As filed with the Securities and Exchange Commission on September 22, 1997
Registration No.
================================================================================
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
POORE BROTHERS, INC.
(Name Of Small Business Issuer In Its Charter)
Delaware
(State Or Other Jurisdiction Of
Incorporation Or Organization)
2096
(Primary Standard Industrial
Classification Code No.)
86-0786101
(I.R.S. Employer
Identification No.)
----------------
3500 South La Cometa Drive
Goodyear, Arizona 85338
(602) 932-6200
(Address And Telephone Number Of Principal Executive Offices And Principal
Place Of Business Or
Intended Principal Place Of Business)
Eric J. Kufel
President and Chief Executive Officer
Poore Brothers, Inc.
3500 South La Cometa Drive
Goodyear, Arizona 85338
(602) 932-6200
(Name, Address And Telephone Number Of Agent For Service)
----------------
With copies to counsel for the Company:
Jeffrey B. Cobb, Esq.
Cobb & Eisenberg LLC
315 Post Road West
Westport, CT 06881
(203) 222-9560
----------------
Approximate date of proposed sale to the public: From time to time after
the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed Proposed
Amount Maximum Maximum Amount of
Title of Each Class Of To Be Offering Price Aggregate Registration
Securities To Be Registered Registered Per Share(3) Offering Price(3) Fee
<S> <C> <C> <C> <C>
Common Stock, par value $0.01 per share...... 607,060(1) $1.50 $910,590 $275.94
Common Stock issuable upon exercise of
Warrant .................................. 300,000(2) $1.50 $450,000 $136.36
</TABLE>
- --------------------------------------------------------------------------------
(1) Shares of the Registrant's Common Stock being registered for resale on
behalf of selling security holders.
(2) Underlying shares of Common Stock issuable upon the exercise of a Warrant
issued by the Registrant to Westminster Capital, Inc. in September, 1996 (the
"Financing Warrant"). This Registration Statement also covers such additional
number of shares as may become issuable upon exercise of the Financing Warrant
by reason of anti-dilution, pursuant to Rule 416.
(3) Estimated solely for purposes of calculating the registration fee. The fee
with respect to the Common Stock (including the Common Stock issuable upon the
exercise of the Financing Warrant) is based upon the last reported sales price
of the Common Stock as reported on the Nasdaq SmallCap Market as of September
17, 1997. The Financing Warrant has an exercise price of $1.40 per share of
Common Stock.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
================================================================================
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION DATED SEPTEMBER 22, 1997
PROSPECTUS
- ----------
907,060 Shares
POORE BROTHERS, INC.
[GRAPHIC OMITTED]
Common Stock
This Prospectus relates to the offer and sale (the "Offering") by certain
persons (the "Selling Security Holders") of up to 907,060 shares (the "Shares")
of common stock, par value $.01 per share (the "Common Stock"), of Poore
Brothers, Inc. (the "Company"). The Shares being offered include (i) 607,060
shares of Common Stock previously issued by the Company and (ii) 300,000 shares
of Common Stock issuable upon the exercise of a Warrant issued in September
1996 by the Company to Westminster Capital, Inc. (the "Financing Warrant"). See
"Selling Security Holders and Plan of Distribution" and "Description of
Securities."
The Selling Security Holders may sell all or a portion of the Shares
offered hereby from time to time in transactions on the Nasdaq SmallCap Market,
in privately negotiated transactions, or by a combination of such methods of
sale, at fixed prices that may be changed, at market prices prevailing at the
time of sale, at prices related to such prevailing market prices or at
negotiated prices. See "Selling Security Holders and Plan of Distribution." The
Company will not receive any of the proceeds from the sale of the Shares
offered pursuant to this Prospectus, but will receive proceeds of up to
$420,000 from the exercise of the Financing Warrant. The expenses of preparing
and filing the Registration Statement of which this Prospectus is a part are
being borne by the Company.
The shares of Common Stock are quoted on the Nasdaq SmallCap Market under
the symbol "POOR."
THESE SECURITIES ARE SPECULATIVE AND INVOLVE A
HIGH DEGREE OF RISK. SEE "RISK FACTORS."
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
================================================================================
Proceeds to
Price Underwriting Proceeds to Selling
to Public(1) Discounts(2) Company(3) Security Holders(2)
Per Share ...... $ 1.50 $-- $0 $ 1.50
Total .......... $1,360,590 $-- $0 $1,360,590
================================================================================
(1) Based on the last reported sales price of the Company's Common Stock as
reported on the Nasdaq SmallCap Market as of September 17, 1997. The
actual prices at which the Shares may be sold will be dependent upon
market prices and other factors on the date of any sale.
(2) The Selling Security Holders will be responsible for payment of any
commissions or discounts in connection with the sale of the Shares and
such amounts may vary. The Company is paying the cost of the preparation
and filing of the Registration Statement of which this Prospectus is a
part. Such cost includes professional fees, filing fees, printing and
other expenses which, in the aggregate, are expected to be approximately
$65,000.
(3) The Company will not receive any of the proceeds from the sale of the
Shares offered pursuant to this Prospectus, but will receive proceeds of
up to $420,000 from the exercise of the Financing Warrant.
The date of this Prospectus is September 22, 1997.
<PAGE>
The Poore Brothers logo (see the cover page of this Prospectus) is a
registered trademark of the Company. Poore Brothers (TM) is a trademark of the
Company. All other trademarks or service marks appearing in this Prospectus are
trademarks or registered trademarks of the respective owners thereof.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), pursuant to which the
Company files reports and other information with the Securities and Exchange
Commission (the "Commission"). Any interested party may inspect the reports and
other information filed by the Company, without charge, at the Public Reference
Section of the Commission at its principal office at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Any interested party may obtain copies of all or any
portion of such documents at prescribed rates from the Public Reference Section
of the Commission at its principal office at 450 Fifth Street, N.W., Washington,
D.C. 20549 The Company files reports and information statements with the
Commission electronically. The Commission maintains a Web site that contains
reports, proxy and information statements and other information regarding
issuers that file electronically with the Commission. The address of such Web
site is http://www.sec.gov.
The Company has filed with the Commission a Registration Statement on Form
SB-2 (such Registration Statement, with all amendments and exhibits thereto,
hereinafter collectively referred to as the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
Shares offered hereby. This Prospectus does not contain all of the information
set forth in the Registration Statement. For further information with respect
to the Company and the Shares offered hereby, reference is made to the
Registration Statement. Statements contained in this Prospectus as to the
contents of any contract or other document are not necessarily complete and, in
each instance, reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each statement being
qualified in its entirety by such reference.
The Company furnishes its stockholders with annual reports containing
audited financial statements and may distribute such other periodic reports as
the Company may determine to be appropriate or as may be required by law.
FORWARD-LOOKING STATEMENTS
This Prospectus, including all documents incorporated by reference,
includes "forward-looking" statements within the meaning of Section 27A of the
Securities Act and Section 12E of the Exchange Act and the Private Securities
Litigation Reform Act of 1995, and the Company desires to take advantage of the
"safe harbor" provisions thereof. Therefore, the Company is including this
statement for the express purpose of availing itself of the protections of the
safe harbor with respect to all of such forward-looking statements. In this
Prospectus, the words "anticipates," "believes," "expects," "intends" "future"
and similar terms and expressions identify forward-looking statements. The
forward-looking statements in this Prospectus reflect the Company's current
views with respect to future events and financial performance. These
forward-looking statements are subject to certain risks and uncertainties,
including specifically the Company's brief operating history and significant
operating losses to date, the probability that the Company will need additional
financing due to continued operating losses or in order to implement the
Company's business strategy, significant competition, volatility of the market
price of the Common Stock and those other risks and uncertainties discussed
herein, that could cause actual results to differ materially from historical
results or those anticipated. In light of these risks and uncertainties, there
can be no assurance that the forward-looking information contained in this
Prospectus will in fact transpire or prove to be accurate. Readers are
cautioned to consider the specific risk factors described herein and in "Risk
Factors," and not to place undue reliance on the forward-looking statements
contained herein, which speak only as of the date hereof. The Company
undertakes no obligation to publicly revise these forward-looking statements to
reflect events or circumstances that may arise after the date hereof. All
subsequent written or oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by this section.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements,
including the notes thereto, contained elsewhere in this Prospectus. Unless
otherwise indicated, the information set forth in this Prospectus assumes no
issuance of: (i) 1,953,618 shares of Common Stock reserved for issuance upon
the exercise of outstanding stock options; (ii) 2,109,717 shares of Common
Stock reserved for issuance upon the conversion of outstanding 9% Convertible
Debentures (as defined herein); and (iii) 225,000 shares of Common Stock
reserved for issuance upon the exercise of the Underwriter's Warrant (as
defined herein). Each prospective investor is urged to read this Prospectus
carefully in its entirety.
The Company
Poore Brothers, Inc. (the "Company") is engaged in the production,
marketing and distribution of salty snack food products that are sold primarily
throughout the western and southern United States. The Company has three
distinct lines of business: it manufactures and sells its own brand of potato
chips under the Poore Brothers (TM) logo; it manufactures private label potato
chips for grocery store chains; and it distributes snack food products that are
manufactured by others. For the six months ended June 30, 1997, revenues totaled
$7,613,814. Approximately 69% of sales were attributable to the Company's Poore
Brothers (TM) brand potato chips; approximately 25% of sales were attributable
to the distribution by the Company of snack food products manufactured by other
companies; and approximately 6% of sales were attributable to potato chips
produced by the Company for sale under the private labels of customers. See
"Business." The Company generally sells its products to independent
distributors. See "Business -- Marketing and Distribution."
Poore Brothers (TM) brand potato chips consist of two primary types,
regular and low-fat. The Poore Brothers (TM) brand regular potato chips, which
are produced with a batch frying process that the Company believes results in
potato chips with enhanced crispness and flavor, are currently offered in eleven
flavors: Original, Salt & Vinegar, Au Gratin, Barbecue, Cajun, Dill Pickle,
Grilled Steak & Onion, Hot Mustard, Jalapeno, No Salt and Parmesan & Garlic. The
Poore Brothers (TM) brand low-fat potato chips, which were introduced in June
1996, are produced with a batch frying process and then processed to remove most
of the cooking oil while retaining the taste of frying. The low-fat potato chips
are produced in five flavors: Original, No Salt, Au Gratin, Salt & Vinegar and
Barbecue. The Company also manufactures potato chips for sale on a private label
basis using a continuous frying process. The Company currently has two Arizona
grocery chains as customers for its private label potato chips. See "Business"
and "Risk Factors."
The Company's business objective is to become a leading regional
manufacturer and distributor of branded premium potato chips and other salty
snack foods by providing high quality products at competitive prices that are
superior in taste to comparable products. The Company plans to expand its sales
and promotional efforts to increase its penetration of existing markets and to
expand into new markets. Such market expansion would consist of initiating
promotional efforts to increase consumer trial and awareness of the Company's
brand-name products and seeking additional private label customers for the
Company's products. The Company expects to achieve growth through regional
expansion of current products, development of new products and acquisitions.
See "Business -- Business Strategy."
The Company, a Delaware corporation, was organized in February 1995 as a
holding company to acquire, on May 31, 1995, (i) substantially all of the
assets, subject to certain liabilities, of Poore Brothers' Foods, Inc. ("PB
Foods"); (ii) a 100% equity interest in Poore Brothers Distributing, Inc. ("PB
Distributing"); and (iii) an equity interest (which, with related purchases,
constituted 80%) in Poore Brothers of Texas, Inc. ("PB Texas"). The Company
also acquired substantially all of the outstanding shares of Poore Brothers
Southeast, Inc. ("PB Southeast") in an exchange transaction consummated
concurrently with the acquisition of PB Foods, PB Distributing and PB Texas.
(Such acquisitions are sometimes referred to collectively herein as the "PB
Acquisition"). As a result of the consummation of the PB Acquisition, the
Company became a holding company with two subsidiaries engaged in
manufacturing, Poore Brothers Arizona, Inc. (which acquired the assets of PB
Foods) ("PB Arizona")
3
<PAGE>
and PB Southeast, and two subsidiaries engaged in distribution, PB Distributing
and PB Texas. Subsequent to the PB Acquisition, the Company purchased the
remaining equity of PB Texas, increasing its equity ownership to 100%. Prior to
their acquisition by the Company, PB Foods, PB Distributing and PB Texas were
owned and operated by Donald and James Poore (since 1986, 1990 and 1986,
respectively). In June 1997, the Company sold the operations of PB Texas. In
September 1997, the Company announced the closing of the PB Southeast
manufacturing operation in LaVergne, Tennessee and that it would consolidate all
the PB Southeast manufacturing operation into the Company's Arizona facility.
The Company, PB Arizona, PB Southeast, PB Distributing and PB Texas are
hereinafter sometimes collectively referred to as the "PB Companies." In May
1997, the Company formed a wholly-owned subsidiary, La Cometa Properties, Inc.,
which owns the land and building comprising the Company's new Arizona facility.
As used herein, the term "Company" refers to Poore Brothers, Inc. and its
subsidiaries, except where the context indicates otherwise. See "Business --
Company History," "Business -- Facilities," and "Legal Proceedings."
In December 1996, the Company completed an initial public offering of its
Common Stock.
The Company's executive offices are located at 3500 South La Cometa Drive,
Goodyear, Arizona 85338, and its telephone number is (602) 932-6200.
The Offering
Common Stock Offered by Selling
Security Holders ..................... 907,060 shares(1)
Common Stock Outstanding Before the
Offering ........................... 7,051,657 shares(2)
Common Stock to be Outstanding After the
Offering ........................... 7,351,657 shares(2)(3)
Use of Proceeds ..................... The Company will not receive any of
the proceeds from the sale of the
Shares offered pursuant to this
Prospectus, but will receive
proceeds of up to $420,000 from the
exercise of the Financing Warrant.
The proceeds, if any, from the
exercise of the Financing Warrant
will be used by the Company for
working capital and general
corporate purposes.
Nasdaq SmallCap Market Symbol ........... POOR
Risk Factors
The Offering involves a high degree of risk. See "Risk Factors."
- ----------
(1) Includes: (i) 607,060 shares of Common Stock previously issued by the
Company and (ii) 300,000 shares of Common Stock issuable upon the exercise
of the Financing Warrant. See "Selling Security Holders and Plan of
Distribution" and "Description of Securities."
(2) Does not include: (i) 1,953,618 shares of Common Stock reserved for
issuance upon the exercise of outstanding stock options; (ii) 2,109,717
shares of Common Stock reserved for issuance upon the conversion of
outstanding 9% Convertible Debentures; or (iii) 225,000 shares of Common
Stock reserved for issuance upon the exercise of the Underwriter's
Warrant. See "Management -- Stock Options," "Business -- Debt Financings"
and "Description of Securities."
(3) Assumes the exercise in full of the Financing Warrant.
4
<PAGE>
Summary Financial Data
The summary financial data set forth below should be read in conjunction
with the Company's consolidated financial statements, including the notes
thereto, included elsewhere in this Prospectus. The summary historical
financial data for the years ended December 31, 1995 and December 31, 1996 have
been derived from the audited consolidated financial statements of the Company
included elsewhere in this Prospectus, and should be read in conjunction with
those consolidated financial statements, including the notes thereto, and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" also included elsewhere in this Prospectus. The summary historical
financial data for the six months ended June 30, 1996 and June 30, 1997 have
been derived from unaudited consolidated financial statements of the Company
included elsewhere in this Prospectus and, in the opinion of the Company,
reflect all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the results of operations for such periods. The
results of operations for the six months ended June 30, 1997 are not
necessarily indicative of results to be expected for the year ending December
31, 1997. The summary pro forma statement of operations for the year ended
December 31, 1995 presented below gives effect to the acquisition by the
Company of the PB Companies that was completed on May 31, 1995, as if all such
transactions had occurred on January 1, 1995, and includes pro forma
adjustments to operating expenses, depreciation and amortization, and interest
expense. The combined pro forma statement of operations (unaudited) of the
Company, including the description of pro forma adjustments, for the year ended
December 31, 1995 is included elsewhere in this Prospectus.
Statement of Operations Data:
<TABLE>
<CAPTION>
Years Ended December 31, Six Months Ended June 30,
------------------------------------------------ -----------------------------
1995 1996(1) 1996(1) 1997(1)
-------------------------------- ------------- ------------ --------------
Historical Pro Forma Historical Historical Historical
--------------- -------------- ------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Sales ........................... $ 6,868,923 $11,456,320 $17,219,641 $8,168,848 $ 7,613,814
Gross profit ..................... 1,564,723 2,580,965 4,128,447 1,876,600 1,709,762
Operating loss .................. (953,527) (1,263,785) (301,212) (29,570) (958,474)
Net loss ........................ (1,194,910) (1,664,045) (691,678) (212,743) (1,049,180)
Net loss per share ............... (0.35) (0.48) (0.15) (0.05) (0.15)
Weighted average number of
common shares outstanding ...... 3,448,601 3,448,601 4,493,307 4,250,490 6,982,594
</TABLE>
Balance Sheet Data:
December 31, June 30,
---------------------------- -----------
1995 1996 1997
------------ ------------- -----------
Current assets .................. $2,082,992 $ 7,822,804 $5,700,209
Current liabilities ............... 1,719,689 3,637,202 1,989,248
Working capital .................. 363,303 4,185,602 3,710,961
Property and equipment, net ...... 1,593,479 4,032,343 6,422,862
Total assets ..................... 6,349,785 14,340,445 14,615,115
Long-term debt .................. 3,793,420 3,355,651 5,242,598
Total shareholders' equity ...... 816,297 7,341,592 7,383,269
- ----------
(1) Results for the fiscal year ended December 31, 1996 and the six months
ended June 30, 1996 and 1997 on a pro forma basis (which give effect to
the sale of the PB Texas operations as if such transaction had occurred on
January 1, 1996) are included in the "Notes to Financial Statements"
included elsewhere in this Prospectus.
5
<PAGE>
RISK FACTORS
THE SHARES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF
RISK, INCLUDING, BUT NOT LIMITED TO, THE RISK FACTORS DESCRIBED BELOW.
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS,
TOGETHER WITH ALL OTHER INFORMATION SET FORTH IN THIS PROSPECTUS, PRIOR TO
MAKING A DECISION TO PURCHASE ANY SHARES OF COMMON STOCK.
Brief Operating History; Significant Losses to Date; Accumulated Deficit.
Although certain of the PB Companies have operated for several years, the
Company as a whole has a relatively brief operating history upon which an
evaluation of its prospects can be made. Such prospects are subject to the
substantial risks, expenses and difficulties frequently encountered in the
establishment and growth of a new business in the snack food industry, which is
characterized by a significant number of market entrants and intense
competition. The Company has had significant operating losses to date and has
never made a profit. On a pro forma basis (giving effect to the May 31, 1995
acquisition of the PB Companies as if it had occurred on January 1, 1995), the
Company incurred losses of $1,664,045 and $691,678 for the fiscal years ended
December 31, 1995 and 1996, respectively. The Company incurred a $1,049,180 loss
for the six months ended June 30, 1997. At June 30, 1997, the Company had an
accumulated deficit of $3,477,016 and net working capital of $3,710,961. See
"Selected Financial Data" and "Management's Discussion and Analysis of Results
of Operations and Financial Condition."
Even if the Company is successful in expanding the production and
distribution of its products and in increasing revenues, it may be expected to
incur substantial additional expense, including advertising and promotional
costs and "slotting" expenses (i.e., the cost of obtaining shelf space in
certain stores). Accordingly, the Company may incur additional losses in the
future as a result of the implementation of the Company's business strategy,
even if revenues increase significantly. There can be no assurance that the
Company's business strategy will prove successful or that the Company will ever
become profitable.
Possible Need for Additional Financing. Continued operating losses or
expansion of the Company's business may each result in requirements for funds
in excess of cash flow generated from operations and the Company's existing
cash and investment balances. Accordingly, the Company may require future debt
or equity financing to meet its business requirements. There can be no
assurance that such financing will be available or, if available, on terms
attractive to the Company. Any such financing may dilute the equity interests
of the Company's stockholders.
Non-Compliance with Financial Covenants. The Company is required to
maintain certain financial ratios pursuant to the Debenture Loan Agreement (as
defined herein) so long as the Company's 9% Convertible Debentures are
outstanding. Should the Company be in default under any of these requirements,
the holders of the 9% Convertible Debentures have the right, upon written
notice and after a thirty day period during which such default may be cured, to
demand immediate payment of all the then unpaid principal and accrued but
unpaid interest under the 9% Convertible Debentures. While the Company is not
in compliance with certain of these requirements, the holders of the 9%
Convertible Debentures have granted the Company a waiver effective through
September 1998. Management believes that the fulfillment of the Company's plans
and objectives will enable the Company to attain a sufficient level of
profitability to be in compliance with the financial ratios; however, there can
be no assurance that the Company will attain any such profitability, be in
compliance with the financial ratios upon the expiration of the waivers, or be
able to obtain an extension or renewal of the waivers. Any acceleration under
the 9% Convertible Debentures prior to their maturity on July 1, 2002 could
have a material adverse effect upon the Company. See "Business -- Debt
Financings."
Competition. The market for salty snack foods, such as those sold by the
Company, primarily potato chips, tortilla chips, popcorn and pretzels, is large
and intensely competitive. Competitive factors in the salty 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 quality and taste.
6
<PAGE>
The snack food industry is primarily dominated by Frito-Lay, Inc., which
has substantially greater financial and other resources than the Company and
sells brands that are more widely recognized than are the Company's products.
Numerous other companies that are actual or potential competitors of the
Company, many with greater financial and other resources (including more
employees and more extensive facilities) than the Company, offer products
similar to those of the Company. To date, none of the Company's large
competitors has introduced full scale production of fat-free potato chips;
however, many have introduced low-fat products (e.g., Frito-Lay's Baked Lays
Potato Chips) and products with reduced-fat levels. Local or regional markets
often have significant smaller competitors, many of whom offer batch fried or
low-fat products similar to those of the Company. Expansion of Company
operations into new markets has and will continue to encounter significant
competition from national, regional and local competitors that may be greater
than that encountered by the Company in its existing markets. In addition, such
competitors may challenge the Company's position in its existing markets. While
the Company believes that its products and method of operations will enable it
to compete successfully, there can be no assurance of its ability to do so.
Promotional and Shelf Space Costs. Successful marketing of food products
generally depends upon obtaining adequate retail shelf space for product
display, particularly in supermarkets. Frequently, food manufacturers and
distributors, such as the Company, incur additional costs in order to obtain
additional shelf space. Whether or not the Company incurs such costs in a
particular market is dependent upon a number of factors, including existing
demand for the Company's products, relative availability of shelf space and
general competitive conditions. There can be no assurance that the Company will
not incur significant shelf space or other promotional costs as a necessary
condition of entering into competition in particular markets or stores. Such
costs may materially affect the Company's financial performance.
Market Acceptance and Dependence on Principal Products. Consumer
preferences for snack foods in general, and for fat-free and low-fat foods in
particular, are continually changing and are extremely difficult to predict.
The ability of the Company to develop successful operations in new markets will
depend upon customer acceptance of, and the Company's ability to manufacture
its products. There can be no assurance that the Company's products will
achieve a significant degree of market acceptance, that acceptance, if
achieved, will be sustained for any significant period or that product life
cycles will be sufficient to permit the Company to recover start-up and other
associated costs. In addition, there can be no assurance that the Company will
succeed in the development of any new products or that any such new products
will achieve market acceptance or generate meaningful revenue for the Company.
Food Product Industry. The food product industry in which the Company is
engaged is subject to numerous uncertainties and risks outside of the Company's
control. Profitability in the food product industry is subject to adverse
changes in general business and economic conditions, oversupply of certain food
products at the wholesale and retail levels, seasonality, the risk that a food
product may be banned or its use limited or declared unhealthful, the risk that
product tampering may occur that may require a recall of one or more of the
Company's products, and the risk that sales of a food product may decline due
to perceived health concerns, changes in consumer tastes or other reasons
beyond the control of the Company.
Commodity Prices; Reliance on Suppliers. The Company's manufacturing costs
are subject to fluctuations in the prices of potatoes and oil, the two major
ingredients used in the manufacture of potato chips, as well as other
ingredients of the Company's products. Potatoes are widely available year-round,
either freshly harvested or from storage during winter months. Trisun (R), a
sunflower oil low in saturated fat that is currently used by the Company in the
production of Poore Brothers (TM) brand name potato chips, is supplied by one
company. The Company believes that alternative cooking oils that are low in
saturated fat are readily abundant and available. The Company is dependent on
its suppliers to provide the Company with products and ingredients in adequate
supply and on a timely basis. Although the Company believes that its
requirements for products and ingredients are readily available, and that its
business success is not dependent on any single supplier, the failure of certain
suppliers to meet the Company's performance specifications, quality standards or
delivery schedules could have a material adverse effect 7
<PAGE>
on the Company's operations. In particular, a sudden scarcity, a substantial
price increase, or an unavailability of product ingredients could materially
adversely affect the Company's operations. There can be no assurance that
alternative ingredients would be available when needed and on commercially
attractive terms, if at all.
Status of Manufacturing Process for Low-Fat Products. In June 1996, the
Company began producing low-fat potato chips using a patented oil extraction
process known as the "Franke Process." Pursuant to an agreement (the "Great
Snaxx Agreement") between the Company and Great Snaxx of AZ. L.L.C. ("Great
Snaxx"), Great Snaxx has granted the Company rights in the states of Arizona,
California, Colorado, Nevada and New Mexico, to market low-fat potato chips
produced using the Franke Process. On September 3, 1997, the Company was
notified that Great Snaxx had sustained an interruption in its ability to
process low-fat potato chips. There can be no assurance as to when or if Great
Snaxx will resume processing low-fat potato chips. The Company is dependent
upon the resources of Great Snaxx for the use of the Franke Process, as Great
Snaxx has the sole right, under the Great Snaxx Agreement, to apply the Franke
Process to products manufactured by the Company.
Great Snaxx has certain rights to terminate the Great Snaxx Agreement
prior to its expiration in September 2006. In addition, the Company may lose
its rights to market low-fat potato chips produced with the Franke Process if
certain conditions are not met by the Company. The termination by Great Snaxx
of the Great Snaxx Agreement or the failure by Great Snaxx to perform its
obligations under the Great Snaxx Agreement for any reason could have a
material adverse effect on the Company's ability to produce low-fat potato
chips. In the case of such a termination or failure, the Company would consider
producing low-fat potato chips using an alternative production method, such as
baking or the use of alternative cooking oils. There can be no assurance,
however, that the Company would be successful in utilizing such alternative
production methods or that low-fat potato chips produced by the Company with
any of such methods would be accepted in the marketplace. See "Business --
Manufacturing."
Lack of Proprietary Manufacturing Methods. The taste and quality of Poore
Brothers (TM) products is largely due to two elements of its manufacturing
process: the Company's 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. While management believes that the successful
use of batch frying involves certain techniques and methods used by the Company
that may not be readily available to or known by other manufacturers, there can
be no assurance that competitors will not develop the same or similar techniques
or methods.
Dependence Upon Major Customers. One customer of the Company, Fry's Food
Stores, a subsidiary of Kroger, Inc., accounted for 16% of the Company's 1996
sales, with the remainder of the Company's 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 sales for 1996. For the six months ended June 30, 1997, two customers
of the Company, Fry's Food Stores and Safeway Inc., accounted for 17% and 11%,
respectively, of the Company's sales. A decision by any major customers to
cease or substantially reduce their purchases could have a material adverse
effect on the Company's business.
