Item 1. Business
General
Inventure Foods, Inc., a Delaware corporation (the “Company”), is a $130+ million leading marketer and manufacturer of healthy/natural and indulgent specialty snack food brands. The Company is headquartered in Phoenix, Arizona with plants in Arizona, Indiana and Washington. The Company’s executive offices are located at 5415 East High Street, Suite 350, Phoenix, Arizona 85054, and its telephone number is (623) 932-6200.
The Company was formed in 1995 as a holding company to acquire a potato chip manufacturing and distribution business, which had been founded by Donald and James Poore in 1986. In December 1996, the Company completed an initial public offering of its Common Stock. In November 1998, the Company acquired the business and certain assets (including the Bob’s Texas Style® potato chip brand) of Tejas Snacks, L.P. (“Tejas”), a Texas-based potato chip manufacturer. In October 1999, the Company acquired Wabash Foods, LLC (“Wabash”) including the Tato Skins®, O’Boisies®, and Pizzarias® trademarks and the Bluffton, Indiana manufacturing operation and assumed all of Wabash Foods’ liabilities. In June 2000, the Company acquired Boulder Natural Foods, Inc. (“Boulder”) and the Boulder CanyonTM brand of totally natural potato chips. The Company changed its name from Poore Brothers, Inc. to The Inventure Group, Inc. on May 23, 2006. In May 2007, the Company acquired Rader Farms, Inc., including a farming operation and a berry processing facility in Lynden, Washington. In May 2010, the Company changed its name from The Inventure Group, Inc. to Inventure Foods, Inc.
Products
In the Company’s healthy/natural category, products include Rader Farms® frozen berries, Jamba® All Natural Smoothies and Boulder CanyonTM Natural Foods brand snack chips including kettle cooked potato chips, Rice & Bean snack chips and Hummus tortilla chips. In the Company’s indulgent specialty category, products include T.G.I. Friday’s® brand snacks, BURGER KING TM brand snack products, Poore Brothers® kettle cooked potato chips, Bob’s Texas Style® kettle cooked chips, Tato Skins® brand potato snacks and O’Boises® potato snacks.
The Company also manufactures and distributes private label and co-branded fruit and snack chip products for several grocery chains and natural stores. While extremely price competitive and often short in duration, the Company believes that such arrangements provide a profitable opportunity for the Company to improve the capacity utilization of its facilities.
In addition to its own products, the Company purchases and resells throughout Arizona snack food products manufactured by others. Such distributed products include pretzels, popcorn, dips and meat snacks.
During 2010, the Company launched a number of new items under its existing brands such as: Boulder CanyonTM Natural Foods Tortilla with Hummus and Sesame Seeds; Multi-Grain Puffs; Red Wine Vinegar, 60% Reduced Sodium and No Salt kettle cooked potato chips; Poore Brothers Habenero potato chips; T.G.I. Friday’s® Jalapeno Cheddar Crunchy Bites; and BURGER KING TM Zesty Ranch. The Company also launched in 2010 the Jamba® Strawberries Wild, Mango-a-go-go, and Razzmatazz at home frozen smoothie kits. These Jamba® branded blend-and-serve smoothie kits contain all natural vitamin and mineral boosts and a variety of fresh-frozen, whole fruit pieces, including raspberries and blueberries from Rader Farms.
For the fiscal years 2010 and 2009, net revenues totaled $134.0 million and $121.0 million, respectively, and T.G.I. Friday’s® brand salted snacks represented 29% of the Company’s total net revenues in 2010 and 33% of the Company’s total net revenues in 2009.
Business Strategy
The Company’s business strategy is to continue building a diverse portfolio of high quality, competitively priced healthy/natural food brands (Rader Farms® , Boulder CanyonTM Natural Foods, and Jamba®) and indulgent specialty food brands (T.G.I. Friday’s®, BURGER KING TM, Poore Brothers®) with annualized target revenues between $5 million and $50 million each through expansion of existing brands, licensing, acquisition and development. The goals of our strategy are to (i) capitalize on healthy/natural and indulgent specialty food brand opportunities, (ii) deliver incremental category growth for retailers, (iii) provide product innovation targeted to a defined consumer segment, (iv) complement, rather than compete directly against, large national competitors with leading national brands, and (v) build relationships with major retailers in all channels of distribution by providing them higher margins, excellent customer service and constant innovation. The Company plans to mitigate the financial impact of launching new products by introducing them in test markets prior to large scale regional or national introductions, and to continue to improve profit margins through increased operating efficiencies and manufacturing capacity utilization. The primary elements of the Company’s long-term business strategy are as follows:
Develop, Acquire or License Innovative Healthy/Natural and Indulgent Specialty Food Brands. A significant element of the Company’s business strategy is to develop, acquire or license new innovative healthy/natural and indulgent specialty food brands that provide strategic fit with our existing business and possess strong national brand equity in order to expand, complement or diversify the Company’s existing business.
Broaden Distribution of Existing Brands. The Company plans to increase distribution and build the market share of its existing branded products through selected trade activity in various existing or new markets and channels. Marketing efforts may include, among other things, trade advertising and promotional programs with distributors and retailers, in-store advertisements, in-store displays and limited consumer advertising, public relations and coupon programs.
Develop New Products for Existing Brands. The Company plans to continue its innovation activities to identify and develop (i) new line extensions for its brands, such as new flavors or products, and (ii) new food segments in which to expand the brand’s presence.
Leverage Infrastructure and Capacity. The Company’s Indiana, Arizona and Washington facilities are currently operating at approximately 45%, 90% and 60% of their respective manufacturing capacities. The Company continues to secure new manufacturing opportunities in private label and co-packing arrangements, as well as expand upon its own branded product lines. In addition, the Company plans to continue capital investment in its plants and drive operating efficiencies.
Pursue Acquisitions. The Company continues to evaluate acquisition opportunities in the specialty food area where we can use our competencies in Operations, Sales, Marketing and Distribution in order to drive revenue and profit growth.
Improve Profit Margins. The Company plans to increase gross profit margins through increased long-term revenue growth, improved operating efficiencies, and higher margin new products. It believes that additional improvements to its manufactured products’ gross profit margins are possible with the achievement of the business strategies discussed above.
Manufacturing
The Company-owned manufacturing facility in Bluffton, Indiana produces snack products utilizing a sheeting and frying process with three fryer lines that can produce an aggregate of up to approximately 9,000 pounds per hour of Boulder Canyon™ Natural Foods, T.G.I. Friday’s®, BURGER KING™, and Tato Skins® brand products. The Company also produces snacks for customers under private label agreements. The Indiana facility is currently operating at approximately 45% of processing capacity. Recently introduced production capabilities at the Bluffton plant allow the Company to use existing equipment to make additional snacks, including pellet snacks, that are entirely different in appearance and taste from its other product lines. The Company believes this technology will help expand its product lines and facilitate growth. During 2010, the Company invested $3.4 million in equipment to produce extruded product previously produced by third parties and to develop innovative new products.
The Company-owned manufacturing facility in Goodyear, Arizona has the capacity to produce up to approximately 3,300 pounds of potato chips per hour, including 2,000 pounds of batch-fried branded potato chips per hour and 1,300 pounds of continuous-fried private label potato chips per hour. Poore Brothers®, Bob’s Texas Style®, Boulder CanyonTM Natural Foods, co-packing and private label branded potato chips are produced in a variety of flavors utilizing a batch-frying process. While conventional continuous line cooking methods may produce higher production volume, the Company believes that its batch-frying process is superior and produces premium potato chip products with enhanced crispness and distinctive flavor. The Arizona facility is currently operating at approximately 90% of processing capacity. During 2010, the Company spent approximately $1.7 million in capital at the Goodyear facility in order to increase capacity and improve efficiencies. The investment included additional high capacity kettle cooking equipment, increasing our high speed packaging machines, and installing automated case packing machines.
The Company-owned Rader Farms farming facility in Lynden, Washington has the capacity to produce up to eight million pounds of grown raspberries and blueberries per year. Rader Farms grows, processes and markets premium berry blends, raspberries, blueberries, and rhubarb and purchases marionberries, cherries, cranberries, strawberries and other fruits from a select network of fruit growers for resale. The fruit is processed and packaged for sale and distribution nationally to wholesale customers under the Rader Farms® brand, as well as through store brands. The Company also uses third party processors for certain products. The individually quick frozen (“IQF”) processing facilities located at the same location have the capacity to apply the IQF process to forty million pounds of berries annually. Overall, the processing facility is operating at 60% of capacity. The Company has invested in new packaging equipment to accommodate the Jamba® smoothie launch. The 2010 harvest at Rader Farms was of average yield for the season, and less when compared to the exceptional 2009 harvest Rader Farms and the rest of the industry produced as a result of favorable farming and weather conditions.
The Company may not obtain sufficient business to recoup the Company’s investments in its manufacturing facilities or to increase the utilization rates of such facilities.
Marketing and Distribution
The Company sells its products nationally and internationally through a number of channels including: Grocery, Natural, Mass, Drug, Club, Vending, Food Service, Convenience Store (C-Store) and International.
The Company’s licensed T.G.I. Friday’s® brand snack food products have achieved significant market presence across a number of sales channels. The Company has retained various sales and marketing agencies with employees and offices nationwide to represent T.G.I. Friday’s® brand snacks on behalf of the Company in the grocery and convenience store channels. The Company’s own sales organization, as well as brokers, sells T.G.I. Friday’s® brand snacks in the mass, club and drug channels. The Company also obtains significant sales on T.G.I. Friday’s® brand snacks in the vending channel nationwide through an independent network of brokers and distributors.
The Company’s potato chip brands are distributed to grocery and other retailers directly, through brokers, and by a select group of independent distributors in Arizona. The Company’s Boulder CanyonTM Natural Foods brand potato chip products have achieved market presence in natural food stores nationwide as well as other leading national grocery retailers. Poore Brothers® brand potato chip products have achieved significant market presence in the southwest United States. The Company selects brokers and distributors for its branded products primarily on the basis of quality of service, call frequency on customers, financial capability and relationships they have with all of the various channels in which we operate. The Company currently retains a Canadian sales and marketing agency to sell to Canadian customers. The Company has also retained an international broker to expand sales.
The Company’s distribution network throughout Arizona includes approximately 42 independently operated service routes. Each route is operated by an independent distributor who merchandises to major grocery store chains in Arizona, such as Albertson’s, Basha’s, Fry’s and Safeway stores. The Company’s independent distributors also service many smaller independent grocery stores, club stores, and military facilities throughout Arizona. In addition to Poore Brothers® brand products, the Company distributes throughout Arizona a wide variety of snack food items manufactured by other companies, including pretzels, popcorn, dips, and meat snacks.
The Company’s marketing of its berry and smoothie products is essentially performed through company sales force and brokers with whom the Company has relationships. Similar to its snack business, the Company selects brokers primarily on the basis of quality of service, call frequency on customers, financial capability and relationships they have with supermarkets and club stores, including access to freezer space for the berry products.
Successful marketing of the Company’s products depends, in part, upon obtaining adequate shelf or freezer space for such products, particularly in supermarkets, discount stores and the club channel for snacks, berry products and smoothies and C-Stores and vending machines for snacks. Frequently, the Company incurs additional marketing costs in order to obtain additional shelf space. Whether or not the Company will continue to incur such costs in the future will depend upon a number of factors including, demand for the Company’s products, relative availability of shelf space and general competitive conditions. The Company may incur significant shelf space, consumer marketing or other promotional costs as a necessary condition of entering into competition or maintaining market share in particular markets or channels. Any such costs may materially affect the Company’s financial performance.
