U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended September 30, 1999
OR
[ ] Transition Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from _______ to _______
Commission File Number 1-14556
POORE BROTHERS, INC.
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
DELAWARE 86-0786101
- ------------------------------------------------ -------------------
(State or other jurisdiction of incorporation or (I.R.S. Employer
Organization) Identification No.)
3500 S. LA COMETA DRIVE, GOODYEAR, ARIZONA 85338
------------------------------------------------
(Address of principal executive offices)
(623) 932-6200
---------------------------
(Issuer's telephone number)
Check whether the Registrant: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
As of September 30, 1999, the number of issued and outstanding shares of common
stock of the Registrant was 7,832,997.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE>
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated balance sheets as of September 30, 1999 and
December 31, 1998............................................... 3
Consolidated statements of operations for the three and
nine months ended September 30, 1999 and 1998................... 4
Consolidated statements of cash flows for the nine months ended
September 30, 1999 and 1998..................................... 5
Notes to consolidated financial statements........................ 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION............................................... 10
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS................................................. 14
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS......................... 14
ITEM 3. DEFAULTS UPON SENIOR SECURITIES................................... 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............... 14
ITEM 5. OTHER INFORMATION................................................. 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................. 16
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
POORE BROTHERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------ ------------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents ..................... $ 155,358 $ 270,295
Accounts receivable, net of allowance of
$83,000 in 1999 and $24,000 in 1998 ......... 2,320,866 1,712,955
Inventories ................................... 556,694 465,038
Other current assets .......................... 269,981 281,994
------------ ------------
Total current assets ........................ 3,302,899 2,730,282
Property and equipment, net ..................... 6,007,962 6,270,374
Intangible assets, net .......................... 3,482,866 3,723,906
Other assets .................................... 179,195 214,327
------------ ------------
Total assets ................................ $ 12,972,922 $ 12,938,889
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .............................. $ 900,456 $ 870,204
Accrued liabilities ........................... 498,451 439,404
Current portion of long-term debt ............. 693,303 652,519
------------ ------------
Total current liabilities ................... 2,092,210 1,962,127
Long-term debt, less current portion ............ 5,650,213 5,720,247
------------ ------------
Total liabilities ........................... 7,742,423 7,682,374
------------ ------------
Shareholders' equity:
Preferred stock, $100 par value; 50,000 shares
authorized; No shares issued or outstanding
in 1999 and 1998 ............................ -- --
Common stock, $.01 par value; 15,000,000 shares
authorized; 7,832,997 shares issued and
outstanding in 1999 and 1998 ................ 78,329 78,329
Additional paid-in capital .................... 11,514,210 11,514,210
Accumulated deficit ........................... (6,362,040) (6,336,024)
------------ ------------
Total shareholders' equity .................... 5,230,499 5,256,515
------------ ------------
Total liabilities and shareholders' equity .... $ 12,972,922 $ 12,938,889
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE>
POORE BROTHERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
THREE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net revenues ..................................... $ 5,514,796 $ 3,014,738 $ 14,435,216 $ 9,475,957
Cost of revenues ................................. 4,083,934 2,295,323 10,747,998 7,108,610
------------ ------------ ------------ ------------
Gross profit ................................... 1,430,862 719,415 3,687,218 2,367,347
Selling, general and administrative expenses ..... 1,165,186 941,036 3,177,310 2,724,126
------------ ------------ ------------ ------------
Operating income (loss) ........................ 265,676 (221,621) 509,908 (356,779)
Interest income .................................. 7,963 12,602 20,943 37,724
Interest expense ................................. (162,801) (134,340) (485,236) (408,669)
------------ ------------ ------------ ------------
Income (loss) before cumulative effect of a
change in accounting principle ............... 110,838 (343,359) 45,615 (727,724)
Cumulative effect of a change in accounting
principle ...................................... -- -- (71,631) --
------------ ------------ ------------ ------------
Net income (loss) .............................. $ 110,838 $ (343,359) $ (26,016) $ (727,724)
============ ============ ============ ============
Earnings (loss) per common share:
Basic-
Income (loss) before cumulative effect of a
change in accounting principle ............... $ 0.01 $ (0.05) $ 0.01 $ (0.10)
Cumulative effect of a change in accounting
principle .................................... -- -- (0.01) --
------------ ------------ ------------ ------------
Net income (loss) .............................. $ 0.01 $ (0.05) $ 0.00 $ (0.10)
============ ============ ============ ============
Diluted-
Income (loss) before cumulative effect of a
change in accounting principle ............... $ 0.01 $ (0.05) $ 0.01 $ (0.10)
Cumulative effect of a change in accounting
principle .................................... -- -- (0.01) --
------------ ------------ ------------ ------------
Net income (loss) .............................. $ 0.01 $ (0.05) $ 0.00 $ (0.10)
============ ============ ============ ============
Weighted average number of common shares:
Basic .......................................... 7,832,997 7,126,657 7,832,997 7,104,335
============ ============ ============ ============
Diluted ........................................ 8,028,843 7,126,657 7,832,997 7,104,335
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
POORE BROTHERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------
1999 1998
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................... $ (26,016) $ (727,724)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Cumulative effect of a change in accounting principle .... 71,631 --
Depreciation ............................................. 447,563 434,244
Amortization ............................................. 213,506 150,115
Valuation reserves ....................................... 77,000 68,000
Other non-cash charges ................................... 208,374 92,481
Change in operating assets and liabilities:
Accounts and note receivable ............................. (677,911) 302,073
Inventories .............................................. (98,656) 32,235
Other assets and liabilities ............................. (205,327) (202,115)
Accounts payable and accrued liabilities ................. 89,300 (319,728)
----------- -----------
Net cash provided by (used in) operating activities .... 99,464 (170,418)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds on disposal of property and equipment ............. -- 27,268
Purchase of property and equipment ......................... (185,151) (122,016)
----------- -----------
Net cash used in investing activities .................. (185,151) (94,748)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock ..................... -- 81,116
Payments made on long-term debt ............................ (461,273) (436,925)
Net increase (decrease) in working capital line of credit .. 432,023 (345,832)
----------- -----------
Net cash used in financing activities .................. (29,250) (701,641)
----------- -----------
Net (decrease) in cash and cash equivalents .................. (114,937) (966,807)
Cash and cash equivalents at beginning of period ............. 270,295 1,622,751
----------- -----------
Cash and cash equivalents at end of period ................... $ 155,358 $ 655,944
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest ..................................... $ 328,847 $ 397,370
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
POORE BROTHERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
GENERAL
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. The exchange transaction with PB Southeast was accounted
for similar to a pooling-of interests since both entities had common ownership
and control immediately prior to the transaction. During 1997, the Company sold
its Houston, Texas distribution business and closed its PB Southeast
manufacturing operation. In November 1998, the Company acquired the business and
certain assets (including the Bob's Texas Style(TM) potato chips brand) of Tejas
Snacks, L.P. ("Tejas"), a Texas-based potato chip manufacturer.