Reliance on Key Employees; Non-Competition Agreements. The Company's
success is dependent in large part upon the abilities of its officers,
including Eric J. Kufel (President and Chief Executive Officer). The inability
of the officers to perform their duties or the inability of the Company to
attract and retain other highly qualified personnel could have a material
adverse effect upon the Company's business and prospects. The Company does not
maintain, nor does it currently contemplate obtaining, "key man" life insurance
with respect to such employees. With the exception of James M. Poore and
Wendell T. Jones, the employment of the officers of the Company is on an
"at-will" basis. The Company has noncompetition agreements with all of its
officers, except Mr. Jones. See "Management."
Legal Proceeding. In June 1996, a lawsuit was commenced in an Arizona
state court against two directors of the Company, Mark S. Howells and Jeffrey
J. Puglisi, and PB Southeast which alleged, among other things, that the
plaintiff, James Gossett, had an oral agreement with Mr. Howells to receive a
49% ownership interest in PB Southeast, that Mr. Howells breached fiduciary
duties and other obligations to
8
<PAGE>
Mr. Gossett and that Mr. Gossett was entitled to exchange such alleged stock
interest for shares in the Company. Mr. Gossett further alleged that Messrs.
Howells and Puglisi failed to honor the terms of an alleged distribution
agreement between PB Foods and Mr. Gossett. On July 11, 1997, summary judgement
was granted in favor of all defendants on all counts of the lawsuit. In its
Order, the Maricopa County (Arizona) Superior Court ruled that there was no
oral contract and that the remainder of the plaintiff's claims could not
support a cause of action against the defendants. No final judgement has been
entered by the Court to date and the time for filing post-judgement motions
and/or for perfecting an appeal has not expired. See "Business -- Legal
Proceedings."
Governmental Regulation. The packaged food industry is subject to numerous
federal, state and local governmental regulations, including those relating to
the preparation, labeling and marketing of food products. The Company is
particularly affected by the Nutrition Labeling and Education Act of 1990
("NLEA"), which requires specified nutritional information to be disclosed on
all packaged foods. The Company believes that the labeling on its products
currently meets these requirements. In addition, the NLEA, which is
administered by the Food and Drug Administration ("FDA"), strictly regulates
the standards that must be met to make a claim that a product is "fat-free" or
"low-fat." In May 1994, new NLEA regulations became effective that reduced the
permitted amount of fat per ounce in products that make such claims. The
Company does not believe that complying with the NLEA regulations materially
increases the Company's manufacturing costs. There can be no assurance,
however, that new laws or regulations will not further reduce the permissible
fat content of "fat-free" or "low-fat" products, which could require the
Company to alter the taste or composition of its products. Such changes could
affect sales of the Company's products and have a material adverse effect on
the Company.
Product Liability Claims. As a manufacturer and marketer of food products,
the Company may be subjected to various product liability claims. While such
claims to date have not been material to the Company and the Company maintains
product liability insurance, there can be no assurance that such insurance will
be adequate to cover any loss or exposure for product liability, or that such
insurance will continue to be available on terms acceptable to the Company. Any
product liability claim not fully covered by insurance, as well as any adverse
publicity from a product liability claim, could have a material adverse effect
on the financial condition or results of operations of the Company.
No Dividends. 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. In any event,
certain debt agreements of the Company limit its ability to declare and pay
dividends on the Common Stock.
Possible Issuance of Additional Common Stock and Preferred Stock. The
authorized capital stock of the Company consists of 15,000,000 shares of Common
Stock, of which 7,351,657 shares will be issued and outstanding upon completion
of the offering assuming the issuance of 300,000 shares upon the exercise in
full of the Financing Warrant, and 50,000 shares of preferred stock, par value
$100 per share (the "Preferred Stock"), of which no shares will be issued and
outstanding. Additionally: (i) there are stock options outstanding which, upon
vesting, could result in the issuance of 1,953,618 additional shares of Common
Stock at an average exercise price of $2.15 per share; (ii) the holders of 9%
Convertible Debentures have the right to convert the 9% Convertible Debentures
into 2,109,717 shares of Common Stock at an effective price of $1.09 per share
of Common Stock, subject to anti-dilution adjustments and certain restrictions;
and (iii) the Underwriter's Warrant gives the Underwriter (as defined herein)
the right to purchase 225,000 shares of Common Stock at an exercise price of
$4.38 per share. In addition, the Company's Board of Directors has authority,
without action or vote of the Company's stockholders, to issue all or part of
the authorized but unissued shares of Common Stock and Preferred Stock. Any
such issuances of Common Stock will dilute the percentage ownership interest of
existing stockholders and may further dilute the per share book value of the
Common Stock. Any such Preferred Stock would have rights senior to the Common
Stock. See "Business -- Debt Financings," "Management -- Stock Options,"
and"Description of Securities."
Volatility of Market Price of Common Stock. Recent history relating to
market prices of companies that recently completed an initial public offering
indicates that, from time to time, there is significant
9
<PAGE>
volatility in the market price of the securities of such companies for reasons
that may not be related to such companies' operations or financial conditions.
Since the Company's initial public offering in December 1996, the market price
of the Common Stock has experienced volatility. There can be no assurance as to
the future market price of the Common Stock.
Market Overhang of Registered Stock May Affect Market Price of the
Company's Common Stock. Of the 607,060 issued and outstanding Shares being
registered in connection with this Offering, 138,643 Shares were sold by the
Company for a purchase price of $1.08 per share and 468,417 Shares were sold by
the Company for a purchase price of $1.25 per share. The aforementioned prices
are below the recent trading price of the Company's Common Stock. Due to the
limited trading market for the Common Stock and the volatility of the market
price of the Common Stock since the Company's initial public offering in
December 1996, sales by the Selling Security Holders of any of the Shares may
have an adverse effect on the market price of the Company's Common Stock. Sales
of significant numbers of Shares into the open market will likely have a
depressive effect on the market price of the Common Stock. The Company cannot
predict the timing or extent of any sales of the Shares or the short- or
long-term effect on the market price of the Common Stock from any such sales.
Nasdaq Maintenance Requirements; No Assurance of Qualification for
Continued Nasdaq Listing. The Nasdaq SmallCap Market has adopted rules changes
increasing its quantitative listing standards. Although the Company currently
meets the new Standards for continued inclusion on the Nasdaq SmallCap Market,
if the Company is unable to satisfy applicable maintenance criteria in the
future, the Common Stock will be subject to being de-listed, and trading, if
any, would thereafter likely be conducted in the over-the-counter market in
what are commonly referred to as the "pink sheets" or on the NASD OTC
Electronic Bulletin Board. As a result, an investor may find it more difficult
to dispose of, or to obtain accurate quotations as to the price of, the Common
Stock, Such an occurrence would likely materially adversely affect the
liquidity of the market for the Common Stock.
Under the rules of the Commission, stock priced under $5.00 per share is
classified as "penny stock." Broker-dealers trading in "penny stock" are
subject to burdensome record keeping and disclosure requirements, which can
have the effect of reducing the liquidity and the value of such stock. A
listing for such stock on the Nasdaq SmallCap Market affords an exemption from
those rules, and because the Common Stock is currently listed on the Nasdaq
SmallCap Market, the "penny stock" rules do not apply to it. If, however, at
some time in the future the Common Stock should become ineligible for continued
listing on the Nasdaq SmallCap Market, those rules would apply.
Future Sales of Common Stock by the Company's Stockholders. At August 29,
1997, there were 7,351,657 shares of Common Stock issued and outstanding
(including 907,060 shares of Common Stock being registered pursuant to the
Registration Statement of which this Prospectus is a part and assuming the
issuance of 300,000 shares of Common Stock upon the exercise in full of the
Financing Warrant), excluding (i) 1,953,618 shares of Common Stock reserved for
issuance upon the exercise of outstanding stock options; (ii) 2,109,717 shares
of Common Stock reserved for issuance upon the conversion of 9% Convertible
Debentures; and (iii) 225,000 shares of Common Stock reserved for issuance upon
the exercise of the Underwriter's Warrant. See "Management -- Stock Options,"
"Business -- Debt Financings" and "Description of Securities." Upon the
effectiveness of the Registration Statement of which this Prospectus is a part,
5,698,698 of the issued and outstanding shares of Common Stock (assuming the
exercise in full of the Financing Warrant) will be freely tradable without
further restriction or further registration under the Securities Act, unless
purchased by "affiliates" of the Company, as that term is defined in Rule 144
under the Securities Act ("Rule 144"). The remaining 1,652,959 issued and
outstanding shares of Common Stock will be "restricted securities" as that term
is defined in Rule 144 and will be eligible for immediate sale under Rule 144,
subject to volume limitations and other conditions of Rule 144. In addition,
the 1,953,618 shares of Common Stock issuable upon the exercise of outstanding
stock options and the 225,000 shares of Common Stock reserved for issuance upon
the exercise of the Underwriter's Warrant have been registered under the
Securities Act. Upon the issuance, if any, of such shares, they will be freely
tradable without further restriction or further registration under the
Securities Act, unless purchased by "affiliates" of the Company, as that term
is defined in Rule 144.
10
<PAGE>
The holders of the 9% Convertible Debentures have agreed that they will
not convert such 9% Convertible Debentures into shares of Common Stock or
exercise any demand registration rights prior to January 1, 1998, without the
prior written consent of the Underwriter. See "Shares Eligible for Future
Sale."
In general, under Rule 144 as currently in effect, any affiliate of the
Company or any person (or persons whose shares are aggregated in accordance
with Rule 144) who has beneficially owned restricted securities for at least
one year would be entitled to sell within any three-month period a number of
shares that does not exceed the greater of 1% of the outstanding shares of
Common Stock (approximately 73,517 shares based upon the number of shares
assumed to be outstanding after the Offering assuming the exercise in full of
the Financing Warrant) or the reported average weekly trading volume in the
over-the-counter market for the four weeks preceding the sale. Sales under Rule
144 are also subject to certain manner-of-sale restrictions and notice
requirements and to the availability of current public information concerning
the Company. Persons who have not been affiliates of the Company for at least
three months and who have held their shares for more than two years are
entitled to sell restricted securities without regard to the volume, manner of
sale, notice and public information requirements of Rule 144.
No Underwriter Participation. No underwriter has participated in the
preparation of this Prospectus. Generally, in an underwritten offering, an
underwriter would conduct certain investigations relative to the issuer, its
business and the terms of the offering in order to establish a reasonable basis
for determining the completeness of the disclosures set forth in any offering
documents. Inasmuch as no underwriter has participated in the preparation of
the Prospectus or the Registration Statement of which this Prospectus is a
part, such an investigation has not been conducted in connection with this
Offering.
Certain Anti-takeover Provisions. The Company's Certificate of
Incorporation authorizes the issuance of up to 50,000 shares of "blank check"
Preferred Stock with such designations, rights and preferences as may be
determined from time to time by the Board of Directors of the Company. Such
shares of Preferred Stock may be issued by the Company in the future without
stockholder 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 stockholder (as defined in the
DGCL) unless certain conditions are met. This statutory provision could also
have an anti-takeover effect. See "Description of Securities."
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale of the
Shares offered pursuant to this Prospectus, but will receive proceeds of up to
$420,000 from the exercise of the Financing Warrant. The proceeds, if any, from
the exercise of the Financing Warrant will be used by the Company for working
capital and general corporate purposes. There can be no assurance that the
Financing Warrant will be exercised in whole or in part.
11
<PAGE>
MARKET FOR THE COMMON STOCK
The Company's Common Stock is traded on the Automated Quotation System of
the Nasdaq SmallCap Market under the symbol "POOR." The following table sets
forth, for the periods indicated, the high and low reported sales prices for
the Common Stock on the Nasdaq SmallCap Market. The trading market in the
Company's securities may at times be relatively illiquid due to low trading
volume. The Company's initial public offering became effective on December 6,
1996. Before this date, there was no public market for the Company's
securities.
Sales Prices
----------------
Period of Quotation High Low
------------------- ---- ---
Fiscal 1996:
Fourth Quarter (December 6, 1996 to
December 31, 1996) ............ $5.13 $3.25
Fiscal 1997:
First Quarter ................... $4.25 $2.88
Second Quarter ................... $3.25 $1.94
At August 29, 1997, there were 7,051,657 shares of Common Stock issued and
outstanding. As of such date, the shares of Common Stock were held of record by
approximately 132 holders. The foregoing is based in part upon information
furnished by American Stock Transfer & Trust Company, New York, New York, the
transfer agent for the Company's Common Stock.
DIVIDEND POLICY
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. In any event,
certain debt agreements of the Company limit the Company's ability to declare
and pay dividends.
12
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at June
30, 1997, and as adjusted to give effect to the exercise in full of the
Financing Warrant, the underlying shares of Common Stock of which are being
registered in connection with the Registration Statement of which this
Prospectus is a part. There can be no assurance as to whether the Financing
Warrant will be exercised in whole or in part.
<TABLE>
<CAPTION>
June 30, 1997(1)
---------------------------------
Actual As Adjusted
--------------- ---------------
<S> <C> <C>
Short-term debt:
Current portion of long-term debt(2) ........................ $ 621,112 $ 621,112
Long-term debt, less current portion:
9% Convertible Debentures ................................. 2,299,591 2,299,591
Other long-term debt(2) .................................... 2,943,007 2,943,007
------------ ------------
Total long-term debt ....................................... 5,242,598 5,242,598
------------ ------------
Shareholders' equity:
Common stock, $0.01 par value, 15,000,000 shares
authorized, 7,051,657 shares issued and outstanding
(7,351,657 shares issued and outstanding as adjusted) ...... 70,516 73,516
Additional paid-in capital ................................. 10,789,769 11,206,769
Accumulated deficit .......................................... (3,477,016) (3,477,016)
------------ ------------
Total shareholders' equity ................................. 7,383,269 7,803,269
------------ ------------
Total capitalization .................................... $ 13,246,979 $ 13,666,979
============ ============
</TABLE>
- ------------
(1) Does not include: (i) 1,953,618 shares of Common Stock reserved for
issuance upon the exercise of outstanding stock options; (ii) 2,109,717
shares of Common Stock reserved for issuance upon the conversion of the 9%
Convertible Debentures; or (iii) 225,000 shares of Common Stock reserved
for issuance upon the exercise of the Underwriter's Warrant. See
"Management -- Stock Options," "Business -- Debt Financings" and
"Description of Securities."
(2) Represents the balance of mortgages, leases and equipment loans. See
"Business -- Facilities," "Business -- Debt Financings" and the financial
statements of the Company, and the notes thereto, which are included
elsewhere in this Prospectus.
13
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with the Company's consolidated financial statements, including the notes
thereto, included elsewhere in this Prospectus. The selected historical
financial data for the years ended December 31, 1995 and December 31, 1996 have
been derived from audited consolidated financial statements of the Company
included elsewhere in this Prospectus, and should be read in conjunction with
those consolidated financial statements, including the notes thereto, and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" also included elsewhere in this Prospectus. The selected historical
financial data for the six months ended June 30, 1996 and June 30, 1997 have
been derived from unaudited consolidated financial statements of the Company
included elsewhere in this Prospectus and, in the opinion of the Company,
reflect all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the results of operations for such periods. The
results of operations for the six months ended June 30, 1997 are not
necessarily indicative of results to be expected for the year ending December
31, 1997. The summary pro forma statement of operations for the year ended
December 31, 1995 presented below gives effect to the acquisition by the
Company of the PB Companies that was completed on May 31, 1995, as if all such
transactions had occurred on January 1, 1995, and includes pro forma
adjustments to operating expenses, depreciation and amortization, and interest
expense. The combined pro forma statement of operations (unaudited) of the
Company, including the description of pro forma adjustments, for the year ended
December 31, 1995 is included elsewhere in this Prospectus.
Statement of Operations Data:
<TABLE>
<CAPTION>
Years Ended December 31, Six Months Ended June 30,
--------------------------------------------------- -----------------------------
1995 1996(1) 1996(1) 1997(1)
----------------------------------- ------------- ------------ --------------
Historical Pro Forma Historical Historical Historical
---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Sales .............................. $ 6,868,923 $ 11,456,320 $17,219,641 $8,168,848 $ 7,613,814
Cost of sales ........................ 5,304,200 8,875,355 13,091,194 6,292,248 5,904,052
------------ ------------ ----------- ---------- ------------
Gross profit ........................ 1,564,723 2,580,965 4,128,447 1,876,600 1,709,762
Selling, general and administrative
expense ........................... 2,198,757 3,396,061 3,969,462 1,698,500 2,200,977
Depreciation and amortization ...... 319,493 448,689 460,197 207,670 197,400
Sale of Texas distribution business . 269,859
------------ ------------ ---------- --------- ------------
Operating loss ..................... (953,527) (1,263,785) (301,212) (29,570) (958,474)
Interest expense, net of interest and
other income ........................ 241,383 400,260 390,466 183,173 90,706
------------ ------------ ----------- ---------- ------------
Net loss ........................... $ (1,194,910) $ (1,664,045) $ (691,678) $(212,743) $(1,049,180)
============ ============ =========== ========== ============
Net loss per share .................. $ (0.35) $ (0.48) $ (0.15) $ (0.05) $ (0.15)
============ ============ =========== ========== ============
Weighted average number of
common shares outstanding ......... 3,448,601 3,448,601 4,493,307 4,250,490 6,982,594
</TABLE>
Balance Sheet Data:
December 31,
---------------------------- June 30
1995 1996 1997
------------ ------------- -----------
Current assets .................. $2,082,992 $ 7,822,804 $5,700,209
Current liabilities ............... 1,719,689 3,637,202 1,989,248
Working capital .................. 363,303 4,185,602 3,710,961
Property and equipment, net ...... 1,593,479 4,032,343 6,422,862
Total assets ..................... 6,349,785 14,340,445 14,615,115
Long-term debt .................. 3,793,420 3,355,651 5,242,598
Total shareholders' equity ...... 816,297 7,341,592 7,383,269
- ----------------
(1) Results for the fiscal year ended December 31, 1996 and the six months
ended June 30, 1996 and 1997 on a pro forma basis (which give effect to
the sale of the PB Texas operations as if such transaction had occurred on
January 1, 1996) are included in the "Notes to Financial Statements"
included elsewhere in this Prospectus.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Overview
The Company has focused its efforts since the PB Acquisition in May 1995 on
increasing revenues and gross margins. The Company has three lines of business:
it manufactures and distributes its Poore Brothers (TM) brand potato chips (in
regular and low-fat styles); it manufactures potato chips for sale on a private
label basis to grocery store chains; and it distributes snack food products
manufactured by others in Arizona.
Results of Operations
Six months ended June 30, 1997 compared to six months ended June 30, 1996
Revenues for the six months ended June 30, 1997 were $7,613,814, down
$555,034 or 7%, from $8,168,848 for the six months ended June 30, 1996. The
disposition by the Company of its PB Texas distribution operation in June 1997
decreased revenue by $1,407,207. See "Business -- Company History". This
decrease was offset by significant growth in the Company's own manufactured
product lines. Sales of regular kettle chips grew to $4,946,400, up $546,291 or
12% from $4,400,109, for the same six-month period in 1996. The low-fat kettle
chip business, launched during June of 1996, contributed $272,097 in revenues
for the first six months of 1997, compared to only $14,724 during the first
half of 1996. The private label business, launched in the first quarter of
1996, generated revenues of $462,214 for the first six months of 1997, up
$82,584 or 22% from the same period of 1996. Sales of products manufactured by
others declined only $34,075 to $1,933,103 despite the Company's elimination of
several unprofitable lines.
Gross profit for the six months ended June 30, 1997 was $1,709,762 or 22%
of revenues, as compared to $1,876,600 or 23% of revenues for the six months
ended June 30, 1996. This decrease in gross profit is due to lower revenues and
a slight erosion in gross profit as a percentage of sales. Gross profit as a
percentage of sales decreased slightly due to higher labor costs associated
with the transition to new equipment and a new Arizona facility, along with
slightly higher raw material costs than experienced in 1996.
Selling, general and administrative expenses increased to $2,200,977 for
the six months ended June 30, 1997, up $502,477 or 30%, from $1,698,500 in
1996. Included in selling, general and administrative expenses in 1997 were
approximately $255,000 of expenses related to severance, relocation, moving and
equipment writedowns. In addition, $108,000 of insurance, printing, legal and
accounting expenses were incurred during the first six months of 1997 that were
not incurred prior to the Company's initial public offering that was
consummated in December 1996. Due to the expansion into new geographical
regions, the Company incurred $93,000 in additional freight costs in 1997.
The Sale of Texas distribution business reflects a $119,859 loss from
operations of the PB Texas business for the six months ended June 30, 1997,
along with one-time expenses of $150,000 related to the disposal of the
operation.
Depreciation and amortization totaled $197,400 for the six months ended
June 30, 1997 and $207,670 for the six months ended June 30, 1996. The decrease
of $10,270, or 5%, was partially due to the sale of the Company's old Goodyear,
Arizona facilities in February 1997, offset by new equipment additions. Since
the sale and until the Company completes the move to the new facility, rental
charges on the old buildings will be incurred.
Net interest expense decreased to $90,706 for the six months ended June
30, 1997 from $183,173 for the six months ended June 30, 1996. This decrease
was due primarily to interest income generated from investment of the proceeds
of the initial public offering and secondarily from decreased interest expense
as a result of lower indebtedness caused by payments on the Company's
indebtedness with a portion of the proceeds from the initial public offering.
The Company's net losses for the six months ended June 30, 1997 and June
30, 1996 were $1,049,180 and $212,743 respectively. The increased net loss was
attributable to lower gross profit due to lower revenues, disposal of the PB
Texas distribution business and higher selling, general and administrative
expenses.
15
<PAGE>
Year ended December 31, 1996 compared to the year ended December 31, 1995
Revenues increased to $17,219,641 for the year ended December 31, 1996 from
$6,868,923 for the year ended December 31, 1995. This represents an increase of
$10,350,718 or 151%. The 1996 results include the revenue effect of the PB
Acquisition on May 31, 1995 for the entire year, as compared to seven months in
the 1995 period. On a pro forma basis, assuming the PB Acquisition had occurred
on January 1, 1995 (see "Item 7. Financial Statements"), revenues for the 1995
period would have totaled $11,456,320. Therefore, on a pro forma basis, revenues
increased by $5,763,321, or 50%, from 1995 to 1996. The increase is due to the
expansion of sales of Poore Brothers (TM) brand products to new markets,
increased sales in existing markets and the introduction of Poore Brothers (TM)
brand low-fat potato chips and potato chips sold on a private label basis to
grocery chains. For 1996, revenues from the private label business (sales of
which began in February 1996) totaled $913,272 and revenues from the sale of the
low-fat potato chips (sales of which began in June 1996) totaled $297,895. For
1996 and 1995, sales of products manufactured by the Company accounted for 62%
and 54%, respectively, of total sales, and sales of products manufactured by
others accounted for 38% and 46%, respectively of total sales. The increased
percentage of sales attributable to products manufactured by the Company is due
to increased sales of such products by PB Southeast and increased sales in
Arizona and California.
Gross profit for the year ended December 31, 1996 was $4,128,447, or 24%
of revenues, as compared to $1,564,723 or 23% of revenues, for the year ended
December 31, 1995. The increase in gross profits is due to the increase in the
Company's revenues. Gross profit margin percentage for 1996 did not increase
significantly from 1995.
Selling, general and administrative expenses increased to $3,969,462 in
1996 from $2,198,757 in 1995. The $1,770,705, or 81%, increase is due to
operating expenses of the companies acquired in the PB Acquisition,
administrative expenses resulting from the creation of staff positions at the
Company's headquarters, and increased selling expenses associated with market
expansion. As a percentage of revenues, selling, general and administrative
expenses were 23% for 1996 and 32% for 1995. This percentage decrease resulted
from economies of scale realized from the PB Acquisition, which increased
revenues without resulting in a corresponding increase in expenses.
Depreciation and amortization totaled $460,197 for the year ended December
31, 1996 and $319,493 for the year ended December 31, 1995. The increase of
$140,704, or 44% is due to the increase in depreciable assets resulting from
the PB Acquisition and the related goodwill and organizational costs. Moreover,
the 1996 period included twelve months of depreciation and amortization
expense, while the 1995 period included only seven months.
Net interest expense increased to $390,466 for the year ended December 31,
1996 from $241,383 for the year ended December 31, 1995. This increase was due
to indebtedness incurred by the Company in connection with the PB Acquisition
on May 31, 1995. Such indebtedness is included for twelve months in the 1996
period as compared to seven months in the 1995 period. The indebtedness
included assumed mortgages relating to the Company's Arizona facilities that
were sold on February 28, 1997, working capital lines, and indebtedness
incurred to finance the PB Acquisition.
The Company's net losses for the years ended December 31, 1996 and
December 31, 1995 were $691,678 and $1,194,910, respectively. On a pro forma
basis, assuming the PB Acquisition occurred on January 1, 1995, the net loss
for the year ended December 31, 1995 was $1,664,045. The decreased net loss is
attributable primarily to the revenue impact of market expansion.
Liquidity and Capital Resources
Net working capital was $3,710,961 at June 30, 1997, with a current ratio
of 2.9:1. At December 31, 1996, net working capital was $4,185,602 with a
current ratio of 2.2:1. The $474,641 decrease in working capital was primarily
attributable to the Company's cash operating loss of approximately $820,000.
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On February 28, 1997, in connection with the construction of its new
Arizona manufacturing facility, the Company sold existing land and buildings
for net proceeds of approximately $710,000. The carrying value of the disposed
property approximated the net proceeds and the sale had an immaterial impact on
the results of operations. Proceeds from the sale were used primarily to pay
off related mortgage debt and notes payable totaling approximately $650,000.
Construction of the Company's new Arizona manufacturing, distribution and
headquarters facility was financed with a $2.4 million construction loan from
the National Bank of Arizona, secured by a first deed of trust on the land and
the building. Interest on the construction loan was at the prime rate plus 2%
(10.25% at December 31, 1996). On June 4, 1997, the Company refinanced the $1
million remaining balance on the construction loan with a $2 million mortgage
arrangement with Morgan Guaranty Trust Company of New York. The fixed rate note
bears interest at 9.03% and is secured by the land and the building. The note
matures on July 1, 2012, however monthly principal and interest installments of
$16,825 are determined based on a twenty year amortization period.
On July 26, 1996, the Company entered into a $1,000,000 Receivable
Financing Agreement to provide working capital, with First Community Financial
Corporation (the "Credit Agreement") pursuant to which it initially borrowed
$675,000, a portion of which was used to retire the Company's previous working
capital line. The Credit Agreement, as amended, expires on November 30, 1997
and bears interest at the prime rate plus 3.50% (12.00% at June 30, 1997), with
minimum monthly interest of $2,500. The Company may borrow up to an amount
equal to 75% of eligible receivables, representing accounts receivable
outstanding less than 60 days, subject to concentration limits. At June 30,
1997, the Company has borrowed $332,987 under the facility. The remaining
portion of the $1,000,000 will become available if the Company's eligible
receivables increase.