The Company’s marketing programs are designed to increase product trial and build brand awareness in core markets. Most of the Company’s marketing spending has traditionally been focused on trade advertising and trade promotions designed to attract new consumers to the products at a reduced retail price. The Company’s marketing programs also include selective event sponsorship designed to increase brand awareness and to provide opportunities to mass sample branded products. The Company also invests marketing dollars in brand and category research, coupons, customer consumer programs, Facebook, Twitter, and other social media.
The Company continues to focus on expanding the distribution of our Boulder CanyonTM Natural Foods brand nationally through the natural channel and in the grocery channel, as well as club stores, vending machines, drug, and C-stores. We continue to pursue expansion of our Rader Farms® and Jamba ® branded fruit products in our Berry segment. We continue to evaluate new private label customer expansion. We also continue to evaluate opportunities overseas with the T.G.I. Friday’s® brand as well as
BURGER KING™ and Boulder CanyonTM Natural Foods brands. BURGER KING™ line of ready-to-eat snack chips are already sold in over 40 countries.
Suppliers
The principal raw materials used by the Company are potatoes, potato flakes, wheat flour, corn, oils and berries. The Company believes that the raw materials it needs to produce its products are readily available from numerous suppliers on commercially reasonable terms. Potatoes, potato flakes and corn are widely available year-round, although they are subject to seasonal price fluctuations. The Company uses a variety of oils and seasonings in the production of its snack products and believes that alternative sources for such oils and seasonings, as well as alternative oils and seasonings, are readily abundant and available. The Company may lock in prices for raw materials, such as oils, as it deems appropriate. The Company produces an average of 25% of its total annual berry requirements in its own farms, and augments that production by purchasing additional berries to meet customer demand. The Company purchases both fresh berries from local farmers and already frozen berries for its repackaging business. The Company uses packaging materials in its snack manufacturing and berry distribution business.
The Company chooses its suppliers based primarily on price, quality, availability, and service. Although the Company believes that its required products and ingredients are readily available, and that its business success is not dependent on any single supplier, the failure of certain suppliers to meet the Company’s performance specifications, quality standards or delivery schedules could have a material adverse effect on the Company’s operations. In particular, a sudden scarcity, a substantial price increase, or an unavailability of product ingredients could materially adversely affect the Company’s operations. In such circumstances, alternative ingredients may not be available when needed and on commercially attractive terms, if at all.
Customers
Costco accounted for 27% and 23% of the Company’s 2010 and 2009 net revenues, respectively. The remainder of the Company’s revenues was derived from sales to customers, grocery chains, club stores or regional distributors, none of which individually accounted for more than 10% of the Company’s net revenues in 2010. A decision by any of the Company’s major customers to cease or substantially reduce their purchases could have a material adverse effect on the Company’s business.
The majority of the Company’s revenues are attributable to external customers in the United States. The Company does sell to Canadian and international customers as well, however, the revenues attributable to these customers are immaterial. All of the Company’s assets are located in the United States.
Competition
The Company’s snack products generally compete against other snack foods, including potato chips and tortilla chips. The snack food industry is large and highly competitive and is dominated by large food companies, including Frito-Lay, Inc., a subsidiary of PepsiCo, Inc., Procter and Gamble and General Mills. These companies possess substantially greater financial, production, marketing, distribution and other resources than the Company, and their brands are more widely recognized than the Company’s products. Numerous other companies that are actual or potential competitors of the Company offer products similar to the Company’s, and some of these have greater financial and other resources (including more employees and more extensive facilities) than the Company. In addition, many competitors offer a wider range of products than offered by the Company. Local or regional markets often have significant smaller competitors, many of whom offer products similar to those of the Company. Expansion of the Company’s operations into new markets has and will continue to encounter significant competition from national, regional and local competitors that may be greater than that encountered by the Company in its existing markets. In addition, such competitors may challenge the Company’s position in its existing markets. While the Company believes that it has innovative products and methods of operation that will enable it to compete successfully, it may not be able to do so.
The Company’s berry products generally compete against other packaged berries on the basis of quality and price. Key competitors include Townsend Farms, Sunopta, and Dole. Obtaining freezer space at supermarkets and club stores is critical to successfully compete with other berry products, as supermarkets and club stores will frequently only carry one brand of frozen berry products, contrasted to snack products where multiple brands are carried.
The Company’s smoothie kits generally compete against other packaged smoothie kits on the basis of quality and price. Key competitors include Yoplait, a General Mills brand, Chiquita smoothies and a number of smaller brands. Obtaining freezer space at supermarkets and club stores is critical to successfully compete with other smoothie products, as supermarkets and club stores will frequently only carry one to two brands of frozen smoothie products, contrasted to snack products where multiple brands are carried.
The principal competitive factors affecting the markets of the Company’s products include product quality and taste, brand awareness among consumers, access to shelf or freezer space, price, advertising and promotion, varieties offered, nutritional content,
product packaging and package design. The Company competes in its markets principally on the basis of product quality and taste. Berry products are produced at the Company’s Lynden, Washington farming facility utilizing an individually quick frozen (IQF) technology which the Company does not have exclusive rights for. While products produced at the Company’s Bluffton, Indiana facility involve the use of certain licensed technology and unique manufacturing processes, the taste and quality of products produced at the Company’s Goodyear, Arizona facility are largely due to two elements of the Company’s manufacturing process: its use of batch-frying and its use of distinctive seasonings to produce a variety of flavors. The Company does not have exclusive rights to the use of either element; consequently, competitors may incorporate such elements into their own processes.
Government Regulation
The manufacture, labeling and distribution of the Company’s products are subject to the rules and regulations of various federal, state and local health agencies, including the Food & Drug Administration (“FDA”). There can be no assurance that new laws or regulations will not be passed that could require the Company to alter the taste or composition of its products or impose other obligations on the Company. Such changes could affect sales of the Company’s products and have a material adverse effect on the Company. In addition to laws relating to food products, the Company’s operations are governed by laws relating to environmental matters, workplace safety and worker health, principally the Occupational Safety and Health Act. The Company believes that it presently complies in all material respects with such laws and regulations.
Employees
As of December 25, 2010, the Company had 389 total employees. There are 329 employees in manufacturing and distribution, composed of 303 full-time, 6 part-time, and 20 in temporary positions. There are 27 employees in sales and marketing, and 33 in administration and finance. The Company’s employees are not represented by any collective bargaining organization and the Company has never experienced a work stoppage. The Company believes that its relations with its employees are good.
Patents, Trademarks and Licenses
In 2000, the Company launched its T.G.I. Friday’s® brand snacks pursuant to a license agreement with T.G.I. Friday’s Inc., which expires in 2014. In 2007, the Company launched its BURGER KING™ snack products pursuant to a license agreement with Burger King Corporation, which expires in 2012. In 2009, the Company entered into a license agreement with Bruce Foods Corporation which the Company launched a new line of Hot Fries snacks under the Louisiana Hot Sauce brand. In 2009, the company entered into a license agreement with Jamba Juice Company, which expires in 2035, and launched in 2010 a line of Jamba® branded blend-and-serve smoothie kits with all natural vitamin and mineral boosts and a variety of fresh-frozen, whole fruit pieces, including raspberries and blueberries from Rader Farms.
The Company produces T.G.I. Friday’s® brand snacks, BURGER KING TM brand potato snack products, Tato Skins® brand potato crisps and Boulder CanyonTM Natural Foods Rice and Bean snacks utilizing a sheeting and frying process that includes technology that the Company licenses from a third party. Pursuant to the license agreement between the Company and the third party, the Company has a royalty-bearing, exclusive right license to use the technology in the United States, Canada, and Mexico until such time the parties mutually agree to terminate the agreement. Even though the patents for this technology expired December 26, 2006, in consideration for the use of this technology, the Company is required to make royalty payments on sales of products manufactured utilizing the technology until such termination date. However, should products substantially similar to Tato Skins®, O’Boisies® and Pizzarias® become available for any reason in the marketplace by any manufacturer other than the Company which results in a sales decline of 10% or more, any royalty obligation for the respective product(s) shall cease.
The Company owns the following trademarks in the United States: Poore Brothers®, Rader Farms®, Intensely Different®, Texas Style®, Boulder Canyon®, Canyon Cut®, Tato Skins®, O’Boisies®, Pizzarias®, and Braids®. The Company considers its trademarks to be of significant importance in the Company’s business. The Company is not aware of any circumstances that would have a material adverse effect on the Company’s ability to use its trademarks. From time to time, the Company enters into licenses with owners of distinctive brands to produce branded snack food products. Generally, the licenses require the Company to make royalty payments on sales and to achieve certain minimum sales levels by certain dates during the contract term. Any termination of any of the Company’s license agreements, whether at the expiration of its term or prior thereto, could have a material adverse effect on the Company’s financial condition and results of operations.
Seasonality
The food products industry is seasonal. Consumers tend to purchase our snack products at higher levels during the major summer holidays and also at times surrounding major sporting events throughout the year. Consumers also tend to purchase fresh berries while in season and therefore we see a decline in frozen berry revenue in the summer months. Additionally, we may face seasonal price increases for raw materials.
Item 1A.
Item 1A. Risk Factors
In addition to the other information in this report, any one of the following factors could materially adversely affect our business, financial condition or operating results. You should read and carefully consider these risk factors, and the entirety of this report, before you invest in our securities.
Risks Related to Our Business
Our performance may be impacted by general economic conditions and an economic downturn.
Recessionary pressures from an overall decline in U.S. economic activity could adversely impact the Company’s results of operations. Economic uncertainty may reduce consumer spending and could result in increased pressure from competitors or customers to reduce the prices of Company products and/or limit the Company’s ability to increase or maintain prices, which could lower revenues and profitability. Instability in the financial markets may impact the Company’s ability or increase the cost to enter into new credit agreements in the future. Additionally, it may weaken the ability of customers, suppliers, distributors, banks, insurance companies and other business partners to perform in the normal course of business, which could expose the Company to losses or disrupt supply of inputs used to conduct the Company’s business. If one or more key business partners fail to perform as expected or contracted, the Company’s operating results could be negatively impacted.
We may incur significant future expenses due to the implementation of our business strategy.
The Company is striving to achieve its long-term vision of being a leading marketer and manufacturer of healthy/natural and indulgent specialty snack food brands. Such action is subject to the substantial risks, expenses and difficulties frequently encountered in the implementation of a business strategy. Even if the Company is successful in developing, acquiring and/or licensing new brands, and increasing distribution and sales volume of the Company’s existing products, this business strategy may require the Company to incur substantial additional expenses, including advertising and promotional costs, “slotting” expenses (i.e., the cost of obtaining shelf or freezer space in certain grocery stores), and integration costs of any future acquisitions. Accordingly, the Company may incur additional losses in the future as a result of the implementation of the Company’s business strategy, even if revenues increase significantly.
We may not be able to obtain the additional financing we need to implement our business strategy.
A significant element of the Company’s business strategy is the development, acquisition and/or licensing of innovative specialty food brands, for the purpose of expanding, complementing and/or diversifying the Company’s business. In connection with each of the Company’s previous acquisitions, the Company borrowed funds or assumed additional indebtedness in order to satisfy a substantial portion of the consideration required to be paid by the Company. The Company may, in the future, require additional third party financing (debt or equity) as a result of any future operating losses, in connection with the expansion of the Company’s business through non-acquisition means, in connection with any additional acquisitions completed by the Company, or to provide working capital for general corporate purposes. Third party financing may not be available when required or, if available, may not be on terms attractive to the Company. Any third party financing obtained by the Company may result in dilution of the equity interests of the Company’s shareholders.
We expect some of our future growth to be derived in part, from acquisitions, but our acquisition strategy may not be successful, or we may not be successful integrating acquisitions.