The Company is engaged in the production, marketing and distribution of
salty snack food products that are sold primarily throughout the southwestern
United States. The Company manufactures and sells its own brands of batch-cooked
potato chips under the Poore Brothers(R) and Bob's Texas Style(TM) brand names,
manufactures private label potato chips for grocery store chains, and
distributes and merchandises snack food products that are manufactured by
others.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Poore
Brothers, Inc. and all of its wholly owned subsidiaries. All significant
intercompany amounts and transactions have been eliminated. The financial
statements have been prepared in accordance with the instructions for Form
10-QSB and, therefore, do not include all the information and footnotes required
by generally accepted accounting principles. In the opinion of management, the
consolidated financial statements include all adjustments, consisting only of
normal recurring adjustments, necessary in order to make the consolidated
financial statements not misleading. A description of the Company's accounting
policies and other financial information is included in the audited financial
statements filed with the Form 10-KSB for the fiscal year ended December 31,
1998. The results of operations for the nine months ended September 30, 1999 are
not necessarily indicative of the results expected for the full year.
CHANGE IN ACCOUNTING PRINCIPLE
In accordance with Statement of Position 98-5, REPORTING ON THE COSTS OF
START-UP ACTIVITIES, effective January 1, 1999, the Company was required to
change its accounting principle for organization costs. Previously, the Company
capitalized such costs and amortized them using the straight-line method over
five years. At December 31, 1998, such costs totaled $257,051 and the
accumulated amortization totaled $185,420. In the first quarter of 1999, the
Company wrote-off the remaining $71,631 and will expense as incurred any future
organization costs. The write-off has been reflected in the Consolidated
Statement of Operations for the nine months ended September 30, 1999 as the
"Cumulative effect of a change in accounting principle" in accordance with APB
No. 20.
EARNINGS PER SHARE
Basic earnings per common share is computed by dividing net income (loss)
by the weighted average number of shares of common stock outstanding during the
period. Exercises of outstanding stock options or warrants and conversion of
convertible debentures are assumed to occur for purposes of calculating diluted
earnings per share for periods in which their effect would not be anti-dilutive.
6
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
1999 1998 1999 1998
----------- --------- --------- -----------
<S> <C> <C> <C> <C>
BASIC EPS:
Income (loss) before cumulative
effect of a change in
accounting principle ........... $ 110,838 $(343,359) $ 45,615 $ (727,724)
=========== ========= ========= ===========
Weighted average number of
common shares .................. 7,832,997 7,126,657 7,832,997 7,104,335
=========== ========= ========= ===========
Earnings (loss) per common share.. $ 0.01 $ (0.05) $ 0.01 $ (0.10)
=========== ========= ========= ===========
DILUTED EPS:
Income (loss) before cumulative
effect of a change in
accounting principle ........... $ 110,838 $(343,359) $ 45,615 $ (727,724)
=========== ========= ========= ===========
Weighted average number of
common shares .................. 7,832,997 7,126,657 7,832,997 7,104,335
Incremental shares from assumed
conversions-
Warrants ....................... 96,660 -- -- --
Stock options .................. 99,186 -- -- --
----------- --------- --------- -----------
Adjusted weighted average
number of common shares ........ 8,028,843 7,126,657 7,832,997 7,104,335
=========== ========= ========= ===========
Earnings (loss) per common share.. $ 0.01 $ (0.05) $ 0.01 $ (0.10)
=========== ========= ========= ===========
</TABLE>
2. LONG-TERM DEBT
At September 30, 1999, the Company had outstanding 9% Convertible
Debentures due July 1, 2002 (the "9% Convertible Debentures") in the principal
amount of $2,229,114. The 9% Convertible Debentures are secured by land,
buildings, equipment and intangibles. Interest on the 9% Convertible Debentures
is paid by the Company on a monthly basis. Monthly principal payments of
approximately $20,000 are required to be made by the Company beginning in
November 1999 through June 2002. For the period November 1, 1998 through October
31, 1999, Renaissance Capital Growth & Income Fund III, Inc. (the holder of
$1,718,094 principal amount of the 9% Convertible Debentures) agreed to waive
all mandatory principal redemption payments and accepted 183,263 unregistered
shares of Common Stock in lieu of $154,628 cash interest payments.
The Convertible Debenture Loan Agreement contains covenants requiring the
maintenance of certain financial ratios including an interest coverage ratio of
1:1, minimum working capital of $500,000, a current ratio of 1.1:1 and a minimum
shareholders' equity of $4,500,000. At September 30, 1999, the Company was in
compliance with all of the financial ratio requirements. In the event of
default, 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 9% Convertible Debentures. Management believes that
the achievement of the Company's plans and objectives will enable the Company to
attain a sufficient level of profitability to remain in compliance with the
financial ratios. There can be no assurance, however, that the Company will
attain any such profitability and remain in compliance with the financial
ratios. Any acceleration under the 9% Convertible Debentures prior to their
maturity on July 1, 2002 could have a material adverse effect upon the Company.
7
<PAGE>
On November 4, 1998, the Company signed a new $2.5 million Credit Agreement
with Wells Fargo Business Credit, Inc. (hereinafter "Wells Fargo" and formerly
Norwest Business Credit, Inc.) which included a $2.0 million working capital
line of credit (the "Wells Fargo Line of Credit") and a $0.5 million term loan
(the "Wells Fargo Term Loan"). The outstanding balance on the Wells Fargo Line
of Credit was $1,279,036 and $847,013 at September 30, 1999 and December 31,
1998, respectively. The Wells Fargo Line of Credit had an annual rate of
interest of prime plus 1.5% and matured in November 2001 while the Wells Fargo
Term Loan had an annual rate of interest of prime plus 3% and required monthly
principal payments of approximately $28,000, plus interest, until maturity on
May 1, 2000. The Wells Fargo Credit Agreement was secured by accounts
receivable, inventories, equipment and general intangibles. The Wells Fargo Line
of Credit and Term Loan were paid in full on October 7, 1999 in connection with
the Wabash Foods, LLC acquisition (see Note 3) and related U.S. Bancorp Republic
Commercial Finance, Inc. ("U.S. Bancorp") financing.
