in compliance with all of the financial covenants.
Management believes that the fulfillment of the Company's plans and objectives
will enable the Company to attain a sufficient level of profitability to remain
in compliance with these financial covenants. There can be no assurance,
however, that the Company will attain any such profitability and remain in
compliance. Any acceleration under the U.S. Bancorp Credit Agreement prior to
the scheduled maturity of the U.S. Bancorp Line of Credit or the U.S. Bancorp
Term Loans could have a material adverse effect upon the Company.
7. COMMITMENTS AND CONTINGENCIES:
Rental expense under operating leases was $956,000, $506,900 and $309,000
for each of fiscal 2002, 2001 and 2000, respectively. Minimum future rental
commitments under non-cancelable leases as of December 28, 2002 are as follows:
CAPITAL OPERATING
YEAR LEASES LEASES TOTAL
---- ----------- ----------- -----------
2003.......................................... $ 46,484 $ 980,270 $ 1,026,754
2004.......................................... -- 952,300 952,300
2005.......................................... -- 916,036 916,036
2006.......................................... -- 888,325 888,325
2007.......................................... -- 706,823 706,823
Thereafter.................................... -- 2,670,891 2,670,891
----------- ----------- -----------
Total......................................... 46,484 $ 7,114,645 $ 7,161,129
Less amount representing interest............. (705) =========== ===========
-----------
Present value................................. $ 45,779
===========
The Company produces T.G.I. Friday's(R) brand salted snacks and Tato
Skins(R) brand potato crisps utilizing a sheeting and frying process that
includes patented technology that the Company licenses from Miles Willard
Technologies, LLC, an Idaho limited liability company ("Miles Willard").
Pursuant to the license agreement between the Company and Miles Willard, the
Company has an exclusive right to use the patented technology within North
America until the patents expire between 2004 and 2006. In consideration for the
use of these patents, the Company is required to make royalty payments to Miles
Willard on sales of products manufactured utilizing the patented technology.
The Company licenses the T.G.I. Friday's(R) brand salted snacks trademark
from TGI Friday's Inc. under a license agreement with a term expiring in 2014.
Pursuant to the license agreement, the Company is required to make royalty
payments on sales of T.G.I. Friday's(R) brand salted snack products and is
required to achieve certain minimum sales levels by certain dates during the
contract term.
In December 2002, Warner Bros. Consumer Products granted the Company rights
to introduce an innovative new brand of salted snacks featuring Looney Tunes(TM)
characters. The Company plans to launch the new brand nationwide in the summer
of 2003 under a multi-year agreement that grants the Company exclusive salted
snack category brand licensing and promotional rights for Looney Tunes(TM)
characters. A prepaid royalty of $500,000 is included in other current assets as
a result of this agreement.
8. SHAREHOLDERS' EQUITY:
COMMON STOCK
On December 27, 2001, the Company completed the sale of 586,855 shares of
Common Stock at an offering price of $2.13 per share to BFS US Special
Opportunities Trust PLC, a fund managed by Renaissance Capital Group, Inc., in a
private placement transaction. The net proceeds of the transaction were utilized
by the Company to reduce the Company's
47
POORE BROTHERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
8. SHAREHOLDERS' EQUITY: (CONTINUED)
outstanding indebtedness. The Company has granted BFS US Special Opportunities
Trust PLC both demand and piggyback registration rights with respect to the
shares of Common Stock purchased in the offering.
PREFERRED STOCK
The Company has authorized 50,000 shares of $100 par value Preferred Stock,
none of which was outstanding at December 28, 2002 or December 31, 2001. The
Company may issue such shares of Preferred Stock in the future without
shareholder approval.
WARRANTS
During 2000, 2001 and 2002 warrant activity was as follows:
WARRANTS WEIGHTED AVERAGE
OUTSTANDING EXERCISE PRICE
----------- --------------
Balance, December 31, 1999.......... 1,413,298 $ 1.62
Issued............................ 85,000 1.09
----------
Balance, December 31, 2000.......... 1,498,298 1.59
Issued............................ 10,000 3.62
Cancelled......................... (225,000) 4.38
----------
Balance, December 31, 2001.......... 1,283,298 1.11
Exercised......................... (269,505) 1.00
----------
Balance, December 28, 2002.......... 1,013,793 1.11
==========
Warrants have been issued in connection with prior financings and the
acquisition of Wabash. At December 28, 2002, outstanding warrants had exercise
prices ranging from $0.88 to $3.62 and a weighted average remaining term of 2.9
years. Warrants that were exercisable at December 28, 2002 totaled 865,716 with
a weighted average exercise price per share of $1.15.