An element of the Company’s business strategy is the pursuit of selected strategic acquisition opportunities for the purpose of expanding, complementing and/or diversifying the Company’s business. The Company may not be able to identify, finance and complete successful acquisitions on acceptable terms. Any future acquisitions could divert management’s attention from the daily operations of the Company and otherwise require additional management, operational and financial resources. Moreover, the Company may not be able to successfully integrate acquired companies or their management teams into the Company’s operating structure, retain management teams of acquired companies on a long-term basis, or operate acquired companies profitably. Acquisitions may also involve a number of other risks, including adverse short-term effects on the Company’s operating results, dependence on retaining key personnel and customers, and risks associated with unanticipated liabilities or contingencies.
We are subject to ongoing financial covenants under our main credit facility, and if we fail to meet those covenants or otherwise default on our credit facility, our lender may accelerate all unpaid amounts, including interest.
At December 25, 2010, the Company had outstanding indebtedness in the aggregate principal amount of $22.4 million.
Our credit agreement with U.S. Bank National Association (“U.S. Bank”) is secured by substantially all assets of the Company. The Company’s obligations under the Credit Agreement are guaranteed by each of its subsidiaries. The Company is required to comply with certain financial covenants pursuant to the U.S. Bank Credit Agreement so long as borrowings from U.S. Bank remain outstanding. Should the Company be in default under any of such covenants, U.S. Bank shall have the right, upon written notice and after the expiration of any applicable period during which such default may be cured, to demand immediate payment of all of the then unpaid principal and accrued but unpaid interest under the Credit Agreement. At December 25, 2010, the Company was in compliance with all covenants of the Credit Agreement.
As the Company implements its business strategy, the Company may not be able to remain in compliance with its financial covenants. Any acceleration of the borrowings under the Credit Agreement prior to the applicable maturity dates could have a material adverse effect upon the Company’s operating results. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources.”
We may not be able to successfully implement our strategy to expand our business internationally.
The Company plans to expand sales to Canadian customers and is exploring other international market opportunities for its brands. Such expansion may require significant management attention and financial resources and may not produce desired levels of revenue. International business is subject to inherent risks, including longer accounts receivable collection cycles, difficulties in managing operations across disparate geographical areas, difficulties enforcing agreements and intellectual property rights, fluctuations in local economic, market and political conditions, compliance requirements with U.S. and foreign export regulations, potential adverse tax consequences and currency exchange rate fluctuations.
We may incur material losses and costs as a result of product liability claims that may be brought against us or any product recalls we have to make.
As a manufacturer and marketer of food products, the Company may be subjected to various product liability claims. The product liability and product recall insurance maintained by the Company may not be adequate to cover any loss or exposure for product liability, and such insurance may not continue to be available on terms acceptable to the Company. Any product liability claim not fully covered by insurance, as well as any adverse publicity from a product liability claim or product recall, could have a material adverse effect on the Company’s operating results.
Newly adopted governmental regulations could increase our costs or liabilities or impact the sale of our products.
The food industry is highly regulated and subject to change. New or increased government regulation of the food industry, including areas related to production processes, product quality, packaging, labeling, marketing, storage and distribution, and labor unions, could adversely impact the Company’s operating results by increasing production costs or restricting methods of operation and distribution. These regulations may address food industry or society factors, such as obesity, nutritional concerns and diet trends. Sales of the Company’s products could be materially and adversely affected if new laws or regulations are passed that require the Company to alter the taste or composition of its products or impose other obligations on the Company.
We do not own the patents for the technology we use to manufacture our T.G.I. Friday’s®, BURGER KING TM and Tato Skins® brand products.
The Company licenses technology from a third party in connection with the manufacture of its T.G.I. Friday’s®, BURGER KING TM and Tato Skins® brand products and has a royalty-bearing, exclusive right license to use the technology necessary to produce these products in the United States, Canada, and Mexico until such time the parties mutually agree to terminate the agreement. Even though the patents for this technology expired December 26, 2006, in consideration for the use of this technology, the Company is required to make royalty payments to the third party on sales of products manufactured utilizing the technology until such termination date. Since these patents expired, we no longer have exclusive rights to this technology and, as a result, may face additional competition that could adversely affect our revenues. Moreover, competitors of the Company, certain of which may have significantly greater resources than the Company, may utilize different technology in the manufacture of products that are similar to those currently manufactured, or that may in the future be manufactured, by the Company. The entry of any such products into the marketplace could have a material adverse effect on the Company’s sales of T.G.I. Friday’s®, BURGER KING TM and Tato Skins® brand products, as well as any such future products.
The majority of our revenues are derived from a limited number of food brands.
The Company derives a substantial portion of its revenue from a limited number of snack food brands. For the year ended December 25, 2010, 65% of the Company’s net revenues were attributable to the T.G.I. Friday’s® brand products, the Boulder CanyonTM Natural Foods brand products and Rader Farms® brand products. A decrease in the popularity of these brands during any year could have a material adverse effect on the Company’s operating results. Any impact to a licensed brand’s reputation could also lead to an impact on the Company’s other snack food products associated with that brand. Decreased sales from any one of our key food brands without a corresponding increase in sales from other existing or newly introduced products would have a material adverse effect on the Company’s operating results.
We depend on a license agreement for the right to sell our T.G.I. Friday’s® brand.
For the year ended December 25, 2010, 29% of the Company’s net revenues were attributable to the T.G.I. Friday’s® brand products, which are manufactured and sold by the Company pursuant to a license agreement by and between the Company and T.G.I. Friday’s Inc. that expires in 2014. Pursuant to the license agreement, the Company is subject to various requirements and conditions (including, without limitation, minimum sales targets). The failure of the Company to comply with certain of such requirements and conditions could result in the early termination of the license agreement by T.G.I. Friday’s Inc. Any termination of the T.G.I. Friday’s license agreement, whether at the expiration of its term or prior thereto, could have a material adverse effect on the Company’s operating results.
The loss of one of our major customers could have a material adverse effect on our business.
Costco accounted for 27% of the Company’s 2010 net revenues, with the remainder of the Company’s net revenues being derived from sales to a limited number of additional customers, either grocery chains or regional distributors, none of which individually accounted for more than 10% of the Company’s revenues for 2010. A decision by any major customer to cease or substantially reduce its purchases could have a material adverse effect on the Company’s operating results.
The loss of certain key employees could adversely affect our business.
The Company’s success is dependent in large part upon the abilities of its executive officers, including Terry McDaniel, Chief Executive Officer, and Steve Weinberger, Chief Financial Officer. The Company’s business strategy will challenge its executive officers, and the inability of such officers to perform their duties or the inability of the Company to attract and retain other highly qualified personnel could have a material adverse effect upon the Company’s operating results.
Risks Related to the Snack Business
We may not be able to compete successfully in our highly competitive industry.
The market for snack foods, such as those sold by us, including potato chips and meat snacks, is large and intensely competitive. Competitive factors in the snack food industry include product quality and taste, brand awareness among consumers, access to supermarket shelf space, price, advertising and promotion, variety of snacks offered, nutritional content, product packaging and package design. The Company competes in that market principally on the basis of product taste and quality.
The snack food industry is dominated by large food companies, including Frito-Lay, Inc., a subsidiary of PepsiCo, Inc., Procter and Gamble, General Mills and others which have substantially greater financial and other resources than the Company and sell brands that are more widely recognized than are the Company’s products. Numerous other companies that are actual or potential competitors of the Company, many with greater financial and other resources (including more employees and more extensive facilities) than the Company, offer products similar to those of the Company. In addition, many of such competitors offer a wider range of products than that offered by the Company. Local or regional markets often have significant smaller competitors, many of whom offer products similar to those of the Company. With expansion of Company operations into new markets, the Company has and will continue to encounter significant competition from national, regional and local competitors that may be greater than that encountered by the Company in its existing markets. In addition, such competitors may challenge the Company’s position in its existing markets.
Unavailability of our necessary supplies, at reasonable prices, could adversely affect our operations.
The Company’s manufacturing costs are subject to fluctuations in the prices of potatoes, potato flakes, wheat flour, corn and oil as well as other ingredients of the Company’s products. Potatoes, potato flakes, wheat flour and corn are widely available year-
round, and the Company uses a variety of oils in the production of its products. Nonetheless, the Company is dependent on its suppliers to provide the Company with products and ingredients in adequate supply and on a timely basis. The failure of certain suppliers to meet the Company’s performance specifications, quality standards or delivery schedules could have a material adverse effect on the Company’s operating results. To the extent that product ingredients become scarce, substantially increase in price, or become unavailable or unavailable on commercially attractive terms, the Company’s operating results could be materially and adversely affected. From time to time, the Company may lock in prices for raw materials, such as oils, as it deems appropriate, and such strategies may result in the Company paying prices for raw materials that are above market at the time of purchase.
We may incur substantial costs in order to market our snacks.
Successful marketing of snack products generally depends upon obtaining adequate retail shelf space for product display, particularly in supermarkets. Frequently, food manufacturers and distributors, such as the Company, incur additional costs in order to obtain additional shelf space. Whether or not the Company incurs such costs in a particular market is dependent upon a number of factors, including demand for the Company’s products, relative availability of shelf space and general competitive conditions. The Company may incur significant shelf space or other promotional costs as a necessary condition of entering into competition or maintaining market share in particular markets or stores. If incurred, such costs may have a material adverse effect on the Company’s operating results.
Our business may be adversely affected by oversupply of snack products at the wholesale and retail levels and seasonal fluctuations.
Profitability in the food product industry is subject to oversupply of certain snack products at the wholesale and retail levels, which can result in our products going out of date before they are sold. The snack products industry is also seasonal. Consumers tend to purchase our products at higher levels during the major summer holidays and also at times surrounding the major sporting events throughout the year. Consumers also tend to purchase fresh berries while in season and therefore we see a decline in frozen berry revenue in the summer months. Any of these seasonal effects may result in an oversupply or undersupply of our products. Additionally, we may face seasonal price increases for raw materials. Such seasonal costs could materially and adversely affect our operating results in any given quarter.
We may not be able to respond successfully to shifting consumer tastes.
Consumer preferences for snack foods are continually changing and are extremely difficult to predict. The Company’s success depends in part on timely responding to current market trends and anticipating changing consumer tastes and dietary habits by developing and licensing new products and entering new markets. The failure to adequately address changing consumer preferences could result in reduced demand for the Company’s products and have a material adverse affect the Company’s operating results.
Risks Related to the Rader Farms Business
Farming is subject to numerous inherent risks including changes in weather conditions or natural disasters that can have an adverse impact on crop production and materially affect our results of operations.
The Company, through its subsidiary Rader Farms, Inc., is subject to the risks that generally relate to the agricultural industry. Adverse changes in weather conditions and natural disasters, such as earthquakes, droughts, extreme cold or pestilence, may affect the planting, growing and delivery of crops, reduce sales stock, interrupt distribution, and have a material adverse impact on our business, financial condition and results of operations. Our competitors may be affected differently by such weather conditions and natural disasters depending on the location of their supplies or operations.
Revenues are derived from one brand; the loss or impairment of this brand may adversely effect operating results.
Rader Farms derives the majority of its revenue from the sales of one brand. In 2010, 36% of the Company’s net revenues were attributable to the berry products segment. A decrease in the popularity of frozen berries during any year could have a material adverse effect on the Company’s operating results.
Unavailability of purchased berries, at reasonable prices, could adversely affect operations.
The Company’s manufacturing costs are subject to fluctuations in the prices of certain commodity prices. Berries are not readily available year-round, therefore, the Company uses an individual quick frozen (IQF) technique to freeze the berries harvested for use during the year to meet processing demands. In addition to freezing our own home-grown berries, we also purchase a significant amount of berries from outside suppliers to meet customer demands. The Company is dependent on its suppliers to provide the Company with adequate supply and on a timely basis. The failure of certain suppliers to meet the Company’s performance
specifications, quality standards or delivery schedules could have a material adverse effect on the Company’s operating results. To the extent that certain types of berries become scarce, substantially increase in price, or become unavailable or unavailable on commercially attractive terms, the Company’s operating results could be materially and adversely affected.