On May 31, 1995, the Company issued $2,700,000 of its 9% Convertible
Debentures, with principal installments beginning in July 1998 and maturing
July 1, 2002, in connection with the PB Acquisition. In December 1996, in
connection with the Company's initial public offering, the holders of the 9%
Convertible Debentures converted $400,409 principal amount of the 9%
Convertible Debentures into 367,348 shares of Common Stock. As of June 30,
1997, $2,299,591 principal amount of the 9% Convertible Debentures remained
outstanding. As of June 30, 1997, the Company was not in compliance with a
financial ratio that the Company is required to maintain while the 9%
Convertible Debentures are outstanding related to a required interest coverage
ratio of 1.5:1. As a result of the Company's default under this requirement,
the holders of the 9% Convertible Debentures have the right, upon written
notice and after a thirty-day period during which such default may be cured, to
demand immediate payment of the then unpaid principal of and accrued but unpaid
interest under the 9% Convertible Debentures. However, the holders of the 9%
Convertible Debentures have granted the Company a waiver effective through
September 1998. At that time, the Company will be required to be in compliance
with the following financial ratios, so long as the 9% Convertible Debentures
remain outstanding: working capital of at least $1,000,000; minimum
shareholders' equity (net worth) that will be calculated based upon the
earnings of the Company and the consideration received by the Company from any
future issuances of securities by the Company, an interest coverage ratio of at
least 1.5:1; and a current ratio at the end of any fiscal quarter of at least
1.1:1. The Company is currently in compliance with the minimum shareholders'
equity, working capital and current ratio requirements. Management believes
that the fulfillment of the Company's plans and objectives will enable the
Company to attain a sufficient level of profitability to be in compliance with
the financial ratios; however, there can be no assurance that the Company will
attain any such profitability, be in compliance with the financial ratios upon
the expiration of the waivers or be able to obtain an extension or renewal of
the waivers. Any acceleration under the 9% Convertible Debentures prior to
their maturity on July 1, 2002 could have a material adverse effect upon the
Company.
The Company has entered into a variety of finance and operating leases for
the acquisition of equipment and vehicles. The leases generally have five-year
terms, and in the case of finance leases, contain an option to purchase the
equipment at lease-end for $1. In June 1997, the Company entered into
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a five-year lease at 8.71% with FINOVA Capital Corporation for new production
equipment installed at the new Arizona facility. In 1997, the Company has
entered into leases with an aggregate fair market value of $719,000.
As of December 31, 1996, the Company had net operating loss carry-forwards
for federal income tax purposes aggregating $1,500,000, which are available
without limitation and which begin to expire in 2010.
In September 1997, the Company announced that it would consolidate all of
its manufacturing operations into its new 60,000 square foot Goodyear, Arizona
facility. As a result, the Company is closing its LaVergne, Tennessee
manufacturing facility in late September. This consolidation will result in
one-time charges of approximately $500,000. In connection with the Company's
plans to close its LaVergne, Tennessee facility and move certain assets to
Arizona, the Tennessee CDBG loan maturity may be accelerated. The loan has a
balance of approximately $170,000.
In February 1997, the Financial Accounting Standard Board ("FASB") adopted
Statement of Financial Accounting Standard No. 128. Earnings per Share ("SFAS
128"), which supersedes and simplifies the standards for computing earnings per
share ("EPS") previously found in Accounting Principles Board Opinion No. 15,
Earnings per Share ("APB 15"). SFAS 128 is effective for financial statements
issued for periods ending after December 15, 1997, including interim periods;
earlier application is not permitted. The Company will provide the required EPS
disclosures in its financial statements commencing with the fiscal year ended
December 31, 1997. SFAS 128 requires restatement of all prior period EPS data
presented. Pursuant to the provisions of SFAS 128, the Company's net loss per
common share was $.15 for the six months of 1997 and $.06 for the six months of
1996.
In February 1997, FASB issued SFAS No. 129. Disclosure of Information
about Capital Structure. This statement establishes standards for disclosing
information about an entity's capital structure. The Company has not yet
determined the effect, if any, of SFAS No. 129 on the consolidated financial
statements.
FASB Statement No. 130 "Reporting Comprehensive Income," which the Company
will adopt during the first quarter of 1998, establishes standards for
reporting and display of comprehensive income and its components in financial
statements. Comprehensive income generally represents all changes in
shareholders' equity except those resulting from investments by or
distributions to shareholders. The Company has not yet determined the effect,
if any, of SFAS No. 130 on the consolidated financial statements.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information. This Statement will change the way
public companies report information about segments of their business in their
annual financial statements and requires them to report selected segment
information in their quarterly reports issued to shareholders. It also requires
entity-wide disclosures about the products and services an entity provides, the
material countries in which it holds assets and reports revenues, and its major
customers. The Statement is effective for fiscal years beginning after December
15, 1997. The Company has not yet determined the effect, if any, of SFAS 131 on
the consolidated financial statements.
As a result of the expansion of the Company's markets, the Company may
incur additional operating losses in the future. Expenditures relating to
market and territory expansion, new product development and equipment
relocation may adversely affect cost of sales and selling, general and
administrative expenses and consequently may adversely affect operating and net
income. These types of expenditures are expensed for accounting purposes as
incurred, while revenue generated from the result of such expansion may benefit
future periods.
Management believes that existing working capital, together with available
line of credit borrowings, and anticipated cash flows from operations, will be
sufficient to finance the operations of the Company for at least the next
twelve months. The belief is based on current operating plans and certain
assumptions, including those relating to the Company's future revenue levels
and expenditures, industry and general economic conditions and other
conditions. If any of these factors change, the Company may require future debt
or equity financings to meet its business requirements. There can be no
assurance that such financings will be available or, if available, on terms
attractive to the Company.
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Inflation
While inflation has not had a significant effect on operations in the last
year, management recognizes that inflationary pressures may have an adverse
effect on the Company as a result of higher asset replacement costs and related
depreciation and higher material costs. Additionally, the Company may be
subject to seasonal price increases for raw materials. The Company attempts to
minimize the fluctuation in seasonal costs by entering into purchase
commitments in advance, which have the effect of smoothing out price
volatility. The Company will attempt to minimize overall price inflation, if
any, through increased sales prices and productivity improvements.
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BUSINESS
The Company
The Company is engaged in the production, marketing and distribution of
salty snack food products that are sold primarily throughout the western and
southern United States. The Company has three distinct lines of business: it
manufactures and sells its own brand of potato chips under the Poore Brothers
(TM) logo; it manufactures private label potato chips for grocery stores chains;
and it distributes snack foods products that are manufactured by others. For the
six months ended June 30, 1997, revenues totaled $7,613,814. Approximately 69%
of such sales were attributable to the Company's Poore Brothers (TM) brand
potato chips; approximately 25% of sales were attributable to the distribution
by the Company of snack food products manufactured by other companies; and
approximately 6% of such sales were attributable to potato chips produced by the
Company for sale under the private labels of customers. The Company generally
sells its products to independent distributors.
Poore Brothers (TM) brand potato chips consist of two primary types,
regular and low-fat. The Poore Brothers (TM) brand regular potato chips, which
are produced with a batch frying process that the Company believes results in
potato chips with enhanced crispness and flavor, are currently offered in eleven
flavors: Original, Salt & Vinegar, Au Gratin, Barbecue, Cajun, Dill Pickle,
Grilled Steak & Onion, Hot Mustard, Jalapeno, No Salt and Parmesan & Garlic. The
Poore Brothers (TM) brand of low-fat chips, which was introduced in June 1996,
is produced using batch frying and then processed to remove most of the cooking
oil while retaining the taste of frying. The low-fat potato chips are produced
in five flavors: Original, No Salt, Au Gratin, Salt & Vinegar and Barbecue. The
Company also manufactures potato chips for sale on a private label basis using a
continuous frying process. The Company currently has two Arizona grocery chains
as private label customers.
The Company's business objective is to become a leading regional
manufacturer and distributor of branded premium potato chips and other salty
snack foods by providing high quality products at competitive prices that are
superior in taste to comparable products. The Company plans to expand its sales
and promotional efforts to increase its penetration of existing markets and to
expand into new markets. Such market expansion would consist of initiating
promotional efforts to increase consumer trial and awareness of the Company's
brand-name products and by seeking additional private label customers for the
Company's products. The Company expects to achieve growth through regional
expansion of current products, development of new products and acquisitions.
See "-- Business Strategy."
The Company, a Delaware corporation, was organized in February 1995 and
currently has three operating subsidiaries, all acquired on May 31, 1995: two
manufacturing companies, PB Arizona and PB Southeast; and a distribution
company, PB Distributing. In June 1997, the Company sold the distribution
operations of a fourth operating subsidiary, PB Texas. In September 1997, the
Company announced that it would close its PB Southeast manufacturing operation
by the end of September 1997. In addition, the Company has a subsidiary, La
Cometa Properties, Inc., which owns the land and building associated with the
Company's recently completed 60,000 square manufacturing, distribution and
headquarters facility in Goodyear, Arizona. See "-- Company History" and "--
Facilities." In December 1996, the Company completed an initial public offering
of its Common Stock.
The Company's executive offices are located at 3500 South La Cometa Drive,
Goodyear, Arizona 85338, and its telephone number is (602) 932-6200.
Company History
PB Foods was founded in 1986 by Messrs. Donald and James Poore (the "Poore
Brothers"), each of whom has substantial experience in the potato chip industry.
The Poore Brothers also founded PB Distributing in 1990 and PB Texas in 1986,
which provided distribution capabilities for the Company's Poore Brothers (TM)
brand products. Prior to forming PB Foods, the Poore Brothers co-founded Groff's
of Texas, Inc. in 1983, which also manufactured batch fried potato chips. The
Poore Brothers had previously been employed for over thirteen years by Mira-Pak,
Inc., a designer and manufacturer of packaging equipment for the snack food
industry.
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In May 1993, Mark S. Howells and associated individuals formed PB
Southeast, which acquired a license from PB Foods to manufacture and distribute
Poore Brothers (TM) brand products. In 1994, PB Southeast opened a manufacturing
plant in LaVergne, Tennessee.
In November 1994, PB Southeast entered into a Purchase Agreement (the
"Purchase Agreement") with PB Foods, the Poore Brothers and Amelia E. Poore,
that provided for the acquisition by PB Southeast of (i) substantially all of
the assets, subject to certain liabilities, of PB Foods; (ii) a 100% equity
interest in PB Distributing; and (iii) an 80% equity interest in PB Texas,
after giving effect to a 32% equity interest to be purchased from other
stockholders of PB Texas not parties to the Purchase Agreement. Thereafter, the
Company was formed as a holding company and the rights and obligations of PB
Southeast under the Purchase Agreement were assigned to the Company. The
transactions contemplated by the Purchase Agreement were consummated on May 31,
1995. Subsequent to the acquisition date, the Company acquired the remaining
20% equity interest in PB Texas. The aggregate purchase price paid by the
Company in connection with these transactions was $4,057,163, $3,232,593 of
which was paid in cash, $500,000 of which was payable pursuant to a five-year
promissory note (paid off in January 1997) and the remainder of which was
satisfied by the issuance of 300,000 shares of Common Stock to the seller. See
"-- Debt Financings" and "Certain Transactions." The Purchase Agreement
contains a non-competition covenant pursuant to which each of the Poore
Brothers agreed not to compete against the Company, directly or indirectly, in
various states for a five-year period expiring on May 31, 2000.
Also in May 1995, the Company entered into an exchange agreement with
certain stockholders of PB Southeast, including Mark S. Howells, Jeffrey J.
Puglisi and Parris H. Holmes, Jr., all of whom are directors of the Company,
pursuant to which the Company agreed to acquire from them approximately 99% of
the outstanding shares of the capital stock of PB Southeast, in exchange for
the issuance to them of 1,560,000 shares of Common Stock, concurrently with and
subject to the consummation of the closing under the Purchase Agreement. Such
exchange was consummated on May 31, 1995. The remaining 1% of PB Southeast is
owned by James Gossett. See "-- Legal Proceedings." The acquisition by the
Company of its subsidiaries on May 31, 1995 is sometimes herein referred to as
the "PB Acquisition."
In December 1996, the Company completed an initial public offering of its
Common Stock, pursuant to which 2,250,000 shares of Common Stock were offered
and sold to the public at an offering price of $3.50 per share. Of such shares,
1,882,652 shares were sold by the Company and 367,348 shares were sold by the
holders of the 9% Convertible Debentures (Renaissance Capital Growth & Equity
Income Fund III, Inc. and Wells Fargo Equity Capital, Inc.), which acquired
such shares upon the conversion of $400,409 principal amount of the 9%
Convertible Debentures. The initial public offering was underwritten by
Paradise Valley Securities, Inc. (the "Underwriter"). The net proceeds to the
Company from the sale of the 1,882,652 shares of Common Stock, after deducting
underwriting discounts and commissions and the expenses of the offering payable
by the Company, were approximately $5,300,000. On January 6, 1997, an
additional 337,500 shares of Common Stock were sold by the Company upon the
exercise by the Underwriter of an over-allotment option granted to it in
connection with the initial public offering. After deducting applicable
underwriting discounts and expenses, the Company received net proceeds of
approximately $1,000,000 from the sale of such additional shares.
On June 4, 1997, PB Texas sold it's Houston Texas distribution business to
Mr. David Hecht (the "Buyer"), pursuant to an Asset Purchase, Licensing and
Distribution Agreement effective June 1, 1997. Under the Agreement, the Buyer
was sold certain assets of PB Texas (including inventory, vehicles and capital
equipment), was granted a license to be the Company's exclusive distributor in
the Houston, Texas market, and agreed not to distribute any other brand of
kettle chips.
In September 1997, the Company announced the closing of its manufacturing
operation in LaVergne, Tennessee and that it would consolidate all the PB
Southeast manufacturing operation into the Company's new Arizona facility.
Market Overview
According to the Snack Food Association ("SFA"), the U.S. market for salty
snack foods reached $16.0 billion at retail in 1996, with potato chips
accounting for approximately 33% of the market and
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tortilla chips, pretzels, popcorn and other products accounting for the
balance. Per capita snack consumption, in dollar terms, has increased every
year during the past six years, ranging from an increase of 6.0% (in 1990) to
0.4% (in 1994), with a 1996 increase of 4.4% to a rate of $60.42 per person per
annum. Potato chip sales have similarly increased steadily over the same
period, with 1996 retail sales of $5.3 billion (a 9.3% increase over 1995)
contrasted to 1990 sales of $4.3 billion.
The major snack food trend according to the SFA, continues to be notable
growth in the "better-for-you" (low-fat/reduced-fat) snack segment. Although
the salty snack food category experienced overall growth of less than 5% per
annum over the past three years, "better-for-you" salty snack foods have grown
at a much greater rate during this period. Numerous new reduced-fat and low-fat
products have been introduced since 1995. Supermarket sales of "better-for-you"
potato chips grew by 32% in 1996, representing nearly 11% of potato chip sales,
at the expense of traditional potato chips, particularly unflavored chips,
which lost market share.
The snack food industry is also rapidly changing in terms of major
manufacturers. In 1995, the second largest snack food manufacturer in the
United States, Eagle Snacks, a subsidiary of Anheuser-Busch, Inc. disclosed
that it had incurred significant losses in the snack food business and was
therefore leaving the business. Also in 1995, Keebler Company, the third
largest snack food company sold its snack food business and various regional
snack food manufacturers discontinued their operations. While these
circumstances have contributed to the increase in market share for Frito-Lay,
Inc., a subsidiary of PepsiCo., Inc., which is the dominant snack food
manufacturer in the United States, such circumstances have also presented sales
opportunities for regional and local snack food manufacturers, including the
Company.
Like other food manufacturers, producers of snack foods are attempting to
capitalize on consumer demand for healthier products. Many manufacturers have
targeted the low-fat/reduced-fat segment for rapid product expansion. Some
supermarkets now offer "health food" sections or separate "healthy snack" areas
in their snack aisles. Despite these factors, sales of reduced fat and low-fat
salty snack foods still constitute a relatively small portion of sales of all
salty snack food products.
Business Strategy
The Company's business objective is to become a leading regional
manufacturer and distributor of branded premium potato chips and other salty
snack foods by providing high quality products at competitive prices that are
superior in taste to comparable products. The Company plans to expand its sales
and promotional efforts to increase its penetration of existing markets and to
expand into new markets. Such market expansion would consist of initiating
promotional efforts to increase consumer trial and awareness of the Company's
brand name products and seeking additional private label customers for the
Company's products. The Company expects to achieve growth through regional
expansion of current products, development of new products and acquisitions.
The key elements of the Company's business strategy are as follows:
Increase consumer acceptance of Poore Brothers brand products. The
Company's branded products have achieved significant market penetration in
Phoenix, Arizona, Wichita, Kansas and St. Louis, Missouri. In addition,
since the beginning of 1997, the Company has achieved new distribution in
approximately 750 new stores in Southern California, Colorado, Texas, Ohio,
and North Carolina. The Company attributes the success of its products to
the taste resulting from its batch frying process and the variety of
flavors, sizes and types of products offered by the Company. To increase
awareness and acceptance of its products, the Company intends to increase
its advertising and distribution efforts in existing markets and in certain
key regional markets, including Southern California, Colorado, New Mexico
and Texas. The Company has added direct sales people to these targeted
geographies to manage sales and promotional activities. Such efforts
include, among other things, joint advertising with supermarkets and other
manufacturers, in-store product sampling, coupon distribution and Poore
Brothers in-store advertisements and displays.
Expand Private Label Business. In the first quarter of 1996, the Company
entered into agreements with two Arizona grocery chains for the manufacture
and distribution by the Company of their respective private label potato
chips. The Company manufactures potato chips for these customers
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in various types and flavors as specified by them. The Company believes
that many opportunities exist for the Company to expand this segment of its
business. Consequently, the Company installed a continuous fryer in its new
Arizona facility that produces approximately 2,100 pounds of potato chips
per hour. This new continuous fryer began producing private label potato
chips in July 1997. The Company intends to utilize the new continuous fryer
to produce private label products for additional grocery chains in the
Southwestern United States.
Develop New Products. The Company intends to develop new products that
leverage its expertise in manufacturing, marketing and distributing snack
food products. The Company believes it can develop new snack food products
that consumers perceive to be superior in taste, texture, appearance and
brand personality, resulting in increased consumer demand and shelf space
for Company products.
Continue to Improve Operations. The Company's management team has
focused efforts on reducing costs and improving product quality. In August
1997, the Company's Arizona operations were consolidated into a single new
facility, which should result in increased efficiencies from the Company's
investments in new machinery and processes. The Company also invested in a
new quality assurance lab and personnel to improve the Company's ability to
consistently produce products within a narrow specification range. In
September 1997, the Company announced the closing of its manufacturing
operation in LaVergne, Tennessee and that it would consolidate all of the
PB Southeast manufacturing operation into the Company's new Arizona
facility.
Products
Potato Chips. Poore Brothers (TM) brand potato chips were first introduced
by the Poore Brothers in 1986 and have accounted for substantially all of the
Company's manufacturing sales to date. The potato chips are marketed by the
Company as a premium product based on their distinctive combination of cooking
method and variety of distinctive flavors. The potato chips manufactured by the
Company consist of two primary types, regular and low-fat. The Company's regular
potato chips are currently offered in ten flavors: Original, Salt & Vinegar, Au
Gratin, Barbecue, Cajun, Dill Pickle, Grilled Steak & Onion, Jalapeno, No Salt
and Parmesan & Garlic. The Company's low-fat potato chips, which were introduced
in June 1996, are produced in five flavors: Original, No Salt, Au Gratin, Salt &
Vinegar and Barbecue. See "-- Manufacturing." Also in 1996, the Company entered
into agreements with two Arizona grocery chains pursuant to which the Company
produces their respective private label potato chips in the styles and flavors
specified by such grocery chains.
Other Snack Food Products. Through its Arizona distribution subsidiary,
PB Distributing, the Company purchases and resells snack food products
manufactured by others. Such products include pretzels, crackers, snack nuts
and meat snacks.
Manufacturing
The Company believes that a key element of its growth to date has been its
use of certain cooking techniques and key ingredients in the manufacturing
process to produce potato chips with improved flavor. These techniques
currently involve two elements: the Company's use of a batch frying process for
its brand name products, as opposed to the conventional continuous line cooking
method, and the Company's use of distinctive seasonings to produce potato chips
in a variety of flavors. The Company believes that its batch frying process is
superior to conventional continuous line cooking methods because it enhances
crispness and flavor through greater control over temperature and other cooking
conditions. Although this manufacturing method produces less volume than the
continuous line techniques of larger manufacturers, the Company believes that
this method facilitates the production of potato chips with enhanced crispness
and flavor.
Production Facilities. In August 1997, the Company completed the
transition of all Arizona manufacturing operations into its newly constructed
Goodyear, Arizona production facility. The new Goodyear facility has the
capacity to produce approximately 3,000 pounds of potato chips per hour, with
approximately 2,100 pounds of such capacity being produced using a continuous
frying method and the remainder
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being produced using the Company's batch frying method. In September 1997, the
Company announced the closing of its manufacturing operation in LaVergne,
Tennessee and that it would consolidate all the PB Southeast manufacturing
operation into the Company's new Arizona facility. The Company plans to move
most of the Tennessee equipment (with an aggregate capacity of approximately 720
pounds per hour) and install it in its new Arizona facility.
Private Label Products. In order to meet potential demand for private
label products, the Company installed a continuous fryer potato chip line that
produces approximately 2,100 pounds per hour. In July 1997, the Company began
producing private label potato chips with the new continuous fryer. There can
be no assurance that the Company will obtain sufficient business to recoup the
costs of its investment in, and alterations of its facilities.
Low-Fat Potato Chips. The Company has an Agreement with Great Snaxx of AZ
L.L.C. ("Great Snaxx") pursuant to which Great Snaxx granted the Company rights
in the states of Arizona, California, Nevada, Colorado and New Mexico
(collectively, the "Territory") to market low-fat potato chips processed by
Great Snaxx. The Company pays a per pound processing fee to Great Snaxx for the
application of Great Snaxx's patented oil extraction process. The Company began
selling low-fat potato chips processed by Great Snaxx in June 1996. The
processed potato chips have approximately two grams of fat per serving, in
contrast to the 8-10 grams of most standard potato chips.
The Great Snaxx Agreement expires on September 19, 2006. The Company may
lose its exclusive marketing rights in the Territory if certain minimum fees
are not paid to Great Snaxx during prescribed periods. In addition, Great Snaxx
has certain rights to terminate the Great Snaxx Agreement prior to its
expiration date. On September 3, 1997, the Company was notified that Great
Snaxx had sustained an interruption in its ability to process low-fat potato
chips. There can be no assurance as to when or if Great Snaxx will resume
processing low-fat potato chips. The termination by Great Snaxx of the Great
Snaxx Agreement or the failure by Great Snaxx to perform its obligations under
the Great Snaxx Agreement for any reason could have a material adverse effect
on the Company's ability to produce low-fat potato chips. In the case of such a
termination or failure, the Company would consider producing low-fat potato
chips using an alternative production method, such as baking or the use of
alternative cooking oils. There can be no assurance, however, that the Company
would be successful in utilizing an alternative method or that low-fat potato
chips produced by the Company with any of such methods would be accepted in the
marketplace.
Marketing and Distribution
The Company sells its products primarily in targeted markets in the
western and southern United States. The Company's products are distributed by
the Company through a select group of independent distributors.
The Company's Arizona distribution subsidiary operates throughout Arizona,
with 35 independently operated service routes. Each route is operated by an
independent contractor who carries in excess of 55 items to most major grocery
store chains in Arizona, such as Albertson's, ABCO, Basha's, Fry's, Safeway,
Smith's, and Smitty's Food Stores. In addition to servicing major supermarket
chains, the Company's distributors service many independent grocery stores,
delicatessens, club stores (including Price/Costco and Sam's), and military
facilities throughout Arizona. In addition to Poore Brothers (TM) brand
products, the Company distributes throughout Arizona a wide variety of other
items manufactured by other companies, including pretzels, crackers, snack nuts
and meat snacks. The Company also sells Poore Brothers (TM) brand potato chips
to America West Airlines and Trans World Airlines for passenger service.
Outside of Arizona the Company selects distributors primarily on the basis
of quality of service, call frequency on customers, financial capability and
relationships they have with supermarkets, including access to shelf space in
the store's snack aisles. As of June 30, 1997, the Company had arrangements
with over 35 distributors in a number of major cities, including St. Louis,
Denver, San Diego, Los Angeles, San Antonio, Cincinnati, Houston, Albuquerque,
Wichita, Oklahoma City, Tampa, Richmond and Minneapolis.
Successful marketing of the Company's products depends, in part, upon
obtaining adequate retail shelf space for such products, particularly in
supermarkets. Frequently, the Company incurs additional
24
<PAGE>
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 existing demand for the Company's products,
relative availability of shelf space and general competitive conditions. There
can be no assurance that the Company will not incur significant shelf space or
other promotional costs as a necessary condition of entering into competition
in particular markets or stores. Such costs may materially affect the Company's
financial performance.
Suppliers
The principal raw materials used by the Company are potatoes and oil. The
Company believes that the raw materials it needs to produce its products are
readily available from numerous suppliers on commercially reasonable terms.
Potatoes are widely available year-round, either freshly harvested or from
storage during the winter months. The Company uses TRISUN(R), a low in saturated
fat sunflower oil, in the production of its Poore Brothers (TM) brand potato
chips, which is supplied by AC Humko Corporation. The Company believes that
alternative cooking oils that are low in saturated fat are readily abundant and
available. The Company also uses flavorings and packaging material in its
manufacturing process. The Company chooses its suppliers based primarily on
price, availability and quality and does not have any long-term arrangements
with any supplier. Although the Company believes that its requirements for
products and ingredients are readily available, and that its business success is
not dependent on any single supplier, the failure of certain suppliers to meet
the Company's performance specifications, quality standards or delivery
schedules could have a material adverse effect on the Company's operations. In
particular, a sudden scarcity, a substantial price increase, or an
unavailability of product ingredients could materially adversely affect the
Company's operations. There can be no assurance that alternative ingredients
would be available when needed and on commercially attractive terms, if at all.
Customers
One customer of the Company, Fry's Food Stores, a subsidiary of Kroger,
Inc., accounted for 16% of the Company's 1996 revenues, and along with
Albertson's, Inc., accounted for 15% and 11%, respectively, of the Company's
1995 revenues, with the remainder of the Company's 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 sales for 1996. For the six months ended June 30, 1997, two
customers of the Company, Fry's Food Stores and Safeway Inc., accounted for 17%
and 11%, respectively, of the Company's revenues. A decision by any of its
major customers to cease or substantially reduce their purchases could have a
material adverse effect on the Company's business.
Competition
The Company's products compete generally against other salty snack foods,
including potato chips, tortilla chips, popcorn and pretzels. The salty snack
food industry is large and highly competitive and is dominated primarily by
Frito-Lay, Inc., a subsidiary of PepsiCo, Inc. Frito-Lay, Inc. possesses
substantially greater financial, production, marketing, distribution and other
resources than the Company and brands that are more widely recognized than the
Company's products. In addition, numerous other companies that are actual or
potential competitors of the Company have greater financial and other resources
(including more employees and more extensive facilities) than the Company.
Local or regional markets often have significant smaller competitors, many of
whom offer batch fried or low-fat products similar to those of the Company.