As of July 30, 1999, the Company agreed to the assignment of a warrant from
Everen Securities, Inc. to Stifel, Nicolaus & Company Incorporated (the
Company's acquisitions and financial advisor) representing the right to purchase
296,155 unregistered shares of Common Stock at an exercise price of $.875 per
share and expiring in August 2003. The warrant provides the holder thereof
certain anti-dilution and piggyback registration rights. The warrant was
exercisable as to 50% of the shares when the Company's pro forma annual sales
reached $30 million, which it did when the Company completed the Wabash
acquisition in October 1999. The remaining 50% of the warrant is exercisable
when the Company's pro forma annual sales reach $100 million.
STOCK OPTIONS
The Company's 1995 Stock Option Plan (the "Plan"), as amended in May 2001,
provides for the issuance of options to purchase 2,500,000 shares of Common
Stock. The options granted pursuant to the Plan expire over a five-year period
and generally vest over three years. In addition to options granted under the
Plan, the Company also issued non-qualified options to purchase Common Stock to
certain Directors and officers which are exercisable and expire either five or
ten years from date of grant. All options are issued at an exercise price of
fair market value and are noncompensatory. Fair market value is determined based
on the price of sales of Common Stock occurring at time of the option award. At
December 28, 2002, outstanding options had exercise prices ranging from $.59 to
$3.50 per share.
48
POORE BROTHERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
8. SHAREHOLDERS' EQUITY: (CONTINUED)
During 2001 and 2002, stock option activity was as follows:
PLAN OPTIONS NON-PLAN OPTIONS
------------------------------ -----------------------------
OPTIONS WEIGHTED AVERAGE OPTIONS WEIGHTED AVERAGE
OUTSTANDING EXERCISE PRICE OUTSTANDING EXERCISE PRICE
------------ -------------- ---------- --------------
Balance, December 31, 1999 ...... 1,483,650 $ 1.54 720,000 $ 1.17
Granted ....................... 336,000 2.13 1,050,000 1.64
Canceled ...................... (91,666) 1.84 -- --
Exercised ..................... (28,334) 1.41 (125,000) 1.08
---------- ----------
Balance, December 31, 2000 ...... 1,699,650 1.64 1,645,000 1.48
Granted ....................... 480,000 3.03 50,000 3.02
Canceled ...................... (143,333) 1.63 -- --
Exercised ..................... (26,000) 1.71 (50,000) 1.08
---------- ----------
Balance, December 31, 2001 ...... 2,010,317 1.97 1,645,000 1.54
Granted ....................... 367,500 2.86 -- --
Canceled ...................... (324,334) 2.78 (66,667) 2.61
Exercised ..................... (315,683) 1.19 (33,333) 2.61
---------- ----------
Balance, December 28, 2002 ...... 1,737,800 2.15 1,545,000 1.47
========== ==========
At December 28, 2002, outstanding Plan options had exercise prices ranging
from $0.59 to $3.10 and a weighted average remaining term of 2.4 years. Plan
options that were exercisable at December 28, 2002, December 31, 2001 and
December 31, 2000 totaled 1,034,793, 1,299,982 and 975,415 with weighted average
exercise prices per share of $1.60, $1.56 and $1.60 respectively. Outstanding
Non-Plan options had exercise prices ranging from $1.18 to $3.50 and a weighted
average remaining term of 2.4 years. Non-Plan options that were exercisable at
December 28, 2002 totaled 1,019,999 with a weighted average exercise price per
share of $1.37.