On October 7, 1999, the Company signed a new $9.15 million Credit Agreement
with U.S. Bancorp (the "U.S. Bancorp Credit Agreement") consisting of a $3.0
million working capital line of credit (the "U.S. Bancorp Line of Credit"), a
$5.8 million term loan (the "U.S. Bancorp Term Loan A") and a $350,000 term loan
(the "U.S. Bancorp Term Loan B"). Borrowings under the U.S. Bancorp Credit
Agreement were used to pay off the Wells Fargo Line of Credit and Wells Fargo
Term Loan and to refinance existing debt of Wabash Foods, LLC, and will also be
used for general working capital needs. The U.S. Bancorp Line of Credit bears
interest at an annual rate of prime plus 1% and matures in October 2002. The
U.S. Bancorp Term Loan A bears interest at an annual rate of prime and requires
monthly principal payments of approximately $74,000 commencing February 1, 2000,
plus interest, until maturity on July 1, 2006. The U.S. Bancorp Term Loan B
bears interest at an annual rate of prime plus 2.5% and requires monthly
principal payments of approximately $29,000 commencing April 30, 2000, plus
interest, until maturity on March 31, 2001. The U.S. Bancorp Credit Agreement is
secured by accounts receivable, inventories, equipment and general intangibles.
Borrowings under the line of credit are limited to 80% of eligible receivables
and 60% of eligible inventories.
As of October 26, 1999, the Company had a borrowing base of approximately
$2,577,000 under the U.S. Bancorp Line of Credit. The U.S. Bancorp Credit
Agreement requires the Company to be in compliance with certain financial
performance criteria, including a minimum cash flow coverage ratio, a minimum
debt service coverage ratio, minimum annual operating results, a minimum
tangible capital base and a minimum fixed charge coverage ratio. At September
30, 1999, the Company was in compliance with all of the financial performance
criteria. Management believes that the fulfillment of the Company's plans and
objectives will enable the Company to attain a sufficient level of profitability
to remain in compliance with these financial performance criteria. There can be
no assurance, however, that the Company will attain any such profitability and
remain in compliance. Any acceleration under the U.S. Bancorp Credit Agreement
prior to the scheduled maturity of the U.S. Bancorp Line of Credit or the U.S.
Bancorp Term Loans could have a material adverse effect upon the Company.
3. ACQUISITION OF WABASH FOODS, LLC
On October 7, 1999, the Company consummated the previously announced Wabash
Foods, LLC ("Wabash") acquisition following shareholder approval at the
Company's annual meeting of shareholders held on October 6, 1999. Wabash is
engaged in the production and marketing of salted snack food products (including
potato crisps, pizza chips and pretzels) primarily through a national vend
distribution network. The Company acquired all of the membership interests of
Wabash from Pate Foods Corporation in exchange for (i) 4,400,000 unregistered
shares of Common Stock, and (ii) a warrant to purchase 400,000 unregistered
shares of Common Stock at an exercise price of $1.00 per share. The warrant has
a five-year term and is immediately exercisable. As a result, the Company
acquired all of the assets of Wabash, including the Tato Skins(R), O'Boises(R)
and Pizzarias(R) trademarks and assumed all of Wabash's liabilities and
indebtedness. Wabash had sales of approximately $9 million for the nine months
ended September 30, 1999. Wabash products will continue to be manufactured at
its Bluffton, Indiana facility. The acquisition will be accounted for using the
purchase method of accounting in accordance with APB Opinion No. 16.
Accordingly, only the results of operations subsequent to the acquisition date
will be included in the Company's results.
8
<PAGE>
4. LITIGATION
The Company is a party to various lawsuits arising in the ordinary course
of business. Management believes, based on discussions with legal counsel, that
the resolution of such lawsuits will not have a material effect on the financial
statements taken as a whole.
5. BUSINESS SEGMENTS
The Company's operations consist of two segments: manufactured products and
distributed products. The manufactured products segment produces potato chips
for sale primarily to snack food distributors. The distributed products segment
sells snack food products manufactured by other companies to the Company's
Arizona snack food distributors and also merchandises in Texas for a fee, but
does not purchase and resell, snack food products for manufacturers. The
Company's reportable segments offer different products and services. All of the
Company's revenues are attributable to external customers in the United States
and all of its assets are located in the United States. The Company does not
allocate assets based on its reportable segments.
The accounting policies of the segments are the same as those described in
the Summary of Accounting Policies included in Note 1 to the audited financial
statements filed with the Form 10-KSB for the fiscal year ended December 31,
1998. The Company does not allocate selling, general and administrative
expenses, income taxes or unusual items to segments and has no significant
non-cash items other than depreciation and amortization.
MANUFACTURED DISTRIBUTED
PRODUCTS PRODUCTS CONSOLIDATED
----------- ----------- ------------
THREE MONTHS ENDED SEPTEMBER 30, 1999
Revenues from external customers ..... $ 4,356,556 $ 1,158,240 $ 5,514,796
Depreciation and amortization in
segment gross profit ................ 146,968 -- 146,968
Segment gross profit ................. 1,351,461 79,401 1,430,862
THREE MONTHS ENDED SEPTEMBER 30, 1998
Revenues from external customers ..... $ 2,309,425 $ 705,313 $ 3,014,738
Depreciation and amortization in
segment gross profit ................ 132,186 -- 132,186
Segment gross profit ................. 656,249 63,166 719,415
MANUFACTURED DISTRIBUTED
PRODUCTS PRODUCTS CONSOLIDATED
----------- ----------- ------------
NINE MONTHS ENDED SEPTEMBER 30, 1999
Revenues from external customers ..... $11,053,978 $ 3,381,238 $14,435,216
Depreciation and amortization in
segment gross profit ................ 441,657 -- 441,657
Segment gross profit ................. 3,452,193 235,025 3,687,218
NINE MONTHS ENDED SEPTEMBER 30, 1998
Revenues from external customers ..... $ 7,543,251 $ 1,932,706 $ 9,475,957
Depreciation and amortization in
segment gross profit ................ 411,640 -- 411,640
Segment gross profit ................. 2,196,689 170,658 2,367,347
9
<PAGE>
The following table reconciles reportable segment gross profit to the
Company's consolidated income (loss) before income taxes and cumulative effect
of a change in accounting principle.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Consolidated segment gross profit ... $ 1,430,862 $ 719,415 $ 3,687,218 $ 2,367,347
Unallocated amounts:
Selling, general and administrative
expenses ........................ 1,165,186 941,036 3,177,310 2,724,126
Interest expense, net ............. 154,838 121,738 464,293 370,945
----------- ----------- ----------- -----------
Income (loss) before income taxes and
cumulative effect of a change in
accounting principle .............. $ 110,838 $ (343,359) $ 45,615 $ (727,724)
=========== =========== =========== ===========
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1998
Net revenues for the three months ended September 30, 1999 were $5,514,796,
up $2,500,058, or 83%, from $3,014,738 for the three months ended September 30,
1998. Revenues for the manufactured products segment accounted for 79% and 77%
of total net revenues in 1999 and 1998, respectively, while revenues from
distributed products accounted for 21% and 23% in 1999 and 1998, respectively.