Expansion of Company operations to other areas of the United States has and
will continue to encounter significant competition from national, regional and
local competitors that may be greater than that encountered by the Company in
its existing markets. In addition, such competitors may challenge the Company's
position in its existing markets. While the Company believes that its
specialized products and method of operations will enable it to compete
successfully, there can be no assurance of its ability to do so.
The principal competitive factors affecting the market of the Company's
products include product quality and taste, brand awareness among consumers,
supermarket shelf space, price, advertising and promotion, variety of snacks
offered, nutritional content, product packaging and package design. Management
believes that the Company's potato chips compete based primarily upon their
taste, distinctive cooking method and variety of flavors that are available.
25
<PAGE>
Facilities
The Company owns a 60,000 square foot facility located on 7.7 acres of
land in Goodyear, Arizona, approximately 15 miles west of Phoenix, Arizona. In
August 1997, the Company completed the transition of all its Arizona operations
into the new facility. Construction of this new facility was completed in June
1997. The site will enable the Company to expand its facilities in the future
to a total building size of 120,000 square feet. The facility is financed by a
mortgage with Morgan Guaranty Trust Company of New York which matures in June
2012. See "-- Debt Financings."
On February 28, 1997, the Company sold its three 12,000 square foot
buildings in Goodyear, Arizona, which housed the Company's Arizona operations
and were replaced by the new facility. The net proceeds from the sale of the
properties, which approximated $710,000 were used to repay mortgages which
encumbered the properties and to repay the $500,000 principal amount of the
Poore Promissory Note. The Company leased the properties from the purchaser on
a month-to-month basis until the Company's relocation to its new facility was
completed in August 1997.
PB Southeast leases a 16,900 square foot manufacturing facility located in
LaVergne, Tennessee, approximately 15 miles south of Nashville, Tennessee. The
facility is leased under a lease agreement that expires in November 1998. In
September 1997, the Company announced plans to close its PB Southeast operation
and to consolidate all manufacturing operations into its new Arizona facility.
The Company believes that its facilities are adequately covered by
insurance.
Debt Financings
9% Convertible Debentures. In connection with the PB Acquisition, on May
31, 1995 the Company issued $2,700,000 aggregate principal amount of its 9%
Convertible Debentures due July 1, 2002 (the "9% Convertible Debentures") to
Wells Fargo Equity Capital, Inc. (formerly First Interstate Equity Corporation)
("Wells Fargo") and Renaissance Capital Growth & Income Fund III, Inc.
("Renaissance"). The 9% Convertible Debentures accrue interest at a rate of 9%
per annum, payable monthly. Installments of principal are due beginning on July
1, 1998 and each month thereafter until July 1, 2002, when all outstanding
principal is due and payable. In December 1996, in connection with the
Company's initial public offering, the holders of the 9% Convertible Debentures
converted $400,409 principal amount of the 9% Convertible Debentures into
367,348 shares of Common Stock. As of June 30, 1997, $2,299,591 principal
amount of the 9% Convertible Debentures remained outstanding. As of June 30,
1997, the Company was not in compliance with a financial ratio set forth in the
Convertible Debenture Loan Agreement dated May 31, 1995 (the "Debenture Loan
Agreement") that the Company is required to maintain so long as the 9%
Convertible Debentures are outstanding, related to a required interest ratio
coverage of 1.5:1. As a result of the Company's default under this requirement,
the holders of the 9% Convertible Debentures have the right, upon written
notice and after a thirty-day period during which such default may be cured, to
demand immediate payment of the then unpaid principal and accrued but unpaid
interest under the Debentures. However, the holders of the 9% Convertible
Debentures have granted the Company a waiver effective through September 1998.
At that time, the Company will be required to be in compliance with the
following financial ratios, so long as the 9% Convertible Debentures remain
outstanding: working capital of at least $1,000,000; minimum shareholders'
equity (net worth) that will be calculated based upon the earnings of the
Company and the consideration received by the Company from any future issuances
of securities by the Company; an interest coverage ratio of at least 1.5:1; and
a current ratio at the end of any quarter of at least 1.1:1. The Company is
currently in compliance with the minimum shareholders' equity, working capital
and current ratio requirements. Management believes that the fulfillment of the
Company's plans and objectives will enable the Company to attain a sufficient
level of profitability to be in compliance with the financial ratios; however,
there can be no assurance that the Company will attain any such profitability,
be in compliance with the financial ratios upon the expiration of the waivers
or be able to obtain an extension or renewal of the waivers. Any acceleration
under the 9% Convertible Debentures prior to their maturity on July 1, 2002
could have a material adverse effect upon the Company. The Debenture Loan
Agreement also contains various covenants that impose restrictions on certain
activities by the Company including the incurrence of additional
26
<PAGE>
encumbrances on assets, investments by the Company, the amendment of material
agreements, sales of assets other than in the ordinary course of business, and
mergers, consolidations or sales of substantially all of the Company's assets.
Renaissance and Wells Fargo have the right, at any time, to convert all or
any portion of their respective 9% Convertible Debentures into shares of Common
Stock at a current conversion price of approximately $1.09 per share, subject
to adjustment in certain events to prevent dilution. In addition, the holders
of the 9% Convertible Debentures have certain registration rights. See
"Description of Securities -- Registration Rights." In connection with the
Company's initial public offering, Wells Fargo and Renaissance agreed not to
sell any Common Stock held by them prior to January 1, 1998. The Company has
the right to redeem the 9% Convertible Debentures under certain circumstances.
Credit Agreement. On July 26, 1996, the Company entered into a Credit
Agreement with First Community Financial Corporation (the "Credit Agreement").
The Credit Agreement, as amended, expires on November 30, 1997 and bears
interest at an annual rate equal to the prime rate plus 3.50% (12.00% at June
30, 1997), with minimum interest of $2,500 per month. The Company may borrow up
to an amount equal to 75% of eligible receivables, representing accounts
receivable outstanding less than 60 days, subject to certain limitations. The
Credit Agreement contains various covenants that impose restrictions on certain
activities by the Company including, without limitation, incurrence of
additional indebtedness and liens, disposition of assets, changes in
management, and mergers or consolidations.
Arizona Facility Mortgage. Construction of the Company's new Arizona
manufacturing, distribution and headquarters facility was financed with a $2.4
million construction loan from the National Bank of Arizona, secured by a first
deed of trust on the land and the building. Interest on the construction loan
was at the prime rate plus 2% (10.25% at December 31, 1996). On June 4, 1997,
the Company refinanced the $1 million remaining balance on the construction
loan with a $2 million mortgage arrangement with Morgan Guaranty Trust Company
of New York. The fixed rate note bears interest at 9.03% and is secured by the
land and the building. The note matures on July 1, 2012, however monthly
principal and interest installments of $16,825 are determined based on a twenty
year amortization period.
Commercial Development Block Grant. In 1993, PB Southeast received a
seven-year $322,310 Commercial Development Block Grant (the "CDBG Loan"),
bearing interest at a rate of 3% per annum, from the State of Tennessee for
construction financing for its manufacturing plant in LaVergne, Tennessee. All
then outstanding principal of the CDBG Loan becomes due and payable on May 1,
2001. As of June 30, 1997, the outstanding principal amount of the CDBG Loan
was $177,874. The CDBG Loan is personally guaranteed by Mark S. Howells, the
Chairman of the Company's Board of Directors. The Company has agreed to
indemnify Mr. Howells with respect to his guarantee of the CDBG Loan. In
connection with the Company's plans to close its PB Southeast operation and
move certain assets to Arizona, the CDBG Loan maturity may be accelerated.
Leases. The Company has entered into a variety of finance and operating
leases. As of June 30, 1997, the Company had entered into leases for cooking
machinery, packaging machines, conveyor equipment and vehicles with an original
fair market value of approximately $1.2 million.
Government Regulation
The manufacture, labeling and distribution of the Company's products are
subject to the rules and regulations of various federal, state and local health
agencies, including the FDA. In May 1994, regulations under the NLEA concerning
labeling of food products, including permissible use of nutritional claims such
as "fat-free" and "low-fat," became effective. In order to comply with the NLEA
regulations, products labeled as "fat-free" may not contain more than 0.5 grams
of fat per ounce, and products labeled as "low-fat" may not contain more than
3.0 grams of fat per ounce. Fat-free products containing less than 0.3 grams of
fat per ounce are required under the NLEA regulations to be labeled as
containing 0 grams of fat.
The Company is complying with the NLEA regulations and closely monitors
the fat content of its products through various testing and quality control
procedures. The Company does not believe that compliance with the NLEA
regulations materially increases the Company's manufacturing costs. There
27
<PAGE>
can be no assurance that new laws or regulations will not further reduce the
permissible fat content of "fat-free" and "low-fat" products, which could
require the Company to alter the taste or composition of its products. Such
changes could affect sales of the Company's products and have a material
adverse effect on the Company.
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 June 30, 1997, the Company had 127 full-time employees, including
109 in manufacturing and distribution, 6 in sales and marketing and 12 in
administration and finance. In connection with the Company's plans to close its
LaVergne, Tennessee manufacturing operation, approximately 35 employees will be
terminated. 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.
Legal Proceedings
In June 1996, a lawsuit was commenced in an Arizona state court against
two directors of the Company, Mark S. Howells and Jeffrey J. Puglisi, and PB
Southeast which alleged, among other things, that the plaintiff, James Gossett,
had an oral agreement with Mr. Howells to receive a 49% ownership interest in
PB Southeast, that Mr. Howells breached fiduciary duties and other obligations
to Mr. Gossett and that Mr. Gossett was entitled to exchange such alleged stock
interest for shares in the Company. Mr. Gossett further alleged that Messrs.
Howells and Puglisi failed to honor the terms of an alleged distribution
agreement between PB Foods and Mr. Gossett. On July 11, 1997, summary judgment
was granted in favor of all defendants on all counts of the lawsuit. In its
Order, the Maricopa County (Arizona) Superior Court ruled that there was no
oral contract and that the remainder of the plaintiff's claims could not
support a cause of action against the defendants. No final judgement has been
entered by the Court to date and the time for filing post-judgement motions
and/or for perfecting an appeal has not expired.
28
<PAGE>
MANAGEMENT
Directors and Executive Officers
The executive officers and Directors of the Company, and their ages, are
as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Eric J. Kufel ............... 30 President, Chief Executive Officer,
Director
Thomas W. Freeze ............ 46 Vice President, Chief Financial Officer,
Treasurer, and Secretary
Scott D. Fullmer ............ 33 Vice President -- Sales and Marketing
Glen E. Flook ............... 39 Vice President -- Manufacturing
James M. Poore ............ 50 Vice President
Wendell T. Jones ............ 56 Director of Sales -- Arizona
Mark S. Howells ............ 43 Chairman, Director
Jeffrey J. Puglisi ......... 38 Director
Parris H. Holmes, Jr. ...... 53 Director
Robert C. Pearson ......... 62 Director
Aaron M. Shenkman ......... 56 Director
</TABLE>
Eric J. Kufel. Mr. Kufel has served as President, Chief Executive Officer
and a Director of the Company since February 1997. From November 1995 to
January 1997, Mr. Kufel was Senior Brand Manager at The Dial Corporation and
was responsible for the operating results of Purex Laundry Detergent. From June
1995 to November 1995, Mr. Kufel was Senior Brand Manager for The Coca-Cola
Company where he was responsible for the marketing and development of Minute
Maid products. From November 1994 to June 1995 Mr. Kufel was Brand Manager for
The Coca-Cola Company, and from June 1994 to November 1994, Mr. Kufel was
Assistant Brand Manager for The Coca-Cola Company. From January 1993 to June
1994, Mr. Kufel was employed by The Kellogg Company in various capacities
including being responsible for introducing the Healthy Choice line of cereal
and executing the marketing plan for Kellogg's Frosted Flakes cereal. Mr. Kufel
earned a Masters of International Management from the American Graduate School
of International Management in December 1992.
Thomas W. Freeze. Mr. Freeze has served as Vice President, Chief Financial
Officer, Secretary and Treasurer of the Company since April 1997. From April
1994 to April 1997, Mr. Freeze served as Vice President, Finance and
Administration -- Retail of New England Business Service, Inc. From October
1989 to April 1994, Mr. Freeze served as Vice President, Treasurer and
Secretary of New England Business Service, Inc.
Scott D. Fullmer. Mr. Fullmer has served as Vice President -- Sales and
Marketing of the Company since February 1997. From September 1993 to February
1997, Mr. Fullmer served in various capacities with The Dial Corporation,
including Senior Brand Manager, where he was responsible for managing the sales
and advertising for Dial Soap. From February 1992 to September 1993, Mr.
Fullmer was Product Manager for Sara Lee Corp. From April 1989 to February
1992, Mr. Fullmer served in various capacities with Borden, Inc. including
Product Manager, Snack Foods, where he was responsible for managing the
merchandising of selected snack food products including potato chips. From May
1986 to April 1989, Mr. Fullmer was in sales management at Frito Lay, Inc.
Glen E. Flook. Mr. Flook has served as Vice President -- Manufacturing
since March 1997. From January 1994 to February 1997, Mr. Flook was employed by
The Dial Corporation as a Plant Manager for a manufacturing operation that
generated $40 million in annual revenues. From January 1983 to January 1994,
Mr. Flook served in various capacities with Frito-Lay, Inc., including Plant
Manager and Production Manager.
James M. Poore. Mr. Poore has served as a Vice President of the Company
since June 1995. Mr. Poore co-founded Poore Brothers Foods, Inc. in 1986 and
served as its Vice President, Secretary, Treasurer and Director until the PB
Acquisition in May 1995. In addition, Mr. Poore served as the Secretary
29
<PAGE>
and a Director of PB Distributing, a subsidiary of the Company, from January
1990 to May 1995, and as Chairman of the Board and a Director of PB Texas, a
subsidiary of the Company, from May 1991 to May 1995. In 1983, he co-founded
Groff's of Texas, Inc., a potato chip manufacturer in Brookshire, Texas, and
served as its President until January 1986.
Wendell T. Jones. Mr. Jones has been the Director of Sales -- Arizona
since February 1997. Previously, Mr. Jones was National Sales Manager of the
Company from January 1996 to February 1997. From 1969 to 1996, Mr. Jones served
in various capacities at Frito-Lay, Inc., including Director of Sales,
Operations Manager and Manager -- Trade Development.
Mark S. Howells. Mr. Howells has served as Chairman of the Board of the
Company since March 1995. For the period from March 1995 to August 1995, Mr.
Howells also served as President and Chief Executive Officer of the Company. He
has served as the Chairman of the Board of PB Southeast, a subsidiary of the
Company, since its inception in May 1993 and served as its President and Chief
Executive Officer from May 1993 to August 1994. Since 1988, Mr. Howells has
devoted a majority of his time to serving as the President and Chairman of
Arizona Securities Group, Inc., a registered securities broker-dealer.
Jeffrey J. Puglisi. Mr. Puglisi has served as a Director of the Company
since March 1995. From March 1996 to August 1996, Mr. Puglisi also served as
Vice Chairman of the Company. For the period from August 1995 to March 1996,
Mr. Puglisi served as Chief Executive Officer of the Company. For the period
from March 1995 to August 1995, Mr. Puglisi served as Executive Vice President,
Chief Operating Officer, Secretary and Treasurer of the Company. He also served
as President, Chief Executive Officer and a Director of PB Southeast from
August 1994 to August 1995. Since 1988, Mr. Puglisi has also served as the
Senior Vice President of Arizona Securities Group, Inc.
Parris H. Holmes, Jr. Mr. Holmes has served as a Director of the Company
since March 1995. Since August 1, 1996, Mr. Holmes has served as Chairman of
the Board and Chief Executive Officer of Billing Information Concepts Corp., a
third-party provider of billing clearing house and information services to the
telecommunications industry. Prior to August 1996, Mr. Holmes served as Chief
Executive Officer of U.S. Long Distance Corp. ("USLD"). In addition, Mr. Holmes
has served as Chairman of the Board of USLD since September 1986. Mr. Holmes is
also a member of the Board of Directors of Tanisys Technology, Inc., a
developer and marketer of computer peripheral equipment. From 1992 to 1996, Mr.
Holmes was a director of Medical Polymers Technologies, Inc., a biomedical firm
specializing in the development of polymer-based technologies.
Mr. Holmes has advised the Company that the staff of the Commission has
determined to terminate an investigation of certain transactions in the
securities of USLD, which has publicly traded securities. The investigation had
concerned whether certain persons had purchased securities while in possession
of material non-public information or disclosed this information to others. Mr.
Holmes has also advised the Company that on December 18, 1996, the Commission
filed a civil injunctive action in federal court alleging that Mr. Holmes
failed to file timely twelve reports regarding certain transactions made in
1991 and 1992 in the stock of USLD, as required by Section 16(a) of the
Exchange Act. Mr. Holmes settled this action on December 18, 1996, without
admitting or denying the allegations of the complaint, by consenting to the
entry of an injunction barring future violations with respect to these
requirements and paying a civil penalty of $50,000.
Robert C. Pearson. Mr. Pearson has served as a Director of the Company
since March 1996. Mr. Pearson has been Senior Vice President -- Corporate
Finance for Renaissance Capital Group, Inc. since April 1997. Previously, Mr.
Pearson had been an independent financial and management consultant
specializing in investments with emerging growth companies. He has performed
services for Renaissance Capital Partners ("RCP") in connection with the
Company and other RCP investments. RCP is the operating manager of Renaissance
Capital Growth & Income Fund III, Inc. ("Renaissance"), the owner of a 9%
Convertible Debenture. From 1990 to 1994, Mr. Pearson served as Executive Vice
President and Chief Financial Officer of Thomas Group, Inc., a publicly traded
consulting firm. Prior to 1990, Mr. Pearson was Vice President -- Finance of
Texas Instruments, Incorporated.
30
<PAGE>
Pursuant to a Convertible Debenture Loan Agreement dated May 31, 1995
among the Company, Renaissance and Wells Fargo Equity Capital, Inc. ("Wells
Fargo"), so long as the 9% Convertible Debentures issued by the Company have
not been fully converted into shares of Common Stock or redeemed or paid by the
Company, Renaissance shall be entitled to designate a nominee to the Company's
Board of Directors subject to election by the Company's stockholders. Mr.
Pearson was designated as a nominee to the Board of Directors by Renaissance.
See "Business -- Debt Financings."
Aaron M. Shenkman. Mr. Shenkman has served as a Director of the Company
since June 1997. Since March 1997, he has served as the Vice-Chairman of Helen
of Troy Corp., a distributor of personal care products. From February 1984 to
February 1997, Mr. Shenkman was the President of Helen of Troy Corp. From 1993
to 1996, Mr. Shenkman also served as a Director of Craftmade International, a
distributor of ceiling fans.
Executive Compensation
The following table sets forth certain information regarding compensation
paid during each of the Company's last two fiscal years, as applicable, to the
Company's Chief Executive Officers and those other executive officers of the
Company whose salary and bonuses, if any, exceeded $100,000 for the Company's
fiscal year ended December 31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------------------------------- ---------------------------------------
Awards Payouts
----------------------------- ---------
Restricted
Name and Other Annual Stock LTIP All Other
Principal Position Year(1) Salary Bonus Compensation Awards Options Payouts Compensation
------------------ ------- ------ ----- ------------ ------ ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
David J. Brennan (2) 1996 $ 96,154 -- $ 4,016(5) -- 130,000 (6) -- --
President, Chief 1995 -- -- -- -- -- -- --
Executive Officer and
Director
Jeffrey J. Puglisi (3) 1996 -- -- -- -- 110,000 -- --
Chief Executive Officer, 1995 -- -- -- -- 275,000 -- --
Executive Vice
President, Chief
Operating Officer,
Secretary, Treasurer,
Vice Chairman and
Director
Jeffrey H. Strasberg (4) 1996 100,750 -- 2,550(5) -- -- -- --
Vice President, Chief 1995 38,675 -- -- -- 83,333 (7) -- --
Financial Officer,
Secretary and
Treasurer
</TABLE>
- ----------------
(1) The Company was incorporated in February 1995.
(2) Mr. Brennan served as the Company's President and Chief Executive Officer
from March 1996 to February 1997. He also served as a Director of the
Company from March 1996 to June 1997.
(3) Mr. Puglisi served as the Company's Chief Executive Officer from August
1995 to March 1996, and as Vice Chairman from March 1996 to August 1996.
From March 1995 to August 1995, Mr. Puglisi also served as Executive Vice
President, Chief Operating Officer, Secretary and Treasurer of the
Company. Mr. Puglisi has served as a Director of the Company since March
1995.
(4) Mr. Strasberg served as Vice President, Chief Financial Officer, Secretary
and Treasurer from July 1995 to April 1997.
(5) Represents the value of a company vehicle provided to Mr. Brennan for his
exclusive use and a car allowance provided to Mr. Strasberg.
(6) Excludes options to purchase 200,000 shares of Common Stock that were
granted to Mr. Brennan in 1996 and were canceled in February 1997 in
connection with his resignation as President and Chief Executive Officer
of the Company.
31
<PAGE>
(7) Excludes options to purchase 41,667 shares of Common Stock that were
granted to Mr. Strasberg in 1995 and were canceled in March 1997 in
connection with his resignation as Vice President, Chief Financial
Officer, Secretary and Treasurer of the Company.
The following tables set forth information concerning stock options
granted during the fiscal year ended December 31, 1996 for the individuals
shown in the Summary Compensation Table. Stock appreciation rights were not
granted in connection with any such stock options during the fiscal year ended
December 31, 1996. No stock options were exercised during the fiscal year ended
December 31, 1996.
OPTION GRANTS IN LAST FISCAL YEAR
(Individual Grants)
<TABLE>
<CAPTION>
Number of Shares of Percent of Total Options
Common Stock Underlying Granted to Employees in Exercise Price
Name Options Granted Fiscal Year (1) per Share Expiration Date
---- --------------- --------------- --------- ---------------
<S> <C> <C> <C> <C>
David J. Brennan ......... 100,000 (1) 23% $ 1.25 March 29, 2001
30,000 7 3.50 October 22, 2001
Jeffrey J. Puglisi ...... 100,000 23 1.25 March 1, 2006
10,000 2 3.50 October 22, 2006
</TABLE>
- ----------------
(1) Excludes options to purchase 200,000 shares of Common Stock that were
canceled in February 1997 in connection with Mr. Brennan's resignation as
President and Chief Executive Officer of the Company.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
Number of Shares of Common
Stock Underlying Unexercised Value of Unexercised
Options at In-the-Market Options at
Name December 31, 1996 December 31, 1996 (3)
- --------------------------------- ------------------------------- ------------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
David J. Brennan (1) ............ 30,000 100,000 $ 11,250 $262,500
Jeffrey J. Puglisi ............ 385,000 ---- 1,034,352 --
Jeffrey H. Strasberg (2) ...... 41,667 41,666 116,380 116,377
</TABLE>
- ----------------
(1) Excludes options to purchase 200,000 shares of Common Stock that were
canceled in February 1997 in connection with Mr. Brennan's resignation as
President and Chief Executive Officer of the Company.
(2) Excludes options to purchase 41,666 shares of Common Stock that were
canceled in March 1997 in connection with Mr. Strasberg's resignation as
Vice President, Chief Financial Officer, Secretary and Treasurer of the
Company.
(3) Value is the difference between the market value of the Company's Common
Stock on December 31, 1996, which was $3.875 per share, and the exercise
price.
Employment Agreements
Mr. Eric J. Kufel was appointed as President and Chief Executive Officer
and elected to the Board of Directors of the Company effective February 3,
1997. Mr. Kufel is employed under an "at will" employment agreement which
provides for a base salary of $115,000 per year, use of a Company vehicle and
participation in Company bonus plans, the terms of which are yet to be
determined. Mr. Kufel's salary is subject to increases at the discretion of the
Company's Board of Directors. Pursuant to his employment agreement, Mr. Kufel
was granted options to purchase 300,000 shares of Common Stock at a price of
$3.5625 per share. The options vest over a three-year period and expire five
years from the date of grant. Mr. Kufel's employment agreement contains a
non-competition covenant.
32
<PAGE>
In addition to Mr. Kufel, the other executive officers of the Company have
entered into employment agreements with the Company. With the exception of
Messrs. Poore and Jones, the employment of the other executive officers is on
an "at-will" basis. In addition, with the exception of Mr. Jones, the other
executive officers are subject to non-competition covenants.
Stock Options
In May 1995, the Company adopted the 1995 Poore Brothers, Inc. Stock
Option Plan (the "Stock Option Plan"). The Stock Option Plan permits the grant
of "incentive stock options" within the meaning of Section 422A of the Internal
Revenue Code of 1986, as amended, as well as non-qualified stock options. The
Stock Option Plan is administered by the Board of Directors or a committee
appointed by the Board, which determines the persons to whom options are
granted, and the number and terms of the options, including the exercise price.
The Stock Option Plan is currently being administered by the Board of
Directors. The Stock Option Plan originally provided for the issuance of
options to purchase up to 300,000 shares of Common Stock, at an exercise price
not less than fair market value at the date of grant. The Stock Option Plan was
amended, effective August 30, 1996, pursuant to which the number of shares of
Common Stock issuable under the Stock Option Plan was increased to 1,000,000
shares. On June 12, 1997, the Stock Option Plan was amended again to increase
the number of shares of Common Stock issuable thereunder by 500,000 shares,
from 1,000,000 to 1,500,000. Options granted pursuant to the Stock Option Plan
expire five years from the date of grant unless the optionee's employment is
terminated prior to the expiration date, in which case the optionee's options
may terminate prior to the expiration date in accordance with the terms of the
Stock Option Plan. The Company has granted options under the Stock Option Plan
to purchase an aggregate of 1,776,950 shares of Common Stock at an average
exercise price of $2.29 per share (with options to purchase 577,999 of such
shares having been cancelled). Such options were granted by the Company as
additional compensation for the services performed by the respective optionees.
Stock options granted to the Company's employees typically vest over a
three-year period after their respective dates of grant, and stock options
granted to the Directors typically vest immediately or upon the expiration of a
one-year period after the date of grant. There are currently outstanding under
the Stock Option Plan incentive stock options to purchase 875,747 shares of
Common Stock and non-qualified stock options to purchase 257,871 shares of
Common Stock. As of the date of this Prospectus 65,333 options granted under
the Stock Option Plan have been exercised.
In addition, in 1995 and 1996 the stockholders of the Company approved
grants of options to Mr. Howells, Mr. Puglisi and Mr. Holmes which do not fall
under the Stock Option Plan. As of the date of this Prospectus, 820,000 of such
non-plan options were outstanding with an average exercise price of $1.18 per
share. These options, which vested on their respective dates of grant, expire
ten years from the date of grant and do not terminate if such persons cease to
be directors of the Company. Each of Messrs. Howells, Puglisi, and Holmes is
entitled to certain registration rights with respect to the Common Stock
underlying his respective stock options. See "Description of Securities --
Registration Rights."
All of the shares of Common Stock issued pursuant to, or reserved for
issuance under, the Stock Option Plan, as well as the 820,000 outstanding
non-plan options, have been registered pursuant to a Registration Statement
that was filed with the Commission on April 29, 1997.
Compensation of Directors
In order to attract and retain highly competent persons as Directors and
as compensation for Directors' service on the Board, the Company may, from time
to time, grant stock options or issue shares of Common Stock to Directors. In
June 1997, the Company granted options to purchase 15,000 shares of Common
Stock to each Director elected at the annual meeting of stockholders. Such
options vest upon the expiration of a period of one year from the date of
grant. In addition, the Company granted to Mr. Shenkman, who had not served as
a Director prior to the annual meeting of stockholders, an option to purchase
an additional 10,000 shares of Common Stock, which vested immediately.