9. 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 provision for income taxes consisted of the following:
2002 2001 2000
--------- --------- ---------
Current:
Federal $ -- $ -- $ --
State 98,593 43,000 38,000
--------- --------- ---------
$ 98,593 $ 43,000 $ 38,000
--------- --------- ---------
Deferred:
Federal $(413,430) $ -- $ --
State 72,000 -- --
--------- --------- ---------
$(341,430) $ -- $ --
--------- --------- ---------
--------- --------- ---------
Total (benefit) provision for income taxes $(242,837) $ 43,000 $ 38,000
========= ========= =========
49
POORE BROTHERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
9. INCOME TAXES: (CONTINUED)
The following table provides a reconciliation between the amount determined
by applying the statutory federal income tax rate to the pretax income amount
for the years ended December 28, 2002, December 31, 2001 and December 31, 2000:
2002 2001 2000
----------- ----------- -----------
Provision at statutory rate .......... $ 813,960 $ 370,010 $ 261,049
State income tax, net ................ 170,593 56,742 38,390
Nondeductible expenses ............... 11,983 18,722 15,600
Net operating loss utilized and
reversal of valuation allowance .... (1,239,373) (402,474) (277,039)
----------- ----------- -----------
Income tax (benefit) provision ....... $ (242,837) $ 43,000 $ 38,000
=========== =========== ===========
The income tax effects of loss carryforwards and temporary differences
between financial and income tax reporting that give rise to the deferred income
tax assets and liabilities are as follows:
DECEMBER 28, DECEMBER 31,
2002 2001
----------- -----------
Net operating loss carryforward............. $ 1,022,000 $ 1,855,000
Bad debt expense............................ 160,000 86,000
Accrued liabilities......................... 121,000 73,000
Other....................................... 141,000 254,000
----------- -----------
1,444,000 2,268,000
Depreciation and amortization............... (966,570) (865,000)
Deferred tax asset valuation allowance...... (136,000) (1,403,000)
----------- -----------
Net deferred tax assets................ $ 341,430 $ --
=========== ===========
The Company experienced significant net losses in prior fiscal years
resulting in a net operating loss carryforward ("NOLC") for federal income tax
purposes of approximately $2.6 million at December 28, 2002. The Company's NOLC
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, we take 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.
During the third quarter of 2002, the Company concluded that it was more likely
than not that its deferred tax asset at the time would be realized, and also
began providing for income taxes at a rate equal to the combined federal and
state effective rates, which approximates 39.2% under current tax rates, rather
than the 7.5% rate previously being used to record a tax provision for only
certain state income taxes. The $136,000 deferred tax valuation allowance at
December 28, 2002 relates to certain state NOL carryforwards.
10. BUSINESS SEGMENTS AND SIGNIFICANT CUSTOMERS:
For the year ended December 28, 2002, one national mass and warehouse club
customer and one national vending distributor accounted for $12,414,000 or 21%
and $7,784,000 or 13%, respectively, of the Company's consolidated net revenues.
For the year ended December 31, 2001, one national warehouse club customer and
one national vending distributor accounted for $9,353,000 or 16% and $6,886,000
or 12%, respectively, of the Company's consolidated net revenues. For the year
ended December 31, 2000, one Arizona grocery chain customer accounted for
$4,673,000, or 11%, and one national vending distributor accounted for
$6,376,000, or 15%, respectively, of consolidated net revenues.
50
POORE BROTHERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
10. BUSINESS SEGMENTS AND SIGNIFICANT CUSTOMERS: (CONTINUED)
The Company's operations consist of two segments: manufactured products and
distributed products. The manufactured products segment produces potato chips,
potato crisps, and tortilla chips 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 all of its assets are located in the United States. The
Company does not allocate assets based on its reportable segments.
The accounting policies of the segments are the same as those described in
the Summary of Significant Accounting Policies (Note 1). The Company does not
allocate selling, general and administrative expenses, income taxes or unusual
items to segments and has no significant non-cash items other than depreciation
and amortization.
MANUFACTURED DISTRIBUTED
PRODUCTS PRODUCTS CONSOLIDATED
-------- -------- ------------
2002
- ----
Revenues from external customers $55,321,985 $ 4,026,486 $59,348,471
Depreciation and amortization included
in segment gross profit 936,499 -- 936,499
Segment gross profit 10,797,357 514,652 11,312,009
2001
- ----
Revenues from external customers $49,116,667 $ 4,788,149 $53,904,816
Depreciation and amortization included
in segment gross profit 859,776 -- 859,776
Segment gross profit 10,711,869 234,125 10,945,994
2000
- ----
Revenues from external customers $33,855,177 $ 5,199,905 $39,055,082
Depreciation and amortization included
in segment gross profit 953,010 -- 953,010
Segment gross profit 7,395,832 308,309 7,704,141
The following table reconciles reportable segment gross profit to the Company's
consolidated income before income tax provision:
2002 2001 2000
----------- ----------- -----------
Segment gross profit $11,312,009 $10,945,994 $ 7,704,141
Unallocated amounts:
Selling, general and administrative expenses 8,637,652 8,816,627 5,758,883
Fire related income, net 259,376 4,014 --
Interest expense, net 539,733 1,045,117 1,177,467
----------- ----------- -----------
Income before income taxes $ 2,394,000 $ 1,088,264 $ 767,791
=========== =========== ===========
11. 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.