Manufactured products segment revenues increased $2,047,131 or 89%, from sales
of branded and private label products, including $759,020 from the Bob's Texas
Style(TM) brand, acquired by the Company in November 1998 in connection with the
Tejas acquisition, and $104,507 from management fees pursuant to the Company's
management contract with Wabash Foods, LLC. Revenues from the distribution and
merchandising of products manufactured by others increased $452,927, or 64%. The
majority of this increase, $351,082, was from the Texas merchandising operation,
acquired by the Company in November 1998 in connection with the Tejas
acquisition. The remainder of the increase was due to increased sales of
distributed product lines.
Gross profit for the three months ended September 30, 1999, was $1,430,862,
or 26% of net revenues, as compared to $719,415, or 24% of net revenues, for the
three months ended September 30, 1998. The $711,447 increase, or 99%, in gross
profit resulted principally from the increased volume in the manufactured
products segment.
Selling, general and administrative expenses increased to $1,165,186, or
21% of net revenues, for the three months ended September 30, 1999 from
$941,036, or 31% of net revenues, for the same period in 1998. The increase of
$224,150, or 24%, compared to the third quarter of 1998, was primarily due to
increased advertising and promotional spending.
Net interest expense increased to $154,838 for the three months ended
September 30, 1999 from a net interest expense of $121,738 for the three months
ended September 30, 1998. This increase was due to lower interest income on
investments of $4,639 and increased interest expense of $28,461 on indebtedness
related to the Tejas acquisition.
10
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1998
Net revenues for the nine months ended September 30, 1999 were $14,435,216,
up $4,959,259, or 52%, from $9,475,957 for the nine months ended September 30,
1998. Revenues for the manufactured products segment accounted for 77% and 80%
of total net revenues in 1999 and 1998, respectively, while revenues from
distributed products accounted for 23% and 20% in 1999 and 1998, respectively.
Manufactured products segment revenues increased $3,510,727, or 47%, from sales
of branded and private label products, including $2,000,621 from the Bob's Texas
Style(TM) brand, acquired by the Company in November 1998 in connection with the
Tejas acquisition, and $299,307, from management fees pursuant to the Company's
management contract with Wabash Foods, LLC. Revenues from the distribution and
merchandising of products manufactured by others increased $1,448,532, or 75%.
The majority of this increase, $971,487, was from the Texas merchandising
operation, acquired by the Company in November 1998 in connection with the Tejas
acquisition. The remainder of the increase was due to increased sales of
distributed product lines.
Gross profit for the nine months ended September 30, 1999, was $3,687,218,
or 26% of net revenues, as compared to $2,367,347, or 25% of net revenues, for
the nine months ended September 30, 1998. The $1,319,871 increase, or 56%, in
gross profit resulted principally from the increased volume in the manufactured
products segment.
Selling, general and administrative expenses increased to $3,177,310, or
22% of net revenues, for the nine months ended September 30, 1999 from
$2,724,126, or 29% of net revenues, for the same period in 1998. The increase of
$453,184, or 17%, compared to the nine month period in 1998, was primarily due
to increased advertising and promotional spending.
Net interest expense increased to $464,293 for the nine months ended
September 30, 1999 from a net interest expense of $370,945 for the nine months
ended September 30, 1998. This increase was due to lower interest income on
investments of $16,781 and increased interest expense of $76,567 on indebtedness
related to the Tejas acquisition.
The cumulative effect of a change in accounting principle resulted in a
$71,631 charge in the first quarter of 1999 and was related to the Company's
expensing of previously capitalized organization costs as required by Statement
of Position 98-5, REPORTING ON THE COSTS OF START-UP ACTIVITIES," which was
effective for the Company's fiscal year beginning January 1, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Net working capital was $1,210,689 (a current ratio of 1.6:1) and $768,155
(a current ratio of 1.4:1) at September 30, 1999 and December 31, 1998,
respectively. The $442,534 increase in working capital was primarily the result
of the growth of accounts receivable due to increased Company revenues. For the
nine months ended September 30, 1999, the Company generated cash flow of $99,464
from operating activities, principally from operating results, and invested
$185,151 in new equipment.
At September 30, 1999, the Company had outstanding 9% Convertible
Debentures due July 1, 2002 (the "9% Convertible Debentures") in the principal
amount of $2,229,114. The 9% Convertible Debentures are secured by land,
buildings, equipment and intangibles. Interest on the 9% Convertible Debentures
is paid by the Company on a monthly basis. Monthly principal payments of
approximately $20,000 are required to be made by the Company beginning in
November 1999 through June 2002. For the period November 1, 1998 through October
31, 1999, Renaissance Capital Growth & Income Fund III, Inc. (the holder of
$1,718,094 principal amount of the 9% Convertible Debentures) agreed to waive
all mandatory principal redemption payments and accepted 183,263 unregistered
shares of Common Stock in lieu of $154,628 cash interest payments.
The Convertible Debenture Loan Agreement contains covenants requiring the
maintenance of certain financial ratios including an interest coverage ratio of
1:1, minimum working capital of $500,000, a current ratio of 1.1:1 and a minimum
shareholders' equity of $4,500,000. At September 30, 1999, the Company was in
compliance with all of the financial ratio requirements. In the event of
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default, 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 9% Convertible Debentures. Management believes that
the achievement of the Company's plans and objectives will enable the Company to
attain a sufficient level of profitability to remain in compliance with the
financial ratios. There can be no assurance, however, that the Company will
attain any such profitability and remain in compliance with the financial
ratios. Any acceleration under the 9% Convertible Debentures prior to their
maturity on July 1, 2002 could have a material adverse effect upon the Company.
On November 4, 1998, the Company signed a new $2.5 million Credit Agreement
with Wells Fargo Business Credit, Inc. (hereinafter "Wells Fargo" and formerly
Norwest Business Credit, Inc.) which included a $2.0 million working capital
line of credit (the "Wells Fargo Line of Credit") and a $0.5 million term loan
(the "Wells Fargo Term Loan"). The outstanding balance on the Wells Fargo Line
of Credit was $1,279,036 and $847,013 at September 30, 1999 and December 31,
1998, respectively. The Wells Fargo Line of Credit had an annual rate of
interest of prime plus 1.5% and matured in November 2001 while the Wells Fargo
Term Loan had an annual rate of interest of prime plus 3% and required monthly
principal payments of approximately $28,000, plus interest, until maturity on
May 1, 2000. The Wells Fargo Credit Agreement was secured by accounts
receivable, inventories, equipment and general intangibles. The Wells Fargo Line
of Credit and Term Loan were paid in full on October 7, 1999 in connection with
the Wabash Foods, LLC acquisition and related U.S. Bancorp Republic Commercial
Finance, Inc. ("U.S. Bancorp") financing.