We may incur losses and costs as a result of product liability claims that may be brought against us or any product recalls we have to make.
The sale of food products for human consumption involves the risk of injury to consumers. Such hazards could result from: tampering by unauthorized third parties; product contamination (such as listeria, e-coli, and salmonella) or spoilage; the presence of foreign objects, substances, chemicals, and other agents; residues introduced during the growing, storage, handling or transportation phases; or improperly formulated products. Product liability and product recall insurance maintained by the Company may not be adequate to cover any loss or exposure for product liability, or such insurance may not continue to be available on terms acceptable to the Company. Any product liability claim not fully covered by insurance, as well as any adverse publicity from a product liability claim or product recall, could have a material adverse effect on the Company’s operating results.
Risks Related to Our Securities
The market price of our Common Stock is volatile.
The market price of our Common Stock has experienced a high level of volatility. During fiscal 2010, the market price of our Common Stock (based on last reported sale price of the Common Stock on the Nasdaq Capital Market) ranged from a high of $4.45 per share to a low of $2.25 per share. The last reported sales price of the Common Stock on the Nasdaq Capital Market on December 25, 2010 was $4.32 per share.
A significant amount of our Common Stock is controlled by a small number of shareholders, and the interests of such shareholders may conflict with those of other shareholders.
As of December 25, 2010, Capital Foods, LLC, an affiliate of our Board of Directors member Larry Polhill (“Capital Foods”), beneficially owned 22.9% of the Company’s outstanding shares, and Heartland Advisors, Inc. (“Heartland”) beneficially owned 16.6% of the Company’s outstanding shares. Capital Foods and Heartland are hereinafter referred to collectively as the “Significant Shareholders.” One or more of the Significant Shareholders could potentially adopt or support a plan to undertake a material change in the management or business of the Company. Apart from transfer restrictions arising under applicable provisions of the securities laws, there are no restrictions on the ability of the Significant Shareholders to transfer any or all of their respective shares of Common Stock at any time. One or more of such transfers could have the effect of transferring effective control of the Company, including to one or more parties not currently known to the Company.
Our Certificate of Incorporation authorizes us to issue preferred stock, and the rights of holders of Common Stock may be adversely affected by the rights of holders of any such preferred stock.
The Company’s Certificate of Incorporation authorizes the issuance of up to 50,000 shares of “blank check” preferred stock with such designations, rights and preferences as may be determined from time to time by the Board of Directors of the Company. The Company may issue such shares of preferred stock in the future without shareholder approval. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of discouraging, delaying or preventing a change of control of the Company, and preventing holders of Common Stock from realizing a premium on their shares. In addition, under Section 203 of the Delaware General Corporation Law (the “DGCL”), the Company is prohibited from engaging in any business combination (as defined in the DGCL) with any interested shareholder (as defined in the DGCL) unless certain conditions are met. This statutory provision could also have an anti-takeover effect.
Item 2.
Item 2. Properties
The Company owns a 140,000 square foot manufacturing facility located on 15 acres of land in Bluffton, Indiana, approximately 20 miles south of Ft. Wayne, Indiana. The facility is financed by a mortgage with U.S. Bank National Association that matures in December, 2016.
The Company owns a 60,000 square foot manufacturing facility located on 7.7 acres of land in Goodyear, Arizona, approximately 15 miles west of Phoenix, Arizona. The facility is financed by a mortgage with Morgan Guaranty Trust Company of New York that matures in June 2012.
The Company owns a farming, processing and storage facility located on 696 acres of land in Lynden, Washington, which is leased from the Uptrails Group LLC, owned by three members of the Rader family. One of the three, Brad Rader, is a current employee of the Company and one of the others, Sue Rader, was a former owner of Rader Farms. This lease commenced on the acquisition date and is effect until May 17, 2017. Lease payments are $43,500 per month throughout the term of the lease.
The Company leases one-half of a 200,000 square foot facility in Bluffton, Indiana which is used as a distribution center. The Company has entered into a lease, the initial term expiring in November 2006, with respect to the facility and has entered into the second of two three-year renewal options. Current lease payments are approximately $32,500 per month.
The Company leases approximately 15,500 square feet of warehouse space in Phoenix, Arizona, which is used as a distribution center. The lease expires March 31, 2013 and current lease payments are approximately $7,700 per month.
The Company also leases approximately 13,865 square feet of office space in Phoenix, Arizona, which is used as its corporate headquarters. The lease expires April 1, 2017 and there were no required lease payments in 2010. Our first required monthly lease payment of $13,500 is due on April 1, 2011.
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, individually and in the aggregate, will not have a material adverse effect on the Company’s financial position or results of operations.
The Company was one of eight companies sued by the Environmental Law Foundation in August, 2006 in the Superior Court for the State of California for the County of Los Angeles by the Attorney General of the State of California for alleged violations of California Proposition 65. California Proposition 65 is a state law that, in part, requires companies to warn California residents if a product contains chemicals listed within the statute. The matter was resolved in March 2009, at which time the Company incurred a settlement liability of $0.2 million.
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Effective February 18, 2011, the Company’s Common Stock is traded on the Nasdaq Global Market tier of the Nasdaq Stock Market under the symbol “SNAK.” There were approximately 200 shareholders of record on March 25, 2011. Prior to February 18, 2011, the Company’s Common Stock was traded on the Nasdaq Capital Market tier of the Nasdaq Stock Market under the symbol “SNAK.” The Company believes the number of beneficial owners is substantially greater than the number of record holders because a large portion of the Common Stock is held of record in broker “street names.”
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 Capital Market for each quarter of the fiscal years ended December 25, 2010 and December 26, 2009.
The information appearing under the heading “Securities Authorized for Issuance under Equity Compensation Plans” in the Company’s 2011 Proxy Statement is incorporated by reference in this section.
See Note 8 to our Financial Statements in this annual report for a summary of treasury stock repurchases and retirements.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the other sections of this Annual Report on Form 10-K, including “Item 1.: Business” and “Item 8.
Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
Consolidated balance sheets as of December 25, 2010 and December 26, 2009
Consolidated statements of operations for the years ended December 25, 2010, and December 26, 2009
Consolidated statements of shareholders’ equity for the years ended December 25, 2010, and December 26, 2009
Consolidated statements of cash flows for the years ended December 25, 2010, and December 26, 2009
Notes to consolidated financial statements
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A. Controls and Procedures.
Disclosure Controls and Procedures
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective for the purpose of providing reasonable assurance that the information required to be disclosed in the reports we file or submit under the Exchange Act of 1934 (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (2) is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
(i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
(ii)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of our management and directors; and
(iii)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements or instances of fraud. As such, a control system, no matter how well conceived and operated, can provide only reasonable assurance that the objectives of the control system are met. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of internal control over financial reporting as of December 25, 2010. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on our assessment and those criteria, management believes that we maintained effective internal control over financial reporting as of December 25, 2010.
This Annual Report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Annual Report.
Changes in Internal Control Over Financial Reporting
No change occurred in our internal controls over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the three months ended December 25, 2010 that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.
Item 9B.
Item 9B. Other Information.
On March 21, 2011, the Company entered into an amended revolving line of credit with U.S. Bank extending our line from $15.0 million up to $25.0 million, maturing in July 2014. The minimum fixed charge coverage ratio and maximum leverage ratio were modified and the minimum tangible net worth covenant was removed. Aside from the covenant changes, the terms of the equipment term loan and real estate term loan were not materially modified.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
Code of Ethics
Each of the Company’s directors, officers and employees are required to comply with the Inventure Foods, Inc. Code of Business Conduct and Ethics adopted by the Company. The Code of Business Conduct and Ethics sets forth policies covering a broad range of subjects and requires strict adherence to laws and regulations applicable to the Company’s business. The Company has also adopted a Financial Code of Ethics for its Chief Executive Officer, Chief Financial Officer and all other finance managers. The Financial Code of Ethics supplements the Code of Business Conduct and Ethics and is intended to emphasize the importance of honest and ethical conduct in connection with the Company’s financial reporting obligations. The Code of Business Conduct and Ethics and the Financial Code of Ethics are available on the Company’s website at www.inventurefoods.com, under the “Investors Relations” section’s “Governance Documents” caption. Copies of these Codes may also be obtained, without charge, by any shareholder upon written request directed to the Secretary of the Company at 5415 East High Street, Suite 350, Phoenix, Arizona 85054. The Company will post to its website any amendments to these Codes, or waiver from the provisions thereof, applicable to the Company’s directors or any principal executive officer, principal financial officer principal accounting officer or controller, or any person performing similar functions under an “Investors-Governance-Code of Business Conduct-Waivers” caption.
The information regarding Directors and Executive Officers appearing under the headings “Proposal 1: Election of Directors,” “Executive Officers,” “Meetings and Committees of the Board of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” of the Company’s 2011 Proxy Statement is incorporated by reference in this section.
Item 11.
Item 11. Executive Compensation
The information appearing under the headings “Director Compensation,” “Employment Agreements,” “Compensation Committee Report on Executive Compensation” and “Executive Officer Compensation” of the Company’s 2011 Proxy Statement is incorporated by reference in this section.
Item 12.
Item 12. Security Ownership of Beneficial Owners and Management and Related Stockholder Matters
The information appearing under the headings “Security Ownership of Certain Beneficial Owners and Management” and “Securities Authorized for Issuance Under Equity Compensation Plans” of the Company’s 2011 Proxy Statement is incorporated by reference in this section.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information appearing under the heading “Meetings and Committees of the Board of Directors” and “Certain Relationships and Related Transactions” of the Company’s 2011 Proxy Statement is incorporated by reference in this section.
Item 14.
Item 14. Principal Accounting Fees and Services
Information appearing under the heading “Independent Auditors” of the Company’s 2011 Proxy Statement is incorporated by reference in this section.
PART IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules:
The following documents are filed as part of this Annual Report on Form 10-K
1. Financial Statements
Reports of Independent Registered Public Accounting Firms
Consolidated balance sheets as of December 25, 2010 and December 26, 2009
Consolidated statements of operations for the years ended December 25, 2010 and December 26, 2009
Consolidated statements of shareholders’ equity and comprehensive income for the years ended December 25, 2010 and December 26, 2009
Consolidated statements of cash flows for the years ended December 25, 2010 and December 26, 2009
Notes to consolidated financial statements
2. Financial Schedules
Schedules have been omitted because of the absence of conditions under which they are required or because the information required is included in the Company’s consolidated financial statements or notes thereto.