Directors are reimbursed for out-of-pocket expenses incurred in attending
meetings of the Board of Directors and for other expenses incurred in their
capacity as directors.
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<PAGE>
Board Committees
The Board of Directors conducts its business through meetings of the Board
of Directors and through its standing committees. To date, two committees have
been established -- an Audit Committee and a Compensation Committee.
The Audit Committee: (i) makes recommendations to the Board of Directors
as to the independent accountants to be appointed by the Board of Directors;
(ii) reviews with the Company's independent accountants the scope of their
examinations; (iii) receives the reports of the independent accountants for the
purpose of reviewing and considering questions relating to their examination
and such reports; (iv) reviews, either directly or indirectly or through
independent accountants, the internal accounting and auditing procedures of the
Company; (v) reviews related party transactions; and (vi) performs such other
functions as may be assigned to it from time to time by the Board of Directors.
The Audit Committee is comprised of two members of the Board of Directors,
Messrs. Pearson and Howells. The chairman of the Audit Committee is Mr.
Pearson. The Audit Committee was established on October 22, 1996.
The Compensation Committee reviews and recommends the compensation of
executive officers and key employees. The Compensation Committee is comprised
of two members of the Board of Directors, Messrs. Howells and Shenkman. The
chairman of the Compensation Committee is Mr. Shenkman. The Compensation
Committee was established on June 12, 1997.
Limitation of Liability and Indemnification Matters
The Company's Certificate of Incorporation provides that no director shall
have any personal liability to the Company or its stockholders for any monetary
damages for breach of fiduciary duty as a director, except that the Certificate
of Incorporation does not eliminate or limit the liability of each director (i)
for any breach of such director's duty of loyalty to the Company or its
stockholders, (ii) for acts of omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174
of the General Corporation Law of the State of Delaware or (iv) for any
transaction from which such director derived an improper personal benefit. As a
result of this provision, the ability of the Company or a stockholder thereof
to successfully prosecute an action against a director for a breach of his duty
of care has been limited. However, this provision does not affect the
availability of equitable remedies such as an injunction or rescission based
upon a director's breach of his duty of care.
The Company's By-Laws provide mandatory indemnification rights to any
officer or director of the Company who, by reason of the fact that he or she is
an officer or director of the Company, is involved in a legal proceeding of any
nature. Such indemnification rights include reimbursement for expenses incurred
by such officer or director in advance of the final disposition of such
proceeding. The By-Laws also provide that the Company may in the discretion of
the Board of Directors, purchase insurance on behalf of any officer or director
against any liability asserted against and incurred by such person in such
capacity.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, the Company has been advised that
in the opinion of the Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock as of August 29, 1997 by (i)
each person known by the Company to be the beneficial owner of more than 5% of
the outstanding Common Stock, (ii) each director and nominee for director of
the Company, (iii) each executive officer of the Company listed in the Summary
Compensation Table set forth in "Executive Compensation" above, and (iv) all
executive officers and directors of the Company as a group, as of August 29,
1997.
<TABLE>
<CAPTION>
Amount and Nature of
Beneficial Ownership of Percent of Shares of Common
Name of Beneficial Owner Common Stock (1) Stock Beneficially Owned (2)
------------------------ ---------------- ----------------------------
<S> <C> <C>
Mark S. Howells .......................................... 748,137(3)(13) 10.1%
2390 E. Camelback Road
Suite 203
Phoenix, AZ 85016
Eric J. Kufel .......................................... 0(4) 0
3500 South La Cometa Drive
Goodyear, AZ 85338
Jeffrey J. Puglisi ....................................... 810,001(5)(13) 10.9
2390 E. Camelback Road
Suite 203
Phoenix, AZ 85016
David J. Brennan ....................................... 330,000(6)(13) 4.6
3121 E. Washington Street
Phoenix, AZ 85034
Parris H. Holmes, Jr. .................................... 348,000(7)(13) 4.9
9311 San Pedro Street
Suite 300
San Antonio, TX 78216
Robert C. Pearson ....................................... 0(8) 0
8080 North Central Expressway
Suite 210/LB59
Dallas, TX 75206
Aaron M. Shenkman ....................................... 10,000(9) *
716 Gary Lane
El Paso, TX 79922
Jeffrey H. Strasberg .................................... 68,434(10) (13) 1.0
13260 N. 82 Place
Scottsdale, AZ 85260
Renaissance Capital Growth & Income Fund III, Inc. ...... 1,640,891(11) 18.9
8080 North Central Expressway
Suite 210/LB59 Dallas, TX 75206
Wells Fargo Equity Capital, Inc. ........................ 468,826(11) 6.2
One Montgomery Street
West Tower, Suite 2530
San Francisco, CA 94104
All executive officers and directors as a group
(9 persons) (12) ....................................... 1,916,138 24.3
</TABLE>
- ----------------
* Less than one percent (1%)
(1) Unless otherwise indicated, each of the persons named has sole voting and
investment power with respect to the shares reported.
(2) Shares of Common Stock which an individual or group has a right to acquire
within 60 days pursuant to the exercise of options or warrants are deemed
to be outstanding for the purpose of computing the percentage ownership of
such individual or group, but are not deemed to be outstanding for the
purpose of computing the ownership percentage of any other person shown in
the table. As of August 29, 1997, the date as of which these percentages
are calculated, there were 7,051,657 shares of Common Stock issued and
outstanding.
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<PAGE>
(3) Excludes 40,000 shares of Common Stock held of record by trusts with
Jeannie L. Howells, the former wife of Mr. Howells, for the benefit of Mr.
Howells' children. Includes 385,000 shares of Common Stock that Mr.
Howells has the right to acquire upon the exercise of stock options
granted outside of the Stock Option Plan which are exercisable within 60
days. Excludes 15,000 shares of Common Stock issuable upon the exercise of
stock options which have not yet vested and which are not exercisable
within 60 days.
(4) Excludes 350,000 shares of Common Stock issuable upon the exercise of
stock options which have not yet vested and which are not exercisable
within 60 days.
(5) Includes 385,000 shares of Common Stock that Mr. Puglisi has the right to
acquire upon the exercise of stock options granted outside of the Stock
Option Plan which are exercisable within 60 days. Excludes 15,000 shares
of Common Stock issuable upon the exercise of stock options which have not
yet vested and which are not exercisable within 60 days.
(6) Includes 130,000 shares of Common Stock that Mr. Brennan has the right to
acquire upon the exercise of stock options granted pursuant to the Stock
Option Plan which are exercisable within 60 days.
(7) Includes 4,000 shares held by his spouse for which shares Mr. Holmes may
be deemed to be the "beneficial owner" for purposes of Rule 13d-3 under
the Exchange Act. Includes 50,000 shares of Common Stock that Mr. Holmes
has the right to acquire upon the exercise of stock options granted
outside of the Stock Option Plan which are exercisable within 60 days.
Excludes 15,000 shares of Common Stock issuable upon the exercise of stock
options which have not yet vested and which are not exercisable within 60
days.
(8) Excludes 15,000 shares of Common Stock issuable upon the exercise of stock
options which have not yet vested and which are not exercisable within 60
days.
(9) Includes 10,000 shares of Common Stock issuable upon the exercise of stock
options which are exercisable within 60 days. Excludes 15,000 shares of
Common Stock issuable upon the exercise of stock options which have not
yet vested and which are not exercisable within 60 days.
(10) Includes 58,334 shares that Mr. Strasberg has the right to acquire upon
the exercise of stock options granted pursuant to the Stock Option Plan
which are exercisable within 60 days.
(11) Reflects shares of Common Stock that would be issued to these parties upon
the conversion of the 9% Convertible Debentures issued by the Company to
these parties, assuming that such conversion was effected at the
conversion price. Russell Cleveland exercises control over the 9%
Convertible Debenture owned by Renaissance. Richard K. Green is the
designated representative of Wells Fargo and, as such, exercises control
over the 9% Convertible Debenture held by Wells Fargo. Renaissance and
Wells Fargo have entered into agreements with the Underwriter, pursuant to
which they agreed not to convert their respective 9% Convertible
Debentures into shares of Common Stock prior to January 1, 1998, without
the prior written consent of the Underwriter.
(12) Includes (i) 830,000 shares of Common Stock which are issuable upon the
exercise of stock options which are exercisable within 60 days (10,000 of
which were granted pursuant to the Stock Option Plan and 820,000 of which
were granted outside of the Stock Option Plan), and (ii) 4,000 shares of
Common Stock that may be deemed to be beneficially owned as described in
(7) above. Excludes 790,000 shares of Common Stock issuable upon the
exercise of stock options which have not yet vested and which are not
exercisable within 60 days.
(13) Messrs. Howells, Puglisi, Brennan, Holmes and Strasberg have entered into
agreements with the Company pursuant to which they agreed not to exercise
their respective stock options that were exercisable on December 6, 1996
prior to December 6, 1997, except the exercise of the options by their
estates in the event of their death or, in the case of officers, upon the
termination of their employment with the Company. Furthermore, with
respect to such stock options exercised by officers after a termination of
employment, such officers have agreed not to transfer any of the shares
issued upon such exercise prior to December 6, 1997.
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<PAGE>
DESCRIPTION OF SECURITIES
Authorized Capital
The Company's authorized capital consists of 15,000,000 shares of Common
Stock, par value $0.01 per share, and 50,000 shares of Preferred Stock, par
value $100 per share.
Common Stock
As of August 29, 1997, there were 7,051,657 shares of Common Stock issued
and outstanding and held of record by 132 stockholders. After giving effect to
the Offering, including the issuance of 300,000 shares of Common Stock upon the
exercise in full of the Financing Warrant, and assuming (i) the Underwriter's
Warrant was exercised in full, (ii) all of the outstanding stock options were
exercised in full, and (iii) the 9% Convertible Debentures were converted into
shares of Common Stock, there would be a total of 11,639,992 shares of Common
Stock issued and outstanding.
The holders of the Common Stock are entitled to one vote for each share of
Common Stock held on all matters voted upon by the stockholders of the Company.
Subject to the rights of any then outstanding shares of Preferred Stock, the
holders of the Common Stock are entitled to such dividends as may be declared
in the discretion of the Board of Directors out of funds legally available for
such purpose. See "Dividend Policy." Holders of Common Stock are entitled to
share ratably in the net assets of the Company upon liquidation after payment
or provision for all liabilities and any preferential liquidation rights of any
Preferred Stock then outstanding. The holders of Common Stock have no
preemptive rights to purchase shares of capital stock of the Company. The
Common Stock is not subject to any redemption provisions and is not convertible
into any other securities of the Company. All issued and outstanding shares of
Common Stock are, and the Common Stock, if any, to be issued in connection with
the Offering upon the exercise in whole or in part of the Financing Warrant
will be, fully paid and non-assessable.
Preferred Stock
There are no shares of Preferred Stock issued or outstanding. Shares of
Preferred Stock of the Company may be issued from time to time as shares of one
or more classes or series. Subject to the provisions of the Certificate of
Incorporation and the limitations prescribed by law, the Board of Directors is
expressly authorized to adopt resolutions to issue shares of Preferred Stock,
to fix the number of shares outstanding and class or series, and to provide for
the voting powers, and such other relative rights, powers and preferences
thereof, including dividend rates, conversion rights, redemption prices and
liquidation preferences of the shares constituting any class or series of the
Preferred Stock, and such qualifications, limitations or restrictions thereof,
in each case without any further action or vote by the stockholders. The
Company has no current plans to issue any shares of Preferred Stock of any
class or series.
Financing Warrant
The Company issued the Financing Warrant to Westminster Capital, Inc. in
September 1996 in connection with the financing of its new Arizona facility.
The Financing Warrant entitles the registered holder thereof to purchase
300,000 shares of Common Stock at an exercise price per share of $1.40. The
Financing Warrant is exercisable until September 11, 2006. All of the shares of
Common Stock issuable upon the exercise of the Financing Warrant are being
registered pursuant to the Registration Statement of which this Prospectus is a
part. See "-- Registration Rights."
Underwriter's Warrant
In December 1996, in connection with the Company's initial public
offering, the Company issued to the Underwriter a warrant to purchase up to
225,000 shares of Common Stock (the "Underwriter's Warrant"). The Underwriter's
Warrant is exercisable during the period commencing December 6, 1997 and ending
December 6, 2001 at an exercise price of $4.38 per share. The Common Stock
underlying the Underwriter's Warrant is subject to certain anti-dilution
provisions in the event the Company declares a stock dividend or other
distribution, or engages in a reclassification, capital reorganization,
consolidation
37
<PAGE>
or merger. The holders of the Underwriter's Warrant have no voting, dividend or
other rights as stockholders of the Company with respect to the shares of
Common Stock underlying the Underwriter's Warrant until the Underwriter's
Warrant has been exercised and the purchase price for the purchased shares of
Common Stock has been paid in full to the Company. The Underwriter's Warrant
may not be sold, transferred, assigned or hypothecated during the term of the
Underwriter's Warrant except to officers of the Underwriter. The Underwriter's
Warrant and the underlying shares of Common Stock have been registered under
the Securities Act. See " -- Registration Rights."
Registration Rights
Underwriter's Warrant. The Company registered the offer and sale of the
Underwriter's Warrant and the Common Stock underlying the Underwriter's Warrant
in December 1996 in connection with the Company's initial public offering. The
Company is obligated to maintain an effective Registration Statement with
respect to the Underwriter's Warrant and the underlying Common Stock during the
six-year period which commenced on December 6, 1996. The Company has agreed to
indemnify the holders of the Underwriter's Warrant or of the underlying shares
of Common Stock registered pursuant to these registration rights. See
"--Underwriter's Warrant."
Financing Warrant. The shares of Common Stock issuable upon exercise of
the Financing Warrant are being registered pursuant to the Registration
Statement of which this Prospectus is a part. Pursuant to the provisions of the
Financing Warrant, the Company will be obligated to maintain the effectiveness
of the registration statement until the date of expiration of the Financing
Warrant or any shorter period of time specified by the holder thereof. The
Company has agreed to indemnify the holder of the Financing Warrant in
connection with the registration of the shares of Common Stock underlying the
Financing Warrant. See "-- Financing Warrant."
9% Convertible Debentures. The holders of the 9% Convertible Debentures
and the holders of shares of Common Stock acquired upon the conversion of all
or a portion of the 9% Convertible Debentures have the right under certain
circumstances to cause the Company to register the shares of Common Stock
underlying the 9% Convertible Debentures at the expense of the Company. In
addition, if the Company registers securities offered in connection with a
public offering of such securities for the Company's account or for the account
of its security holders, then the holders of the shares underlying the 9%
Convertible Debentures shall, subject to certain limitations, have the right to
elect to have included in such registration, at the expense of the Company, all
or a portion of such shares. The Company will be obligated to maintain the
effectiveness of any registration statement filed with the Commission in
connection with the registration of such shares until all such registered
shares have been distributed, or until 120 days have elapsed since the
registration statement was declared effective. The Company has agreed to
indemnify the holders of the 9% Convertible Debentures in connection with these
registration rights. See "Business -- Debt Financings." In connection with the
Company's initial public offering, the holders of the 9% Convertible Debentures
agreed that they will not convert the outstanding 9% Convertible Debentures
into shares of Common Stock or exercise any demand registration rights prior to
January 1, 1998, without the prior written consent of the Underwriter.
Stock Options. The Company registered the shares of Common Stock issuable
upon the exercise of options granted to Messrs. Brennan, Howells, Puglisi and
Holmes pursuant to a Registration Statement on Form S-8 that was filed with the
Commission on April 29, 1997. Pursuant to registration rights contained in the
stock option agreements relating to such stock options, the Company is
obligated to maintain the effectiveness of such registration statement for such
period of time as is necessary to permit the sale of the underlying shares of
Common Stock. See "Management -- Stock Options."
Stockholder Registration Rights. 607,060 of the shares of Common Stock
being registered pursuant to the Registration Statement of which this
Prospectus is a part, are being registered pursuant to registration rights
granted by the Company to the holders of such shares.
38
<PAGE>
The Delaware Business Combination Act
The Company is a Delaware corporation subject to the provisions of Section
203 of the General Corporation Law of the State of Delaware. That section
provides, with certain exceptions, that a Delaware Corporation may not engage
in any of a broad range of business combinations with a person, or an affiliate
or associate of such person, who is an "interested stockholder" for a period of
three years from the date that such person became an interested stockholder
unless (i) the transaction resulting in a person becoming an interested
stockholder, or the business combination, is approved by the board of directors
of the corporation before the person becomes an interested stockholder; (ii)
the interested stockholder acquires 85% or more of the outstanding voting stock
of the corporation in the same transaction that makes it an interested
stockholder (excluding shares owned by persons who are both officers and
directors of the corporation and shares held by certain employee stock
ownership plans); or (iii) on or after the date the person becomes an
interested stockholder, the business combination is approved by the
corporation's board of directors and by the holders of at least 66-2/3% of the
corporation's outstanding voting stock at an annual meeting or special meeting,
excluding shares owned by the interested stockholder. Under Section 203, an
"interested stockholder" is defined as any person who is: (i) the owner of 15%
or more of the outstanding voting stock of the corporation; or (ii) an
affiliate or associate of the corporation and who was the owner of 15% or more
of the outstanding voting stock of the corporation at any time within the
three-year period immediately prior to the date on which it is sought to be
determined whether such person is an interested stockholder.
A corporation may, at its option, exclude itself from the coverage of
Section 203 by amending its certificate of incorporation or by-laws, by action
of its stockholders, to exempt itself from coverage, provided that such by-law
or certificate of incorporation amendment shall not become effective until 12
months after the date it is adopted. The Company has not adopted such an
amendment to its Certificate of Incorporation or By-laws.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the Company's Common Stock is
American Stock Transfer & Trust Company, New York, New York.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On January 23, 1995, PB Southeast entered into an agreement with Parris H.
Holmes, Jr., a Director of the Company, pursuant to which PB Southeast borrowed
$140,000 from Mr. Holmes, evidenced by three 7% promissory notes with an
aggregate principal amount of $140,000, which loan was repaid by the Company on
June 1, 1995. In connection with that transaction, Mr. Holmes purchased shares
of common stock of PB Southeast for $280. In May 1995, such shares of PB
Southeast common stock were converted into 420,000 shares of Common Stock of
the Company. Mr. Holmes also provided certain consulting services to the
Company in 1995 at a cost to the Company of $35,000.
In May 1995, in connection with the PB Acquisition, the Company issued
423,137 and 403,138 shares of Common Stock to Messrs. Howells and Puglisi,
respectively, in exchange for shares of capital stock of PB Southeast owned by
such persons.
In connection with the PB Acquisition, the Company issued an aggregate of
300,000 shares of its Common Stock to James Poore, Donald Poore and Amelia
Poore (the "Poores"). Through May 31, 1998, the Company has the right to
repurchase all of these shares at any time for $500,000 ($1.67 per share).
Additionally, in connection with PB Acquisition, the Company issued to the
Poores a Promissory Note due May 31, 2000 in the principal amount of $500,000,
which was repaid by the Company in February 1997. The Promissory Note accrued
interest at a rate equal to the prime rate of Bank One, Arizona N.A. plus
1-3|M/4% per annum. The remaining $3,228,061 of the acquisition price for the
PB Acquisition was paid by the Company in cash.
To finance the PB Acquisition, in May 1995 the Company issued an aggregate
of $2,700,000 of the 9% Convertible Debentures to Renaissance and Wells Fargo.
In connection with the initial public offering
39
<PAGE>
of the Company's Common Stock, which was consummated in December 1996,
Renaissance and Wells Fargo converted a total of $400,409 of the principal
amount of the 9% Convertible Debentures into 367,348 shares of Common Stock (at
a conversion rate of $1.09 per share). Such shares of Common Stock were sold by
Renaissance and Wells Fargo in connection with the initial public offering. The
remaining principal amount of the outstanding 9% Convertible Debentures is
convertible into an aggregate of 2,109,717 shares of Common Stock. Also in
connection with the PB Acquisition, in May 1995 the Company sold 1,663,723
shares of its Common Stock through a private placement for aggregate
consideration of $1,799,982 (approximately $1.08 per share). Arizona Securities
Group, Inc., of which Mark S. Howells and Jeffrey J. Puglisi are principals,
acted as the placement agent for these transactions and received $120,000 in
sales commissions and $22,000 as reimbursement of expenses in connection with
the private placement.
In March 1996, the Company engaged in a private placement pursuant to
which it issued 750,000 shares of Common Stock to a group of investors for
aggregate consideration of $937,500 ($1.25 per share). Arizona Securities
Group, Inc. acted as the placement agent and received $46,875 in sales
commissions in connection with the private placement.
Since February 1997, the Company has paid $62,000 to a company owned by
Matthew Howells, brother of Company Chairman Mark Howells, for construction
management services related to the Company's new Arizona manufacturing
facility.
SHARES ELIGIBLE FOR FUTURE SALE
At August 29, 1997, there were 7,351,657 shares of Common Stock issued and
outstanding (including 907,060 shares of Common Stock being registered pursuant
to the Registration Statement of which this Prospectus is a part, assuming the
issuance of 300,000 shares of Common Stock upon the exercise in full of the
Financing Warrant), but excluding (i) 1,953,618 shares of Common Stock reserved
for issuance upon the exercise of outstanding stock options; (ii) 2,109,717
shares of Common Stock reserved for issuance upon the conversion of the 9%
Convertible Debentures; and (iii) 225,000 shares of Common Stock reserved for
issuance upon the exercise of the Underwriter's Warrant. See "Management --
Stock Options," "Business -- Debt Financings" and "Description of Securities."
Upon the effectiveness of the Registration Statement of which this Prospectus
is a part, 5,698,698 of the issued and outstanding shares of Common Stock will
be freely tradable without further restriction or further registration under
the Securities Act, unless purchased by "affiliates" of the Company, as that
term is defined in Rule 144 under the Securities Act ("Rule 144"). The
remaining 1,652,959 issued and outstanding shares of Common Stock will be
"restricted securities" as that term is defined in Rule 144 and will be
eligible for immediate sale under Rule 144 volume limitations and other
conditions of Rule 144. In addition, the 1,953,618 shares of Common Stock
issuable upon the exercise of outstanding stock options and the 225,000 shares
of Common Stock reserved for issuance upon the exercise of the Underwriter's
Warrant have previously been registered under the Securities Act. Upon the
issuance, if any, of such shares, they will be freely tradable without further
restriction or further registration under the Securities Act, unless purchased
by "affiliates" of the Company, as that term is defined in Rule 144.
The holders of the 9% Convertible Debentures have agreed that they will
not convert such 9% Convertible Debentures into shares of Common Stock or
exercise any demand registration rights prior to January 1, 1998, without the
prior written consent of the Underwriter. Messrs. Howells, Puglisi, and Holmes,
directors of the Company, as well as David J. Brennan, a former Director and
officer, and Jeffrey H. Strasberg, a former officer, have entered into
agreements with the Company pursuant to which they agreed not to exercise their
respective stock options that were exercisable on December 6, 1996 prior to
December 6, 1997, except the exercise of options by their estates in the event
of their death or, in the case of officers, upon the termination of their
employment with the Company. Furthermore, with respect to such stock options
exercised by officers after a termination of employment such officers have
agreed not to transfer any of the shares issued upon such exercise prior to
December 6, 1997.
In general, under Rule 144 as currently in effect, any affiliate of the
Company or any person (or persons whose shares are aggregated in accordance
with Rule 144) who has beneficially owned restricted securities for at least
one year would be entitled to sell within any three-month period a number of
shares that does not exceed the greater of 1% of the outstanding shares of
Common Stock (approximately
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<PAGE>
73,517 shares based upon the number of shares assumed to be outstanding after
the Offering (assuming the exercise in full of the Financing Warrant) or the
reported average weekly trading volume in the over-the-counter market for the
four weeks preceding the sale. Sales under Rule 144 are also subject to certain
manner of sale restrictions and notice requirements and to the availability of
current public information concerning the Company. Persons who have not been
affiliates of the Company for at least three months and who have held their
shares for more than two years are entitled to sell restricted securities held
by them without regard to the volume, manner of sale, notice and public
information requirements of Rule 144.
No predictions can be made as to the effect, if any, that future sales of
shares, or the availability of shares for future sale, will have on the
prevailing market price for the Common Stock. Sales of substantial amounts of
Common Stock, or the perception that such sales could occur, could adversely
affect the prevailing market prices for the Common Stock and could impair the
Company's future ability to obtain capital through an offering of equity
securities.
SELLING SECURITY HOLDERS AND PLAN OF DISTRIBUTION
All of the securities of the Company covered by this Prospectus are being
sold for the account of the Selling Security Holders as identified in the
following table. The Selling Security Holders are offering for sale an
aggregate of up to 907,060 shares of Common Stock, including (i) 607,060 shares
of Common Stock previously issued by the Company and (ii) 300,000 shares of
Common Stock issuable upon the exercise of the Financing Warrant.
The following table sets forth with respect to each of the Selling
Security Holders: the number of securities held of record or beneficially (to
the extent known by the Company); the number of shares included in the
Offering; the number of shares to be held after the Offering; and the
percentage ownership of such person after the Offering.
<TABLE>
<CAPTION>
Number of Shares Number of Shares Number of Shares Percentage
of Common Stock of Common Stock of Common Stock Ownership
Held Before Included in to be Held After After
Name Offering Offering Offering Offering(1)
---- -------- -------- -------- -----------
<S> <C> <C> <C> <C>
Delaney B. Campbell Gift Trust ...... 50,000 50,000 0 --%
David M. Clem ........................ 46,214 46,214 0 --
Arthur D. Ehrenreich ............... 10,000 5,000 5,000 *
William A. Franke .................. 80,000 80,000 0 --
Burton J. Lewin ..................... 15,000 15,000 0 --
David M. Mitchell .................. 92,429 92,429 0 --
Gerald Rubin ........................ 50,000 50,000 0 --
Larry Searles ........................ 10,000 10,000 0 --
Challmers & Colleen Seymour ......... 8,417 8,417 0 --
CeCe Turner Irrevocable Trust ...... 100,000 100,000 0 --
Chris Campbell Turner ............... 100,000 100,000 0 --
Westminster Capital, Inc. ............ 300,000 300,000 0 --
George J. Wischer Trust ............ 50,000 50,000 0 --
All Selling Security Holders ......... 912,060 907,060 5,000 *
</TABLE>
- ------------
* Less than 1%.
(1) Based on 7,351,657 shares of Common Stock issued and outstanding as of
August 29, 1997, assuming the issuance of 300,000 shares of Common Stock
upon the exercise in full of the Financing Warrant.
The Company has agreed to pay for all costs and expenses incident to the
preparation and filing of the Registration Statement of which this Prospectus
is a part, including but not limited to all expenses and fees of preparing,
filing and printing the Registration Statement and Prospectus and any related
exhibits, amendments and supplements thereto and the mailing of such items. The
Company will not pay selling commissions and expenses associated with any sales
of the Shares by the Selling Security holders.
The Shares offered by the Selling Security Holders pursuant to this
Prospectus may be offered and sold from time to time directly by the Selling
Security Holders acting as principal for their own account
41
<PAGE>
in one or more transactions on or through the Nasdaq SmallCap Market, in the
over-the-counter market or in negotiated transactions at market prices
prevailing at the time of sale or at prices otherwise negotiated.