On October 7, 1999, the Company signed a new $9.15 million Credit Agreement
with U.S. Bancorp (the "U.S. Bancorp Credit Agreement") consisting of a $3.0
million working capital line of credit (the "U.S. Bancorp Line of Credit"), a
$5.8 million term loan (the "U.S. Bancorp Term Loan A") and a $350,000 term loan
(the "U.S. Bancorp Term Loan B"). Borrowings under the U.S. Bancorp Credit
Agreement were used to pay off the Wells Fargo Line of Credit and Wells Fargo
Term Loan and to refinance existing debt of Wabash Foods, LLC, and will also be
used for general working capital needs. The U.S. Bancorp Line of Credit bears
interest at an annual rate of prime plus 1% and matures in October 2002. The
U.S. Bancorp Term Loan A bears interest at an annual rate of prime and requires
monthly principal payments of approximately $74,000 commencing February 1, 2000,
plus interest, until maturity on July 1, 2006. The U.S. Bancorp Term Loan B
bears interest at an annual rate of prime plus 2.5% and requires monthly
principal payments of approximately $29,000 commencing April 30, 2000, plus
interest, until maturity on March 31, 2001. The U.S. Bancorp Credit Agreement is
secured by accounts receivable, inventories, equipment and general intangibles.
Borrowings under the line of credit are limited to 80% of eligible receivables
and 60% of eligible inventories.
As of October 26, 1999, the Company had a borrowing base of approximately
$2,577,000 under the U.S. Bancorp Line of Credit. The U.S. Bancorp Credit
Agreement requires the Company to be in compliance with certain financial
performance criteria, including a minimum cash flow coverage ratio, a minimum
debt service coverage ratio, minimum annual operating results, a minimum
tangible capital base and a minimum fixed charge coverage ratio. At September
30, 1999, the Company was in compliance with all of the financial performance
criteria. Management believes that the fulfillment of the Company's plans and
objectives will enable the Company to attain a sufficient level of profitability
to remain in compliance with these financial performance criteria. There can be
no assurance, however, that the Company will attain any such profitability and
remain in compliance. Any acceleration under the U.S. Bancorp Credit Agreement
prior to the scheduled maturity of the U.S. Bancorp Line of Credit or the U.S.
Bancorp Term Loans could have a material adverse effect upon the Company.
In connection with the implementation of the Company's business strategy,
the Company may incur additional operating losses in the future and is likely to
require future debt or equity financings (particularly in connection with future
strategic acquisitions). Expenditures relating to acquisition-related
integration costs, market and territory expansion and new product development
may adversely affect selling, general and administrative expenses and
12
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consequently may adversely affect operating and net income. These types of
expenditures are expensed for accounting purposes as incurred, while sales
generated from the result of such expansion may benefit future periods. As a
result of the 1997 restructuring actions, the November 1998 Tejas acquisition,
and the October 1999 Wabash acquisition, management believes that the Company
will generate positive cash flow from operations, during the next twelve months,
which along with its existing working capital and borrowing facilities, should
enable the Company to meet its operating cash requirements through 2000. The
belief is based on current operating plans and certain assumptions, including
those relating to the Company's future revenue levels and expenditures, industry
and general economic conditions and other conditions. If any of these factors
change, the Company may require future debt or equity financings to meet its
business requirements. There can be no assurance that any required financings
will be available or, if available, on terms attractive to the Company.
YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to identify the applicable year. For example,
computer programs that utilize date-sensitive information may recognize a date
using "00" as the year 1900 rather than the year 2000. This could result in
system failures or miscalculations.
The Company processes much of its data using licensed computer programs
from third parties, including its accounting software. Such third parties have
advised the Company that they have made all necessary programming changes to
such computer programs to address the Year 2000 issue. The Company tested its
systems for Year 2000 compliance during the first half of 1998 and discovered
that certain database information utilized by the Company for purposes of order
entry, billing and accounts receivables is not Year 2000 compliant, although the
underlying database software is Year 2000 compliant. The Company has
successfully completed testing of the corrective measures implemented with
respect to such database information during November of 1999. The Company does
not expect to incur significant expenses in connection with such corrective
measures. In addition, the Company believes that, notwithstanding the foregoing,
it has no material internal risk in connection with the potential impact of the
Year 2000 issue on the processing of date sensitive information by the Company's
computerized information systems.
The Company is in the process of determining the effect of the Year 2000
issue on its vendors' and customers' systems. There can be no assurance that the
systems of such third parties will be Year 2000 compliant on a timely basis, or
that the Company's results of operations will not be adversely affected by the
failure of systems operated by third parties to properly operate in the Year
2000.
The Company has not completed the development of contingency plans in the
event that its internal systems or those of third parties fail to operate in
compliance with the Year 2000 date change. The Company expects to complete
development of its contingency plans and begin implementation, if required, by
November 30, 1999.
13
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FORWARD LOOKING STATEMENTS
WHEN USED IN THIS FORM 10-QSB AND IN FUTURE FILINGS BY THE COMPANY WITH THE
SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION"), THE WORDS OR PHRASES
"WILL LIKELY RESULT," "THE COMPANY EXPECTS," "WILL CONTINUE," "IS ANTICIPATED,"
"ESTIMATED," "PROJECT," OR "OUTLOOK," OR SIMILAR WORDS OR EXPRESSIONS, ARE
INTENDED TO IDENTIFY "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED. THE COMPANY WISHES TO CAUTION READERS NOT TO
PLACE UNDUE RELIANCE ON ANY SUCH FORWARD-LOOKING STATEMENTS, EACH OF WHICH
SPEAKS ONLY AS OF THE DATE MADE. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS
AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
HISTORICAL EARNINGS AND THOSE PRESENTLY ANTICIPATED OR PROJECTED. IN LIGHT OF
SUCH RISKS AND UNCERTAINTIES, THERE CAN BE NO ASSURANCE THAT FORWARD-LOOKING
INFORMATION CONTAINED IN THIS FORM 10-QSB WILL, IN FACT, TRANSPIRE OR PROVE TO
BE ACCURATE. THE COMPANY HAS NO OBLIGATION TO PUBLICLY RELEASE THE RESULT OF ANY
REVISIONS THAT MAY BE MADE TO ANY FORWARD-LOOKING STATEMENTS TO REFLECT
ANTICIPATED OR UNANTICIPATED EVENTS OR CIRCUMSTANCES OCCURRING AFTER THE DATE OF
SUCH STATEMENTS.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to various lawsuits arising in the ordinary course
of business. Management believes, based on discussions with legal counsel, that
the resolution of such lawsuits will not have a material effect on the financial
statements taken as a whole.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On October 7, 1999, the Company issued (i) 4,400,000 unregistered shares of
Common Stock and (ii) a warrant to purchase 400,000 unregistered shares of
Common Stock at an exercise price of $1.00 per share, to Pate Foods Corporation
in connection with the acquisition by the Company of all the membership
interests of Wabash Foods, LLC. The warrant has a five-year term and is
immediately exercisable. These issuances were made in reliance upon the
exemption from registration under the Securities Act of 1933, as amended (the
"Securities Act"), set forth in Section 4(2) as it did not involve a public
offering.