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. (1)
3.4
-
By-Laws of the Company (as amended and restated on January 11, 2005). (2)
3.5
-
Certificate of Amendment to the Certificate of Incorporation of the Company filed with the Secretary of State of the State of Delaware on May 24, 2006. (1)
3.6
-
Certificate of Amendment to the Certificate of Incorporation of the Company filed with the Secretary of State of the State of Delaware on May 20, 2010. (23)
4.1
-
Specimen Certificate for shares of Common Stock. (3)
10.10
-
Fixed Rate Note dated June 4, 1997, by and between La Cometa Properties, Inc. and Morgan Guaranty Trust Company of New York. (4)
10.11
-
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. (4)
10.12
-
Guaranty Agreement dated June 4, 1997, by and between the Company and Morgan Guaranty Trust Company of New York. (4)
10.23
-
License Agreement, dated April 3, 2000, by and between the Company and T.G.I. 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)
10.25
-
First Amendment to License Agreement, dated as of July 11, 2001, by and between the Company and T.G.I. Friday’s Inc. (certain portions of this exhibit have been omitted pursuant to a confidentiality treatment request filed with the Securities and Exchange Commission.) (8)
10.33
-
Commercial Lease Agreement, dated May 22, 2003, by and between the Company and Westland Park LLC (9)
10.34
-
Warehouse Services Agreement, dated June 30, 2003, by and between the Company and Customized Distribution Services, Inc. (9)
10.37 *
-
Form of Officer Nonstatutory Stock Option Agreement. (10)
10.40
-
Loan Agreement (Revolving Line of Credit Loan and Term Loan) dated August 19, 2005 between the Company and
U.S. Bank National Association. (11)
10.41
-
Security Agreement relating to the Loan Agreement dated August 19, 2005 between the Company and U.S. Bank National Association. (11)
10.42
-
$5 Million Promissory Note (Facility 1 - Revolving Line of Credit Loan) dated August 19, 2005 between the Company and U.S. Bank National Association. (11)
10.43
-
$756,603 Promissory Note (Facility 2 - Term Loan) dated August 19, 2005 between the Company and U.S. Bank National Association. (11)
10.44*
-
Executive Employment Agreement dated August 1, 2005 between the Company and Steven Sklar. (11)
10.45*
-
Restricted Stock Agreement dated August 1, 2005 between the Company and Steven Sklar. (11)
10.49*
-
Poore Brothers, Inc. Amended and Restated 2005 Equity Incentive Plan. (12)
10.50*
-
Form of Director Nonstatutory Stock Option Agreement - Amended and Restated 2005 Equity Incentive Plan. (13)
10.51*
-
Form of Employee Incentive Stock Option Agreement - Amended and Restated 2005 Equity Incentive Plan. (13)
10.52*
-
Executive Employment Agreement by and between Poore Brothers, Inc. and Eric J. Kufel, dated as of February 14, 2006. (14)
10.53*
-
Executive Employment Agreement by and between Poore Brothers, Inc. and Terry McDaniel, dated as of April 17, 2006. (15)
10.54
-
Commercial Lease Agreement, dated May 8, 2006, by and between the Company and B.G. Associates, Inc. (16)
10.57*
-
Executive Employment Agreement by and between the Company and Steve Weinberger, dated as of July 27, 2006. (17)
10.58*
-
The Inventure Group, Inc. Deferred Compensation Plan. (18)
10.59
-
Asset Purchase Agreement dated as of May 17, 2007, by and among Rader Farms Acquisition Corp., Rader Farms, Inc. and the Company Shareholders named therein. (19)
10.60
-
Agricultural Ground Lease dated as of May 17, 2007, by and among Lyle Rader, Sue Rader, Brad Rader, Julie Newell and Rader Farms Acquisition Corp. (19)
10.61
-
Loan Agreement (Revolving Line of Credit and Term Loan) dated as of May 16, 2007, by and between The Inventure Group, Inc. and U.S. Bank, National Association. (19)
10.62
-
Promissory Note (Facility 1 - Revolving Line of Credit Loan) dated May 16, 2007, by The Inventure Group, Inc. in favor of U.S. Bank, National Association. (19)
10.63
-
Promissory Note (Facility 2 - Term Loan) dated May 16, 2007, by The Inventure Group, Inc. in favor of U.S. Bank, National Association. (19)
10.64
-
Security Agreement (Blanket - All Business Assets) dated as of May 16, 2007, by and among between The Inventure Group, Inc., La Cometa Properties, Inc., Poore Brothers Bluffton, LLC, Tejas PB Distributing, Inc., Boulder Natural Foods, Inc., BN Foods, Inc., Rader Farms Acquisition Corp. and U.S. Bank, National Association. (19)
10.65
-
Term Loan Agreement dated as of June 28, 2007, by and between The Inventure Group, Inc. and U.S. Bank, National Association. (19)
10.66
-
Promissory Note Secured by Deed of Trust (Term Loan) dated June 28, 2007, by The Inventure Group, Inc. in favor of U.S. Bank, National Association. (19)
10.67
-
Deed of Trust dated June 28, 2007, by and between Rader Farms Acquisition Corp. and U.S. Bank National Association. (19)
10.68*
-
Letter Agreement effective as of May 19, 2008, by and between the Company and Eric J. Kufel. (20)
10.69*
-
Form of Employee Restricted Stock Award Agreement - Amended and Restated 2005 Equity Incentive Plan. (21)
10.70*
-
Form Amendment of Stock Option Agreement. (24)
10.71*
-
Form Executive Stock Option Agreement - Amended and Restated 2005 Equity Incentive Plan. (24)
10.72*
-
Form Performance Share Restricted Stock Award Agreement - Amended and Restated 2005 Equity Incentive Plan. (25)
10.73*
-
2011 Bonus Plan. (26)
10.74*
Executive Employment Agreement by and between the Company and Richard Suchenski, dated as of June 21, 2010. (27)
10.75*
-
Form of Director Restricted Stock Award Agreement - Amended and Restated 2005 Equity Incentive Plan. (27)
10.76
-
Loan Modification and Extension Agreement (Revolving Line of Credit and Term Loan) dated as of March 21, 2011, by and between Inventure Foods, Inc. and U.S. Bank, National Association. (27)
10.77
-
Amended and Restated Promissory Note (Facility 1 - Revolving Line of Credit Loan) dated as of March 21, 2011, by and between Inventure Foods, Inc. and U.S. Bank, National Association (27)
10.78
-
Amendment to Leasehold Deed of Trust with Assignment of Rents, Security Agreement, and Fixture Filing and Memorandum of Modification dated as of March 21, 2011, by and between Inventure Foods, Inc. and U.S. Bank, National Association (27)
10.79
-
Amended and Restated Security Agreement (Blanket-All Business Assets), dated as of March 21, 2011, by and between Inventure Foods, Inc. and U.S. Bank, National Association. (27)
21.1
-
List of Subsidiaries of the Company. (22)
23.1
-
Consent of Moss Adams LLP (27)
31.1
-
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15(d)-14(a). (27)
31.2
-
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15(d)-14(a) (27)
-
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (27)
* Management compensatory plan or arrangement.
(1)
Incorporated by reference to the Company’s Current Report on Form 8-K filed on May 23, 2006.
(2)
Incorporated by reference to the Company’s Current Report on Form 8-K filed on January 12, 2005.
(3)
Incorporated by reference to the Company’s Registration Statement on Form SB-2, Registration No. 333-5594-LA.
(4)
Incorporated by reference to the Company’s Quarterly Report on Form 10-QSB for the quarter ended June 30, 1997.
(5)
Incorporated by reference to the Company’s definitive Proxy Statement on Schedule 14A filed with the Commission on September 19, 1999.
(6)
Incorporated by reference to the Company’s Annual Report on Form 10-KSB for the year ended December 31, 1999.
(7)
Incorporated by reference to the Company’s Quarterly Report on Form 10-QSB for the quarter ended March 31, 2001.
(8)
Incorporated by reference to the Company’s Quarterly Report on Form 10-QSB for the quarter ended September 30, 2001.
(9)
Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 27, 2003.
(10)
Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 25, 2004.
(11)
Incorporated by reference to the to the Company’s Quarterly Report on 10-Q for the quarter ended October 1, 2005.
(12)
Incorporated by reference to the Company’s definitive Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on April 18, 2008.
(13)
Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005.
(14)
Incorporated by reference to the Company’s Current Report on Form 8-K/A filed on February 16, 2006.
(15)
Incorporated by reference to the Company’s Current Report on Form 8-K filed on April 17, 2006.
(16)
Incorporated by reference to the Company’s Quarterly Report on 10-Q for the quarter ended April 1, 2006.
(17)
Incorporated by reference to the Company’s Current Report on Form 8-K fild on July 27, 2006.
(18)
Incorporated by reference to the Company’s Current Report on Form 8-K filed on January 23, 2007.
(19)
Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007.
(20)
Incorporated by reference to the Company’s Current Report on Form 8-K filed on May 9, 2008.
(21)
Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 27, 2009.
(22)
Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2007.
(23)
Incorporated by reference to the Company’s Current Report on Form 8-K filed on May 24, 2010.
(24)
Incorporated by reference to the Company’s Current Report on Form 8-K filed on April 22, 2010.
(25)
Incorporated by reference to the Company’s Current Report on Form 10-Q filed on August 10, 2010.
(26)
Incorporated by reference to the Company’s Current Report on Form 8-K filed on February 17, 2011.
(27)
Filed herewith.
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.
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/ Terry McDaniel
Chief Executive Officer and Director
March 25, 2011
Terry McDaniel
(Principal Executive Officer)
/s/ Steve Weinberger
Chief Financial Officer, Secretary & Treasurer
March 25, 2011
Steve Weinberger
(Principal Financial and Accounting Officer)
/s/ Itzhak Reichman
Chairman and Director
March 25, 2011
Itzhak Reichman
/s/ Larry Polhill
Director
March 25, 2011
Larry Polhill
/s/ Ashton D. Asensio
Director
March 25, 2011
Ashton D. Asensio
/s/ Mark S. Howells
Director
March 25, 2011
Mark S. Howells
/s/ Macon Bryce Edmonson
Director
March 25, 2011
Macon Bryce Edmonson
/s/ Ronald Kesselman
Director
March 25, 2011
Ronald Kesselman
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Inventure Foods, Inc.
Phoenix, Arizona
We have audited the accompanying consolidated balance sheets of Inventure Foods, Inc. and subsidiaries (the “Company”) as of December 25, 2010 and December 26, 2009 and the related consolidated statements of operations, stockholders’ equity and comprehensive income and cash flows for each of the years in the two-year period ended December 25, 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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, such consolidated financial statements referred to above present fairly, in all material respects, the financial position of Inventure Foods, Inc. as of December 25, 2010 and December 26, 2009, and the results of their operations and their cash flows for each of the years in the two-year period ended December 25, 2010, in conformity with accounting principles generally accepted in the United States of America.
/s/ MOSS ADAMS LLP
Scottsdale, Arizona
March 25, 2011
INVENTURE FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these consolidated financial statements.
INVENTURE FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these consolidated financial statements.
INVENTURE FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
The accompanying notes are an integral part of these consolidated financial statements.
INVENTURE FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these consolidated financial statements.
INVENTURE FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization, Business and Summary of Significant Accounting Policies:
Inventure Foods, Inc., a Delaware corporation (the “Company”), is a $130+ million leading marketer and manufacturer of healthy/natural and indulgent specialty snack food brands. The Company changed its name in May 2010 to Inventure Foods, Inc. from The Inventure Group, Inc. to emphasize its focus as an innovative food maker and manufacturer. The Company is headquartered in Phoenix, Arizona with plants in Arizona, Indiana and Washington. The Company’s executive offices are located at 5415 East High Street, Suite 350, Phoenix, Arizona 85054, and its telephone number is (623) 932-6200.
The Company was formed in 1995 as a holding company to acquire a potato chip manufacturing and distribution business, which had been founded by Donald and James Poore in 1986. In December 1996, the Company completed an initial public offering of its Common Stock. In November 1998, the Company acquired the business and certain assets (including the Bob’s Texas Style® potato chip brand) of Tejas Snacks, L.P. (“Tejas”), a Texas-based potato chip manufacturer. In October 1999, the Company acquired Wabash Foods, LLC (“Wabash”) including the Tato Skins®, O’Boisies®, and Pizzarias® trademarks and the Bluffton, Indiana manufacturing operation and assumed all of Wabash Foods’ liabilities. In June 2000, the Company acquired Boulder Natural Foods, Inc. (“Boulder”) and the Boulder CanyonTM brand of totally natural potato chips. In May 2007, the Company acquired Rader Farms, Inc., including a farming operation and a berry processing facility in Lynden, Washington.