Alternatively, the Shares may be sold from time to time through agents,
brokers, dealers or underwriters designated from time to time, and such agents,
brokers, dealers or underwriters may receive compensation in the form of
commissions or concessions from the Selling Security Holders or the purchasers
of the securities. The Shares have not been registered under any securities
laws of any state.
Selling Security Holders will be subject to applicable provisions of the
Exchange Act and the rules and regulations thereunder including without
limitation Regulation M, which provisions may limit the timing of purchases and
sales of Shares by the Selling Security Holders.
LEGAL MATTERS
Certain legal matters with respect to the shares of Common Stock offered
hereby will be passed upon for the Company by Cobb & Eisenberg LLC, Westport,
Connecticut 06881.
EXPERTS
The consolidated balance sheets of the Company as of December 31, 1995 and
December 31, 1996 and the consolidated statements of operations, shareholders'
equity, and cash flows of the Company for each of the two years in the period
ended December 31, 1996 included in this Prospectus, have been included herein
in reliance on the report of Coopers & Lybrand L.L.P., independent accountants,
given on the authority of that firm as experts in accounting and auditing.
42
<PAGE>
<TABLE>
<CAPTION>
POORE BROTHERS, INC.
INDEX TO FINANCIAL STATEMENTS
Page
----
<S> <C>
Poore Brothers, Inc. and Subsidiaries
Report of Independent Accountants.............................................................. F-2
Financial Statements:
Consolidated balance sheets as of December 31, 1995 and 1996 and June 30, 1997............... F-3
Consolidated statements of operations for the years ended December 31, 1995 and 1996 and for
the six months ended June 30, 1996 and 1997............................................... F-4
Consolidated statement of shareholders' equity for the years ended December 31, 1995 and 1996
and for the six months ended June 30, 1997................................................ F-5
Consolidated statements of cash flows for the years ended December 31, 1995 and 1996 and for
the six months ended June 30, 1996 and 1997............................................... F-6
Notes to financial statements................................................................ F-7
Poore Brothers, Inc. Combined Pro Forma Statements of Operations (unaudited) for the year ended
December 31, 1995............................................................................. F-17
Poore Brothers' Foods, Inc.
Statement of operations (unaudited) for the quarter ended March 31, 1995..................... F-18
Statement of cash flows (unaudited) for the quarter ended March 31, 1995..................... F-19
Notes to financial statements (unaudited) ................................................... F-20
Poore Brothers Distributing, Inc.
Statement of operations (unaudited) for the quarter ended March 31, 1995 .................... F-21
Statement of cash flows (unaudited) for the quarter ended March 31, 1995..................... F-22
Notes to financial statements (unaudited) ................................................... F-23
Poore Brothers of Texas, Inc.
Statement of operations (unaudited) for the quarter ended March 31, 1995 .................... F-24
Statement of cash flows (unaudited) for the quarter ended March 31, 1995..................... F-25
Notes to financial statements (unaudited) ................................................... F-26
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Poore Brothers, Inc.
We have audited the accompanying consolidated balance sheets of Poore Brothers,
Inc. and Subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Poore
Brothers, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for the years then
ended, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Phoenix, Arizona
March 4, 1997
F-2
<PAGE>
<TABLE>
<CAPTION>
POORE BROTHERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
------------------------------- June 30,
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
ASSETS (unaudited)
Current assets:
Cash and cash equivalents.............................................. $ 200,603 $ 3,603,850 $ 953,473
Restricted certificate of deposit...................................... 1,250,000
Short term investments................................................. 2,003,436
Accounts receivable, net of allowance of $86,000 in 1995, $121,000
in 1996 and $136,000 at June 30, 1997................................ 1,198,215 1,912,064 2,189,806
Inventories............................................................ 681,791 863,309 475,880
Other current assets................................................... 2,383 193,581 77,614
--------------- -------------- ---------------
Total current assets................................................. 2,082,992 7,822,804 5,700,209
Property and equipment, net............................................... 1,593,479 4,032,343 6,422,862
Goodwill, net............................................................. 2,415,385 2,295,617 2,233,439
Organizational costs, net................................................. 226,048 174,614 148,779
Other assets.............................................................. 31,881 15,067 109,826
--------------- -------------- ---------------
Total assets......................................................... $6,349,785 $14,340,445 $14,615,115
=============== ============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................................... $ 633,281 $ 1,318,952 $ 964,614
Accrued liabilities.................................................... 450,397 500,192 403,522
Current portion of long-term debt...................................... 636,011 1,818,058 621,112
--------------- -------------- ---------------
Total current liabilities............................................ 1,719,689 3,637,202 1,989,248
Long-term debt, less current portion...................................... 3,793,420 3,355,651 5,242,598
Other liabilities......................................................... 20,379 6,000
--------------- -------------- ---------------
Total liabilities.................................................... 5,533,488 6,998,853 7,231,846
--------------- -------------- ---------------
Shareholders' equity:
Common stock, $.01 par value; 15,000,000 shares authorized;
shares issued and outstanding 3,598,924 (1995), 6,648,824
(1996) and 7,051,657 (1997)........................................ 35,989 66,488 70,516
Additional paid-in capital............................................. 2,516,466 9,702,940 10,789,769
Accumulated deficit.................................................... (1,736,158) (2,427,836) (3,477,016)
--------------- -------------- ---------------
Total shareholders' equity........................................... 816,297 7,341,592 7,383,269
--------------- -------------- ---------------
Total liabilities and shareholders' equity........................... $6,349,785 $14,340,445 $14,615,115
=============== ============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
POORE BROTHERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended
Years ended December 31, June 30 ,
------------------------------ -----------------------------
1995 1996 1996 1997
---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues................................................. $ 6,868,923 $ 17,219,641 $8,168,848 $7,613,814
Cost of sales............................................ 5,304,200 13,091,194 6,292,248 5,904,052
--------------- -------------- -------------- --------------
Gross profit.......................................... 1,564,723 4,128,447 1,876,600 1,709,762
Selling, general and administrative expenses............. 2,198,757 3,969,462 1,698,500 2,200,977
Depreciation and amortization............................ 319,493 460,197 207,670 197,400
Sale of Texas distribution business...................... 269,859
--------------- -------------- -------------- --------------
Operating loss........................................ (953,527) (301,212) (29,570) (958,474)
--------------- -------------- -------------- --------------
Interest income.......................................... 13,211 1,949 74,687
Interest expense......................................... (241,383) (403,677) (185,122) (165,393)
--------------- -------------- -------------- --------------
Net interest expense.............................. (241,383) (390,466) (183,173) (90,706)
--------------- -------------- -------------- --------------
Net loss............................................. $(1,194,910) $ (691,678) $ (212,743) $(1,049,180)
=============== ============== ============== ==============
Net loss per share of common stock....................... $(0.35) $(0.15) $(0.05) $(0.15)
=============== ============== ============== ==============
Loss per common share - assuming full dilution........... * * * *
Weighted average common and common equivalent shares
Outstanding............................................ 3,448,601 4,493,307 4,250,490 6,982,594
=============== ============== ============== ==============
</TABLE>
* Anti - dilutive
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
POORE BROTHERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Common Stock Paid-in Accumulated
-----------------------------
Shares Amount Capital Deficit Total
------ ------ ------- ------- -----
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994......................... 1,107,322 $ 11,073 $ 363,854 $ (541,248) $ (166,321)
Conversion of notes payable to related
parties to common stock....................... 161,668 1,617 141,011 142,628
Issuance of common stock in
connection with acquisition................... 300,200 3,002 321,570 324,572
Sale of common stock............................ 2,029,734 20,297 1,690,031 1,710,328
Net loss........................................ (1,194,910) (1,194,910)
--------- --------- ----------- ------------ ----------
Balance, December 31, 1995......................... 3,598,924 35,989 2,516,466 (1,736,158) 816,297
Purchases of common stock....................... (50,100) (501) (56,209) (56,710)
Conversion of convertible debentures............ 367,348 3,674 396,735 400,409
Sales of common stock........................... 2,732,652 27,326 6,215,948 6,243,274
Issuance of financing warrant................... 630,000 630,000
Net loss........................................ (691,678) (691,678)
--------- --------- ----------- ------------ ----------
Balance, December 31, 1996......................... 6,648,824 66,488 9,702,940 (2,427,836) 7,341,592
Exercise of common stock over allotment
option (unaudited)........................... 337,500 3,375 1,015,301 1,018,676
Exercise of common stock options
(unaudited)................................... 65,333 653 71,528 72,181
Net loss (unaudited)............................ (1,049,180) (1,049,180)
--------- --------- ----------- ------------ ----------
Balance, June 30, 1997 (unaudited)................. 7,051,657 $ 70,516 $ 10,789,769 $ (3,477,016) 7,383,269
========= ========= ============ ============ =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
POORE BROTHERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, Six months ended June 30,
-------------------------- -------------------------
1995 1996 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash flows from operating activities: (unaudited) (unaudited)
Net loss ................................................................... $(1,194,910) $ (691,678) $ (212,743) $(1,049,180)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ............................................ 319,493 460,197 207,760 207,414
Bad debt expense ......................................................... 50,861 60,230 21,500
Change in operating assets and liabilities, net of effects of acquisition:
Accounts receivable .................................................... 197,089 (767,179) (576,966) (220,828)
Inventories ............................................................ (159,286) (181,518) (50,432) 203,601
Other assets and liabilities ........................................... 585 (172,786) (28,423) 60,107
Accounts payable and accrued liabilities ............................... 45,906 724,687 319,313 (457,008)
----------- ----------- ----------- -----------
Net cash used in operating activities ......................................... (740,262) (568,047) (341,581) (1,207,394)
----------- ----------- ----------- -----------
Cash flows from investing activities:
Proceeds on disposal of property ........................................... 3,080 767,859
Payment for acquisition, net of cash acquired .............................. (3,145,269)
Sale of Texas distribution business ........................................ 78,414
Purchase of property and equipment ......................................... (68,421) (675,620) (357,865) (2,275,463)
Purchase of short term investments ......................................... (2,003,436)
----------- ----------- ----------- -----------
Net cash used in investing activities ......................................... (3,213,690) (675,620) (354,785) (3,432,626)
----------- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock ..................................... 1,854,328 7,635,781 1,046,511 1,253,431
Payments on purchase of common stock ....................................... (56,709) (56,709)
Stock issuance costs ....................................................... (144,000) (1,392,508) (94,639) (162,574)
Proceeds from issuance of debt ............................................. 2,700,000 1,677,793
Debt issuance costs ........................................................ (257,170)
Investment in restricted certificate of deposit ............................ (1,250,000) 1,250,000
Payments made on long-term debt ............................................ (51,603) (267,920) (91,760) (2,010,723)
Net increase (decrease) in working capital line ............................ 53,000 (21,730) 127,000 (18,284)
----------- ----------- ----------- -----------
Net cash provided by financing activities ..................................... 4,154,555 4,646,914 930,403 1,989,643
----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents .......................... 200,603 3,403,247 234,037 (2,650,377)
Cash and cash equivalents at beginning of period .............................. 200,603 200,603 3,603,850
----------- ----------- ----------- -----------
Cash and cash equivalents at end of period .................................... $ 200,603 $ 3,603,850 $ 434,640 $ 953,473
=========== =========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for interest, net of amounts
capitalized .............................................................. $ 251,311 $ 416,764 $ 220,289 $ 194,793
Summary of noncash investing and financing activities:
Conversion of debt to common stock ....................................... 142,628 400,409
Capital lease obligation incurred - equipment acquisition ................ 195,317 186,220 148,112 6,479
Construction loan for new facility ....................................... 1,248,117 998,746
Mortgage impounds for interest, taxes and insurance ...................... 35,990
Note received for sale of Texas distribution business .................... 78,414
Warrants issued ....................................................... 630,000
Long-term debt issued in connection with acquisition .................... 500,000
Stock issued in connection with acquisition .............................. 324,572
In conjunction with the acquisition (see Note 2), the Company purchased
and assumed the following amounts:
Fair value of assets acquired ............................................ 5,612,882
Purchase price ........................................................... (4,052,631)
Liabilities assumed ...................................................... 1,560,251
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
POORE BROTHERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Information pertaining to six months ended June 30, 1996 and 1997 is unaudited)
1. Organization and Summary of Significant Accounting Policies:
Poore Brothers, Inc, (the "Company"), a Delaware corporation, was organized
in February 1995 as a holding company and on May 31, 1995 acquired substantially
all of the equity of Poore Brothers Southeast, Inc. ("PB Southeast") in an
exchange transaction pursuant to which 1,560,000 previously unissued shares of
the Company's common stock, par value $.01 per share (the "Common Stock"), were
exchanged for 150,366 issued and outstanding shares of PB Southeast's common
stock. See Note 2. The exchange transaction with PB Southeast has been accounted
for similar to a pooling since both entities had common ownership and control
immediately prior to the transaction. In December 1996, the Company completed an
initial public offering of its Common Stock.
On June 4, 1997, Poore Brothers of Texas, Inc. ("PB Texas"), a wholly-owned
subsidiary of Poore Brothers, Inc., sold its Houston, Texas distribution
business. See Note 14.
The Company manufactures and distributes potato chip and other snack food
products under the Poore Brothers (TM) brand name, as well as private label
potato chips and also distributes a wide variety of other independently
manufactured snack food items.
The financial statements as of June 30, 1996 and 1997 are unaudited, but in
the opinion of management, reflect all adjustments, consisting only of a normal
and recurring nature, necessary for a fair presentation. The results for the
interim periods are not necessarily indicative of the results for the entire
year.
Principles of Consolidation
The consolidated financial statements include the accounts of Poore
Brothers, Inc. and all of its controlled subsidiaries. In all situations, the
Company owns from 94% to 100% of the voting interests of the controlled
subsidiaries. All significant intercompany amounts and transactions have been
eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
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. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments with a maturity of
three months or less when purchased.
Restricted Certificate of Deposit
Restricted certificate of deposit represents amounts segregated as collateral
for a construction loan.
Short term Investments
Short term investments represent investments with original maturity dates of
six months. These investments are held for cash management purposes and are
recorded at cost, which approximates fair value.
Inventory
Inventories are stated at the lower of first-in, first-out (FIFO) cost or
market.
Property and Equipment
Property and equipment are recorded at cost. Cost includes expenditures for
major improvements and replacements. Maintenance and repairs are charged to
operations when incurred. When assets are retired or otherwise disposed of, the
related costs and accumulated depreciation are removed from the appropriate
accounts, and the resulting gain or loss is included in operations.
F-7
<PAGE>
POORE BROTHERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)
(Information pertaining to six months ended June 30, 1996 and 1997 is unaudited)
1. Organization and Summary of Significant Accounting Policies: (continued)
Property and Equipment (Continued)
During construction, the Company capitalizes interest monthly by applying the
effective interest rate on certain borrowings to the average balance of the
expenditures. Capitalized interest for 1996 was $687,177 and $0 in 1995. Total
interest costs incurred were $1,090,854 and $251,311 for 1996 and 1995,
respectively. Total interest for the six months ended June 30, 1997 was
$202,153, of which $36,760 was capitalized.
Depreciation expense is computed using the straight-line method over the
estimated useful lives of the assets, ranging from 2 to 30 years. Amortization
expense for leasehold improvements is computed using the straight-line method
over the lease term.
Loss Per Share
Loss per common share and common share equivalent ("loss per common share")
is computed by dividing the net loss by the weighted average number of shares of
Common Stock and common stock equivalents outstanding during each period.
Pursuant to the Securities and Exchange Commission Staff Accounting Bulletin
(SAB) No. 83, Company issuance of Common Stock, and options and warrants to
purchase Common Stock granted by the Company during the 12 months immediately
preceding the initial filing date of the public offering have been included in
the calculation of weighted average number of shares of Common Stock outstanding
as if the underlying shares were outstanding for all periods presented (even if
anti-dilutive, using the treasury stock method and an offering price of $3.50
per share). The effect on loss per common share for the outstanding options and
warrants issued prior to the one year period preceding the initial public
offering have been excluded from the loss per common share computation as they
are anti-dilutive. For 1996, the principles of SAB No. 83 were applied for the
first three quarters of the year before the initial public offering became
effective. For the fourth quarter of 1996 and the first half of 1997, the
principles of Accounting Principles Board Opinion No. 15 were followed.
Accordingly, the effect on loss per common share of the outstanding options and
warrants in the fourth quarter of 1996 and the first half of 1997 have been
excluded from the computation as they are anti-dilutive. Loss per common share,
assuming full dilution, is not applicable for loss periods as it is
anti-dilutive.
Intangible Assets
Organizational costs are recorded at cost. Amortization expense is computed
using the straight-line method over a five-year period. Goodwill is amortized
under the straight-line method over twenty years. The Company assesses the
recoverability of goodwill at each balance sheet date by determining whether
amortization of the assets over their original estimated useful life can be
recovered through estimated future undiscounted operating income, excluding
amortization.
Revenue Recognition
Sales and related cost of sales are recognized upon shipment of products.
Income Taxes
Deferred tax assets and liabilities are recognized for the expected future
tax consequences of events that have been included in the financial statements
or income tax returns. Deferred tax assets and liabilities are determined based
on the difference between the financial statement and tax basis of assets and
liabilities using enacted rates expected to apply to taxable income in the years
in which those differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 123, Accounting for Stock-Based Compensation ("FAS
123"), which defines a fair value based method of accounting for employee stock
options or similar equity instruments. However, it also allows an entity to
continue to account for these plans according to Accounting Principles Board
Opinion No. 25 ("APB 25"), provided pro forma disclosures of net income and
earnings per share are made as if the fair value based
F-8
<PAGE>
POORE BROTHERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)
(Information pertaining to six months ended June 30, 1996 and 1997 is unaudited)
Stock-Based Compensation (Continued)
method of accounting defined by FAS 123 had been applied. The Company has
elected to continue to measure compensation expense cost related to employee
stock purchase options using APB 25, and in Note 9 provides required pro forma
disclosures.
2. Business Acquisition:
On May 31, 1995, the Company acquired (i) substantially all of the assets,
subject to certain liabilities of Poore Brothers Foods, Inc.; (ii) a 100% equity
interest in Poore Brothers Distributing, Inc.; and (iii) an 80% equity interest
in PB Texas. Over the balance of 1995, the Company acquired an additional equity
interest in PB Texas, bringing the Company's total equity interest to 94%. The
total purchase price for these acquisitions was $4,052,631, and the assets
acquired were primarily property and equipment, accounts receivable and
inventory. The purchase was financed with $500,000 of notes payable, 300,000
shares of Common Stock issued to the sellers, and by the issuance of Convertible
Debentures and the sale of Common Stock in a private offering. In 1997, the
Company acquired the remaining 6% equity interest in PB Texas for $4,532 in
cash.
The above acquisitions have been accounted for as purchases and,
accordingly, the results of their operations subsequent to acquisition have been
included in the Company's results. In connection with the acquisitions, the
Company recorded goodwill, which is being amortized on a straight-line basis
over a twenty-year period.
Presented below are the results of operations for the year ended December
31, 1995 on a pro forma basis as if the above acquisitions had occurred at the
beginning of 1995:
Revenues...................................................$11,456,320
Net loss................................................... (1,664,045)
Net loss per common share and common share equivalent...... (0.39)
3. Concentrations of Credit Risk:
The Company's cash and restricted cash are placed with major banks. The
Company, in the normal course of business, maintains balances in excess of
Federal insurance limits. The balance in excess of the insurance limit at
December 31, 1996 was $4,376,179, and $546,750 at June 30, 1997.
Financial instruments subject to credit risk consist primarily of trade
accounts receivable. In the normal course of business, the Company extends
unsecured credit to its customers. Substantially all of the Company's customers
are distributors whose sales are concentrated to retailers in the grocery
industry in the southern and western United States. The Company investigates a
customer's credit worthiness before extending credit.
4. Inventories:
Inventories consist of the following:
December 31,
-------------------------------- June 30,
1995 1996 1997
--------------- ------------- ------------
Finished goods......... $610,108 $609,918 $159,087
Raw materials.......... 71,683 253,391 316,793
--------------- ------------- ------------
$681,791 $863,309 $475,880
=============== ============= ============
F-9
<PAGE>
POORE BROTHERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)
(Information pertaining to six months ended June 30, 1996 and 1997 is unaudited)
5. Property and Equipment:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------------------ June 30,
1995 1996 1997
-------------- ------------- -------------
<S> <C> <C> <C>
Buildings and improvements $658,735 $2,652,548 $3,415,226
Equipment 916,428 1,307,417 3,027,084
Land 142,302 401,842 272,006
Vehicles 193,553 251,559 111,529
Furniture and office equipment 63,869 118,965 183,499
-------------- ------------- -------------
1,974,887 4,732,331 7,009,344
Less accumulated depreciation and amortization (381,408) (699,988) (586,482)
-------------- ------------- -------------
$1,593,479 $4,032,343 $6,422,862
============== ============= =============
</TABLE>
Included in equipment are assets which are under capital leases with an
original cost of $277,637 and accumulated amortization of $18,128 at December
31, 1995, and original cost of $463,857 and accumulated amortization of $33,888
at December 31, 1996. As of June 30, 1997, equipment under capital leases had an
original cost of $1,182,864 and accumulated amortization of $72,575.
Depreciation expense was $221,262 and $284,409 for 1995 and 1996,
respectively, and $109,560 for the six months ended June 30, 1997.
At December 31, 1996, the Company was completing the construction of a new
manufacturing facility in Arizona. Included in land, buildings and improvements
was the carrying value of the old facility. At December 31, 1996, the Company
reflected a charge of $30,000 in its statement of operations to reduce the
carrying value of the sold facility to its net realizable value of $710,000. On
February 28, 1997, the land and buildings were sold for approximately $710,000
and the proceeds from the sale were used to pay off related mortgage debt and
notes payable totaling approximately $650,000.
F-10
<PAGE>
POORE BROTHERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)
(Information pertaining to six months ended June 30, 1996 and 1997 is unaudited)
6. Long-Term Debt:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------- June 30,
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Convertible Debentures; interest rate is at 9%; interest and principal
due in monthly installments over varying periods through 2002;
collateralized by land, buildings, equipment and
intangibles......................................................... $2,700,000 $2,299,591 $2,299,591
Construction loan due June 11, 1997; interest rate at bank prime plus 2%
(10.25% at December 31, 1996); collateralized by first deed of trust
on land and building and certificate of deposit totaling
$1,250,000.......................................................... 1,248,117
Notes payable due May 31, 2000; interest rate is at bank prime rate plus
1.75% (10.00% at December 31, 1996)................................. 500,000 500,000
Note payables; due in monthly installments through December 2000;
interest rates ranging from 3% to 11.75%; collateralized by equipment
and vehicles........................................................ 290,363 234,071 184,343
Working capital line (up to 75% of eligible receivables); interest rate
is at bank prime plus 4.50% (12.75%) at December 31, 1996 and at
prime plus 3.50% (12.0%) at June 30,1997; collaterized by accounts
receivable and inventories; due November 30, 1997................... 351,270 332,987
Bank operating line; interest rate is at bank prime plus 1.75% (10.50%
at December 31, 1995); collateralized by accounts receivable and
inventories......................................................... 373,000
Mortgage loan due in monthly installments through July 2012;
interest at 9.03%; collaterized by the land and building............ 2,000,000
Mortgage loans due 1997 to 1998; interest at bank prime rate plus 1.75%
(10.00% at December 31, 1996); collateralized by land and
buildings........................................................... 301,399 156,740
Capital lease obligations.............................................. 264,669 383,920 1,046,789
------------ ------------ ------------
4,429,431 5,173,709 5,863,710
Less current portion................................................... 636,011 1,818,058 621,112
------------ ------------ ------------
$3,793,420 $3,355,651 $5,242,598
============ ============ ============
</TABLE>
Annual maturities under long-term debt are as follows:
<TABLE>
<CAPTION>
December 31, June 30,
1996 1997
---------------- ---------------
<S> <C> <C> <C>
Year 1 ......................................... $1,818,058 $621,112
Year 2 ......................................... 326,818 521,270
Year 3 ......................................... 385,081 598,835
Year 4 ......................................... 879,923 562,601
Year 5 ......................................... 307,424 436,769
Thereafter...................................... 1,456,405 3,123,123
---------------- ---------------
$5,173,709 $5,863,710
================ ===============
</TABLE>
In September 1996, the Company entered into a $2,400,000 loan agreement to
finance the construction of its new Arizona facility collateralized by a first
deed of trust on the land and building and additionally collateralized by U.S.
treasury bills provided by an independent investor. As consideration for the
treasury bills, the Company issued to the investor a warrant which, as amended,
entitles the investor to purchase 300,000 shares of Common Stock at an exercise
price of $1.40 per share and expires September 11, 2006. In connection with the
warrant, the Company recorded an increase to Additional paid-in capital and
Other assets (debt issuance costs) of
F-11
<PAGE>
POORE BROTHERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)
(Information pertaining to six months ended June 30, 1996 and 1997 is unaudited)
6. Long-Term Debt: (Continued)
$630,000 which represents the fair value of the warrant at the date of award.
The recorded asset was amortized as interest expense and capitalized as part of
the new Arizona facility through December 1996, at which time the U.S treasury
bills provided by the investor as collateral were replaced by the Company with a
$1,250,000 certificate of deposit. In January 1997, the Company modified its
construction loan by applying the certificate of deposit against outstanding
loan proceeds. The maximum amount of the loan was reduced from $2,400,000 to
$1,150,000.
Various debt agreements of the Company contain covenants requiring the
maintenance of financial ratios. The most restrictive covenants require the
Company to maintain an interest coverage ratio of 1.5:1, minimum working capital
of $1,000,000 and a calculated minimum amount of shareholders' equity. At
December 31, 1996 and June 30, 1997, the Company was in violation of the
interest coverage ratio. The Company has received waivers from lenders for this
covenant violation through September 30, 1998.
Based on the borrowing rates currently available to the Company, management
estimates that the fair value of the long-term debt approximates the carrying
value as of December 31, 1996 and 1995, and at June 30, 1997.
On June 4, 1997, the Company refinanced its $998,746 construction loan
provided by National Bank of Arizona, for the Company's new 60,000 square foot
manufacturing, distribution and headquarters facility in Goodyear, Arizona. The
new permanent financing, provided by Morgan Guaranty Trust Company of New York,
is a $2 million, 15-year mortgage at 9.03%. In addition, on June 25, 1997, the
Company received funding of $719,007 from FINOVA Capital Corporation on a
$930,000, 5-year, 8.71% equipment lease line for new production equipment
installed recently in the Company's new facility.
7. Commitments and Contingencies:
At December 31, 1996, the Company was obligated under non-cancelable leases
for real property used in its operations. Rental expense under leases that meet
the criteria of operating leases was $73,699 and $171,612 for the years 1995 and
1996. Rental expense for operating leases was $85,806 and $82,159 for the six
months ended June 30, 1996 and 1997. Minimum future rental commitments under
non-cancelable long-term leases as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases Total
<S> <C> <C> <C> <C>
1997 ........................................... $116,881 $121,316 $238,197
1998 ........................................... 114,440 91,040 205,480
1999 ........................................... 111,651 34,632 146,283
2000 ........................................... 91,706 34,632 126,338
2001 ........................................... 14,837 14,837
---------- ----------- -----------
Total ........................................... 449,515 $281,620 $731,135
=========== ===========
Less amount representing interest................. 65,595
-----------
Present value..................................... $383,920
==========
</TABLE>
8. Capital Stock:
In connection with the acquisition of the Poore Brothers companies (see Note
2), the Company issued 300,000 shares of Common Stock to the sellers of the
companies. The Company has the right to repurchase these shares for an aggregate
purchase price of $500,000 by May 31, 1998.