On October 7, 1999, pursuant to the terms of the U.S. Bancorp Credit
Agreement, the Company issued to U.S. Bancorp a warrant to purchase 50,000
shares of Common Stock at an exercise price of $1.00 per share. The warrant has
a three-year term and is immediately exercisable. The issuance of the warrant
was made in reliance upon the exemption from registration under the Securities
Act set forth in Section 4(2) as it did not involve a public offering.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Shareholders of the Company (the "Meeting") was
held on October 6, 1999.
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(b) Proxies for the Meeting were solicited pursuant to Regulation 14A
under the Exchange Act. There was no solicitation in opposition to the
Management's nominees as listed in the proxy statement and all of such
nominees were elected.
(c) At the Meeting, the Company's shareholders voted upon the election of
seven directors of the Company. Management's nominees were Messrs.
Thomas W. Freeze, Richard E. Goodspeed, Mark S. Howells, Eric J.
Kufel, James W. Myers, Robert C. Pearson and Aaron M. Shenkman. There
were no other nominees. The following are the respective numbers of
votes cast "for" and "withheld" with respect to each nominee. There
were no votes cast against or broker nonvotes with respect to any
nominee.
Name of Nominee Votes Cast For Votes Withheld
--------------- -------------- --------------
Thomas W. Freeze 6,715,502 48,955
Richard E. Goodspeed 6,716,602 47,855
Mark S. Howells 6,716,602 47,855
Eric J. Kufel 6,716,602 47,855
James W. Myers 6,716,602 47,855
Robert C. Pearson 6,715,502 48,955
Aaron M. Shenkman 6,715,502 48,955
(d) At the Meeting, the Company's shareholders voted to approve an
amendment to the Company's Certificate of Incorporation, as amended,
to increase the number of authorized shares of Common Stock by
35,000,000 shares from, 15,000,000 to 50,000,000 shares. The following
are the respective number of votes cast "for", "against" and
"abstaining".
Votes for: 4,169,468
Votes against 199,760
Votes abstaining: 18,450
(e) At the Meeting, the Company's shareholders voted to approve the
acquisition of Wabash Foods, LLC, a Delaware limited liability
company, and, in connection therewith, the issuance by the Company of
(i) 4,400,000 shares of Common Stock, and (ii) a warrant to purchase
400,000 shares of Common Stock. The following are the respective
number of votes cast "for", "against" and "abstaining".
Votes for: 4,288,843
Votes against 66,235
Votes abstaining: 32,600
(f) At the Meeting, the Company's shareholders voted to approve an
amendment to the Poore Brothers, Inc. 1995 Stock Option Plan to
increase the number of shares of Common Stock reserved for issuance
thereunder by 500,000 shares, from 1,500,000 to 2,000,000 shares. The
following are the respective number of votes cast "for", "against" and
"abstaining".
Votes for: 4,126,888
Votes against 221,940
Votes abstaining: 38,850
There were no other matters voted upon at the Meeting.
15
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ITEM 5. OTHER INFORMATION
On October 19, 1999, the Company was notified by the Nasdaq Stock Market,
Inc. ("Nasdaq") that the Nasdaq Listing Qualifications Panel (the "Panel") had
made a determination to permit the Company's Common Stock to continue to be
listed on the Nasdaq SmallCap Market. The determination was based upon the
Company's recent compliance with Nasdaq's closing bid price requirement of $1.00
per share for continued listing of the Common Stock and the satisfaction by the
Company of various information requests made by the Panel.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit Number Description
-------------- -----------
10.1 Letter Agreement dated July 30, 1999 by and between
the Company and Stifel, Nicolaus & Company,
Incorporated. *
27.1 Financial Data Schedule. *
* Filed herewith.
(b) Current Reports on Form 8-K:
None.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
POORE BROTHERS, INC.
By /s/ Eric J. Kufel
-------------------------------------
Dated: November 9, 1999 Eric J. Kufel
President and Chief Executive Officer
(principal executive officer)
By: /s/ Thomas W. Freeze
-------------------------------------
Dated: November 9, 1999 Thomas W. Freeze
Vice President, Chief Financial
Officer, Treasurer and Secretary
(principal financial and accounting
officer)
16
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EXHIBIT INDEX
Exhibit
Number Description
------ -----------
10.1 Letter Agreement dated July 30, 1999 by and between
the Company and Stifel, Nicolaus & Company,
Incorporated. *
27.1 Financial Data Schedule.
17
Stifel, Nicolaus & Company, Incorporated
3401 Enterprise Parkway, Suite 110
Beachwood, Ohio
Lawrence D. Bain 44122 216-514-8685
Managing Director
July 30, 1999
Poore Brothers, Inc.
3500 South La Cometa
Goodyear, AZ 85338
Attention: Eric Kufel
President and Chief Executive Officer
Dear Eric:
We are pleased to set forth the terms of the retention of Stifel, Nicolaus &
Company, Incorporated ("Stifel") by Poore Brothers, Inc. (collectively with its
affiliates, the "Acquiror") to assist the Acquiror as its exclusive financial
advisor and exclusive agent in connection with the Acquiror's efforts to acquire
certain business entities ("Acquisition Candidates"). This Agreement will
confirm Stifel's engagement by the Acquiror on the following terms and
conditions:
l. DESCRIPTION OF ENGAGEMENT. Stifel will advise the Acquiror on a variety
of subjects relating to Acquisition Candidates and any Transaction (as defined
below), including, but not limited to:
(a) the market value of the Acquisition Candidates, taking into account
competitive factors;
(b) the pricing of acquisition proposals;
(c) the form and terms of consideration to be utilized in acquisition
proposals; and
(d) strategies to be utilized in approaches and negotiations;
Stifel will use its best efforts to identify Acquisition Candidates meeting
Acquiror's criteria, and assist the Acquiror in providing advisory support from
the negotiation process through closing and, if requested, will assist the
Acquiror in obtaining any financing it may need to consummate the Transaction
("the Financing").