The Company’s goal is to build a rapidly growing specialty brand company that specializes on evolving consumer eating habits in two primary product segments: 1) healthy/natural food products 2) indulgent specialty snack food brands. The Company sells its products nationally through a number of channels including: Grocery, Natural, Mass, Drug, Club, Vending, Food Service, Convenience Stores and International.
In the healthy/natural portfolio, products include Rader Farms frozen berries, Boulder Canyon Natural Foods™ brand kettle cooked potato chips, and Jamba® branded blend-and-serve smoothie kits under license from Jamba Juice Company. In the Indulgent Specialty category, products include TGI Friday’s® brand snacks under license from TGI Friday’s Inc., BURGER KING™ brand snack products under license from Burger King Corporation, Poore Brothers® kettle cooked potato chips, Bob’s Texas Style® kettle cooked chips, and Tato Skins® brand potato snacks. The Company also manufactures private label snacks for certain grocery retail chains and distributes snack food products in Arizona that are manufactured by others.
The Company’s frozen berry products are manufactured by Rader Farms, Inc. (“Rader Farms”) a Washington corporation located in Whatcom County, and acquired by the Company in May of 2007. Rader Farms grows, processes and markets premium berry blends, raspberries, blueberries, and rhubarb and purchases marionberries, cherries, cranberries, strawberries and other fruits from a select network of fruit growers for resale. The fruit is processed, frozen and packaged for sale and distribution to wholesale customers. The Company also uses third party processors for certain products.
The Company’s snack products are manufactured at the Arizona and Indiana plants as well as some third party plants for certain products.
The Company’s fiscal year ends on the last Saturday occurring in the month of December of each calendar year. Accordingly, fiscal 2010 commenced December 27, 2009 and ended December 25, 2010. The fiscal year end dates result in an additional week of results every five or six years.
Business
The Company is engaged in the development, production, marketing and distribution of innovative snack food products and frozen berry products that are sold primarily through grocery retailers, mass merchandisers, club stores, convenience stores and vend distributors across the United States and internationally. The Company currently manufactures and sells nationally T.G.I. Friday’s® brand snacks under license from T.G.I. Friday’s Inc. and BURGER KING TM brand snack products under license from Burger King Corporation. The Company currently (i) manufactures and sells its own brands of snack food products, including Poore Brothers®, Bob’s Texas Style® and Boulder CanyonTM Natural Foods brand batch-fried potato chips, Tato Skins® brand potato snacks and O’Boises® potato snacks (ii) manufactures private label snacks for grocery and various other retail chains and (iii) distributes in Arizona snack food products that are manufactured by others. The Company sells its T.G.I. Friday’s® brand snack products and BURGER KING TM brand snack products to mass merchandisers, grocery, club and drug stores directly and to primarily convenience
stores and vend operators through independent distributors. The Company’s other brands are also sold through independent distributors.
In addition, the Company grows, processes and markets premium berry blends, raspberries, blueberries, and rhubarb and purchases marionberries, cherries, cranberries, strawberries, and other fruits from a select network of fruit growers for resale. The fruit is processed, frozen and packaged for sale and distribution nationally to wholesale customers under the Rader Farms® brand, as well as through store brands. In 2009, the Company entered into a license agreement with Jamba Juice Company and launched in 2010 a line of Jamba® branded blend-and-serve smoothie kits with all natural vitamin and mineral boosts and a variety of fresh-frozen, whole fruit pieces, including raspberries and blueberries from Rader Farms.
Principles of Consolidation
The consolidated financial statements include the accounts of Inventure Foods, 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. The Company routinely evaluates its estimates, including those related to accruals for customer programs and incentives, product returns, bad debts, income taxes, long-lived assets, inventories, stock based compensation, interest rate swap valuations, accrued broker commissions and contingencies. The Company bases its 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.
Reclassifications
Certain 2009 amounts have been reclassified to conform to the 2010 presentation. Specifically, we reclassified $9.9 million line of credit balance from current liabilities to long-term liabilities on the Company’s consolidated balance sheets. In addition, the Company’s previously reported distributed products segment is now included in the Company’s Snack Products segment. See Footnote 10 “Business Segments and Significant Customers.”
Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. The Company classifies its investments based upon an established fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described as follows:
Level 1
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2
Quoted prices in markets that are not considered to be active or financial instruments without quoted market prices, but for which all significant inputs are observable, either directly or indirectly;
Level 3
Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
At December 25, 2010 and December 26, 2009, 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.
Considerable judgment is required in interpreting market data to develop the estimate of fair value of our derivative instruments. Accordingly, the estimate 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.
Derivative Financial Instruments
The Company utilizes interest rate swaps in the management of its variable interest rate exposure and does not enter into derivatives for trading purposes. All derivatives are measured at fair value. The Company’s interest rate swaps are classified as cash flow hedges.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Accounts Receivable
Accounts receivable consist primarily of receivables from customers and distributors for products purchased. Receivable are past due when they are unpaid greater than thirty days. The Company determines any required reserves by considering a number of factors, including the length of time the accounts receivable have been outstanding, and the Company’s loss history. The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments.
Inventories
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 write-down provisions related thereto. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. In the ordinary course of business, the Company manages price and supply risk of commodities by entering into various short-term purchase arrangements with its vendors.
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 two to thirty years. We capitalize certain computer software and software development costs incurred in connection with developing or obtaining computer software for internal use. Capitalized software costs are included in property, plant and equipment and amortized on a straight-line basis when placed into service over three years.
The Company evaluates 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, in accordance with relevant authoritative guidance. 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
Goodwill and trademarks are reviewed for impairment annually or more frequently if impairment indicators arise. Goodwill, by reporting unit, is required to be tested for impairment between the annual tests if an event occurs or circumstances change that more-likely-than-not reduces the fair value of a reporting unit below its carrying value. The Company has concluded from its annual impairment testing performed in December that neither of our two reporting units were at risk of failing the impairment test in the near term, and we believe that there are no known risks for that conclusion to change at either of our reporting units. 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. Amortizable intangible assets are amortized using the straight-line method over their estimated useful lives, which is the estimated period over which economic benefits are expected to be provided.
Management believes that each of our trademarks has the continued ability to generate cash flows indefinitely, and therefore each of our trademarks has been determined to have an indefinite life. Management’s determination that our trademarks have indefinite lives includes an evaluation of historical cash flows and projected cash flows for each of these trademarks. In addition, there are no legal, regulatory, contractual, economic or other factors to limit the useful life of these trademarks, and management intends to renew each of these trademarks, which can be accomplished at little cost.
During 2010, the Company determined that the carrying values of two trademarks were fully impaired, and recorded a $0.6 million charge as a result.
See Footnote 2 “Goodwill, Trademarks, and Other Intangible Assets” for additional information.
Self-Insurance Reserves
The Company is partially self-insured for the purposes of providing health care benefits to employees covered by its insurance plan. The plan covers all full-time employees of the Company on the first day of the month after hiring date for salaried employees, and the first day of the month following the ninetieth day of service for hourly employees. The plan covers the employee’s dependents, if elected by the employee. The Company has contracted with an insurance carrier for stop loss coverage that commences when $75,000 in claims is paid annually for a covered participant. In addition, the Company has contracted for aggregate stop loss insurance which provides coverage after the maximum amount paid by the Company exceeds approximately $1.5 million. Estimated unpaid claims included in accrued liabilities amount to $221,742 and $187,774 at December 25, 2010 and December 26, 2009 respectively. These amounts represents management’s best estimate of amounts that have not been paid prior to the year-end dates. It is reasonably possible that the expense the Company will ultimately incur could differ.
Revenue Recognition
In accordance with accounting principles generally accepted in the United States, the Company recognizes operating revenues upon shipment of products to customers provided title and risk of loss pass to its customers. In those instances where title and risk of loss does not pass until delivery, revenue recognition is deferred until delivery has occurred. Revenue for direct store delivery distributed products is recognized when the product is received by the retailer. Provisions and allowances for sales returns, promotional allowances and discounts are recorded as a reduction of revenues in the Company’s consolidated financial statements.
Advertising and Promotional Expenses and Trade Spending.
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 accounted for as a reduction of revenue 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 promotional allowance to a purchaser of products at any point along the distribution chain, the amount is accrued and recorded as a reduction in revenue when the transaction occurs. Marketing programs that deal directly with the consumer, primarily consisting of in-store demonstration/samples, are recorded as a marketing expense in selling, general and administrative expenses. Further discussion of these marketing programs is expanded upon below:
· Demonstrations/Samples: The Company will periodically arrange in-store product demonstrations with club stores or grocery retailers. Product demonstrations are conducted by independent third party providers designated by the various retailer or club chains. During the in-store demonstrations the consumers in the stores receive small samples of our products, and consumers are not required to purchase our product in order to receive the sample. The cost of product used in the demonstrations, which is insignificant, and the fee paid to the independent third party providers who conduct the in-store demonstrations are recorded as a sales and marketing expense in selling, general and administrative expenses.
· Sponsorships : The Company is a national co-sponsor of American Rivers, a leading conservation organization protecting and restoring America’s rivers. The Company donates a portion of each Boulder Canyon bag sold and is allowed to use the American Rivers mark on packaging and printed materials as well as directly promote products to members and river cleanup volunteers.
Shipping and Handling
Shipping and handling costs are included in cost of revenues. The Company does not bill customers for freight.
Income Taxes
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. Failure to achieve forecasted taxable income in applicable tax jurisdictions could affect the ultimate realization of deferred tax assets and could result in an increase in the Company’s effective tax rate on future earnings. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The authoritative guidance provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. The tax benefit is measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.
It is the Company’s policy to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. The Company does not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest or penalties recorded during the years ended December 25, 2010 and December 26, 2009.
The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The Company’s U.S. federal income tax returns for years 2007 through 2010 remain open to examination by the Internal Revenue Service. The Company’s state tax returns for years 2006 through 2010 remain open to examination by the state jurisdictions.
Stock Options and Stock-Based Compensation
Stock options and other stock based compensation awards expense are adjusted for estimated forfeitures and are recognized on a straight-line basis over the requisite period of the award, which is currently five to ten years for stock options, and one to three years for restricted stock. The Company estimates future forfeiture rates based on its historical experience.
Compensation costs related to all share-based payment arrangements, including employee stock options, are recognized in the financial statements based on the fair value method of accounting. Excess tax benefits related to share-based payment arrangements are classified as cash inflows from financing activities and cash outflows from operating activities.
See Footnote 8 “Shareholder’s Equity” for additional information.
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. Diluted earnings per share is calculated by including all dilutive common shares such as stock options and restricted stock. The total stock options outstanding of 2,145,500 and restricted shares outstanding of 364,353 were excluded from the weighted average per share calculation for the year ended December 25, 2010 because inclusion of such would be anti-dilutive. The total stock options outstanding of 2,130,500 and restricted shares outstanding of 124,353 were excluded from the weighted average per share calculation for the year ended December 26, 2009 because inclusion of such would be anti-dilutive. Exercises of outstanding stock options or warrants are assumed to occur for purposes of calculating diluted earnings per share for periods in which their effect would not be anti-dilutive. Earnings per common share was computed as follows for the years ended December 25, 2010 and December 26, 2009:
Subsequent Events
Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. The Company recognizes in the financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing the financial statements. The Company’s financial statements do not recognize subsequent events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after the balance sheet date and before financial statements are issued.