At issuance, the Company's Convertible Debentures (see Note 6) were
convertible into 2,477,065 shares of Common Stock at an effective price of $1.09
per share, subject to anti-dilution adjustments. In December 1996, $400,409 of
such debentures were converted into 367,348 shares of Common Stock, leaving a
debt balance convertible into 2,109,717 shares of Common Stock.
The Company has authorized 50,000 shares of Preferred Stock, $100 par value
per share, of which there are no shares issued or outstanding.
F-12
<PAGE>
POORE BROTHERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)
(Information pertaining to six months ended June 30, 1996 and 1997 is unaudited)
9. Stock Options:
The Company's 1995 Stock Option Plan (the "Plan"), as amended in June 1997,
provides for the issuance of options to purchase 1,500,000 shares of Common
Stock. The options granted pursuant to the Plan expire over a five-year period
and generally vest over three-year periods. In addition to options granted under
the Plan, the Company also issued non-qualified options to purchase Common Stock
to certain Directors which were exercisable on issuance and expire ten years
from date of grant. All options are issued at fair market value and are
noncompensatory. Fair market value is determined based on the price of sales of
Common Stock occurring at or near the time of the option award. Outstanding
options have exercise prices ranging from $1.08 to $3.94 per share.
Stock option activity is as follows:
<TABLE>
<CAPTION>
Plan Options Non-Plan Options
------------ ----------------
Average Average
Options Option Price Options Option Price
Outstanding per Share Outstanding per Share
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Balance, December 31, 1994 ........... 0 0
Granted ........................... 485,000 $1.08 600,000 $1.08
------------ -------------
Balance, December 31, 1995 ........... 485,000 1.08 600,000 1.08
Granted ........................... 420,000 1.69 220,000 1.46
Canceled .......................... (250,000) 1.08
------------ -------------
Balance, December 31, 1996 ........... 655,000 1.47 820,000 1.18
Granted ........................... 858,950 3.26
Canceled .......................... (299,666) 1.42
Exercised ......................... 65,333 1.10
------------ -------------
Balance, June 30, 1997 ............... 1,148,951 2.84 820,000 1.18
============ =============
</TABLE>
Outstanding Plan options had an average remaining term of 4.1 and 4.5
years at December 31, 1996 and June 30, 1997, respectively. Plan options that
were exercisable totaled 122,334 and 239,668 at December 31, 1996 and June 30,
1997, respectively. The average exercise price per share was $1.88 and $1.64 at
December 31, 1996 and June 30, 1997, respectively. At December 31, 1995, there
were 10,000 Plan options that were exercisable at an exercise price of $1.08 per
share. Non-Plan options had an average remaining term of 8.3 and 8.2 years at
December 31, 1996 and June 30, 1997, respectively.
Had compensation cost for the Company's stock options been determined
based on the fair value at the date of grant date for awards in 1995 and 1996
consistent with the provisions of FAS 123, the Company's net loss and net loss
per share would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Net loss - as reported $(1,194,910) $(691,678)
Net loss - pro forma (1,507,000) (907,000)
Net loss per common share and common share equivalent - as reported (0.35) (0.15)
Net loss per common share and common share equivalent - pro forma (0.49) (0.20)
</TABLE>
The assumption regarding the stock options issued was that 100% of such
options vested when granted, rather than the 64% currently vested as required by
the awards. The fair value of options granted prior to the Company's initial
public offering was computed using the minimum value calculation method. For all
other options, the fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions: dividend yield of 0%; expected volatility of 102%;
risk-free interest rate of 6.14%; and expected lives of 5 years.
10. Income Taxes:
For the period prior to the exchange transaction on May 31, 1995, PB
Southeast had elected to be taxed as an S Corporation under Section 1362 of the
Internal Revenue Code, and as such, taxes on net earnings were payable
personally by the shareholders.
F-13
<PAGE>
POORE BROTHERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)
(Information pertaining to six months ended June 30, 1996 and 1997 is unaudited)
10. Income Taxes: (continued)
There was no current or deferred benefit for income taxes for the years ended
December 31, 1995 and 1996.
The following table provides a reconciliation between the amount
determined by applying the statutory federal income tax rate to the pretax loss
and benefit for income taxes:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1995 1996
---- ----
<S> <C> <C>
Benefit at statutory rate...................... $ 337,588 $ 235,170
Valuation allowance............................ (379,000) (265,000)
State income tax, net.......................... 41,412 29,830
-------------- ---------------
$ 0 $ 0
============== ===============
</TABLE>
The income tax effects of loss carryforwards and temporary differences
between financial and income tax reporting that give rise to the deferred income
tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
------------
1995 1996
---- ----
<S> <C> <C>
Net operating loss carryforward......................... $ 393,000 $ 658,000
Accrued bad debt expense................................ 34,000 48,000
Accrued liabilities..................................... 17,000 14,000
----------- -----------
Gross deferred tax assets.......................... 444,000 720,000
Deferred tax asset valuation allowance.................. (379,000) (655,000)
Gross deferred tax liabilities(depreciation and
amortization)...................................... (65,000) (65,000)
----------- -----------
Net deferred tax assets................................. $ 0 $ 0
=========== ===========
</TABLE>
Gross deferred tax assets are reduced by a valuation allowance based on
management's estimate that it is more likely than not that the tax benefits will
not be realized.
At December 31, 1996, the Company has net operating losses available for
federal and state income taxes of approximately $1,500,000 which begin to expire
in the year 2010 if not used.
11. Major Customers:
For the year ended December 31, 1995, two Arizona grocery chains
comprised $1,057,714, or 15%, and $724,560, or 11%, of the Company's
consolidated revenues. One Arizona grocery chain comprised $2,820,000, or 16%,
of the Company's consolidated revenues for the year ended December 31, 1996. For
the six months ended June 30, 1997, two customers of the Company accounted for
$1,309,000, or 17%, and $854,000, or 11%, of the Company's consolidated
revenues.
12. Litigation:
On June 19, 1996 , James Gossett and an associated entity commenced a
lawsuit in an Arizona state court against two directors of the Company, Messrs.
Mark Howells and Jeffrey Puglisi, and the Company's subsidiary, PB Southeast,
alleging, inter alia, that Mr. Gossett had an oral agreement with Mr. Howells to
receive up to a 49% ownership interest in PB Southeast, that Messrs. Howells and
Puglisi breached fiduciary duties and other obligations to Mr. Gossett and that
he is entitled to exchange such alleged stock interest for shares in the
Company. Mr. Gossett further alleges that PB Southeast and Messrs. Howells and
Puglisi failed to honor the terms of an alleged distribution agreement between
Poore Brothers Foods, Inc. and Mr. Gossett's associated entity, whereby such
entity was granted exclusive distribution rights to Poore Brothers products in
California. The complaint seeks unspecified amounts of damages, fees and costs.
In February 1997, plaintiffs filed pleadings indicating their seeking $3 million
in damages; plaintiffs may not be limited by this damage amount at trial.
Management of the Company believes the complaint has no merit and that the
Company has defenses to the action. Messrs. Howells and Puglisi and PB Southeast
have filed an answer and counterclaim against Mr. Gossett,
F-14
<PAGE>
POORE BROTHERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)
(Information pertaining to six months ended June 30, 1996 and 1997 is unaudited)
12. Litigation: (continued)
denying the major provisions of the complaint, alleging various acts of
nonperformance and breaches of fiduciary duty on the part of Mr. Gossett and
seeking various compensatory and punitive damages. The Company has agreed to
indemnify Messrs. Howells and Puglisi in connection with this lawsuit.
On July 11, 1997, summary judgement was granted in favor of all defendants,
including PB Southeast, on all counts of the Gosset lawsuit. In its July 11,
1997 Order, the Maricopa County (Arizona) Superior Court ruled that there was no
oral contract and that the remainder of plaintiffs' claims could not support a
cause of action against the defendants. Because no final judgement has been
entered by the Court, the time for filing post-judgment motions and/or for
perfecting an appeal has not expired.
13 Related Parties:
In connection with the sale of Common Stock and Convertible Debentures in
the May 31, 1995 acquisitions of the Poore Brothers companies, the Company paid
Arizona Securities Group, Inc. $120,000 in sales commissions and $22,000 as
reimbursement of expenses incurred in its services as Placement Agent. On
January 23, 1995, PB Southeast entered into an agreement with Parris H. Holmes,
Jr., a director, pursuant to which Poore Brothers Southeast, Inc. borrowed
$140,000 from Mr. Holmes, evidenced by three 7% promissory notes with an
aggregate principal amount of $140,000, which were repaid by the Company on June
2, 1995. In 1995 Mr. Holmes purchased 420,000 shares of Common Stock of the
Company for $280. In addition, Mr. Holmes provided certain consulting services
to Poore Brothers Southeast, Inc. at a cost of $35,000. In connection with a
sale of stock in March 1996, Arizona Securities Group, Inc. received a fee of
$46,875. Arizona Securities Group, Inc. is managed and owned by Messrs. Howells
and Puglisi, directors of the company.
14. Pro Forma Financial Statements (unaudited)
On June 4, 1997, PB Texas entered into an Asset Purchase, Licensing and
Distribution Agreement, effective June 1, 1997, pursuant to which PB Texas sold
certain assets (including inventory, vehicles and capital equipment) to Mr.
David Hecht (the "Buyer"). In addition, pursuant to the Agreement the Buyer has
been granted a license to be the Company's exclusive distributor in the Houston,
Texas market. The purchase price for the assets sold by PB Texas is
approximately $157,000, 50% of which was paid by the Buyer in cash at the
closing and 50% of which will be paid pursuant to a one year, non-interest
bearing promissory note issued by the Buyer to the Company. The Company will
provide certain financial support to the Buyer, estimated at up to $40,000, in
connection with the transition of the business to the Buyer. As a result of this
transaction, the PB Texas distribution operation has been dissolved.
Pro forma information has been provided below for the following periods -
the six months ended June 30, 1996 and 1997; and the fiscal year ended December
31, 1996. The pro forma data is based on the historical statement of operations,
with elimination of all PB Texas transactions. The revenue decrease associated
with the elimination of PB Texas was $1,407,207 and $0 for the six months ended
June 30, 1996 and 1997, respectively, and $2,878,869 for the fiscal year ended
December 31, 1996. Costs and expenses were reduced with the elimination of PB
Texas by $1,572,674 and $269,859 for the six months ended June 30, 1996 and
1997, respectively, and $3,158,435 for the fiscal year 1996. Included in the
$269,859 loss on the sale of the PB Texas distribution business for the six
months ended June 30, 1997 are revenues of $1,323,427, costs of $1,443,286, and
a one-time charge of $150,000. Accordingly, the pro-forma financial statements
have been adjusted to reflect the above mentioned amounts.
F-15
<PAGE>
POORE BROTHERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)
(Information pertaining to six months ended June 30, 1996 and 1997 is unaudited)
14. Pro Forma Financial Statements (unaudited) (cont.)
<TABLE>
<CAPTION>
POORE BROTHERS, INC.
PRO FORMA STATEMENTS OF OPERATIONS
Fiscal year
ended December
31, Six months ended June 30,
------------------ ----------------- ----------------
1996 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues $ 14,340,772 $ 7,613,814 $ 6,761,641
Cost of sales 10,518,421 5,904,052 5,030,531
------------------ ----------------- ----------------
Gross profit 3,822,351 1,709,762 1,731,110
Selling, general and administrative expenses 3,401,828 2,200,977 1,406,291
Depreciation and amortization 443,020 197,400 189,670
------------------ ----------------- ----------------
Operating income (loss) (22,497) (688,615) 135,149
Net interest expense ( 389,615) (90,706) (182,425)
------------------ ----------------- ----------------
Net income (loss) $ (412,112) $ (779,321) $ (47,276)
================== ================= ================
Loss per common share and common share
equivalent $ (0.09) $ (0.11) $ (.01)
================== ================= ================
</TABLE>
15 New Accounting Pronouncements
In February 1997, the Financial Accounting Standard Board ("FASB")
adopted Statement of Financial Accounting Standard No. 128, Earnings per Share
("SFAS 128"), which supersedes and simplifies the standards for computing
earnings per share ("EPS") previously found in Accounting Principles Board
Opinion No. 15, Earnings per Share ("APB 15"). SFAS 128 is effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods; earlier application is not permitted. The Company
will provide the required EPS disclosures in its financial statements commencing
with the fiscal year ended December 31, 1997. SFAS 128 requires restatement of
all prior period EPS data presented. Pursuant to the provisions of SFAS 128, the
Company's net loss per common share was $.15 for the six months of 1997 and $.06
for the six months of 1996.
In February 1997, FASB issued SFAS No. 129, Disclosure of Information
about Capital Structure. This statement establishes standards for disclosing
information about an entity's capital structure. The Company has not yet
determined the effect, if any, of SFAS No. 129 on the consolidated financial
statements.
FASB Statement No. 130 "Reporting Comprehensive Income," which the
Company will adopt during the first quarter of 1998, establishes standards for
reporting and display of comprehensive income and its components in financial
statements. Comprehensive income generally represents all changes in
shareholders' equity except those resulting from investments by or distributions
to shareholders. The Company has not yet determined the effect, if any, of SFAS
No. 130 on the consolidated financial statements.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information. This Statement will change the way
public companies report information about segments of their business in their
annual financial statements and requires them to report selected segment
information in their quarterly reports issued to shareholders. It also requires
entity-wide disclosures about the products and services an entity provides, the
material countries in which it holds assets and reports revenues, and its major
customers. The Statement is effective for fiscal years beginning after December
15, 1997. The Company has not yet determined the effect, if any, of SFAS 131 on
the consolidated financial statements.
16. Subsequent Event (unaudited):
In September 1997, the Company announced that it would consolidate all of
its manufacturing operations into its new 60,000 square foot Goodyear, Arizona
facility. As a result, the Company is closing its LaVergne, Tennessee
manufacturing operation in late September. This consolidation will result in
one-time charges of approximately $500,000, substantially all of which will be
incurred in the quarter ending September 30, 1997. These charges consist
primarily of asset write-downs, severance, moving and lease termination costs.
In connection with the closure, an equipment loan maturity may be accelerated.
The loan has a balance of approximately $170,000.
F-16
<PAGE>
<TABLE>
<CAPTION>
POORE BROTHERS, INC.
COMBINED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(unaudited)
For the period from January 1, 1995 to May 31, 1995
---------------------------------------------------------------
Poore PB Adjustments
Brothers, Inc. PB Foods Distributing PB Texas Eliminations
---------------- -------------- --------------- --------------- ----------------
(a)
<S> <C> <C> <C> <C> <C>
Revenues $ 6,868,923 $ 1,618,800 $ 2,661,833 $ 1,245,764 $ (939,000) (b) (c)
Cost of sales 5,304,200 973,010 2,444,187 1,078,958 (925,000) (b)
---------------- -------------- --------------- --------------- ----------------
Gross profit 1,564,723 645,790 217,646 166,806 (14,000)
Selling, general and
administrative expenses 2,198,757 392,246 247,378 391,987 (14,000) (c)
Depreciation and amortization 319,493 29,775 1,050 11,981
---------------- -------------- --------------- --------------- ----------------
Operating income (loss) (953,527) 223,769 (30,782) (237,162)
Interest income (expense) (241,383) (18,215) (16,385) (319)
---------------- -------------- --------------- --------------- ----------------
Net income (loss) $ (1,194,910) $ 205,554 $ (47,167) $ (237,481) $ 0
================ ============== =============== =============== ================
Net loss per share
Weighted average number of
shares outstanding
</TABLE>
Pro forma Pro forma
Adjustments Combined
---------------- --------------
Revenues $ 11,456,320
Cost of sales 8,875,355
---------------- --------------
Gross profit 2,580,965
Selling, general and
administrative expenses $ 179,693 (d) 3,396,061
Depreciation and amortization 86,390 (e) 448,689
---------------- --------------
Operating income (loss) (266,083) (1,263,785)
Interest income (expense) (123,958) (f) (400,260)
---------------- --------------
Net income (loss) $ (390,041) $ (1,664,045)
================ ==============
Net loss per share $ (.39)
==============
Weighted average number of
shares outstanding 4,260,088
==============
Notes:
- ------
(a) Results of the PB Companies subsequent to the PB Acquisition date of May
31, 1995, and prior to May 31, 1995, Poore Brothers, Southeast, Inc.
(b) Reflects the elimination of intercompany sales and cost of sales.
(c) Reflects the elimination of intercompany rental income and expense of
$14,000.
(d) Reflects the recognition of pro forma administrative expenses associated
with establishing a corporate office, including related salaries.
(e) Reflects the recognition of pro forma depreciation expense on the stepped
up value of property and equipment recorded under the purchase method of
accounting and the recognition of pro forma amortization expense on the
intangible assets recorded under the purchase method of accounting for the
acquisition transaction.
(f) Reflects the recognition of pro forma interest expense on the debt incurred
with the acquisition of PB Foods, PB Distributing and PB Texas.
F-17
<PAGE>
POORE BROTHERS' FOODS, INC.
STATEMENT OF OPERATIONS (unaudited)
Three months ended March 31,
1995
------------------------------
Sales $ 843,026
Cost of sales 519,199
------------------------------
Gross profit 323,827
Selling, general and administrative expenses 179,058
Depreciation 17,865
------------------------------
Operating income 126,904
Other income, net 7,811
------------------------------
Net income $ 134,715
==============================
See the accompanying notes to financial statements.
F-18
<PAGE>
POORE BROTHERS' FOODS, INC.
STATEMENT OF CASH FLOWS (unaudited)
Three months ended
March 31, 1995
---------
Cash flows from operating activities: $ 134,715
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 17,865
Change in operating assets and liabilities, net:
Accounts receivable (48,698)
Inventories 10,500
Accounts payable 68,640
Accrued expenses (5,334)
---------
Net cash provided by operating activities 177,688
---------
Cash flow from financing activities:
Net payments under bank operating line (40,000)
Payments made on long-term debt (16,733)
---------
Net cash used in financing activities (56,733)
---------
Net increase in cash 120,955
Cash, beginning of period 10,787
---------
Cash, end of period $ 131,742
=========
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 10,056
Cash received during the year for interest 4,187
See the accompanying notes to financial statements.
F-19
<PAGE>
POORE BROTHERS' FOODS, INC.
NOTES TO FINANCIAL STATEMENTS (unaudited)
1. General:
The financial statements reflect all adjustments, such adjustments being
normal recurring accruals, which are necessary, in the opinion of management,
for the fair presentation of the results of the interim period. Interim results,
however, may not be indicative of the results for the full year.
The notes to the interim financial statements are presented to enhance
the understanding of the financial statements and do not necessarily represent
complete disclosures required by generally accepted accounting principles.
2. Acquisition:
During November 1994, the Company and its shareholders entered into a
tentative agreement to sell 1) the Company's assets, subject to certain
liabilities, 2) the shareholders 100% interest in Poore Brothers Distributing,
Inc., and 3) an equity interest (which, with related purchases, will constitute
80% in Poore Brothers of Texas, Inc. to Poore Brothers Southeast, Inc.). On May
31, 1995, the purchase transactions were consummated.
F-20
<PAGE>
POORE BROTHERS DISTRIBUTING, INC.
STATEMENT OF OPERATIONS (unaudited)
Three months ended March
31, 1995
-------------------
Sales $ 1,497,421
Cost of sales 1,389,938
-------------------
Gross profit 107,483
Selling, general and administrative expenses 125,801
Depreciation 700
-------------------
Operating loss (19,018)
Interest expense 11,153
-------------------
Net loss $ (30,171)
===================
See the accompanying notes to financial statements.
F-21
<PAGE>
POORE BROTHERS DISTRIBUTING, INC.
STATEMENT OF CASH FLOW (unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31, 1995
-------------------------
<S> <C>
Cash flows from operating activities:
Net loss $ (30,171)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 700
Change in operating assets and liabilities, net:
Accounts receivable 15,853
Inventories 28,574
Other assets 6,243
Accounts payable (53,333)
Accrued expenses 10,334
-------------------------
Net cash used in operating activities (21,800)
-------------------------
Cash flow from financing activities:
Advances under bank operating line 35,000
Payments made on long-term debt (2,000)
-------------------------
Net cash provided by financing activities 33,000
-------------------------
Net increase in cash 11,200
Cash, beginning of period 24,880
-------------------------
Cash, end of period $ 36,080
=========================
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 11,153
</TABLE>
See the accompanying notes to financial statements.
F-22
<PAGE>
POORE BROTHERS DISTRIBUTING, INC.
NOTES TO THE FINANCIAL STATEMENTS (unaudited)
1. General:
The financial statements reflect all adjustments, such adjustments being
normal recurring accruals, which are necessary, in the opinion of management,
for the fair presentation of the results of the interim period. Interim results,
however, may not be indicative of the results for the full year.
The notes to the interim financial statements are presented to enhance
the understanding of the financial statements and do not necessarily represent
complete disclosures required by generally accepted accounting principles.
2. Long-term debt:
Long-term debt is comprised of the following:
March 31,
1995
-------------------
Bank credit agreement $ 335,000
Related company notes 163,408
Equipment lease purchase 9,657
-------------------
508,065
Less current portion (337,848)
-------------------
$ 170,217
===================
3. Acquisition agreement:
During the calendar year 1994, the Company's principals and its equity
owners entered into an agreement to sell 100% of their equity ownership in the
Company to Poore Brothers Southeast, Inc. (the "Acquisition Transaction"). On
May 31, 1995, the Acquisition Transaction was consummated.
F-23
<PAGE>
POORE BROTHERS OF TEXAS, INC.
STATEMENT OF OPERATIONS (unaudited)
Three months ended
March 31, 1995
---------------------------
Sales $ 752,457
Cost of sales 660,356
---------------------------
Gross profit 92,101
Selling, general and administrative expenses 220,828
Depreciation 7,169
---------------------------
Operating loss (135,896)
Interest expense 222
---------------------------
Net loss $ (136,118)
===========================
See the accompanying notes to financial statements.
F-24
<PAGE>
POORE BROTHERS OF TEXAS, INC.
STATEMENT OF CASH FLOW (unaudited)
<TABLE>
<CAPTION>
Three months ended March
31, 1995
-------------------------
<S> <C>
Cash flows from operating activities: $ (136,118)
Net loss
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 7,169
Change in operating assets and liabilities, net:
Accounts receivable (23,451)
Inventories 29,391
Other assets 3,045
Notes receivable (3,293)
Accounts payable 46,122
Accrued expenses 59,570
Notes payable (2,909)
-------------------------
Net cash used in operating activities (20,474)
-------------------------
Cash flow from investing activities:
Purchase of equipment (8,989)
-------------------------
Net cash used in investing activities (8,989)
-------------------------
Net decrease in cash (29,463)
Cash, beginning of period 66,846
-------------------------
Cash, end of period $37,383
=========================
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 222
Forgiveness of accounts payable from a related
party accounted for as a contribution to
additional paid-in capital 213,614
</TABLE>
See the accompanying notes to financial statements.
F-25
<PAGE>
POORE BROTHERS OF TEXAS, INC.
NOTES TO THE FINANCIAL STATEMENTS (unaudited)
1. General:
The financial statements reflect all adjustments, such adjustments being
normal recurring accruals, which are necessary, in the opinion of management,
for the fair presentation of the results of the interim period. Interim results,
however, may not be indicative of the results for the full year.
The notes to the interim financial statements are presented to enhance
the understanding of the financial statements and do not necessarily represent
complete disclosures required by generally accepted accounting principles.
2. Intercompany transaction:
The Company purchases potato chips for resale from an affiliated entity,
Poore Brothers Foods, Inc. Poore Brothers Foods, Inc. canceled a portion of the
amount due from the Company. This cancellation totaled $213,614 for the period
ended March 31, 1995 and has been accounted for as a contribution to additional
paid-in capital.
3. Acquisition agreement:
During the calendar year 1994, the Company's principals and its equity
owners entered into an agreement to sell 100% of their equity ownership in the
Company to Poore Brothers Southeast, Inc. (the "Acquisition Transaction"). On
May 31, 1995, the Acquisition Transaction was consummated.
F-26
<PAGE>
==================================== ====================================
- ------------------------------------ ------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, OR ANY OF THE SELLING SECURITY HOLDERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER
TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS
PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO BUY THE SHARES OF COMMON STOCK BY
ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Available Information .................. 2
Forward-Looking Statements ............ 2
Prospectus Summary .................. 3
Risk Factors ........................... 6
Use of Proceeds ........................ 11
Market for the Common Stock ............ 12
Dividend Policy ........................ 12
Capitalization ........................ 13
Selected Financial Data ............... 14
Management's Discussion and Analysis of
Results of Operations and Financial
Condition ........................... 15
Business .............................. 20
Management ........................... 29
Security Ownership of Certain Beneficial
Owners .............................. 35
Description of Securities ............ 37
Certain Relationships and Related
Transactions ........................ 39
Shares Eligible for Future Sale ...... 40
Selling Security Holders and Plan of
Distribution ........................ 41
Legal Matters ........................ 42
Experts .............................. 42
Index to Financial Statements ......... F-1
</TABLE>
907,060 Shares
POORE BROTHERS, INC.
[GRAPHIC OMITTED]
Common Stock
----------
PROSPECTUS
----------
September 22, 1997
- ------------------------------------ ------------------------------------
==================================== ====================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
The Certificate of Incorporation of the Company provides that no director
shall have any personal liability to the Company or its stockholders for any
monetary damages for breach of fiduciary duty as a director, except that the
Certificate of Incorporation does not eliminate or limit the liability of each
director (i) for any breach of such director's duty of loyalty to the Company
or its stockholders, (ii) for acts of omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the Delaware General Corporation Law or (iv) for any transaction
from which such director derived an improper personal benefit.
The By-Laws of the Company provide that:
(a) The Company shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Company) by
reason of the fact that he is or was a director, officer, employee or agent
of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Company, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of
any action, suit or proceeding by judgment, order, settlement, conviction
or upon a plea of nolo contendere or its equivalent, shall not, of itself,
create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the Company, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
(b) The Company shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the Company to procure a judgment in
its favor by reason of the fact that he is or was a director, officer,
employee or agent of the Company, or is or was serving at the request of
the Company as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses (including attorneys' fees) actually and reasonably incurred by
him in connection with the defense or settlement of such action or suit if
he acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the Company and except that no
indemnification shall be made in respect to any claim, issue or matter as
to which such person shall have been adjudged to be liable to the Company
unless and only to the extent that the Court of Chancery or the court in
which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
(c) To the extent that a director, officer, employee or agent of the
Company has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in Subsections (a) and (b) above, or
in defense of any claim, issue or matter therein, he shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred
by him in connection therewith.
