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.
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:
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
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.
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
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.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
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.
ITEM 6. SELECTED FINANCIAL DATA 1998
FIVE YEAR FINANCIAL SUMMARY (IN MILLIONS EXCEPT SHARE AND PER SHARE DATA)
(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.
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.
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
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:
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
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.
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.
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.
ITEM 8.
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.
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.
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.
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
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, 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)
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)
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.
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
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)
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)
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
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
POORE BROTHERS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these consolidated financial statements.
POORE BROTHERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
The accompanying notes are an integral part of these consolidated financial statements.
POORE BROTHERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
The accompanying notes are an integral part of these consolidated financial statements.
POORE BROTHERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these consolidated financial statements.
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.
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.
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
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.
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 =========== =========== ===========
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:
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.
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
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 ========== ==========
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.
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:
POORE BROTHERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
6. LONG-TERM DEBT: (CONTINUED)
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
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:
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
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.
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:
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 ========= ========= =========
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.
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 -------- -------- ------------ - ---- 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
- ---- 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
- ---- 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:
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.
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.
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.
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
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
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
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.
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, 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)
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)
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.
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
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)
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)
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
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
POORE BROTHERS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these consolidated financial statements.
POORE BROTHERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
The accompanying notes are an integral part of these consolidated financial statements.
POORE BROTHERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
The accompanying notes are an integral part of these consolidated financial statements.
POORE BROTHERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these consolidated financial statements.
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.
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.
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
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.
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 =========== =========== ===========
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1. ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
DILUTED EARNINGS PER COMMON SHARE:
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.
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
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 ========== ==========
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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.
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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:
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6. LONG-TERM DEBT: (CONTINUED)
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
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:
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
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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.
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8. SHAREHOLDERS' EQUITY: (CONTINUED)
During 2001 and 2002, stock option activity was as follows:
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 ========= ========= =========
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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.
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 -------- -------- ------------ - ---- 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
- ---- 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
- ---- 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:
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.
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.
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.
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
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