Recent Accounting Pronouncements
In January 2010, the FASB issued an amendment to require new disclosures for fair value measurements and provide clarification for existing disclosure requirements. More specifically, this update requires (a) an entity to disclose separately the amounts of significant transfers in and out of Levels 1 and 2 fair value measurements and to describe the reasons for the transfers; and (b) information about purchases, sales, issuances and settlements to be presented separately (i.e. present the activity on a gross basis rather than net) in the reconciliation for fair value measurements using significant unobservable inputs (Level 3 inputs). This update clarifies existing disclosure requirements for the level of disaggregation used for classes of assets and liabilities measured at fair value and requires disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements using Level 2 and Level 3 inputs. The Company adopted this standard at the beginning of its 2010 fiscal year and it did not have a material impact on the Consolidated Financial Statement note disclosures.
In June 2009, the FASB issued a new standard that changed the definition of a variable interest entity (“VIE”), contained new criteria for determining the primary beneficiary of a VIE, required enhanced disclosures to provide more information about a company’s involvement in a VIE and increased the frequency of required reassessments to determine whether a company is the primary beneficiary of a VIE. The adoption of this standard at the beginning of the fiscal 2010 had no impact on the Company’s financial position, results of operations or cash flows.
In August 2009, the Financial Accounting Standards Board (“FASB”) issued guidance on the measurement of liabilities at fair value. The guidance provides clarification that in circumstances in which a quoted market price in an active market for an identical liability is not available, an entity is required to measure fair value using a valuation technique that uses the quoted price of an identical liability when traded as an asset or, if unavailable, quoted prices for similar liabilities or similar assets when traded as assets. If none of this information is available, an entity should use a valuation technique in accordance with existing fair valuation principles. The Company adopted this guidance in the quarter ended September 26, 2009 and there was no material impact on the Company’s financial position, results of operations or liquidity.
2. Goodwill, Trademarks, and Other Intangible Assets:
Goodwill, trademarks and other intangibles, net consisted of the following as of December 25, 2010 and December 26, 2009:
The weighted average useful life of amortizable intangible assets is 6.92 years. The trademarks are deemed to have an indefinite useful life because they are expected to generate cash flows indefinitely. Amortization expense for the years ending December 25, 2010 and December 26, 2009 was $42,001 and $41,999, respectively. As of December 25, 2010, we expect amortization expense on these intangible assets over the next five years to be as follows:
Goodwill and trademarks are reviewed for impairment annually in the fourth fiscal quarter, 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 reduces 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. During the fourth quarter of 2010, the Company determined the carrying values of two trademarks were impaired utilizing a discounted cash flow analysis, and recorded a $0.6 million charge to write off the trademarks. This expense is recorded in “Selling, general, and administrative expenses” on the Company’s Consolidated Statements of Income. The Company believes the carrying values of its intangible assets are appropriate after recognition of the trademark impairment.
3. Accrued Liabilities:
Accrued liabilities consisted of the following as of December 25, 2010 and December 26, 2009:
4. Inventories:
Inventories consisted of the following as of December 25, 2010 and December 26, 2009:
5. Property and Equipment:
Property and equipment consisted of the following as of December 25, 2010 and December 26, 2009:
The total cost of equipment and furniture and office equipment included in the table above held under capital lease obligations was $3.6 million and $0.04 million as of December 25, 2010 and December 26, 2009, respectively. Depreciation expense, including amortization of property under capital leases, for fiscal years 2010 and 2009 was $3.9 million and $3.4 million, respectively.
6. Long-Term Debt and Line of Credit:
Long-term debt consisted of the following as of December 25, 2010 and December 26, 2009:
Annual maturities of long-term debt as of December 25, 2010 are as follows:
To fund the acquisition of Rader Farms the Company entered into a Loan Agreement (the “Loan Agreement”) with U.S. Bank. Each of our subsidiaries is a guarantor of the Loan Agreement, which is secured by a pledge of all of the assets of our consolidated group. The borrowing capacity available to us under the Loan Agreement consists of notes representing:
· a $15.0 million revolving line of credit maturing on June 30, 2011; $9.1 million was outstanding at December 25, 2010. Based on eligible assets, there was $5.9 million of borrowing availability under the line of credit at December 25, 2010. All borrowings under the revolving line of credit will bear interest at either (i) the prime rate of interest announced by U.S.
Bank from time to time or (ii) LIBOR, plus the LIBOR Rate Margin (as defined in the revolving credit facility note as adjusted). The rate was 3.86% at December 25, 2010.
· Equipment term loan due May 2014 noted above.
· Real estate term loan due July 2017 noted above.
On March 21, 2011, the Company entered into an amended revolving line of credit with U.S. Bank extending our line from $15.0 million up to $25.0 million, maturing in July 2014. The minimum fixed charge coverage ratio and maximum leverage ratio were modified and the minimum tangible net worth covenant was removed. Aside from the covenant changes, the terms of the equipment term loan and real estate term loan were not materially modified.
As is customary in such financings, U.S. Bank may terminate its commitments and accelerate the repayment of amounts outstanding and exercise other remedies upon the occurrence of an event of default (as defined in the Loan Agreement), subject, in certain instances, to the expiration of an applicable cure period. The agreement requires the Company to maintain compliance with certain financial covenants, including a minimum tangible net worth, a minimum fixed charge coverage ratio and a leverage ratio. At December 25, 2010, the Company was in compliance with all of the financial covenants. Deferred financing fees totaling $119,744, which are included in Other Assets, were recorded in connection with the Loan Agreement and are being amortized over the life of the loan.
Interest income (expense), net consisted of the following for the fiscal years ended December 25, 2010 and December 26, 2009:
Interest Rate Swaps
To manage exposure to changing interest rates, the Company selectively enters into interest rate swap agreements. The Company’s interest rate swaps qualify for and are designated as cash flow hedges. Changes in the fair value of a swap that is highly effective and that is designated and qualifies as a cash flow hedge to the extent that the hedge is effective, are recorded in other comprehensive income (loss).
The Company entered into an interest rate swap in 2006 to convert the interest rate of the mortgage to purchase the Bluffton, Indiana plant from the contractual rate of 30 day LIBOR plus 165 basis points to a fixed rate of 6.85%. On September 28, 2008, the Company’s first day of its fiscal fourth quarter, the Company prospectively redesignated the hedging relationship to a cash flow hedge. The swap has a fixed pay-rate of 6.85% and a notional amount of approximately $2.2 million at December 25, 2010 and expires in December 2016. We evaluate the effectiveness of the hedge on a quarterly basis and at December 25, 2010 the hedge is highly effective. The interest rate swap had fair value of ($317,243) at December 25, 2010, which is recorded as a liability on the accompanying consolidated balance sheet. The swap value was determined in accordance with the fair value measurement guidance discussed earlier using Level 2 observable inputs and approximates the loss that would have been realized if the contract had been settled on December 25, 2010. An unrealized loss of $138,528 was recorded as interest expense in the Company’s condensed, consolidated statement of operations during the three quarters ending September 27, 2008, associated with this swap.
The Company entered into another interest rate swap in January 2008 to effectively convert the interest rate on the real estate term loan to a fixed rate of 4.28%. The interest rate swap is structured with decreasing notional amounts to match the expected pay down of the debt. The notional value of the swap at December 25, 2010 was $3.4 million. The interest rate swap is accounted for as a cash flow hedge derivative and expires in July 2017. We evaluate the effectiveness of the hedge on a quarterly basis and during the year ended December 25, 2010 the hedge is highly effective. The interest rate swap had fair value of ($332,146) at December 25, 2010, which is recorded as a liability on the accompanying consolidated balance sheet, and was recorded in “Accumulated other comprehensive income,” all of which represents the change in fair value for the year ended December 25, 2010. This value was determined in accordance with the fair value measurement guidance discussed earlier using Level 2 observable inputs and approximates the loss that would have been realized if the contract had been settled on December 25, 2010.
The only component of other comprehensive income/loss for the periods presented is the change in fair value of the interest rate swaps. For the years ending December 25, 2010 and December 26, 2009, the effect of such is as follows:
7. Commitments and Contingencies:
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, individually and in the aggregate, will not have a material adverse effect on the Company’s financial position or results of operations. See Note 11, “Litigation”.
The Company leases one-half of a 200,000 square foot facility in Bluffton, Indiana which is used as a distribution center. The Company entered into an operating lease, the initial term expiring in November 2006, with respect to the facility and has entered into the second of two three-year renewal options. Current lease payments are approximately $32,500 per month. The Company also has entered into a service agreement expiring in December 2011 with a third party for warehousing services. The service agreement includes certain minimum monthly usage commitments amounting to $1,188,000 in each of 2009 and 2010.
The Company owns a farming, processing and storage facility located on 696 acres of land in Lynden, Washington, which is leased from the Uptrails Group LLC, owned by three members of the Rader family. One of the three, Brad Rader, is a current employee of the Company and one of the others, Sue Rader, was a former owner of Rader Farms. This operating lease commenced on the acquisition date and is effect until May 17, 2017. Lease payments are $43,500 per month throughout the term of the lease.
In addition to the Company’s facility and land leases, the Company has entered into a variety of operating leases for equipment, vehicles, and office space. Rental expense under all operating leases was $2.3 million and $2.2 million for fiscal 2010 and 2009, respectively. Minimum future rental commitments under non-cancelable leases as of December 25, 2010 are as follows:
The Company produces T.G.I. Friday’s® brand snacks, BURGER KING TM brand potato snack products, Tato Skins® brand potato crisps and Boulder CanyonTM Natural Foods Rice and Bean snacks utilizing a sheeting and frying process that includes technology that the Company licenses from a third party. Pursuant to the license agreement between the Company and the third party, the Company has a royalty-bearing, exclusive right license to use the technology in the United States, Canada, and Mexico until such time the parties mutually agree to terminate the agreement. Even though the patents for this technology expired December 26, 2006, in consideration for the use of this technology, the Company is required to make royalty payments on sales of products manufactured utilizing the technology until such termination date. However, should products substantially similar to Tato Skins®, O’Boisies® and Pizzarias® become available for any reason in the marketplace by any manufacturer other than the Company which results in a sales decline of 10% or more, any royalty obligation for the respective product(s) shall cease.
The Company licenses the T.G.I. Friday’s® brand snacks trademark from T.G.I. 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® brand snack products and is required to achieve certain minimum sales levels by certain dates during the contract term.
The Company licenses the BURGER KING TM brand snacks trademark from Burger King Corporation under a license agreement with a term expiring in 2012. Pursuant to the license agreement, the Company is required to make royalty payments on
sales of BURGER KING TM brand snack products and is required to achieve certain minimum sales levels by certain dates during the contract term.
The Company licenses the Jamba® brand trademark from Jamba Juice Company under a license agreement with a term expiring in 2035. Pursuant to the license agreement, the Company is required to make royalty payments on sales of Jamba® products, and is required to achieve certain minimum sales levels by certain dates during the contract term.
8. Shareholders’ Equity:
Common Stock
The Company may grant restricted shares and restricted share units to eligible employees. Such restricted shares and restricted share units are subject to forfeiture if certain employment conditions are not met. Restricted share units generally vest in equal annual increments over a three year period with no performance criteria for employees, and a one year vesting period for Board of Director members. However, the restricted stock units granted to all officers and senior management of the Company during the fiscal year ending December 25, 2010 contain performance restrictions which are required to be achieved at each vesting period in order for the shares to be awarded. The fair value of the restricted stock units is equal to the market price of our stock at the date of the grant. Share-based compensation expense related to restricted stock awards is recognized on the straight-line method over the requisite vesting period, and the related share-based compensation expense is included in selling, general and administrative expenses.
During fiscal years 2009 and 2010, restricted share activity was as follows:
During the years ended December 25, 2010 and December 26, 2009, the total share-based compensation expense from restricted stock recognized in the financial statements was $0.3 million and $0.04 million respectively. There were no share-based compensation costs which were capitalized. As of December 25, 2010 and December 26, 2009 the total unrecognized costs related to non-vested restricted stock awards granted were $0.7 million and $0.2 million respectively. The Company expects to recognize such costs in the financial statements over a weighted-average period of three years.