2. DEFINITION OF TRANSACTION. As used in this Agreement, the term
"Transaction" shall mean an acquisition (a) by merger, consolidation,
reorganization, recapitalization, business combination or other transaction
pursuant to which an Acquisition Candidate is acquired by or combined with the
Acquiror, or (b) the acquisition, directly or indirectly, by the Acquiror (or by
one or more persons acting together with the Acquiror pursuant to a written
agreement or otherwise) in a single Transaction or a series of Transactions of
(i) any subsidiary, business segment or operation divisions or assets of the
Acquisition Candidate or (ii) 25% or more of the Acquisition Candidate's
outstanding stock (whether by way of tender or exchange offer, open market
purchases, negotiated purchases or otherwise).
3. INFORMATION. In connection with Stifel's activities on the Acquiror's
behalf, the Acquiror will cooperate with Stifel and will furnish Stifel with all
reasonable information and data concerning the Acquiror, any Transaction and, to
the extent available to the Acquiror, each Acquisition Candidate (the
"Information") which Stifel deems appropriate and will provide Stifel with
access to the Acquiror's officers, directors, employees, independent accountants
and legal counsel. To the extent that the Acquiror has access to the officers,
<PAGE>
Poore Brothers, Inc.
July 30, 1999
Page 2
directors, employees, independent accountants and legal counsel of any
Acquisition Candidate, it will provide such access to Stifel. The Acquiror
represents and warrants that all Information (a) made available to Stifel by the
Acquiror or (b) contained in any filing by the Acquiror with any court or
governmental regulatory agency, commission or instrumentality with respect to
any Transaction will, at all times during the period of the engagement of Stifel
hereunder, be complete and correct in all material respects and will not contain
any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein not misleading in the light of
the circumstances under which such statements are made. The Acquiror further
represents and warrants that any projections provided by it to Stifel will have
been prepared in good faith and will be based upon assumptions which, in light
of the circumstances under which they are made, are reasonable. The Acquiror
acknowledges and agrees that, in rendering its services hereunder, Stifel will
be using and relying on the Information (and information available from public
sources and other sources deemed reliable by Stifel) without independent
verification thereof by Stifel or independent appraisal by Stifel of any of the
Acquiror's or the Acquisition Candidate's assets. Stifel does not assume
responsibility for the accuracy or completeness of the Information or any other
information regarding the Acquiror, any Acquisition Candidate or any
Transaction. Any advice rendered by Stifel pursuant to this Agreement may not be
disclosed publicly without Stifel's prior written consent, except as may be
required by applicable law.
4. COMPENSATION. In consideration of Stifel's services pursuant to this
Agreement, Stifel shall be entitled to receive, and the Acquiror agrees to pay
Stifel, the following compensation:
(a) Upon execution of this Agreement and for every 90-day period
thereafter until the termination of this Agreement, the Acquiror shall
pay Stifel, a cash fee of $5,000 on the first of such 90-day period.
(b) If a Transaction is consummated during the term of this Agreement,
then the Acquiror shall pay Stifel, upon such consummation, cash fee
equal to 2% of the value of the total consideration paid by the
Acquiror in the Transaction in respect of (i) assets of the
Acquisition Candidate, (ii) capital stock of the Acquisition Candidate
(and any securities convertible into, or options, warrants or other
rights to acquire, such capital stock) and (iii) the assumption,
directly or indirectly (by operation of law or otherwise), or
repayment of indebtedness (including, without limitation, indebtedness
secured by assets of the Acquisition Candidate), less amounts paid
pursuant to (a) above. The value of total consideration paid will be
calculated as the sum of the following values at closing:
(i) Cash and cash equivalents paid to an Acquisition Candidate
or its shareholders;
(ii) Market value of any common stock issued to an Acquisition
Candidate or its shareholders;
(iii) The liquidation preference of any preferred stock issued to
an Acquisition Candidate or its shareholders, unless market
value is easily determinable;
(iv) The face value of any notes issued to an Acquisition
Candidate or its shareholders, unless market value is
easily determinable;
(v) Consideration paid or payable under covenants not to
compete, earn-outs (determinable upon consummation) and
consulting arrangements (such terms not to encompass
standard employment agreements).
<PAGE>
Poore Brothers, Inc.
July 30, 1999
Page 3
(vi) The face value of any debt owed or preferred stock issued
by an Acquisition Candidate or its shareholders which is
assumed and/or forgiven, unless market value is easily
determinable; and
(vii) The difference between the exercise price of any stock
options and the fair market value per share of common stock
even though such differences may be paid to the option
holder in cash rather than through exercise of the options.
(c) Upon the closing of each and any part of a Financing obtained by
Stifel or negotiation with the assistance of Stifel, the Acquiror
shall pay Stifel a cash fee equal to:
(i) 1.0% of the aggregate principal amount of any senior debt
Financing raised: plus
(ii) 3% of the aggregate principal amount of any subordinated
debt Financing raised: plus
(iii) 3% of any preferred equity Financing raised: plus
(iv) 7% of the aggregate of any common equity Financing raised,
less the amounts paid pursuant to (a) above.
Any financing involving a public offering of senior
subordinated debt to be based on terms as may from time to
time be agreed upon by Stifel and the Acquiror.
(d) Stifel shall receive from the Acquiror warrants to purchase up to
296,155 shares of common stock of the Acquiror upon execution of this
Agreement. Such warrants will have an aggregated exercise price of
$0.875 per share, and shall have such other terms (including, without
limitation, customary anti-dilution and piggy back registration
provisions) as shall be mutually agreed upon in good faith by Stifel
and the Acquiror. The above warrants will have a 5 year term, be
issued effective upon execution of this Agreement and vest as follows:
50% when the Acquiror's annual Sales are at $30,000,000 on a proforma
basis and the additional 50% when the Acquiror's annual sales are at
$100,000,000 on a proforma basis.
For purposes of this subparagraph 4(d), "Acquiror's Sales" shall mean
sales of the businesses owned by Acquiror on the date hereof, plus
sales of the businesses acquired in a Transaction pursuant to which
Stifel is eligible for compensation pursuant to subparagraph 4(b)
above.
(e) Stifel shall be entitled to the fees enumerated in any preceding
subparagraph of this Paragraph 4 with respect to any event specified
in any such subparagraph if both: (i) the transaction is consummated
during the term of this Agreement or within one year after the date of
termination of this Agreement; and (ii) prior to the termination of
this Agreement Stifel, at the request of the Acquiror, participates
and plays a material role in connection with the identification,
analysis, structuring and/or negotiation of such Transaction.