51
POORE BROTHERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
12. RELATED PARTY TRANSACTIONS:
The land and building (140,000 square feet) occupied by the Company in
Bluffton, Indiana is leased pursuant to a twenty year lease dated May 1, 1998
with American Pacific Financial Corporation, an affiliate of Pate Foods
Corporation from whom the Company purchased Wabash in October 1999. The lease
extends through April 2018 and contains two additional five-year lease renewal
periods at the option of the Company. Lease payments are approximately $20,000
per month, plus CPI adjustments, and the Company is responsible for all real
estate taxes, utilities and insurance.
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
The results for any single quarter are not necessarily indicative of the
Company's results for any other quarter or the full year. The quarterly net
sales and gross profit amounts presented below reflect the reclassifications
required by EITF 01-9 discussed in Note 1.
(in 000's except for share data) FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER FULL YEAR
----------- ----------- ----------- ----------- -----------
FISCAL 2002
Net revenues $ 14,278 $ 15,358 $ 15,209 $ 14,503 $ 59,348
Gross profit 2,517 3,188 2,564 3,043 11,312
Operating income 552 819 550 753 2,674
Net income $ 380 $ 640 $ 1,051 $ 565 $ 2,637
Earnings per common share:
Basic $ 0.02 $ 0.04 $ 0.06 $ 0.03 $ 0.16
Diluted $ 0.02 $ 0.04 $ 0.06 $ 0.03 $ 0.15
Weighted average number of common shares:
Basic 15,692,387 15,833,473 16,362,344 16,686,148 16,146,081
Diluted 17,439,210 18,079,446 17,961,882 18,049,958 17,826,953
FISCAL 2001
Net revenues $ 13,267 $ 14,482 $ 13,871 $ 12,285 $ 53,905
Gross profit 2,872 3,121 2,778 2,175 10,946
Operating income 668 703 422 336 2,129
Net income $ 369 $ 404 $ 161 $ 111 $ 1,045
Earnings per common share:
Basic $ 0.02 $ 0.03 $ 0.01 $ 0.01 $ 0.07
Diluted $ 0.02 $ 0.02 $ 0.01 $ 0.01 $ 0.06
Weighted average number of common shares:
Basic 14,999,765 15,046,655 15,042,765 15,111,704 15,050,509
Diluted 16,965,390 17,708,387 17,920,140 17,107,814 17,198,648
The sum of quarterly earnings per share information may not agree to the annual
amount due to the use of the treasury stock method of calculating earnings per
share.
52
POORE BROTHERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
14. ACCOUNTS RECEIVABLE ALLOWANCE
Changes to the allowance for doubtful accounts during the three years ended
December 28, 2002 are summarized below:
Balance at Balance
beginning Charges to at end of
of period Expense Deductions period
--------- --------- ---------- ------
Allowance for Doubtful Accounts
Fiscal 2000 $206,000 124,000 84,000 $246,000
Fiscal 2001 $246,000 332,000 359,000 $219,000
Fiscal 2002 $219,000 379,000 189,000 $409,000
53
EXHIBIT INDEX
10.33 -- License Agreement, dated November 20, 2002, by and between the Company
and Warner Bros., a division of Time Warner Entertainment Company,
L.P.
10.34 -- License Agreement, dated November 20, 2002, by and between the Company
and Warner Bros., a division of Time Warner Entertainment Company,
L.P.
10.35 -- License Agreement, dated July 19, 2000, by and between the Company and
M.J. Quinlan & Associates Pty. Limited
21.1 -- List of subsidiaries of Poore Brothers, Inc.
23.1 -- Consent of Deloitte & Touche LLP.
23.2 -- Notice Regarding Consent of Arthur Andersen LLP
99.1 -- Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
54