Preferred Stock
The Company has authorized 50,000 shares of $100 par value Preferred Stock, none of which is outstanding. The Company may issue such shares of Preferred Stock in the future without shareholder approval.
Stock Options
The Company’s 1995 Stock Option Plan (the “1995 Plan”), as amended, provided for the issuance of options to purchase 3,500,000 shares of Common Stock. The options granted pursuant to the 1995 Plan expire over a five-year period and generally vest over three years. In addition to options granted under the 1995 Plan, the Company also issued non-qualified options (non-plan 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 at the date of grant and are non-compensatory. The 1995 Plan expired in May 2005 with 410,518 reserved but unissued shares of Common Stock available for issuance under the 1995 Plan, and was replaced by the Inventure Foods, Inc. 2005 Equity Incentive Plan (the “2005 Plan”) as described below.
The 2005 Plan was approved at the Company’s 2005 Annual Meeting of Shareholders and reserved for issuance that number of shares of Common Stock determined by adding (a) 410,518, which is the number of reserved but unissued shares available for
issuance under the 1995 Plan, (b) 500,000, which is the number of additional shares approved by the stockholders on May 23, 2006 to be added to the 2005 Plan, (c) 500,000, which is the number of additional shares approved by the stockholders on May 19, 2008 to be added to the 2005 Plan and (d) 500,000, which is the number of additional shares approved by the stockholders on May 19, 2009 to be added to the 2005 Plan. If any shares of Common Stock subject to awards granted under the 1995 Plan or the 2005 Plan are canceled, those shares will be available for future awards under the 2005 Plan. The 2005 Plan expires in May 2015, and awards granted under the 2005 Plan may include: nonqualified stock options, incentive stock options, restricted stock, restricted stock units, stock appreciation rights, performance units and stock-reference awards. Prior to May 2008, all stock option grants had a five year term. The fair value of these stock option grants is amortized to expense over the vesting period, generally three years for employees and one year for the Board of Directors.
In May 2008, the Company’s Board of Directors approved a ten year term for all future stock option grants . The vesting periods for these stock option grants are five years and one year for employees and Board of Director members, respectively. As of December 25, 2010, there were 5,892 shares of Common Stock available for Awards under the 2005 Plan.
The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions for the years ended:
The expected dividend yield was based on the Company’s expectation of future dividend payouts. The volatility assumption was based on historical volatility during the time period that corresponds to the expected life of the option. The expected life (estimated period of time outstanding) of stock options granted was estimated based on historical exercise activity. The risk-free interest rate assumption was based on the interest rate of U.S. Treasuries on the date the option was granted.
During fiscal years 2009 and 2010, stock option activity was as follows:
The total share-based compensation expense from stock options recognized in the financial statements was $0.2 million for the years ended December 25, 2010 and December 26, 2009 respectively, which reduced income from operations accordingly. There were no share-based compensation costs which were capitalized. As of December 25, 2010 and December 26, 2009 the total unrecognized costs related to non-vested stock options granted were $0.6 million and $0.5 million, respectively. The Company expects to recognize such costs in the financial statements over a weighted average period of five years. This expected compensation expense does not reflect any new awards, or modifications to existing awards, that could occur in the future. Generally, the Company issues new shares upon the exercise of stock options, as opposed to reissuing treasury shares.
The following table summarizes information about stock options outstanding and exercisable at December 25, 2010:
The following table summarizes information about stock options outstanding and exercisable at December 26, 2009:
The weighted average grant-date fair value of options granted during the years ending December 25, 2010 and December 26, 2009 was $2.34 and $1.44 respectively.
The intrinsic value related to total stock options outstanding was $4,188,175 as of December 25, 2010 and $527,500 as of December 26, 2009. The intrinsic value related to vested stock options outstanding was $2,401,148 as of December 25, 2010 and $134,273 as of December 26, 2009. The aggregate intrinsic value is based on the exercise price and the Company’s closing stock price of $4.32 as of December 25, 2010 and $2.32 as of December 26, 2009.
Treasury Stock
In September 2008, the Company’s Board of Directors approved a stock re-purchase program whereby up to $2 million of common stock could be purchased from time to time at the discretion of management (the “2008 program”). The repurchased shares were held as treasury stock and are available for general corporate purposes. The program expired August 23, 2009 and the Company continues to evaluate its share repurchase opportunities. During 2009, a total of 367,957 shares were repurchased pursuant to open market transactions at a weighted average price of $1.28 per share. Common stock held in the Company’s treasury has been recorded at cost.
9. Income Taxes:
The provision for income taxes consisted of the following for the years ended December 25, 2010 and December 26, 2009:
The following table provides reconciliation between the amount determined by applying the statutory federal income tax rate to the pretax income amount for the years ended December 25, 2010 and December 26, 2009:
The income tax effects of loss carryforwards and temporary differences between financial and income tax reporting that give rise to the deferred income tax asset and liability are as follows as of December 25, 2010 and December 26, 2009:
The Company experienced significant net losses in prior fiscal years resulting in regular and alternative minimum tax (“AMT”) net operating loss (“NOL”) carryforwards for federal income tax purposes of approximately $0.6 million at December 26, 2009. The Company used all remaining NOL carryforwards during 2009. The Company had federal income taxes receivable of $139,218 and $399,571 as of December 25, 2010 and December 26, 2009, respectively. The Company had a state income tax receivable of $74,908 and a state income tax payable of $110,506 as of December 25, 2010 and December 26, 2009, respectively.
Generally accepted accounting principles require that a valuation allowance be established when it is more-likely-than-not that all or a portion of a deferred tax asset will not be realized. Changes in valuation allowances from period to period are included in the tax provision in the period of change. In determining whether a valuation allowance is required, the Company takes into account all positive and negative evidence with regard to the utilization of a deferred tax asset including our past earnings history, expected future earnings, the character and jurisdiction of such earnings, unsettled circumstances that, if unfavorably resolved, would adversely affect utilization of a deferred tax asset, carryback and carryforward periods and tax strategies that could potentially enhance the likelihood of realization of a deferred tax asset.
The effective tax rate for fiscal year 2010 was 31.0% compared with 39.0% for fiscal year 2009. The change in the effective rate is due to the impact of research and development tax credits, including a catch-up of prior periods, of $0.4 million, representing a 6% reduction in the effective rate and domestic production activity deductions of $0.2 million, representing a 3% reduction in the effective rate.
10. Business Segments and Significant Customers:
For the years ended December 25, 2010 and December 26, 2009, Costco was the only customer accounting for more than 10% of total Company net revenue. Costco accounted for $36.7 million or 27% and $27.5 million or 23%, for fiscal years 2010 and 2009, respectively.
The Company’s operations consist of two reportable segments: snack products and berry products. The snack products segment produces potato chips, potato crisps, potato skins, pellet snacks, kettle chips, and extruded product for sale primarily to snack food distributors and retailers. The segment also sells a limited number of snack products manufactured by other companies to the Company’s Arizona snack food distributors. The berry products segment produces frozen fruit products, such as berries and smoothies, for sale primarily to groceries and mass merchandisers. The Company’s reportable segments offer different products and services. The majority of the Company’s revenues are attributable to external customers in the United States. The Company does sell to external customers internationally in over 40 countries worldwide, however the revenues attributable to those customers are immaterial. All of the Company’s assets are located in the United States.
The accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies (Note 1). The Company does not allocate assets, selling, general and administrative expenses, income taxes or other income and expense to segments.
The following table reconciles reportable segment gross profit to the Company’s consolidated income before income tax provision for the years ended December 25, 2010 and December 26, 2009:
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, individually and in the aggregate, will not have a material adverse effect on the Company’s financial position or results of operations.
Inventure Foods, Inc. was one of eight companies sued by the Environmental Law Foundation in August, 2006 in the Superior Court for the State of California for the County of Los Angeles by the Attorney General of the State of California for alleged violations of California Proposition 65. California Proposition 65 is a state law that, in part, requires companies to warn California residents if a product contains chemicals listed within the statute. The matter was resolved in March 2009, and the Company incurred a settlement liability of $0.2 million.
12. Related Party Transactions:
The Company owns the farming operations and the processing and storage facility located on 696 acres of land in Lynden, Washington, which is leased from the Uptrails Group LLC, owned by three members of the Rader family. One of the three, Brad Rader, is a current employee of the Company and one of the others, Sue Rader, was a former owner of Rader Farms. This operating lease commenced on the acquisition date and is effect until May 17, 2017. Lease payments are $43,500 per month throughout the term of the lease.
13. Accounts Receivable Allowance:
Changes to the allowance for doubtful accounts during the each of the two fiscal years ended December 25, 2010 and December 26, 2009 are summarized below:
14. Concentrations of Credit Risk:
The Company maintains most of its cash with one financial institution. As of November 1, 2008 the FDIC introduced the transaction guarantee program which guaranteed non-interest bearing accounts without limit. The FDIC program is temporary and only offered through participating financial institutions. The Company’s primary financial institution participated in this program and therefore all cash balances held with this institution as of December 25, 2010 are insured.
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 2010 and 2009, 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 25, 2010 and December 26, 2009, three customers accounted for 36% and 29% of accounts receivable, respectively.
15. Deferred Compensation Plans
The Company has contributory 401(k) plans covering substantially all employees. The Company may contribute amounts not in excess of the lesser of the maximum deductions allowable for income tax purposes or a specific percentage of the of the operating profits of the Company, as defined in the plan. The Company made contributions totaling $0.4 million and $0.3 million during the year ended December 25, 2010 and December 26, 2009, respectively.
The Company also sponsors a trusteed, nonqualified savings plan for employees whose contributions to a tax qualified 401(k) plan would be limited by provisions of the Internal Revenue Code. The plan allows participants to defer receipt of a portion of their salary and incentive compensation. The plan was amended in 2009 and the Company no longer matches any employee contributions to this plan. Participants earn a return on their deferred compensation based on investment earnings of participant-selected mutual funds. Deferred compensation, including accumulated earnings on the participant-directed investment selections, is distributable in cash at participant-specified dates or upon retirement, death, disability or termination of employments. At December 25, 2010 and December 26, 2009, the plan’s assets and the Company’s liability to participants of the deferred compensation plans was $0.3 million and $0.2 million, respectively, and is recorded in other assets and other liabilities in the Consolidated Balance Sheets.
16. 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 sum of quarterly earnings per share information may not agree to the annual amount due to rounding and use of the treasury stock method of calculating earnings per share.
EXHIBIT INDEX
10.74 - Executive Employment Agreement by and between the Company and Richard Suchenski, dated as of June 21, 2010.
10.75 - Form of Director Restricted Stock Award Agreement - Amended and Restated 2005 Equity Incentive Plan
10.76 - Loan Modification and Extension Agreement (Revolving Line of Credit and Term Loan) dated as of March 21, 2011, by and between Inventure Foods, Inc. and U.S. Bank National Association
10.77 - Amended and Restated Promissory Note (Facility 1 - Revolving Line of Credit Loan) dated as of March 21, 2011, by and between Inventure Foods, Inc. and U.S. Bank National Association
10.78 - Amendment to Leasehold Deed of Trust with Assignment of Rents, Security Agreement, and Fixture Filing and Memorandum of Modification dated as of March 21, 2011, by and between Inventure Foods, Inc. and U.S. Bank National Association
10.79 - Amended and Restated Security Agreement (Blanket-All Business Assets), dated as of March 21, 2011, by and between Inventure Foods, Inc. and U.S. Bank National Association.
23.1 - Consent of Moss Adams LLP.
31.1 - Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15(d)-14(a).
31.2 - Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15(d)-14(a).
32 - Certification of Chief Executive Officer and Chief Financial Officer and Principal Accounting Officer pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.