(f) If a Transaction is not consummated, but the Acquiror receives a
"break-up" fee or any other payment as a result of the termination or
cancellation of an Acquisition Candidate's efforts to effect a
Transaction, a judgment for damages, or an amount in settlement of any
dispute relating to a Transaction or Alternate Transaction, then the
Acquiror shall pay to Stifel a cash fee equal to 25% of such fee,
<PAGE>
Poore Brothers, Inc.
July 30, 1999
Page 4
payment, judgment or amount, not to exceed the fee Stifel would
otherwise have received if the Transaction had been consummated.
(g) For purposes of this paragraph 4, the term "Acquiror" includes any
person acting together with the Acquiror pursuant to a written
agreement or otherwise.
5. NO ASSURANCES. Stifel makes no representations, express or implied that
Stifel will succeed in its efforts to assist the Acquiror in consummating a
Transaction.
6. RIGHT OF FIRST REFUSAL. (a) If the Acquiror requires Financing to
consummate the Transaction during the term of this Agreement, then Stifel shall
have the right to act as the Acquiror's sole managing underwriter or exclusive
agent, as the case may be, in connection with raising such financing, subject to
approval of Stifel's Capital Commitment Committee and the good faith negotiation
of customary and mutually agreeable terms; provided that Stifel's compensation
in connection with such engagement shall be as set forth on Paragraph 4(c)
hereof.
7. EXPENSES. In addition to the fees described above, the Acquiror agrees
to promptly reimburse Stifel, upon request from time to time, for all reasonable
out-of-pocket expenses incurred by Stifel (including without limitation, fees
and disbursements of counsel, and of other consultants and advisors retained by
Stifel) in connection with the matters contemplated by this Agreement. Such
expenses shall not exceed $5,000 in the aggregate without prior approval of the
Acquiror, which approval shall not be unreasonably withheld.
8. INDEMNIFICATION. The Acquiror hereby agrees to indemnify Stifel in
accordance with the indemnification provisions (the "Indemnification
Provisions") attached to this Agreement, which Indemnification Provisions are
incorporated herein and made a part hereof.
9. TERMINATION; SURVIVAL. Either party hereto may terminate this Agreement
at any time upon written notice, without liability or continuing obligation
except as set forth in the following sentence. Neither termination nor
completion of this assignment shall affect: (i) any compensation earned by
Stifel up to the date of termination or completion, or after termination, as the
case may be, pursuant to the paragraph herein entitled "Compensation", (ii) the
reimbursement of expenses incurred by Stifel up to the date of termination or
completion, as the case may be, pursuant to the paragraph herein entitled
"Expenses", (iii) the attached Indemnification Provisions, and (iv) the
provisions of the paragraphs herein entitled "Governing Law; Jurisdiction" and
"Successors and Assigns" of this Agreement, all of which shall remain operative
and in full force and effect.
10. GOVERNING LAW; JURISDICTION. The validity and interpretation of this
agreement shall be governed by the laws of the State of Missouri applicable to
agreements made and to be fully performed therein. The Acquiror irrevocably
submits to the jurisdiction of any court of the State of Missouri or the United
States District Court for the Eastern District of the State of Missouri for the
purpose of any suit, action or other proceeding arising out of this Agreement or
any of the agreements or transactions contemplated hereby, which is brought by
or against the Acquiror, and (i) hereby irrevocably agrees that all claims in
respect of any such suit, action or proceeding may be heard and determined in
any such court and (ii) to the extent that the Acquiror has acquired, or
hereafter may acquire, any immunity from jurisdiction of any such court or from
any legal process therein, the Acquiror hereby waives, to the fullest extent
permitted by law, such immunity. The Acquiror hereby waives and agrees not to
assert in any such suit, action or proceeding, in each case, the fullest extent
permitted by applicable law, any right to trial by jury and any claim that (a)
the Acquiror is not personally subject to the jurisdiction of any such court,
(b) the Acquiror is immune from any legal process (whether through service or
notice, attachment prior to judgment, attachment in aid of execution, execution
<PAGE>
Poore Brothers, Inc.
July 30, 1999
Page 5
or otherwise) with respect to the Acquiror's property or (c) any such suit,
action or proceeding is brought in an inconvenient forum.
11. ASSIGNMENT. This agreement shall be binding upon and insure to the
benefit of the parties hereto and their respective successors, but the rights
and obligations of the parties shall not be assignable by either of the parties
hereto without the prior written consent of the other party.
12. ADVERTISEMENT. Stifel or the Acquiror may publish an advertisement, at
its own expense with prior approval of the other party, which approval shall not
be unreasonably withheld, or issue a press release announcing the hiring of
Stifel or the completion of a Transaction and Stifel's role therein after the
consummation of such event.
13. CONFLICTS. Stifel acknowledges their professional responsibility
regarding conflicts of interest and agrees that Stifel will act accordingly in
representing other premium food companies.
14. COUNTERPARTS; AMENDMENTS. For the convenience of the parties, any
number of counterparts of this Agreement may be executed by the parties hereto.
Each such counterpart shall be, and shall be deemed to be, an original
instrument, but all such counterparts taken together shall constitute one and
the same Agreement. This Agreement may not be modified or amended except in
writing signed by the parties hereto.
If the foregoing correctly sets forth our Agreement, please sign the enclosed
copy of this letter in the space provided and return it to us.
Very truly yours,
Stifel, Nicolaus & Company, Incorporated
BY: /s/ Lawrence D. Bain
-------------------------------------
Lawrence D. Bain
Managing Director
Accepted and Agreed to this
10th day of August, 1999.
Poore Brothers, Inc.
BY: /s/ Thomas W. Freeze
------------------------------------
Name: Thomas W. Freeze
Title: Vice President & Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999,
INCLUDED WITH FORM 10-QSB, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 155,358
<SECURITIES> 0
<RECEIVABLES> 2,403,487
<ALLOWANCES> 82,621
<INVENTORY> 556,694
<CURRENT-ASSETS> 3,302,899
<PP&E> 7,639,170
<DEPRECIATION> 1,631,208
<TOTAL-ASSETS> 12,972,922
<CURRENT-LIABILITIES> 2,092,210
<BONDS> 5,650,213
0
0
<COMMON> 78,329
<OTHER-SE> 5,152,170
<TOTAL-LIABILITY-AND-EQUITY> 12,972,922
<SALES> 14,435,216
<TOTAL-REVENUES> 14,435,216
<CGS> 10,747,998
<TOTAL-COSTS> 10,747,998
<OTHER-EXPENSES> 3,177,310
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 464,293
<INCOME-PRETAX> 45,615
<INCOME-TAX> 0
<INCOME-CONTINUING> 45,615
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (71,631)
<NET-INCOME> (26,016)
<EPS-BASIC> 0.00
<EPS-DILUTED> 0.00
</TABLE>