(d) Any indemnification under Subsections (a) and (b) above (unless
ordered by a court) shall be made by the Company only as authorized in the
specific case upon a determination that indemnification of the director,
officer, employee or agent is proper in the circumstances because he has met
the applicable standard of conduct set forth in Subsections (a) and (b). Such
determination shall be made (1) by the Board of Directors by a majority vote
of a quorum consisting of directors who were not parties to such action, suit
or proceeding, or (2) if such quorum is not obtainable, or, even if
obtainable a quorum of disinterested directors so directs, by independent
legal counsel in a written opinion, or (3) by the stockholders.
II-1
<PAGE>
(e) Expenses incurred in defending a civil or criminal action, suit or
proceeding shall be paid by the Company in advance of the final disposition
of such action, suit or proceeding upon receipt of an undertaking by or on
behalf of the director, officer, employee or agent to repay such amount if
it shall be ultimately determined that he is not entitled to be indemnified
by the Company as authorized in this Section.
(f) The indemnification provided by this Section shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled by any By-Law, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in
his official capacity and as to action in another capacity while holding
such office, and shall continue as to a person who has ceased to a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
(g) The Company is authorized, according to the discretion of the Board
of Directors, to purchase and maintain insurance on behalf of any person
who is or was a director, officer, employee or agent of the Company, or is
or was serving at the request of the Company as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust
or other enterprise against any liability asserted against him and incurred
by him in any such capacity, or arising out of his status as such, whether
or not the Company must indemnify him against such liability under the
provisions of this Section.
(h) For purposes of these provisions, references to "the Company" shall
include, in addition to the Company, any constituent corporation (including
any constituent of a constituent) absorbed in a consolidation or merger
which, if its separate existence had continued, would have had the power
and authority to indemnify its directors, officers and employees or agents,
so that any person who is or was a director, officer, employee or agent of
such constituent corporation, or is or was serving at the request of such
constituent corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
shall stand in the same position under these provisions with respect to the
resulting corporation as he would have with respect to such constituent
corporation if its separate existence had continued.
The employment agreement of each of Eric Kufel, a director and officer of the
Company, and Scott Fullmer and Glen Flook, each of which is an officer of the
Company, provides that the Company shall indemnify and hold harmless and defend
such person for, from and against all claims, liabilities, obligations, fines,
penalties and other matters and all costs and expenses relating thereto that the
Company and/or any of its subsidiaries or affiliated entities is permitted by
applicable law, except as any of the foregoing arises out of or is related to
such employee's negligence, willful malfeasance, and/or breach of the employment
agreement. The Company has also agreed to provide indemnification on similar
terms to David J. Brennan, the Company's former director, President and Chief
Executive Officer, and Jeffrey H. Strasberg, the Company's former Vice
President, Chief Financial Officer, Treasurer and Secretary.
The Company has agreed to indemnify Mark S. Howells and Jeffrey J. Puglisi,
directors of the Company, in connection with the lawsuit brought against PB
Southeast and each of Messrs. Howells and Puglisi, by James Gossett.
II-2
<PAGE>
Item 25. Other Expenses of Issuance and Distribution
The expenses of the Company for the issuance and distribution of the
shares of Common Stock registered hereby are set forth in the following table:
Item Amount
---- ------
Securities and Exchange Commission Filing Fee ...... $ 412
Legal Fees .......................................... 20,000*
Accounting Fees .................................... 25,000*
Printing and Engraving Costs ........................ 15,000*
Miscellaneous Expenses .............................. 5,000*
---------
Total ............................................. $ 65,412
=========
- ------------
* Estimated.
Item 26. Recent Sales of Unregistered Securities.
Set forth below in chronological order is information regarding issuances
by the Company, since its formation in February 1995, of securities that were
not registered under the Securities Act of 1933, as amended (the "Securities
Act").
In May 1995, the Company issued 423,137, 403,138 and 420,000 shares of
Common Stock to Messrs. Howells and Puglisi and Parris H. Holmes, Jr.,
directors of the Company, respectively, in exchange for their respective shares
of capital stock of PB Southeast. In addition, the Company issued a total of
313,725 shares of Common Stock to other shareholders of PB Southeast in
exchange for such persons' respective shares of capital stock of PB Southeast.
In connection with the PB Acquisition, in May 1995, the Company issued an
aggregate of 300,000 shares of its Common Stock to James Poore, Donald Poore and
Amelia Poore. Also in connection with such transactions, the Company issued to
such persons a single Promissory Note due May 31, 2000 in the principal amount
of $500,000 which accrued interest at a rate equal to the prime rate of Bank
One, Arizona N.A. plus 1.75% per annum. The Promissory Note was paid off by the
Company in February 1997.
To finance the acquisition of its subsidiaries in May 1995, the Company
issued an aggregate of $2,700,000 of the 9% Convertible Debentures to
Renaissance Capital Growth & Income Fund III, Inc. and Wells Fargo Equity
Capital, Inc. (formerly First Interstate Equity Corporation). The 9% Convertible
Debentures were convertible into an aggregate of 2,477,065 shares of Common
Stock. In December 1996, in connection with the Company's initial public
offering, $400,409 in principal amount of the 9% Convertible Debentures was
converted into an aggregate of 367,348 shares of Common Stock. The remaining
$2,299,591 outstanding principal amount of the 9% Convertible Debenture is
convertible into an aggregate of 2,109,717 shares of Common Stock. Also in
connection with the PB Acquisition, the Company sold 1,663,723 shares of its
Common Stock through a private placement at a per share price of $1.08, of which
Bank Von Ernst & Cie, SA, a stockholder of the Company, purchased 277,289
shares. Arizona Securities Group, Inc., of which Messrs. Howells and Puglisi,
directors of the Company, are principals, acted as the placement agent for these
transactions and received $120,000 in sales commissions and $22,000 as
reimbursement of expenses in connection with the private placement. Each of the
investors in the private placement represented to the Company prior to the
issuance of shares thereto, that he, she or it was an "accredited investor"
within the meaning of Rule 501 under the Securities Act.
II-3
<PAGE>
In August 1995, Kenneth M. Pierce purchased 50,000 shares of Common Stock
for a purchase price of $54,095 (which was paid to the Company in installments
from August 1995 through November 1995).
In November 1995, in exchange for minority interests in PB Texas, the
Company issued 100 shares of Common Stock to each of Arnold Olivarez and Barney
Bennett.
In October 1995, Jeffrey H. Strasberg, a former officer of the Company,
purchased 25,000 shares of Common Stock for an aggregate purchase price of
$27,048.
In March 1996, the Company engaged in a private placement pursuant to
which it issued 750,000 shares of Common Stock to a group of investors for
aggregate consideration of $937,500. Arizona Securities Group, Inc. acted as
the placement agent and received $46,875 in sales commissions in connection
with the private placement. Mr. Puglisi, a director of the Company, Mr.
Brennan, a former officer and director of the Company, and Michael J. DePinto,
a former officer of the Company, purchased shares of common stock in the March
1996 private placement. Each of the investors in the private placement
represented to the Company prior to the issuance of shares thereto, that he,
she or it was an "accredited investor" within the meaning of Rule 501 under the
Securities Act.
In April 1996, pursuant to his employment agreement dated March 11, 1996,
Mr. Brennan, a former officer and director of the Company, purchased 100,000
shares of Common Stock for an aggregate purchase price of $109,000.
On September 11, 1996, the Company issued to Westminster Capital, Inc. a
warrant to purchase an aggregate of 300,000 shares of the Company's common
stock at an exercise price of $1.40 per share.
The Company believes that each of the foregoing transactions was exempt
from registration under the Securities Act by virtue of the provisions of
Section 4(2) of the Securities Act, as transactions by an issuer not involving
any public offering. None of the foregoing transactions involved a distribution
or public offering. Each purchaser of the securities described above has
represented that he, she or it understands that the securities acquired may not
be sold or otherwise transferred absent registration under the Securities Act
or the availability of an exemption from the registration requirements of the
Securities Act, and each certificate evidencing the securities owned by each
purchaser bears or will bear upon issuance a legend to that effect.
Item 27. Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
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 By-Laws of the Company. (1)
4.1 Specimen Certificate for shares of Common Stock. (2)
4.2 Form of Underwriter's Warrant issued by the Company to Paradise Valley Securities, Inc. on
December 11, 1996. (3)
4.3 Convertible Debenture Loan Agreement dated May 31, 1995 (the "Debenture Loan
Agreement") by and among the Company, PB Arizona, PB Distributing, PB Texas, PB
Southeast, Renaissance and Wells Fargo. (2)
4.4 9.00% Convertible Debenture dated May 31, 1995, issued by the Company to Renaissance. (1)
4.5 9.00% Convertible Debenture dated May 31, 1995, issued by the Company to Wells Fargo. (1)
5.1 Opinion of Cobb & Eisenberg LLC. (5)
10.1 Employment Agreement dated March 11, 1996, by and between the Company and David J.
Brennan. (1)
10.2 Employment Agreement dated May 31, 1995, by and between PB Arizona and James M.
Poore. (1)
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
10.3 Employment Agreement dated May 20, 1996, by and between the Company and Wendell T.
Jones. (1)
10.4 Non-Qualified Stock Option Agreement dated August 1, 1995, by and between the Company
and Mark S. Howells. (1)
10.5 Non-Qualified Stock Option Agreement dated August 1, 1995, by and between the Company
and Mark S. Howells. (1)
10.6 Non-Qualified Stock Option Agreement dated August 31, 1995, by and between the Company
and Mark S. Howells. (1)
10.7 Non-Qualified Stock Option Agreement dated February 29, 1996, by and between the
Company and Mark S. Howells. (1)
10.8 Non-Qualified Stock Option Agreement dated August 1, 1995, by and between the Company
and Jeffrey J. Puglisi. (1)
10.9 Non-Qualified Stock Option Agreement dated August 1, 1995, by and between the Company
and Jeffrey J. Puglisi. (1)
10.10 Non-Qualified Stock Option Agreement dated August 31, 1995, by and between the Company
and Jeffrey J. Puglisi. (1)
10.11 Non-Qualified Stock Option Agreement dated February 29, 1996, by and between the
Company and Jeffrey J. Puglisi. (1)
10.12 Non-Qualified Stock Option Agreement dated August 1, 1995, by and between the Company
and Parris H. Holmes, Jr. (1)
10.13 Accounts Receivable Security Agreement dated July 26, 1996, by and between PB Arizona
and First Community Financial Corporation ("First Community").(1)
10.14 Guaranty and Subordination dated July 26, 1996, issued by PB Arizona to First Community.
(1)
10.15 Multiple Advance Promissory Note dated July 26, 1996, issued by PB Arizona to First
Community. (1)
10.16 Accounts Receivable Security Agreement dated July 26, 1996, by and between PB
Distributing and First Community, with exhibits. (1)
10.17 Guaranty and Subordination Agreement dated July 26, 1996, issued by PB Distributing to
First Community. (1)
10.18 Multiple Advance Promissory Note dated July 26, 1996, issued by PB Distributing to First
Community. (1)
10.19 Security Agreement dated July 26, 1996, by and between PB Southeast and First Community.
(1)
10.20 Security Agreement dated July 26, 1996, by and between PB Texas and First Community. (1)
10.21 Form of Security Agreements dated May 31, 1995, by and among Renaissance, Wells Fargo
and each of the Company, PB Arizona, PB Southeast, PB Texas and PB Distributing. (1)
10.22 Lease Agreement dated July 23, 1993, by and among PB Southeast and Jerome Rosenblum,
Fred Yazdian and Sol Rosenblum. (1)
10.23 Security Agreement dated October 14, 1993, by and among PB Southeast, Department of
Economic and Community Development of the State of Tennessee and Rutherford County,
Tennessee. (1)
10.24 Master Equipment Lease Agreement dated September 22, 1995, by and between Banc One
Arizona Leasing Corporation and PB Arizona ("Banc One Lease Agreement"), with
equipment schedules. (1)
10.25 Corporate Guaranty dated September 25, 1995, issued by PB Distributing to Banc One
Arizona Leasing Corporation in connection with the Banc One Lease Agreement. (1)
10.26 Equipment Lease Agreement dated December 12, 1995, by and between PB Arizona and
FINOVA Capital Corporation. (1)
10.27 Guaranty dated December 12, 1995, issued by the Company to FINOVA Capital Corporation.
(1)
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
10.28 Master Lease Agreement (the "LCA Lease Agreement") dated February 1, 1996, by and
between PB Arizona and LCA Capital Corp. (also known as LCA, a Division of Associates
Commercial Corporation) ("LCA"). (1)
10.29 Purchase Agreement dated February 1, 1996, by and between PB Arizona and LCA in
connection with the LCA Lease Agreement. (1)
10.30 Corporate Guaranty dated as of February 1, 1996, issued by the Company to LCA in
connection with LCA Lease Agreement. (1)
10.31 Loan Agreement dated September 11, 1996, by and between the Company and National Bank
of Arizona ("NBA"). (1)
10.32 Promissory Note dated September 11, 1996, in the principal amount of $2,400,000, issued by
the Company to NBA. (1)
10.33 Deed of Trust, Security Agreement and Financing Statement dated September 11, 1996, by
and between the Company and NBA. (1)
10.34 Assignment Of Permits, Licenses, Approvals, Deposits, Contracts and Documents dated
September 11, 1996, by and between the Company and NBA. (1)
10.35 Specific Assignment of Development Agreement dated September 11, 1996, by and between
the Company and NBA. (1)
10.36 Development Agreement dated May 14, 1996, by and between the Company and the City of
Goodyear, Arizona. (1)
10.37 Agreement dated August 29, 1996, by and between the Company and Westminster Capital,
Inc. ("Westminster"), as amended. (1)
10.38 Secured Promissory Note dated September 11, 1996, in the principal amount of $1,250,000,
issued by the Company to Westminster. (1)
10.39 Unsecured Environmental Indemnity Agreement dated September 11, 1996, by the Company
in favor of Westminster. (1)
10.40 Warrant dated September 11, 1996, issued by the Company to Westminster. (1)
10.41 Commercial Pledge and Security Agreement dated September 11, 1996, by and among the
Company, NBA and Westminster. (1)
10.42 Subordinated Deed of Trust, Security Agreement, Assignment of Leases and Rents and
Fixture Filing dated September 11, 1996, by and among the Company, First American Title
Insurance Company and Westminster. (1)
10.43 Standard Form of Agreement between Owner and Contractor dated August 8, 1996, between
the Company and Newcon, Inc. (1)
10.44 Agreement for the Purchase and Sale of Assets and Assumption and Liabilities dated
November 11, 1994, by and between PB Arizona, PB Foods, James Poore, Donald Poore and
Amelia Poore. (1)
10.45 Assignment Letter dated March 8, 1995, by and between PB Southeast and PB Foods. (1)
10.46 Form of Independent Distributor Agreement by and between PB Distributing and
independent distributors. (1)
10.47 Agreement for the Exclusive Right to Purchase, Package, Distribute and Sell "Low Fat"
Snack Foods dated September 11, 1996, by and between the Company and Great Snaxx.
(Certain portions of this document are omitted pursuant to a confidential treatment request.)
(2)
10.48 Amendment No. 1 dated October 14, 1996, to Warrant dated September 11, 1996, issued by
the Company to Westminster. (2)
10.49 Waiver Letter dated August 1. 1996, from Renaissance, in connection with the Debenture
Loan Agreement. (2)
10.50 Waiver Letter dated August 27, 1996, from Wells Fargo, in connection with the Debenture
Loan Agreement. (2)
10.51 Letter Agreement dated November 5, 1996, amending the Non-Qualified Stock Option
Agreement dated February 29, 1996, by and between the Company and Mark S. Howells. (2)
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
10.52 Letter Agreement dated November 5, 1996, amending the Non-Qualified Stock Option
Agreement dated February 29, 1996, by and between the Company and Jeffrey J. Puglisi. (2)
10.53 Non-Qualified Stock Option Agreement dated as of October 22, 1996, by and between the
Company and Mark S. Howells.(2)
10.54 Letter Agreement dated as of November 5, 1996, by and between the Company and Jeffrey J.
Puglisi.(2)
10.55 Letter Agreement dated as of November 5, 1996, by and between the Company and David J.
Brennan. (2)
10.56 Stock Option Agreement dated October 22, 1996, by and between the Company and David J.
Brennan. (3)
10.57 Amendment to Accounts Security Receivable Agreement dated November 1, 1996, by and
between PB Arizona and First Community. (2)
10.58 Amendment to Accounts Receivable Security Agreement dated November 1, 1996, by and
between PB Distributing and First Community. (2)
10.59 Letter Agreement dated November 1, 1996, by and among the Company, Mark S. Howells,
Jeffrey J. Puglisi, David J. Brennan and Parris H. Holmes, Jr. (2)
10.60 Letter Agreement dated December 4, 1996, by and between the Company and Jeffrey J.
Puglisi, relating to stock options. (3)
10.61 Letter Agreement dated December 4, 1996, by and between the Company and Mark S.
Howells, relating to stock options. (3)
10.62 Letter Agreement dated December 4, 1996, by and between the Company and Parris H.
Holmes, Jr., relating to stock options. (3)
10.63 Letter Agreement dated December 4, 1996, by and between the Company and David J.
Brennan, relating to stock options. (3)
10.64 Letter Agreement dated December 4, 1996, by and between the Company and Jeffrey H.
Strasberg, relating to stock options. (3)
10.65 Form of Underwriting Agreement entered into on December 6, 1996, by and between the
company, Paradise Valley Securities, Inc., Renaissance and Wells Fargo. (Incorporated by
reference to Amendment No. 4 to the Company's Registration Statement on Form SB-2,
Registration No. 333-5594-LA.)
10.66 Employment Agreement dated January 24, 1997, by and between the Company and Eric J.
Kufel. (4)
10.67 First Amendment to Employment Agreement dated February 2, 1997, by and between the
Company and David J. Brennan. (4)
10.68 Employment Agreement dated February 4, 1997, by and between the Company and Scott D.
Fullmer. (4)
10.69 Employment Agreement dated February 14, 1997, by and between the Company and Glen E.
Flook. (4)
10.70 Amendment dated January 28, 1997, amending Employment Agreement by and between the
Company and Wendell T. Jones. (4)
10.71 Second Loan Modification Agreement dated January 10, 1997, by and between the Company
and NBA. (4)
10.72 Amendment to Accounts Receivable Security Agreement dated December 30, 1996, by and
between PB Distributing and First Community. (4)
10.73 Amendment to Accounts Receivable Security Agreement dated December 30, 1996, by and
between PB Arizona and First Community. (4)
10.74 Promissory Note Modification Agreement dated December 30, 1996, by and between PB
Distributing and First Community. (4)
10.75 Promissory Note Modification Agreement dated December 30, 1996, by and between PB
Arizona and First Community. (4)
10.76 Commercial Real Estate Purchase Contract and Receipt for Deposit dated January 22, 1997,
by and between the Company and D.F. Properties, Inc. (4)
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
10.77 Separation Agreement and Release of All Claims dated March 10, 1997, by and between the
Company and Jeffrey H. Strasberg. (Incorporated by reference to the Company's Quarterly
Report on Form 10-QSB for the quarter ended March 31, 1997, File No. 001-14556.)
10.78 Employment Agreement dated April 10, 1997, by and between the Company and Thomas W.
Freeze. (Incorporated by reference to the Company's Quarterly Report on Form 10-QSB for
the quarter ended March 31, 1997, File No. 001- 14556.)
10.79 Asset Purchase, Licensing and Distribution Agreement dated as of June 1, 1997, by and
between PB Texas and David Hecht. (Incorporated by reference to the Company's Current
Report on Form 8-K dated June 4, 1997, File No. 001-14556.)
10.80 Fixed Rate Note dated June 4, 1997, by and between La Cometa Properties, Inc. and Morgan
Guaranty Trust Company of New York. (Incorporated by reference to the Company's
Quarterly Report on Form 10-QSB for the quarter ended June 30, 1997, File No. 001-14556.)
10.81 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. (Incorporated by
reference to the Company's Quarterly Report on Form 10-QSB for the quarter ended June
30, 1997, File No. 001-14556.)
10.82 Guaranty Agreement dated June 4, 1997, by and between the Company and Morgan
Guaranty Trust Company of New York. (Incorporated by reference to the Company's
Quarterly Report on Form 10-QSB for the quarter ended June 30, 1997, File No. 001-14556.)
10.83 Equipment Lease Agreement dated June 9, 1997, by and between PB Arizona and FINOVA
Capital Corporation. (Incorporated by reference to the Company's Quarterly Report on Form
10-QSB for the quarter ended June 30, 1997, File No. 001- 14556.)
10.84 Poore Brothers, Inc. 1995 Stock Option Plan, as amended (Incorporated by reference to the
Company's Quarterly Report on Form 10-QSB for the quarter ended June 30, 1997, File No.
001-14556.)
11.1 Statement regarding computation of per share earnings. (5)
21.1 List of Subsidiaries of the Company. (5)
23.1 Consent of Coopers & Lybrand, L.L.P. (5)
</TABLE>
- ----------------
(1) Incorporated by reference to the Company's Registration Statement on Form
SB-2, Registration No. 333-5594-LA.
(2) Incorporated by reference to Amendment No. 1 to Company's Registration
Statement on Form SB-2, Registration No. 333-5594-LA.
(3) Incorporated by reference to Amendment No. 3 to the Company's Registration
Statement on Form SB-2, Registration No. 333-5594-LA.
(4) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1996, File No. 001-14556.
(5) Filed herewith.
II-8
<PAGE>
Item 28. Undertakings.
(a) Rule 415 Offering.
The Registration will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement to:
(i) Include any prospectus required by Section 10(a)(3) of the Securities
Act;
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii) Include any additional or changed material information on the plan
of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(b) Indemnification.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or controlling persons of the
Registrant pursuant to the provisions referred to in Item 24 of this
Registration Statement, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
II-9
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe
that it meets all the requirements for filing on Form SB-2 and authorized this
Registration Statement to be signed on its behalf by the undersigned, in the
City of Goodyear, State of Arizona on September 22, 1997.
POORE BROTHERS, INC.
By: /s/ ERIC J. KUFEL
-------------------------------------
Eric J. Kufel
President and Chief Executive
Officer
In accordance with the requirements of the Securities Act of 1933, as
amended, this amendment to the Registration Statement was signed by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ ERIC J. KUFEL President, Chief Executive Officer and September 22, 1997
- --------------------------- Director (Principal Executive Officer)
Eric J. Kufel
/s/ THOMAS W. FREEZE Vice President, Chief Financial Officer, September 22, 1997
- --------------------------- Treasurer and Secretary (Principal
Thomas W. Freeze Financial Officer and Principal
Accounting Officer)
/s/ MARK S. HOWELLS Chairman and Director September 22, 1997
- ---------------------------
Mark S. Howells
/s/ JEFFREY J. PUGLISI Director September 22, 1997
- ---------------------------
Jeffrey J. Puglisi
/s/ PARRIS H. HOLMES, JR. Director September 22, 1997
- ---------------------------
Parris H. Holmes, Jr
/s/ ROBERT C. PEARSON Director September 22, 1997
- ---------------------------
Robert C. Pearson
/s/ AARON M. SHENKMAN Director September 22, 1997
- ---------------------------
Aaron M. Shenkman
</TABLE>
II-10
[COBB & EISENBERG LLC Letterhead]
September 22, 1997
Poore Brothers, Inc.
3500 South La Cometa Drive
Goodyear, Arizona 85338
Re: Registration Statement on Form SB-2 of
Poore Brothers, Inc.
Dear Sirs:
We refer to the Registration Statement on Form SB-2 (the "Registration
Statement") to be filed by Poore Brothers, Inc., a Delaware corporation (the
"Company"), with the Securities and Exchange Commission under the Securities Act
of 1933, as amended (the "Securities Act"), relating to the offer and sale by
certain persons of up to 907,060 shares of the Company's common stock, par value
$.01 per share (the "Common Stock"). The following securities are being
registered pursuant to the Registration Statement: (i) 607,060 shares of Common
Stock previously issued by the Company (the "Stockholder Shares"); and (ii)
300,000 shares of Common Stock (the "Warrant Shares") issuable upon the exercise
of a warrant issued in September 1996 by the Company to Westminster Capital,
Inc. (the "Warrant").
In connection with this opinion, we have examined copies of (i) the
Certificate of Incorporation, as amended to date, and the By-laws of the Company
and (ii) certain resolutions of the Board of Directors of the Company relating
to the Registration Statement. We have also examined originals, photostatic or
certified copies, of such records of the Company, certificates of officers of
the Company and of public officials and such other documents as we have deemed
relevant and necessary as the basis for the opinion set forth below. In such
examinations, we have assumed the completion of all requisite corporate actions
and authorizations prior to the effectiveness of the Registration Statement, the
genuineness of all signatures, the authenticity of all documents submitted to us
as originals, the conformity to original documents of all copies submitted to us
as certified, conformed or photostatic copies, and the authenticity of all
originals of such copies
Based upon the foregoing, we are of the opinion that:
(a) to our knowledge, the Stockholder Shares have been validly
issued and fully paid, and are non-assessable; and
<PAGE>
Poore Brothers, Inc. -2- September 22, 1997
(b) the Warrant Shares have been validly authorized for issuance
and sale and will, when duly issued and sold as contemplated
by the Warrant, be validly issued, fully-paid and
non-assessable.
The foregoing opinion is limited to the Federal laws of the United
States and the laws of the State of Delaware, and we express no opinion as to
the effect of the laws of any other jurisdiction.
We consent to the filing of this opinion with the Securities and
Exchange Commission as Exhibit 5.1 to the Registration Statement and to the
reference to our firm under the caption "Legal Matters" in the Prospectus
constituting a part of the Registration Statement.
Very truly yours,
/s/ COBB & EISENBERG LLC
EXHIBIT 11.1
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
POORE BROTHERS, INC.
<TABLE>
<CAPTION>
Fiscal year ended December 31, Six months ended June 30,
------------------------------------ ---------------------------------------
1995 1996 1996 1997
----------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net loss
................................................... $ (1,194,910) $ (691,678) $ (212,743) $ (1,049,180)
----------------- ----------------- ---------------- ----------------
Weighted average common shares outstanding ........ 2,690,189 3,924,498 3,492,078 6,982,594
Common stock equivalents from stock options and
warrants........................................... 758,412 568,809 758,412 (1) *
----------------- ----------------- ---------------- ----------------
Total weighted average common shares outstanding .. 3,448,601 4,493,307 4,250,490 6,982,594
----------------- ----------------- ---------------- ----------------
Loss per common share and common share equivalent.. $ (0.35) $ (0.15) $ (0.05) $ $(0.15)
================= ================= ================ ================
</TABLE>
(1) Anti-dilutive common stock equivalents included in accordance with
Securities and Exchange Commission Staff Accounting Bulletin No. 83.
* Not included as they are anti-dilutive.
EXHIBIT 21.1
LIST OF SUBSIDIARIES OF POORE BROTHERS, INC.
Company State of Incorporation
- ---------------------------------------- ---------------------------------
Poore Brothers Arizona, Inc. Arizona
Poore Brothers Distributing, Inc. Arizona
Poore Brothers of Texas, Inc. Texas
Poore Brothers Southeast, Inc. Arizona
La Cometa Properties, Inc. Arizona
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form SB-2 (File
No.------------) of our report dated March 4, 1997 on our audits of the
consolidated financial statements of Poore Brothers, Inc. and Subsidiaries. We
also consent to the reference to our firm under the caption "Experts."
COOPERS & LYBRAND L.L.P.
Phoenix, Arizona
September 22, 1997
